UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

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

 

For the month of February 2021

 

Commission File Number: 001-39155

 

XP Inc.

(Exact name of registrant as specified in its charter)

 

Av. Chedid Jafet, 75, Torre Sul, 30th floor,

Vila Olímpia – São Paulo

Brazil 04551-065

+55 (11) 3075-0429

(Address of principal executive office)

 

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

 

Form 20-F

X

  Form 40-F  

 

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

 

Yes     No

X

 

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):

 

Yes     No

X

 

 

 
 

SIGNATURE

 

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

    XP Inc.
     
     
      By: /s/ Bruno Constantino Alexandre dos Santos
        Name: Bruno Constantino Alexandre dos Santos
        Title: Chief Financial Officer

 

Date: February 23, 2021

 

 

EXHIBIT INDEX

Exhibit No. Description
99.1 Earnings Release dated February 23, 2021 – XP Inc. Reports 4Q20 Financial Results
99.2 4Q20 Earnings Presentation
99.3 XP Inc. – Consolidated financial statements for the years ended December 31, 2020, 2019 and 2018

  

 

 

. V I S A In fi n it e X P..117 nc. 4Q20 Earnings Release February 23rd, 2021

 
 

‘ XP Inc. Reports 4Q20 Financial Results 2 São Paulo, Brazil, February 23 , 2021 – XP Inc . (NASDAQ : XP) (“XP” or the “Company”), a leading tech - enabled platform and a trusted pioneer in providing low - fee financial products and services in Brazil, today reported its financial results for the fourth quarter of 2020 and for the year ended December 31 , 2020 . To our shareholders : The events of 2020 were certainly demanding for all of us around the world . Faced with a pandemic of unimaginable proportions, we collectively became more resilient, supportive, flexible and aware that nothing can be taken for granted . Amid the catastrophic health crisis and the reality of quarantine, we reflected and reviewed the way we relate to our family, work, routine and old habits . After many challenges, we remain confident that better days are ahead . 2020 marked XP Inc . 's first as a publicly traded company, which presented new challenges in internal and external communications, governance and strategy . We have, undeniably become a better and more prepared company for the future since our IPO in December 2019 . I am convinced that our culture, which I consider our greatest asset and a key long - term competitive advantage, has been tested, strengthened and, without a doubt, was the main factor in successfully navigating this turbulent period and driving robust growth . I want to reinforce our values that we believe will allow all our employees to help transform the financial markets in Brazil and improve peoples’ lives over time : Dream Big – to continue to believe in “impossible” projects and build the bridges to make them possible. Open Mind – to never forget that there are no absolute truths, that mistakes are part of the journey and that great ideas and projects often come from where and when you least expect them . Entrepreneurial Spirit – to turn employees into owners of the company, with responsibilities to maintain the company’s competitive and ethical standards, and free from hierarchical limitations. After 2020 , I am convinced that the result of our values in practice is greater than the sum of the three separate parts, and I would like to share some concrete examples of how we have evolved during the year . Almost twelve months ago, at the beginning of the crisis, we experienced an unprecedented increase in trading volumes across our platforms . This allowed us to solve operational bottlenecks and anticipate investments in technology to guarantee the availability and robustness of services for our customers . We are proud of the improvements we have achieved in a short period of time, which have resulted in expanded capacity to manage new levels of demand . Even more remarkable is the fact that the entire team working on this has been working from home and, therefore, with a greater need for creativity, intensity and strong communication . We have also made significant progress on our ESG initiatives, accelerated by the pandemic that severely impacted the most disadvantaged part of the population in our country . We created the “Juntos Transformamos” movement, with the goal of delivering food and medical equipment quickly and effectively to the people who need it most, serving approximately 500 , 000 people thus far . Going forward, we are committed to leading by example and seeking to leave a better country for future generations . We created our ESG board and will strive to become an ESG reference, generating relevant and long - term impacts on society . Rest assured that this will be a recurring theme in our communications and one of our key priorities for years to come . Additionally, during 2020 we learned new ways to work as a team without necessarily being together physically . As a result, the XP Anywhere concept was born – permanent adoption of the flexible work model – as well as the Villa XP project, a sustainable and innovative space for XP employees, partners and clients . These initiatives will provide a better quality of life for our employees and their families, avoiding traffic and large displacements, allowing them to live outside large corporate centers and consequently enhancing commitment and

 
 

‘ performance . Also, we improved our ability to attract talent in Brazil and around the world and significantly lower our cost structure, which will drive significant benefits in terms of efficiency and long - term profitability . Throughout last year, we experienced significant digital acceleration . In this context, we revisited our long - term strategic planning and the pace with which we intend to address new markets and target new customers . The expected launches of our digital bank and credit card business, along with our recently available collateralized loan products, will enhance customer experience and drive expanded relationships . In terms of operating and financial results, we had the best year in our history . We generated gross revenue of R $ 8 . 7 billion , an increase of 58 % Y - o - Y . Our Adjusted Net Income totaled R $ 2 . 3 billion , an increase of 111 % Y - o - Y . Despite our accelerated growth, it is important to highlight the size of the market opportunity across the Brazilian financial system . The total revenue pool across the Brazilian financial system represents over R $ 770 billion , which today equates to almost 90 times the size of XP Inc . ’s revenue . Our existing footprint currently addresses roughly 20 % of total financial revenue in Brazil . Our plans include TAM expansion throughout our journey, always focused on maintaining our asset - light business model and leveraging the evolution of the capital markets as a lever for growth . As we have always done throughout our history, we have grown our company by connecting dots and picking low - hanging fruits, with a focus on profitability, execution and the experience of our clients, adding new businesses gradually and consistently . It is always important to remember that back in 2008 we were a brokerage firm that offered only one product (stocks) for only one customer profile (individuals) . Since then, we have built a dynamic ecosystem in terms of products and experiences encompassing multiple agents . We remain in the early stages of our journey, and we believe the growth we have achieved so far will be surpassed by what is yet to come . Finally, I would like to thank all market participants for the partnership and interactions throughout our first year as a listed company and reinforce my commitment and that of my partners to drive long - term value for shareholders . We are more motivated and energized than ever to build a legacy, inspire our country and contribute to the development of the Brazilian financial system across verticals . Guilherme Benchimol, CEO 3

 
 

‘ Highlights Key Business Metrics ¹ See appendix for a reconciliation of Adjusted Net Income and Adjusted EBITDA. 4 Q 2 0 4Q19 YoY 3Q20 QoQ Operating and Financial Metrics (unaudited) AUC (in R$ bn) 660 409 61% 563 17% Active clients (in '000s) 2,777 1,702 63% 2,645 5% Retail – gross total revenues (in R$ mn) 1,844 1,155 60% 1,698 9% Institutional – gross total revenues (in R$ mn) 307 306 0% 239 28% Issuer Services – gross total revenues (in R$ mn) 323 221 46% 169 91% Digital Content – gross total revenues (in R$ mn) 25 30 - 15% 32 - 20% Other – gross total revenues (in R$ mn) 71 111 - 36% 107 - 34% Company Financial Metrics Gross revenue (in R$ mn) 2,570 1,823 41% 2,245 14% Net Revenue (in R$ mn) 2,395 1,691 42% 2,101 14% Gross Profit (in R$ mn) 1,559 1,204 29% 1,395 12% Gross Margin 65.1% 71.2% - 612 bps 66.4% - 132 bps Adjusted EBITDA 1 (in R$ mn) 891 627 42% 727 23% Adjusted EBITDA margin 37.2% 37.1% 11 bps 34.6% 258 bps Adjusted Net Income 1 (in R$ mn) 721 417 73% 570 26% Adjusted Net Margin 30.1% 24.6% 544 bps 27.1% 294 bps FY20 FY19 YoY 660 409 61% 2,777 1,702 63% 6,271 3,676 71% 1,210 802 51% 688 507 36% 130 112 16% 413 420 - 2% 8,711 5,518 58% 8,152 5,128 59% 5,451 3,522 55% 66.9% 68.7% - 181 bps 2,918 1,679 74% 35.8% 32.7% 305 bps 2,270 1,074 111% 27.8% 20.9% 691 bps +58% YoY GROSS REVENUE ADJUSTED NET INCOME TOTAL AUC R$660 Billion +61% YoY ACTIVE CLIENTS 2.8 million +63% YoY NPS 71 GROSS REVENUE R$2.6 Billion +41% YoY ADJUSTED EBITDA R$891 Million +42% YoY ADJUSTED NET INCOME R$721 Million +73% YoY 2020 KPIs 4 4Q20 KPIs R$2.3 Billion 27.8% Margin R$8.7 Billion ADJUSTED EBITDA R$2.9 Billion 35.8% Margin

 
 

‘ Operational Performance Assets Under Custody (in R$ billions) Total AUC reached R $ 660 billion on December 31 , up 61 % year - over - year and 17 % quarter - over - quarter . Year - over - year growth was driven by R $ 198 billion of net inflows and R $ 53 billion of market appreciation . Despite last year’s uncertainty and market volatility, XP delivered solid AUC growth, while continuing to strengthen brand recognition among Brazilian investors . Net Inflows (in R $ billions) Adjusted Net Inflow totaled R $ 37 billion in 4 Q 20 , stable relative to 3 Q 20 . The average monthly Net Inflow, adjusted for extraordinary equity inflows/outflows, was R $ 12 . 7 billion in 2 H 20 , up 17 % from R $ 10 . 8 billion in 1 H 20 . For 4 Q 20 , flows were strong across all channels and brands, led by the Private segment reflecting ongoing cross - selling opportunities across XP’s ecosystem . 5

 
 

‘ Active Clients (in 000’s) Active clients grew 63 % and 5 % in 4 Q 20 vs 4 Q 19 and 3 Q 20 , respectively . In 2020 , client growth was strong across channels, with XP Direct outpacing the IFA channel, and Rico accelerating in 4 Q 20 following the elimination of brokerage fees in September . Retail Equity DARTs¹ (million trades) ¹Daily Average Revenue Trades, including Stocks, REITs, Options and Futures Retail DARTs have held strong since 2 Q 20 with 2 . 6 million daily average trades in 4 Q 20 despite a typical seasonal slowdown in December due to the holiday season . Retail DARTs at Rico reached a record level in 4 Q 20 following the implementation of zero brokerage fees in September . 6

 
 

‘ Collateralized Credit Portfolio (in R$ millions) Our Credit portfolio reached R $ 3 . 9 billion of assets as of December 31 , 2020 , which represented 0 . 6 % of our total AUC . Demand was driven by both individuals and SMB clients, boosted by XP’s AUC growth and the Government’s decision to charge zero IOF (Tax on Financial Operations) on loans granted over the last two weeks of the year . The average duration of our credit book was 3 . 2 years , with a 90 - day Non - Performing Loan (NPL) ratio of 0 . 0 % at year - end . Furthermore, we highlight the asset - light nature of our loan book, which currently represents R $ 721 million of Risk - Weighted Assets and requires minimum regulatory capital of just R $ 58 million . The fact that most of our credit portfolio is collateralized minimizes capital needs for growth . Our book is mainly funded by the issuance of Structured Notes (COEs) and Deposits, which are distributed to clients on our platform . Net Promoter Score (NPS) Our NPS, a widely known survey methodology used to measure customer satisfaction, increased to 71 in December 2020 . Maintaining a high NPS score is a priority for XP since our business model is built around the client experience . The NPS calculation as of a given date reflects the average scores in the prior six months . 7

 
 

‘ 4Q20 Revenue Breakdown Total Gross Revenue (in R$ millions) Total Gross Revenue increased 41 % from R $ 1 . 8 billion in 4 Q 19 to R $ 2 . 6 billion in 4 Q 20 . For the year, gross revenue expanded 58 % to R $ 8 . 7 billion in 2020 from R $ 5 . 5 billion in 2019 . The increase was mainly driven by strong growth in the Retail business, which contributed 92 % and 81 % of the growth in 4 Q 20 and 2020 , respectively . 8

 
 

‘ Retail Retail Revenue (in R$ millions) 4 Q 20 vs 4 Q 19 Retail revenue grew 60 % from R $ 1 . 2 billion in 4 Q 19 to R $ 1 . 8 billion in 4 Q 20 . The main growth drivers included, in order of contribution : ( 1 ) Equities and Futures, reflecting resilient trading volumes and growing participation of retail investors at B 3 ; ( 2 ) Financial Products, represented by Structured Notes (COE) and equity - linked derivatives ; and ( 3 ) Fixed Income . In 4 Q 20 , Retail - related revenues represented 75 % of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, and were composed of Derivatives with Retail Clients, Fixed Income secondary transactions, and Floating, among others . 2020 vs 2019 Retail revenue totaled R $ 6 . 3 billion in 2020 , a 71 % increase compared to 2019 , and contributing 81 % of total revenue growth, mainly driven by platform growth, both in AUC and Active Clients . For 2020 , Equities and Futures, Financial Products, and Fixed Income were also the main growth drivers, in order of contribution . 9

 
 

‘ LTM Take Rate (LTM Retail Revenue / Average AUC) 4 Q 20 take rate (for the last twelve months) remained stable compared to 4 Q 19 . Despite the strong growth in AUC during the period, higher Equities and Futures’ trading volumes and rising distribution of Financial Products and securities through Capital Markets worked as an offset . Note : LTM Take Rate (LTM Retail Revenue / Average AUC) . Average AUC = (Sum of AUC from beginning of period and each quarter end in a given year, being 5 data points in one year)/ 5 Institutional Institutional Revenue (in R$ millions) 4 Q 20 vs 4 Q 19 Institutional gross revenue remained stable in 4 Q 20 , since 4 Q 19 had strong performance fees from funds, which offset a higher equity trading volume in 4 Q 20 . In 4 Q 20 , Institutional revenue accounted for 16 % of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, and was composed mostly of Fixed Income secondary transactions and Derivatives, among others . 10

 
 

‘ 2020 vs 2019 Compared to 2019, Institutional revenue grew 51%, from R$802 million to R$1.2 billion, driven by market activity benefiting both fixed income and equity trading volume. Issuer Services Issuer Services Revenue (in R$ millions) 4 Q 20 vs 4 Q 19 Issuer Services revenue expanded 46 % year - over - year from R $ 221 million in 4 Q 19 to R $ 323 million in 4 Q 20 . This increase was driven by ( 1 ) Equity Capital Markets (ECM), with 11 executed deals vs 8 in 4 Q 19 , and ( 2 ) our Debt Capital Markets (DCM) division, with participation in 55 deals vs 51 in 4 Q 19 . 2020 vs 2019 Issuer Services revenue grew 36 % year - over - year, from R $ 507 million in 2019 to R $ 688 million in 2020 , despite modest activity in 2 Q 20 due to overall market conditions . The increase was mainly attributable to ( 1 ) Equity Capital Markets (ECM), with 32 executed deals vs 13 in 2019 and ( 2 ) and Debt Capital Markets (DCM) division, with 147 deals vs 145 in 2019 . In 2020 , XP Investment Banking was a protagonist in capital markets, ranked # 1 in the distribution of ( 1 ) Fixed Income & Hybrid products (consolidated), ( 2 ) REITs distribution, and ( 3 ) in CRA (agribusiness certificate of receivable), participating in 25 % , 56 % , and 46 % of total deals, respectively . 11

 
 

‘ Digital Content and Other Digital Content Revenue Gross revenue totaled R $ 25 million in 4 Q 20 , down 15 % from R $ 30 million in 4 Q 19 . When looking at full - year figures, Digital content had a solid year, growing revenues 16 % over 2019 . 4 Q 20 was impacted mostly by the absence of in - person events and courses compared to the same period of last year . Other Revenue 4 Q 20 vs 4 Q 19 Other revenue decreased 36 % in 4 Q 20 vs . 4 Q 19 , from R $ 111 million to R $ 71 million, primarily driven by a lower average Selic rate . In 4 Q 20 , other revenue accounted for 9 % of consolidated Net Income from Financial Instruments, as per the Accounting Income Statement, composed mostly of interest on adjusted gross cash and a small portion related to our treasury’s asset liability management . 2020 vs 2019 Other revenue remained stable for the full - year comparison, impacted by a lower average Selic rate, offset by an increase in the average adjusted gross cash balance during the year . COGS COGS (in R$ millions) and Gross Margin 12

 
 

‘ 4 Q 20 vs 4 Q 19 COGS rose 72 % from R $ 487 million in 4 Q 19 to R $ 836 million in 4 Q 20 , reducing gross margin from 71 . 2 % to 65 . 1 % , driven by an (i) 306 bps compression caused by long - term incentive plans to our IFAs, from which 182 bps are related to share - based compensation ; and (ii) 259 bps from product mix . 2020 vs 2019 For the year, COGS rose 68 % , from R $ 1 . 6 billion to R $ 2 . 7 billion, driven by the increase in revenues from our IFA Network and active clients . Gross profit margin decreased 181 bps, also affected by the investments made in the IFA network in the second half of 2020 . SG&A Expenses SG&A Expense (ex - Share - Based Compensation) (in R$ millions) 4 Q 20 vs 4 Q 19 SG&A expenses (excluding share - based compensation) totaled R $ 717 million in 4 Q 20 , up 20 % from R $ 599 million in 4 Q 19 . Expenses, as a percentage of net revenue, decreased, even though we are significantly growing our headcount (over 50 % year - over - year) and being consistently developing our product offering and client experience to address an even greater addressable market . The efficiency gain in SG&A was allowed by past investments in technology and our highly scalable platform business model . 2020 vs 2019 SG&A expenses (excluding share - based compensation) for the full - year of 2020 totaled R $ 2 . 6 billion, an increase of 44 % over R $ 1 . 8 billion from 2019 . The efficiency gain, as mentioned above, is mostly related to our highly scalable business model, even considering investments to jump into a greater addressable market . 13

 
 

‘ Share - Based Compensation (in R $ millions) In December 2019 , we implemented our new partnership model, according to which existing or new partners may be entitled to share - based compensation based on cultural fit and individual performance, consisting of restricted stock units and performance share units . Expenses related to this model were significantly higher in 2020 . As of December 2020 , there was a total of 13 , 899 , 648 outstanding shares, or approximately 50 % of the total dilution planned and approved during IPO, on December 19 . In 2020 , we have anticipated a significant part of the approved dilution, and, for this reason, this increase should not be repeated at the same pace in new grants . We expect to use the approved dilution as originally planned : within five years counting from IPO . A portion of Share - Based Compensation is related to IFAs and allocated in COGS . 14

 
 

‘ Adjusted EBITDA Adjusted EBITDA¹ (in R$ millions) and Margin ¹ See appendix for a reconciliation of Adjusted EBITDA. 4 Q 20 vs 4 Q 19 Adjusted EBITDA grew 42 % , from R $ 627 million to R $ 891 million . The growth was driven by ( 1 ) strong growth in Retail Revenue and ( 2 ) operating leverage in SG&A . Both were partially offset by higher COGS, impacted by investments made in our IFA Network . 2020 vs 2019 Compared to 2019 , Adjusted EBITDA expanded 74 % , from R $ 1 . 7 billion to R $ 2 . 9 billion . Despite ( 1 ) growing our number of employees 50 % year - over - year, ( 2 ) investing in new business (such as credit cards and digital bank), and ( 3 ) investing in our IFA Network, adjusted EBITDA Margin expanded from 32 . 7 % to 35 . 8 % . The margin expansion reflects the benefits of our operating leverage and technology investments made in the past, which provided scalability for the company . 15

 
 

‘ Adjusted Net Income Adjusted Net Income¹ (in R$ millions) and Margin 4Q20 vs 4Q19 Adjusted Net Income grew 73 % , from R $ 417 million to R $ 721 million, driven by ( 1 ) strong performance of the Retail business and ( 2 ) a lower effective tax rate, as a result of our post - IPO corporate structure . Our adjusted net income margin expanded by 544 bps in 4 Q 20 . 2020 vs 2019 In 2020 , Adjusted Net Income grew 111 % vs 2019 and reached R $ 2 . 3 billion . The adjusted net margin expanded from 20 . 9 % in 2019 to 27 . 8 % in 2020 , up 691 bps, reflecting : ( 1 ) strong growth in Retail Revenue, which was mainly driven by Equity, Derivatives, Financial Products and Fixed Income, ( 2 ) a lower effective tax rate ; and ( 3 ) operating leverage in SG&A . ¹ See appendix for a reconciliation of Adjusted Net Income . Guidance We have revised our 3 - 5 year adjusted net margin guidance, from previous 18 - 22 % range to 24 - 30 % . 16

 
 

‘ Cash flow 17 Net Cash Flow Used in Operating Activities Our net cash flow used in Operating activities represented by Adjusted net cash flow (used in) from operating activities (which in management’s view is a more useful metric to track the intrinsic cash flow generation of the business) increased to R $ 1 . 6 billion for 4 Q 20 from negative R $ 129 million in 3 Q 20 , and increased from R $ 1 . 4 billion in 2019 to R $ 3 . 0 billion in 2020 driven by :  Higher balance of securities and derivatives that we hold in the ordinary course of our business as a Retail investment distribution platform and as an Institutional broker - dealer (concerning the sale of fixed income securities and structured notes) ;  Our strategy to allocate excess cash and cash equivalents from treasury funds, from Floating Balances and private pension balances to securities and other financial assets . These balances may fluctuate substantially from quarter to quarter and were the key drivers to the net cash flow from operating activities figures ;  Increases in our banking activities from loan operations, deposits mainly derived from time deposits, structured operations certificates (COE) and other financial liabilities which include financial bills as a result of our expected growth in new financial services verticals .  Growth of our omnichannel distribution network through our network of IFA partners ;  Our income before tax of R $ 892 million in 4 Q 20 and R $ 3 . 0 billion in 2020 combined with non - cash expenses consisting primarily of (i) share - based plan of R $ 154 million in 4 Q 20 and R $ 233 million in 2020 (ii) depreciation and amortization of R $ 37 million in 4 Q 20 and R $ 143 million in 2020 , (iii) Losses on impairment and write - off of property, equipment, intangible assets and leases of R $ 11 million in 4 Q 20 and R $ 73 million in 2020 . The total amount of adjustments to reconcile income before income taxes for 4 Q 20 was R $ 229 million and R $ 564 million for 2020 . Net Cash Flow Used in Investing Activities Our net cash used in investing activities decreased from R$302 million in 3Q20 to R$202 million in 4Q20 and increased from R$161 million in 2019 to R$582 million in 2020, primarily affected by: Net cash flow (used in) from securities, repos, derivatives and banking activities Net cash flows from operating activities 656 990 Net cash flows from investing activities ( 202 ) (302) Net cash flows from financing activities 1 , 39 0 (478) (in R$ millions) 4Q20 3Q20 F Y 2 0 FY19 Cash Flow Data Income before income tax 663 632 2 , 42 1 1,544 Adjustments to reconcile income before income tax 229 128 564 206 Income tax paid (97) (126) ( 519 ) (403) Contingencies paid (1) (0) ( 2 ) (3) Interest paid (9) (44) ( 71 ) (28) Changes in working capital assets and liabilities 830 (720) 565 122 Adjusted net cash flow (used in) from operating activities 1,615 (129) 2 , 95 9 1,437 1 , 51 1 (3,814) ( 582 ) (161) 789 4,234 ( 959 ) 1 , 11 9 (1,448) (5,251)

 
 

‘  Our acquisitions of FinTech’s investments in associates and joint ventures of R $ 290 million in 2020 ;  the investment in intangible assets, mostly IT infrastructure and capitalized software development which increased from R $ 35 million in 3 Q 20 to R $ 66 million in 4 Q 20 and from R $ 89 million in 2019 to R $ 145 million in 2020 . Net Cash Provided by Financing Activities Our net cash flows from financing activities increased from negative R$478 million in 3Q20 to R$1.4 billion in 4Q20 and decreased from R$4.2 billion in 2019 to R$789 million in 2020, primarily due to:  R$1.4 billion related to proceeds from the issuance of shares related to our primary offering in 4Q20;  R$400 million related to principal payments of the first series of non - convertible debentures in 3Q20;  R$66 million related to a partial repurchase of the second series of non - convertible debentures in 2Q20;  R$4.5 billion related to the initial public offering proceeds in 2019 and;  R$22 million in 4Q20, R$78 million in 3Q20, R$153 million in 2020 and R$123 million in 2019 related to Payments of borrowings and lease liabilities. 18

 
 

‘ Fl o a t in g Bal a nce an d Adj u sted Gross Financial Assets (in R$ millions) 19 We present Adjusted Gross Financial Assets because we believe this metric captures the liquidity that is, in fact, available to us, net of the portion of liquidity that is related to our Floating Balance (and therefore attributable to clients) . We calculate Adjusted Gross Financial Assets as the sum of ( 1 ) Cash and Financial Assets (comprised of Cash plus Securities – Fair value through profit or loss, plus Securities – Fair value through other comprehensive income, plus Securities – Evaluated at amortized cost, plus Derivative financial instruments, plus Securities (purchased under agreements to resell), plus Loans, less ( 2 ) Financial Liabilities (comprised of the sum of Securities loaned, Derivative financial instruments, Securities sold under repurchase agreements and Private pension liabilities), Deposits, Structured Operation Certificates (COE) and ( 3 ) less Floating Balance . It is a measure that we track internally daily, and it more intuitively reflects the effect of the operational profits we generate and the variations between working capital assets and liabilities (cash flows from operating activities), investments in fixed and intangible assets (cash flows from investing activities) and inflows and outflows related to equity and debt securities in our capital structure (cash flows from financing activities) . Our management treats all securities and financial instrument assets, net of financial instrument liabilities, as balances that compose our total liquidity, with subline items (such as, for example, “securities at fair value through profit and loss” and “securities at fair value through other comprehensive income”) expected to fluctuate substantially from quarter to quarter as our treasury manages and allocates our total liquidity to the most suitable financial instruments . Floating Balance (=net univested clients' deposits) 4 Q 2 0 3Q20 Assets ( 1 , 052 ) ( 1 , 484 ) ( - ) Securities trading and intermediation ( 1,052 ) ( 1,484 ) Liabilities 20 , 30 3 15 , 16 0 (+) Securities trading and intermediation 20,30 3 15,16 0 (=) Floating Balance 19 , 25 2 13 , 67 6 Adjusted Gross Financial Assets 4 Q 2 0 3Q20 Assets 90 , 51 8 83 , 06 1 (+) Cash 1,95 5 642 (+) Securities - Fair value through profit or loss 49,59 0 38,70 2 (+) Securities - Fair value through other comprehensive income 19,03 9 9,589 (+) Securities - Evaluated at amortized cost 1,82 9 1,366 (+) Derivative financial instruments 7,55 9 13,14 9 (+) Securities purchased under agreements to resell 6,62 7 18,24 4 (+) Loans 3,91 8 1,369 Liabilities ( 60 , 484 ) ( 61 , 514 ) ( - ) Securities loaned ( 2,237 ) ( 1,112 ) ( - ) Derivative financial instruments ( 7,819 ) ( 12,730 ) ( - ) Securities sold under repurchase agreements ( 31,839 ) ( 35,254 ) ( - ) Private Pension Liabilities ( 13,388 ) ( 9,649 ) ( - ) Deposits ( 3,022 ) ( 1,627 ) ( - ) Structured Operations ( 2,178 ) ( 1,142 ) ( - ) Floating Balance ( 19 , 252 ) ( 13 , 676 ) (=) Adjusted Gross Financial Assets 10 , 78 2 7,871

 
 

‘ Other Information 20 Web Meeting The Company will host a webcast to discuss its 4 Q 20 financial results on Tuesday, February 23 , 2021 , at 5 : 00 pm ET ( 7 : 00 pm BRT) . To participate in the earnings webcast please subscribe at 4 Q 20 Earnings Web Meeting . The replay will be available on XP’s investor relations website at https : //investors . xpinc . com/ Investor Relations Team André Martins Antonio Guimarães Natali Pimenta ir@xpi.com.br

 
 

‘ Important Disclosure 21 IN REVIEWING THE INFORMATION CONTAINED IN THIS RELEASE, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER . THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT . This release is prepared by XP Inc . (the “Company,” “we” or “our”), is solely for informational purposes . This release does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities . In addition, this document and any materials distributed in connection with this release are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction . This release was prepared by the Company . Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this release or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information . The information and opinions contained in this release are provided as at the date of this release, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company . The information in this release is in draft form and has not been independently verified . The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this release and any errors therein or omissions therefrom . Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any . The information contained in this release does not purport to be comprehensive and has not been subject to any independent audit or review . Certain of the financial information as of and for the periods ended December 31 , 2019 , 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements . A significant portion of the information contained in this release is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate . The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results . Statements in the release, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward - looking statements . These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others . By their nature, forward - looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company . Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward - looking statements and there can be no assurance that such forward - looking statements will prove to be correct . These risks and uncertainties include factors relating to : ( 1 ) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business ; ( 2 ) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future ; ( 3 ) competition in the financial services industry ; ( 4 ) our ability to implement our business strategy ; ( 5 ) our ability to adapt to the rapid pace of technological changes in the financial services industry ; ( 6 ) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers ; ( 7 ) the availability of government authorizations on terms and conditions and within periods acceptable to us ; ( 8 ) our ability to continue attracting and retaining new appropriately - skilled employees ; ( 9 ) our capitalization and level of indebtedness ; ( 10 ) the interests of our controlling shareholders ; ( 11 ) changes in government regulations applicable to the financial services industry in Brazil and elsewhere ; ( 12 ) our ability to compete and conduct our business in the future ; ( 13 ) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors ; ( 14 ) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes ; ( 15 ) changes in labor, distribution and other operating costs ; ( 16 ) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us ; ( 17 ) other factors that may affect our financial condition, liquidity and results of operations . Accordingly, you should not place undue reliance on forward - looking statements . The forward - looking statements included herein speak only as at the date of this release and the Company does not undertake any obligation to update these forward - looking statements . Past performance

 
 

‘ does not guarantee or predict future performance . Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward - looking statements to reflect events that occur or circumstances that arise in relation to the content of the release . You are cautioned not to unduly rely on such forward - looking statements when evaluating the information presented and we do not intend to update any of these forward - looking statements . Market data and industry information used throughout this release are based on management’s knowledge of the industry and the good faith estimates of management . The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third - party sources . All of the market data and industry information used in this release involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates . Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information . The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company . The Company is not acting on your behalf and does not regard you as a customer or a client . It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction . This release includes our Floating Balance, Adjusted Gross Financial Assets, Adjusted EBITDA and Adjustments to Reported Net Income, which are non - GAAP financial information . We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations . We also believe that these non - GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business . Further, investors regularly rely on non - GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS . We also believe that certain non - GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results . The non - GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements . The non - GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results . As other companies may determine or calculate this non - GAAP financial information differently, the usefulness of these measures for comparative purposes is limited . A reconciliation of such non - GAAP financial measures to the nearest GAAP measure is included in this release . 22 For purposes of this release : “Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R $ 100 . 00 or that have transacted at least once in the last thirty days . For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account . For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric . “Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform and that is related to reported Retail Revenue, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda . , XP Advisory Gestão de Recursos Ltda . and XP Vista Asset Management Ltda . , as well as by third - party asset managers), pension funds (including those from XP Vida e Previdência S . A . , as well as by third - party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others . Although AUC includes custody from Corporate Clients that generate Retail Revenue, it does not include custody from institutional clients (asset managers, pension funds and insurance companies) . Rounding We have made rounding adjustments to some of the figures included in this annual report . Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them .

 
 

‘ Unaudited Managerial Income Statement (in R$ millions) ¹ A portion of total Share - Based Compensation is related to IFAs and allocated in COGS 4 Q 2 0 4 Q 1 9 YoY 3 Q 2 0 QoQ F Y 2 0 F Y 1 9 YoY Managerial Income Statement Total Gross Revenue 2,570 1,823 41% 2 , 24 5 14% 8,711 5,518 58% Retail 1,844 1,155 60% 1,698 9% 6,271 3,676 71% Institutional 307 306 0% 239 28% 1,210 802 51% Issuer Services 323 221 46% 169 91% 688 507 36% Digital Content 25 30 - 15% 32 - 20% 130 112 16% Other 71 111 - 36% 107 - 34% 413 420 - 2% Net Revenue 2,395 1,691 42% 2 , 10 1 14% 8,152 5,128 59% COGS (836) (487) 72% (706) 18% (2,701) (1,606) 68% As a % of Net Revenue (34.9%) (28.8%) - 6.1 p.p (33.6%) - 1.3 p.p (33.1%) (31.3%) - 1.8 p.p Gross Profit 1,559 1,204 29% 1 , 39 5 12% 5,451 3,522 55% Gross Margin 65.1% 71.2% - 6.1 p.p 66.4% - 1.3 p.p 66.9% 68.7% - 1.8 p.p SG&A (717) (599) 20% (669) 7% (2,584) (1,794) 44% Share Based Compensation 1 (136) (8) 1714% (44) 207% (250) (8) 3225% EBITDA 705 598 18% 681 4% 2,616 1,720 52% EBITDA Margin 29.4% 35.3% - 5.9 p.p 32.4% - 3.0 p.p 32.1% 33.5% - 1.4 p.p Adjusted EBITDA 891 627 42% 727 23% 2,918 1,679 74% Adjusted EBITDA Margin 37.2% 37.1% 0.1 p.p 34.6% 2.6 p.p 35.8% 32.7% 3.0 p.p D&A (37) (29) 30% (36) 3% (143) (92) 56% EBIT 668 569 17% 645 4% 2,473 1,629 52% Interest expense on debt (6) (22) - 71% (12) - 46% (53) (84) - 38% Share of profit or (loss) in joint ventures and associates 1 - n.a. (1) n.a. 1 - n.a. EBT 663 547 21% 632 5% 2,421 1,544 57% Income tax expense (60) (157) - 61% (91) - 34% (340) (455) - 25% Effective Tax Rate (9.1%) (28.7%) 19.5 p.p (14.4%) 5.3 p.p (14.0%) (29.4%) 15.4 p.p Net Income 602 390 54% 541 11% 2,081 1,089 91% Net Margin 25.2% 23.1% 2.1 p.p 25.8% - 0.6 p.p 25.5% 21.2% 4.3 p.p Non Recurring Items 118 27 343% 29 309% 189 (16) - 1305% Adjusted Net Income 721 417 73% 570 26% 2,270 1,074 111% Adjusted Net Margin 30.1% 24.6% 5.4 p.p 27.1% 2.9 p.p 27.8% 20.9% 6.9 p.p 23

 
 

‘ Accounting Income Statement (in R$ millions) 24 4 Q 2 0 4 Q 1 9 YoY 3Q20 QoQ Accounting Income Statement Net revenue from services rendered 1,523 1 , 25 5 21% 1,278 19% Brokerage commission 545 352 55% 548 - 1% Securities placement 508 462 10% 388 31% Management fees 415 444 - 6% 274 51% Insurance brokerage fee 39 37 4% 18 118% Educational services 23 23 - 1% 25 - 11% Other services 143 63 129% 155 - 8% Taxes and contributions on services (148) ( 125 ) 18% (131) 13% Net income from financial instruments at amortized cost and at fair value through other (115) (4) n.a. 190 n.a. comprehensive income Net income from financial instruments at fair value through profit or loss 987 441 124% 633 56% Total revenue and income 2,395 1 , 69 1 42% 2,101 14% Expected credit losses (17) (3) 463% (10) 82% Operating costs (819) ( 484 ) 69% (696) 18% Selling expenses (41) ( 73 ) - 44% (38) 6% Administrative expenses (936) ( 597 ) 57% (810) 16% Other operating revenues (expenses), net 86 35 146% 98 - 12% Interest expense on debt (6) ( 22 ) - 71% (12) - 46% Share of profit or (loss) in joint ventures and associates 1 - n.a. (1) n.a. Income before income tax 663 547 21% 632 5% Income tax expense (60) ( 157 ) - 61% (91) - 34% Effective tax rate (9.1%) ( 28 . 7 % ) 19.6 p.p (14.4%) 5.3 p.p Net income for the period 602 390 54% 541 11% FY20 FY19 YoY 5,016 3,596 40% 2,140 1,288 66% 1,430 1,155 24% 1,224 1,035 18% 113 106 6% 118 98 21% 478 275 73% (486) (362) 34% 188 200 - 6% 2,947 1,332 121% 8,152 5,128 59% (56) (9) 490% (2,645) (1,597) 66% (135) (155) - 13% (3,014) (1,891) 59% 171 153 12% (53) (84) - 38% 1 - n.a. 2,421 1,544 57% (340) (455) - 25% (14.0%) (29.4%) 15.4 p.p 2,081 1,089 91%

 
 

‘ Balance Sheet (in R$ millions) 25 2020 2019 Assets Cash 1 , 95 5 110 Financial assets 90 , 19 1 41,889 Fair value through profit or loss 57 , 14 9 26,528 Securities 49 , 590 22,443 Derivative financial instruments 7 , 559 4,085 Fair value through other comprehensive income 19 , 03 9 2,616 Securities 19 , 039 2,616 Evaluated at amortized cost 14 , 00 2 12,744 Securities 1 , 829 2,267 Securities purchased under agreements to resell 6 , 627 9,490 Securities trading and intermediation 1 , 052 505 Accounts receivable 506 462 Loan Operations 3 , 918 0 Other financial assets 70 20 Other assets 1 , 76 1 644 Recoverable taxes 128 243 Rights - of - use assets 183 227 Prepaid expenses 1 , 394 90 Other 57 83 Deferred tax assets 505 285 Investments in associates and joint ventures 700 - Property and equipment 204 142 Intangible assets 714 553 Total Assets 96 , 02 9 43,623

 
 

‘ 2020 2019 Liabilities Financial liabilities 70 , 60 1 31,842 Fair value through profit or loss 10 , 05 7 5,251 Securities 2 , 23 7 2,022 Derivative financial instruments 7 , 81 9 3,229 Evaluated at amortized cost 60 , 54 4 26,591 Securities sold under repurchase agreements 31 , 83 9 15,638 Securities trading and intermediation 20 , 30 3 9,115 Deposits 3 , 02 2 70 Structured operations certificates 2 , 17 8 19 Accounts payables 860 267 Borrowings and lease liabilities 493 637 Debentures 335 835 Other financial liabilities 1 , 51 4 9 Other liabilities 14 , 52 2 4,620 Social and statutory obligations 667 493 Taxes and social security obligations 436 345 Private pension liabilities 13 , 38 8 3,759 Provisions and contingent liabilities 20 15 Other 11 7 Deferred tax liabilities 8 5 Total Liabilities 85 , 13 2 36,467 Equity attributable to owners of the Parent company 10 , 89 5 7,153 Issued capital 0 0 Capital reserve 10 , 66 4 6,943 Other comprehensive income 231 210 Retained earnings - - Non - controlling interest 3 3 26 Total equity 10 , 89 8 7,156 Total liabilities and equity 96 , 02 9 43,623

 
 

‘ Adjusted EBITDA (in R$ millions) 27 Adjusted Net Income (in R$ millions) 4Q20 4Q19 YoY 3Q20 QoQ FY20 FY19 Y o Y EBITDA 705 598 18% 681 4% 2,616 1,720 52% (+) Stock Based Compensation 180 8 n.a. 44 305% 293 8 n . a . (+) Offering expenses 6 22 - 73% 2 216% 8 22 - 65 % ( - ) Tax claim recognition (2010 - 2020) - - n.a. - n.a. - (71) - 100 % Adj. EBITDA 891 627 42% 727 23% 2,918 1,679 74% 4Q20 4Q19 YoY 3Q20 QoQ FY20 FY19 Y o Y Net Income 602 390 54% 541 11% 2,081 1,089 91% (+) Stock Based Compensation 180 8 n.a. 44 305% 293 8 n . a . (+) Offering expenses 6 22 - 73% 2 216% 8 22 - 65 % ( - ) Tax claim recognition (2010 - 2020) - - n.a. - n.a. - (71) - 100 % (+/ - ) Taxes (68) (3) n.a. (18) 283% (113) 25 n . a . Adj. Net Income 721 417 73% 570 26% 2,270 1,074 111%

 

1 4Q20 Earnings Presentation

 
 

2 Important Disclosure IN REVIEWING THE INFORMATION CONTAINED IN THIS PRESENTATION, YOU ARE AGREEING TO ABIDE BY THE TERMS OF THIS DISCLAIMER . THIS INFORMATION IS BEING MADE AVAILABLE TO EACH RECIPIENT SOLELY FOR ITS INFORMATION AND IS SUBJECT TO AMENDMENT . This presentation is prepared by XP Inc . (the “Company,” “we” or “our”), is solely for informational purposes . This presentation does not constitute a prospectus and does not constitute an offer to sell or the solicitation of an offer to buy any securities . In addition, this document and any materials distributed in connection with this presentation are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction . This presentation was prepared by the Company . Neither the Company nor any of its affiliates, officers, employees or agents, make any representation or warranty, express or implied, in relation to the fairness, reasonableness, adequacy, accuracy or completeness of the information, statements or opinions, whichever their source, contained in this presentation or any oral information provided in connection herewith, or any data it generates and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information . The information and opinions contained in this presentation are provided as at the date of this presentation, are subject to change without notice and do not purport to contain all information that may be required to evaluate the Company . The information in this presentation is in draft form and has not been independently verified . The Company and its affiliates, officers, employees and agents expressly disclaim any and all liability which may be based on this presentation and any errors therein or omissions therefrom . Neither the Company nor any of its affiliates, officers, employees or agents makes any representation or warranty, express or implied, as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any . The information contained in this presentation does not purport to be comprehensive and has not been subject to any independent audit or review . Certain of the financial information as of and for the periods ended December 31 , 2019 , 2018 and 2017 has been derived from audited financial statements and all other financial information has been derived from unaudited interim financial statements . A significant portion of the information contained in this presentation is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate . The Company’s internal estimates have not been verified by an external expert, and the Company cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same results . Statements in the presentation, including those regarding the possible or assumed future or other performance of the Company or its industry or other trend projections, constitute forward - looking statements . These statements are generally identified by the use of words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others . By their nature, forward - looking statements are necessarily subject to a high degree of uncertainty and involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company . Such factors may cause actual results, performance or developments to differ materially from those expressed or implied by such forward - looking statements and there can be no assurance that such forward - looking statements will prove to be correct . These risks and uncertainties include factors relating to : ( 1 ) general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business ; ( 2 ) fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future ; ( 3 ) competition in the financial services industry ; ( 4 ) our ability to implement our business strategy ; ( 5 ) our ability to adapt to the rapid pace of technological changes in the financial services industry ; ( 6 ) the reliability, performance, functionality and quality of our products and services and the investment performance of investment funds managed by third parties or by our asset managers ; ( 7 ) the availability of government authorizations on terms and conditions and within periods acceptable to us ; ( 8 ) our ability to continue attracting and retaining new appropriately - skilled employees ; ( 9 ) our capitalization and level of indebtedness ; ( 10 ) the interests of our controlling shareholders ; ( 11 ) changes in government regulations applicable to the financial services industry in Brazil and elsewhere ; ( 12 ) our ability to compete and conduct our business in the future ; ( 13 ) the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors ; ( 14 ) changes in consumer demands regarding financial products, customer experience related to investments and technological advances, and our ability to innovate to respond to such changes ; ( 15 ) changes in labor, distribution and other operating costs ; ( 16 ) our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us ; ( 17 ) the negative impacts of the COVID - 19 pandemic on global, regional and national economies and the related market volatility and protracted economic downturn ; and ( 18 ) other factors that may affect our financial condition, liquidity and results of operations . Accordingly, you should not place undue reliance on forward - looking statements . The forward - looking statements included herein speak only as at the date of this presentation and the Company does not undertake any obligation to update these forward - looking statements . Past performance does not guarantee or predict future performance . Moreover, the Company and its affiliates, officers, employees and agents do not undertake any obligation to review, update or confirm expectations or estimates or to release any revisions to any forward - looking statements to reflect events that occur or circumstances that arise in relation to the content of the presentation . You are cautioned not to unduly rely on such forward - looking statements when evaluating the information presented and we do not intend to update any of these forward - looking statements . Market data and industry information used throughout this presentation are based on management’s knowledge of the industry and the good faith estimates of management . The Company also relied, to the extent available, upon management’s review of industry surveys and publications and other publicly available information prepared by a number of third party sources . All of the market data and industry information used in this presentation involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates . Although the Company believes that these sources are reliable, there can be no assurance as to the accuracy or completeness of this information, and the Company has not independently verified this information . The contents hereof should not be construed as investment, legal, tax or other advice and you should consult your own advisers as to legal, business, tax and other related matters concerning an investment in the Company . The Company is not acting on your behalf and does not regard you as a customer or a client . It will not be responsible to you for providing protections afforded to clients or for advising you on the relevant transaction . This presentation also includes certain non - GAAP financial information . We believe that such information is meaningful and useful in understanding the activities and business metrics of the Company’s operations . We also believe that these non - GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with our International Financial Reporting Standards (“IFRS”) results, as issued by the International Accounting Standards Board, provide a more complete understanding of factors and trends affecting the Company’s business . Further, investors regularly rely on non - GAAP financial measures to assess operating performance and such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with IFRS . We also believe that certain non - GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in the Company’s industry, many of which present these measures when reporting their results . The non - GAAP financial information is presented for informational purposes and to enhance understanding of the IFRS financial statements . The non - GAAP measures should be considered in addition to results prepared in accordance with IFRS, but not as a substitute for, or superior to, IFRS results . As other companies may determine or calculate this non - GAAP financial information differently, the usefulness of these measures for comparative purposes is limited . A reconciliation of such non - GAAP financial measures to the nearest GAAP measure is included in this presentation . For purposes of this presentation : “Active Clients” means the total number of retail clients served through our XP Investimentos, Rico, Clear, XP Investments and XP Private (Europe) brands, with an AUC above R $ 100 . 00 or that have transacted at least once in the last thirty days . For purposes of calculating this metric, if a client holds an account in more than one of the aforementioned entities, such client will be counted as one “active client” for each such account . For example, if a client holds an account in each of XP Investimentos and Rico, such client will count as two “active clients” for purposes of this metric . “Assets Under Custody (AUC)” means the market value of all client assets invested through XP’s platform, including equities, fixed income securities, mutual funds (including those managed by XP Gestão de Recursos Ltda . , XP Advisory Gestão Recursos Ltda . and XP Vista Asset Management Ltda . , as well as by third - party asset managers), pension funds (including those from XP Vida e Previdência S . A . , as well as by third - party insurance companies), exchange traded funds, COEs (Structured Notes), REITs, and uninvested cash balances (Floating Balances), among others . 2

 
 

3 Index Strategy Update 02 4Q20 KPIs and Financials 03 Guidance 04 01 Opening Remarks Q&A 05

 
 

1 Opening Remarks

 
 

5 2020: A Challenging Year With Many Lessons Learned X P reinvented itself in order to maintain growth and contribute to society 2020 LESSONS DIGITAL ACCELERATION: A SECULAR TREND CAPACITY TO ADAPT QUICKLY TO CHANGES ESG INITIATIVES AND A DIFFERENT WAY OF WORKING BEST HISTORICAL FINANCIALS AND KPIS R$660 bn TOTAL AUC +58% YoY 2,777k ACTIVE CLIENTS +63% YoY +8K IFA IN OUR NETWORK R$8,711 mn GROSS REVENUE Note: Data as of 31 December, 2020 +61% YoY R$2,270 mn ADJ NET INCOME +111% YoY OUR CULTURE DREAM BIG OPEN MINDED ENTREPRENEURIAL SPIRIT 27.8% ADJ. NET MARGIN

 
 

2 Strategy Update

 
 

7 Addressing the Brazilian Financial Revenue Pool E xpanding our TAM: XP has historically entered in new verticals and there is much more to come… Source: XP Inc. 5.5 2016 1.3 2017 2018 2020 2019 2.0 3.2 8.7 XP Revenue 2020 Total TAM 770.0 8.7 XP INC. GROSS REVENUE (in R$ bn) TOTAL FINANCIAL REVENUE POOL (2021) (in R$ bn) 60% CAGR TOTAL ADDRESSABLE MARKET (TAM) ROADMAP 2001 - 2018 2019 2021 2020 HISTORICAL REVENUE DRIVERS ▪ RETAIL INVESTMENTS ▪ INSTITUTIONAL BROKERAGE ▪ DCM ADDRESSED TAM @IPO R$70BN + PENSION FUNDS + INSURANCE BROKERAGE + ECM + REITS ADDRESSED TAM R$125BN + INSURANCE (LIFE + SURETY) + FX AND DERIVATIVES + M&A (RIZA ACQUISITION) + COLLATERALIZED CREDIT ADDRESSED TAM TODAY R$180BN + CREDIT CARD + DEBIT CARD + DIGITAL BANKING + UPPER MIDDLE MARKET CREDIT + CORPORATE CREDIT 1.2% of TAM 2022+ LONG - TERM TAM R$770BN + SMB & MIDDLE MARKET CREDIT + OTHER CREDIT PRODUCTS + OTHER PRODUCTS

 
 

8 Connecting the Dots: How XP Will Complement the Client Journey From Assets to Liabilities , we intend to democratize financial services in its integrity COMPLETE RELATIONSHIP LIABILITIES ASSETS ASSET LIGHT MODEL + DISTRIBUTION CAPABILITIES 20 YEARS CREDIBILITY FINANCIAL EDUCATION OPEN PRODUCT PLATFORM LOW - COST CREDIT CREDIT CARD & MARKETPLACE MIDDLE MARKET: IFAs & ANTECIPA FLIPER & OPEN BANKING 360 ° ORGANIZED FINANCIAL LIFE BEST - IN - CLASS INTEGRATED APP CLIENT EXPERIENCE

 
 

9 Collateralized Credit and Credit Card EXPONENTIAL GROWTH Dec - 20 Mar - 20 Jun - 20 Sep - 20 64 3,874 380 1,368 CREDIT CARD NOW AVAILABLE FOR XP INVESTIMENTOS’ CLIENTS WITH THE FOLLOWING BENEFITS : ▪ ASSET LIGHT CREDIT PORTFOLIO, WITH 19 % RWA ▪ OVERCOLLATERAL SUPPORTING 0 % NPL RATIO ▪ COMPETITIVE INTEREST RATES FOR COMPANIES AND INDIVIDUALS ▪ NO FEES ▪ 1% INVESTBACK, FIRST IN THE MARKET ▪ MARKETPLACE ▪ DYNAMIC CREDIT LIMIT ▪ SINGLE XP APP FOR ALL THE SERVICES ▪ DIGITAL WALLET Innovative and integrated solutions made possible by XP’s proprietary technology developments 1. COLLATERALIZED CREDIT 2. XP VISA INFINITE CREDIT CARD CREDIT PORTFOLIO (in R$ mn )

 
 

10 Tech Development Example: Innovation from Scratch to Scale Soma is XP’s own Design System AN ECOSYSTEM TO UNITE, CREATE AND EVOLVE SOMA EFFICIENCY IMPACTS 60 MINUTES OF WORK REDUCED PER HEAD 40K HOURS OF PROJECT WORK REDUCED LESS 15% ON OUR TIME TO MARKET 2020 MAIN PROJECTS ALL XP INC. BRANDS BENEFITED FROM SOMA CREDIT CARD 6 MONTHS OF DEVELOPMENT IFA HUB SCALE AND PERFORMANCE FOR OUR IFA NETWORK DESIGN AWARD 2020 FINALIST NEW XP APP 4.8 RATING IN APPLE STORE

 
 

3 4Q20 KPIs and Financials

 
 

12 KPIs AUC, Active Clients and NPS Assets Under Custody (AUC) (R$ in bn) Net Inflow (R$ in bn) 4Q19 4Q20 1,702 2,777 +63% Active Clients (‘000) Net Inflow Adj. by Extraordinary Inflows (R$ in bn) 411 660 198 Net Inflow 4Q19 51 Market Appreciatio n 4Q20 61% 15 29 117 37 1Q20 3Q20 2Q20 4Q20 36 29 39 37 2Q20 1Q20 3Q20 4Q20

 
 

13 Gross Revenue Breakdown RETAIL INSTITUTIONAL ISSUER SERVICES DIGITAL CONTENT 72 % 12 % 13 % 1 % Other Revenue represented 3% of Total Gross Revenues Total Gross Revenues (in R$ mn) Highlights ▪ Strong growth of the Retail business, with 92 % and 81 % growth contribution, respectively, in those periods . of 4Q20 Total Gross Revenue 4Q19 4Q20 2,570 1,823 +41% 2019 2020 5,518 8,711 +58%

 
 

14 Retail Revenue and Take Rate Strong expansion following client addition and healthy net inflow LTM Take Rate (LTM Retail Revenue / Average AUC) Retail Revenue (in R$ mn) 1.3% 4Q19 4Q20 1.3% 4Q20 1,844 4Q19 1,155 +60% Highlights ▪ Stable take rate as higher Equities and Futures’ trading volumes and Financial Products distribution offset the impact from the recent extraordinary equity inflow . Highlights ▪ Key revenue growth drivers were : ( 1 ) Equity and futures ; ( 2 ) Financial Products and ( 3 ) Fixed Income ; ▪ On 4 Q 20 , Retail related revenues represented 75 % of consolidated Net Income from Financial Instruments . Note: Average AUC = (Sum of AUC from beginning of period and each quarter end in a given year, being 5 data points in one yea r)/ 5 2019 2020 6,271 3,676 +71%

 
 

15 Financial Revenue: Recurring Stream Mainly Driven by Retail Growth 75% of Net Income from Financial Instruments is related to our Retail Business LTM Managerial Retail Revenue vs Accounting Financial Income (in R$ mn) 1Q20 1Q19 2Q19 4Q19 3Q19 2Q20 3Q20 4Q20 1,135 2,535 1,219 2,818 1,378 3,181 1,532 3,676 1,780 5,582 4,229 2,289 4,833 2,700 3,135 6,271 Total Net Income From Financial Instruments Retail Highlights ▪ Total Financial Revenue is highly correlated to Retail Revenue over time ; ▪ For the 4 Q 20 , 75 % of Financial Revenue was related to Retail . 43.3% 44.8% 43.2% 41.7% 42.1% 47.4% 48.4% 50.0% Total Fin. Revenue as a % of Total Retail Revenue

 
 

16 29.9% 35.4% % of Net Revenue 599 717 4Q19 4Q20 +20% 2,584 2019 2020 1,794 +44% 31.7% 35.0% COGS and SG&A Gross margin slight compression following distribution channel investments COGS (in R$ mn) Operating Expenses (in R$ mn) Highlights ▪ Year - over - year gross margin contraction due to product mix and investments in the IFA network – including the recognition of shared based compensation expenses related to IFAs . 65.1% 71.2% Gross Margin % of Net Revenue Highlights ▪ Efficiency gains in SG&A (excluding share - based compensation) Excluding Share - Based Compensation 487 836 4Q19 4Q20 +72% 2019 1,606 2020 2,701 +68% 66.9% 68.7%

 
 

17 Highlights ▪ 4 Q 20 growth was driven by : ( 1 ) strong performance of Retail and ( 2 ) operating leverage in SG&A, offset by higher COGS ratio ; ▪ Despite ( 1 ) 50 % year - over - year growth in headcount, ( 2 ) investing in new business and ( 3 ) investing in our IFA Network, adjusted EBITDA Margin expanded from 32 . 7 % to 35 . 8 % . The margin expansion reflects the benefits of our operating leverage and technology investments made in the past, which provided scalability for the company . Adjusted EBITDA and Margin Operating Leverage offsetting higher COGS Adjusted EBITDA (in R$ mn) Adjusted EBITDA Margin 627 891 4Q19 4Q20 +42% 2,918 2020 2019 1,679 +74% 4Q19 4Q20 37.1% 37.2% 2019 32.7% 2020 35.8% Note: See appendix for a reconciliation of Adjusted EBITDA.

 
 

18 Highlights ▪ In 2020 , Adjusted Net Income grew 111 % vs . 2019 explained by ( 1 ) strong growth in Retail Revenue, ( 2 ) a lower effective tax rate and ( 3 ) operational leverage in SG&A . Adjusted Net Income and Margin Net margin expansion driven by strong growth in Retail, operating leverage and a lower tax rate Adjusted Net Income (in R$ mn) 417 721 4Q19 4Q20 +73% 1,074 2019 2020 2,270 +111% Note: See appendix for a reconciliation of Adjusted Net Income. 30.1% 24.6% Net Margin 27.8% 20.9% YoY Growth Across 2020 P&L +58% +74% +111% Gross Revenue Adj. EBITDA Adj. Net Income +305 bps Operating leverage Efficient Corporate Structure +691 bps Margin expansion YoY

 
 

19 Long - Term Incentive Plan Details Originally planned dillution on track, with a one - time anticipation in 2H20 Note: (1) Not affected by new primary offerings; (2) Net of forfeited shares Share Based Compensation Expense (in R$ mn ) Highlights ▪ Our long - term incentive plan is based on the distribution of RSU and PSU based on cultural fit and individual performance ; ▪ SBC expenses were significantly higher in 4 Q 20 , driven by new RSU grants and a significant anticipation during 2 H 20 . 8 44 136 4Q19 4Q20 180 8 44 250 293 2019 2020 Allocated to COGS Planned Grant Schedule

 
 

4 Guidance

 
 

21 REVISED 3 - 5 YEAR ADJUSTED NET MARGIN GUIDANCE DISCLAIMER – Estimated and subject to change. See “Important Disclosure” on page 2 of this presentation. 18% – 22% OLD 24% – 30% NEW G uidance Revision

 
 

Q&A

 
 

23 Investors Relations ir@xpi.com.br https://investors.xpinc.com/

 
 

Appendix

 
 

25 KPIs Average Trades and NPS Note: NPS, is an independent widely known survey methodology that measures the willingness of customers to recommend a Compan y’s products and services. The NPS calculation as of a given date reflects the average of the answers in the previous six months Retail Equity DARTs (million) 4Q19 2.5 1.1 4Q20 126% NPS Dec - 20: 71 XP Inc. Retail Equity Market Share Dec - 20 29% Custody Traded Volume 55%

 
 

26 Highlights ▪ ( 1 ) ECM, with 11 executed deals in the quarter and ( 2 ) DCM division, with participation in 55 deals, vs . 8 and 51 , respectively ; ▪ Revenue increase of 36 % for the full year, even with a low performance in the second quarter due to overall market conditions . Highlights ▪ Increase in equity trading volume compared to 4 Q 19 , offset by lower funds performance fees ; ▪ Compared to 2019 , Institutional revenue grew 51 % , from R $ 802 million to R $ 1 . 2 billion, driven by higher equity trading volume . Institutional and Issuer Services Institutional benefited from volumes and Issuer Services from market window Issuer Services Revenue (in R$ mn) Institutional Revenue (in R$ mn) 306 307 4Q19 4Q20 802 2020 2019 1,210 +51% 221 323 4Q19 4Q20 +46% 507 688 2019 2020 +36%

 
 

27 Non - GAAP Financial Information Adjusted Net Income and Adjusted Gross Financial Assets 27 Adjusted Net Income (in R $ mn ) Adjusted EBITDA (in R $ mn ) 4Q20 4Q19 YoY 3Q20 QoQ FY20 FY19 YoY EBITDA 705 598 18% 681 4% 2,616 1,720 52% (+) Stock Based Compensation 180 8 n.a. 44 305% 293 8 n.a. (+) Offering expenses 6 22 -73% 2 216% 8 22 -65% (-) Tax claim recognition (2010-2020) - - n.a. - n.a. - (71) -100% Adj. EBITDA 891 627 42% 727 23% 2,918 1,679 74% 4Q20 4Q19 YoY 3Q20 QoQ FY20 FY19 YoY Net Income 602 390 54% 541 11% 2,081 1,089 91% (+) Stock Based Compensation 180 8 n.a. 44 305% 293 8 n.a. (+) Offering expenses 6 22 -73% 2 216% 8 22 -65% (-) Tax claim recognition (2010-2020) - - n.a. - n.a. - (71) -100% (+/-) Taxes (68) (3) n.a. (18) 283% (113) 25 n.a. Adj. Net Income 721 417 73% 570 26% 2,270 1,074 111%

 
 

28 Non - GAAP Financial Information Adjusted Net Income and Adjusted Gross Financial Assets 28 Adjusted Gross Financial Assets (in R $ mn ) Floating Balance (in R $ mn ) Floating Balance (=net univested clients' deposits) 4Q20 3Q20 QoQ Assets (1,028) (1,484) -31% (-) Securities trading and intermediation (1,028) (1,484) -31% Liabilities 20,303 15,160 34% (+) Securities trading and intermediation 20,303 15,160 34% (=) Floating Balance 19,275 13,676 41%

 

 

 

 

 

 

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil, 05001 - 903, Caixa Postal 60054, T: +55 (11) 3674 2000 , www.pwc.com.br Independent auditor's report To the Board of Directors and Shareholders XP Inc. Opinion We have audited the accompanying consolidated financial statements of XP Inc. (the “Company”) and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2020 and the consolidated statements of income and of comprehensive income, of changes in equity and of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XP Inc. and its subsidiaries as at December 31, 2020, and their financial performance and their cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Ma tt er s Why it is a Key Audit Matter How the matter was addressed 

2 

 

 

 

XP Inc. Why it is a Key Audit Matter How the matter was addressed in the audit Information technology environment The processing of transactions, operations development and business continuity processes of XP and its subsidiaries are technological structure dependent. The inherent risks in information technology, associated with eventual deficiencies in the controls that support the processing and operation, logical accesses, systems change management in the existing technology environments, can, eventually, cause incorrect processing of critical transactions, improper accesses to systems and data, and consequently processing of unauthorized transactions and errors in automated controls of application systems. For this reason, this was considered as a focal area in our audit. With the support of professionals with specialized skill and knowledge, we understood the information technology environment and tested general technology controls. During our planning activities, we considered tests related to systemic development and change management, access, security to programs, systems and data, systems operation/processing and physical security of the data processing center. We tested automated and technology - dependent controls related to applications in the relevant XP business processes. Considering the results obtained in the procedures described above and in order to obtain necessary and sufficient evidence in our financial statements audit, it was necessary to carry out additional documental testing in order to assess the integrity and accuracy of the information generated by systems and automated reports and, when necessary, the application of procedures using analytical databases, which allowed us to apply a wider spectrum of testing and evidence gathering. We also performed unpredictability tests and review procedures for specific access to accounting entries, in addition to the procedures already applied to address the risk of management override of controls. The results of these procedures provided us with appropriate and sufficient audit evidence considering the consolidated financial statements taken as a whole. Revenue from services rendered (Notes 3 (xxi. 1) and 31 (a)) 2 XP Inc. and its subsidiaries ' revenue is substantially comprised of brokerage commission, securities placement and management fees. These revenues are recognized according to contractual terms that consider the commission percentage for services provided. Revenue We understood the internal controls environment regarding revenue recognition processes. We also performed a tie - out between analytical information extracted from operational systems and revenue recorded in the accounting ledger. On a sample basis, we inspected supporting evidence of

3 

 

 

 

XP Inc. Why it is a Key Audit Matter How the matter was addressed in the audit Considering the relevance of these revenues in the consolidated financial statements, associated with eventual deficiencies in the controls , this area was considered as a focus area of our audit . recognition requires management controls to revenue in the accounting ledger and confronted its ensure proper recognition at a certain point in time. subsequent financial settlement with bank statements. In addition, we recalculated selected revenue transactions recognized in the accounting ledger. Therefore, our audit procedures provided us with appropriate and sufficient audit evidence in the consolidated financial statements taken as a whole. Responsibilities of management and those charged with governance 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) as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiaries. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

4 

 

 

 

XP Inc. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. São Paulo, February 22, 2021 Tatiana Fernandes Kagohara Gueorguiev Contadora CRC 1SP245281/O - 6 PricewaterhouseCoopers Auditores Independentes CRC 2 SP 000160 /O - 5

5 

 

XP Inc. and its subsidiaries

Consolidated balance sheets at December 31

In thousands of Brazilian Reais

 

 

 

  Note 2020   2019
         
Cash   1,954,788   109,922
         
Financial assets   90,190,827   41,888,778
         
Fair value through profit or loss   57,149,446   26,528,396
Securities 7 49,590,013   22,443,392
Derivative financial instruments 8 7,559,433   4,085,004
         
Fair value through other comprehensive income   19,039,044   2,616,118
Securities 7 19,039,044   2,616,118
         
Evaluated at amortized cost   14,002,337   12,744,264
Securities 7 1,828,704   2,266,971
Securities purchased under agreements to resell 6 6,627,409   9,490,090
Securities trading and intermediation 22 1,051,566   504,983
Accounts receivable 11 506,359   462,029
Loan operations 10 3,918,328   386
Other financial assets   69,971   19,805
         
Other assets   1,760,999   643,619
Recoverable taxes 12 127,623   243,320
Rights-of-use assets 16 183,134   227,478
Prepaid expenses 13 1,393,537   89,684
Other   56,705   83,137
         
Deferred tax assets 27 505,046   284,533
Investments in associates and joint ventures 15 699,907   -
Property and equipment 16 204,032   142,464
Goodwill and Intangible assets 16 713,562   553,452
         
         
Total assets   96,029,161   43,622,768

 

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

 

6 

 

XP Inc. and its subsidiaries

Consolidated balance sheets at December 31

In thousands of Brazilian Reais

 

 

 

  Note 2020   2019
         
Financial liabilities   70,600,989   31,842,054
         
Fair value through profit or loss   10,056,806   5,250,943
Securities loaned 7 2,237,442   2,021,707
Derivative financial instruments 8 7,819,364   3,229,236
         
Evaluated at amortized cost   60,544,183   26,591,111
Securities sold under repurchase agreements 19 31,839,344        15,638,407
Securities trading and intermediation   22 20,303,121           9,114,546
Deposits 17 3,021,750                70,195
Structured operations certificates 18 2,178,459                19,474
Accounts payables   859,550              266,813
Borrowings and lease liabilities 20 492,535              637,484
Debentures 21 335,250              835,230
Other financial liabilities 23 1,514,174                   8,962
         
Other liabilities   14,522,206   4,619,623
Social and statutory obligations 24 667,448   492,723
Taxes and social security obligations   25 435,849   345,331
Private pension liabilities 26 13,387,913   3,759,090
Provisions and contingent liabilities 30 19,711   15,193
Other   11,285   7,286
         
Deferred tax liabilities 27 8,352   5,132
         
Total liabilities   85,131,547   36,466,809
         
         
Equity attributable to owners of the Parent company   10,894,609   7,153,396
Issued capital   23   23
Capital reserve   10,663,942   6,943,446
Other comprehensive income   230,644   209,927
         
Non-controlling interest   3,005   2,563
         
Total equity 28 10,897,614   7,155,959
         
Total liabilities and equity   96,029,161   43,622,768

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

 

7 

 

XP Inc. and its subsidiaries

Consolidated statements of income and

of comprehensive income for the years ended December 31

In thousands of Brazilian Reais, except earnings per share

 

 

 

      Note   2020   2019   2018
                   
Net revenue from services rendered   31 (a)   5,016,488   3,595,772   2,054,549
Net income from financial instruments at amortized cost and at fair value throughother comprehensive income   31 (b)   183,393   199,947   114,442
Net income from financial instruments at fair value through profit or loss   31 (b)   2,951,724   1,332,089   789,462
Total revenue and income       8,151,605   5,127,808   2,958,453
                 
Operating costs   32   (2,645,359)   (1,596,650)   (933,026)
Selling expenses   33   (134,915)   (155,115)   (96,075)
Administrative expenses   33   (3,013,598)   (1,891,481)   (1,176,805)
Other operating income (expenses), net       34   171,053   153,357   (31,289)
Expected credit losses   14   (55,564)   (9,410)   (8,220)
Interest expense on debt       (52,671)   (84,400)   (72,310)
Share of profit or (loss) in joint ventures and associates   15   862   -   -
Income before income tax       2,421,413   1,544,109   640,728
                   
Income tax expense      27   (339,924)   (454,625)   (175,398)
                   
Net income for the year       2,081,489   1,089,484    465,330
                   
Other comprehensive income                
Items that can be subsequently reclassified to income                
  Foreign exchange variation of investees located abroad     57,439   6,823   18,645
  Gains (losses) on net investment hedge   9 (60,563)   (7,133)   (17,495)
  Changes in the fair value of financial assets at fair value through other comprehensive income       24,203   698   4,160
                   
  Other comprehensive income (loss) for the year, net of tax   21,079   388   5,310
                 
Total comprehensive income for the year       2,102,568   1,089,872   470,640
                   
Net income attributable to:                
  Owners of the Parent company       2,076,430   1,080,484    461,440
  Non-controlling interest       5,059   9,000    3,890
                   
Total comprehensive income attributable to:                
  Owners of the Parent company       2,097,509   1,080,872    466,750
  Non-controlling interest       5,059   9,000    3,890
                   
  Earnings per share from total income attributable to the ordinary equity holders of  the company                
  Basic earnings per share (*)   36   3.7597   2.1125   0.9358
  Diluted earnings per share (*)   36   3.7138   2.1115   0.9358
                   
                     

 

(*) The basic and diluted earnings per common share are in effect with the reverse share split occurred on November 30, 2019.

 

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

 

8 

 

XP Inc. and its subsidiaries

Consolidated statements of changes in equity

In thousands of Brazilian Reais

 

 

 

  Atributable to owners of the Parent      
      Capital reserve                  
  Notes Issued Capital   Additional paid-in capital Other Reserves   Other comprehensive income   Retained Earnings   Total   Non-Controlling interest   Total Equity  
Balances at December 31, 2017   20   254,602   685,731   203,446   -   1,143,799   7,923   1,151,722  
Net income for the year   -   -   -   -   461,440   461,440   3,890   465,330  
Other comprehensive income, net   -   -   -   5,310   -   5,310   -   5,310  
Transactions with shareholders - contributions and distributions                                  
Capital contributions 28 1   673,293   -   -   -   673,294   -   673,294  
Corporate reorganization   -   -   525   -   -   525   -   525  
Gain (loss) in changes in interest of subsidiaries, net   -   -   -   409   -   409   (788)   (379)  
Allocations of the net income for the year                                  
Transfer to capital reserves 28 -       261,440   -   (261,440)   -   -   -  
Dividends distributed 28 -       -   -   (200,000)   (200,000)   (4,090)   (204,090)  
Balances at December 31, 2018   21   927,895   947,696   209,165   -   2,084,777   6,935   2,091,712  
                                   
Comprehensive income for the year                                  
Net income for the year   -   -   -   -   1,080,484   1,080,484   9,000   1,089,484  
Other comprehensive income, net   -   -   -   388   -   388   -   388  
Transactions with shareholders - contributions and distributions                                  
Proceeds from the issuance of shares 1.1 2   4,504,824   -   -   -   4,504,826   -   4,504,826  
Transactions costs from proceeds from the issuance of shares 1.1 -   (22,824)   -   -   -   (22,824)   -   (22,824)  
Other equity transactions                                  
Share based plan 35 -   -   5,371   -   -   5,371   -   5,371  
Gain (loss) in changes in interest of subsidiaries, net   -   -   -   374   -   374   (2,229)   (1,855)  
Allocations of the net income for the year                                  
Transfer to capital reserves   -   -   580,484   -   (580,484)   -   -   -  
Dividends distributed 28 -   -   -   -   (500,000)   (500,000)   (11,143)   (511,143)  
Balances at December 31, 2019   23   5,409,895   1,533,551   209,927   -   7,153,396   2,563  

7,155,959

 

 
Comprehensive income for the year                                  
Net income for the year   -   -   -   -   2,076,430   2,076,430   5,059   2,081,489  
Other comprehensive income, net   -   -   -   21,079   -   21,079   -   21,079  
Transactions with shareholders - contributions and distributions                                  
Proceeds from the issuance of shares 1.2 -   1,412,930   -   -   -   1,412,930   -   1,412,930  
Transactions costs from proceeds from the issuance of shares 1.2 -   (1,649)   -   -   -   (1,649)   -   (1,649)  
Other equity transactions                                  
Share based plan 35 -   -   232,785   -   -   232,785   6   232,791  
Gain (loss) in changes in interest of subsidiaries, net   -   -   -   (362)   -   (362)   944   582  
Allocations of the net income for the year                                  
Transfer to capital reserves   -   -   2,076,430   -   (2,076,430)   -   -   -  
Dividends distributed   -   -   -   -   -   -   (5,567)   (5,567)  
Balances at December 31, 2020   23   6,821,176   3,842,766   230,644   -   10,894,609   3,005   10,897,614  

 

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

 

9 

 

XP Inc. and its subsidiaries

Consolidated statements of cash flows for the years ended December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

  Note 2020   2019   2018
Operating activities                
Income before income tax   2,421,413   1,544,109   640,728
             
Adjustments to reconcile income before income taxes            
Depreciation of property, equipment and right-of-use assets 16 67,422   53,080    24,470
Amortization of intangible assets 16 75,839   37,630    28,318
Loss or write-off of property, equipment, intangible assets and leases, net 16 73,140   11,245    19,915
Share of profit or (loss) in joint ventures and associates 15 (862)   -   -
Expected credit losses on financial assets   55,564   9,410    8,220
(Reversal of) Provision for contingencies, net 30 2,045   (1,601)    7,897
Net foreign exchange differences   1,478   3,636    (25,832)
Share based plan   232,791   5,371   -
Interest accrued   56,923   86,862    64,330
             
Changes in assets and liabilities            
Securities (assets and liabilities)   (42,954,505)   (20,188,931)   (2,929,021)
Derivative financial instruments (assets and liabilities)   1,023,937   825,719    (492,024)
Securities trading and intermediation (assets and liabilities)   10,605,139   4,201,246    1,969,621
Securities purchased under agreements to resell   2,862,311   (2,919,480)   (5,635,630)
Accounts receivable   (46,247)   (243,893)    (92,809)
Loan operations   (3,925,042)   (386)   -
Prepaid expenses   (1,303,853)   7,040    (31,380)
Other assets and other financial assets   (23,078)   (14,162)    (58,964)
Securities sold under repurchase agreements   16,200,937   8,997,713    6,126,676
Accounts payable   564,324   132,235    63,000
Deposits   2,951,555   70.195   -
Structured operations certificates   2,158,985   19.474   -
Social and statutory obligations   174,725   241,033    81,253
Tax and social security obligations   182,391   (9,223)    4,463
Private pension liabilities   9,628,823   3,743,031   16,059
Other liabilities and other financial liabilities   1,016,397   8,829    14,524
             
Cash from operations   2,102,552   (3,379,819)   (196,186)
             
Income tax paid   (518,971)   (402,574)   (202,443)
Contingencies paid 30 (1,629)   (3,172)   (3,933)
Interest paid   (71,224)   (28,427)   (54,185)
Net cash flows from (used in) operating activities   1,510,728   (3,813,992)   (456,747)
             
Investment activities                
Acquisition of intangible assets 16 (b) (146,368)   (88,949)    (53,517)
Acquisition of property and equipment 16 (a) (145,164)   (72,499)    (83,149)
Acquisition of subsidiaries, net of cash acquired 5 (ii) (62,443)   -    (10,413)
Investment in associates and joint ventures   (228,035)   -   -
Net cash flows used in investing activities   (582,010)   (161,448)   (147,079)
             
Financing activities                 
Proceeds from borrowings 40 -   -    325,370
Payments of borrowings and lease liabilities 40 (152,868)   (123,332)    (689,634)
Proceeds from issuance of debentures 40 -   400,000    400,000
Payments of debentures 40 (400,000)   (11,815)   -
Repurchase of debentures 40 (64,717)   -   -
Dividends paid to owners of the parent 28(c) -   (500,000)    (325,000)
Proceeds from the issuance of shares 1.1 / 1.2 1,411,281   4,482,002    673,294
Transactions with non-controlling interests   582   (1,855)    146
Dividends paid to non-controlling interests   (5,567)   (11,143)    (4,090)
Net cash flows from financing activities   788,711   4,233,857   380,086
             
Net increase (decrease) in cash and cash equivalents   1,717,429   258,417   (223,740)
             
Cash and cash equivalents at the beginning of the fiscal year   887,796   626,863   835,493
Effects of exchange rate changes on cash and cash equivalents   55,163   2,516   15,110
Cash and cash equivalents at the end of the fiscal year   2,660,388   887,796   626,863
Cash   1,954,788   109,922   68,407
Securities purchased under agreements to resell 6 593,673   654,057     488,809
Interbank certificate deposits 7 111,927   123,817   69,647

 

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

 

10 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

1.Operations

 

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

 

The Group carried out a corporate reorganization in order to prepare the structure for the Initial Public Offering of its shares. As result, XP Inc. was incorporated in 2019 and is currently the entity which is registered with the Securities Exchange Commission and for which these financial statements are presented.The comparative historical figures presented in these financial statements are the ones of the predecessor entity, XP Investimentos S.A.

 

XP Inc. is a holding company controlled by XP Controle Participações S.A., which holds 55.40% of voting rights and whose is ultimately controlled by a group of individuals.

 

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

 

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

 

These consolidated financial statements were approved by the Board of Director’s meeting on February 22, 2021.

 

1.1Initial Public Offering and resulting transactions

 

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

 

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

 

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

 

  

 

11 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
1.2Follow-on public offering

 

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

 

On December 7, 2020, XP Inc closed of its underwritten secondary public offering of 31,654,894 Class A common shares, 7,130,435 of which were issued and sold by the Company and 24,524,459 of which were sold by ITB Holding Brasil Participações Ltda.. The offering was made pursuant to a registration statement on Form F-1 filed with the U.S. Securities and Exchange Commission (“SEC”).

 

The offering price per Class A common share was US$ 39.00, resulting in gross proceeds of US$ 283,087 thousand (or R$1,444,530) to XP Inc, deducting R$31,599 thousand as underwriting discounts and commissions. Additionally, the Company incurred in R$7,271 thousand regarding other offering expenses, of which R$5,622 thousand was recognized directly in income statements and an amount of R$1,649 in equity as transaction costs.

 

1.3COVID-19

 

Starting from January 2020, it was reported that a novel strain of coronavirus, later named COVID-19, spread worldwide. The current pandemic has negatively impacted the global, national and regional economies and disrupted supply chains and otherwise reduce international trade and business activity. As a consequence of this pandemic, most of the Group’s employees is working from home. During the pandemic, the Group maintained trading platforms and other services available to clients without interruption. XP has played a valuable role on keeping our clients connected to the market and reinforce our mission to our clients.

 

Based on thorough assessments about the well-being and performance of our workforce, management announced on September 11, 2020, the permanent and company-wide adoption of the home-office model. The impacts is described in Note 16 (a).

 

The Group has reviewed its exposure to economic-related and market volatility, which could negatively impact the value of a certain class of financial instruments however has not identified relevant impact to the financial performance or position of the group as December 31, 2020. The Company has sufficient headroom to enable it to comply with its covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.

 

2.Basis of preparation of the financial statements

 

(i)Basis of preparation

 

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

 

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

 

12 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.

 

The consolidated financial statements are presented in Brazilian reais (“R$”),our functional currency, and all amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand currency units unless otherwise stated.

 

The balance sheet is presented in order of liquidity of assets and liabilities. The timing of their realization or settlement is dependent not just on their liquidity, but also on management’s judgements on expected movements in market prices and other relevant aspects.

 

(ii)New and amended standards adopted by the Group

 

The Group applied for the first-time certain standards and amendments, which are effective for the consolidated financial statements beginning on or after 1 January 2020. The Group has not early adopted any other standard, interpretation or amendment that has been issued but not yet effective.

 

Amendments to IFRS 3 Definition of a Business

 

The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all the of inputs and processes needed to create outputs. These amendments had no impact on the consolidated financial statements of the Group, but may impact future e periods should the Group enter into any business combinations.

 

Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform

 

The amendments to IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedge item or the hedging instrument. These amendments have no impact on the consolidated financial statements of the Group as it does not have any interest rate hedge relationships.

 

Amendments to IAS 1 and IAS 8 Definition of Material

 

The amendments provided a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with order information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Group.

 

13 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Conceptual Framework for Financial Reporting

 

The Conceptual Framewrok is not a standard, an none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help prepares develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Group.

 

(iii)New standards and interpretations not yet adopted

 

Certain new accounting standards and interpretations have been published that are not mandatory for the 31 December 2020 reporting period and have not been early adopted by the Group. These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

 

(iv)Basis of consolidation and equity accounting

 

The consolidated financial statements comprise the consolidated balance sheets of the Company as of December 31, 2020 and 2019 and the consolidated statements of income and comprehensive income, consolidated statements of cash flows and consolidated statements of changes in equity for each of the years ended December 31, 2020, 2019 and 2018.

 

(i)Subsidiaries

 

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

 

The acquisition method of accounting is used to account for business combinations by the Group (refer to Note 5.

 

Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of income and of comprehensive income, statement of changes in equity and balance sheet respectively.

 

(ii)Associates

 

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

 

(iii)Joint ventures

 

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

 

14 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(iv)Equity method

 

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

 

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

 

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

 

(v)Segment reporting

 

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

 

The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries. Disaggregated information is only reviewed at the revenue level (Note 31), with no corresponding detail at any margin or profitability levels.

 

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

 

See Note 31 (c) for a breakdown of revenues and income and selected assets from external customers by country of domicile.

 

(vi)Foreign currency translation

 

(i)Functional and presentation currency

 

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Brazilian Reais (“R$”), which is the Group functional and presentation currency.

 

The functional currency for all the Company’s subsidiaries in Brazil is also the Brazilian reais. Certain subsidiaries outside of Brazil have different functional currencies, including US Dollar ("USD"), Euro ("EUR"), Pound sterling (“GBP”) and Swiss Franc (“CHF”).

 

15 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(ii)Transactions and balances

 

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation.

 

Foreign exchange gains and losses that relate to borrowings are presented in the statement of income and other comprehensive income, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within interest expense on debt.

 

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as at fair value through other comprehensive income are recognized in other comprehensive income.

 

(iii)Group companies

 

The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

 

·assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

 

·income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

 

·all resulting exchange differences are recognized in other comprehensive income.

 

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognized in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

 

3.Summary of significant accounting policies

 

This note provides a description of the significant accounting policies adopted in the preparation of these consolidated financial statements in addition to other policies that have been disclosed in other notes to these consolidated financial statements. These policies have been consistently applied to all periods presented, unless otherwise stated.

 

16 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(i)Business combinations

 

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:

 

·fair values of the assets transferred;

 

·liabilities incurred to the former owners of the acquired business;

 

·equity interests issued by the Group;

 

·fair value of any asset or liability resulting from a contingent consideration arrangement; and

 

·fair value of any pre-existing equity interest in the subsidiary.

 

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets.

 

Acquisition-related costs are expensed as incurred.

 

The excess of the consideration transferred, amount of any non-controlling interest in the acquired entity, and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in profit or loss as a bargain purchase.

 

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

 

Contingent consideration, when applicable, is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognized in profit or loss.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognized in profit or loss.

 

(ii)Financial instruments

 

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

 

1) Financial assets

 

Initial recognition and measurement

 

On initial recognition, financial assets are classified as instruments measured at amortized cost, fair value through other comprehensive income (“FVOCI”) and fair value through profit and loss (“FVPL”).

 

The classification of financial assets at initial recognition is based on either (i) the Company’s business model for managing the financial assets and (ii) the instruments’ contractual cash flows characteristics.

 

  

 

17 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

For a financial asset to be classified and measured at amortized cost or FVOCI, it needs to give rise to cash flows that are 'Solely Payments of Principal and Interest' (the "SPPI" criterion) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

 

The Group's business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model considers whether the Company’s objective is to receive cash flows from holding the financial assets, from selling the assets or a combination of both.

 

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

 

Classification and subsequent measurement

 

(i)   Financial assets at FVPL

 

Financial assets at FVPL include Securities, financial assets designated upon initial recognition at FVPL, or financial assets mandatorily required to be measured at fair value. This category includes securities and Derivative financial instruments, including equity instruments which the Group had not irrevocably elected to classify at FVOCI.

 

Financial assets are classified as fair value through profit and loss if they either fail the contractual cash flow test or in the Group’s business model are acquired for the purpose of selling or repurchasing in the near term. Financial assets may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

 

Derivative financial instruments, including separated embedded derivatives, are also classified as Securities unless they are designated as effective hedging instruments. Financial assets with cash flows that do not meet the SPPI criteria are classified and measured at FVPL, irrespective of the business model.

 

Financial assets at FVPL are carried in the statement of financial position at fair value with net changes in fair value recognized in profit or loss. The net gain or loss recognized in profit or loss includes any dividend or interest earned on the financial asset. Financial assets measured at FVTPL consist of Securities owned and sold short.

 

A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: (i) the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; (ii) and the hybrid contract is not measured at FVPL. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the FVPL category.

 

A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.

 

  

 

18 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

(ii)   Financial assets at FVOCI

 

The Group measures financial assets at FVOCI if both of the following conditions are met:

 

.The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and to sell.

 

.The contractual terms of the financial asset give rise on specified dates to cash flows that meet the SPPI criteria.

 

For financial assets at FVOCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in profit or loss and similarly to financial assets measured at amortized cost. The remaining fair value changes are recognized in OCI. Upon derecognition, the cumulative fair value change recognized in OCI is recycled to profit or loss.

 

The Group's financial assets at FVOCI includes certain debt instruments.

 

Upon initial recognition, the Group can elect to classify irrevocably equity investments at FVOCI when they meet the definition of equity under IAS 32 - "Financial Instruments: Presentation" and are not financial assets at FVPL. The classification is determined on an instrument-by-instrument basis.

 

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

 

The Group has no equity instruments that have been irrevocably classified under this category.

 

(iii)   Financial assets at amortized cost

 

A financial asset is measured at amortized cost if both of the following conditions are met:

 

.The financial asset is held within a business model with the objective to hold the financial asset in order to collect contractual cash flows.

 

.The contractual terms of the financial asset give rise on specified dates to cash flows that meet the SPPI criteria.

 

Financial assets at amortized cost are subsequently measured using the Effective Interest Rate ("EIR") method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

 

The Group's financial assets at amortized cost mainly includes ‘Securities’, 'Securities purchased under agreements to resell', 'Securities trading and intermediation', ‘Loan operations’, 'Accounts receivable' and 'Other financial assets.

 

The Company reclassifies financial assets only when its business approach for managing those assets changes.

 

19 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Derecognition

 

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group's consolidated statement of financial position) when:

 

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

 

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

 

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

 

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

 

Expected credit loss on financial assets

 

The Group recognizes expected credit losses ("ECLs") for all debt instruments not held at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

The Group classifies assets in three stages to measure the expected credit loss, in which the financial assets migrate from one stage to another in accordance with the changes in credit risk.

 

Stage 1: overdue less than 30 days. It is understood that a financial instrument in this stage does not present a significant increase in the risk since initial recognition. The provision for this asset represents the expected loss resulting from possible noncompliance in the next 12 months.

 

Stage 2: overdue 30 days. If a significant increase in the risk is identified from the initial recognition, and no deterioration is realized, the financial instrument falls within this stage. In this case, the amount related to the provision for expected loss reflects the estimated loss of the financial instrument remaining life (lifetime).

 

Stage 3: overdue 90 days. The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before considering any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

 

For accounts receivables, and other financial contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

 

20 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

For debt instruments at FVOCI, the Group applies the low credit risk simplification at every reporting date, the Group evaluates whether the debt instrument is considered to have low credit risk using all reasonable and supportable information that is available without undue cost or effort. In making that evaluation, the Group reassesses the internal credit rating of the debt instrument. In addition, the Group considers that there has been a significant increase in credit risk when contractual payments are more than 30 days past due.

 

2) Financial liabilities

 

Initial recognition and measurement

 

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

 

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

 

The Group's financial liabilities include 'Securities Loaned', 'Derivative financial instruments', 'Securities purchased under agreements to resell', 'Securities trading and intermediation', long-term debts such as 'Borrowings and lease liabilities' and 'Debentures', 'Accounts payables' and 'Other financial liabilities'.

 

Classification and subsequent measurement

 

(i)   Financial liabilities at FVPL

 

Financial liabilities at FVPL include securities loaned and derivatives financial instruments designated upon initial recognition as at FVPL.

 

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

 

Gains or losses on liabilities at fair value through PL are recognized in profit or loss.

 

Financial liabilities designated upon initial recognition at FVPL are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. Securities loaned, and derivative financial instruments are classified as fair value through PL and recognized at fair value.

 

(ii)   Amortized cost

 

After initial recognition, these financial liabilities are subsequently measured at amortized cost using the Effective Interest Method (“EIR”) method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.

 

21 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

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

 

This category generally applies to Securities sold under repurchase agreements, ‘Securities trading and intermediation’, 'Borrowings and Lease Liabilities', 'Debentures', 'Accounts payables' and 'Other financial liabilities'.

 

Derecognition

 

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

 

3) Fair value of financial instruments

 

The fair value of financial instruments actively traded in organized financial markets is determined based on purchase prices quoted in the market at the close of business at the reporting date, without deducting transaction costs.

 

The fair value of financial instruments for which there is no active market is determined by using measurement techniques. These techniques may include the use of recent market transactions (on an arm's length basis); reference to the current fair value of another similar instrument; analysis of discounted cash flows or other measurement models. See Note 37.

 

4) Derivative financial instruments and hedging activities

 

Derivative financial instruments are financial contracts, the value of which is derived from the value of the underlying assets, interest rates, indexes or currency exchange rates.

 

Derivatives are initially recognised at fair value on the date a derivative contract is entered into, and they are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The group designates certain derivatives as either:

 

·hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges), or

 

·hedges of a net investment in a foreign operation (net investment hedges).

 

At inception of the hedge relationship, the group documents the economic relationship between hedging instruments and hedged items, including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items. The group documents its risk management objective and strategy for undertaking its hedge transactions.

 

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

 

22 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
a)Hedge ineffectiveness

 

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.

 

To evaluate the effectiveness and to measure the ineffectiveness of such strategies, The Group uses the Dollar Offset Method. The Dollar Offset Method is a quantitative method that consists of comparing the change in fair value or cash flows of the hedging instrument with the change in fair value or cash flows of the hedged item attributable to the hedged risk.

 

(iii)Cash and cash equivalents

 

Cash is not subject to a significant risk of change in value and are held for the purpose of meeting short-term cash commitments and not for investments or other purposes. Transactions are considered short-term when they have maturities in three months or less from the date of acquisition. For purposes of consolidated statement of cash flows, cash equivalents refer to collateral held securities purchased under agreements to resell and bank deposit certificates measured at fair value through profit and loss that are readily convertible into a known cash amount and for which are no subject to a significant risk of change in value.

 

(iv)Securities purchased under agreements to resell and obligations related to securities sold under repurchase agreements

 

The Group has purchased securities with resale agreement (resale agreements) and sold securities with repurchase agreement (repurchase agreement) of financial assets. Resale and repurchase agreements are accounted for under Securities purchased under agreements to resell and Securities sold under repurchase agreements, respectively. The difference between the sale and repurchase prices is treated as interest and recognized over the life of the agreements using the effective interest rate method. The financial assets accepted as collateral in our resale agreements can be used by us, if provided for in the agreements, as collateral for our repurchase agreements or can be sold.

 

(v)Securities trading and intermediation (receivable and payable)

 

Refers to transactions at B3 S.A. – Brasil, Bolsa, Balcão (“B3”) on behalf of and on account of third parties. Brokerages on these transactions are classified as revenues and service provision expenses are recognized at the time of the transactions. These balances are offset and the net amount shown in the balance sheet when, and only when, there is a legal and enforceable right to offset and the intention to liquidate them on a net basis, or to realize the assets and settle the liabilities simultaneously.

 

Amounts due from and to customers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the balance sheet date respectively. The due from customers balance is held for collection. These amounts are subdivided into the following items:

 

• Cash and settlement records - Represented by the registration of transactions carried out on the stock exchanges on its own behalf and for customers; and

 

• Debtors/Creditors pending settlement account - debtor or creditor balances of customers, in connection with transactions with fixed income securities, shares, commodities and financial assets, pending settlement as of the statement of reporting date. Sales transactions are offset and in the event the final amount is a credit, it will be recorded in liabilities, on the other hand if this amount is debt, it will be recorded in assets, provided that the offset balances refer to the same counterparty.

 

23 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

These amounts are recognized initially at fair value and subsequently measured at amortized cost. At each reporting date, the Group shall measure the loss allowance on amounts due from customer at an amount equal to the lifetime expected credit losses if the credit risk has increased significantly since initial recognition. If, at the reporting date, the credit risk has not increased significantly since initial recognition, the Group shall measure the loss allowance at an amount equal to 12-month expected credit losses. Significant financial difficulties of the customer, probability that the customer will enter bankruptcy or financial reorganization, and default in payments are all considered indicators that a loss allowance may be required. If the credit risk increases to the point that it is considered to be credit impaired, interest income will be calculated based on the gross carrying amount adjusted for the loss allowance. A significant increase in credit risk is defined by management as any contractual payment which is more than 30 days past due.

 

Any contractual payment which is more than 90 days past due is considered credit impaired. The estimated credit losses for brokerage clients and related activity was immaterial for all periods presented.

 

(vi)Loan operations

 

Loan operations consist in arrangements under which clients can borrow stipulated amounts under defined terms and conditions. They are subsequently measured at amortised cost using the effective interest method, less expected credit loss. See note 10 for further information about the Company’s accounting for Loan Operations and note 3(iii) for a description of the Company’s Expected Losses on Financial Assets.

 

Interest income from these financial assets is included in Net income from financial instruments at amortized cost using the effective interest rate method. Any gain or loss arising on derecognition of the loan operations is recognized directly in profit or loss and presented in Note 14. Expected credit losses are presented as a separate line item in profit or loss.

 

(vii)Prepaid expenses

 

Prepaid expenses are recognized as an asset in the balance sheet. These expenditures include incentives to IFAs, prepaid software licenses, certain professional services and insurance premiums.

 

(viii)Leases

 

As of January 1, 2019 the Group has adopted IFRS 16, replacing IAS 17, which was applicable until December 31, 2018. Both accounting practices are explained below.

 

IAS 17 - Leases

 

Leases in which a significant portion of the risks and rewards of ownership were not transferred to the Group as lessee were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

 

Lease income from operating leases where the Group is a lessor is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as expense over the lease term on the same basis as lease income. The respective leased assets are included in the balance sheet based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting the new leasing standard.

 

24 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

IFRS 16 Leases

 

Effective from January 1, 2019, IFRS 16 was issued in January 2016 and supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard establishes the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single model in the balance sheet, similar to the recognition of finance leases under IAS 17.

 

The Group has adopted IFRS 16 from January 1, 2019 using the modified retrospective method of adoption, under which the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application and not restated comparatives for the 2018 and 2017 reporting period. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019.

 

Practical expedients and exemptions applied

 

In applying IFRS 16 for the first time, the Group has used the following permitted practical expedients:

 

·applying only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application;

 

·applying a single discount rate to a portfolio of leases with reasonably similar characteristics;

 

·relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous contracts as of January 1, 2019;

 

·exempting leases contracts with a remaining lease term of less than 12 months as of January 1, 2019 and not containing a purchase option (short-term leases);

 

·exempting lease contracts for which the underlying asset is of low value (low-value assets);

 

·excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application; and

 

·using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

 

i)     Measurement of lease liabilities and right-of-use assets

 

The Group leases its main offices and certain equipments under non-cancelable operating lease agreements. The lease terms varies from one to ten years, and the majority of the lease agreements is renewable at the end of the lease period at market rates. The Group has no lease contracts previously classified as finance leases and existing contracts do not include variable payments or residual value guarantees.

 

As a result of initial adoption, there is no impact to retained earnings in equity on January 1, 2019. Right-of-use assets are presented in a separate line item in the balance sheet under “Right-of-use assets” group, while the lease liabilities are presented within borrowings in the line item “Borrowings and lease liabilities” in the balance sheet.

 

Set out below are the new accounting policies of the Group upon adoption of IFRS 16, which have been applied from the date of initial application:

 

25 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Right-of-use assets

 

The Group recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities.

 

The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment.

 

Lease liabilities

 

At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

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

 

Short-term leases and leases of low-value assets

 

The Group applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

Significant judgement in determining the lease term of contracts with renewal options

 

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Group has the option, under some of its leases to lease the assets for additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

 

26 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(ix)Property and equipment

 

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

 

  Annual Rate (%)
Data Processing Systems 20%
Furniture and equipment 10%
Security systems 10%
Facilities 10%

 

Assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting date and adjusted prospectively, if appropriate. An asset’s carrying amount is written down immediately to its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use, if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals or derecognition are determined by comparing the disposal proceeds (if any) with the carrying amount and are recognized in profit or loss.

 

(x)Intangible assets

 

i)Goodwill

 

Goodwill arises on the acquisition of subsidiaries and represents the excess of (i) the consideration transferred; (ii) the amount of any non-controlling interest in the acquiree; and (iii) the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of the consideration transferred, non-controlling interest recognized and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired, in the case of a bargain purchase, the difference is recognized directly in profit or loss.

 

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment.

 

ii)Software and development costs

 

Certain direct development costs associated with internally developed software and software enhancements of the Group’s technology platform is capitalized. Capitalized costs, which occur post determination by management of technical feasibility, include external services and internal payroll costs. These costs are recorded as intangible assets when development is complete, and the asset is ready for use, and are amortized on a straight-line basis, generally over a period of five years. Research and pre-feasibility development costs, as well as maintenance and training costs, are expensed as incurred. In certain circumstances, management may determine that previously developed software and its related expense no longer meets management’s definition of feasible, which could then result in the impairment of such asset.

 

27 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
iii)Other intangible assets

 

Separately acquired intangible assets are measured at cost on initial recognition. The cost of intangible assets acquired in a business combination corresponds to their fair value at the acquisition date. After initial recognition, intangible assets are stated at cost, less any accumulated amortization and accumulated impairment losses. Internally generated intangible assets other than (i) above, are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.

 

The useful life of intangible assets is assessed as finite or indefinite. As of December 31, 2020 and 2019, the Group does not hold indefinite life intangible assets, except for goodwill.

 

Intangible assets with finite useful lives are amortized over their estimated useful lives and tested for impairment whenever there is an indication that their carrying amount may be not be recovered. The period and method of amortization for intangible assets with finite lives are reviewed at least at the end of each fiscal year or when there are indicators of impairment. Changes in estimated useful lives or expected consumption of future economic benefits embodied in the assets are considered to modify the amortization period or method, as appropriate, and treated as changes in accounting estimates.

 

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

 

  Estimate useful life (years)
Software 3-5
Internally developed intangible 3-7
Customer list 2-8
Trademarks 10-20

 

Gains and losses resulting from the disposal or derecognition of intangible assets are measured as the difference between the net disposal proceeds (if any) and their carrying amount and are recognized in profit or loss.

 

(xi)Impairment of non-financial assets

 

Assets that have an indefinite useful life, for example goodwill, are not subject to amortization and are tested annually for impairment. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

 

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash-generating units (CGU's)). For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs (or groups of CGUs) that is expected to benefit from the synergies of the combination, which are identified at the operating segment level.

 

Non-financial assets other than goodwill that were adjusted due to impairment are subsequently reviewed for possible reversal of the impairment at the balance sheet date. The impairment of goodwill recognized in the profit or loss is not reversed.

 

28 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(xii)Taxes

 

i)Current income and social contribution taxes

 

Each of Group’s entities pay Federal Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) under one of two different methods:

 

·Actual Profit Method (“APM”), where the taxpayer calculates both taxes based on its actual taxable income, after computing all income, gains and tax-deductible expenses, including net operating losses of prior years. Taxes calculated under the APM method are due quarterly or annually depending on entity’s adoption through the first collection document of each calendar year. APM annual method requires taxpayers to make monthly prepayments of IRPJ and CSLL during the calendar-year.

 

·Presumed Profit Method (“PPM”), where taxpayer calculates IRPJ and CSLL applying a presumed profit margin over the operating revenues. It is important to emphasize that the profit margin is defined by Brazilian Revenue Service (“RFB”) according to type of services rendered and/or goods sold. Under the PPM method, both taxes are due on a quarterly basis and no prepayment are required during the quarters. This method can be adopted only by entities with gross revenue up to a annually revised threshold determined by tax authorities.

 

The tax rates applicable to APM or PPM are also defined according to entities’ main activity:

 

·Federal Income Tax (IRPJ) – tax rate of 15% calculated on taxable income and a surcharge of 10% calculated on the taxable income amount that exceeds R$ 20 per month (or R$ 240 annually).

 

·Social Contribution on Net Income (CSLL) – tax rate of 9% calculated on taxable income. However, financial institutions (i.e., XP CCTVM) and insurance companies (i.e., XP Vida e Previdência) are subject to a higher CSLL rate of 15%. As of march, 2020, Brazilian banks (i.e, Banco XP) are subject to a CSLL rate of 20%.

 

From 2015 to 2018, the CSLL rate was temporarily increased to 20% for all Brazilian financial entities by means of federal Law 12.169/2015.

 

ii)Deferred income and social contribution taxes

 

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

 

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

 

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

 

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

 

29 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
iii)Sales and other taxes

 

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

 

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

 

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

 

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

 

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

 

·PIS and COFINS are contributions levied by the Brazilian Federal government on gross revenues. These amounts are invoiced to and collected from the Group’s customers and recognized as deductions to gross revenue (Note 31) against tax liabilities, as we are acting as tax withholding agents on behalf of the tax authorities. PIS and COFINS paid on certain purchases may be claimed back as tax credits to offset PIS and COFINS payable. These amounts are recognized as Recoverable taxes (Note 12) and are offset monthly against Taxes payable and presented net, as the amounts are due to the same tax authority. PIS and COFINS are contributions calculated on two different regimes according to Brazilian tax legislation: cumulative method and non-cumulative method.

 

The non-cumulative method is mandatory to companies that calculate income tax under the Actual Profit Method (APM). The applicable rates of PIS and COFINS are 1.65% e 7.60%, respectively.

 

Otherwise, the cumulative method should be adopted by entities under the Presumed Profit Method (PPM) and is also mandatory to Financial and Insurance Companies. The rate applicable to companies under PPM are PIS 0.65% and COFINS 3.00%. Financial entities (i.e., XP CCTVM) and Insurance companies (i.e., XP Vida e Previdência) have a different percentage of COFINS with the surcharge of 1.00%, totaling 4.00%.

 

·ISS is a tax levied by municipalities on revenues from the provision of services. ISS tax is added to amounts invoiced to the Group’s customers for the services the Group renders. These are recognized as deductions to gross revenue (Note 31) against tax liabilities, as the Group acts as agent collecting these taxes on behalf of municipal governments. The rates may vary from 2.00% to 5.00%. The ISS stated in the table is applicable to the city of São Paulo and Rio de Janeiro refers to the rate most commonly levied on the Group’s operations.

 

·INSS is a social security charge levied on wages paid to employees.

 

(xiii)Equity security loans

 

Represent liabilities to return cash proceeds from security lending transactions. Securities lending transactions are used primarily to earn spread income which relates mainly to equity securities received with a fixed term payable, based on the fair value of the securities plus pro rata interest over the period of the loan. Equity securities borrowed are recognized as unrestricted assets on the statement of financial position and may be sold to third parties. The Equity security loans is recorded as a trading liability and measured at fair value with any gains or losses included in the income statement under net fair value gains/(losses) on financial instruments (Note 31 b).

 

30 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(xiv)Borrowings and debentures

 

Borrowings and debentures are recognized initially at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in profit or loss over the period of the borrowings using the effective interest rate method.

 

Borrowing and debentures costs are recognized as interest expense on debt in the period in which they are incurred. The Group does not have qualifying assets to which costs could be capitalized.

 

(xv)Accounts payables

 

Accounts payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Accounts payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method.

 

(xvi)Private pension liabilities

 

Private pension plans, relates to accumulation of financial resources, called PGBL (Plan Generator of Benefits), a plan that aims at accumulating funds for participant’s retirement in life, and VGBL (Redeemable Life Insurance), a financial product structured as a pension plan. In both products, the contribution received from the participant is applied to a Specially Constituted Investment Fund (“FIE”) and accrues interest based on FIE investments.

 

The private pension products offered by Company do not contain significant insurance risk where the Company accepts significant insurance risk from participants by agreeing to compensate them if a specified uncertain future event adversely affects them. These products also do not contain any discretionary participation features. Therefore, the contracts are accounted for under the scope of IFRS 9, Financial Instruments (“IFRS 9”).

 

(xvii)Provisions

 

Provisions for legal claims (labor, civil and tax) are recognized when: (i) the Group has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount can be reliably estimated. Provisions do not include future operating losses.

 

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

 

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

 

31 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(xviii)Employee benefits

 

i)Short-term obligations

 

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

 

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

 

ii)Share-based plan

 

The establishment of the shared-based plan was approved by the board of Director’s meeting on December 6, 2019.

 

The Company launched two share-based plans, the Restricted Stock Unit “RSU” and the Performance Share Unit (“PSU”). The shared-based plans are designed to provided long-term incentives to certain employees, directors, and other eligible service providers in exchange for their services. For both plans, management commits to grant shares of XP Inc to the defined participants.

 

The cost of share-based compensation is measured using the fair value at the grant date. The cost is expensed together with a corresponding increase in equity over the service period or on the grant date when the grant relates to past services.

 

The total amount to be expensed is determined by reference to the fair value of the tranche shares granted at the grant date, which is also based on:

 

Including any market performance conditions;

 

Including the impact of any non-market performance vesting conditions (i.e. remaining an employee of the entity over a specified time), and;

 

Including the impact of any non-vesting conditions (i.e. the requirement for participants to save or hold shares for a specific period of time).

 

The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of shares that are expected to vest based on the non-market vesting conditions. The Company recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

 

When the shares are vested, the Company transfers the correspondent number of shares to the participant. The shares received by the participants, net of any directly attributable transactions costs (including withholding taxes) are credited directly to equity.

 

The significant judgments, estimates and assumptions regarding share-based payments and activity relating to share-based payments are discussed further in Note 35.

 

iii)Profit-sharing and bonus plans

 

The Group recognizes a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the owners of the Company after certain adjustments, and distributed based on individual and collective performance, including qualitative and quantitative indicators.

 

32 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Employee profit-sharing terms are broader established by means of annual collective bargaining with workers’ unions. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

 

(xix)Share capital

 

Common shares are classified in equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

 

(xx)Earnings per share

 

Basic earnings per share is calculated by dividing the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary and preferred shares by the weighted average number of ordinary and preferred shares outstanding during the year, adjusted for bonus elements in ordinary and preferred shares issued during the year and excluding treasury shares (Note 36).

 

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after-income tax effect of interest and other financing costs associated with dilutive potential common and preferred shares, and the weighted average number of additional common and preferred shares that would have been outstanding assuming the conversion of all dilutive potential common and preferred shares (Note 36).

 

(xxi)Revenue and income

 

1)Revenue from contracts with customers

 

Revenue is recognized when the Group has transferred control of the services to the customers, in an amount that reflects the consideration the Group expects to collect in exchange for those services.

 

The Group applies the following five steps: i) identification of the contract with a customer; ii) identification of the performance obligations in the contract; iii) determination of the transaction price; iv) allocation of the transaction price to the performance obligations in the contract; and v) recognition of revenue when or as the entity satisfies a performance obligation.

 

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

 

The Group has discretion to involve and contract a third-party providers in providing services to the customer on its behalf. The Group presents the revenues and associated costs to such third-party providers on a gross basis where it is deemed to be the principal and on a net basis where it is deemed to be the agent. Generally, the Group is deemed to be the principal in these arrangements because the Group controls the promised services before they are transferred to customers, and accordingly presents the revenue gross of related costs.

 

The Group main types of revenues contracts are:

 

i)Brokerage commission

 

Brokerage commission revenue consist of revenue generated through commission-based brokerage services on each transaction carried out on i.e. the stock exchanges for customers, recognized at a point in time (trade date) as the performance obligation is satisfied.

 

  

 

33 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
ii)Securities placement

 

Securities placement revenue refers to fees and commissions earned on the placement of a wide range of securities on behalf of issuers and other capital raising activities, such as mergers and acquisitions, including related finance advisory services. The act of placing the securities is the sole performance obligation and revenue is recognized at the point in time when the underlying transaction is complete under the engagement terms and it is probable that a significant revenue reversal will not occur.

 

iii)Management fees

 

Management fees relates substantially to (i) services as investments advisor from funds, investment clubs and wealth management; and (ii) distributions of quotas from investments funds managed by others. Revenue is recognized over the period of time when this performance obligation is delivered, and generally based on an agreed-upon fixed percentage of the net asset value of each fund on a monthly basis. A part of management fees are performance-based (performance fees), which are recognized for the delivery of asset management services and calculated based on appreciation of the net asset value of the funds, subject to certain thresholds, such as internal rates of returns or hurdle rates in accordance with the terms of the fund’s constitution. Performance fees, which includes variable consideration, are only recognized after an assessment of the facts and circumstances and when it is highly probable that significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.

 

iv)Insurance brokerage fee

 

Refers to insurance brokerage, capitalization, pension plans and health insurance through the intermediation of the sale of insurance services.

 

Revenues are recognized after the provision of brokerage services to insurers. Products that were sold through XP Corretora de Seguros are inspected monthly, and amounts received from commission are recognized as revenue at a point in time as the performance obligation is satisfied.

 

v)Educational services

 

Educational revenue relates to advising and consulting on finance, financial planning, business management and the development of courses and business training programs in the national territory through the development and management of courses.

 

vi)Other services

 

Other services refers to revenue related to finance advisory services, advertisements on the Group’s website and sponsorship on events held by the Group.

 

2)    Net income from financial instruments

 

Net income from financial instruments include realized gains and losses on the sales of investments, unrealized gains and losses resulting from our investments measured at fair value and interest earned on both cash balances and investments in connection with our trading activities. These gains and losses are outside the scope of IFRS 15 but in scope of IFRS 9 – Financial Instruments, and the related accounting policies are disclosed in Note 3.

 

  

 

34 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
4.Significant estimated and judgements

 

The preparation of the financial statements according to accounting policies described in Note 3 requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts for assets, liabilities, revenues and expenses. Actual results may differ from these estimates. In addition, this note also explains where there have been actual adjustments this year as a result of and error and of changes to previous estimates.

 

Information about uncertainties on assumptions and estimates that have a significant risk of resulting in a material adjustment in the future fiscal year is included as follows:

 

(i)Estimation fair value of certain financial assets

 

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.

 

(ii)Expected credit losses on financial assets

 

The expected credit losses for financial assets are based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Group’s past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period.

 

(iii)Recognition of deferred tax asset for carried-forward tax losses

 

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

 

The Group has concluded that the deferred assets will be recoverable using the estimated future taxable income based on the approved business plans and budgets for the subsidiaries where a deferred tax asset has been recognized.

 

(iv)Property and equipment and intangible assets useful lives

 

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

 

As of December 31, 2020, the Group did not identify evidence that could indicate that useful lives described in Note 3 ((ix) and (x)) should be revised. Therefore, the Group concluded that changes to the estimated useful live was not deemed necessary.

 

(v)Impairment of non-financial assets, including goodwill

 

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. Intangible assets with indefinite useful lives and goodwill are tested for impairment annually at the level of the CGU, as appropriate, and when circumstances indicate that the carrying value may be impaired.

 

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Technological obsolescence, suspension of certain services and other changes in circumstances that demonstrate the need for recording a possible impairment are also regarded in estimates.

 

  

 

35 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(vi)Provision for contingent liabilities

 

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

 

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

 

5.Group structure

 

(i)Subsidiaries

 

The following are the direct and indirect interests of Company in its subsidiaries for the purposes of these consolidated financial statements:

 

      % of Group’s interest (i)
Entity name Country of incorporation Principal activities 2020 2019 2018
           
Directly controlled          
XP Investimentos S.A. Brazil Holding 100.00% 100.00%                         -   
           
Indirectly controlled          
XP Investimentos Corretora de Câmbio, Títulos e Valores Mobiliários S.A. Brazil Broker-dealer 100.00% 100.00% 100.00%
XP Vida e Previdência S.A. (iv) Brazil Private pension and insurance 100.00% 100.00% 100.00%
Banco XP S.A. Brazil Multipurpose bank 100.00% 100.00% -
XP Controle 3 Participações S.A. Brazil Financial Holding 100.00% 100.00% 100.00%
XPE Infomoney Educação Assessoria Empresarial e Participações Ltda. Brazil Digital Content services 100.00% 99.99% 99.70%
Tecfinance Informática e Projetos de Sistemas Ltda. Brazil Rendering of  IT services 99.76% 99.76% 99.73%
XP Corretora de Seguros Ltda. Brazil Insurance Broker 99.99% 99.99% 99.82%
XP Gestão de Recursos Ltda. Brazil Asset management 94.80% 93.70% 92.80%
XP Finanças Assessoria Financeira Ltda. Brazil Investment consulting service 99.99% 99.99% 99.99%
Infostocks Informações e Sistemas Ltda. Brazil Mediation of information systems 99.99% 99.99% 99.99%
XP Advisory Gestão Recursos Ltda. Brazil Asset management 99.50% 99.57% 99.52%
XP Vista Asset Management Ltda. Brazil Asset management 99.45% 99.42% 99.60%
XP Controle 4 Participações S.A. Brazil Insurance holding 100.00% 100.00% 100.00%
Leadr Serviços Online Ltda. Brazil Social media 99.99% 99.99% -
Spiti Análise Ltda. Brazil Research 95.00% 99.99% -
Chamaleon Bravery Unipessoal LDA Portugal Investment Advisor (pending regulatory approval) 100.00% 100.00% -

  

 

36 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
XP Investments UK LLP UK Inter-dealer broker and Organized Trading Facility (OTF) 100.00% 100.00% 100.00%
Sartus Capital LTD UK Investment advisor 100.00% 100.00% 100.00%
XP Private (Europe) S.A. Switzerland Investment advisor 100.00% 100.00% 100.00%
XP Holding UK Ltd UK International financial holding 100.00% 100.00% 100.00%
XP Investments US, LLC USA Broker-dealer 100.00% 100.00% 100.00%
Xperience Market Services LLC (vi) USA Non-operational 100.00% 100.00% -
XP Holding International LLC (ii) USA International financial holding 100.00% 100.00% 100.00%
XP Advisory US USA Investment advisor 100.00% 100.00% 100.00%
XP PE Gestão de Recursos Ltda. (v) Brazil Asset management 98.70% - -
XP LT Gestão de Recursos Ltda. (v) Brazil Asset management 92.00% - -
Carteira Online Controle de Investimentos Ltda. - ME (iii) Brazil Investment consolidation platform 99.99% - -
Antecipa S.A. (iii) Brazil Receivables Financing Market 100.00% - -
XP Allocation Asset Management Ltda. (v) Brazil Asset management 99.99% - -
Track Índices Consultoria Ltda. (v) Brazil Index Provider 100.00% - -
XP Eventos Ltda. (v) Brazil Media and Events 99.00% - -
DM10 Corretora de Seguros Ltda. (iii) Brazil Insurance Broker 100.00% - -
           
Consolidated investments funds          
Falx Fundo de Investimento Multimercado Crédito Privado  Investimento no Exterior Brazil Investment fund 100.00% 100.00% 100.00%
Gladius Fundo de Investimento Multimercado Investimento no Exterior Brazil Investment fund 100.00% 100.00% 100.00%
Scorpio Debentures Incentivadas Fundo de Investimento Multimercado Crédito Privado Brazil Investment fund 100.00% 100.00% 100.00%
Galea Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (vi) Brazil Investment fund - 100.00% 100.00%
Javelin Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior Brazil Investment fund 100.00% 100.00% 100.00%
Spatha Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (vi) Brazil Investment fund - 100.00% 100.00%
Frade Fundo de Investimento em Cotas de Fundos de Investimento em Direitos Creditórios NP Brazil Investment fund 100.00% 100.00% 100.00%
Frade III Fundo de Investimento em Cotas de Fundo de Investimento Multimercado Crédito Privado Brazil Investment fund 100.00% 100.00% -
Balista Debentures Incentivadas Fundo de Investimento Multimercado Crédito Privado (vi) Brazil Investment fund - 100.00% -
Coliseu Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior Brazil Investment fund 100.00% 100.00% -
NIMROD Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (v) Brazil Investment fund 100.00% 100.00% -
XP High Yield Fund SP (v) Cayman Investment fund 100.00% 100.00% -
XP International Fund SPC (v) Cayman Investment fund 100.00% 100.00% -
XP Managers Fundo de Investimento em Participações Multiestratégia (v) Brazil Investment fund 100.00% 100.00% -

    

 

(i)The percentage of participation represents the Group’s interest in total capital and voting capital of its subsidiaries.
(ii)Subsidiaries legally merged into their respective immediate parent, with no impact on the consolidated financial statements.
(iii)New subsidiaries acquired in 2020. See further details in Note 5 (ii) below.
(iv)Subsidiaries incorporated in 2018 for operating in the private pension and life insurance business, which is regulated by the  Superintendency of Private Insurance (SUSEP) in Brazil
(v)New subsidiaries and investment funds incorporated in the year. (vi) Subsidiaries and investment funds closed or incorporated by others during the year.

   

 

37 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
(ii)Business combinations

 

Acquisitions in 2020

 

The preliminary fair value of the identifiable assets acquired and liabilities assumed as of each acquisition date were:

 

  Fliper   Antecipa   DM10   Total
Assets              
Cash 617   1,917   275   2,809
Other assets 0   79   411   490
Intangible assets (Note 16(b)) 2,869   7,819   2,950   13,638
  3,486   9,815   3,636   16,936
Liabilities              
Other liabilities (6,159)   (198)   (1,522)   (7,879)
               
Total identifiable net assets at fair value (2,673)   9,617   2,114   9,057
Goodwill arising on acquisition (Note 16 (b)) 39,832   22,965   14,886   77,683
Contingent consideration 10,100   4,083   -   14,183
Purchase consideration transferred 47,259   36,665   17,000   100,923
               
Analysis of cash flows on acquisition              
Net cash acquired with the subsidiary (617)   (1,917)   (275)   (2,809)
Payable in installments -   (15,487)   (6,000)   (21,488)
Contingent consideration (10,100)   (4,083)   -   (14,183)
Net of cash flow on acquisition (investing activities) 36,542   15,178   10,724   62,443

 

For the purchase price allocation, the following intangible assets were identified. The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Assets   Amount   Method   Expected amortization period
Customer list   2,181   Multi-period excess earning method   5.5 years
Trademark   3,314   Relief from royalty   5 years
Technology   8,143   Relief from royalty   5 years

 

For the concluded acquisitions, the total consideration paid is R$100,923, being: i) R$62,443 paid in cash, ii) R$21,488 payable in three consecutives annual installments from 2020 to 2022 adjusted by the Interbank Certificates of Deposit (“CDI”) rate and iii) R$14,183 as a fair value of the contingent consideration.

 

The preliminary goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. The preliminary goodwill recognized is not expected to be deductible for income taxes purposes.

 

The Company has not yet finalized the valuation of all identifiable assets acquired and liabilities assumed in the business combination presented above and therefore some of these amounts are preliminary. These amounts may be adjusted when the valuations are finalized.

 

38 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

In addition, the Company incurred direct costs for the business combinations which were expensed as incurred.

 

The results of operations of the businesses acquired for periods prior to acquisitions, individually and in the aggregate, were not material to the Company´s consolidated statements of income and, accordingly, pro forma information has not been presented.

 

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

 

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

 

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

 

On September 9, 2020, the Group entered into an agreement, to acquire 100% of total share capital of DM10 Corretora de Seguros e Assessoria Ltda. (“DM10”). DM10 is an marketplace that connects hundreds of independent distributors with Life Insurance and Pension Plan products, adding value through technology and education. With the transaction, the Group enhances its distribution network in the insurance division. On September 24, 2020, the acquisition was consummated, through approval of Central Bank (BACEN).

 

Acquisition of Antecipa S.A. (“Antecipa”)

 

On September 29, 2020, the Group entered into an agreement, to100% of total share capital of Antecipa S.A. (“Antecipa”). Antecipa is a digital platform focused on financing of receivables and offering an efficient alternative for companies to optimize its cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On September 1, 2020, acquisition was consummated, through approval of Central Bank (BACEN).

 

Acquisition of Riza Capital Consultoria de Investimentos S.A (“Riza”)

 

On December 23, 2020 the Group entered into an agreement, to acquire 100% of total share capital of Riza an independent financial advisory company. Riza has one of the most seasoned and respected teams in the segment, with experience in important financial institutions and active participation in some of the most relevant M&A transactions over the last decades. The transaction is aligned with XP Inc.’s strategy to reinforce its Capital Markets ecosystem.

 

The acquisition date fair value of net assets acquired, including the allocation of the purchase price has not been completed by the Group as of the date of these consolidated financial statements.

 

  

 

39 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
6.Securities purchased under agreements to resell

 

  2020   2019
       
Available portfolio 1,409,637   971,991
National Treasury Notes (NTNs) (a) 876,102   771,099
Financial Treasury Bills (LFTs) (a) 452,691   195,980
National Treasury Bills (LTNs) (a) 44,091   4,912
Debentures (b) 36,753   -
       
Collateral held 5,217,772   8,518,099
National Treasury Bills (LTNs) (a) 976,419   1,764,410
National Treasury Notes (NTNs) (a) 4,241,353   6,753,689
       
Total (c) 6,627,409   9,490,090

 

(a) Refers to fixed-rate fixed-income and low-risk investments issued by financial institutions, collateral-backed by debentures.

 

(b) Investments in purchase and sale commitments collateral-backed by sovereign debt securities refer to transactions involving the purchase of sovereign debt securities with a commitment to sale originated in the subsidiary XP CCTVM and in exclusive funds and were carried out at an average fixed rate of 1.91% p.a. (4.63% p.a. as of December 31, 2019).

 

(c) Includes expected credit loss in the amount of R$ 370.The reconciliation of gross carrying amount and the expected credit loss segregated by stages are presented in the Note 14.

 

As of December 31, 2020, R$ 593,673 (2019 - R$ 654,057) from the total amount of available portfolio is being presented as cash equivalents in the statements of cash flows.

 

7.Securities

 

a)Securities classified at fair value through profit and loss and at fair value through other comprehensive income are presented in the following table:

 

  2020   2019
  Gross carrying amount  

Fair

 

value

 

  Gross carrying amount  

Fair

 

value

 

Financial assets (ii)              
At fair value through profit or loss 49,157,111   49,590,013   22,332,936    22,443,392
Brazilian government bonds 30,752,903   31,129,671   15,404,300   15,494,046
Investment funds (ii) 11,216,914   11,221,774   3,047,198   3,047,198
Stocks issued by public-held company 3,802,610   3,802,470   1,562,965   1,562,965
Debentures 1,111,595   1,114,967   885,344   885,068
Uniated States government bonds 590,710   602,214   -      -   
Structured transaction certificate 485,012   515,960   237,112   256,381
Bank deposit certificates (i) 371,455   372,329   244,071   246,827
Agribusiness receivables certificates 359,607   363,721   598,085   589,525
Certificate of real estate receivable 97,606   96,930   75,922   75,123
Financial credit bills 81,465   82,209   98,068   106,759
Real estate credit bill 474   477   1,282   1,300
Others (iii) 286,760   287,291   178,589   178,200

 

(i)Bank deposit certificates include R$ 111,927 (December 31, 2019 – R$123,817) is being presented as cash equivalents in the statements of cash flows.

 

(ii)Financial assets include R$ 13,387,913 (December 31, 2019 – R$ 3,759,090) amounts related to Specially Constituted Investment Fund (“FIE”) as presented in Note 26. Investments funds include 10,625,520 (December 31, 2019 – R$ 2,249,459) of XP Vida e Previdência S.A..

 

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

 

40 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
b)Securities at fair value through other comprehensive income are presented in the following table

 

  2020   2019
  Gross carrying amount  

Fair

value

  Gross carrying amount  

Fair

value

Financial assets              
At fair value through other comprehensive income              
National treasury bill (i) 19,011,499   19,039,044   2,608,325   2,616,118

 

(i) Includes expected credit losses in the amount of R$ 8,855 . The reconciliation of gross carrying amount and the expected credit loss segregated by stages are presented in the Note 14.

 

c)Securities evaluated at amortized cost are presented in the following table:

 

  2020   2019
  Gross carrying amount  

Book

value

  Gross carrying amount  

Book

value

Financial assets              
At amortized cost              
Bonds (i) 1,829,791       1,828,704    2,266,971    2,266,971

 

(i) Includes expected credit losses in the amounts of R$1,087 . The reconciliation of gross carrying amount and the expected credit loss segregated by stages are presented in the Note 14.

 

d)Securities on the financial liabilities classified at fair value through profit or loss are presented in the following table:

 

  2020   2019
  Gross carrying amount  

Fair

value

  Gross carrying amount  

Fair

value

Financial liabilities              
At fair value through profit or loss              
Securities loaned 2,237,442   2,237,442   2,021,707   2,021,707

  

 

41 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Below is presented the securities classified by maturity:

 

      Assets       Liabilities
  2020   2019   2020   2019
               
Financial assets              
At fair value through PL and at OCI              
Current 34,572,107    9,804,819   2,237,442    2,021,707
Non-stated maturity   15,246,105    4,999,333     2,237,442    2,021,707
Up to 3 months 794,025    257,544   -   -
From 3 to 12 months   18,531,977    4,547,942   -   -
               
Non-current 34,065,805    15,254,691   -   -
After one year   34,065,805    15,254,691   -   -
               
Evaluated at amortized cost              
Current 1,829,791    2,266,971   -   -
Up to 3 months  1,623,487    807,218   -   -
From 3 to 12 months 206,304    1,459,753   -   -
               
Total 70,467,703   27,326,481   2,237,442   2,021,707

 

The reconciliation of expected loss to financial assets at amortized cost – securities segregate by stage according with IFRS 9 is demonstrated in Note 14.

 

8.Derivative financial instruments

 


The Group uses the derivatives to manage its overall exposures of foreign exchange rates, interest rates and price of shares.

 

The fair value of derivative financial instruments, comprised of futures, forward, options, and swaps operations, is determined in accordance with the following criteria:

 

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

 

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

 

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

 

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

 

  

 

42 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Positions with derivative financial instruments as of December 31, 2020 and 2019 are shown below:

 

        2020
 

Assets

Liabilities

 

Fair value

Notional

Fair value

Notional

Swaps 777,816 5,578,227 870,393 6,143,671
Forward contracts 456,724 2,905,411 200,272 3,035,011
Futures contracts 26,535 43,100,609 13,221 44,981,642
Options

6,298,358

681,464,674

6,735,478

614,741,256

Total

7,559,433

733,048,921

7,819,364

668,901,580

         
        2019
 

Assets

Liabilities

 

Fair value

Notional

Fair value

Notional

Swaps 1,133,768 3,955,473 485,164 3,420,857
Forward contracts 187,392 1,857,542 2,480 164,209
Futures contracts 21,809 15,920,584 - -
Options

2,742,035

498,484,022

2,741,592

488,482,756

Total

4,085,004

520,217,621

3,229,236

492,067,822

         

 

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

 

  2020
  Fair Value   %   Up to 3 months   From 3 to 12 months   Above 12 months
Assets                  
Swap contracts 777,816   10%   35,241   206,921   535,654
Forward contracts 456,724   6%   230,862   201,324   24,538
Future contracts 26,535   1%   26,535   -   -
Options

6,298,358

 

83%

 

2,327,062

 

2,351,285

 

1,620,011

Total

7,559,433

 

100%

 

2,619,700

 

2,759,530

 

2,180,203

   
Liabilities                  
Options 6,735,478   87%   2,152,890   2,378,689   2,203,899
Forward contracts 200,272   3%   133,679   49,102   17,491
Future contracts 13,221   1%   542   1,742   10,937
Swap contracts

870,393

 

11%

 

99,249

 

213,532

 

557,612

Total

7,819,364

 

100%

 

2,386,360

 

2,643,065

 

2,789,939

                   

 

  2019
  Fair value  %  Up to 3 months  From 3 to 12 months  Above 12 months
Assets              
Swap contracts 1,133,768  27  10,418  700,668  422,682
Forward contracts 187,392  5  159,163  28,175  54
Future contracts 21,809  1  21,809  -  -
Options 2,742,035  67  1,837,073  577,177  327,785
Total 4,085,004  100  2,028,463  1,306,020  750,521
               
Liabilities              
Options 2,741,592  85  1,745,532  637,393  358,667
Forward contracts 2,480  1  1,693  325  462
Swap contracts 485,164  14  15,838  40,687  428,639
Total 3,229,236  100  1,763,063  678,405  787,768

 

   

 

43 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

Derivatives financial instruments by index:

 

   

2020

2019

   

Notional

Fair Value

Notional

Fair Value

Swap Contracts        
  Asset Position        
  Interest 5,014,934 776,215 3,955,473 1,133,768
  Foreign exchange 563,293 1,601 - -
           
  Liability Position        
  Interest 6,143,671 (870,393) 3,420,857 (485,164)
           
Forward Contracts        
  Asset Position        
  Foreign exchange 2,546,940 98,253 1,710,648 40,499
  Share 325,519 325,519 - -
  Interest 32,952 32,952 146,893 146,893
           
  Liability Position        
  Foreign exchange 3,002,067 (167,328) 162,551 (822)
  Shares - - 1,658 (1,658)
  Interest 32,944 (32,944) - -
           
Future Contracts        
  Purchase commitments        
  Foreign exchange - - 965 329
  Interest 43,100,609 26,535 15,919,619 21,480
  Commitments to sell        
  Interest 44,981,642 (13,221) - -
Options        
  Purchase commitments        
  Foreign exchange - - 37,500 82,369
  Share 5,827,205 1,074,507 1,770,220 210,448
  Interest 675,637,469 5,223,851 496,676,302 2,449,218
           
  Commitments to sell        
  Foreign exchange - - 37,500 (94,612)
  Shares 9,229,113 (945,828) 2,511,960 (229,291)
  Commodities     - -
  Interest 605,512,143 (5,789,650) 485,933,296 (2,417,689)
           
  Assets   7,559,433   4,085,004
  Liabilities  

(7,819,364)

 

(3,229,236)

  Net  

(259,931)

 

855,768

  

9.Hedge accounting

 

The Group has two types of hedge relationships: hedge of net investment in foreign operations and fair value hedge.For hedge accounting purposes, the risk factors measured by the Group are:

 

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

 

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

 

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

 

44 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

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

 

a)Hedge of net investment in foreign operations

 

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

 

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

 

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

 

    Hedged item   Hedge instrument
    Book Value   Variation in value recognized in Other comprehensive income   Notional value   Variation in the
amounts used to
calculate hedge
ineffectiveness
Strategies   Assets   Liabilities  
2020                    
Foreign exchange risk                    
Hedge of net investment in foreign operations   245,986   -   52,299   349,218   (60,563)
Total   245,986   -   52,299   349,218   (60,563)
                     
2019                    
Foreign exchange risk                    
Hedge of net investment in foreign operations   186,412   -   5,946   248,896   (7,133)
Total   186,412   -   5,946   248,896   (7,133)

 

2018                    
Foreign exchange risk                    
Hedge of net investment in foreign operations 147,179   -   18,645   225,901   (17,495)
Total   147,179   -   18,645   225,901   (17,495)

   

 

45 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
b)Fair value hedge

 

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

 

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

 

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

 

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

 

    Hedged item   Hedge instrument
    Book Value   Variation in value recognized in income   Notional value   Variation in the
amounts used to
calculate hedge
ineffectiveness
Strategies Assets   Liabilities
2020
Interest rate risk                    
Hedge of fixed-income securities   -   2,178,459   (47,923)   2,188,732   46,795
Total   -   2,178,459   (47,923)   2,188,732   46,795

  

There was no ineffectiveness during 2020, 2019 and 2018 in relation to the foreign net investment hedge.

 

            2020
    Notional amount Book value (i) Variation in fair value used to calculate hedge ineffectiveness Hedge ineffectiveness recognized in income
Hedge Instruments   Assets Liabilities
Interest rate risk            
Futures   2,188,732 - 2,178,459 46,795 (1,128)

 

(i)Amounts recorded within financial statement line “Derivative financial instruments”. See Note 8.

 

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

 

    December 31, 2020   December 31, 2019   December 31, 2018
Strategies   Hedge instruments Hedge item   Hedge instruments Hedge item   Hedge instruments Hedge item
  Notional amount Fair value adjustments Book value   Notional amount Fair value adjustments Book value   Notional amount Fair value adjustments Book value
Hedge of Fair Value   2,188,732        (47,923)          46,795                   -                    -                    -                    -                    -                    -   
Hedge of net investment in foreign operations      349,218          52,299       (60,563)       248,896            5,946       (7,133)    225,901          18,645        (17,495)
Total   2,537,950            4,376       (13,768)       248,896            5,946       (7,133)    225,901          18,645        (17495)

 

46 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

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

 

  2020
  0-1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years Total
Hedge of Fair Value 1,977 13,375 94,099 44,843 672,978 1,361,460 2,188,732
Hedge of net investment in foreign operations - - 146,547 202,671 - - 349,218
Total 1,977 13,375 240,646 247,514 672,978 1,361,460 2,537,950
  2019
  0-1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years Total
Hedge of net investment in foreign operations 7,658 - - 91,698 149,540 - 248,896
Total 7,658 - - 91,698 149,540 - 248,896
  2018
  0-1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years Total
Hedge of net investment in foreign operations - - - - - 225,901 225,901
Total - - - - - 225,901 225,901

 

10.Loan operations

 

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

 

Loans by type 2020   2019
Retail      
Pledged asset loan 2,698,018   388
Non-pledged loan 116,978   -
Credit card 51,270   -
Corporate      
Pledged asset loan 946,008   -
Non-pledged loan 113,155   -
Total Loans operations 3,925,429   388
Expected Credit Loss (Note 14(b)) (7,101)   (2)
Total loans operations, net of Expected Loss 3,918,328    386

 

By maturity  

2020

2019
Due in 3 months or less   160,918 388
Due after 3 months through 12 months   580,183 -
Due after 12 months   3,184,328 -
Total Loans operations   3,925,429 388

   

 

47 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
By concentration    
2020 2019
Largest debtor 150,040 71
10 largest debtors 726,904 310
20 largest debtors 1,043,583 375
50 largest debtors 1,521,310 388
100 largest debtors 1,885,614 388

 

XP Inc offers loan products through Banco XP to its customers. The loan products offered to its customers are fully collaterized by customers’ investments on XP platform and credit product strictly related to investments in structured notes, in which the borrower is able to operate leveraged, retaining the structured note itself as guarantee for the loan.

 

Certain loans operations originated by the collateralized credit has insignificant risk of loss, which results in no loss allowance being recognised in accordance with the Group's expected credit loss model. The carrying amount of such financial assets is R$ 297,443 at December 31, 2020 (December 31, 2019:nill).

 

The reconciliation of gross carrying amount and the expected credit loss in loan operations segregate by stage according with IFRS 9 were demonstrated in Note 14. These stages are periodically reassessed in accordance with XP Inc.’s credit risk policy.

 

11.Accounts receivable

 

  2020   2019
Customers (a) 455,253   458,776
Dividends and interest receivable on equity capital - Funds 6,393   7,052
Other (b) 51,131   702
(-) Expected credit losses on accounts receivable (Note 14(b)) (6,418)   (4,501)
Total 506,359   462,029
       

(a) Refers to receivables from management fee arising from the distribution of funds and amounts receivable related to service provision, which have an average term of 30 days. There is no concentration on the balances receivable as of December 31, 2020 and 2019.

 

(b) Mainly related to accounts receivable from B3.

 

The reconciliation of gross carrying amount and the expected credit loss in Accounts receivable segregate by stage according with IFRS 9 were demonstrated in Note 14.

 

12.Recoverable taxes

 

  2020   2019
Prepayments of income taxes (IRPJ and CSLL) 122,070   225,465
Contributions over revenue (PIS and COFINS) 3,993   16,859
Taxes on services (ISS) 979   846
Value added taxes (VAT) 581   150
Total 127,623   243,320
       
Current 127,623   243,320
Non-current -   -
       

  

 

48 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
13.Prepaid expenses

 

  2020   2019
Commissions and premiums paid in advance (a) 1,314,771   49,233
Marketing expenses 28,056   9,678
Services paid in advance 6,245   2,043
Other expenses paid in advance 44,465   28,730
Total 1,393,537   89,684
       
Current 283,183   56,605
Non-current 1,110,354   33,079

 

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

 

14.Expected Credit Losses on Financial Assets and Reconciliation of carrying amount

 

a)      Reconciliation of carrying amount of Financial Assets

 

It is presented below the reconciliation by stage of gross carrying amount of Financial assets through other comprehensive income and Financial assets measured at amortized cost – that have their ECLs (Expected Credit Losses) measured using the three stage model and the low credit risk simplification.

 

Stage 1 Balance at December 31, 2019 Acquisition / (Settlements) Transfer to stage 2 Transfer to stage 3 Cure from stage 2 Cure from stage 3 Closing balance December 31, 2020
               
Financial assets at fair value through other comprehensive income              
Securities  2,616,118 16,431,781 - - - - 19,047,899
               
Financial assets amortized cost              
Securities 2,266,971 (437,180) - - - - 1,829,791
Securities purchased under agreements to resell  9,490,090 (2,862,311) - - - - 6,627,779
Loans and credit card operations - 3,599,808 - - - - 3,599,808
               
Total on-balance exposures 14,373,179 16,732,098 - - - - 31,105,277
               
Total exposures 14,373,179 16,732,098 - - - - 31,105,277
               
Stage 2 Balance at December 31, 2019 Acquisition / (Settlements) Transfer to stage 1 Transfer to stage 3 Cure from stage 1 Cure from stage 3 Closing balance December 31, 2020
               
               
Financial assets amortized cost              
Loans and credit card operations - 325,621 - - - - 325,621
               
Total on-balance exposures - 325,621 - - - - 325,621
               
Off-balance exposures (credit card limits) - 35,810 - - - - 35,810
               
Total exposures - 361,431 - - - - 361,431

  

 

49 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
Consolidated Stages   Balance at December 31, 2019 Derecognition Purchases / (Settlements) Closing balance December 31, 2020
           
Financial assets at fair value through other comprehensive income          
Securities    2,616,118 - 16,431,781 19,047,899
           
Financial assets amortized cost          
Securities   2,266,971 - (437,180) 1,829,791
Securities purchased under agreements to resell    9,490,090 - (2,862,311) 6,627,779
Loans and credit card operations   - - 3,925,429 3,925,429
           
Total on-balance exposures   14,373,179 - 17,057,719 31,430,898
           
Off-balance exposures (credit card limits)   - - - 35,810
           
Total exposures   14,373,179 - 17,057,719 31,466,708

 

For December 31, 2020, XP Group does not have financial assets classified as a Stage 3.

 

Stage 1 Balance at December 31, 2018 Acquisition / (Settlements) Transfer to stage 2 Transfer to stage 3 Cure from stage 2 Cure from stage 3 Closing balance December 31, 2019
               
Financial assets at fair value through other comprehensive income              
Securities  695,778 1,920,340 - - - - 2,616,118
               
Financial assets amortized cost              
Securities 155,292 2,111,679 - - - - 2,266,971
Securities purchased under agreements to resell  6,570,610 2,919,480 - - - - 9,490,090
               
Total on-balance exposures 7,421,680 6,951,499 - - - - 14,373,179
               
Total exposures 7,421,680 6,951,499 - - - - 14,373,179

 

Consolidated Stages   Balance at December 31, 2018 Purchases / (Settlements) Closing balance December 31, 2019
         
         
Financial assets at fair value through other comprehensive income        
Securities    695,778 1,920,340 2,616,118
         
Financial assets amortized cost        
Securities   155,292 2,111,679 2,266,971
Securities purchased under agreements to resell    6,570,610 2,919,480 9,490,090
         
Total on-balance exposures   7,421,680 6,951,499 14,373,179
Total exposures   7,421,680 6,951,499 14,373,179

 

For December 31, 2019, XP Group does not have financial assets classified as a Stage 3.

 

The following table presents the gross carrying amount of Financial assets measured at amortized cost that have their ECLs measured using the simplified approach:

 

Operations 2020 2019
     
Financial assets amortized cost    
Securities trading and intermediation          1,107,051           523,613
Accounts Receivable              512,777           466,530
Other financial assets                73,466             23,301
     
Total          1,693,294        1,013,444

 

50 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

b)      Expected credit loss

 

The table below presents the changes in ECLs, measured according three stage model, for assets classified as Financial assets through other comprehensive income –and Financial assets measured at amortized cost in the period ended December 31, 2020 and December 31, 2019, segregated by stages:

 

Stage 1

ECL at

December 31, 2019

Increase / (Reversal) Transfer to stage 2 Transfer to stage 3 Cure from stage 2 Cure from stage 3

ECL at

December 31, 2020

               
Financial assets at fair value through other comprehensive income              
Securities  - 8,855 - - - - 8,855
               
Financial assets amortized cost              
Securities  - 1,087 - - - - 1,087
Securities purchased under agreements to resell  - 370 - - - - 370
Loans and credit card operations 2 5,646 - - - - 5,648
               
Total on-balance exposures 2 15,958 - - - - 15,960
Total exposures 2 15,958 - - - - 15,960
               
Stage 2 ECL at December 31, 2019 Increase / (Reversal) Transfer to stage 1 Transfer to stage 3 Cure from stage 1 Cure from stage 3 ECL at December 31, 2020
               
Financial assets amortized cost              
Loans and credit card operations - 1,453 - - - - 1,453
               
Total on-balance exposures - 1,453 - - - - 1,453
Total exposures - 1,453 - - - - 1,453

 

Consolidated Stages   ECL at December 31, 2019 Derecognition Increase / (Reversal) ECL at December 31, 2020
           
Financial assets at fair value through other comprehensive income          
Securities    - - 8,855 8,855
           
Financial assets amortized cost          
Securities    - - 1,087 1,087
Securities purchased under agreements to resell   - - 370 370
Loans and credit card operations   2 - 7,099 7,101
           
Total on-balance exposures   2 - 17,411 17,413
           
Total exposures   2 - 17,411 17,413

 

51 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

The table below presents the ECLs for the financial assets measured according to simplified approach approach in the period ended December 31, 2020 and December 31, 2019:

 

Expected Credit Losses 2020 2019
     
Financial assets amortized cost    
Securities trading and intermediation 55,485 18,630
Accounts Receivable 6,418 4,501
Other financial assets 3,312 3,497
Total 65,215 26,628

 

c)       Expected credit losses segregated by products

 

It is presented below the expected credit losses for 2020 and 2019, segregated by the products:

 

Expected Credit Losses 2020 2019
     
Financial assets at fair value through other comprehensive income 8,855 -
Securities 8,855 -
Financial assets amortized cost 73,956 27,247
Securities 1,087 -
Securities purchased under agreements to resell 370 -
Loans and credit card operations 7,101 2
Securities trading and intermediation 55,485 18,630
Accounts Receivable 6,418 4,501
Other financial assets 3,495 4,114
Total losses for exposures 82,811 27,247
     
15.Investments in associates and joint ventures

 

Set out below are the associates and joint venture of the Group as of December 31, 2020. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held.

 

Name of entity % of ownership interest Nature of relationship Measurement method Equity Carrying amount
Du Agro Holdings S.A. 49% Joint Venture (1) Equity method 3,213 1,574
Wealth High Governance Holding de Participações S.A. 49.9% Associate (2) Equity method 149,520 74,610
O Primo Rico Mídia, Educacional e Participações Ltda. 20% Associate (3) Equity method 10,330 2,066
Total equity-accounted investments       163,063 78,250

 

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

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

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

 

52 

XP Inc. and its subsidiaries

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 
             
Entity

December 31,

2019

Acquisition/Equity Equity in earnings Other comprehensive income Goodwill (i) December 31,
2020
Du Agro Holdings S.A. - 2,335 (777) 17 408 1,983
Wealth High Governance Holding de Participações S.A. (ii) - 74,851 (240) - 621,248 695,859
O Primo Rico - 242 1,879 (56) - 2,065
 Total - 77,428 862 (39) 621,656 699,907

 

(i) Related to the acquisitions of associates and joint ventures. As of December 31, 2020 the goodwill recognized is includes the value of expected synergies arising from the investments. 

(ii) The Goodwill included an element of contingent consideration. The fair value of the contingent consideration is in Note 23.

 

16.Property, equipment, intangible assets and leases

 

(a) Property and equipment

 

  Data processing system Furniture and equipment Security systems Facilities Fixed assets in progress (ii) Total
             
Balance as of January 1, 2018 13,743 13,261 4,907 15,162 - 47,073
Additions 22,319 10,448 376 9,930 40,076 83,149
Write-offs (40) (924) (30) (5,078) (553) (6,625)
Transfers 31 2,109 192 37,191 (39,523) -
Depreciation in the year (7,282) (3,253) (2,892) (11,043) - (24,470)
Balance as of December 31, 2018 28,771 21,641 2,553 46,162 - 99,127
Cost 48,023 29,613 6,388 47,843 - 131,867
Accumulated depreciation (19,252) (7,972) (3,835) (1,681) - (32,740)
             
Balance as of January 1, 2019 28,771 21,641 2,553 46,162 - 99,127
Additions 15,039 9,942 664 22,315 24,539 72,499
Write-offs (304) (2,047) - (6,112) - (8,463)
Transfers - 2,409 - 22,130 (24,539) -
Depreciation in the year (9,059) (4,189) (1,673) (5,778) - (20,699)
Balance as of December 31, 2019 34,447 27,756 1,544 78,717 - 142,464
Cost 62,235 38,086 7,716 84,726 - 192,763
Accumulated depreciation (27,788) (10,330) (6,172) (6,009) - (50,299)