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The revenue from our tuition is recognized monthly in the results for the year, reflecting the occurrence of the activity that generated the revenue, irrespective of whether or not the revenue has actually been received. Our service agreements with our students are effective for an indefinite period of time, but must be renewed semiannually, upon the payment of the first monthly tuition each semester, which represents confirmation of enrollment. Whenever a student withdraws before the end of an academic semester, we only charge the monthly tuition for those months the student attended classes and we cancel the tuition where it has been generated for students who have already withdrawn. Cancelled monthly tuition is accounted for as deductions from revenue.
Prepaid tuition refers to enrollments and monthly tuitions for the following year that are received in advance, at the end of the current year, and which we recognize to income on an accrual basis over the related term. Prepaid tuition is recorded under “prepaid tuition” in current liabilities. This account is usually significant at December 31 since the new enrollments made soon after the admission exam held in the last two months of the year refer to January of the following year. This advance is then charged to result in the month it effectively occurs.
Provision for Doubtful Accounts
We record provisions for doubtful accounts based on our management’s estimates of probable losses on accounts receivable. In this determination, we consider statistics regarding default, economic factors and our recovery history of overdue accounts. This process requires a certain degree of discretion by our management, given the uncertainty of the assumptions involved, such as the financial condition of students who are in default, as well as macroeconomic trends. In the event that the amount of our provisions for doubtful accounts is different from the amount actually received, an increase in our provisions may be necessary and our net income may be adversely affected. Our provision for doubtful accounts is recorded under selling expenses in our income statement.
Property, Plant and Equipment
We register our property, plant and equipment at the cost of acquisition, development or construction. We depreciate our property, plant and equipment according to the straight-line method, taking into consideration the useful lives of our assets. Since we have purchase options under our lease agreements, any improvements we make to real estate leased from third parties are depreciated according to the useful lives of the assets. In the event we fail to renew our lease agreements or in the event they are terminated, we record the remaining depreciation of the improvements to income until the date of expiration of the agreements.
The estimated useful lives of our property, plant and equipment is, on all terms, subjective and uncertain, given the changes in technology and industry practice that may cause our property, plant and equipment to become obsolete before our original estimate. If we make any material change in the estimated useful life of our assets and if the market conditions require a new valuation of our property, plant and equipment, expenses for depreciation, obsolescence of our assets and, consequently, the value of our property, plant and equipment may be substantially different.
We record goodwill on the companies we acquired, which are amortized over a period of five years, in accordance with their expected future result. On the date of each financial statement, we conduct an impairment analysis of goodwill. To the extent the amount of the goodwill recorded in our assets exceeds the amount that is actually realized, we will be required to reduce the goodwill and recognize the corresponding impairment.
Determination of impairment of goodwill is supported by an appraisal report prepared by specialized companies and based on certain assumptions and estimates concerning projections related to our revenue, expenses and future investments. These assumptions and estimates may be influenced by several internal and external factors, such as, for example, trends in the economy and in our industry, interest rates, changes in our strategy and changes in our services and products. The adoption of different assumptions and estimates could substantially affect our financial statements. For example, more conservative assumptions and estimates of
projected cash flow could result in a lower realization of goodwill, thus adversely affecting our results of operations and shareholders’ equity. In accordance with Brazilian GAAP, by adopting the assumptions and estimates we consider appropriate, we are not required to record any impairment in connection with the value of our goodwill.
Our deferred expenses relate to expenses incurred in the opening of new campuses, acquisitions and development of projects that are still in pre-operational stage. We amortize deferred expenses over a period of five years. If our management significantly changes the assumptions of the amortization periods, our amortization expenses and consequently the net value of our deferred expenses may be materially different.
Provision for Contingencies
We are currently party to lawsuits and administrative proceedings filed during the normal course of our business. We make provisions in our balance sheet when a lawsuit or administrative contingency is likely to result in probable loss pursuant to the assessment of our outside counsel and the amounts involved are measurable. Particularly in the case of labor claims, we establish reserves based on past losses. We constantly review our provision for contingencies based on judicial decisions and amendment to legislation that may have a material adverse effect on our results of operations and shareholders’ equity. Although our management believes our existing provision for contingencies is adequate, we cannot assure you that the facts on which our management based its decisions will not change in the future.