Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

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. 11

2       IFRS – International Financial Reporting Standards – December 2010

Independent Auditors’ Report

To the Board of Directors

Banco Bradesco S.A.

We have audited the accompanying consolidated financial statements of Banco Bradesco S.A. and its subsidiaries  (the “Bank”), which comprise the consolidated balance sheet as at December 31, 2010 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting practices and other explanatory information.

Management’s responsibility for the consolidated financial statements

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

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the bank’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Banco Bradesco S.A. and its subsidiaries as at December 31, 2010, and their financial performance and their cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

São Paulo, April 14, 2011

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

The Notes are an integral part of the Consolidated Financial Statements.

The Notes are an integral part of the Consolidated Financial Statements.

The Notes are an integral part of the Consolidated Financial Statements.

The Notes are part of the Consolidated Financial Statements.

(1)  Consists of unrealized gains from investment securities, classified as available for sale, net of taxes, totaling R$ 1,479,515 thousand (2009 – R$ 1,223,773 thousand and January 1, 2009 – R$ 170,850 thousand).

(2)  On October 29, 2009, the Special Shareholders’ Meeting approved the merger of Banco Ibi SA upon the issue of 45,662,775 new shares, being 22,831,389 common shares and 22,831,386 preferred shares, to the former’s shareholders of the Banco Ibi S.A., in amount of R$ 1,368,183 thousand and capital increase through the transfer of reserve, without issue new shares, in amount of R$ 131,817 thousand, R$ 65,909 thousand of common shares and R$ 65,908 thousand of preferred shares.

(3)  On December 18, 2009, the Special Shareholders’ Meeting decided to implement a stock dividend of one new share for each ten held of the same class in order for shareholders to increase their holdings, without owns. Thus, all numbers of shares presented in the previous years were adjusted to reflect the share split in the proportion of one new share for every ten held. The same Meeting decided to increase the capital with reserves in the amount of R$ 2,000,000 thousand – R$ 1,000,000 thousand in common shares and R$ 1,000,000 thousand in preferred shares.

(4)  On June 10, 2010, the Special Shareholders’ Meeting decided to implement a stock dividend of one new share for each ten held of the same class in order for shareholders to increase their holdings, without owns. Therefore, all the numbers of shares, presented during previous periods were adjusted to reflect the share split in the proportion of one new share for every ten held. The same Meeting decided to increase the capital with reserves in the amount of R$ 2,000,000 thousand – R$ 1,000,000 thousand in common shares and R$ 1,000,000 thousand in preferred shares.

(5)  On December 17, 2010, the Special Shareholders’ Meeting approved an increase in Share Capital, in the amount of R$ 1,500,000 thousand, raising it from R$ 28,500,000 thousand to R$ 30,000,000 thousand, with the issuance of 62,344,140 new, nominative, book entry shares, with no par value, being 31,172,072 common shares and 31,172,068 preferred shares, based on the private subscription by shareholders during the period from December 29, 2010 to January 31, 2011 in proportion to the shares each one held on the date of the Meeting, to be paid up in cash on February 18, 2011.

1)     General information

Banco Bradesco S.A. (“Bradesco”, the “Bank”, the “Company” or the “Organization”) is a publicly-traded company established according to the laws of the Federative Republic of Brazil and headquartered in the city of Osasco, state of São Paulo, Brazil.

Bradesco is a multiple service bank in compliance with the terms of Brazilian banking regulations, operating in two main segments. The banking segment includes a number of areas in the banking activities, serving individual and corporate customers, investment banking, nacional and a international banking operations, asset management operations and consortium administration. The insurance segment covers auto, health, life, accident and property insurance and pension plans as well as certificated savings plans.

The retail banking products include demand deposits, savings deposits, time deposits, mutual funds, foreign exchange services and a range of credit operations, including overdrafts, credit cards and loans with repayments in installments. The services provided to corporate entities include fund management and treasury services, foreign exchange operations, corporate finance and investment banking services, hedge and finance operations including working capital financing, leasing and loans with repayments in installments. These services are provided, mainly, in domestic markets, but also include international services on a smaller scale.

The Organization was originally listed on the São Paulo Stock Exchange (“BM&FBovespa”) and then subsequently on the New York Stock Exchange (“NYSE”).

The consolidated financial statements for the years ended December 31, 2010 and 2009 and as at December 31, 2010, December 31, 2009 and January 1, 2009 were approved by the Board of Directors on April 14, 2011.

2)     Significant accounting practices

The Organization’s Consolidated Financial Statements for the years ended December 31, 2010 and 2009, were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) translated to portuguese by the Brazilian Institute of Accountants. These consolidated financial statements comply with IFRS 1 – first time adoption of the international financial reporting standards (“IFRS1 (R)”). For further informations about the preparation of the first consolidated financial statements in compliance with IFRS, please see Note 46 – Transition to IFRS.

The consolidated financial statements were prepared on the historic cost basis, adjusted to reflect the fair value of the financial assets available for sale and financial assets and liabilities (including derivative financial instruments) measured at fair value through profit or loss.

The consolidated financial statements include the consolidated balance sheets, consolidated statements of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows as well as the notes to the financial statements.

The Organization has classified its expenses according to their nature.

The consolidated cash flows statements show the changes in cash and cash equivalents during the year arising from operating, investing and financing activities. Cash and cash equivalents include highly

liquid investments. Note 19 details the accounts of the consolidated balance sheets comprising cash and cash equivalents. The consolidated cash flows statements are prepared using the indirect method.

Accordingly, the income before taxes and the participation of non-controlling interests were adjusted by non-cash itens such as gains or losses, on provisions, depreciation, amortization and losses due to impairment of loans and advances. The interests received and paid are classified as operating cash flows.

The preparation of the consolidated financial statements requires the adoption of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the profit and loss amounts for the year. The consolidated financial statements also reflect various estimates and assumptions, including but not limited to adjustments to the provision for impairment losses of loans and advances, estimates of the fair value of financial instruments, depreciation and amortization, evaluation of losses on assets, the useful life of intangible assets, evaluation of the realization of tax assets, assumptions for the calculation of technical provisions for insurance, supplemental pension plans and certificated savings plans, provisions for contingencies and provisions for potential losses arising from fiscal and tax uncertainties. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

The accounting policies listed below were used in all the periods presented and by all the companies of the Organization.

a)      Consolidation 

The consolidated financial statements include the financial statements of Bradesco and those of its direct and indirect subsidiaries, including jointly-controlled entities, as well as exclusive mutual funds and special purpose entities.

The main entities included in the consolidated financial statements are as follows:

12       IFRS – International Financial Reporting Standards – December 2010

i.       Subsidiaries 

Subsidiaries are all companies over which the Organization has control, i.e., when it has control of the majority of the voting rights. There may still be control when the Organization has direct or indirect power to govern financial and operational policies of the entity so as to obtain benefits from its activities, even if the percentage that the Organization holds in the equity capital is less than 50%. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Organization controls another entity. The subsidiaries are fully consolidated from the date on which the control is transferred to the Organization and cease to be consolidated from the date that control ceases.

The results of the subsidiaries acquired or sold during the years are included in the consolidated financial statements as from the effective acquisition date or up to the effective date on which the control ceases.

For acquisitions meeting the definition of a business, the purchase method of accounting is used. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Organization’s share of the identifiable net assets acquired is recorded as goodwill. Any goodwill arising from initial consolidation is tested for impairment at least once a year and whenever events or changes in circumstances may indicate the need for impairment write-down. If the cost of acquisition is less than the fair value of the Organization’s share of the net assets acquired, the difference is recognized directly in the consolidated income statement.

For acquisitions not meeting the definition of a business, the Organization allocates the cost between the individual identifiable assets and liabilities. The cost of acquired assets and liabilities is determined by (a) recognizing financial assets and liabilities at their fair value at the acquisition date as measured in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’; and (b) allocating the remaining balance of the cost of purchasing assets and assuming liabilities to individual assets and liabilities, other than financial instruments, based on their relative fair values at the acquisition date.

ii.      Associated companies

Companies are classified as associated companies if the Organization has significant influence, but not control, over the operating and financial management policy decisions. Normally significant influence is presumed when the Organization holds in excess of 20%, but no more than 50%, of the voting rights. Even if less than 20% of the voting right are held, the Organization could still have significant influence through its participation in the management of the investee or on its Board of Directors, providing it has executive power.

Investments in associated companies are recorded in the consolidated financial statements of the Organization using the equity method being initially recognized at cost and subsequently increased (decreased) each year by the Organization’s share of the post-acquisition profit (or loss). The investments in associates include goodwill (net of any impairment losses) identified at the time of acquisition.

iii.    Joint ventures

The Organization has contractual agreements in which one or more parties undertake activities subject to joint control. Joint control is the contractual sharing of control over an activity and it exists only if strategic, financial and operating decisions are made on an unanimous basis by the parties. Investments in joint ventures are recorded in the consolidated financial statements of the Organization using the proportional consolidation method.

See Note 28 for summarized financial information about jointly controlled enterprises.

iv.    Special purpose entities

Even if there is no shareholder relationship, special purpose entities (SPEs) are consolidated in accordance with SIC-12 (Consolidation of Special Pourpose Entities), if the Organization controls them from an economic perspective.

When assessing whether the Organization controls a SPE, in addition to the criteria in IAS 27, it evaluates a range of factors, including whether:

(a) the activities of the SPE are being conducted on the Organization’s behalf according to its specific business needs so that the Organization obtains the benefits from the SPE’s operations; or

(b) the Organization has the decision-making power to obtain the majority of the benefits of the activities of the SPE or the Organization has delegated these decision-making powers by setting up an ‘autopilot’ mechanism; or

(c) the Organization has the rights to obtain the majority of the benefits from the activities of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or

(d) the Organization retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities.

Whenever there is a change in the substance of the relationship between the Organization and the SPE, the Organization reassesses the continued appropriateness of consolidation. Indicators for a re-assessment of consolidation are especially changes in ownership of the SPE, changes in contractual arrangements and changes in the financial structure.

v.      Transactions with and interest of non-controlling shareholders

The Organization applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Bank. For purchases of equity from non-controlling interests, the difference between any consideration paid and the share of the carrying value of net assets of the subsidiary acquired is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Profits or losses attributable to non-controlling interests are presented in the consolidated income statements under this title.

vi.    Balances and transactions eliminated in the consolidation

Intra-group transactions and balances are eliminated in the consolidation process, including any unrealized profits or losses resulting from operations between the companies except when unrealized losses indicate an impairment of the asset transferred which should be recognized in the consolidated statements. Consistent accounting policies as well as similar valuation methods for similar transactions, events and circumstances are used throughout the Organization for the purposes of consolidation.

b)      Foreign currency translation

                 i.          Functional and presentation currency

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

                ii.          Transactions and balances

Foreign currency transactions, which are denominated or settled in a foreign currency, are translated into the functional currency using the exchange rates prevailing on the dates of the transactions.

Monetary items denominated in foreign currency are translated at the closing exchange rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated at the exchange rate on the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates on the date when the fair value was determined.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at each period exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated income statement.

In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available for sale, a distinction is made between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in the income statement, and other changes in the carrying amount, except impairment, are recognized in equity.

               iii.          Organization companies

The results and financial position of all Organization entities (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 statement;

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

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

Exchange differences arising from the above process are reported in equity as “Foreign currency translation adjustment”.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to ‘Other comprehensive income’. When a foreign operation is parcially sold ou disposed, such exchange differences, wich were recognized in equity, are recognized in the consolidated income statement as part of the gain or loss on sale.

c)      Cash and cash equivalents

Cash and cash equivalents are represented by: cash, bank deposits and other highly liquid short–term investments, with original maturities of three months or less and insignificant risk of change in fair value, used by the Organization to management its short-term commitments. See Note 19 (b) – “Cash and cash equivalents”.

d)      Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as “Pledged assets” when the puchaser has the right to sell or repledge the asset. The counterparty liability is included in “Deposits from Banks - Funding in the open market”. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest in the consolidated income statement and recognized over the life of the agreements using the effective interest rate method.

e)      Financial assets and liabilities

i.       Financial assets

The Organization classifies financial assets in the following categories: measured at fair value through profit or loss, available for sale, held to maturity and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets upon initial recognition.

•     Measured at fair value through profit or loss

Financial assets are recorded and valued on their fair value and the respective changes to the fair value are recognized immediately in the income statement. These assets can be subdivided into two distinct classifications at the time of original recognition: financial assets designated at fair value through profit or loss and financial assets held for trading.

Financial assets designated at fair value through profit or loss

The Organization does not have any financial assets designated at fair value through profit or loss.

Financial assets held for trading

A financial asset is classified as held for trading if it is acquired by Management for the purpose of selling it in the near term or if it is part of a portfolio of identified financial instruments that are managed together for short-term profit or taking a position. Financial derivatives instruments are also categorized as held for trading, unless they are designated as hedging instruments.

Financial assets held for trading are initially recongnized in the balance sheet at fair value and the transaction costs are recorded directly in the income statement.

Gains and losses arising from changes in fair value are recognized directly in the income statement under “Net gains and losses from financial instruments held for trading.” Interest income and expense on financial assets held for trading are included in ‘Interest and similar income”.

·       Financial assets available for sale

Available-for-sale investments are non-derivative financial assets that are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices or that are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

Available-for-sale financial assets are initially recognized at fair value, which is the cash consideration including any transaction costs and measured, subsequently, at fair value with gains and losses being recognized in the consolidated statement of comprehensive income, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognized. If an available-for-sale financial asset is determined to be impaired, the cumulative gain or loss previously recognized in the consolidated statement of comprehensive income is recognized in the consolidated income statement.

Interest is recognized in the income statement using the effective interest method. Dividends on available-for-sale equity instruments are recognized in the consolidated income statement in ‘Dividend income’ when the Organization’s right to receive payment is established. Exchange gains and losses on investments in debt securities classifield as available for sale are recognized in the income statement, except when they relate to foreign subsidiaries with a functional currency different from that of the Organization.

·       Financial assets held to maturity

Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed term maturities, which the Organization has the positive intention and ability to hold to maturity, and are not designated as at fair value or available for sale and do not meet the definition of loans and receivables.

Financial assets held to maturity are recognized initially at fair value including direct and incremental costs, and are subsequently recorded at amortized cost, using the effective interest method.

Interest on held-to-maturity investments is included in the consolidated income statement and reported as ‘Interest and similar income’. In the case of impairment, the impairment loss is reported as a deduction from the carrying value of the investment and is recognized in the income statement.

·       Loans and receivables

Loans and receivables are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market and that the Organization has no intention of selling immediately or in the short term.

Loans and receivables are initially measured at their fair value plus direct transaction costs and are subsequently valued at amortized cost using the effective interest rate method.

Loans and receivables are reported in the balance sheet as loans and advances to banks or customers. Interests on loans are included in income statement and are reported as ‘Interest and similar income’. In the case of impairment, the impairment loss is reported as a deduction in carrying amount of loans, and is recognized in the income statement as loans impairment charges.

ii.      Financial liabilities

The Organization classifies its financial liabilities under the following categories: measured at fair value through profit and loss and amortized cost.

·       Measured at fair value through profit and loss

These financial liabilities are recorded and measured at fair value and the respective changes in fair value are immediately recognized in the income statement. These liabilities can be subdivided into two different classifications upon initial recognition: financial liabilities designated at fair value through profit and loss and financial liabilities held for trading.

Financial liabilities designated at fair value through profit and loss

The Organization does not have any financial liability classified at fair value through profit and loss in income.

Financial liabilities held for trading

Financial liabilities held for trading are those liabilities maintained by the Organization for the purpose of sale or repurchase in the short term, or which it holds as part of a joint managed portfolio for profit in the short term or for taking a position. Derivatives are classified as held for trading unless designated or used as hedge instruments.

Liabilities held for trading are initially recognized and valued at fair value in the balance sheet and their costs of transactions are recorded directly in the income statement for the period. All changes in fair value are recognized in the income statement in “Net gains and losses from financial instruments held for trading.”

·       Financial liabilities at amortized cost

These are financial liabilities that are not classified as at fair value through profit or loss, initially, recognized at fair value and, subsequently, are measured at amortized cost. They include deposits from banks and customers, securities issued and subordinated debt securities, among others.

iii.     Derivative financial instruments and hedge transactions

Derivatives are initially recognized at fair value on the date the derivatives contract is signed and are, subsequently, re-measured at their fair values with the changes recognized in the income statement under “Net gains and losses from financial instruments for trading.” The calculation of fair value considers the credit risk of the counterparties.

Fair values are obtained from quoted market prices in active markets (for example, for exchange-traded options), including recent market transactions, and valuation techniques (for example for swaps and foreign currency transactions), such as discounted cash flow models and options pricing models, as appropriate.

Derivatives are recorded as assets when the fair value is positive and as liabilities when the fair value is negative.

The Organization has not designated any transactions as hedges for accounting purposes.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not recorded at fair value through profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognized in the income statement. No embedded derivatives were identified during the year.

iv.     Recognition 

Initially, the Organization recognizes loans and advances, deposits, securities issued and subordinated debts at the date on which they are originated. All other financial assets and liabilities (including assets and liabilities at fair value through profit and loss) are recorded on the trade date, in accordance with the contractual provisions of the instrument.

v.      Derecognition 

Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and, substantially, all the risks and rewards of ownership of the assets are also transferred. Financial liabilities are derecognized when they have been paid, redeemed or otherwise extinguished.

vi.     Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when, and only when, the Organization has the intention and the legal enforceable right to offset the recognized amounts on a net basis or realize the asset and settle the liability simultaneously.

vii.    Determination of fair value

The determination of the fair values of financial assets and liabilities is based on the market price or quotes of securities dealers for financial instruments traded in an active market. The fair value for other instruments is determined using valuation techniques. The valuation techniques include the techniques to calculate the net current value, discounted cash flow method, comparison with other instruments similar to those for which there are observable market prices and valuation models. The Organization uses reputable valuation models to determine the fair value of financial instruments that consider observable market data.

For more complex instruments, the Organization uses proprietary models that are usually developed based on standard valuation models. Some of the information included in the models may not be observable in the market and are derived from market prices or rates or may be estimated on the basis of assumptions.

The value produced by a model or by a valuation technique is adjusted to reflect various factors, since the valuation techniques do not necessarily reflect all the factors that market participants take into account in a transaction.

The valuations are adjusted to consider the risks of the models, differences between the buy and sell price, and liquidity risks, as well as other factors. Management believes that such valuation adjustments are necessary and appropriate for the correct evaluation of the fair value of the financial instruments recorded in the balance sheet.

viii.   Impairment of financial assets

(a)   Financial assets recognized as amortized cost

At each reporting date, the Organization assesses whether there is objective evidence that financial assets are impaired. The financial assets are impaired and impairment losses are recognized only if there are objective evidences of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Organization uses to determine that there is objective evidence of an impairment include:

·         significant financial difficulty of the issuer or obligor;

·         a breach of contract, such as a default or delinquency in interest or principal payments;

·         economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

·         it becomes probable that the borrower will enter bankruptcy or other financial reorganization;

·         the disappearance of an active market for that financial asset because of financial difficulties; or

·         observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:

(i)      adverse changes in the payment status of borrowers; and

(ii)     national or local economic conditions that correlate with defaults on the assets.

The Organization takes into consideration evidence of impairment loss for both individually significant assets and groups of assets. All significant financial assets are evaluated to detect specific losses. All significant assets that an assessment indicates have not been specifically impaired are valued as a group to detect any impairment loss that may have occurred, although not yet identified. The financial assets which are not individually significant are valued as a group to detect any collective impairment loss (recorded at the amortized cost) based on similar risk features. Assets that are individually assessed for impairment and for which an impairment loss is recognized are not included in a collective assessment of impairment.

The amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the income statement.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (that is, on the basis of the Organziation’s rating process that considers asset type, market segment, geographical location, collateral type, past-due status and other related factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.

The methodology and assumptions used for estimating future cash flows are reviewed regularly to mitigate any differences between loss estimates and actual loss experience.

Following impairment, interest income is recognized using the effective rate of interest which was used to discount the future cash flows for the purpose of measuring the impairment loss.

When a loan is uncollectable, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary collection procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the income statement.

(b)   Financial assets classified as available for sale

The Organization assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities the Organization adopts the assessement described in item (a) above. If, in a subsequent period the fair value increases, for debt instrument classified as available for sale, and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement.

In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is objective evidence of impairment resulting in the recognition of an impairment loss. If any such evidence exists for available-for- sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the consolidated income statement. Increases in the fair value of equity instruments after impairment are recognized directly in equity.

f)       Non-current assets held for sale

Under certain circumstances, property is repossessed following the foreclosure on loans that are in default. Repossessed properties are measured at the lower of carrying amount and fair value less costs to sell and reported within ‘Non-current assets held for sale.”

g)      Assets related to reinsurance

Reinsurance cessions are made in the normal course of operations with the purpose of limiting potential losses, by spreading risks. Liabilities related to reinsurance operations are presented gross of their respective asset positions since the existing contract does not preclude us from our obligations with the insured parties.

As required by the regulators, reinsurance companies headquartered abroad must have a minimum rating from a risk classification agency, to reinsure Brazilian risks which are for the most part ceded to local reinsurers. Therefore, the risks of impairment are reduced. If there are indications that the amounts recorded will not be realized by its carring amount, these assets will be adjusted for impairment and recognized in the income statement.

h)      Deferred selling expenses

These comprise deferred selling expenses including commissions and brokers fees related to the sale of insurance policies. Deferred commissions are allocated to the income statement over the life of the respective policies and the brokers fees over a twelve month period.

i)       Tangible assets

i.    Recognition and valuation

Tangible assets are valued at cost less accumulated depreciation and impairment losses, if any.

The cost includes expenses directly attributable to the acquisition of an asset.

The cost of assets constructed by the Organization itself includes the cost of materials and direct labor, as well as any other costs that can be directly allocated and that are necessary for them to function. Software acquired for the operation of the related equipment is recorded as part of the equipment.

When different parts of an item have different useful lives, they are recorded as separate items (main components) comprising the tangible asset.

The useful life and residual value of tangible asset items are reassessed and adjusted, when necessary, periodically.

Gains and losses from the sale of tangible assets are recorded in the consolidated income statement under the heading “Other operating income/ (expenses).”

ii.   Subsequent costs

Expenditure on maintenance and repairs of a tangible asset item is recognized as an asset when it is probable that future economic benefits associated with the items will flow to the Organization and the cost can be measured reliably. All other repairs and maintenance costs are charged to the consolidated income statement during the financial period in which they are incurred.

iii.  Depreciation 

Depreciation is recognized in the income statement using the straight-line basis over the estimated useful economic life of the assets. The depreciable amount is the gross carrying amount, less the estimated residual value at the end of the useful economic life.

j)       Intangible assets

Intangible assets comprise separately identifiable non-monetary items, without fisical substance due to business combinations, computer software licenses and other intangible assets. Intangible assets are recognized at cost. The cost of an intangible asset, acquired in a business combination, is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life, generally not exceeding 20 years. Intangible assets with an indefinite useful life are not amortized.

Generally, the identified intangible assets of the Organization have a definite useful life. At each reporting date, intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount.

i.    Goodwill 

Goodwill (or negative goodwill) arises on the acquisition of subsidiaries, associated companies and joint ventures.

Goodwill reflects the excess of the cost of acquisition in relation to the Organization’s share of the net fair value of identifiable assets or liabilities of an acquired subsidiary, associated company or joint venture on the date of acquisition. Goodwill originated from the acquisition of subsidiaries is recognized as “Intangible Assets”, while the goodwill from acquisition of associated companies is included in the carrying amount of the investment (net of any accumulated impairment loss). When the difference is negative (negative goodwill), it is immediately taken to the income statement as a gain on the acquisition date.

Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

Goodwill is tested annually, as well as whenever a trigger event has been observed, for impairment by comparing the present value of the expected future cash flows from a cash generating unit with the carrying value of its net assets, including attributed goodwill, and is carried at cost less impairment losses. Impairment losses on goodwill are not reversed.

ii.   Software 

Software acquired by the Organization is recorded at cost, less amortization and impairment losses, if any.

Internal software development expenses are recognized as assets when the Organization can demonstrate its intention and capacity to conclude the development, can measure its cost and intends to use the software in order to generate future economic benefits. The capitalized costs of internally developed software include all costs directly allocated to development and are amortized over their useful lives. Internally developed software is recorded at its capitalized cost less amortization and impairment losses.

Subsequent software expenses are capitalized only when they increase the future economic benefits incorporated in the specific asset to which it refers. All other expenses are recorded as expenses as incurred.

Amortization is recognized in the income statement using the straight-line method during the estimated useful life of the software, beginning on the date that it becomes available for use. The estimated useful life of software is two to five years.

iii.  Other intangible assets

Other intangible assets refer basically to the customer portfolio and acquisition of banking service rights. They are recorded at cost less amortization and impairment losses, if any, and are amortized over the period in which the asset is expected to contribute, direct or indirectly, to the future cash flow.

These intangible assets are reviewed annually or whenever events, or changes in circumstances, occur which could indicate that the book value of the assets cannot be recovered. If required the associated write-off is immediately recognized in the income statement.

k)      Leasing 

The Organization participates in the leasing market as both lessor and lessee.

Leases in which a significant part for the risks and benefits of the asset is borne by the lessor are classified as operating leases. For leases in which a significant part of the risks and benefits of the asset is borne by the lessee, the leases are classified as financial leasing.

As a lessee, the Organization classifies its leasing operations mainly as operating leases, and the monthly payments are recognized them in the financial statements using the straight-line method over the term of the lease.

When an operating lease is terminated before the contract expires, any payment that may be made to the lessor in the form of a fine is recognized as an expense for the period.

As a lessor, the Organization has substantially operating and financial lease contracts.

i.        Finance Lease

Finance leasing assets on the balance sheet are initially recognized in the “loans and advances” account at an amount equal to the net investment in the lease.

The initial direct costs generally incurred by the Organization are included in the initial measurement of the leasing receivable, decreasing the amount of income recognized over the lease term. These initial costs include amounts for commissions, legal fees and internal costs. The costs incurred in relation to the negotiation, structuring and sales of leases are excluded from the definition of initial direct costs and therefore are recognized as expenses when the profit from the sale of the lease is recognized, which is recognized at the beginning of the lease term.

Recognition of financial revenue reflects the constant rate of return on the net investment made by the Organization.

The estimated non-guaranteed residual values used in the calculation of the gross investment of the lessor in the lease are reviewed periodically. If there is a decrease in the estimated non-guaranteed residual value, the income allocated over the period of the lease is also reviewed periodically and any decrease in relation to the accumulated values is immediately recognized in the income statement.

ii.       Operating leases

The assets leased under operating leases are recognized in the balance sheet as fixed assets according to the nature of the item leased.

The initial direct costs incurred by the Organization are added to the book value of the leased asset and are recognized as expenses over the period of the lease and on the same basis as the income recognition.

Revenue from leasing is recognized using the straight-line method over the term of the lease even if the payments are not made on the same basis. Costs, including depreciation, incurred to produce the income are recognized as expenses.

The depreciation policy for leased assets is the same as the depreciation policy used by the Organization for similar assets.

l)       Impairment of non-financial assets

Assets that have an undefined useful life such as goodwill are not subject to amortization and are tested annually to verify the existence of impairment.

Assets which are subject to amortization are reviewed to verify impairment whenever events or changes in circumstances indicate that the book value may not be recoverable. An impairment loss is recognized based on the excess of the asset’s book value over 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 purpose of assessing impairment, the assets are grouped at the lowest levels for which there are separate identifiable cash flows (Cash Generation Units (UGC)).

The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. When assessing the value in use, the estimated future cash flows are deducted from the present value using a pre-tax discount rate that reflects the current market conditions of the time value of money and the specific risks of the asset.

An impairment of goodwill can not be reversed. With regard to other assets, an impairment recognized in previous periods is reassessed at each balance sheet date to detect indications that the impairment has decreased or no longer exists. An impairment is reversed if there is a change in the estimates used to determine the recoverable amount. An impairment is only reversed to the extent that the book value of the asset does not exceed the book value that would have been determined net of depreciation and amortization, if no impairment had been recognized.

m)     Deposits, securities issued and subordinated debts

Deposits, securities issued and subordinated liabilities are the main sources of funding used by the Organization to finance its operations.

They are initially recorded at fair value plus transaction costs and are subsequently measured at amortized cost using the effective interest method.

n)      Provisions, contingent liabilities and contingent assets

A provision is recognized when, as a result of a past event, the Organization has a present legal or constructive obligation that can be reliably estimated and will probably require the outflow of economic resources for settlement.

Contingent liabilities are disclosed if there is a possible future obligation resulting from past events or if there is a present obligation resulting from a past event.

Contingent assets are recorded only when there are real guarantees or favorable and unappealable court decisions, and therefore the gain is practically certain. The contingent assets which expectation outcome is favorable are only disclosed in the financial statements, except when it is probable that these assets will result in an increase in resources, representing economic benefits.

The provisions were established taking into account the opinion of the legal advisors, nature of the actions, similarity with previous suits, complexity and positioning of the Courts, whenever there is a probable loss.

The liabilities related to a legal obligation under judicial discussion are maintained until the suit has definitely been won, represented by favorable and unappealable court decisions or if the statute of limitations period has expired.

o)      Classification of insurance contracts and investments

A contract under which the Insurer accepts a significant insurance risk from the insured party, agreeing to compensate the insured in the case of an uncertain, specific and adverse future event is classified as an insurance contract.  The Organization issues contracts that transfer both insurance risk or financial risk. The Organization understands that both products and also reinsurance involve significant insurance risks and therefore accounts for them as insurance contracts in accordance with IFRS 4. A contract under which the Organization assumes only financial risk is treated as an investment contract and these mainly refer to certificated savings plans.

p)      Insurance and pension plan technical provisions

i.    Property damage, group life and health insurance

A provision for unearned premiums (PPNG) is calculated on a pro-rata day basis on the net assignment of coinsurance premiums, taking into account reinsurance operations in and corresponding to the unexpired risk period of the insurance contracts. The portion of this provision corresponding to estimated effective risk outstanding is recorded under the PPNG-RVNE.

A provision for benefits to be granted (PMBAC) is recorded for the individual health plan portfolio, particularly for the five-year coverage of remission for dependents should the policy holder pass away. The calculation basis for PMBAC considers the expectation that the plan holder will only cease to be part of the plan upon death, at which point the dependants will continue receiving benefits for five years without the payment of premiums.

The provision for incurred but not reported claims (IBNR) related to the Company’s own operations is calculated on an actuarial basis considering the amount of claims that have been incurred but not reported by insured/beneficiaries. The methodology uses a projection - based on observed historic behavior – of future claim payments related to events that occurred before the reference date for the calculation. The IBNR provision is calculated by subtracting the expected total of the provision for claims to settle (PSL) from the aforementioned projection, estimated on a case-by-case basis.

The provision for claims to settle (PSL) is estabilished based on the estimated claims paid, taking into account all administrative and judicial claims notifications received and unpaid on the balace sheet date and the related costs such as expenses for claim adjustements and legal fees, among others.

The provision for benefits granted (PMBC) from the individual health plan portfolio is made up of liabilities resulting from contractual remission clauses of health assistance coverage payments, based on the present value of future estimated expenses with health assistance costs of the dependents of deceased policy holders.

A provision for the insufficiency of premiums (PIP) is established to cover the differences between the present values of indemnities expected and related future expenses, and the present value of future premiums in compliance with the methodology provided in a NTA.

The supplementary premium provisions (PCP) is recorded on a monthly basis to complete the PPNG and considers estimates of current risks that have yet to be issued (RVNE).

The technical provisions related to retrocession operations are established based on the information received from reinsurers.

ii.   Supplementary pension plan and survivorship life insurance

The mathematical provision for benefits to be granted (PMBAC) refers to participants that have yet to begin receiving benefits. For pension plans structured under the Defined Benefit regime, the provision represents the difference between the current value of future benefits and the current value of future contributions, corresponding to liabilities taken on as retirement, disability, pension and estate plans, calculated according to actuarial methods and premises established in agreements. For Deposit Insurance Fund plans, the provision is the balance accumulated up to the reference-date resulting from the participant’s net contributions and respective earnings.

Mathematical provisions for benefits to be granted (PMBAC) related to long term life insurance plans (VGBL and PGBL) represent the total amount of contributions made by participants, net of charges and other contractual fees, plus financial yield generated through the investment of resources in investments funds through quotas in specially recorded investment funds (FIEs).

The mathematical provision for benefits granted (PMBC) refers to participants that receive benefits and corresponds to the current value of future obligations for the continued payment of benefits, according to technical basis established in the agreement (guaranteed interest rate and biometric table).

The provision for insufficient contributions (PIC) is recorded to meet expected unfavorable variations in technical risks taken on in the mathematical provision for benefits to be granted (PMBAC) and the mathematical provision for benefits granted (PMBC), considering a greater tendency of survival among participants and possible differences in expected interest rates.

The provision for incurred but not reported claims (IBNR) for pension plan operations is recorded using benchmark percentages, defined by the insurance market regulatory agency and is applied to historic premiums and claims. These percentages are used as the volume of historic data is not sufficient for the creation of own statistics with an acceptable level of credibility.

The provision for unexpired risks (PRNE) is calculated on a pro-rata basis per day, using the installment of contributions/premiums corresponding to the risk periods that have yet to expire, including an estimate of current risks yet to be issued (RVNE).

The provision for financial surplus (PEF) corresponds to an installment of financial yield obtained through the application of provisions that exceed the minimum guaranteed yield of pension plans with a clause for the participation in financial surplus.

The provision for administrative expenses (PDA) presented under “Other provisions” is recorded to cover the future administrative expenses of plans that include the payment of annual fees and is based on the expected present value of related administrative expenses and expected payment of income.

The provision for financial variation (POF) recorded under "Other provisions” is uprecorded up to the 15% limit on the mathematical provision for benefits to be granted for variable-contribution pension plans with guaranteed yield, in order to cover future financial variations.

Financial charges credited to technical provisions, as well as the recording and/or reversal of the provision for financial surplus, is classified under “Financial expenses.”

iii.  DPVAT agreement

The provision for claims incurred but not reported for future charges is calculated and notified by head insurer of the DPVAT agreement. An interest rate of 6% per year is provisioned on the values established, against the “Financial expenses” account.

iv.  Liability Adequacy Test (LAT)

Pursuant to IFRS 4 requirements, at each balance date the Organization must conduct a test of the adequacy of liabilities of all agreements that meet the definition of an insurance contract according to IFRS 4 and that are effective on the date of the test. This test is conducted at least every reporting date and considers the net carrying amount of the liabilities of insurance contracts permitted according to IFRS 4, minus deferred selling expenses (DAC). This value is the balance to be compared with the actuarial test laid out by the Liability Adequacy Test.

To conduct this test, the Organization uses actuarial methods that consider the estimated present value of all future cash flows, including expenses to settle claims from actuarial premises on the date the test is conducted. In the test, contracts are grouped by similar risk or whether the insurance risk is managed by the Organization.

The assumptions related to the claims ratio, administrative and operating expenses, selling expenses, cancellations, future contributions, redemptions and conversion into income adopted for testing purposes, are based on historical records.  On the other hand, the assumptions related to mortality and survival follow the biometric tables which are formulated specifically based on Brazilian insurance market experience, BR-EMS, and also consider the continued improvement of life expectancy (known technically as the ‘improvement’ assumption), in accordance with the G Scale of the Sociedade de Atuários(SOA). Other less significant assumptions are used and defined, based either on the Organization historical records, or on market benchmarks.

The discount rates used to bring the projected flows to present value are risk-free forward rates, corresponding to the guarantees offered for each product.

If any insufficiency is detected, the Organization must record the loss immediately as an expense in the income statement for the year and establish additional provisions for the insurance losses already recorded on the test date. The liability adequacy test did not indicate the need for an adjustment to the Technical Provisions.

q)      Financial guarantees

Financial guarantees are contracts that oblige the Organization to assume specific payments under the guarantee for a loss incurred when a specific debtor fails to make a payment in compliance with the terms of the debt instrument.

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature is zero because all guarantees are agreed on arm’s length terms and the premium agreed corresponds to the value of the guarantee obligation. No receivable for the future premiums is recognized. Subsequent to initial recognition, the Organization’s obligations under such guarantees are measured at the higher of the initial amount, less payments of fees and the best estimate of the amount required to settle the guarantee. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgement of Management. The fee income earned is recognized on a straight-line basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in the income statement within “Other operating income/ (expenses)”.

r)       Employee benefits

i.    Defined contribution plan

Bradesco and its subsidiaries sponsor pension plans for their employees and Management of the “Free Benefit Generator Plan (PGBL)” type. The PGBL is a pension plan with defined contributions which allows financial resources to be accumulated throughout the professional career of the participants based on contributions paid by them and the sponsoring company, the funds of which are invested in an Exclusive Mutual Fund (FIE).

The PGBL is managed by Bradesco Vida e Previdência S.A. and BRAM - Bradesco Asset Management S.A. DTVM is responsible for the financial management of the FIEs funds.

Contributions from employees and management are equal to 4% of their salaries except for those participants who, in 2001, opted to migrate from a defined benefit plan to the PGBL, and whose contributions were maintained at the same level as the defined benefit plan at the time it was transferred, always in compliance with the minimum of 4% of the salary.

Contribution obligations for the defined contribution pension plans are recognized as expenses in the income statement. The Organization, as employer, has no further payment obligations, once the contributions have been made.

In addition to the PGBL described above, the participants who migrated from the defined benefit plan are assured a proportional deferred benefit corresponding to their accumulated assets in the plan. Retired and pensioned employees, regardless of whether they are participants in the migrated defined benefit plan or not are fully covered by guaranteed assets at the present value of the actuarial obligations of the plan.

ii.   Defined benefit plans

The Organization’s net obligation, in relation to the defined benefit pension plans, is calculated separately for each plan, estimating the future value of the benefit that the employees have earned on the basis of their work during the current and previous years. The benefit is discounted to determine the present value and any unrecognized past service costs are deducted as well as the fair value of any plan assets. The calculation is made by a qualified actuary, using the projected unit credit method.

When the benefits of a plan are improved the portion of increased benefits related to past employee services is recognized in the income statement using the straight line method over the average period the benefits are acquired. As certain benefits are acquired, the expense is recognized in the income statement.

In relation to the actuarial gains and losses, to the extent that any unrecognized and cumulative actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation or the fair value of the plan’s assets, the amount is recognized in the income statement over the estimated remaining time of service of the participating employees. Otherwise the actuarial gain or loss is not recognized.

iii.  Termination benefits

Severance benefits are required to be paid when the employment relationship is terminated by the Organization before the employee’s normal date of retirement or whenever the employee accepts voluntary redundancy in return for such benefits.

Benefits which are payable 12 months or more after the balance sheet date are discounted to their present value.

iv.  Short-term benefits

Such benefits are recorded as expenses in the consolidated statement of income, without any discount to present value, if the Organization is legally required to make the payment and the obligation can be reliably estimated.

s)      Certificated savings plans

Certificated savings plans are deposits entered by customers in specific amounts in accordance with each plan adhered which are redeemable by the originated amounts plus an interest.  Customers are entered, during the term of the plan, into monthly lotteries that award a cash prize. These products are regulated by the insurance regulator in Brasil however does not meet  the definition of an insurance contract in accordance with IFRS 4 therefore are classsified as financial liabilities at amortized cost in accordance with IAS 39.

The provisions for redemption of the certificated savings plans are calculated based on their face value and price-level restated, when applicable.

The provision for redemptions of expired certificated savings plans, included in the redemption provision, represents the amounts of securities that have already expired but have not yet been redeemed and are price-level restated based on the indices established in each plan. The provision for early redemption of the certificated savings plans, also included in the redemption provision, includes the values of the certificated savings plans for which redemption has been requested and which are still within grace periods or will be paid to customers in the following month, as well as bonds with requested redemption, but which have not yet been withdrawn by the customers plus price-level restatement based on the indices established in each plan.

The provision for the lottery draws is calculated on the basis of actuarial models which estimate the probability of the draws occuring in comparison to the volume of bonds sold.

t)       Interest 

Interest income and expenses are recognized thought accrual basis in the income statement using the effective interest rate method. The effective interest rate is the rate that exactly discounts future cash payments and receivables throughout the expected life of the financial asset or liability (or, when appropriate, a shorter period) to calculate the recorded value of the financial asset or liability. The effective rate of interest is established when the financial asset or liability is first recorded and does not undergo subsequent reviews.

The calculation of the effective interest rate includes all commissions, transaction costs, discounts or bonuses which are an integral part of such rate. Transaction costs are incremental costs directly attributable to the acquisition or disposal of a financial asset or liability.

u)      Fees and commissions

Fee and commission income and expenses of a financial asset or liability are included in the calculation of the effective interest rate.

Other fee and commission income, including account maintenance fees, asset management fees, credit card annual charges, and collection and consortium fees are recognized as the related services are rendered.

v)      Insurance income

Insurance premiums are recognized as revenue proportionally over the policie coverage period.

The insurance and coinsurance premiums and acquisition costs are recognized in the income statement at the time the respective insurance policies are issued and amortized through the income statement over the period of coverage. The portion of premium received on in-force contracts that related to unexpired risks at the reporting date is reported as the PUP.

Income from premiums and the corresponding selling expenses related to risks already assumed whose respective policies have not yet been issued are recognized in income at the start of the risk coverage on an estimated basis.

The transaction arising from acceptance of coinsurance and retrocession are recorded based on the information received from other insurance and reinsurance companies.

Contributions to pension plans and life insurance premiums with survivor coverage are recognized in income upon their effective receipt.

Brokers´ commissions and other selling expenses of pension plans and life insurance are deferred and allocated to the income statement, using the straight line method over 12 months.

Deferral of reinsurance premiums ceded is made consistently with the treatment of the respective insurance premium.

w)     Income tax and social contribution expenses

Income tax is calculated at the rate of 15%, plus a surcharge of 10% and the social contribution tax at the rate of 15% for banks, insurance companies and similar institutions and 9% for non-financial subsidiaries, after making certain adjustments required by tax legislation.

Taxes are recorded in the consolidated statement of income except when the result of a transaction is recognized directly in equity, in which case the related tax effect is also recorded in equity.

Current tax expenses are the total of current taxes resulting from the calculation of the applicable tax rate to taxable income for the period (net of any adjustments required for tax purposes) and the changes in deferred tax assets and liabilities is recognized in the statement of income.

Deferred taxes on temporary differences will be realized when the respective provisions are used and/or reversed. Deferred taxes on loss carryforwards are realized against future taxable income. These deferred taxes are recognized based on current realization expectations taking into account technical studies and analyses performed by Management.

x)        Segment reporting

Information or operating segments is consistent with the internal reports provided for the management decision making process. The Organization operates mainly in the banking and insurance segments. The banking operations include operations in retail, middle market and corporate activities, leasing, international bank operations, investment banking and private banking. The Organization performs in banking segment through its own branches located throughout the country, in branches abroad and through over subsidiaries, as well as by means of our shareholding interest in other companies. Additionally we are engaged in operations in insurance, supplementary pension plans and certificated savings plans through a subsidiary, Bradesco Seguros S.A., and its subsidiaries.

y)      Equity 

The preferred shares have no voting rights but have priority over the common shares in reimbursement of capital, in the event of liquidation, up to the amount of the capital represented by such preferred shares, and the right to receive a minimum dividend per share ten percent (10%) higher than the dividend distributed per share to the holders of common shares.

i.    Share issue costs

Incremental costs directly attributable to the issuance of shares are shown net of taxes in equity, thus reducing the initial share value.

ii.   Earnings per share

The Organization presents basic and diluted earnings earnigs per share data.

Basic earnings per share is calculated by dividing the net income attributable to shareholders of the Organization by the weighted average number of shares outstanding during the year, excluding the average number of common shares purchased by the Organization and held as treasury shares.

Diluted earnings per share is the same as basic earnings per share, as there are no potentially dilutive instruments.

iii.    Dividends payable

Dividends on shares are recognized at the time they are approved by a Meeting of Shareholders.

Dividends for the year, approved and declared after the base date of the financial statements, are disclosed in the notes as subsequent events.

3)     Risk Management

Risk management structure

The risk management structure in the Organization allows risks to be effectively identified, measured, mitigated, monitored and reported in an integrated manner, involving the Top Management.

With the objective of obtaining synergy throughout the risk management process, a forum operates permanently in the Organization at the high management level. The forum, known as Integrated Risk Management and Capital Allocation Committee is a statutory body chaired by the Chief Executive Officer of the Organization with the responsibility of giving advice to the Board of Directors for the approval of institutional policies and risk exposure limits in the Organization.

The Integrated Risk Management and Capital Allocation Committee is assisted by the Executive Committees for Risk Management relating to a) Credit, b) Market and Liquidity, c) Operations and d) Grupo Bradesco de Seguros e Previdência, in addition to Executive Committees in the business areas, which, among other things, suggest the tolerance limits for their respective risks and prepare the mitigation plans to be submitted to the Integrated Risk Management and Capital Allocation Committee and the Board of Directors.

Reflecting the Organization’s commitment to the issue is the Integrated Risk Control Department (DCIR), charged with implementing the Organization’s risk control and capital allocation activities in an independent, consistent, transparent and integrated manner. It is also responsible for complying with the Brazilian Central Bank rules for risk management activities.

This department also includes a Risk Modeling area. The Organization considers quantitative measurement and statistical modeling fundamental for risk management and hence the Modeling area uses cutting-edge information management and statistical modeling tools.

3.1.  Credit risk

Credit Risk consists of the possible incurrence of losses associated with non-performance, by the borrower or its counterparty, of its respective financial obligations according to agreed terms, with credit agreement devaluation derived from the deteriorated risk classification of the borrower, reduced gains or remuneration, advantages granted at renegotiation, recovery costs, and other values related to any non-performance of financial obligations by the counterparty.

Credit risk management in the Organization is a continuous and evolutional process for doing the mapping, evaluation and diagnosis of existing models, instruments and procedures that require a high level of discipline and control of operation analyses to preserve the integrity and independence of processes.

The Organization carefully controls the exposure to credit risk which follows mainly of credit operations, securities and derivatives. There is also the credit risk in financial obligations relating to commitments on loan or financial guarantees.

With the objective of not to compromise the quality of the portfolio are observed all aspects inherent to credit concession, concentration, guarantee requirements, terms, etc.

The Organization always maps the activities likely to generate exposures to credit risk, and their respective classification, in terms of probability and magnitude, as well as the identification of their managers, measurement and mitigation plan, where this control is made in a corporate, centralized and standard manner.

Counterparty’s Credit Risk

The counterparty credit risk to which the Organization is exposed consists of the probable failure of the counterparty to comply with its financial or non-financial obligations, causing losses to the Organization. This risk may be identified especially in transactions that involve derivative instruments, where the counterparty is subject to market fluctuations.

The Organization maintains total control over the net position (that is, the difference between purchase and sale agreements) and potential future exposures of operations where there is counterparty risk. Every counterparty’s exposure to risk is treated in the same way and is part of general limits of credit granted to the Organization’s customers. Usually, guarantees associated with this type of operation include margin deposits made by the counterparty with the Organization or with other trustees, whose counterparty’s risks are also appropriately evaluated.

Credit Concession

Under the responsibility of the Credit Department, the loan granting process observes the Organization's credit policy giving priority to safety, quality, liquidity and diversification when using credit assets. The process is guided by the Organization's risk management governance and complies with Brazilian Central Bank rules.

In the constant pursuit for speed and profitability in the business, the Organization uses the appropriate methodologies for each segment in which it operates, which guide the lending processes and the determination of operational limits.

In the evaluation and classification of customers or economic groups, the quantitative (economic and financial indicators) and qualitative (personal data and behaviors) aspects associated with the customers capacity to honor their obligations are considered.

According to the guidance contained in the Credit Policy, all business proposals meet the operational competence of the Organization’s units:

The Organization has Credit and Behavior Scoring systems in place for mass credit concessions, which provide better agility, reliability and standardization of procedures in the credit analysis and approval process.

The Executive Credit Committee is focused on making decisions, within its level of competence, on inquiries about assignment of limits and operations proposed to the Organization, which are previously analyzed and supported by the Credit Department opinion. Consultations going beyond the authority of this Committee, after its favorable opinion, are submitted to the Board of Directors resolution.

The business are diversified, sprayed and intended for individuals and businesses that demonstrate the ability of payment and good repute, seeking to to sustain with guarantees commensurate with the risks, whereas the aims and deadlines credits granted.

Credit Risk Rating

The methodology for credit risk evaluation, in addition to providing the institution with the minimum parameters for credit concession and risk management, promotes the determination of credit procedures that are differentiated by the customer’s characteristics and capacity. Thus, it provides a base for correct operation pricing and determination of guaranties adapted to each circumstance.

Risk ratings for economic groups – legal entities – are based on standardized statistical and discriminant procedures, and on quantitative and qualitative information. Classifications are made corporately and are monitored periodically in order to preserve the quality of the credit portfolio.

For individuals, credit ratings are based on personal data variables, such as income, assets, restrictions and indebtedness, in addition to the history of their relationship with the Organization, and statistical credit evaluation models.

The risk classification adopted on the basis of the customers' capacity of honoring their commitments is shown below:

Credit Risk Management Process

The credit risk is controlled in a corporate and centralized manner. All exposures to credit risk are analyzed, measured, classified and monitored independently by the Credit Risk sector.

This sector participates actively in the process to improve customer risk classification models by monitoring the high risks through the periodic follow-up of major default events, and the level of provision against expected and unexpected losses.

The Credit Risk sector reviews the internal processes, continuously, including roles and liabilities, the capacity building and demands for information technology, and risk evaluation, with the creation or review of products and services.

As part of its risk information dissemination philosophy, Bradesco holds specific meetings focused on monitoring and controlling credit risk. The Business Areas and Executive Board take part in the monthly Meeting for Monitoring the Credit Portfolio and related Recoveries, the main purpose of which is to establish the status of the credit portfolio, default positions, the allowance for loan losses, credit recoveries, portfolio concentration and other items in each of Bradesco’s business segments and across the Organization as a whole. This information is also reported monthly to the Audit Committee.

The Meeting of the Credit Risk Management Executive Committee, which has decision making powers, is held monthly.

Credit risk control process includes the periodic review of projects focused on the compliance with the best market practices and the requirements of the New Basel Capital Framework. With the objective of improving the management process, all actions in course are monitored to identify and remedy any new gaps or eventual needs.

Credit Risk Exposure

We present below the maximum credit risk exposure of the financial instruments.

Organization’s maximum credit risk exposure totaled R$ 712 billion in December 2010, an increase as compared to prior years as a result of the increase in business volume, reflecting the country’s improved economic situation.

Of this exposure, the amount of R$ 81 billion comprises cash and available funds in central banks, mainly balances deposited in the Brazilian Central Bank, for which the credit risk is limited and insignificant.

Other financial assets in the amount of R$ 191.9 billion, comprise substantially financial assets recorded at fair value, which among other factors, reflect the issuer’s credit risk. Moreover, 64% of the other financial assets comprise Brazilian government securities which present no credit risk.

As regards the items which are not recorded in the balance sheet, the amount of R$ 105 billion comprises credit limits to be released, of which 79% corresponds to limits to be released of the following products: credit cards, personal credit, housing loans and checking account overdraft facilities, and which are considerably dispersed. In addition, an amount of R$ 42 billion comprises guarantees provided, of which 90% is realized with large size companies, which based on the Organization`s internal rating, are classified as low risk.

We present below a detailed analysis of our main credit risk exposures, which total R$ 292 billion in derivative financial instruments, loans and advances to banks and to customers.

Derivative Financial Instruments

We stress that 98% of the derivative financial instruments comprise OTC contracts. Of this amount, most of the counterparts are internally rated by the Organization as low risk (Rating AA1-C3). Accordingly, the credit risk exposure of this type of transaction is insignificant.