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Financial Statements

Gafisa S.A.

December 31, 2014

and Report of Independent Registered Public Accounting Firm

(A free translation from the original in Portuguese into English)

Gafisa S.A.

Financial Statements

December 31, 2014

Table of contents

Management report 2014

Dear Shareholders,

The management of Gafisa S.A. ("Gafisa" or "Company") is pleased to submit for your review the Management Report and the corresponding Financial Statements, together with the Independent Auditors and the Fiscal Council reports for the fiscal year ended December 31, 2014. The information is presented in millions of reais and on a consolidated basis, unless specified otherwise, and in accordance with accounting practices adopted in Brazil.

Despite a challenging environment, the Company remained focused on maintaining operating performance, increasing profitability, and generating shareholder value in 2014.

Last year, we made further headway in managing our working capital. By streamlining the production cycle, we were able to shorten overall construction time and strengthen the financial management of construction overall. We also increased both the quality and speed of the transfer process and completed almost all legacy projects at Tenda, thereby improving the management of our capital employed. This allowed us to begin 2015 in a strong position and keep pace with the business cycle, despite current economic uncertainty in Brazil.

In this context, we would like to note the sound performance of Gafisa and Tenda’s projects during the year and their contribution to the Company’s consolidated results. The adjusted gross margin reached 33.2% in 2014, around 2 percentage points higher than a year ago. The Gafisa segment maintained consistent results with an adjusted gross margin of 35.4% in the year. The Tenda segment benefited from the consolidation of its New Business Model and consequently a larger contribution of new projects to results. Tenda ended the year with an adjusted gross margin of 26.9%, significantly higher than 2013.

Last year was impacted by several one-off events, including the World Cup at the end of 1H14, uncertainty and turbulence around the presidential elections at the end of the year, and continuing economic stagnation in Brazil. These factors resulted in challenging conditions in various sectors, including the real estate market, creating a slowdown in demand; especially in the medium- and high-income brackets. Consequently, the Gafisa segment is being very selective in the development and launch of products in order to prioritize stable levels of profitability. The segment is also maintaining a conservative stance towards new investments.

During the 2014 year the Gafisa segment launched R$1.0 billion in total, which is slightly below guidance of R$1.1 – R$1.2 billion. Given the uncertainty in the economic environment and a lower level of consumer confidence, the Gafisa segment chose to postpone the launch of some of its planned projects in the hopes of better market conditions in 2015. This strategy is also expected to result in higher levels of profitability, consistent with the Company's expectations. It is also aligned with increased market risk and conservatism regarding the use of available cash.

For the Gafisa segment, the past year was another important step in the consolidation of its production cycle. From an operational point of view, we ended the year with strong delivery volumes, including 23 projects/phases, corresponding to 3,806 units, and transfers of R$1.6 billion. The result reflects the increasing level of control and efficiency in the segment’s operations. Currently, Gafisa has 41 projects under management which are all within contractual deadlines, confirming our commitment to clients.

Gafisa segment ended the year with turnover in the portfolio of approximately R$2.3 billion, of which R$143.1 million is related to projects outside the Rio-São Paulo area, a 47.5% decrease year-over-year. It is worth noting the more long-term and balanced profile of the Gafisa segment’s inventory, with a high composition of total inventory (63.2%) scheduled for delivery from 2016 onwards. These factors combined enable greater flexibility for the sale of these units.

Looking ahead to 2015, given the likely continuation of the current economic scenario, we expect to maintain the more conservative approach, particularly with regards to the placement of products in the market. Priority will be given to those projects with higher liquidity, in order to achieve a good level of sales and profitability. Efforts made in the last two years, including the restoration of our landbank and the achievement of a higher level of operational efficiency and balance, gives us comfort over the development of the business plan for the year.

Turning to the Tenda segment, last year was a defining point in the turnaround process. Having focused on the delivery of the remaining units of legacy projects, we ended the year with only three such construction sites, equivalent to 2,593 thousand units in construction, which we expect to be completed by the end of the first half of 2015. This compares with nearly 31 thousand outstanding units in early 2012. Another key advance for the Tenda segment in 2014 was the performance and high volume of deliveries on New Model projects. Last year 9 projects / phases totaling 1,700 units and R$ 213.8 million in Potential Sales Value (PSV) were delivered. All were launched in 2013 under the New Model. It is noteworthy that in these first successful deliveries and other new projects under construction, Tenda achieved the profitability drivers established for the operation of the New Model projects: adjusted gross margin was above the floor of 28%; average monthly VSO was between 5-7%; and recently, in October 2014, with change in the sales process, the level of cancellations is expected to be around 15% of total gross sales.

In 2014, the Tenda segment launched 14 projects, totaling R$613.3 million in PSV, in line with launch guidance for the year. Tenda continues to believe in the resilience of its market in the face of a more uncertain economic scenario. Demand in the low income housing segment remains strong thanks to low unemployment and continued access to credit.

For the coming year, the Tenda segment continues to seek increased scale through growth in launches and the implementation of strategies to ensure the achievement of solid sales volume. Tenda will also actively seek out new businesses, taking advantage of the opportunities created by the general market environment. Consistent results in the New Model projects reinforces our confidence in the business plan for 2015.

Consolidated Gafisa and Tenda launch volumes reached R$241.5 million in the quarter and R$1.6 billion in the year. Net pre-sales were R$303.9 million in the quarter and R$1.2 billion in the year. Adjusted gross profit was R$190.1 million, with a margin of 30.2% in the quarter. On a full year basis, adjusted gross profit totaled R$713.3 million, with a margin of 33.2%, above the prior year.

We are consistently seeking greater efficiency and productivity in the business cycle in both segments. In 2014, this led to a 19.9% year-over-year drop in the level of selling, general and administrative expenses, due to the reforms implemented over the past two years.

Consolidated net income was a positive R$8.0 million in the fourth quarter, comprising Gafisa’s net income of R$36.8 million, and a loss at Tenda of R$28.8 million. For the full year 2014, net income was negative R$42.5 million, as Gafisa reported net income of R$66.5 million and Tenda reported a loss of R$109.4 million.

Again, we highlight the Company's cash generation throughout the year. We ended 4Q14 with operating cash flow of R$ 103.1 million, reaching R$ 298.6 million in the year, reflecting: (i) the sound performance of the transfer process, with approximately R$ 1.7 billion transferred to financial institutions in the year; and (ii) the greater assertiveness and control of our business cycle. Free cash flow was positive again, reaching R$38.3 million and totaling R$81.0 million in the year. Total cash generation excludes certain non-recurring effects such as share repurchases and expenses related to the Alphaville transaction, which impacted the full year of 2014.

At the end of 2014, the net debt/equity ratio was slightly higher than the previous quarter, reaching 47.1%. Excluding project financing, net debt/equity totaled a negative ratio of 19.0%.

The spinoff process is ongoing. The brands are currently operating independently, with their own structures that reflect the specifics of their business models. We continue to work with partners and bankers in order to advance the separation of financial products that have already been structured, as well as to open specific credit lines for each company.

Finally, we would like to note all the initiatives taken in 2014 to remunerate our shareholders. During the year, the Company distributed to its shareholders, in the form of interest on capital and dividends, approximately R$163.1 million, or R$0.40 per share, representing a cash yield of 17.9% compared to the year-end stock price. In addition, since the beginning of 2013, and in-line with the policy of maximizing shareholder value through the various buyback programs open throughout the period, we disbursed approximately R$208.7 million in the acquisition of nearly 73.2 million shares, of which 57.5 million have been canceled, representing nearly 15.2% of the total outstanding shares issued by the Company. In early February, a new share repurchase program comprising 27 million shares was opened. It should be noted that despite the volume repurchased, the Company reaffirms its commitment to capital discipline, limiting the implementation of the new program to a net debt/equity ratio of 60%.

The total volume launched by the Company amounted to R$1.6 billion in 2014, an increase of 14.9% over 2013. The volume launched was slightly below the guidance released by the Company, in the range of R$ 1.7 to R$ 2.0 billion, due to the Company's strategic decision of postponing some planned launches in the Gafisa segment for 2015, since the market conditions were not appropriate.

In 2014, 23 projects/phases were launched, in 5 states. Considering PSV, the Gafisa segment was responsible for 62% of launches in the year, and Tenda for the remaining 38%.

Consolidated pre-sales totaled R$1.2 billion in 2014, down 17% from R$1.4 billion recorded in 2013. Consolidated sales from launches in the year represented 43% of the total, while sales from inventory comprised the remaining 57%. Consolidated inventory at market value decreased 2.7%, R$85.3 million in the quarter, reaching R$3.1 billion, compared to R$3.2 billion recorded at the end of 3Q14.

Consolidated sales over supply (SoS) was stable in the year, at 8.9% in 4Q14, compared to 6.7% in 3Q14. For the year, consolidated SoS was 27.9%.

Throughout 2014, the Company delivered 10,070 units. The Gafisa segment delivered 3,806 units, while the Tenda segment delivered the remaining 6,264 units.

In 2014, our net revenue reached R$2.2 billion, 13.3% lower than 2013. Reported gross profit for the year was R$541.7 million, down 12.3% from R$617.4 million recorded in 2013. Adjusted gross margin went up to 33.2%, as compared to 31.2% reported in 2013.

Adjusted EBITDA totaled R$71.7 million in the 4Q14, and R$261.5 million in 2014. Excluding the Alphaville equity income impact, adjusted EBITDA reached R$51.0 million in 4Q14 and R$229.2 million in the year.

Gafisa Group ended the 4Q14 with a net profit of R$8.0 million. In the year, net income was negative R$42.5 million.

Our balance sheet key indicators stayed at safe and comfortable levels throughout the year. The Gafisa Group ended 2014 with R$1.2 billion in cash.

The Company's consolidated gross debt was reduced to R$2.6 billion at the end of 4Q14, compared to R$2.8 billion at the end of 3Q14, while net debt was stable compared to the previous year, at R$1.4 billion in December 31, 2014.

The Company’s leverage, measured by the Net Debt/Equity ratio, reached 47.1% at the end of 2014. Excluding project finance, the Net Debt/Equity ratio was negative 19.0%.

2014 was a year marked by some relevant events, which resulted from the implementation of corrective actions taken since the beginning of the turnaround process. These actions include the maintenance of Gafisa segment’s consolidation strategy in the Rio and São Paulo states, the reduction in the number of projects related to the legacy projects, the resumption and development of the Tenda segment launches within its New Business Model, and finally the improvement of the Company's capital structure through the Alphaville transaction. As a result, the Company was well positioned for a new sustainable and profitability growth cycle.

Gafisa segment reached R$1.0 billion in launches, down by 5.7% year-over-year. The segment was responsible for 62% of the period’s consolidated launches.

In the 2014, net sales totaled R$811.0 million, down 15.6% year-over-year. Units launched during the year represented 42.2% of total, while sales from inventory accounted for the remaining 57.8%. Sales speed was 26.1% in 2014.

During 2014, Gafisa launched 23 projects/phases and delivered 3,806 units.

The market value of Gafisa segment inventory reached R$2.3 billion in 2014, or 73% of total consolidated inventory.

In terms of revenues, Gafisa reached R$1.6 billion in net revenues in 2014, while adjusted EBITDA was R$296.7 million.

2013 was characterized by the evolution in Tenda segment launches using the New Business Model, along with another significant deliveries in relation to old projects,  and the segment is nearing the completion of the last legacy units.

Tenda reached a PSV of R$613.3 million in launches, related to 14 new projects. The segment was responsible for 38% of consolidated launches.

Tenda reached R$396.0 million in net pre-sales for the 2014 year, compared to R$490.4 million in 2013. Speed of sales for the segment was 32.3% in 2014. It is worth noting that, out of the R$613.3 million launched in 2014, we recorded sales of R$176.8 million.

Throughout the year, R$715.7 million, relative to 5,522 units, were already transferred to financial institutions.

In 2014, Tenda launched 30 projects/phases and delivered 6,264 units.

The market value of Tenda inventory was R$828.7 million at the end of the year, representing 26.5% of total consolidated inventory.

Tenda reached R$570.1 million in net revenues in 2014.

Gafisa’s people are its greatest asset. Our team is made up of individuals with a unique way of thinking that are in-line with our corporate vision, values and culture. This culture and team have been built up over the past 60 plus years. The commitment of Gafisa’s people is to achieve results. Results aimed at delivering quality products and respecting the customer, which are foundations of the brand’s competitive position.

We have an experienced professional team that is at the forefront of the Brazilian real estate industry. Many of the professionals who make up our workforce started their careers at the Company.

Approximately 70% of our leaders were trained within the Company, through talent training programs.

Our CEO started his career as a trainee of the Company and 50% of the current directors have followed the same path of success, starting in our Trainee Program.

Currently, this program has about 320 students (230 in Gafisa and 90 in Tenda) and 85% of them are studying civil engineering. The selection, evaluation and remuneration of our employees is based on daily commitment to our values. These should be practiced by everyone in their working attitude, decision-making, strategic actions and relationships with customers, suppliers, investors and the community.

The Company's remuneration policy is applicable for employees, including members of the Board of Directors, Fiscal Council and Executive Board (statutory and non-statutory), and is in-line with the best corporate governance practices. We aim to attract and retain the best professionals. The remuneration policy is established based on market research and is directly linked to the alignment of interests of executives and the Company's shareholders.

The meritocratic model is based on variable remuneration. A significant percentage of the total remuneration is linked to the achievement of corporate results and individual goals. All employees have objective individual targets directly related to the Company's strategy and key indicators of our business.  

Regarding Directors and Managers, in addition to the short-term variable remuneration, there is also a portion of long-term incentives (in the form of grant of stock purchase options), which allows for even greater share of the risk and the Company’s results with its top executives, a characteristic of a transparent policy aimed at achieving long-lasting results.

Safety and prevention of accidents at work are important issues. Therefore, we maintain an ongoing program of identification, prevention and mitigation of risk, which aims to preserve the physical integrity of our employees and provide the foundation for a healthier life. For us, investing in security is welfare assurance within and outside the workplace. We offer training programs for the field teams (working at our construction sites), as well as for third parties’ employees who work for us.

The Company relies on the collaboration of 2,162 employees (1,152 in Gafisa and 1,010 in Tenda – based on Dec/14), as well as the third parties’ employees mentioned above.

Gafisa, in order to maintain its position as a leader in its field, has and encourages multiple strategies focused on innovation.

Since 2006, the Operations and Technology Development (DOT) area, which is mainly focused on the search for technological innovations and process improvements, has been producing solutions that have helped to create competitive market advantages.

The Product Development team monitors the main trends and implements unique ideas in our projects.

The Market Intelligence and the Institutional Marketing areas are examples of other groups that support the business areas with information and innovative ideas.

In addition to these, each year support areas such as planning and IT develop projects and tools for monitoring business indicators and increasing efficiency in our internal processes, construction, sales, etc.

These teams also use funds allocated in all areas of the Company to implement and provide feedback for project development. We understand that the multidisciplinary contribution is essential for the evolution of new ideas within the Company.

Gafisa’s Board of Directors is the decision making body responsible for formulating general guidelines and policies relating to the Company's business, including long-term strategies. In addition, the Board also names executive officers and oversees their activities.

The Board of Directors' decisions are ratified by the majority vote of its members. In the case of a tie, it is up to the President of the Board of Directors to cast the deciding vote, in addition to his/her individual vote.

The Board consists of seven members elected by the General Shareholders’ Meeting, of which six (86%) are independent, considering not only the independent concept of BM&FBovespa’s Novo Mercado, but also the New York Stock Exchange (NYSE), which is more restrictive and requires that all listed companies have a board of directors comprised mostly of independent members, while BM&FBovespa’s regulations establish a minimum of 20% independent members. As required by the Novo Mercado Regulation, the members’ term is two years, re-election allowed and subject to removal from office by shareholders in a General Meeting.

The table below shows the members of the Board of Directors.

* Odair G. Senra is a non-independent member of the board of directors, in accordance with the regulations of the NYSE and the Novo Mercado.

Gafisa’s Bylaws provide for a non-permanent Fiscal Council, which can be formed and have its members determined by a General Shareholders’ Meeting, as provided by Brazilian Corporate Law. The Fiscal Council, when formed, will consist of 3 to 5 members, with an equal number of alternates.

The operations of the Fiscal Council end at the first Annual General Meeting ("AGM") held after its formation, and its members can be re-elected. The remuneration of the Fiscal Council members shall be set by the General Shareholders' Meeting that elects them.

The AGM of April 25, 2014 appointed the members of the Fiscal Council, which will operate until the Company's next Annual General Meeting to be held in April 2015.

The Executive Board is the Company's body mainly responsible for the daily administration and monitoring of the general policies and guidelines established by the General Shareholders’ Meeting and the Board of Directors.

Gafisa’s Executive Board must consist of a minimum of two and a maximum of eight members, including the President, the Chief Financial Officer and the Investor Relations Officer, elected by the Board of Directors for a term of three years, re-election allowed as per the Bylaws. Currently, five members comprise the Board:

The Company has three advisory committees to the Board of Directors, on a permanent and statutory basis, and that must be composed of three independent members of the Board of Directors. These Committees have no decision making power - working in an advisory capacity only for the Board of Directors, which is always responsible for the final decision:

§ Appointments and Corporate Governance Committee: aims to periodically analyze and report issues regarding the size, identification, selection and appointment of the Board of Directors, Management and candidates nominated to join the Board and its Committees, as well as developing and recommending governance principles applicable to the Company. It is currently presided by Claudio José Carvalho de Andrade, and the members Rodolpho Amboss and Guilherme Affonso Ferreira.

§ Audit Committee: is responsible for the planning and reviewing of the Company’s annual reports and quarterly accounts, as well as the involvement of auditors in the process and is specially focused on the compliance with legal requirements and accounting norms, ensuring the maintenance of an effective system of internal controls. This Committee must be composed of members experienced in matters relating to accounting, auditing, finance, taxation and internal controls, and one of the members must have vast experience in accounting and financial management. It is currently presided by José Écio Pereira, and the members Maurício Marcellini Pereira and Francisco Vidal Luna.

§ Compensation Committee: is responsible for evaluating and making recommendations to the Board of Directors regarding the compensation policies and all forms of remuneration to be offered to the Executive Directors and other Company’s employees. It is currently presided by Claudio José Carvalho de Andrade, and the members Rodolpho Amboss and Guilherme Affonso Ferreira.

The Company also has three non-statutory advisory committees to the Board of Directors, composed of Directors and Managers of the Company:

§ Ethics Committee: is responsible for monitoring practices adopted by the entire organization, ensuring that they are compatible with Gafisa’s vision and values and in line with the principles and conduct guidelines in the Code of Ethics. This Committee is overseen by the Audit Committee.

§ Investment Committee: is responsible for analyzing, discussing and recommending the acquisition of new properties and real estate launches; advising the Directors on the negotiation of new contracts and project structuring; monitoring releases of funds and the Company’s cash flow; and, in special cases, participating in the negotiation and structuring of new types of agreements. This Committee is composed only of Statutory Directors of the Company.

§ Finance Committee: is responsible for evaluating and providing recommendations to the Board of Directors about risk policies and the Company’s financial investments. This Committee is composed of Executive Officers of the Company.

The composition of these committees can be accessed on the Company’s Investor Relations website: www.gafisa.com.br/ri.

In order to equally protect the interest of all shareholders, the Company determines, in accordance with the current legislation and best governance practices, the following rights to Gafisa’s shareholders:

§ vote at the General Meeting, annual or extraordinary, and make recommendations and guidelines to the Board of Directors in the decision making processes;

§ receive dividends and participate in the distribution of profits or other distributions relating to shares, in proportion to their holdings in the Company’s capital stock;

§ overseeing Gafisa’s management, as per the Bylaws, and to withdraw from the Company in cases provided for by Brazilian Corporate Law; and

§ receive at least 100% of the price paid per common share of the control block, according to the regulations of the Novo Mercado, in the case of public offering of shares as a result of the Company's loss of control.

Under Article 47, paragraph 2 (b) of the Bylaws, 25% of the balance of net income of the fiscal year, after deductions provided for in the Bylaws and adjusted pursuant to Article 202 of Brazilian Corporate Law, will be paid as dividends to all shareholders.

Due to the accumulated loss of R$42.5 million, calculated in the fiscal year ended 12.31.2014, the management proposal to be voted on at the General Meeting to be held in April 2015, will not include the distribution of dividends for the fiscal year of 2014.

The Company, who´s capital is publically traded, remains the only Brazilian real estate company to have its shares traded on Level 3 ADRs on the New York Stock Exchange (NYSE), and is one of the most liquid real estate stocks. In 2014, we reached an average daily trading volume of R$18.9 million on the BM&FBovespa, in addition to the US dollar equivalent of approximately US$7.5 million on the NYSE, totaling R$26.4 million average daily volume.

In 2014, the Bovespa index fell by 0.66%, and the Company's shares ended at R$2.20 (GFSA3) and US$1.63 (GFA), representing a decrease of 32.31% and 43.60%, respectively, compared to 2013.

Gafisa's shares are included in the IBOV - Bovespa, IBX – Bovespa and IBX50 – Bovespa indices.

9

For 2015, due to the deterioration of the economic scenario over the past few months, the Company, in a prudent and transparent manner, opted to reconsider the guidance in order to wait for a better economic environment in Brazil.

The launches in 2014 totaled R$1,636 million. The Gafisa segment accounted for 62.5% of the launches during the period, reaching R$1,023 million, slightly below guidance, while the Tenda segment accounted for 37.5%, or the remaining R$613.3 million, in-line with the projections presented.

The Company ended the year with a comfortable liquidity position. As stated in this report, the ratio between Net Debt/Equity remained stable throughout the year, and ended 2014 at 47.1%. Given this scenario and considering the Company's business plan for the coming years, we expect the consolidated leverage level to remain between 55% - 65%, measured by the same Net Debt/Equity, as in the established guidance.

Finally, as announced at the end of 2013, the Company confirms as a hurdle rate, the Return on Capital Employed (ROCE), and we understand that in a period of three years, this indicator should reach between 14% - 16%, both for the Tenda segment and the Gafisa segment.

The Company's operating policy on contracting services unrelated to external audit from the independent auditors is based on principles that preserve the autonomy of the independent auditor. These internationally accepted principles consist of: (a) the auditor should not audit his/her own work, (b) the auditor should not perform management roles for his/her client, and (c) the auditor should not promote the interests of his/her clients.

According to Article 2 of CVM Instruction nº 381/03, Gafisa reports that KPMG Auditores Independentes, independent auditors of the Company and its subsidiaries, did not provide services unrelated to the independent audit in 2014.

The Management declares, in compliance with Article 25, Paragraph 1, items V and VI of CVM Instruction nº 480/2009, that they reviewed, discussed and agreed with the Financial Statements in this Report and views expressed in the opinion of the Independent Auditors regarding the financial statements.

Gafisa thanks the valuable contribution of its employees, customers, suppliers, partners, shareholders, financial institutions, government agencies, regulators and other stakeholders for their support throughout 2014.

Report of Independent Registered Public Accounting Firm

To shareholders and management of

Gafisa S.A.

São Paulo - SP

We have audited the accompanying individual and consolidated financial statements of Gafisa S.A. (the “Company”), identified as Company and Consolidated, respectively, comprising the balance sheet as of December 31, 2014 and the related statement of profit or loss, statement of comprehensive income, statement of changes in equity and statement of cash flow for the year then ended, as well as the summary of main accounting practices and other notes to the financial statements.

Management responsibility for the financial statements

The Company’s management is responsible for the preparation and the fair presentation of the individual and consolidated financial statements in accordance with the accounting practices adopted in Brazil, and of the consolidated financial in accordance with the International Financial Reporting Standards (IFRS) applicable to real estate development entities in Brazil, as approved by the  Accounting Pronouncements Committee (CPC), by the Brazilian Securities Commission (CVM) and by the Federal Accounting Council (CFC), and for such internal control as Management determines is necessary to enable the preparation of individual and consolidated financial statements that are free from material misstatements, whether due to fraud or error.

Independent auditor’s responsibility

Our responsibility is to express an opinion on these individual and consolidated financial statements based on our audit. We conducted our audit in accordance with Brazilian auditing standards 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the individual and consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error.  In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the individual and consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  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 individual and 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 aforementioned individual (Company) and consolidated financial statements present fairly, in all material respects, the financial position of Gafisa S.A. as of December 31, 2013, and of its individual and consolidated financial performance, and its  individual and consolidated cash flows for the year then ended, in accordance with the accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS), applicable to real estate development entities in Brazil, as approved by the  Accounting Pronouncements Committee (CPC), by the Brazilian Securities Commission (CVM) and by the Federal Accounting Council (CFC)

Emphasis of a matter

Guideline OCPC 04 issued by the Accounting Pronouncements Committee

As mentioned in Note 2.1, the individual and consolidated financial statements were prepared in accordance with the IFRS applicable to real estate development entities also consider Guideline OCPC 04 issued by the Accounting Pronouncements Committee (CPC).. This guideline deals with the recognition of the revenue from this sector and involves matters related to the meaning and adoption of the concept of continuous transfer of the risks, benefits and control over real estate unit sales, as described in further details in Note 2.2.2. Our opinion is not modified in view of this matter.

Other matters

Statement of value added

We have also examined the individual (Company) and consolidated statements of value added for the year ended December 31, 2014, prepared under the responsibility of the Company’s management, the presentation of which is required by the Brazilian Corporate Legislation, and as additional information under IFRS, whereby no statement of value added presentation is required. These value added statements were submitted to the same previously described audit procedures and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole.

São Paulo (SP), February 27, 2015

KPMG Auditores Independentes

CRC 2SP014428/O-6

Giuseppe Masi

Accountant CRC 1SP176273/O-7

Gafisa S.A.

Balance sheet

December 31, 2014

(In thousands of Brazilian Reais)

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

Gafisa S.A.

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

Gafisa S.A.

Statement of profit or loss

Years ended December 31, 2014 and 2013

(In thousands of Brazilian Reais, except if stated otherwise)

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

Gafisa S.A.

Statement of comprehensive income (loss)

Years ended December 31, 2014 and 2013

 (In thousands of Brazilian Reais, except if stated otherwise)

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

Gafisa S.A.

Statement of changes in equity

Years ended December 31, 2014 and 2013

(In thousands of Brazilian Reais)

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

Gafisa S.A.

Cash flow statement

Years ended December 31, 2014 and 2013

(In thousands of Brazilian Reais)

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

Gafisa S.A.

Statement of value added

Years ended December 31, 2014 and 2013

(In thousands of Brazilian Reais)

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

1.    Operations

Gafisa S.A. ("Gafisa" or "Company") is a publicly traded company with registered office at Avenida das Nações Unidas, 8.501, 19^th floor, in the city and state of São Paulo, Brazil and commenced its operations in 1997 with the objectives of: (i) promoting and managing all forms of real estate ventures on its own behalf or for third parties (in the latter case, as construction company and proxy); (ii) selling and purchasing real estate properties; (iii) providing civil construction and civil engineering services; (iv) developing and implementing marketing strategies related to its own and third party real estate ventures; and (v) investing in other companies who share similar objectives.

The Company enters real estate development projects with third parties through specific purpose partnerships (“Sociedades de Propósito Específico” or “SPEs”) or through the formation of consortia. Controlled entities substantially share the managerial and operating structures and the corporate, managerial and operating costs with the Company. SPEs and consortia operate solely in the real estate industry and are linked to specific ventures.

On February 7, 2014, the Company disclosed a material fact informing its shareholders and the public that its Board of Directors authorized the Company’s management to begin studies aimed at a potential spin off of the Gafisa and Tenda business units into two publicly-held and independent companies in order to reinforce the creation of value to the Company and its shareholders. Should the plan be approved by the Board of Directors and shareholders, this transaction could be completed throughout 2015.

On July 28, 2014, giving continuity to the process of the spin off of business units, the Brazilian Securities and Exchange Commission (CVM) granted the request submitted by the subsidiary Tenda, to convert its securities from category  to category A.

2.    Presentation of financial statements and summary of significant accounting policies

2.1.    Basis of presentation and preparation of individual and consolidated financial statements

On February 27, 2015, the Company’s Board of Directors approved these individual and consolidated financial statements of the Company and has authorized their disclosure.

The individual financial statements, identified as “Company”, were prepared according to the accounting practices adopted in Brazil issued by the Accounting Pronouncements Committee (CPC) and are disclosed together with the consolidated financial statements.

In view of the fact that the accounting practices adopted in Brazil for preparing the individual financial statements, from 2014, do not differ from the IFRS standards applicable to separate financial statements, once the IFRS started to permit the adoption of the equity method in subsidiaries in the separate statements, the financial statements are also in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

The consolidate financial statements of the Company have been prepared and are being presented according to the accounting practices adopted in Brazil, including the pronouncements issued by the CPC, approved by the Brazilian Securities and Exchange Commission (CVM), and according to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

The consolidated financial statements are specifically in compliance with the International Financial Reporting Standards (IFRS) applicable to real estate development entities in Brazil, including the Guideline OCPC 04 - Application of the Technical Interpretation ICPC 02 to the Brazilian Real Estate Development Entities, in relation to the treatment of the recognition of revenue from this sector and involves certain matters related to application of the continuous transfer of the risks, benefits and control over the real estate units sold.

The presentation of the Statement of Value Added (DVA), individual and consolidated, is required by the Brazilian corporate legislation and the accounting practices adopted in Brazil applicable to publicly-held companies and was prepared according to CVM Resolution 557, of November 12, 2008, which approved the accounting pronouncement CPC 09 – Statement of Value Added. IFRS does not require the presentation of this statement. Consequently, under IFRS this statement is presented as additional information, without causing harm to the financial statements as a whole.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.1.    Basis of presentation and preparation of individual and consolidated financial statements --Continued

The financial statements have been prepared on a going concern basis. Management makes an assessment of the Company’s ability to continue as going concern when preparing the financial statements. The Company is in compliance with all of its debt covenants at the date of issue of these Financial Statements.

All amounts reported in the accompanying financial statements are in thousands of Reais, except as otherwise stated.

2.1.1.    Consolidated financial statements

The consolidated financial statements of the Company include the financial statements of Gafisa and its direct and indirect subsidiaries. The Company controls an entity when it is exposed or is entitled to variable returns arising from its involvement with the entity and has the ability to affect those returns through the power that it exerts over the entity. The existence and the potential effects of voting rights, which are currently exercisable or convertible, are taken into account when evaluating whether the Company controls other entity. The subsidiaries are fully consolidated from the date the control is transferred and the consolidation is discontinued from the date control ceases.

The accounting practices were uniformly adopted in all subsidiaries included in the consolidated financial statements and the fiscal year of these companies is the same of the Company. See further details in Note 9.

2.1.2.    Functional and presentation currency

The individual (Company) and consolidated financial statements are presented in Reais (presentation currency), which is the functional currency of the Company and its subsidiaries.

2.1.3.    Presentation of segment information

The presentation of operating segment information is consistent with the internal reports provided to the main decision makers of operational matters, the Board of Executive Officers and the Statutory Board, who are responsible for allocating resources, assessing the performance of operating segments and making strategic decisions.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies

2.2.1.    Accounting judgments, estimates and assumptions

Accounting estimates and judgments are evaluated on an ongoing basis based on historical experience and other factors, including expectations on future events, considered reasonable under the circumstances.

(i)     Judgments

The preparation of the individual and consolidated financial statements of the Company requires management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, as well as the disclosure of contingent liabilities, at the reporting date.

(ii)    Estimates and assumptions

Assets and liabilities subject to estimates and assumptions include the provision for impairment of asset, transactions with share-based payment, provision for legal claims, fair value of financial instruments, measurement of the estimated cost of ventures, deferred tax assets, among others.

The main assumptions related to sources of uncertainty over future estimates and other important sources of uncertainty over estimates at the reporting date, which may result in different amounts upon settlement are discussed below:

a)      Impairment of assets

Management reviews annually and/or when a specific event occurs the carrying value of assets with the objective of evaluating events or changes in the economic, operational or technological circumstances that may indicate an impairment. Should such evidences exist, and the carrying value exceeds the recoverable amount, a provision is recognized by adjusting the carrying value to the recoverable amount. These impairment losses are recognized in statement of profit or loss when incurred. Indefinite lived intangible assets and goodwill attributable to future economic benefit are tested at least annually or when circumstances indicate a decrease in the carrying value.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.1.    Accounting judgments, estimates and assumptions --Continued

(ii)    Estimates and assumptions --Continued

a)      Impairment of assets--Continued

Cash flows are derived from the budget for the following five years, and do not include uncommitted restructuring activities or future significant investments that will improve the asset basis of the cash-generating unit being tested. The recoverable amount is sensitive to the discount rate used under the discounted cash flow method, the estimated future cash inflows and to the growth rate used for purposes of extrapolation.

The value less costs to sell is determined, whenever possible, based on a binding sale agreement in an arm’s length transaction between the knowledgeable and willing parties, adjusted by expenses attributable to the sale of the asset, or, in the absence of a binding sale agreement, based on the market price in an active market, or on a recent transaction with similar assets.

The main assumptions used for determining the recoverable amount of cash-generating unit are detailed in Note 11.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.1.    Accounting judgments, estimates and assumptions --Continued

(ii)    Estimates and assumptions --Continued

b)    Share-based payment transactions

The Company measures the cost of transactions with employees to be settled with shares based on the fair value of equity instruments on the grant date. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to grant equity instruments, which depends on the grant terms and conditions. It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend income, and the corresponding assumptions. The assumptions and models used to estimate the fair value of share-based payments are disclosed in Note 19.3.

c)    Provision for legal claims

The Company recognizes a provision for tax, labor and civil claims (Note 17). The assessment of the probability of a loss includes the evaluation of the available evidence, the hierarchy of laws, existing case law, the latest court decisions and their significance in the judicial system, and the opinion of external legal counsel. Provisions are reviewed and adjusted to take into account the changes in circumstances, such as applicable statutes of limitations, findings of tax inspections, or additional exposures found based on new court issues or decisions. Claims may be settled in amounts different from those estimated in view of the inaccuracies inherent in the estimation process. The Company reviews its estimates and assumptions at least annually.

There are uncertainties inherent in the interpretation of complex tax rules and in the value and timing of future taxable income. In the ordinary course of business, the Company and its subsidiaries are subject to assessments, audits, legal claims and administrative proceedings in civil, tax and labor matters.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.1.    Accounting judgments, estimates and assumptions --Continued

(ii)    Estimates and assumptions --Continued

d)    Fair value of financial instruments

When the fair values of the financial assets and liabilities presented in the balance sheet cannot be obtained in the active market, they are determined using valuation techniques, including the discounted cash flow method.

The data for such methods is based on those available market information; however, when it is not viable, a certain level of judgment is required to establish the fair value. The judgment includes considerations regarding the data used, such as interest rates, liquidity risk, credit risk, and volatility. Changes in the assumptions about these factors may affect the stated fair value of financial instruments.

e)    Estimated cost of construction

Estimated costs, mainly comprising the incurred and future costs for completing the construction projects, are regularly reviewed, based on the progress of construction, and any resulting adjustments are recognized in profit or loss of the Company. The effects of such estimate reviews affect the statement of profit or loss.

f)     Realization of deferred income tax

A deferred tax asset is recognized when it is probable that a taxable profit will be available in subsequent years to offset the deferred tax asset, based on projections of results and based on internal assumptions and future economic scenarios that enable its total or partial use.

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.2.    Recognition of revenue and expenses

(i)     Real estate development and sales

(a)     For the sales of completed units, revenues are recognized upon completion of the sale and the transfer of significant risks and benefits, regardless of the timing of receipt from the customer.

(b)    For the construction phase pre-sale of completed units:

·   The incurred cost (including cost of land, and other directly related expenditure) that corresponds to the units sold is included in profit or loss. For the units not yet sold, the incurred cost is included in inventory (Note 2.2.7);

·   Sales revenues are appropriated to profit or loss, using the percentage-of-completion method for each venture, this percentage being measured in view of the incurred cost in relation to the total estimated cost of the respective ventures;

·   Revenues recognized in excess of actual payments received from customers is recorded as either a current or non-current asset in “Trade accounts receivable”. Any payment received in connection with the sales of units that exceeds the amount of revenues recognized is recorded as “Payables for purchase of land and advances from customers ";

·   Interest and inflation-indexation charges on accounts receivable as from the time the units are sold and delivered, as well as the adjustment to present value of account receivable, are included in the real estate development and sales when incurred, on a pro rata basis using the accruals basis of accounting;

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.2.    Recognition of revenue and expenses

(i)     Real estate development and sales --Continued

·   Financial charges on account payable for acquisition of land and those directly associated with the financing of construction are capitalized and recorded in properties for sale and included in the incurred cost of units under construction until their completion, and follow the same recognition criteria as the cost of real estate development for units sold while under construction;

·   Taxes levied and deferred on the difference between real estate development revenues and the cumulative revenue subject to tax are calculated and recognized when this difference in revenues is recognized; and

·   Other expenses, including advertising and publicity, are recognized in profit or loss when incurred.

(ii)    Construction services

Revenues from real estate services are recognized as services are rendered and tied to the construction management activities for third parties and technical advisory services.

(iii)   Barter transactions

Barter transactions have the objective of receiving land from third parties that are settled with the delivery of real estate units or transfer of portions of the revenue from the sale of real estate units of ventures. The land acquired is determined based on fair value, as a component of inventories, with a corresponding entry to advances from customers in liabilities. Revenues and costs incurred from barter transactions are included in profit or loss over the course of construction period of ventures, as previously described in item (b).

2.    Presentation of financial statements and summary of significant accounting policies --Continued

2.2.    Summary of significant accounting policies --Continued

2.2.3.    Financial instruments