XP Inc. and its subsidiaries Unaudited interim condensed consolidated balance sheets As of March 31, 2021 and December 31, 2020 In thousands of Brazilian Reais  

	Note	March 31, 2021		December 31, 2020
Cash			1,556,782		1,954,788
Financial assets			115,611,055		90,190,827
Fair value through profit or loss			76,441,946		57,149,446
Securities	4		62,855,038		49,590,013
Derivative financial instruments	5		13,586,908		7,559,433
Fair value through other comprehensive income			21,629,266		19,039,044
Securities	4		21,629,266		19,039,044
Evaluated at amortized cost			17,539,843		14,002,337
Securities	4		1,915,816		1,828,704
Securities purchased under agreements to resell	3		6,741,459		6,627,409
Securities trading and intermediation	9		3,184,130		1,051,566
Accounts receivable			367,459		506,359
Loan operations	7		5,041,413		3,918,328
Other financial assets			289,566		69,971
Other assets			2,174,885		1,760,999
Recoverable taxes			128,769		127,623
Rights-of-use assets	12		204,430		183,134
Prepaid expenses	8		1,784,698		1,393,537
Other			56,988		56,705
Deferred tax assets	19		652,632		505,046
Investments in associates and joint ventures	11		733,861		699,907
Property and equipment	12		223,141		204,032
Goodwill and Intangible assets	12		798,001		713,562
Total assets			121,750,357		96,029,161

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

2 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated balance sheets As of March 31, 2021 and December 31, 2020 In thousands of Brazilian Reais  

	Note	March 31, 2021		December 31, 2020
Financial liabilities			92,617,251		70,600,989
Fair value through profit or loss			16,269,472		10,056,806
Securities loaned	4		2,705,869		2,237,442
Derivative financial instruments	5		13,563,603		7,819,364
Evaluated at amortized cost			76,347,779		60,544,183
Securities sold under repurchase agreements	3		44,483,097		31,839,344
Securities trading and intermediation	9		20,398,530		20,303,121
Deposits	13		4,003,129		3,021,750
Structured operations certificates	14		2,841,116		2,178,459
Accounts payables			803,443		859,550
Borrowings and lease liabilities	15		506,531		492,535
Debentures	16		336,987		335,250
Other financial liabilities	17		2,974,946		1,514,174
Other liabilities			17,580,356		14,522,206
Social and statutory obligations			399,957		667,448
Taxes and social security obligations			249,950		435,849
Private pension liabilities	18		16,896,508		13,387,913
Provisions and contingent liabilities	22		26,024		19,711
Other			7,917		11,285
Deferred tax liabilities	19		-		8,352
Total liabilities			110,197,607		85,131,547
Equity attributable to owners of the Parent company			11,549,981		10,894,609
Issued capital			23		23
Capital reserve			10,802,675		10,663,942
Other comprehensive income			13,615		230,644
Retained earnings			733,668		-
Non-controlling interest			2,769		3,005
Total equity	20		11,552,750		10,897,614
Total liabilities and equity			121,750,357		96,029,161

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

3 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of income and of comprehensive income For the three months ended March 31, 2021 and 2020 In thousands of Brazilian Reais, except earnings per share  

		Three months period ended March 31,
	Note	2021			2020
Net revenue from services rendered	23		1,454,656			1,151,946
Net income from financial instruments at amortized cost and at fair value through other comprehensive income	23		30,884			202,497
Net income from financial instruments at fair value through profit or loss	23		1,142,501			380,398
Total revenue and income			2,628,041			1,734,841
Operating costs	24		(837,435	)		(556,854	)
Selling expenses	25		(44,418	)		(28,476	)
Administrative expenses	25		(966,278	)		(578,116	)
Other operating income (expenses), net	26		18,361			(13,883	)
Expected credit losses	10		(3,455	)		(21,962	)
Interest expense on debt			(9,516	)		(19,019	)
Share of profit or (loss) in joint ventures and associates	11		(1,084	)		-
Income before income tax			784,216			516,531
Income tax expense	19		(50,068	)		(118,977	)
Net income for the period			734,148			397,554
Other comprehensive income
Items that can be subsequently reclassified to income
Foreign exchange variation of investees located abroad			26,312			56,560
Gains (losses) on net investment hedge			(20,744	)		(56,496	)
Changes in the fair value of financial assets at fair value through other comprehensive income			(222,597	)		31,490
Other comprehensive income (loss) for the period, net of tax			(217,029	)		31,554
Total comprehensive income for the period			517,119			429,108
Net income attributable to:
Owners of the Parent company			733,668			396,860
Non-controlling interest			480			694
Total comprehensive income attributable to:
Owners of the Parent company			516,639			428,414
Non-controlling interest			480			694
Earnings per share from total income attributable to the ordinary equity holders of the company
Basic earnings per share	28		1.3123			0.7192
Diluted earnings per share	28		1.2810			0.7139

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

4 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of changes in equity For the three months ended March 31, 2021 and 2020 In thousands of Brazilian Reais  

		Atributable to owners of the Parent
		Issued Capital	Capital reserve		Other comprehensive income	Retained Earnings	Total	Non- Controlling interest	Total Equity
	Notes		Additional paid-in capital	Other Reserves
Balances at December 31, 2019		23	5,409,895	1,533,551	209,927	-	7,153,396	2,563	7,155,959
Comprehensive income for the period
Net income for the period		-	-	-	-	396,860	396,860	694	397,554
Other comprehensive income, net		-	-	-	31,554	-	31,554	-	31,554
Transactions with shareholders - contributions and distributions
Share based plan	27	-	-	23,221	-	-	23,221	(7)	23,214
Gain (loss) in changes in interest of subsidiaries, net		-	-	-	(83)	-	(83)	1,933	1,850
Allocations of the net income for the period
Dividends distributed		-	-	-	-	-	-	(3,432)	(3,432)
Balances at March 31, 2020		23	5,409,895	1,556,772	241,398	396,860	7,604,948	1,751	7,606,699
Balances at December 31, 2020		23	6,821,176	3,842,766	230,644	-	10,894,609	3,005	10,897,614
Comprehensive income for the period
Net income for the period		-	-	-	-	733,668	733,668	480	734,148
Other comprehensive income, net		-	-	-	(217,029)	-	(217,029)	-	(217,029)
Transactions with shareholders - contributions and distributions
Share based Plan	27	-	-	140,549	-	-	140,549	2	140,551
Gain (loss) in changes in interest of subsidiaries, net		-	-	(1,816)	-	-	(1,816)	61	(1,755)
Allocations of the net income for the period
Dividends distributed		-	-	-	-	-	-	(779)	(779)
Balances at March 31, 2021		23	6,821,176	3,981,499	13,615	733,668	11,549,981	2,769	11,552,750

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

5 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of cash flows For the three months ended March 31, 2021 and 2020 In thousands of Brazilian Reais  

		Three months ended March 31,
	Note	2021			2020
Operating activities
Income before income tax			784,216			516,531
Adjustments to reconcile income before income taxes
Depreciation of property and equipment and right-of-use assets	12		15,145			15,878
Amortization of intangible assets	12		54,362			15,648
Loss on write-off of property, equipment and intangible assets and lease, net	12		3,028			3,452
Share of profit or (loss) in joint ventures and associates	11		1,084			-
Expected credit losses on financial assets			3,455			21,962
(Reversal of) Provision for contingencies, net	22		3,295			(387	)
Net foreign exchange differences			(56	)		(19,510	)
Share based plan	27		140,551			23,221
Interest accrued			12,019			20,087
Changes in assets and liabilities
Securities (assets and liabilities)			(15,255,321	)		(6,676,164	)
Derivative financial instruments (assets and liabilities)			(314,666	)		988,979
Securities trading and intermediation (assets and liabilities)			(2,037,783	)		3,708,191
Securities purchased (sold) under resale (repurchase) agreements			12,528,762			46,190
Accounts receivable			138,006			6,197
Loan operations			(1,121,807	)		(63,520	)
Prepaid expenses			(391,161	)		(15,811	)
Other assets and other financial assets			(220,817	)		52,295
Structured operations certificates			662,657			130,987
Accounts payable			(56,375	)		(1,616	)
Deposits			981,379			4
Social and statutory obligations			(267,491	)		(217,971	)
Tax and social security obligations			7,257			(33,554	)
Private pension liabilities			3,508,595			1,395,998
Other liabilities and other financial liabilities			1,419,510			141,008
Cash from operations			597,844			58,095
Income tax paid			(235,785	)		(196,585	)
Contingencies paid	22		(1,480	)		(234	)
Interest paid			(38	)		(572	)
Net cash flows (used in) from operating activities			360,541			(139,296	)
Investing activities
Acquisition of property and equipment	12 (a)		(23,698	)		(20,746	)
Acquisition of intangible assets	12(a)		(114,298	)		(19,914	)
Acquisition of subsidiaries, net of cash acquired	2 (e)		(854	)		-
Acquisition of associates and joint ventures			(23,231	)		-
Net cash flows (used in) investing activities			(162,081	)		(40,660	)
Financing activities
Payments of borrowings and lease liabilities	32		(23,758	)		(26,058	)
Transactions with non-controlling interests			(1,755	)		1,844
Dividends paid to non-controlling interests			(779	)		(3,432	)
Net cash flows from (used in) financing activities			(26,292	)		(27,646	)
Net increase (decreased) in cash and cash equivalents			172,168			(207,602	)
Cash and cash equivalents at the beginning of the period			2,660,388			887,796
Effects of exchange rate changes on cash and cash equivalents			7,636			31,009
Cash and cash equivalents at the end of the period			2,840,192			711,203
Cash			1,556,782			249,950
Securities purchased under agreements to resell	3		1,191,577			309,053
Interbank certificate deposits	4		91,833			152,200

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

6 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

1. Operations

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

XP Inc. is a holding company controlled by XP Controle Participações S.A., which holds 55.40% of voting rights and whose is ultimately controlled by a group of individuals. On December 13, 2019, the Company completed its Initial Public Offering (“IPO”) and the common shares began trading on the Nasdaq Global Select Market (“NASDAQ-GS”) under the symbol “XP”.

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

These unaudited interim condensed consolidated financial statements as of March 31, 2021 were approved by the Board of Directors on June 9, 2021.

1.1 Follow-on public offering

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

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

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

1.2 Spin-off of Itaú’s investment in XP Inc.

In January 2021, XP Inc. reached an agreement with Itaú Unibanco in connection with Itaú’s spin-off of its investment in XP Inc., and has entered into two agreements regarding to the corporate reorganization announced by Itaú Unibanco Holding S.A. on December 31, 2020 (Itaú Agreements).

The Itaú Agreements establish certain steps to be taken as a result of the corporate reorganization approved and announced by its shareholders, which are subject to the US Federal Reserve Board’s (FED) approval.

7 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

The proposed transaction is being proposed by XPart and XP to streamline and simplify the corporate structure at shareholders’ level of XP, specifically by giving XPart’s shareholders more accessible ways to trade XP shares as they will directly own an interest in XP.

It is not expected that such transaction will have any impact on XP Inc.’s results of operations and financial condition.

1.3 COVID-19

Covid-19 has significantly impacted the world economy. Many countries have imposed travel bans on millions of people and, additionally, people in many locations are subject to quarantine measures. Businesses are dealing with lost revenue and disrupted supply chains. Countries have imposed lockdowns in response to the pandemic and, as a result of the disruption to businesses, millions of workers have lost their jobs. The Covid-19 pandemic has also resulted in significant volatility in the financial and commodities markets worldwide. Numerous governments have announced measures to provide both financial and non-financial assistance to the affected entities. During the pandemic, the Group maintained trading platforms and other services available to clients without interruption. XP has played a valuable role on keeping our clients connected to the market and reinforce our mission to our clients.

Based on thorough assessments about the well-being and performance of our workforce, management announced on September 11, 2020, the permanent and company-wide adoption of the home-office model.

The Group has reviewed its exposure to economic-related and market volatility, which could negatively impact the value of a certain class of financial instruments however has not identified relevant impact to the financial performance or position of the group as of March 31, 2021. The Company has sufficient headroom to enable it to comply with its covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.

2. Basis of preparation and changes to the Group’s accounting policies

a) Basis of preparation

The unaudited interim condensed consolidated financial statements as of March 31, 2021 and for three months ended March, 2021 and 2020 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

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

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group’s annual consolidated financial statements as of December 31, 2020. The list of notes that were not presented in this unaudited interim condensed is described below:

8 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Note to financial statements of December 31, 2020	Description
3.	Summary of significant accounting policies
4.	Significant estimated and judgements
5.	Group structure
11.	Accounts receivable
12.	Recoverable taxes
24.	Social and Statutory obligations
25.	Tax and social security obligations
29. (a)	Key-person management compensation
38. (b) to (f)	Management of financial risks and financial instruments

The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those of the previous financial year and corresponding interim reporting period, except for the new accounting policies adopted for the current interim reporting period, see Note 2 (b).

The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“R$”), which is the Group’s presentation currency and all amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand currency units unless otherwise stated.

b) New standards, interpretations and amendments adopted by the Group

The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR).

The amendments include the following practical expedients:

· A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest

· Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the hedging relationship being discontinued

· Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component

These amendments had no impact on the unaudited interim condensed consolidated financial statements of the Group. The Group intends to use the practical expedients in future periods if they become applicable.

c) Basis of consolidation

There were no changes since December 31, 2020 in the accounting practices adopted for consolidation of the Company’s direct and indirect interests in its subsidiaries for the purposes of these unaudited interim condensed consolidated financial statements, except for the following items:

			% of Group’s interest (i)
Entity name	Country of incorporation	Principal activities	March 31, 2021	December 31, 2020
Directly controlled
XPAC Sponsor LLC (ii)	Cayman	Special Purpose Acquisition (SPAC) Sponsor	100.00%	-
Indirectly controlled
Leadr Serviços Online Ltda. (iii)	Brazil	Social media	-	99.99%

9 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

(i) The percentage of participation represents the Group’s interest in total capital and voting capital of its subsidiaries.

(ii) New subsidiaries incorporated in the period. In March 2021, XPAC Sponsor LLC was created as a holding Company which has the objective to be an initial investors of the special purpose acquisitions companies.

(iii) Subsidiaries closed in the period.

d) Interests in associates and joint ventures

i. Associates

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

ii. Joint ventures

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

iii. Equity method

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

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

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

e) Business combinations

During 2020 the Group acquired certain companies as part of our growth strategy and the fair value of the identifiable assets acquired and liabilities assumed as of each acquisition date were:

10 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

	Fliper			Antecipa			DM10			Total
Assets
Cash		617			1,917			275			2,809
Other assets		-			95			411			506
Intangible assets		2,869			10,037			2,950			15,856
		3,486			12,049			3,636			19,171
Liabilities
Other liabilities		(6,159	)		(198	)		(1,522	)		(7,879	)
Total identifiable net assets at fair value		(2,673	)		11,851			2,114			11,292
Goodwill arising on acquisition (*)		39,832			20,732			14,886			75,450
Contingent consideration (**)		30,300			8,732			-			39,032
Purchase consideration transferred (*)		67,459			41,315			17,000			125,774
Analysis of cash flows on acquisition
Net cash acquired with the subsidiary		(617	)		(1,917	)		(275	)		(2,809	)
Payable in installments		-			(14,636	)		(6,000	)		(20,636	)
Contingent consideration		(30,300	)		(8,732	)		-			(39,032	)
Net of cash flow on acquisition (investing activities)		36,542			16,030			10,725			63,297

From R$ 63,297 of net cash flow on aquisition, R$ 62,443 was settled during 2020, and R$ 854 was settled in 2021.

*During the measurement period, the purchase consideration transferred for the acquisitions was adjusted to R$ 125,774 (R$ 100,923 previously disclosed) as a result of purchase price adjustments. Accordingly, goodwill was updated to R$2,233.

** During the measurement period, the preliminary contingent consideration for the acquisitions was adjusted to R$39,032 (R$14,183 previously disclosed) as a result of a fair value adjustment of R$24,849.

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

Assets	Amount	Method	Expected amortization period
Customer list	2,181	Multi-period excess earning method	5.5 years
Trademark	3,799	Relief from royalty	5 years
Technology	9,876	Relief from royalty	5 years

For the concluded acquisitions, the total consideration paid is R$125,774, being: i) R$62,443 paid in cash, ii) R$21,487 payable in three consecutives annual installments from 2020 to 2022 adjusted by the Interbank Certificates of Deposit (“CDI”) rate and iii) R$ 39,032 as a fair value of the contingent consideration.

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

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

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

11 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

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

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

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

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

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

On June 29, 2020, the Group entered into an agreement, to 100% of total share capital of Antecipa S.A. (“Antecipa”). Antecipa is a digital platform focused on financing of receivables and offering an efficient alternative for companies to optimize its cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On September 1, 2020, the acquisition was consummated, through approval of Central Bank (BACEN).

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

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

As at March 31, 2021, the acquisition of Riza has not been completed. The Company expects to conclude the transaction until June 2021, subject to certain contractual conditions. After the closing of the acquisition XP will proceed with the purchase price allocation of net assets acquired as well as the consolidation of entity purchased.

f) Segment reporting

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

The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries and joint ventures. Disaggregated information is only reviewed at the revenue level (Note 23), with no corresponding detail at any margin or profitability levels.

12 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

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

See Note 23 (c) for a breakdown of total revenue and income and selected assets by geographic location.

g) Estimates

The preparation of unaudited interim condensed consolidated financial statements of the Group requires management to make judgments and estimates and to adopt assumptions that affect the amounts presented referring to revenues, expenses, assets and liabilities at the reporting date. Actual results may differ from these estimates.

In preparing these unaudited interim condensed consolidated financial statements, the significant judgements and estimates made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that are set the consolidated financial statements for the year ended December 31, 2020.

3. Securities purchased (sold) under resale (repurchase) agreements

a) Securities purchased under agreements to resell

	March 31,  2021			December 31, 2020
Available portfolio		2,959,713			1,409,742
National Treasury Notes (NTNs) (a)		1,322,501			876,146
Financial Treasury Bills (LFTs) (a)		650,613			452,714
National Treasury Bills (LTNs) (a)		873,138			44,093
Debentures (b)		113,461			36,789
Collateral held		3,783,057			5,218,037
National Treasury Bills (LTNs) (a)		977,999			976,468
National Treasury Notes (NTNs) (a)		2,360,239			4,241,569
Financial Treasury Bills (LFTs) (a)		241,195			-
Debentures (b)		203,624			-
Expected Credit Loss (c)		(1,311	)		(370	)
Total		6,741,459			6,627,409

(a) Investments in purchase and sale commitments collateral-backed by sovereign debt securities refer to transactions involving the purchase of sovereign debt securities with a commitment to sale originated in the subsidiary XP CCTVM and in exclusive funds and were carried out at an average fixed rate of 2.58% p.a. (1.91% p.a. as of December 31, 2020).

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

(c) The reconciliation of gross carrying amount and the expected credit loss segregated by stages are presented in the Note 10.

As of March 31, 2021, R$1,191,577 (December 31, 2020 - R$593,673) from the total amount of available portfolio is being presented as cash equivalents in the statements of cash flows.

13 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

b) Securities sold under repurchase agreements

	March 31,  2021		December 31, 2020
National Treasury Bills (LTNs)		17,018,906		18,318,498
National Treasury Notes (NTNs)		22,008,552		13,497,944
Financial Treasury Bills (LFTs)		5,215,499		-
Debentures		240,140		22,902
Total		44,483,097		31,839,344

As of March 31, 2021, securities sold under repurchase agreements were agreed with average interest rates of 2.64% p.a. (December 31, 2020 – 1.89% p.a.), with assets pledged as collateral.

4. Securities

a) Securities classified at fair value through profit and loss:

	March 31, 2021				December 31, 2020
	Gross carrying amount		Fair  value		Gross carrying amount		Fair value
Financial assets (ii)
At fair value through profit or loss		63,160,733		62,855,038		49,157,111		49,590,013
Brazilian government bonds		40,895,440		40,563,575		30,752,903		31,129,671
Investment funds (ii)		14,989,732		14,994,872		11,216,914		11,221,774
Stocks issued by public-held company		4,558,222		4,557,967		3,802,610		3,802,470
Debentures		1,184,649		1,188,995		1,111,595		1,114,967
Structured transaction certificate		382,230		401,185		485,012		515,960
Bank deposit certificates (i)		287,617		289,022		371,455		372,329
Agribusiness receivables certificates		152,999		151,756		359,607		363,721
Certificate of real estate receivable		84,919		83,055		97,606		96,930
Financial credit bills		65,449		65,758		81,465		82,209
United States government bonds		19,968		20,004		590,710		602,214
Real estate credit bill		2,085		2,121		474		477
Others (iii)		537,423		536,728		286,760		287,291

(i) Bank deposit certificates includes R$ 91,833 presented as cash equivalents in the statements of cash flows.

(ii) Financial assets include R$ 16,896,508 (December 31, 2020 – R$ 13,387,913) related to Specially Constituted Investment Fund (“FIE”) as presented in Note 18, out of which R$14,181,289 (December 31, 2020 – R$ 10,625,520) are Investments funds.

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

14 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

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

	March 31, 2021		December 31, 2020
	Gross carrying amount	Fair value	Gross carrying amount	Fair value
Financial assets
At fair value through other comprehensive income
Brazilian government bonds (i)	21,977,757	21,629,266	19,011,499	19,039,044

(i) Includes expected credit losses in the amount of R$ 10,238 (2020 – R$ 8,855). The reconciliation of gross carrying amount and the expected credit loss are presented in the Note 10.

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

	March 31, 2021		December 31, 2020
	Gross carrying amount	Book value	Gross carrying amount	Book value
Financial assets
At amortized cost
Bonds (i)	1,916,962	1,915,816	1,829,791	1,828,704

(i) Includes expected credit losses in the amount of R$ 1,146 (2020 – R$ 1,087). The reconciliation of gross carrying amount and the expected credit loss are presented in the Note 10.

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

	March 31, 2021		December 31, 2020
	Gross carrying amount	Fair  value	Gross carrying amount	Fair  value
Financial liabilities
At fair value through profit or loss
Securities loaned	2,705,869	2,705,869	2,237,442	2,237,442

e) Securities classified by maturity:

			Assets				Liabilities
	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Financial assets
At fair value through PL and at OCI
Current		38,300,712		34,572,107		2,705,869		2,237,442
Non-stated maturity		19,903,106		15,246,105		2,705,869		2,237,442
Up to 3 months		11,831,738		794,025		-		-
From 3 to 12 months		6,565,868		18,531,977		-		-
Non-current		46,193,830		34,065,805		-		-
After one year		46,193,830		34,065,805		-		-
Evaluated at amortized cost
Current		1,916,962		1,829,791		-		-
Up to 3 months		1,715,080		1,623,487		-		-
From 3 to 12 months		201,882		206,304		-		-
Total		86,411,504		70,467,703		2,705,869		2,237,442

The reconciliation of expected loss to financial assets at amortized cost – securities according with IFRS 9 is demonstrated in Note 10.

15 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

5. Derivative financial instruments

The Group trades derivative financial instruments with various counterparties to manage its overall exposures (interest rate, foreign currency and fair value of financial instruments) and to assist its customers in managing their own exposures.

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

	March 31, 2021
	Notional		Fair Value		%			Up to 3 months		From 3 to 12 months		Above 12 months
Assets
Options		509,856,294		6,967,818		95	%		3,059,069		2,467,835		1,440,914
Swap contracts		8,009,244		919,856		1	%		210,430		79,270		630,156
Forward contracts		10,565,131		5,488,700		2	%		4,770,720		679,012		38,968
Future contracts		9,565,259		210,534		2	%		141,705		50,885		17,944
Total		537,995,928		13,586,908		100	%		8,181,924		3,277,002		2,127,982
Liabilities
Options		428,490,648		7,717,168		95	%		3,535,508		2,377,603		1,804,057
Swap contracts		7,333,816		1,247,598		2	%		200,494		496,051		551,053
Forward contracts		10,581,320		4,598,604		2	%		4,564,545		21,952		12,107
Future contracts		1,564,977		233		1	%		-		11		222
Total		447,970,761		13,563,603		100	%		8,300,547		2,895,617		2,367,439

	December 31, 2020
	Notional		Fair Value		%			Up to 3 months		From 3 to 12 months		Above 12 months
Assets
Options		681,464,674		6,298,358		83	%		2,327,062		2,351,285		1,620,011
Swap contracts		5,578,227		777,816		10	%		35,241		206,921		535,654
Forward contracts		2,905,411		456,724		6	%		230,862		201,324		24,538
Future contracts		43,100,609		26,535		1	%		26,535		-		-
Total		733,048,921		7,559,433		100	%		2,619,700		2,759,530		2,180,203
Liabilities
Options		614,741,256		6,735,478		87	%		2,152,890		2,378,689		2,203,899
Swap contracts		6,143,671		870,393		11	%		99,249		213,532		557,612
Forward contracts		3,035,011		200,272		3	%		133,679		49,102		17,491
Future contracts		44,981,642		13,221		1	%		542		1,742		10,937
Total		668,901,580		7,819,364		100	%		2,386,360		2,643,065		2,789,939

16 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

6. Hedge accounting

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

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

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

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

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

a) Hedge of net investment in foreign operations

In the period ended March 31, 2021, the objective for the Group was to hedge the risk generated by the US$ variation from investments in our subsidiaries in the United States, XP Holdings International and XP Advisors Inc.

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

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

	Hedged item						Hedge instrument
	Book Value				Variation in value				Variation in the
Strategies	Assets		Liabilities		recognized in Other comprehensive income		Notional value		amounts used to calculate hedge ineffectiveness
March 31, 2021
Foreign exchange risk
Hedge of net investment in foreign operations		282,760		-		24,103		427,297		(20,744	)
Total		282,760		-		24,103		427,297		(20,744	)
December 31, 2020
Foreign exchange risk
Hedge of net investment in foreign operations		245,986		-		52,299		349,218		(60,563	)
Total		245,986		-		52,299		349,218		(60,563	)

17 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

b) Fair value hedge

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

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

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

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

	Hedged item			Hedge instrument
	Book Value		Variation in value recognized in income	Nominal value	Variation in the
					amounts used to
					calculate hedge
Strategies	Assets	Liabilities			ineffectiveness
March 31, 2021
Interest rate risk
Hedge of pre-fixed operations	-	2,841,116	228,878	2,838,377	(228,524)
Total	-	2,841,116	228,878	2,838,377	(228,524)
December 31, 2020
Interest rate risk
Hedge of pre-fixed operations	-	2,178,459	(47,923)	2,188,732	46,795
Total	-	2,178,459	(47,923)	2,188,732	46,795

					March 31, 2021
	Notional amount	Book value (i)		Variation in fair value used to calculate hedge ineffectiveness	Hedge ineffectiveness recognized in income
Hedge Instruments		Assets	Liabilities
Interest rate risk
Futures	2,838,377	-	2,841,116	(228,524)	354
					December 31, 2020
	Notional amount	Book value (i)		Variation in fair value used to calculate hedge ineffectiveness	Hedge ineffectiveness recognized in income
Hedge Instruments		Assets	Liabilities
Interest rate risk
Futures	2,188,732	-	2,178,459	46,795	(1,128)

(i) Amounts recorded within financial statement line “Derivative financial instruments”. See Note 5.

18 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

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

	March 31, 2021			December 31, 2020
Strategies	Hedge instruments		Hedge item	Hedge instruments		Hedge item
	Notional amount	Fair value adjustments	Book value	Notional amount	Fair value adjustments	Book value
Hedge of Fair Value	2,838,377	(228,524)	228,878	2,188,732	(47,923)	46,795
Hedge of net investment in foreign operations	427,297	(20,744)	24,103	349,218	(60,563)	52,299
Total	3,265,674	(249,268)	252,981	2,537,950	(108,486)	99,094

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

	March 31, 2021
	0-1 year	1-2 years	2-3 years	3-4 years	4-5 years	5-10 years	Total
Hedge of Fair Value	18,367	19,307	166,022	103,503	1,049,761	1,481,417	2,838,377
Hedge of net investment in foreign operations	42,730	-	162,373	222,194	-	-	427,297
Total	61,097	19,307	328,395	325,697	1,049,761	1,481,417	3,265,674

	December 31, 2020
	0-1 year	1-2 years	2-3 years	3-4 years	4-5 years	5-10 years	Total
Hedge of Fair Value	1,977	13,375	94,099	44,843	672,978	1,361,460	2,188,732
Hedge of net investment in foreign operations	-	-	146,547	202,671	-	-	349,218
Total	1,977	13,375	240,646	247,514	672,978	1,361,460	2,537,950

7. Loan operations

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

Loans by type	March 31, 2021			December 31, 2020
Retail
Pledged asset loan		3,472,794			2,698,018
Non-pledged loan		121,739			116,978
Credit card		317,266			51,270
Corporate
Pledged asset loan		1,104,551			946,008
Non-pledged loan		31,046			113,155
Total Loans operations		5,047,396			3,925,429
Expected Credit Loss (Note 10)		(5,983	)		(7,101	)
Total loans operations, net of Expected Loss		5,041,413			3,918,328

19 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

By maturity	March 31,  2021		December 31,  2020
Due in 3 months or less		249,274		160,918
Due after 3 months through 12 months		800,923		580,183
Due after 12 months		3,997,199		3,184,328
Total Loans operations		5,047,396		3,925,429

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

Certain loans operations originated by the collateralized credit have insignificant risk of loss, which results in no loss allowance being recognised in accordance with the Group's expected credit loss model. The carrying amount of such financial assets is R$349,890 at March 31, 2021 (December 31, 2020 – R$297,443).

The Group uses client’s investments as collaterals to reduce potential losses and protect against credit risk exposure by managing these collaterals so that they are always sufficient, legally enforceable (effective) and viable, the Group monitors the value of the collaterals. The Credit Risk Management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy.

The reconciliation of loans operations according with IFRS 9 is demonstrated in Note 10.

8. Prepaid expenses

	March 31, 2021		December 31, 2020
Commissions and premiums paid in advance (a)		1,702,308		1,314,771
Marketing expenses		21,984		28,056
Services paid in advance		8,248		6,245
Other expenses paid in advance		52,158		44,465
Total		1,784,698		1,393,537
Current		114,754		283,183
Non-current		1,669,944		1,110,354

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

20 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

9. Securities trading and intermediation (receivable and payable)

Represented by operations at B3 on behalf of and on account of third parties, with liquidation operating cycle between D+1 and D+3.

	March 31, 2021			December 31, 2020
Cash and settlement records		1,279,944			18,128
Debtors pending settlement		1,705,048			847,620
Other		255,251			241,303
(-) Expected losses on Securities trading and intermediation (a)		(56,113	)		(55,485	)
Total Assets		3,184,130			1,051,566
Cash and settlement records		905,410			59,712
Creditors pending settlement		19,493,120			20,243,409
Total Liabilities		20,398,530			20,303,121

(a) The reconciliation of gross carrying amount and the expected loss according with IFRS 9 were demonstrated in Note 10.

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

It is presented below the reconciliation of gross carrying amount of Financial assets through other comprehensive income and Financial assets measured at amortized cost – that have their ECLs (Expected Credit Losses) measured using the three stage model, the low credit risk simplification and the simplified approach and the ECLS as of March 31, 2021:

						March 31, 2021
	Gross carrying amount		Expected Credit Losses			Carrying amount, net
Financial assets at fair value through other comprehensive income
Low credit risk simplification
Securities (i)		21,639,504		(10,238	)		21,629,266
Financial assets amortized cost
Low credit risk simplification
Securities (i)		1,916,962		(1,146	)		1,915,816
Securities purchased under agreements to resell (i)		6,742,770		(1,311	)		6,741,459
Three stage model
Loans and credit card operations (ii) (iii)		5,047,204		(5,791	)		5,041,413
Simplified approach
Securities trading and intermediation		3,240,243		(56,113	)		3,184,130
Accounts Receivable		374,771		(7,312	)		367,459
Other financial assets		293,729		(4,163	)		289,566
Total losses for on-balance exposures		39,255,183		(86,074	)		39,169,109
Off-balance exposures (iv)		562,017		(192	)		561,825
Total exposures		39,817,200		(86,266	)		39,730,934

(i) Financial assets considered in Stage 1.

(ii) As of March 31, 2021 are presented in Stage 1: Gross amount of R$ 4,243,736 and ECL of R$ 3,284 and Stage 2: Gross amount of R$ 803,468 and ECL of R$ 2,507 respectively.

(iii) As of March 31, 2021 there were transfers between Stage 1 to Stage of R$2,156.

(iv) Include credit cards limits and sureties.

21 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

						December 31, 2020
	Gross carrying amount		Expected Credit Losses			Carrying amount, net
Financial assets at fair value through other comprehensive income
Low credit risk simplification
Securities (i)		19,047,899		(8,855	)		19,039,044
Financial assets amortized cost
Low credit risk simplification
Securities (i)		1,829,791		(1,087	)		1,828,704
Securities purchased under agreements to resell (i)		6,627,779		(370	)		6,627,409
Three stage model
Loans and credit card operations (ii) (iii)		3,925,429		(7,101	)		3,918,328
Simplified approach
Securities trading and intermediation		1,107,051		(55,485	)		1,051,566
Accounts Receivable		512,777		(6,418	)		506,359
Other financial assets		73,466		(3,495	)		69,971
Total losses for on-balance exposures		33,124,192		(82,811	)		33,041,381
Off-balance exposures (credit card limits)		35,810		-			35,810
Total exposures		33,160,002		(82,811	)		33,077,191

(i) Financial assets considered in Stage 1.

(ii) As of December 31, 2020 are presented in Stage 1: Gross amount of R$ 3,599,808 and ECL of R$ 5,648 and Stage 2: Gross amount of R$ 325,621 and ECL of R$ 1,453 respectively.

(iii) As of December 31, 2020, there were no transfers between stages.

11. Investments in associates and joint ventures

Set out below are the associates and joint venture of the Group as of March 31, 2021. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held.

22 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Name of entity	% of ownership interest	Nature of relationship	Measurement method	Equity	Carrying amount
Du Agro Holdings S.A.	49%	Joint Venture (1)	Equity method	2,543	1,246
Wealth High Governance Holding de Participações S.A.	49.99%	Associate (2)	Equity method	144,559	72,135
O Primo Rico Mídia, Educacional e Participações Ltda.	20%	Associate (3)	Equity method	19,481	3,896
Total equity-accounted investments				166,583	77,277

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

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

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

Entity	December 31,  2020	Equity in earnings	Other comprehensive income	Goodwill (i)	March 31, 2021
Du Agro Holdings S.A.	1,983	(329)	-	-	1,654
Wealth High Governance Holding de Participações S.A. (ii)	695,859	(2,475)	-	34,927	728,311
O Primo Rico	2,065	1,720	111	-	3,896
Total	699,907	(1,084)	111	34,927	733,861

(i) Related to the acquisitions of associates and joint ventures. The goodwill recognized includes the value of expected synergies arising from the investments.

(ii) The Goodwill includes an element of contingent consideration. The fair value of the contingent consideration is presented in Note 17. During the measurement period, the preliminary fair value of contingent consideration for the acquisitions was adjusted to R$482,744 (R$447,817 previously disclosed).

12. Property, equipment, goodwill, intangible assets and lease

a) Changes in the period

	Property and equipment			Intangible assets
As of January 1, 2020		142,464			553,452
Additions		20,746			19,914
Write-offs		(324	)		-
Transfers		(2,083	)		2,083
Depreciation / amortization in the period		(6,255	)		(15,648	)
As of March 31, 2020		154,548			559,801
Cost		211,839			672,045
Accumulated depreciation / amortization		(57,291	)		(112,244	)
As of January 1, 2021		204,032			713,563
Additions		23,698			114,298
Business combination		-			27,048
Write-offs		(452	)		(2,576	)
Transfers		5			(5	)
Foreign exchange		1,091			35
Depreciation / amortization in the period		(5,233	)		(54,362	)
As of March 31, 2021		223,141			798,001
Cost		269,430			952,536
Accumulated depreciation / amortization		(46,289	)		(154,535	)

23 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

b) Impairment test for goodwill

Given the interdependency of cash flows and the merger of business practices, all Group’s entities are considered a single cash generating units (“CGU”) and, therefore, goodwill impairment test is performed at the single operating level. Therefore, the carrying amount considered for the impairment test represents the Company’s equity.

The Group performs its annual impairment test in December and when circumstances indicates that the carrying value may be impaired. The Group’s impairment tests are based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the cash generating unit were disclosed in the annual consolidated financial statements for the year ended December 31, 2020. As of March 31, 2021, there were no indicators of a potential impairment of goodwill.

c) Leases

Set out below, are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period.

	Right-of-use assets			Lease liabilities
As of January 1, 2020		227,478			255,406
Additions (i)		19,273			19,361
Depreciation expense		(9,623	)		-
Interest expense		-			6,145
Revaluation		(19,968	)		(19,968	)
Impairment		(3,040	)		-
Effects of exchange rate		22,016			23,561
Payment of lease liabilities		-			(15,558	)
As of March 31, 2020		236,136			268,947
As of January 1, 2021		183,134			208,448
Additions (i)		1,528			1,528
Depreciation expense		(9,912	)		-
Interest expense		-			3,965
Revaluation		21,543			21,275
Effects of exchange rate		8,137			9,206
Payment of lease liabilities		-			(13,258	)
As of March 31, 2021		204,430			231,164
Current		-			53,817
Non-current		204,430			177,347

(i) Additions to right-of-use assets in the period include prepayments to lessors and accrued liabilities.

The Group recognized rent expense from short-term leases and low-value assets of R$902 for the period ended March 31, 2021 (R$1,002 – March 31, 2020) . The total rent expense of R$ 6,070 (R$9,225 – March 31, 2020) include other expenses related to leased offices such as condominium for the period ended March 31, 2021.

24 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

13. Deposits

	March 31, 2021		December 31, 2020
Demands deposits		148,745		44,536
Time deposits		3,854,384		2,977,214
Total		4,003,129		3,021,750
Current		3,545,327		2,524,651
Non-Current		457,802		497,099

Maturity – As of March 31, 2021
Class	Within 30 days		From 31 to 60 days		From 61 to 90 days		From 91 to 180 days		From 181 to 360 days		After 360 days		Total
Demand deposits		148,745		-		-		-		-		-		148,745
Time deposits		21,533		46,170		145,499		1,549,421		1,633,959		457,802		3,854,384
Total		170,278		46,170		145,499		1,549,421		1,633,959		457,802		4,003,129
Maturity – As of December 31, 2020
Class		Within 30 days		From 31 to 60 days		From 61 to 90 days		From 91 to 180 days		From 181 to 360 days		After 360 days		Total
Demand deposits		44,536		-		-		-		-		-		44,536
Time deposits		67,501		1,185		57,781		191,886		2,161,762		497,099		2,977,214
Total		112,037		1,185		57,781		191,886		2,161,762		497,099		3,021,750

14. Structured operations certificates

Structured Operations Certificates (COE) are financial instruments combining fixed and variable income elements, with returns linked to assets indices such as exchange, inflation, shares and international assets. All the financial instruments its originate by Banco XP S.A.

	March 31, 2021		December 31, 2020
Maturity
From 91 to 180 days		1,889		945
From 180 to 360 days		25,345		1,489
After 360 days		2,813,882		2,176,025
Total		2,841,116		2,178,459
Current		27,234		2,434
Non-Current		2,813,882		2,176,025

25 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

15. Borrowings and lease liabilities

	Interest rate %	Maturity		March 31, 2021		December 31, 2020
Bank borrowings – domestic (i)	113% of CDI(*)		March 2021		-		10,523
Related parties					-		10,523
Financial institution (ii)	CDI (*)+ 0.774%		April 2023		275,367		273,564
Third parties					275,367		273,564
Total borrowings					275,367		284,087
Lease liabilities					231,164		208,448
Total borrowings and lease liabilities					506,531		492,535
Current					62,164		51,656
Non-current					444,367		440,879

(*) Brazilian Interbank Offering Rate (CDI)

(i) Loan agreement with Itaú Unibanco that was fully paid on March 8, 2021.

(ii) Loan agreement entered into on March 28, 2018 with the International Finance Corporation (IFC). The principal amount is due on the maturity date and accrued interests payable at every six months.

All the obligations above contain financial covenants, which have certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 31 (ii)).

16. Debentures

On May 15, 2019, the Company issued Debentures, non-convertible into shares, in the amount of R$ 400,000, with the objective of funding the Group’s working capital and treasury investments.

As of March 31, 2021, the total balance is comprised of the following issuances:

Issuance

Quantity Issued (units)

Annual rate

Issuance date

Maturity date

Unit value at issuance

Unit value at period-end

Book  value

2nd

400,000

107.5% CDI

5/15/2019

5/15/2022

R$ 1,000.00

R$1,007.76

336,987

Total

400,000

336,987

	March 31,  2021			December 31, 2020
Principal		400,000			400,000
Interest		26,828			25,091
Payments		(25,124	)		(25,124	)
Repurchase		(64,717	)		(64,717	)
Total		336,987			335,250
Current		205,664			204,731
Non-current		131,323			130,519

26 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

The principal amount and accrued interest payables related to the second issuance are as follow: (i) for the principal amount, 50% is due and was paid on May 15, 2021 and the remaining balance on the maturity date, and (ii) the accrued interest is payable every 12 months from the issuance date.

Debentures are subject to financial covenants, which have certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 31(ii)).

17. Other financial liabilities

	March 31,  2021		December 31, 2020
Structured financing (i)		1,725,220		874,771
Contingent consideration (ii)		521,776		462,000
Foreign exchange portfolio		322,227		70,208
Credit cards operations (iii)		306,720		50,727
Financial bills (iii)		83,009		16,389
Others		15,994		40,079
Total		2,974,946		1,514,174
Current		2,370,161		1,035,785
Non-current		604,785		478,389

(i) Financing for maintenance of financial assets required to perform financial transactions.

(ii) Contractual contingent considerations mostly associated to the investment acquisition of WHG, as described in Note 11. The contingent consideration arrangement requires that the Company pay the selling shareholders an amount principally associated to the performance (net income without dividends). The maturity of the total contingent consideration payment is up to 6 years and the contractual maximum amount payable is R$653,222 (the minimum amount is zero).

(iii) Related to operations of Banco XP S.A.

18. Private pension liabilities

As of March 31, 2021, active plans are principally accumulation of financial resources through products PGBL and VGBL structured in the form of variable contribution, for the purpose of granting participants with returns based on the accumulated capital in the form of monthly withdraws for a certain term or temporary monthly withdraws.

In this respect, such financial products represent investment contracts that have the legal form of private pension plans, but which do not transfer insurance risk to the Group. Therefore, contributions received from participants are accounted for as liabilities and balance consists of the balance of the participant in the linked Specially Constituted Investment Fund (“FIE”) at the reporting date (Note 4 (a)).

27 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Changes in the period:

	Three months period ended March 31,
	2021			2020
As of January 1		13,387,913			3,759,090
Contributions received		619,361			278,357
Transfer with third party plans		3,123,046			1,636,370
Withdraws		(211,872	)		(46,585	)
Gain (loss) from FIE		(21,940	)		(472,144	)
As of March 31		16,896,508			5,155,088

19. Income tax

a) Deferred income tax

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:

	Balance Sheet					Net change in the three months period ended
	March 31, 2021		December 31, 2020			March 31, 2021			March 31, 2020
Share based compensation		186,025		115,976			70,049			11,237
Tax losses carryforwards		143,923		7,382			136,541			22,152
Provisions for IFAs’ commissions		103,871		94,544			9,327			(3,372	)
Profit sharing plan		83,996		164,808			(80,812	)		(69,828	)
Net gain on hedge instruments		37,745		20,987			16,758			59,091
Expected credit losses (ii)		21,634		19,444			2,190			8,029
Revaluations of financial assets at fair value		20,931		(16,780	)		37,711			(51,629	)
Goodwill on business combinations (i)		20,300		22,838			(2,538	)		(7,589	)
Other provisions		34,207		67,495			(33,288	)		14,019
Total		652,632		496,694			155,938			(17,890	)
Deferred tax assets		652,632		505,046
Deferred tax liabilities		-		(8,352	)

(i) For tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity acquired is sold or merged into another entity.

(ii) Include expected credit loss on accounts receivable, loan operations and other financial assets.

The changes in the net deferred tax were recognized as follows:

	Three months period ended March 31,
	2021			2020
As of January 1		496,694			279,401
Foreign exchange variations		987			21,055
Charges to statement of income		(9,571	)		(47,072	)
Tax relating to components of other comprehensive income		164,522			8,128
As of March 31		652,632			261,512

Unrecognized deferred taxes

Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$40,169 (December 31, 2020 - R$ 37,309) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income.

28 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Changes in Social Contribution on Net Income (CSLL)

On March 1, 2021, Provisional Measure No. 1,034 was published increasing the Social Contribution on Net Income (CSLL) rate by 5%, to 25% for Banks and 20% for Broker dealers.

The text of the Provisional Measure proposes the increase in the CSLL rate between July and December 2021. The deadline for converting the Provisional Measure into Law is 60 days, extendable for an additional 60 days from the date of publication of the said rule.

The Group is monitoring the impacts on its business, which are still uncertain and will depend on the approval and conversion of the provisional measure into Law and does not expect significant impacts on the Company's results or financial position.

b) Income tax expense reconciliation

The tax on the Group's pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income tax expense to profit (loss) for the period, calculated by applying the combined Brazilian statutory rates at 34% for the period ended March 31:

	Three months period ended March 31,
	2021			2020
Income before taxes		784,216			516,531
Combined tax rate in Brazil (a)		34	%		34	%
Tax expense at the combined rate		266,634			175,620
Income loss from entities not subject to taxation		2,176			(9,246	)
Effects from entities taxed at different rates		14,068			14,287
Effects from entities taxed at different taxation regimes (b)		(215,804	)		(64,678	)
Intercompany transactions with different taxation		(13,394	)		(9,156	)
Tax incentives		(543	)		605
Non deductible expenses (non-taxable income), net		(5,231	)		6,586
Others		2,162			4,959
Total		50,068			118,977
Effective tax rate		6.38	%		23.03	%
Current		40,498			71,905
Deferred		9,570			47,072
Total expense		50,068			118,977

(a) Considering that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos S.A. which is the holding company of all operating entities of XP Inc. in Brazil.

(b) Certain eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries. Additionally, some entities and investment funds adopt different taxation regimes according to the applicable rules in their jurisdictions

29 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Other comprehensive income

The tax (charge)/credit relating to components of other comprehensive income is as follows:

	Before tax			(Charge) / Credit			After tax
Foreign exchange variation of investees located abroad		56,560			-			56,560
Gains (losses) on net investment hedge		(85,600	)		29,104			(56,496	)
Changes in the fair value of financial assets at fair value		52,467			(20,977	)		31,490
As of March 31, 2020		23,427			8,127			31,554
Foreign exchange variation of investees located abroad		26,312			-			26,312
Gains (losses) on net investment hedge		(31,430	)		10,686			(20,744	)
Changes in the fair value of financial assets at fair value		(376,434	)		153,837			(222,597	)
As of March 31, 2021		(381,552	)		164,523			(217,029	)

20. Equity

(a) Issued capital

The Company has an authorized share capital of US$ 35 thousand, corresponding to 3,500,000,000 authorized shares with a par value of US$ 0,00001 each of which:

· 2,000,000,000 shares are designated as Class A common shares and issued; and

· 1,000,000,000 shares are designated as Class B common shares and issued.

The remaining 500,000,000 authorized but unissued shares are presently undesignated and may be issued by our board of directors as common shares of any class or as shares with preferred, deferred or other special rights or restrictions. Therefore, the Company is authorized to increase capital up to this limit, subject to approval of the Board of Directors.

As of March 31, 2021, the Company have R$23 thousand of issued capital which were represented by 377,764,985 Class A common shares and 181,293,980 Class B common shares.

(b) Additional paid-in capital and capital reserve

Class A and Class B common shares, have the following rights:

· Each holder of a Class B common share is entitled, in respect of such share, to 10 votes per share, whereas the holder of a Class A common share is entitled, in respect of such share, to one vote per share.

· Each holder of Class A common shares and Class B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, except as provided below and as otherwise required by law.

· Class consents from the holders of Class A common shares and Class B common shares, as applicable, shall be required for any modifications to the rights attached to their respective class of shares the rights conferred on holders of Class A common shares shall not be deemed to be varied by the creation or issue of further Class B common shares and vice versa; and

· the rights attaching to the Class A common shares and the Class B common shares shall not be deemed to be varied by the creation or issue of shares with preferred or other rights, including, without limitation, shares with enhanced or weighted voting rights.

30 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

The Articles of Association provide that at any time when there are Class A common shares in issue, Class B common shares may only be issued pursuant to: (a) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire shares or following capitalization of profits; (b) a merger, consolidation, or other business combination involving the issuance of Class B common shares as full or partial consideration; or (c) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional ownership and voting interests in XP Inc.

In December 2020, as a result of the completion of the secondary public offering describe in Note 1.1 a number of 7,258,639 Class A common shares were offered by the controlling shareholder of XP Inc.

The Board of Directors approved on December 2019 a share based long-term incentive plan, which the maximum number of shares should not exceed 5% of the issued and outstanding shares. As of March 31, 2021, the outstanding number of company reserved under the plans were 10,593,118 restricted share units (“RSUs”) (December 31, 2020 – 11,079,736) and 2,819,912 performance restricted units (“PSUs”) (December 31, 2020 – 2,819,812) to be issued at the vesting date.

The additional paid-in capital refers to the difference between the purchase price that the shareholders pay for the shares and their par value. Under Cayman Law, the amount in this type of account may be applied by the Company to pay distributions or dividends to members, pay up unissued shares to be issued as fully paid, for redemptions and repurchases of own shares, for writing off preliminary expenses, recognized expenses, commissions or for other reasons. All distributions are subject to the Cayman Solvency Test which addresses the Company’s ability to pay debts as they fall due in the natural course of business

(c) Dividends distribution

The Group has not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as the Company's results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by XP Inc. board of directors and, where applicable, the shareholders.

For the three months period ended March 31, 2021, XP Inc. has not declared and paid dividends to the shareholders.

Non-controlling shareholders of some XP Inc’s subsidiaries received dividends in the period ended of March 31, 2021.

(d) Other comprehensive income

Other comprehensive income is comprised of changes in the fair value of financial assets at fair value through other comprehensive income, while these financial assets are not realized. Also includes gains (losses) on net investment hedge and foreign exchange variation of investees located abroad.

31 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

21. Related party transactions

The main transactions carried with related parties, conducted on an arm’s length basis, including interest rates, terms and guarantees, and period-end balances arising from such transactions are as follows:

	Assets/(Liabilities)						Revenue/(Expenses)
							Three months period ended March 31,
Relation and transaction	March 31, 2021			December 31, 2020			2021			2020
Shareholders with significant influence (i)		(3,732,842	)		(5,667,588	)		(21,596	)		(26,039	)
Securities		91,833			112,127			628			3,780
Securities purchased under agreements to resell		174,999			-			830			(30,087	)
Accounts receivable		326			11,238			297			797
Securities sold under repurchase agreements		(4,000,000	)		(5,780,430	)		(23,330	)		-
Borrowings		-			(10,523	)		(21	)		(529	)

(i) These transactions are related to Itaú Unibanco who became shareholder of the Company in 2018 and since then a related party.

Transactions with related parties also includes transactions among the Company and its subsidiaries in the course of normal operations include services rendered such as: (i) education, consulting and business advisory; (ii) financial advisory and financial consulting in general; (iii) management of resources and portfolio management; (iv) information technology and data processing; and (v) insurance. The effects of these transactions have been eliminated and do not have effects on the consolidated financial statements.

22. Provisions and contingent liabilities

The Company and its subsidiaries are party to judicial and administrative litigations before various courts and government bodies, arising from the ordinary course of operations, involving tax, civil and labor matters and other issues. Periodically, Management evaluates the tax, civil and labor and risks, based on legal, economic and tax supporting data, in order to classify the risks as probable, possible or remote, in accordance with the chances of them occurring and being settled, taking into consideration, case by case, the analyses prepared by external and internal legal advisors.

	March 31,  2021		December 31, 2020
Tax contingencies		10,129		10,097
Civil contingencies		10,267		4,281
Labor contingencies		5,628		5,333
Total provision		26,024		19,711
Judicial deposits (i)		10,219		10,199

(i) There are circumstances in which the Group is questioning the legitimacy of certain litigations or claims filed against it. As a result, either because of a judicial order or based on the strategy adopted by management, the Group might be required to secure part or the whole amount in question by means of judicial deposits, without this being characterized as the settlement of the liability. These amounts are classified as “Other assets” on the consolidated balance sheets and referred above for information.

32 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Changes in the provision during the period

	Three months period ended March 31,
	2021			2020
As of January 1		19,711			15,193
Monetary correction		4,498			325
Provisions accrued		3,308			159
Provisions reversed		(13	)		(546	)
Payments		(1,480	)		(234	)
As of March 31		26,024			14,897

Nature of claims

a) Tax

As of March 31, the Group has claims classified as probable risk of loss in the amount of R$ 10,129 (December 31, 2020 - R$ 10,097), regarding questioning the definition of the basis for calculating revenues to be paid correctly. This case was pending the specialized technical report after the decision of the court of second instance to grant the right to provide evidence and send the case back to the court of first instance. These processes are supported by judicial deposits in their entirety.

b) Civil

The majority of the civil and administratives claims involve matters that are normal and specific to the business, and refer to demands for indemnity primarily due to: (i) financial losses in the stock market; (ii) portfolio management; and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of March 31, 2021, there were 102 civil and administrative claims for which the likelihood of loss has been classified as probable, in the amount of R$ 10,267 (December 31, 2020 - R$ 4,281). An amount of R$100 was deposited in court as of March 31, 2021 (December 31, 2020 – R$ 100).

c) Labor

Labor claims to which the Group is party primarily concern: (i) the existence (or otherwise) of a working relationship between the Group and IFAs; and (ii) severance payment of former employees. As of March 31, 2021, the Company and its subsidiaries are the defendants in approximately 12 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 5,628 (December 31, 2020 - R$ 5,333).

Contingent liabilities - probability of loss classified as possible

In addition to the provisions constituted, the Company and its subsidiaries have several labor, civil and tax contingencies in progress, in which they are the defendants, and the likelihood of loss, based on the opinions of the internal and external legal advisors, is considered possible, and the contingencies amount to approximately R$ 220,759 (December 31, 2020 - R$ 217,426).

33 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

Below is summarized these possible claims by nature:

	March 31, 2021		December 31, 2020
Tax (i)		71,172		71,027
Civil (ii)		130,778		136,228
Labor		18,809		10,171
Total		220,759		217,426

(i) In December 2019, the Group was notified by tax authorities for a requirement of social security contributions due to employee profit sharing payments related to the calendar year 2015, allegedly in violation of Brazilian Law 10.101/00. Currently, the first appeal was denied by the first administrative level of the Revenue Service Office. The Group will provide the ordinary appeal to Administrative Council of Tax Appeals (“CARF”). There are other favorable CARF precedents on the subject and the Group obtained legal opinions that support the Group’s defense and current practice.

(ii) The Group is defendant in 477 (December 31, 2020 – 586) civil and administrative claims by customers and investment agents, mainly related to portfolio management, risk rating, copyrights and contract termination. The total amount represents the collective maximum value to which the Group is exposed based on the claims’ amounts monetarily restated.

23. Total revenue and income

a) Net revenue from services rendered

Revenue from contracts with customers derives mostly from services rendered and fees charged at daily transactions from customers, therefore mostly recognized at a point in time. Disaggregation of revenue by major service lines are as follows:

	Three months period ended  March 31,
	2021			2020
Major service lines
Brokerage commission		641,324			504,644
Securities placement		469,323			348,174
Management fees		309,897			255,049
Insurance brokerage fee		31,962			29,226
Educational services		18,866			25,700
Other services		118,920			94,085
		1,590,292			1,256,878
(-) Sales taxes and contributions on revenue (i)		(135,636	)		(104,932	)
		1,454,656			1,151,946

(i) Mostly related to taxes on services (ISS) and contributions on revenue (PIS and COFINS).

34 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

b) Net income from financial instruments

	Three months period ended March 31,
	2021			2020
Net Income of financial instruments at fair value through profit or loss		1,161,364			391,689
Net Income of financial instruments measured at amortized cost and at fair value through other comprehensive income		32,288			207,299
(-) Taxes and contributions on financial income		(20,267	)		(16,093	)
		1,173,385			582,895

c) Disaggregation by geographic location

Breakdown of total net revenue and income and selected assets by geographic location:

	Three months period ended March 31,
	2021		2020
Brazil		2,533,157		1,634,093
United States of America		84,915		91,890
Europe		9,969		8,858
Total revenue and income		2,628,041		1,734,841

	March 31, 2021		December 31, 2020
Brazil		3,802,978		3,244,421
United States of America		122,829		129,956
Europe		4,081		4,123
Selected assets (i)		3,929,888		3,378,500

(i) Selected assets are total assets of the Group, less: cash, financial assets and deferred tax assets and are presented by geographic location.

None of the clients represented more than 10% of our revenues for the periods presented.

24. Operating costs

	Three months period ended  March 31,
	2021		2020
Commission costs		676,505		441,951
Operating losses and provisions		7,411		16,341
Other costs		153,519		98,562
Clearing house fees		99,035		63,504
Third parties’ services		30,829		18,148
Other (a)		23,655		16,910
Total		837,435		556,854

(a) Other cost include operational errors and other costs.

35 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

25. Operating expenses by nature

	Three months period ended March 31,
	2021		2020
Selling Expenses (a)		44,418		28,476
Administrative expenses		966,278		578,116
Personnel expenses		693,738		400,980
Compensation		294,620		177,119
Employee profit-sharing and bonus		287,478		103,020
Executives profit-sharing		6,654		72,677
Other personnel expenses (b)		104,986		48,164
Other taxes expenses		11,558		6,843
Depreciation of property and equipment and right-of-use assets		15,146		15,878
Amortization of intangible assets		54,362		15,648
Data processing		98,730		55,947
Technical services		25,271		20,768
Third parties' services		36,343		40,193
Other administrative expenses (c)		31,130		21,859
Total		1,010,696		606,592

(a) Selling expenses refers to advertising and publicity.

(b) Other personnel expenses include benefits, social charges and others.

(c) Other administrative expenses include rent, communication and travel expenses, legal and judicial and other expenses.

26. Other operating income (expenses), net

	Three months period ended March 31,
	2021			2020
Other operating income		28,399			27,666
Revenue from incentives from Tesouro Direto, B3 and Others		18,476			21,672
Other operating income (a)		9,923			5,994
Other operating expenses		(10,038	)		(41,549	)
Legal, administrative proceedings and agreement with customers		(826	)		(10,246	)
Losses on write-off and disposal of assets		(1,673	)		(59	)
Charity		(3,028	)		(16,596	)
Other operating expenses (b)		(4,511	)		(14,648	)
Total		18,361			(13,883	)

(a) Other operating income include recovery of charges and expenses, reversal of operating provisions, interest received on tax and others.

(b) Other operating expenses include fines and penalties, association and regulatory fees and other expenses.

36 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

27. Share-based plan

Outstanding shares granted and valuation inputs

The maximum number of shares available for issuance under the share-based plan shall not exceed 5% of the issued and outstanding shares.

As of March 31, 2021, the outstanding number of Company reserved under the plans were 13,413,030 (December 31, 2020 – 13,899,648) including 10,593,118 RSUs (December 31, 2020 – 11,079,736) and 2,819,912 PSUs (December 31, 2020 – 2,819,912).

Set out below are summaries of XP Inc's RSU and PSU activity for the period ended March 31, 2021.

	RSUs			PSUs		Total
(In thousands, except weighted-average data, and where otherwise stated)	Number of units			Number of units		Number of units
Outstanding, January 1		11,079,736			2,819,912		13,899,648
Forfeited		(486,618	)		-		(486,618	)
Outstanding, March 31		10,593,118			2,819,912		13,413,030

No options were granted, expired or vested during the periods covered by the above table.

For the three months periods ended March 31, 2021 and 2020, total compensation expense of both plans were R$178,246 (2020 – R$ 28,408), including R$37,697 (2020 – R$ 5,187) of tax provisions and does not include any tax benefits on total share-based compensation expense once, as this expense is not deductible for tax purposes. The tax benefits will be perceived when the shares are converted into common shares.

The original weighted-average grant-date fair value of RSU and PSU shares was US$27 and US$ 34.56 respectively. In May 2020, the Company decided to update the measurement condition of its PSU shares, replacing the TSR measurement from US Dollars (US$) to Brazilian Reais (R$), being therefore subject to exchange variation. The weighted-average grant-date fair value of PSU shares for the updated plan was US$52.41. The incremental fair value will be recognised as an expense over the period from the modification date to the end of the vesting period. All other conditions of the PSU shares plan has not been modified.

28. Earnings per share (basic and diluted)

Basic earnings per share is calculated by dividing net income for the period attributed to the owners of the parent by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing net income attributable to owners of XP Inc by the weighted average number of shares outstanding during the year plus the weighted average number of shares that would be issued on conversion of all dilutive potential shares into shares. The shares in the share based plan are the only shares with potential dilutive effect.

The following table presents the calculation of net income applicable to the owners of the parent and basic and diluted EPS for period ended of March 31:

	Three months period ended March 31,
	2021		2020
Net Income attributable to owners of the Parent		733,668		396,860
Basic weighted average number of outstanding shares (i) (iii)		559,059		551,800
Basic earnings per share - R$		1.3123		0.7192
Effect of dilution
Shared-based plan (ii) (iii)		13,676		4,096
Diluted weighted average number of outstanding shares (iii)		572,735		555,896
Diluted earnings per share - R$		1.2810		0.7139

(i) See on Note 20, the number of XP Inc.’s outstanding common shares during the period.

(ii) See on Note 27, the number of shares granted and forfeited during the period regarding XP Inc.’s Share-based plan.

(iii) Thousands of shares.

37 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

29. Determination of fair value

The Group measures financial instruments such as certain financial investments and derivatives at fair value at each balance sheet date.

Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. The financial instruments included in the level 1 consist mainly in public financial instruments and financial instruments negotiated on active markets (i.e. Stock Exchanges).

Level 2: The fair value of financial instruments that are not traded in active markets is determined using valuation techniques, which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value as instrument are directly or indirectly observable, the instrument is included in level 2. The financial instruments classified as level 2 are composed mainly from private financial instruments and financial instruments negotiated in a secondary market.

Level 3: If one or more of the significant inputs is unobservable, the instrument is included in level 3. This is the case for unlisted equity securities.

Specific valuation techniques used to value financial instruments include:

• Financial assets (other than derivatives) - The fair value of securities is determined by reference to their closing prices on the date of presentation of the consolidated financial statements. If there is no market price, fair value is estimated based on the present value of future cash flows discounted using the observable rates and market rates on the date of presentation.

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

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

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

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

38 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

• Other financial assets and liabilities - Fair value, which is determined for disclosure purposes, is calculated based on the present value of the principal and future cash flows, discounted using the observable rates and market rates on the date the financial statements are presented.

• Loans operations – Fair value is determined through the present value of expected future cash flows discounted using the observable rates and market rates on the date the financial statements are presented.

• Contingent consideration: Fair value of the contingent consideration liability related to acquisitions is estimated by applying the income approach and discounting the expected future payments to selling shareholders under the terms of the purchase and sale agreements.

Below are the Group financial assets and liabilities by level within the fair value hierarchy. The Group assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels:

	March 31, 2021
	Level 1	Level 2	Level 3	Fair Value	Book Value
Financial Assets
Financial assets at Fair value through profit or loss
Securities	60,208,275	2,646,763	-	62,855,038	62,855,038
Derivative financial instruments	210,534	13,376,374	-	13,586,908	13,586,908
Fair value through other comprehensive income
Securities	21,629,266	-	-	21,629,266	21,629,266
Evaluated at amortized cost
Securities	1,916,817	-	-	1,916,817	1,915,816
Securities purchased under agreements to resell	-	6,736,411	-	6,736,411	6,741,459
Securities trading and intermediation	-	3,184,130	-	3,184,130	3,184,130
Accounts receivable	-	367,459	-	367,459	367,459
Loan operations	-	5,041,413	-	5,041,413	5,041,413
Other financial assets	-	289,566	-	289,566	289,566
Financial liabilities
Fair value through profit or loss
Securities loaned	2,705,869	-	-	2,705,869	2,705,869
Derivative financial instruments	233	13,563,370	-	13,563,603	13,563,603
Evaluated at amortized cost
Securities sold under repurchase agreements	-	44,317,354	-	44,317,354	44,483,097
Securities trading and intermediation	-	20,398,530	-	20,398,530	20,398,530
Deposits	-	3,707,630	-	3,707,630	4,003,129
Structured operations certificates	-	2,841,116	-	2,841,116	2,841,116
Borrowings and lease liabilities	-	506,453	-	506,453	506,531
Debentures	-	334,795	-	334,795	336,987
Accounts payables	-	803,443	-	803,443	803,443
Other financial liabilities	-	2,453,170	521,776	2,974,946	2,974,946

39 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

	December 31, 2020
	Level 1		Level 2		Level 3		Fair Value		Book Value
Financial Assets
Financial assets at Fair value through profit or loss
Securities		35,549,047		14,040,966		-		49,590,013		49,590,013
Derivative financial instruments		26,535		7,532,898		-		7,559,433		7,559,433
Fair value through other comprehensive income
Securities		19,039,044		-		-		19,039,044		19,039,044
Evaluated at amortized cost
Securities		1,830,031		-		-		1,830,031		1,828,704
Securities purchased under agreements to resell		-		6,627,044		-		6,627,044		6,627,409
Securities trading and intermediation		-		1,051,566		-		1,051,566		1,051,566
Accounts receivable		-		506,359		-		506,359		506,359
Loan operations		-		4,037,954		-		4,037,954		3,918,328
Other financial assets		-		69,971		-		69,971		69,971
Financial liabilities
Fair value through profit or loss
Securities loaned		2,237,442		-		-		2,237,442		2,237,442
Derivative financial instruments		13,221		7,806,143		-		7,819,364		7,819,364
Evaluated at amortized cost
Securities sold under repurchase agreements		-		31,810,893		-		31,810,893		31,839,344
Securities trading and intermediation		-		20,303,121		-		20,303,121		20,303,121
Deposits		-		2,636,085		-		2,636,085		3,021,750
Structured operations certificates		-		2,178,459		-		2,178,459		2,178,459
Borrowings and lease liabilities		-		492,441		-		492,441		492,535
Debentures		-		331,520		-		331,520		335,250
Accounts payables		-		859,550		-		859,550		859,550
Other financial liabilities		-		1,052,174		462,000		1,514,174		1,514,174

As of March 31, 2021 the total contingent consideration liability is reported at fair value and is dependent on the profitability of the acquired associate (WHG) and businesses (Fliper and Antecipa).The total contingent consideration is classified within Level 3 of the fair value hierarchy. The contigent consideration liability represents the maximum amount payable under the purchase and sale agreements discounted using a weighted average rate of 5.19% p.a. Change in the discount rate by 100 bps would increase/decrease the fair value by R$13,933. The change in the fair value in the contingent consideration between the acquisition date and December 31, 2020 was not material.

Transfers into and out of fair value hierarchy levels are analysed at the end of each consolidated financial statements. As of March 31, 2021 the Group had no transfers between Level 2 and Level 3.

30. Management of financial risks and financial instruments

The Group’s activities are exposed to a variety of financial risks: credit risk, liquidity risk, market risk (including currency risk, interest rate risk and price risk), and operational risk. The Group’s overall risk management structure focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to mitigate certain risk exposures. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken.

Management has overall responsibility for establishing and supervising the risk management structure of the Group. Risk Management is under a separated structure from business areas, reporting directly to senior management, to ensure exemption of conflict of interest, and segregation of functions appropriate to good corporate governance and market practices.

40 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

The risk management policies of the Group are established to identify and analyze the risks faced, to set appropriate risk limits and controls, and to monitor risks and adherence to the limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the activities of the Group. The Group, through its training and management standards and procedures, developed a disciplined and constructive control environment within which all its employees are aware of their duties and obligations.

Regarding one specific subsidiary XP CCTVM, the organizational structure is based on the recommendations proposed by the Basel Accord, in which procedures, policies and methodology are formalized consistent with risk tolerance and with the business strategy and the various risks inherent to the operations and/or processes, including market, liquidity, credit and operating risks. The Group seek to follow the same risk management practices as those applying to all companies.

Such risk management processes are also related to going concern management procedures, mainly in terms of formulating impact analyses, business continuity plans, contingency plans, backup plans and crisis management.

The unaudited interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group’s annual financial statements as of December 31, 2020. There have been no changes in the risk management department or in any risk management policies since the year-end.

Sensitivity analysis

According to the market information, the Group performed the sensitivity analysis by market risk factors considered relevant. The largest losses, by risk factor, in each of the scenarios were presented with an impact on the profit or loss, providing a view of the exposure by risk factor of the Group in exceptional scenarios. The following sensitivity analyzes do not consider the functioning dynamics of risk and treasury areas, since once these losses are detected, risk mitigation measures are quickly triggered, minimizing the possibility of significant losses.

								March 31, 2021
Trading portfolio	Exposures	Scenarios
Risk factors	Risk of variation in:	I			II			III
Pre-fixed	Pre-fixed interest rate in Reais		(4,985	)		(54,441	)		(92,397	)
Exchange coupons	Foreign currencies coupon rate		(174	)		(6,874	)		(13,572	)
Foreign currencies	Exchange rates		(1,407	)		93,369			281,357
Price indexes	Inflation coupon rates		(163	)		(7,496	)		(12,359	)
Shares	Shares prices		(489	)		125,400			428,900
Seed Money (i)	Seed Money		(3,796	)		(94,890	)		(189,779	)
			(11,014	)		55,068			402,150

								December 31, 2020
Trading portfolio	Exposures	Scenarios
Risk factors	Risk of variation in:	I			II			III
Pre-fixed	Pre-fixed interest rate in Reais		(191	)		(9,056	)		(33,402	)
Exchange coupons	Foreign currencies coupon rate		(379	)		(5,508	)		(11,184	)
Foreign currencies	Exchange rates		(1,997	)		(169,318	)		(373,807	)
Price indexes	Inflation coupon rates		(311	)		(14,384	)		(28,434	)
Shares	Shares prices		(4,957	)		(107,704	)		(167,737	)
			(7,835	)		(305,970	)		(614,564	)

41 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

(i) Related to seed money strategy, which includes several risk factors that are dicloused in aggregate.

Scenario I: Increase of 1 basis point in the rates in the fixed interest rate yield, exchange coupons, inflation and 1 percentage point in the prices of shares, commodities and currencies;

Scenario II: Project a variation of 25 percent in the rates of the fixed interest yield, exchange coupons, inflation, price of shares, commodities and currencies, both rise and fall, being considered the largest losses resulting by risk factor; and

Scenario III: Project a variation of 50 percent in the rates of the fixed interest yield, exchange coupons, inflation, prices of shares, commodities and currencies, both rise and fall, being considered the largest losses resulting by risk factor.

31. Capital Management

The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and maintain an optimal capital structure to reduce the cost of capital, In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group also monitors capital on the basis of the net debt and the gearing ratio. Net debt is calculated as total debt (including borrowings, lease liabilities, Structured financing and debentures as shown in the consolidated balance sheet) less cash and cash equivalent (including cash, Securities purchased under agreements to resell and certificate deposits as shown in the consolidated statement of cash flows). The gearing ratio corresponds to the net debt expressed as a percentage of total capital.

The net debt and corresponding gearing ratios as of March 31, 2021 and December 31, 2020 were as follows:

	March 31,  2021			December 31, 2020
Borrowings and lease liabilities		506,531			492,535
Debentures		336,987			335,250
Structured financing (Note 17 (i))		1,725,220			874,771
Total debt		2,568,738			1,702,556
Cash		(1,556,782	)		(1,954,788	)
Securities purchased under agreements to resell		(1,191,577	)		(593,673	)
Certificate deposits (Securities)		(91,833	)		(111,933	)
Net debt		(271,454	)		(957,838	)
Total equity		11,549,981			10,894,609
Total capital		11,278,527			9,936,771
Gearing ratio %		(2.41	)%		(9.64	)%

(i) Minimum capital requirements

Although capital is managed considering the consolidated position, certain subsidiaries are subject to minimum capital requirement from local regulators.

The subsidiary XP CCTVM, leader of the Prudential Conglomerate (which includes Banco XP), under BACEN regulation regime, is required to maintain a minimum capital and follow aspects from the Basel Accord.

The subsidiary XP Vida e Previdência operates in Private Pension Business and is oversight by the SUSEP, being required to present Adjusted Shareholders' Equity (PLA) equal to or greater than the Minimum Required Capital (“CMR”), CMR is equivalent to the highest value between base capital and Venture Capital Liquidity (“CR”).

At March 31, 2021 the subsidiaries XP CCTVM and XP Vida e Previdência were in compliance with all capital requirements.

There is no requirement for compliance with a minimum capital for the other Group companies.

(ii) Financial covenants

In relation to the long-term debt contracts, including multilateral instruments, recorded within “Borrowing and lease liabilities” and “Debentures” (Notes 15 and 16), the Group is required to comply with certain performance conditions, such as profitability and efficiency indexes.

At March 31, 2021, the amount of contracts under financial covenants is R$ 612,354 (December 31, 2020 – R$619,337). The Group has complied with these covenants throughout the reporting period.

Eventual failure of the Group to comply with such covenants may be considered as breach of contract and, as a result, considered for early settlement of related obligations.

32. Cash flow information

(i) Debt reconciliation

	Borrowings			Lease liabilities			Debentures		Total
Total debt as of January 1, 2020		382,078			255,406			835,230		1,472,714
Acquisitions / Issuance		-			19,361			-		19,361
Payments		(10,500	)		(15,558	)		-		(26,058	)
Revaluation		-			(19,968	)		-		(19,968	)
Net foreign exchange differences		-			23,561			-		23,561
Interest accrued		4,486			6,145			9,131		19,762
Interest paid		(572	)		-			-		(572	)
Total debt as of March 31, 2020		375,492			268,947			844,361		1,488,800
Total debt as of January 1, 2021		284,087			208,448			335,250		827,785
Acquisitions / Issuance		-			1,528			-		1,528
Payments		(10,500	)		(13,258	)		-		(23,758	)
Revaluation		-			21,275			-		21,275
Net foreign exchange differences		-			9,206			-		9,206
Interest accrued		1,818			3,965			1,737		7,520
Interest paid		(38	)		-			-		(38	)
Total debt as of March 31, 2021		275,367			231,164			336,987		843,518

42 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of March 31, 2021 In thousands of Brazilian Reais, unless otherwise stated  

(ii) Non-cash investing and financing activities

Non-cash investing and financing activities disclosed in other notes are: (i) related to business acquisitions through accounts payables and contingent consideration – see Note 2(e) – R$39,032, and (ii) related to Acquisition of investment in associates through accounts payables and contingent consideration – see note 11 – R$482,744.

33. Subsequent events

(i) Issuance of Debentures

On May 6, 2021, XP Investimentos, issued Debentures, non-convertible into shares, in the amount of R$ 500,000, with the objective of funding the Group’s working capital of the construction of our new headquarters at São Roque, State of São Paulo, or Villa XP. The principal amount is due and paid on the maturity date on April 10, 2036. The accrued interest payable of every month from the issuance date. The annual rate is 5% of the principal amount.

43