BANCOLOMBIA SA | CIK:0001071371 |

 

At initial recognition, the Bank measures financial assets at fair value plus, in the case of a financial asset that is not measured at fair value through profit or loss, the transaction costs directly attributable to the acquisition of the financial assets. Financial assets are then classified considering their subsequent measurement at fair value or amortized cost, respectively, on the basis of the business model for managing the financial assets and the contractual cash flow characteristics of the instrument. In addition, for particular investments in equity instruments, in accordance with IFRS 9 (2013), the Bank made the irrevocable election to present subsequent changes in fair value in other comprehensive income.

 

 

 

These are funds that the Bank lends to other financial institutions or borrows from the Central Bank and other financial institutions. The transactions in an asset position with maturity of up to ninety days are measured at fair value and classified as cash equivalents. The operations in an asset position with maturity greater than ninety days and all the operations in a liability position are measured at amortized cost and presented as “Other assets” or “interbank deposits”, respectively.

 

 

 

Asset position refers to transactions accounted for as collateralized lending in which the Bank purchases securities with an agreement to resell them back to the seller at a stated price plus interest at a specified date, not exceeding one year. Repos in asset position are initially recognized at the consideration paid and they are subsequently measured at amortized cost. The difference between the purchase value and resale price is recorded in net interest income and accrued over the life of the agreement using the effective interest rate method.

 

 

Liability position refers to transactions accounted for as collateralized borrowing in which the Bank sells debt securities with an agreement to repurchase them back from the buyer at a stated price plus interest at a specified date, not exceeding one year.

 

The securities sold under those agreements are not derecognized from the statement of financial position when the Bank substantially retains all of the risks and rewards of the securities. However, the securities are disclosed as pledged assets. The amounts received are initially recognized, at fair value, as a financial liability and subsequently measured at amortized cost. The difference between the sale value and the repurchase value is treated as interest expense and accrued over the life of the agreement by the effective interest rate method.

 

 

 

Debt securities are classified at amortized cost only if the asset is maintained within a business model whose objective is to hold it in order to collect contractual cash flows and the contractual terms of the security give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; Its interest income is recognized using the effective interest rate method.

 

The effective interest method is a method used to calculate the amortized cost of an asset and to assign the income or cost in interest during the relevant period. The effective interest rate is the discount rate at which the present value of future estimated cash payments or those received through the expected life of the financial instrument, or, when appropriate, in a shorter time frame, are equal to the net carrying value at the beginning. To calculate the effective interest rate, the Bank estimates cash flows considering all the contractual terms of the financial instrument, including transaction costs and premiums granted minus commissions and discounts, but without considering future credit losses.

 

 

These are equity securities and debt securities that are not subsequently measured at amortized cost. The difference between the current fair value and the immediately preceding fair value of the respective security is recorded as a higher or lower value of the asset, affecting the statement of income.

 

The Bank has made an irrevocable election to present in other comprehensive income, subsequent changes in fair value of some equity instruments that are not held for trading; dividends from this type of instrument are recognized in net income only when the entity’s right to receive payment of the dividend is established.

 

 

These are financial assets that consist primarily of corporate loans, personal loans (including mainly consumer finance and overdrafts), residential mortgage loans and financial leases. The Bank established that loans, advances to customers and other receivables are held within a business model whose objective is to hold them in order to collect contractual cash flows and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. They are initially measured at fair value, plus transaction costs and origination fees that are directly attributable to the acquisition. They are subsequently measured at amortized cost using the effective interest rate method.

 

At the end of every period, the Bank assesses whether there is objective evidence that a financial asset or group of financial assets measured at amortized cost are impaired; impairment is recognized as a result of one or more events that occurred, after the initial recognition of the financial asset, where the loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

 

Indicators that the financial asset is impaired include historical performance data, particular characteristics of the borrower, fair value of collateral, the borrower’s debt to other entities, macroeconomic factors and financial information, a significant financial difficulty of the borrower, whether the borrower will likely to declare bankruptcy or financial restructuring, or any breach of contract, such as a default or delinquency in interest or principal payments.

 

The Bank individually reviews impaired loans superior to five billion Colombian pesos (USD 1.5 million for foreign subsidiaries), analyzing the debt profile of each debtor, the guarantees granted and information on the credit behavior in the sector. Financial assets are considered significant when, based on current or past information and events, it is likely that the entity will not be able to recover the amounts described in the original contract, including the interests and commissions agreed upon in the contract. When a significant financial asset has been identified as impaired, the amount of the loss is measured as the balance due minus the current net value of the estimated future cash flows. To estimate these flows, basic projected hypotheses are used based on qualitative analysis and backed up by information obtained from the Special Client Administration Committee as well as approvals made with Commerce Managers. When it is determined that a fundamental source of credit collection is a guarantee, the amount of loss is estimated as the balance due minus the fair value of the guarantee minus the estimated selling costs.

 

For credits that are not considered individually significant and for the portfolio of individually significant credits that are not considered impaired, a collective evaluation is carried out. Portfolios of financial assets with similar characteristics are grouped, using statistical techniques based on the analysis of historical losses to determine an estimated percentage of losses that have been incurred by those assets on the balance date. The percentages of historical losses used in the process are updated to incorporate the most recent data of the current economic conditions, the performance trends by industry or region, or the concentration of obligations in each portfolio of financial assets by segment, and any other relevant information that may affect the provision of loss estimate for financial assets.

 

The financial assets are removed from the balance from the provision when they are considered non-recoverable. The recoveries of financial assets previously discounted are recorded as an increase in the provision.

 

Quantification of the losses incurred takes into account three fundamental factors: exposure at default, the probability of default and the loss caused by default:

 

 

 

A hybrid model is used to estimate the probabilities of defaulting based on a through-the-cycle defaulting probability model, and then these probabilities are changed using the following parameters:

 

 

 

In the specific case of doubtful assets, the allocated probability of default is 100%. The classification of an asset as “doubtful” is made because of a non-payment of 90 days or more (180 days for the Banistmo mortgage portfolio), as well as in cases that there is no non-payment, but where there are doubts about the solvency of the debtor.

 

 

Once a debt or collection of debts is classed as impaired, the interest revenues are still accounted for using the applicable rate of interest for the discount for future cashflows in order to measure loss due to depreciation.

  

 

Loan restructuring is an alternative to achieve a proper collection management. It must be understood as a resource of atypical use to standardize the behavior of a portfolio, using a new contractual agreement between the parties. Such agreement aims to modify the originally established conditions in order to allow the proper attention to the loan in the light of the real or potential impairment in the debtor’s payment ability. The loan restructuring is implemented through amendments to the contractual terms, rates and payment terms. In any case, at the restructuring time, all the collateral must be preserved and if possible, the Bank’s position should be improved by obtaining new guarantees or guarantors that support the obligations.

 

In the restructuring, real and personal property can be received as foreclosed assets to cancel partially the obligations. Likewise, the Bank can grant discounts on interest or other related receivables. If necessary, the discount can be applied to loan principal, either because the guarantees or payment sources do not have coverage on total loan or because the agreement does not permit full recovery of the total balance. The terms are reviewed in each negotiation to determine if the client should continue in the portfolio and if so, the terms to restore the business relationship after a certain time.

 

If as a result of restructuring, the financial asset is derecognized, costs and fees are recognized in net income, as well the difference between the value in the balance sheet and the consideration received. In the case in which the modified financial asset is not derecognized, the costs and fees are deferred and will be amortized by the remaining life of the modified asset.

 

Before the commencement of the restructuring process, the Bank should perform an analysis of the debtor’s projected cash flow in order to evaluate the capacity to pay the proposed plan. Restructuring loans are classified as follows:

 

 

These are restructuring based on agreement with the client resulting from, after negotiations between the two parties, without any legal special scheme adopted by the debtor.

 

 

These are restructuring that result from legal bankruptcy and insolvency procedures or corporate restructuring agreements acquired by the client.

 

 

The assets taken for lease under financial leases are recognized at the lower of the fair value of the leased assets and the present value of the minimum lease payments. Such assets are recognized as premises and equipment in the statement of financial position.

 

The assets leased under financial leases are depreciated throughout their life using the straight line method. However, if there is no reasonable certainty that the Bank will obtain the property at the end of the lease term, the asset is depreciated throughout its life or the lease term, whichever is shorter. The lease payments are divided between interest and debt reduction. The finance charges are recorded in the consolidated statement of income.

 

The payments for operating leases are recognized on a straight line basis over the term of the lease as expenses in the statement of income during the lease term. Lease incentives received are recognized as an integral part of the total lease expenses over the term of the lease.

  

 

The lease agreements entered into by the Bank are classified at the initial recognition as financial or operating leases.

 

The Bank classifies a lease as a financial lease when according to the agreement substantially, all the inherent risks and benefits are transferred to the lessee and are recognized as the sum of the minimum payments to be received and any unguaranteed residual value discounted at the lease interest rate is recorded as part of the loan. Otherwise, the lease is classified as an operating lease, which is classified in the statement of financial position as premises and equipment. The initial direct costs incurred in the negotiation of an operating lease are added to the carrying value of the leased assets and recorded as a cost during the lease term on the same basis as the lease income. The contingent rents of the leases are recorded as income in the period in which they are obtained.

 

Among the risks transferred are the possibilities of losses through underutilization, technological obsolescence, decrease in profitability or changes in the economic environment. Among the benefits derived from the use are the expectation of profit over the economic life of the asset and eventually, the appreciation of its residual value or realization of the asset.

 

The following are indications of transfer of risk and rewards of ownership to the lessee:

 

 

If during the lease term, the lessor and the lessee decide to modify the initial conditions, and the agreed changes result in a different classification, then the modified agreement will be considered a new lease with new clauses that will lead to the classification of a financial or operating lease, as appropriate.