Grupo Aval Acciones Y Valores S.A. (ifrs-full:DescriptionOfAccountingPolicyForFinancialAssetsExplanatory)

2.6

Financial assets

Definition

A financial asset is an asset that is:

Cash.

An equity instrument of another entity.

A contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity, or

A contract that will or may be settled in the entity´s own equity instruments and is a non-derivative.

Classification

For accounting purposes, financial assets are classified at initial recognition into four categories:

Fair value through profit or loss:

(i)

Held for trading financial assets acquired to generate short term profits or that is part of a portfolio of financial instruments managed together for that purpose.

(ii)

Some financial assets under concessions contracts are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or recognizing the gains or losses on them on different bases, in accordance with a documented risk management or investment strategy, and information is provided on that basis to Grupo Aval’s key management personnel. This classification adequately reflects the present market expectations over future costs comprising the amount of the concession to be negotiated with the different Colombian Government, upon the termination of the concession or its renewal.

Held-to-maturity Investments: These are debt securities with fixed or determinable payments and a fixed maturity date, which Grupo Aval intends and has the ability to hold to maturity.

Loans and receivables: These are financial assets of fixed or determinable payments that are not quoted in active markets and are not classified as either trading or available-for-sale.

Available-for-sale: These are financial assets that are designated initially as available-for-sale and are those not classified as loans and receivables, or as held-to-maturity investments.

Initial measurement

Grupo Aval initially recognizes loans and receivables, on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognized on the trade date, which is the date on which Grupo Aval becomes a party to the contractual provisions of the instrument.

Financial assets not measured at fair value through profit or loss are initially measured at fair value plus any directly attributable transaction costs.

Subsequent measurement

Subsequent to initial recognition, financial assets are measured as follows:

At fair value through profit or loss: are measured daily at their fair value with changes recognized in profit or loss.

Loans and receivables and held-to-maturity investments: are measured at their amortized cost, calculated based on the effective interest rate method, less any impairment.

The effective interest rate method is a method of calculating the amortized cost of a financial asset and allocating the interest income or expense over the relevant period. The effective interest rate is the rate that discounts future cash payments or receipts (without consideration of future credit losses, over the expected life of the financial instrument) to the net carrying amount of the financial asset at initial recognition. In the process of calculating the effective interest rate, Grupo Aval estimates the cash flows considering the contractual terms including prepayment expectations of the financial instrument for portfolios with high prepayment levels, except for future credit losses and considering the initial fair value plus transaction costs and premiums granted, minus commissions and discounts received which form integral part of the effective rate.

Available-for-sale:

Debt instruments are initially recognized at fair value. The effective interest rate method is used in order to calculate the amortized cost of the instrument to determine interest income that is recognized in profit or loss. Any changes in fair value are recognized in Other Comprehensive Income (OCI). Impairment losses and foreign exchange gains and losses on available-for-sale debt instruments are excluded from the fair value gains and losses recognized in other comprehensive income and are recognized in profit or loss as incurred.

Available-for-sale equity instruments are recognized at fair value, with gains or losses recognized in other comprehensive income. Dividends received from such instruments are recognized in profit or loss when Grupo Aval becomes entitled to receive the payment and impairment losses are recognized in profit or loss.

When available-for-sale financial assets are sold, the accumulated values in other comprehensive income are reclassified to profit or loss.

Reclassifications

Subsequent to their initial classification, financial assets shall not be reclassified to other categories, except for special circumstances. In the event of such circumstances, transfers shall be accounted for as follows:

From the category “fair value through profit or loss” to other categories: assets are recognized at their fair value.

From available-for-sale to held-to-maturity investment: the fair value amount recognized immediately before the reclassification to held-to-maturity category becomes the basis for the amortized cost. In reclassification of an asset with a fixed maturity, any gain or loss previously recognized in other comprehensive income (OCI) and the difference between the newly established amortized cost and the maturity amount are both amortized over the remaining term of the financial asset using the effective interest rate method. However, any gain or loss previously recognized in other comprehensive income is immediately reclassified from equity to profit or loss if the asset is subsequently impaired. For a financial asset with no stated maturity, any gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss when the financial asset is disposed of or impaired.

From held-to-maturity investment to available-for-sale: the difference between the amortized cost and fair value as of the reclassification date is recognized in other comprehensive income.

Fair value of financial assets

Fair value is the price to be received from the sale of an asset or paid for transferring a liability in an orderly transaction between market participants at the measurement date.

Fair value of financial assets is determined as follows:

When available, Grupo Aval measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, then Grupo Aval uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. (See Note 5).

Impairment of financial assets

Grupo Aval assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired depending on its classification.

For financial assets measured at amortized cost, objective evidence includes: significant financial difficulties of the borrower, default or delinquency by a borrower, restructuring of a loan or advance on terms that Grupo Aval would not consider otherwise, indications that a borrower or issuer will enter bankruptcy, disappearance of an active market for a security or observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in Grupo Aval, or economic conditions that correlate with defaults. If there is objective evidence of impairment, impairment is recognized in profit or loss. The amount of the allowance is determined as follows:

Grupo Aval performs an individual assessment of significant financial assets classified as held until maturity and loans and receivables, analyzing the debt profile of each debtor, the guarantees granted and information provided by credit risk agencies. Financial assets are deemed impaired when based on information and current and past events it is likely that Grupo Aval may not collect all the amounts due in the original contract, including interest and fees. If a financial asset has been identified as impaired, the amount of the loss is measured as the difference between the carrying amount of the financial asset and the present value of the future cash flows expected pursuant to the debtor’s conditions, discounted at the original effective interest rate, or the present value of the collateral guarantee covering the asset, less the estimated costs of sale when it is determined that the most important source of collection of the loan is such guarantee.

For those financial assets which are not deemed individually as significant and for individually significant financial asset portfolios which were not determined as impaired after the individual assessment described above, Grupo Aval carries out a collective assessment of impairment. For this purpose, financial assets are grouped together into segments with similar characteristics, using statistical assessment techniques based on an analysis of historical losses to determine an estimated percentage of losses which could have been incurred in such assets as of the date of the reporting, but that have not been identified on an individual basis (See Note 4 for further details regarding the calculation of the collective allowance).

Once an allowance is recorded for a financial asset or a group of similar financial assets, due to an impairment loss, interest income of the loan continues to be recognized using the same effective interest rate applied to the carrying value of the loan.

Impaired financial assets are charged off from the consolidated statement of financial position when the recovery of any recognized amount is considered to be unlikely. Collections charged-off of financial assets are recognized in profit or loss.

For available-for-sale debt securities, Grupo Aval assesses objective evidence for impairment following the same criteria used for loans and receivables, which could include:

significant financial difficulty of the issuer or counterparty; or

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

indication that a borrower or issuer will enter bankruptcy or reorganization; or

the disappearance of an active market for that financial asset because of financial difficulties.

For available-for-sale equity instruments, a significant or prolonged decline in the fair value of the security below its cost is considered to be an objective evidence of impairment.

When there is objective evidence at the measurement date that excesses of carrying value over fair value are due to an impairment that is other than temporary, cumulative gains or losses previously recognized in equity under “Other Comprehensive Income” are reclassified to profit or loss.

In respect of available-for-sale debt instruments, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

For available-for-sale equity instruments impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in equity under “Other Comprehensive Income”.

Once the impairment losses have been estimated, they are charged to profit or loss of the period and credited to an allowance sub-account in the respective financial asset category.

Troubled debt restructured loans

Troubled debt restructured loans are those that have collection problems in which Grupo Aval grants the debtor a modification that it would not otherwise consider. These modifications generally involve interest rate reductions, extension of deadlines for payment or reductions in the balance due to a troubled debt loan.

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognized. If the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized and the new financial asset is recognized at fair value. The impairment loss before an expected restructuring is measured as follows.

If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset, and based on their expected timing and amounts are discounted at the original effective interest rate of the existing financial asset.

If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

Transfers of financial assets

The accounting treatment of transfers of financial assets is conditioned by the transfer of risks and rewards, associated with the asset. Those financial assets are only derecognized when the cash flows generated by the asset have been transferred or when the implicit risks and rewards have been substantially transferred to third parties. In this case, the transferred financial asset is derecognized from the consolidated statement of financial position, simultaneously recognizing any right or obligation retained or recording a profit or loss on the transfer (see note 34).

If the risks and/or rewards associated with the financial asset transferred are substantially retained:

The transferred financial asset is not derecognized and continues to be valued using the same criteria applied before the transfer ;

A financial liability is recognized in an amount that equals the compensation received, which is subsequently valued at amortized cost; and

Both the income associated with the transferred financial assets (but not derecognized) as well as the expenses associated with the new financial liability will continue to be recognized in the consolidated financial statements of Grupo Aval.

Offsetting of financial instruments in the consolidated statement of financial position

Financial assets and liabilities are offset, and the net amount is recognized in the consolidated statement of financial position, when there is a legally enforceable right to offset recognized amounts and management intends to settle them on a net basis or to realize the asset and settle the liability simultaneously.

Repurchase agreements and reverse repurchase agreements

Purchases of financial instruments under a non-optional resale agreement are measured at fair value and recognized as assets in the consolidated statement of financial position under loans and receivables to credit institutions – Reverse repurchase agreements or loans and receivables to customers – Reverse repurchase agreements (see note 34).

The excess of the purchase prices over the resale prices is recognized as interest income over the contractual term.

Sales of financial instruments under a non-optional repurchase agreement are measured at fair value and recognized as liabilities in the consolidated statement of financial position under Deposits from the Central Bank – Repurchase agreements, Deposits from credit institutions – Repurchase agreements or Customer deposits – Repurchase agreements (see note 34).

The excess of the sales prices over the repurchase prices is recognized as interest expense over the contractual term.

Grupo Aval Acciones Y Valores S.A. | CIK:0001504764 |

ifrs-full:DescriptionOfAccountingPolicyForFinancialAssetsExplanatory