| 2.29 | New and Amended IFRS |
Below is a list of the new and amended standards that have been issued by the IASB and are effective for annual periods starting on or after January 1, 2018. Grupo Aval has not early adopted the new standards in preparing these consolidated financial statements. Management is in the process of assessing the potential impact of these pronouncements on Grupo Aval consolidated financial statements as further explained below:
Forthcoming requirements
IFRS 9 Financial Instruments and associated amendments to various other standards
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. It replaces IAS 39 Financial Instruments: Recognition and Measurement.
In October 2017, the IASB issued Prepayment Features with Negative Compensation (Amendments to IFRS 9). The amendments are effective for annual periods beginning on or after January 1, 2019, with early adoption permitted.
Grupo Aval will apply IFRS 9 as issued in July 2014 initially on January 1, 2018 without early adopting the amendments to IFRS 9. Based on assessments performed to date, the total estimated effect (net of tax) due to the adoption of this standard on the opening balance of Grupo Aval’s total equity at January 1, 2018 is a reduction of approximately of Ps. 806,679, comprised of:
| – | a reduction of approximately Ps. 1,212,968 related to new expected loss impairment requirements (see (ii)); |
| – | an increase of approximately Ps. 603 related to classification and measurement requirements, other than impairment (see (i) and (iii)); |
| – | an increase of approximately Ps. 65,123 related to IFRS 9 removes the cost exception for unquoted equity investments, requiring all equity investments to be measured at fair value (see (i); and |
| – | an increase of approximately Ps. 340,563 related to deferred tax effect. |
The above assessment is preliminary because not all transition work has been finalized. The estimated impact of adopting IFRS 9 on January 1, 2018 may change a consequence of:
| – | IFRS 9 will require Grupo Aval to revise its accounting processes and internal controls and these changes ongoing; |
| – | although parallel exercises were carried out in the second half of 2017, the new systems and associated controls in place have not been operational for a more extended period; |
| – | Grupo Aval has not finalized the testing and assessment of controls over its new IT systems and changes to its governance framework; |
| – | Grupo Aval is refining and finalizing its models for Expected Credit Loss (ECL) calculations; and |
| – | the new accounting policies, assumptions, judgments and estimation techniques employed are subject to change until Grupo Aval finalizes its first financial statements that will include the date of initial application. |
| i. | Classification and Measurement of Financial Assets |
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.
IFRS 9 includes three principal classification categories for financial assets: measured at amortized cost, measured at fair value through other comprehensive income (FVOCI) and measured at fair value through profit or loss (FVTPL). It eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:
| – | it is held within a business model which objective is to hold assets to collect contractual cash flows; and |
| – | its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. |
A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL:
| – | it is held within a business model which objective is achieved by both collecting contractual cash flows and selling financial assets; and |
| – | its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
On initial recognition of an equity investment that is not held for trading, Grupo Aval may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by- investment basis.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition Grupo Aval may irrevocably designate a financial asset that otherwise would meet the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
A financial asset is classified into one of these categories on initial recognition. See (vii) for the transition requirements relating to classification of financial assets.
Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification.
Business Model Assessment
Grupo Aval assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects business is managed and information is provided to management. The information includes:
| – | the stated policies and objectives for the portfolio and the operation of those policies in practice, including whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of assets; |
| – | how the performance of the portfolio is evaluated and reported to Grupo Aval’s management; |
| – | the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; |
| – | how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and |
| – | the frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how Grupo Aval’s stated objective for managing the financial assets is achieved and how cash flows are realized. |
Financial assets that are held for trading and those that are managed and whose performance is evaluated on a fair value basis will be measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
Assessment Whether Contractual Cash Flows Are Solely Payments of Principal and Interest (SPPI)
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, Grupo Aval will consider the contractual terms of the instrument. This will include assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, Grupo Aval will consider:
| – | contingent events that would change the amount and timing of cash flows; |
| – | prepayment and extension terms; |
| – | terms that limit Grupo Aval’s claim to cash flows from specified assets – e.g. non-recourse asset arrangements; and |
| – | features that modify consideration for the time value of money – e.g. periodic reset of interest rates. |
Interest rates on certain corporate and retail loans made by Grupo Aval are based on standard variable rates (SVRs) that are set used generally in each country where the group operates and also include a discretional spread. In Colombian, the SVR is based on the interest rate named DTF and IBR which are calculated weekly by the Central Bank with base in information collected by all the Colombian financial system, plus a discretionary spread, and in the case of loans in foreign currency the group uses libor interest rates plus a discretionary spread. In these cases, Grupo Aval will assess whether the discretionary feature is consistent with the SPPI criterion by considering a number of factors, including whether:
| – | The borrowers are able to prepay the loans without significant penalties. |
| – | the market competition ensures that interest rates are consistent between banks; and |
| – | any regulatory or customer protection framework is in place that requires banks to treat customers fairly. |
A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for early termination of the contract.
In addition, a prepayment feature is treated as consistent with this criterion if a financial asset is acquired or originated at a premium or discount to its contractual par amount, the prepayment amount substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable compensation for early termination), and the fair value of the prepayment feature is insignificant on initial recognition.
Preliminary Impact Assessment
The standard will affect the classification and measurement of financial assets held as at January 1, 2018 as follows.
| · | Trading assets and derivative assets held for risk management, which are classified as held-for-trading and measured at FVTPL under IAS 39, will also be measured at FVTPL under IFRS 9. |
| · | Debt investment securities that are classified as available-for-sale under IAS 39 will also be measured at FVOCI under IFRS 9. |
| · | The majority of the equity investment securities that are classified as available-for-sale under IAS 39 will be measured at FVOCI under IFRS 9 on January 1, 2018. IFRS 9 removes the cost exception for unquoted equity investments, requiring all equity investments (and derivatives on them) to be measured at fair value, the impact of these changes (before tax) is an increase in Grupo Aval’s equity of approximately Ps. 65,123, a reduction of approximately Ps. 13,623 related to deferred tax effect, and the impact of these changes (after tax) is an increase in Grupo Aval’s equity of approximately Ps. 51,500. |
| · | Loans and advances to banks and to customers that are classified as loans and receivables and measured at amortized cost under IAS 39 will generally continue to be measured at amortized cost under IFRS 9. Grupo Aval has estimated that, on the adoption of IFRS 9 at January 1, 2018, few loans are classified FVTPL under IFRS 9 the impact of these changes (before tax) is an increase in Grupo Aval’s equity of approximately Ps. 603, reduction of approximately Ps. 181 related to deferred tax effect, and the impact of these changes (after tax) is an increase in Grupo Aval’s equity of approximately Ps. 422. |
| ii. | Impairment – Financial Assets, Loan Commitments and Financial Guarantee Contracts |
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model “ECL”. This will require considerable judgement over how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.
The new impairment model applies to the following financial instruments that are not measured at FVTPL:
| – | financial assets that are debt instruments; |
| – | loan commitments and financial guarantee contracts issued (previously, impairment was measured under IAS 37 Provisions, Contingent Liabilities and Contingent Assets). |
Under IFRS 9, no impairment loss is recognized on equity investments.
IFRS 9 requires a loss allowance to be recognized at an amount equal to either 12-month ECLs or lifetime ECLs. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument, whereas 12-month ECLs are the portion of ECLs that result from default events that are expected within the 12 months after the reporting date.
Grupo Aval will recognize a loss allowances at an amount equal to lifetime ECLs, except in the following cases, for which the amount recognized will be a 12-month ECLs:
| – | debt investment securities that are determined to have low credit risk at the reporting date. Grupo Aval considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment-grade’; and |
| – | other financial instruments (other than lease receivables) for which credit risk has not increased significantly since initial recognition. |
Loss allowances for lease receivables will always be measured at an amount equal to lifetime ECLs.
The impairment requirements of IFRS 9 are complex and require management judgements, estimates and assumptions, particularly in the following areas, which are discussed in detail below:
| – | assessing whether the credit risk of an instrument has increased significantly since initial recognition; and |
| – | incorporating forward-looking information into the measurement of ECLs. |
Measurement of ECLs
ECLs are probability-weighted of credit losses and will be measured as follows:
| – | financial assets that are not credit-impaired at the reporting date: the present value of all cash shortfalls – i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that Grupo Aval expects to receive, considering a 12-month ECL for financial assets which credit risk has not significantly increased since initial recognition, and life-time ECL for financial assets with significant increase in credit risk since initial recognition; |
| – | financial assets that are credit-impaired at the reporting date: the difference between the gross carrying amount and the present value of estimated future cash flows; |
| – | undrawn loan commitments: the present value of the difference between the contractual cash flows that are due to Grupo Aval if the commitment is drawn down and the cash flows that Grupo Aval expects to receive; and |
| – | financial guarantee contracts: the present value of the expected payments to reimburse the holder less any amounts that Grupo Aval expects to recover. |
Financial assets that are credit-impaired are defined by IFRS 9 in a similar way to financial assets that are impaired under IAS 39 (see note 2.6 g).
Definition of Default
Under IFRS 9, Grupo Aval will consider a financial asset to be in default when:
| – | the borrower is unlikely to pay its credit obligations to Grupo Aval in full, without recourse by Grupo Aval to actions such as realizing collateral (if any is held); or |
| – | the borrower is more than 90 days past due on any material credit obligation to Grupo Aval. Overdrafts are considered past due once the customer has breached an advised limit or been advised of a limit that is smaller than the current amount outstanding. |
In assessing whether a borrower is in default, Grupo Aval will consider indicators that are:
| – | qualitative: e.g. breaches of covenant; |
| – | quantitative: e.g. overdue status and non-payment of another obligation of the same issuer to Grupo Aval; and |
| – | based on data developed internally and obtained from external sources. |
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.
Significant Increase in Credit Risk
Under IFRS 9, when determining whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, Grupo Aval will consider reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on Grupo Aval’s historical experience, expert credit assessment and forward-looking information.
Grupo Aval will primarily identify whether a significant increase in credit risk has occurred for an exposure by comparing:
| – | the remaining lifetime probability of default (PD) as at the reporting date; with |
| – | the remaining lifetime PD for this point in time that was estimated on initial recognition of the exposure. |
Assessing whether credit risk has increased significantly since initial recognition of a financial instrument requires identifying the date of initial recognition of the instrument. For certain revolving facilities (e.g. credit cards and overdrafts), the date when the facility was first entered into could be a long time ago. Modifying the contractual terms of a financial instrument may also affect this assessment.
Credit Risk Grades
Grupo Aval will allocate each exposure to a credit risk grade based on a variety of data that is intended to be predictive of the risk of default and applying experienced credit judgement. Grupo Aval will use these grades in identifying significant increases in credit risk under IFRS 9. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default. These factors may vary depending on the nature of the exposure and the type of borrower.
Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates – e.g. the difference in the risk of default between credit risk grades A and B is smaller than the difference between credit risk grades B and C.
Each exposure will be allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures will be subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade.
Generating the Term Structure of PD
Credit risk grades will be a primary input into the determination of the term structure of PD for exposures. Grupo Aval will collect performance and default information about its credit risk exposures analyzed by jurisdiction, by type of product and borrower and by credit risk grading. For some portfolios, information purchased from external credit reference agencies may also be used.
Grupo Aval will employ statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.
This analysis will include the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors, as well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. For most exposures, key macro- economic indicators are likely to include GDP growth, benchmark interest rates and unemployment.
For exposures to specific industries and/or regions, the analysis may extend to relevant commodity and/ or real estate prices.
Grupo Aval’s approach to incorporating forward-looking information into this assessment is discussed below.
Grupo Aval has established a framework that incorporates both quantitative and qualitative information to determine whether the credit risk on a particular financial instrument has increased significantly since initial recognition. The framework aligns with Grupo Aval’s internal credit risk management process.
The criteria for determining whether credit risk has increased significantly will vary by portfolio and will include a backstop based on delinquency.
Grupo Aval will deem the credit risk of a particular exposure to have increased significantly since initial recognition if, based on Grupo Aval’s quantitative modelling, the remaining lifetime PD is determined to have increased significantly since initial recognition.
In certain instances, using its expert credit judgement and, where possible, relevant historical experience, Grupo Aval may determine that an exposure has undergone a significant increase in credit risk if particular qualitative factors indicate so and those indicators may not be fully captured by its quantitative analysis on a timely basis. As a backstop, and as required by IFRS 9, Grupo Aval will presumptively consider that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due.
Grupo Aval will monitor the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that:
| – | the criteria are useful in identifying significant increases in credit risk before an exposure is in default; |
| – | the criteria do not align with the point in time when an asset becomes 30 days past due; |
| – | the average time between the identification of a significant increase in credit risk and default appears reasonable; |
| – | exposures are not generally transferred directly from 12-month ECL measurement to credit-impaired; and |
| – | there is no unwarranted volatility in loss allowance from transfers between 12-month ECL and lifetime ECL measurements. |
Modified Financial Assets
The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognized and the renegotiated loan recognized as a new loan at fair value.
Under IFRS 9, when the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of:
| – | the remaining lifetime PD at the reporting date based on the modified terms; with |
| – | the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms. |
Grupo Aval renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’) to maximize collection opportunities and minimize the risk of default. Under Grupo Aval’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.
The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy. Grupo Aval Credit Committee regularly reviews reports on forbearance activities.
For financial assets modified as part of Grupo Aval’s forbearance policy, the estimate of PD will reflect whether the modification has improved or restored Grupo Aval’s ability to collect interest and principal and Grupo Aval’s previous experience of similar forbearance action. As part of this process, Grupo Aval will evaluate the borrower’s payment performance against the modified contractual terms and consider various behavioral indicators.
Generally, forbearance is a qualitative indicator of default and credit impairment and expectations of forbearance are relevant to assessing whether there is a significant increase in credit risk.
Following forbearance, a customer needs to demonstrate consistently good payment behavior over a period of time before the exposure is no longer considered to be in default/credit-impaired or the PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECLs.
Inputs into Measurement of ECLs
The key inputs into the measurement of ECLs are likely to be the term structures of the following variables:
| – | probability of default (PD); |
| – | loss given default (LGD); and |
| – | exposure at default (EAD). |
These parameters will be derived from internally developed statistical models and other historical data that leverage regulatory models. They will be adjusted to reflect forward-looking information as described below.
PD estimates are estimates at a certain date, which will be calculated based on statistical rating models and assessed using rating tools tailored to the various categories of counterparties and exposures.
These statistical models will be based on internally compiled data comprising both quantitative and qualitative factors. Where it is available, market data may also be used to derive the PD for large corporate counterparties. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD. PDs will be estimated considering the contractual maturities of exposures and estimated prepayment rates.
LGD is the magnitude of the likely loss if there is a default. Grupo Aval will estimate LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models will consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For loans secured by retail property, loan-to-value (LTV) ratios will be a key parameter in determining LGD. LGD estimates will be calibrated for different economic scenarios and, for real estate lending, to reflect possible changes in property prices. They will be calculated on a discounted cash flow basis using the effective interest rate as the discounting factor.
EAD represents the expected exposure in the event of a default. Grupo Aval will derive the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract, including amortization, and prepayments. The EAD of a financial asset will be the gross carrying amount at default. For lending commitments and financial guarantees, the EAD will consider the amount drawn, as well as potential future amounts that may be drawn or repaid under the contract, which will be estimated based on historical observations and forward-looking forecasts. For some financial assets, Grupo Aval will determine EAD by modelling the range of possible exposure outcomes at various points in time using scenario and statistical techniques.
As described above, and subject to using a maximum of a 12-month PD for financial assets for which credit risk has not significantly increased, Grupo Aval will measure ECLs considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for risk management purposes, Grupo Aval considers a longer period. The maximum contractual period extends to the date at which Grupo Aval has the right to require repayment of an advance or terminate a loan commitment or guarantee.
For retail overdrafts and credit card facilities and certain corporate revolving facilities that include both a loan and an undrawn commitment component, Grupo Aval will measure ECLs over a period longer than the maximum contractual period if Grupo Aval’s contractual ability to demand repayment and cancel the undrawn commitment does not limit Grupo Aval’s exposure to credit losses to the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. Grupo Aval can cancel them with immediate effect but this contractual right is not enforced in the normal day-to-day management, but only when Grupo Aval becomes aware of an increase in credit risk at the facility level. This longer period will be estimated taking into account the credit risk management actions that Grupo Aval expects to take and that serve to mitigate ECLs. These include a reduction in limits and cancellation of the facility.
Where modelling of a parameter is carried out on a collective basis, the financial instruments will be grouped on the basis of shared risk characteristics that include:
| – | LTV ratio for retail mortgages; |
| – | date of initial recognition; |
| – | remaining term to maturity; |
| – | geographic location of the borrower. |
The groupings will be subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous.
Forward-looking Information
Under IFRS 9, Grupo Aval will incorporate forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since initial recognition and its measurement of ECLs. Grupo Aval will formulate a ‘base case’ view of the future direction of relevant economic variables and a representative range of other possible forecast scenarios based on forecasts provided by economic experts, considering a variety of external actual and forecast information. This process will involve developing two or more additional economic scenarios and considering the relative probabilities of each outcome.
The base case will represent a most-likely outcome and be aligned with information used by Grupo Aval for other purposes, such as strategic planning and budgeting. The other scenarios will represent more optimistic and more pessimistic outcomes.
Grupo Aval has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. These key drivers include interest rates, unemployment rates and GDP forecasts.
Impact Assessment
The most significant impact on Grupo Aval’s financial statements from the implementation of IFRS 9 is expected to result from the new impairment requirements. Impairment losses will increase and become more volatile for financial instruments in the scope of the IFRS 9 impairment model.
Grupo Aval has estimated that, on the adoption of IFRS 9 at January 1, 2018, the impact of the increase in loss allowances (before tax) will be approximately Ps. 1,212,968. Taxes impact will be approximately Ps. 354,367. Loss allowances on unsecured products with longer expected lives such as overdrafts and credit cards will be most affected by the new impairment requirements.
| iii. | Classification – Financial Liabilities |
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities.
However, under IAS 39 all fair value changes of financial liabilities designated as at FVTPL are recognized in profit or loss, whereas under IFRS 9 these fair value changes will generally be presented as follows:
| – | the amount of the change in the fair value that is attributable to changes in the credit risk of the liability will be presented in OCI; and |
| – | the remaining amount of the change in the fair value will be presented in profit or loss. |
Grupo Aval does not have any impact over financial liabilities as no financial liabilities designated as at FVTPL are recorded under IAS 39 neither IFRS 9.
| iv. | Derecognition and contract modification |
IFRS 9 incorporates the requirements of IAS 39 for the derecognition of financial assets and financial liabilities without substantive amendments.
However, it contains specific guidance for the accounting when the modification of a financial instrument not measured at FVTPL does not result in derecognition. Under IFRS 9, the Group will recalculate the gross carrying amount of the financial asset (or the amortized cost of the financial liability) by discounting the modified contractual cash flows at the original effective interest rate and recognize any resulting adjustment as a modification gain or loss in profit or loss. Under IAS 39, the Group does not recognize any gain or loss in profit or loss on modifications of financial liabilities and nondistressed financial assets that do not lead to their derecognition.
The Group expects an immaterial impact from adopting these new requirements.
When initially applying IFRS 9, Grupo Aval may choose as its accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS 9. Grupo Aval has elected to continue to apply IAS 39 until macro-hedging project has finalized.
IFRS 9 will require extensive new disclosures, in particular about hedge accounting, credit risk and ECLs.
Changes in accounting policies resulting from the adoption of IFRS 9 are generally applied retrospectively, except as described below.
| – | Grupo Aval will take advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. |
| – | Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 will generally be recognized in retained earnings and reserves as at January 1, 2018. The following assessments have to be made on the basis of the facts and circumstances that exist at the date of initial application: |
| - | The determination of the business model within which a financial asset is held. |
| - | The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL. |
| - | The designation of certain investments in equity instruments not held for trading as at FVOCI. |
If a debt investment security has low credit risk at January 1, 2018, then Grupo Aval will determine that the credit risk on the asset has not increased significantly since initial recognition.
IFRS 15 Revenue from contracts with customers
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, which supersedes various previous standards, but in particular IAS 11, “Construction Contracts” and IAS 18, “Revenue from Ordinary Activities”. This new standard, with a mandatory application since January 1, 2018, requires that revenues of the entities from ordinary activities with customers, different to those resulting from financial instruments and financial leasing contracts, to be recognized using specific rules. IFRS 15, stablishes that revenues should be recognized in an amount that reflects the transfer of promised goods or services to customers in exchange for an consideration the entity expects to be entitled in exchange for those good an services. Under this new standard, Grupo Aval recognizes revenue from ordinary activities, different to financial revenues, and revenues from leasing contracts, such as: commissions for banking services, sale of goods or services for different concepts, and revenue from construction contracts by applying the following steps:
| 1. | Identify the contract with the customers. |
| 2. | Identify the performance obligations in the contract. |
| 3. | Determine the transaction price. |
| 4. | Allocate the transaction price to the performance obligations in the contract. |
| 5. | Recognize revenue when the entity satisfies a performance obligation. |
The main changes applicable to Grupo Aval in the determination of revenues, different to financial revenue and revenue from financial lease contracts, relate to the re-valuation made in order to allocate the transaction price in the customer contract based on the fair value of the different services render in the contract, and now to use the expected costs method plus a margin, instead of using the method of residual amounts, particularly in the allocation of revenues from construction activities under concession contracts with the Colombian Government .
Grupo Aval plans to adopt the standard using a prospective approach, as it is permitted without re-stating previous periods, which involves the recognition of the accumulated impact of the IFRS 15 adoption on the retained earnings on January 1, 2018
The preliminary high level assessment performed by Grupo Aval management in this matter, indicates that the implementation of IFRS 15 will not have a material impact on its consolidated financial statements.
IFRS 16 Leases
IFRS 16 was issued by the IASB in 2016 with an effective application date for entities since January 1, 2019, with early adoption permitted.
IFRS 16 replaces the current standards for accounting of leases, including IAS 17, “Leases”, IFRIC 4, “Determining whether an Arrangement Contains a Lease”, SIC 15, “Operating Leases – Incentives”, and SIC 27, “Evaluating the Substance of Transactions in the Legal Form of a Lease”.
IFRS 16 introduces one single model for the accounting of lease contracts in the statement of financial position of lessees. The lessee will recognize an asset that represents his right to use the leased asset, and a lease liability that represents the obligation to make leasing payments. There are optional exceptions for short-term leases or lease of low value assets. The accounting treatment of lease contracts for lessors in the new standards is still very similar to current accounting standards, in which the lessor classifies lease contracts as financial or operating leases.
Grupo Aval management has started a potential assessment of the impact on its consolidated financial statements of this standard. Until now, the most significant identified impact is the recognition of a new asset and a liability in its operating lease contracts, particularly for properties used in the normal course of operation of its branches and agencies. Additionally, the nature of the expenses corresponding to operating lease contracts from the perspective of the lessee will change with IFRS 16, from expenses for leases to charges by depreciation of the recognized assets and the financial expenses in the lease liabilities. At this time, Grupo Aval management is moving forward in the assessment and determination of impacts resulting from the adoption of this new standard on Grupo Aval financial statements.
New or Amended Standards
| New or Amended
Standard | | Title of the Standard | | Effective for
Annual Periods
Beginning on or After |
| Amendments to IAS 12 | | Recognition of Deferred Tax Assets for Unrealized Losses | | January 1, 2017 |
| Amendments to IAS 7 | | Disclosure Initiative | | January 1, 2017 |
| Amendments to IFRS 12 | | Annual improvements 2014-2016 cycle | | January 1, 2017 |
| | | | | |
| Forthcoming requirements. | | | | |
| IFRS 9 | | Financial Instruments and associated amendments to various other standards | | January 1, 2018 |
| IFRS 15 | | Revenue from contracts with customers | | January 1, 2018 |
| IFRS 16 | | Leases | | January 1, 2019 |
| Amendments to IFRS 2 | | Classification and Measurement of Share-based Payment Transactions | | January 1, 2018 |
| Amendments to IFRS 4 | | Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts | | 1 January 2018 or when the entity first applies IFRS 9 |
| Annual improvements 2014-2016 cycle | | Annual improvements 2014-2016 cycle | | January 1, 2018 |
| Amendments to IAS 40 | | Transfers of Investment Property | | January 1, 2018 |
| IFRIC 22 | | Foreign Currency Transactions and Advance Consideration | | January 1, 2018 |
| IFRIC 23 | | Uncertainty over Income Tax Treatments | | January 1, 2018 |
| Amendments to IFRS 10 and IAS 28 | | Sale or contribution of assets between an investor and its associate or joint venture | | applicable to reporting periods commencing on or after the given date |
Grupo Aval has assessed the impacts of the adoption of the new or amended standards detailed above, concluding that they do not have a significant impact on the financial statements of Grupo Aval as of December 31, 2017, except for IFRS 9 as was explained above.
