| 16. | Provisions, contingent liabilities and contingent assets |
Provisions are recorded when the Bank has a present obligation (legal or constructive) as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Provisions are determined by the management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period and it is discounted using a risk-free rate which reflects current market assessments of the time value of money in each country, treasury bonds (TES)1 for Colombia. The corresponding expense of any provision is recorded in the statement of income, net of all expected reimbursement. The increase of the provision due to the time value of money is recognized as a financial expense.
The amounts recognized in the statement of income, correspond mainly to:
| – | Provisions for loan commitments and financial guarantee contracts; and |
| – | Provisions for legal proceedings, classified as probable to be decided against the Bank. |
Possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Bank, or a present obligation that arise from past events but are not recognized because it is not probable, that an outflow of resources embodying economic benefits will be required to settle the obligations or the amount of the obligations cannot be measured with sufficient reliability are not recognized in the financial statement but instead are disclosed as contingent liabilities, unless the possibility of an outflow of resources embodying economic benefits is remote, in which case no disclosure is required.
Possible assets that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Bank, are not recognized in the financial statement; instead are disclosed as contingent assets where an inflow of economic benefits is probable. When the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
1 It refers to the interest rate of treasury bonds (TES), representative of the nation's public debt.
