x) Application of new and revised International Financial Reporting Standards
| i. | New and revised standards effective in current year |
The following new and revised IFRS have been adopted in these financial statements:
Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12)- On January 19, 2016, the IASB published final amendments to IAS 12 “Income Taxes”. The amendments clarify the following aspects:
| · | Unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use. |
| · | The carrying amount of an asset does not limit the estimation of probable future taxable profits. |
| · | Estimated for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences. |
| · | An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. |
The amendments are effective for annual periods beginning on or after January 1, 2017. The implementation of this amendments did not have material impact on the consolidated financial statement of the Bank.
Disclosure Initiative (Amendments to IAS 7)- The amendments are part of the IASB’s Disclosure initiative project and introduce additional disclosure requirements intended to address investors’ concerns that financial statements do not currently enable them to understand the entity’s cash flows; particularly in respect of the management of financing activities. The amendments require disclosure of information enabling users of financial statements to evaluate changes in liabilities arising from financial activities. Although there is no specific format required to comply with the new requirements, the amendments include illustrative examples to show how an entity can meet the objective of these amendments.
The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The implementation of this amendments did not have material impact on the consolidated financial statement of the Bank.
Annual Improvement 2014-2016
This annual improvements issued in December 8, 2016, containing the following amendments:
IFRS 12 Disclosure of Interests in Other Entities - Clarification of the scope of the Standard.
The amendments to IFRS 12 for annual periods beginning on or after 1 January 2017. The implementation of IFRS 12 amendments did not have material impact on the consolidated financial statement of the Bank.
IFRS Practice statement 2 Making Materiality Judgement – This standard was issued in September 2017. The objective is to assist management in presenting financial information about the entity that is useful to existing and potential investors, lenders and other creditors making decisions about providing resources to the entity. This practice statement applies to the preparations of financial information in accordance with full IFRS. The Bank’s management has considered this practice statement in preparing current financial statements.
ii. New and revised IFRS issued but not effective
IFRS 9 Financial instruments (2014) - In July 2014, the International Accounting Standards Board (IASB) issued IFRS 9 as a complete standard, to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. This standard is effective for reporting periods beginning on or after 1 January 2018. IFRS 9 includes requirements for recognition and measurement of financial instruments. Changes in accounting policies resulting from the adoption of IFRS 9 will be applied retrospectively adjusting open balance as of 1 January 2018, applying the transition exemption that allow not to restate comparative information for prior periods.
Classification &measurement: IFRS 9 defined the financial asset and certain non-financial assets purchases agreements classification and measurement model changes requirements. The main aspects included in the new standard are:
a) Classification of financial instruments: The criterion for classifying financial assets will depend both on their business management model and the features of the contractual flows. Consequently, the asset will be measured at amortized cost, at fair value with changes in other comprehensive income (equity), or at fair value with changes in profit and loss for the period. IFRS 9 also establishes the option of designating an instrument at fair value with changes in Profit and loss under certain conditions. The main activity of the Bank is the concession of retail banking operations and does not concentrate its exposure on complex financial products. The main objective of the Bank is to achieve a homogeneous implementation of the classification of financial instruments of the portfolios established under IFRS 9 and, for this purpose, it has developed standardized guidelines to enable a homogeneous analysis in all of its units.
The Bank prepared an analysis of its portfolios under the mentioned guidelines in order to identify and classify the financial instruments into their corresponding portfolio under IFRS 9. Based on the analysis currently being carried out, the Group considers that:
· The Bank offers commercial and consumer banking services, which are consistent with a basic lending arrangement. In accordance with the above mentioned, most of the financial assets classified as “loans and account receivable from customers” will continue to be classified at amortised cost, except for 0.4% over the outstanding amount as of December 31, 2017 that is reclassified to be measured at fair value with changes in profit or loss. No other reclassification will be made to this portfolio.
· As of December 31, 2017, financial assets classified as “available for sale investments” will continue to be classified at fair value with changes reported in other comprehensive income, except for a small ownership in shares that will be classified at fair value, with changes reported in other comprehensive income (irrevocably), which represent a 0.01% of the “available for sale investments” as of December 31, 2017.
· The financial assets up to now classified as “trading investments” will remain classified at fair value, with changes reported in profit and loss for the year,
· IAS 39 financial liabilities classification and measurement criteria remains substantially under IFRS 9. The Bank considers that all the changes in classification mentioned above are not significant.
In October 12, 2017, the IASB issued “Prepayment features with negative compensation” to address particular prepaid options under assessment whether contractual clash flows are solely payments of principal and interest. The Bank concluded that this amendment does not have significant impact over its financial statements.
b) Credit risk Impairment model: The most important new development compared with the current model is that the new accounting standard introduces the concept of expected loss, whereas the current model (IAS 39) is based on incurred loss.
· Scope of application: The IFRS 9 asset impairment model is applicable to financial assets valued at amortized cost, to debt instruments valued at fair value through other comprehensive income, to leasing receivables, and to contingent risks and commitments not valued at fair value.
· Application of practical expedients under IFRS 9: IFRS 9 contains a set of practical expedients that might be used by the entities to facilitate its implementation. However, in order to achieve full and high quality implementation of the standard, considering industry best practices, these practical solutions will not be widely used.
· Rebuttable presumption that the credit risk has increased significantly when payments are more than 30 days past due: this threshold will be used as an additional – but not primary - indicator of significant risk increase.
· Financial instruments that have low credit risk at the reporting date.
· Impairment estimation methodology: The portfolio of financial instruments subject to impairment will be divided into three categories, based on the phase of each instrument with regard to its level of credit risk:
| - | Phase 1: a financial instrument will be considered to be in this phase when there has been no significant increase in risk since its initial recognition. In this case, the value correction will reflect expected credit losses arising from defaults over the 12 months from the reporting date. |
| - | Phase 2: financial instruments are included in this phase when there has been a significant increase in risk since the date of initial recognition, but the impairment has not materialized. In this case, the value correction for losses will reflect the expected losses from defaults over the residual life of the financial instrument. The existence of a significant increase in credit risk will be determined by considering the quantitative indicators used in the ordinary management of credit risk, together with other qualitative variables, such as the indication of whether refinanced transactions are considered non-impaired and transactions included in special debt sustainability agreements. |
| - | Phase 3: financial instruments are catalogued in this phase when they show effective signs of impairment as a result of one or more events that have already occurred that will result in a loss. In this case, the amount of the value correction will reflect the expected losses for credit risk over the expected residual life of the financial instrument. |
The methodology required for quantification of expected loss for credit events will be based on an unbiased and weighted consideration of the occurrence of a range of possible future scenarios that could impact the collection of contractual cash flows, taking into account the time-value of money, all available information relevant to past events, and current conditions and projections of macroeconomic factors deemed relevant to the estimation of this amount.
The assessment of whether a significant increase in credit risk has occurred since initial recognition involves the application of both quantitative measures and qualitative factors, requires management judgement and is a key aspect of the IFRS 9 methodology.
The key inputs into the measurement of the ECL (expected credit loss) are EAD (exposure at default), PD (probability of default) and LGD (loss given default). 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. The Bank has focused in developing an “expected credit loss” model in accordance with all IFRS 9 requirements, including all essential definitions:
| · | Significant increase in credit risk: when determining whether the credit risk on a financial instrument has increased significantly since initial recognition, the Bank will consider reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information, analysis based on the Bank historical experience, expert credit assessment and forward looking information. |
| · | Default: this definition is largely consistent with the current definition used by the Bank. In assessing whether a borrower is in default, the Bank considers indicator as: overdue status, non-payment of another obligation of the same issuer to the Bank, data developed internally and obtained from external sources, among others. Inputs into the assessment may vary over the time to reflect changes in circumstances. |
| · | Forward-looking information: the Bank has incorporated 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. Following this, the Bank has developed macroeconomic scenarios and considers the relative probability of each outcome. External information include macroeconomic factor as PIB , among others. |
| · | Financial assets expected lives: the Bank considers contractual terms of the instruments (amortization, prepayments features, extension terms, etc.). The bank will measure ECLs considering the risk of default over the maximum contractual period. For certain revolving facilities (e.g. credit card and overdraft), the expected lives is the credit risk exposure period and credit risk management actions that the Bank expects to take and that serve to mitigate ECLs. |
| · | Impairment records: IFRS 9 bring a changes related to the FVOCI financial assets, where the amount of the change in the fair value that is attributable to changes in the credit risk of the financial asset will be presented in other comprehensive income, and the remaining amount of the change in the fair value will be presented in profit or loss. |
c) Hedge accounting: The general hedge accounting requirements align more closely with risk management practices and establish a more principle-based approach thereby allowing hedge accounting to be applied to a wider variety of hedging instruments and risks. Macro hedge accounting is being dealt with as a separate project. Until such time as that project is complete, and to remove any potential conflict between any existing macro hedge accounting undertaken under IAS 39 and the new general hedge accounting requirements of IFRS 9, entities can choose to continue to apply the existing hedge accounting requirements in IAS 39.
After concluding the IFRS 9 implementation process, the most significant impact on the Bank´s financial statements arise from the new impairment requirements. Impairment losses for financial instruments will be increased under the scope of the IFRS 9 impairment model. At January 1, 2018, based on the assessment made, the total impact in equity (net of tax) derived from the adoption of IFRS 9 is Ch$82,454 million(net of tax).
IFRS 15, Revenue from Contracts with Customers - issued on May 28, 2014, the IASB has published its new standard, IFRS 15 Revenue from contracts with customers. The new standard provides a single, principles based five-step model to be applied to all contracts with customers, i) identify the contract with the customer, ii) identify the performance obligations in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligations in the contracts, v) recognize revenue when (or as) the entity satisfies a performance obligation.
IFRS 15 must be applied in an entity’s first annual IFRS financial statements for periods beginning on or after 1 January 2017. Application of the Standard is mandatory and early adoption is permitted. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 must disclose this fact.
In April 12, 2016, the IASB published an amendments to clarify and provide alternatives for the transition. The amendment are applicable from January 1, 2018, with early application permitted.
The Bank completed its assessment regarding the application of this standard and concluded that it does not have a significant impact over its consolidated financial statements.
Sale or Contributions of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) - Issued on September 11, 2014, the IASB has published 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)'. The amendments address a conflict between the requirements of IAS 28 'Investments in Associates and Joint Ventures' and IFRS 10 'Consolidated Financial Statements' and clarifies the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:
| · | requires full recognition in the investor's financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations); |
| · | requires the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognized only to the extent of the unrelated investors’ interests in that associate or joint venture. |
On December 17, 2015 the IASB has published final amendments to “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”. The amendments defer the effective date of the September 2014 amendments to these standards indefinitely until the research project on the equity method has been concluded. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
IFRS 16 Leases – issued on January 13, 2016, the IASB has published its new standard for leases, which replaces IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC15 Operating leases and SIC27 Evaluating the substance of transactions involving the legal form of a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payment. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.
IFRS 16 is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 “Revenue from Contracts with Customer” has also been applied.
The Bank has completed its operating lease contract inventory (as lessee) and it is currently determining the potential impact that the standard will have on the consolidated financial statements of the Bank.
Amendments to IFRS 2 Classification and measurement of share-based payment transactions – These amendments were published June 20, 2016, to address issues with:
· The accounting of share- based payment transactions paid in cash that include a performance condition
· The classification of share-based transactions
· Accounting for modifications of share-based payment transactions from cash-settled to equity-settled.
This standard is applicable from January 1, 2018, with early application permitted. Management is assessing the potential impact of applying this standard.
Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - The amendments are intended to address concerns about the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard (expected as IFRS 17 within the next six months). The amendments provide two options for entities that issue insurance contracts within the scope of IFRS 4:
-an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the "overlay approach");
-an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 (the "deferral approach").
An entity would apply the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9 while an entity would apply the deferral approach for annual periods beginning on or after January 1, 2018. Management has assessed that the implementation of these modifications will not have a material impact on the Unaudited Consolidated Interim Financial Statements of the Bank.
IFRIC 22 Foreign Currency Transactions and Advance Consideration – This interpretations issued on December 8, 2016, clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency.
The Interpretation covers foreign currency transactions when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income. It does not apply when an entity measures the related asset, expense or income on initial recognition at fair value or at the fair value of the consideration received or payed at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability. Also, the Interpretation need not be applied to income taxes, insurance contracts or reinsurance contracts.
Consensus
The date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability.
If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt.
IFRIC 22 is effective for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
Annual Improvement 2014-2016
This annual improvements issued in December 8, 2016, containing the following amendments:
IFRS 1 First time adoption of IFRS - Deletion of short-term exemptions for first-time adopters.
IAS 28 Investments in Associates and Joint Ventures - Measuring an associate or joint venture at fair value.
The amendments to IFRS 1 and IAS 28 are effective for annual periods beginning on or after 1 January 2018. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
IFRS 17 Insurance contracts – This standard issued on May 18, 2017 replaces the current IFRS 4. IFRS 17 will mainly change accounting for all entities that issue insurance contracts and investment contracts with discretionary participation characteristics. The standard applies to annual periods beginning on or after January 1, 2021, with early application permitted provided IFRS 15, "Revenue from contracts with customers" and IFRS 9, "Financial instruments" is applied. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
IFRIC 23 Uncertainty over Income Tax Treatments – This standard issued on June 7, 2017, clarifies how the recognition and measurement requirements of IAS 12 apply when there is uncertainty about tax treatments. The standard applies to annual periods beginning on or after January 1, 2019, with early application permitted. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
Amendments to IAS 28 long-term interest in Associates and Joint Ventures - This standard was issued in October 12, 2017 to clarify that an entity applies IFRS 9 including its impairment requirements, to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendments are effective for periods beginning on or after January 1, 2019, early application is permitted.
The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.
Annual Improvements to IFRS Standards 2015–2017 Cycle
This annual improvements issued in December 12, 2017, containing the following amendments:
IFRS 3 Business Combination and IFRS 11 Joint Arrangements – The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interest in that business.
IAS 12 Income taxes – The amendments clarify that all income tax consequences of dividends should be recognized in profit or loss, regardless of how the tax arises.
IAS 23 Borrowing cost – The amendments clarify that if any specific borrowing remain outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings.
The amendments are effective for periods beginning on or after January 1, 2019, early application is permitted. The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.