Crédito Agrícola CONSOLIDATED ANNUAL REPORT Notes

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2 08 Notes Notes 2

3 I. NOTES 8.1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP 1. INTRODUCTION The constitution, in 1991, of the Sistema Integrado do Mútuo (Integrated System of Mútuo - SICAM), composed of Caixa Central Caixa Central de Mútuo, CRL (Caixa Central) and its Associated Caixas, established an arrangement of co-responsibility between them. The Caixas have freedom of association to Caixa Central and may pursue their business outside SICAM, although under stricter rules, similar to those applied for all other credit institutions. The consolidated accounts presented herein reflect the overall situation of the net worth of the Sistema Integrado do Mútuo (SICAM), composed of Caixa Central and Associated Caixas de Mútuo which, with their affiliates and associates, form the Financial Group Mútuo (or Grupo GCA ). These financial statements were prepared in conformity with the legal and regulatory provisions in force established in article 74 of the Legal System for Mutual Agricultural Credit, Decree-Law 36/92 and the instructions stipulated in article 7 of this diploma. Grupo is a nationwide financial group, with a large number of local banks (Caixas Agrícolas) and specialist companies, with the central structure being the Caixa Central de Crédito Agrícola Mútuo. This is a banking institution that also has powers to supervise, guide and monitor the activities of the Associated Caixas and Fenacam, a cooperative representative institution that provides specialist services to GCA. The financial statements attached herewith refer to the consolidated activity of Grupo Crédito Agrícola, and were prepared in order to comply with the requirements on the presentation of accounts of Banco de Portugal. On 16 February 2017 the Executive Board of Directors of Caixa Central approved the consolidated financial statements with reference to 31 December The financial statements shall be submitted to the General Meeting of Associated Members to be held on 27 May The General Meeting may refuse the proposal of the members of the Board of Directors relative to the approval of the presented accounts and deliberate the preparation of new accounts or reformulation of specific points. During 2016 the activities were maintained in relation to the reporting of accounting and prudential nature, underpinned by harmonised information models in the European context (FINREP/ COREP), as well as the periodic accomplishment of various exercises which, in addition to internal management elements of GCA, represent prudential supervisory instruments on the part of the regulator. In this regard, particular importance is given to the Funding and Capital Plan, which involves the projection of the main financial and prudential aggregates primarily Notes 3

4 aimed at highlighting potential capital and liquidity needs, from a markedly prospective angle, the stress test exercise established by Banco de Portugal, which was based on the 2016 EU Wide Stress Test conducted by the European Banking Authority (EBA) and on the 2016 SREP Stress Test carried out by the European Central Bank (ECB), in the context of the Single Supervisory Mechanism, the Internal Capital Adequacy Assessment Process (ICAAP), which seeks to assess and quantify the main risks to which the institution is exposed, and the Recovery Plan, with the objective of ensuring the prior planning of the measures that may be adopted for timely correction of any situation of financial imbalance, or even its prevention. The process of closure of the Financial Branch Abroad in Cape Verde, named Sucursal Financeira Exterior (SFE) de Cabo Verde was started in 2016, together with the competent authorities, with its completion being expected in In 2016 there were no alterations in the scope of SICAM derived from mergers between associated Caixas Agrícolas. In Grupo, the only change referred to FCR Central Frie (a venture capital fund for qualifying investors) which was wound up during 2016, and therefore left the consolidation perimeter of GCA. The consolidated accounts integrate the accounts of 82 associated Caixas de Mútuo as at 31 December BASIS FOR PRESENTATION, CONSOLIDATION PRINCIPLES AND MAIN ACCOUNTING PRINCIPLES 2.1. Basis of presentation of the accounts The consolidated financial statements of GCA were prepared on a going-concern principle, based on the books and accounting ledgers kept in accordance with the principles established in the International Financial Reporting Standards (IAS/IFRS), as endorsed by the European Union, pursuant to Regulation (EC) 1606/2002 of the European Parliament and the Council of 19 July, transposed into Portuguese law by Decree Law 35/2005 of 17 February and by Banco de Portugal Notice 1/2005 of 21 February, and in accordance with the specific rules on consolidation of accounts established in article 74 of the Legal System for Mutual Agricultural Credit, Decree-Law 36/92 of 28 March, and Banco de Portugal Instruction 71/96. When GCA companies use different accounting standards, IAS/IFRS conversion adjustments are prepared. The adoption of the new standards, interpretations, amendments or revisions referred to above had no impact on the consolidated financial statements of Grupo for the year ended on 31 December The amounts indicated herein are presented in euros (unless explicitly indicated otherwise), rounded off to the closest euro. Notes 4

5 Except with respect to matters regulated by Banco de Portugal, as mentioned above, the entities of Grupo use the Standards and Interpretations issued by the International Accounting Standards Board (IASB) and by the International Financial Reporting Interpretations Committee (IFRIC) which are relevant for their operations and have been approved by the European Union, effective for periods started from 1 January 2016 onwards. In the preparation of the consolidated financial statements, GCA followed the historical cost convention, modified, when applicable, by measurement at fair value, which was the case of financial assets available for sale, derivative financial instruments and investment properties. The preparation of financial statements in conformity with the IFRS requires the use of estimates, assumptions and critical judgements in the process of determining the accounting policies to be adopted by GCA, with significant impact on the book value of the assets and liabilities, as well as the income and costs of the reporting period. Although these estimates are based on the best experience of the Board of Directors and its best expectations in relation to current and future events and actions, the real current and future results could differ from these estimates. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant for the consolidated financial statements, are set forth in Note Alterations to the accounting policies and comparative information The accounting policies used in the preparation of the financial statements for the year are consistent with those used in the previous year, therefore the presented values are comparable, in the relevant aspects. The amendments to the IFRS, listed below did not have any impact on the accounting policies or financial statements prepared with reference to 31 December The following amendments were made to the IFRS during 2016: 1. Impact of adoption of standards and interpretations which became effective on 1 January 2016: Standards - IAS 1 (amendment)), Review of disclosures. The amendment gives indications relative to materiality and aggregation, the presentation of sub-totals, the structure of the financial statements, the disclosure of accounting policies, and the presentation of items of Other comprehensive income generated by investments measured by the equity method. Notes 5

6 - IAS 16 and IAS 38 (amendment), Permitted methods of calculation of amortisation and depreciation. This amendment clarifies that the use of calculation methods of depreciation/amortisation of assets based on the revenue received are not, as a rule, considered appropriate to measure the standard consumption of the economic benefits associated to the asset. This is of prospective application. - IAS 16 and IAS 41 (amendment), Agriculture: plants that produces consumable biological assets. This amendment defines the concept of a plant which produces consumable biological assets, and removes this type of asset from the scope of application of IAS 41 Agriculture to the scope of IAS 16 Tangible assets, with the consequent impact on measurement. However, the biological assets produced by these plants remain under the scope of IAS 41 - Agriculture. - IAS 19 (amendment), Defined benefit plans Employee contributions. The amendment of IAS 19 is applicable to contributions of employees or third party entities for defined benefit plans, and intends to simplify their accounting, when the contributions are not associated to the number of years of service. - IAS 27 (amendment), Equity method in separate financial statements. This amendment enables an entity to apply the equity method in the measurement of investments in subsidiaries, joint ventures and associates, in the separate financial statements. This amendment is applied retrospectively. - Amendments IFRS 10, 12 and IAS 28 Investment entities: applying the consolidation exception. This amendment clarifies that the exemption from the obligation to consolidate an Investment Entity is applicable to an intermediary holding company which constitutes a subsidiary of an investment entity. Furthermore, the option of applying the equity method, pursuant to IAS 28, is extendible to an entity which is not an investment entity, but that holds an interest in an associate or joint venture which is an Investment Entity. - IFRS 11 (amendment), Accounting for acquisitions of interests in joint operations. This amendment introduces guidelines on the accounting of acquisition of interests in a joint operation classified as a business, with the principles of IFRS 3 Business combinations being applicable. - Improvements to the standards This cycle of improvements affects the following standards: IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16 and 38, and IAS 24. Notes 6

7 - Improvements to the standards This cycle of improvements affects the following standards: IFRS 5, IFRS 7, IAS 19 and IAS Standards that have been published with mandatory application for annual periods starting on or after 1 January 2017, which the European Union has already endorsed: - IFRS 9 (new), Financial instruments (applicable in financial years starting on or after 1 January 2018). IFRS 9 replaces the requirements of IAS 39, regarding: (i) the classification and measurement of financial assets and liabilities; (ii) the recognition of impairment of credit receivable (through the expected loss model); and (iii) the requirements for recognition and classification of hedge accounting, The impacts of the future adoption of this standard on the consolidated financial statements of GCA are under appraisal. - IFRS 15 (new), Revenue from contracts with customers (applicable in financial years starting on or after 1 January 2018). This new standard is applicable only to contracts for delivery of products or provision of services, and requires that the entity recognise the revenue when the contractual liability to deliver assets or render services is fulfilled and for the amount reflected in the consideration to which the entity is entitled, as established in the "5 stage methodology. It is not expected that the adoption of this standard will have a relevant impact on the consolidated financial statements of GCA. 3. Standards (new and amendments) and interpretations, whose application is mandatory for annual periods starting on or after 1 January 2017, but which the European Union has not yet endorsed: Standards - IFRS 7 (amendment), Review of disclosures (applicable in financial years starting on or after 1 January 2017). This amendment is still subject to endorsement by the European Union. This amendment introduces an additional disclosure on the variations of financing liabilities, broken down into the transactions which led to cash movements and those which did not, and the way that this information is reconciled with the cash flow of financing activities of the Cash Flow Statement. - IAS 12 (amendment), Income tax Recognition of deferred tax assets for unrealised losses (applicable in financial years starting on or after 1 January 2017). This amendment is still subject to endorsement by the European Union. This amendment clarifies the form of accounting for deferred tax assets related to assets measures at fair value, how to estimate future taxable Notes 7

8 profits when there are deductible temporary differences, and how to assess the recoverability of deferred tax assets when there are restrictions in the tax law. - IAS 40 (amendment), Transfer of investment properties (applicable in financial years starting on or after 1 January 2018). This amendment is still subject to endorsement by the European Union. This amendment clarifies that assets can only be transferred to and from the category of investment properties when there is evidence of the change of use. The management s mere change of intention is insufficient to enable the transfer. - IFRS 2 (amendment), Classification and measurement of share-based payment transactions (applicable in financial years starting on or after 1 January 2018). This amendment is still subject to endorsement by the European Union. This amendment clarifies the basis of measurement for share-based payment transactions that are entirely paid-up (cash-settled) and the accounting of modifications to a share-based payment plan, which change their classification from cashsettled to equity-settled. Additionally, this amendment introduces an exception to the principles of IFRS 2, which henceforth requires that a share-based payment plan should be treated as if it were fully equity-settled, when the employer is obliged to withhold a tax amount to pay this value to the tax authority. - IFRS 4 (amendment), Insurance contracts (application of IFRS 4 with IFRS 9) (applicable in financial years starting on or after 1 January 2018). This amendment is still subject to endorsement by the European Union. This amendment attributes to entities that trade insurance contracts the option to recognise under comprehensive income, instead of recognition in the Income statement, the volatility that could result from the application of IFRS 9 before the new standard on insurance contracts is published. Additionally, temporary exemption is given to the application of IFRS 9 up to 2021 to entities whose predominant activity is insurance. This exemption is optional and is not applicable to consolidated financial statements that include an insurance entity. - Amendments to IFRS 15, Revenue from contracts with customers (applicable in financial years starting on or after 1 January 2018). These amendments are still subject to endorsement by the European Union. These amendments refer to the additional indications to be followed to determine the performance obligations of a contract, from the time of the recognition of the revenue from an intellectual property license, to the review of the indicators for the classification of the principal versus agent relationship, and to the new arrangements established to simplify the transition. - IFRS 16 (new), Leases (applicable in financial years starting on or after 1 January 2019). This standard is still subject to endorsement by the European Union. This new standard replaces IAS 17, with a significant impact on the accounting by the lessees that are now obliged to recognise a lease liability reflecting future lease payments and a right of use" asset for all lease contracts, Notes 8

9 except certain short term leases and assets of low value. The definition of a lease contract has also been changed, being based on the "right to control the use of an identified asset". - Improvements to the standards (applicable, in general, in financial years starting on or after 1 January 2017). This cycle of improvements is still subject to endorsement by the European Union. This cycle of improvements affects the following standards: IFRS 1, IFRS 12 and IAS 28. Interpretations - IFRS 22 (new), Foreign currency transactions and advance consideration (applicable in financial years starting on or after 1 January 2018). This interpretation is still subject to endorsement by the European Union. This is an interpretation to IAS 21 The effects of changes in foreign exchange rates and refers to the determination of the "transaction date" when an entity pays or receives in advance the consideration of contracts denominated in foreign currency. The transaction date determines the exchange rate to use to convert transactions in foreign currency [include information on the impact of the future adoption of this interpretation in the Entity s financial statements]. Despite being approved/endorsed by the European Union, these standards were not adopted by CCCAM in the preparation of the financial statements relative to 31 December 2016 as their application is not yet compulsory. The impacts of their future adoption are being assessed and estimated by the management Principles of consolidation and recording of associates The consolidation of accounts of Grupo is conducted in compliance with the requirements of the following legislation: - Article 74 of the Legal System for Mutual Agricultural Credit and Agricultural Credit Cooperatives (Decree-Law 24/91, of 11 January, with the most recent amendments introduced by Decree-Law 142/2009, of 16 June); - Decree-Law 36/92, of 28 March; and - Notice 1/2005, of Banco de Portugal. Grupo holds, directly and indirectly, financial stakes in affiliates and associates. Affiliates are considered companies in which this percentage stake is more than 50% of its capital or companies in which Caixa Central has effective control of their management Associates are companies in which the percentage stake stands between 20% and 50% of its capital or in which SICAM, directly or indirectly, exerts significant influence on their management and financial policy. Notes 9

10 a) Affiliates or subsidiaries The consolidated financial statements included in the accounts of Caixa Central - Caixa Central de Mútuo, C.R.L. (Caixa Central), the Associated Caixas de and the affiliates and associates controlled directly and indirectly by Caixa Central (Note 4). Regarding the participated companies, "affiliates" are considered those in which GCA effectively controls their current management in order to obtain economic benefits from their activities. Control is normally evident through holding more than 50% of the share capital or voting rights. The financial statements of all the companies controlled by the Group (subsidiaries or affiliates) were included in these consolidated financial statements by the full consolidation method. The Group controls an entity when it is exposed to, or has rights to variable returns arising from its involvement with the Entity, and has the capacity to affect these same returns through the power it exercises over the Entity. The subsidiaries are consolidated from the date when their control is transferred to the Group, and are excluded from consolidation from the date when this control ends. The consolidation of the accounts of the affiliates was carried out by the full consolidation method, from the date when Caixa Central takes control of its activities up to the time when this control ceases to exist. The transactions and significant balances between the companies object of the consolidation were eliminated. Furthermore, when applicable, consolidation adjustments are made in order to assure consistency in the application of the accounting principles of Grupo. Acquisitions of affiliates are recorded by the purchase method. The acquisition cost corresponds to the sum of the fair values of the assets acquired and liabilities incurred or undertaken, as well as any equity instruments issued in exchange for control over the acquired entity. The costs directly attributable to the transaction are recorded as costs when incurred. On the acquisition date, the assets, liabilities and contingent assets that are identifiable and meet the requirements for recognition established in IFRS 3 "Business combinations", are stated at their fair value. When the acquisition of control is carried out for a percentage of less than 100%, in the application of the purchase method, the non-controlling interests can be measured at fair value or in proportion to the fair value of the acquired assets and liabilities, with this option being defined in each transaction. Whenever control is acquired through potential rights, the noncontrolling interests are measured at fair value. Subsequent transactions involving the divestment or acquisition of holdings from noncontrolling interests, which do not imply change of control, do not result in the recognition of gains, losses or goodwill, with any difference between the transaction value and the book value of the traded holding being recorded in Equity, under Other equity instruments. Notes 10

11 Any losses generated in each period by subsidiaries with non-controlling interests are allocated according to the percentage held in them, regardless of assuming a negative balance. Up to 1 January 2006, and as permitted by the accounting policies defined by Banco de Portugal, goodwill was totally annulled against reserves in the year of acquisition of the holdings. Pursuant to that permitted by IFRS 1, GCA did not carry out any alteration to this record, and therefore the goodwill generated in operations occurred up to 1 January 2006 remains recorded in reserves. The value corresponding to the holding of third parties in the affiliates is presented under the equity heading of "Minority Interests". The consolidated profit derives from the sum of the net income of SICAM and the affiliates, in proportion to their effective holding, after consolidation adjustments, namely the elimination of dividends received and capital gains and losses generated in transactions between companies included in the consolidation perimeter. b) Associates Associates are entities in which GCA has significant influence, but does not control. Significant influence is considered to exist when GCA has financial holdings (directly or indirectly held) above 20% (but less than 50% with voting rights in proportion to the holding) or the power to participate in decisions about the financial and operational policies of the entity but has neither control nor has joint control over it. Any dividends received are recorded as a decrease of the value of the financial investment. Investments in associates are initially measured at cost in the consolidated financial statements. Investments in associates are recorded by the equity method, from the date that GCA acquires significant influence until the date it ceases. The excess of the cost of acquisition over the fair value of the share of the identifiable assets and liabilities acquired, goodwill, is recognised as part of the financial investment in the Associate. If the acquisition cost is lower than the fair value of the net assets of the acquired Associate, the difference is recognised directly as a gain in the consolidated comprehensive income statement. If the financial holding in an associate is reduced, but maintaining the significant influence, only a proportional amount of the values recognised previously in other comprehensive income is reclassified to the Income Statement. Unrealised gains or losses in transactions between the Group and its Associates are eliminated in the application of the equity method. The accounting policies of the Associates are changed whenever necessary so as to ensure that the same policies are applied consistently by all the companies of the Group. Notes 11

12 When the share of the losses of an Associate exceeds the investment in the Associate, the Group recognises additional losses if it has undertaken liabilities or made payments in benefit of the Associate. The consolidated financial statements include the part attributable to GCA of the total profit and loss recognised by the associate. c) Goodwill Acquisitions of subsidiaries and associates occurred after 1 January 2006 are recorded by the purchase method. The acquisition cost corresponds to the fair value determined on the acquisition date of the assigned assets, issued equity instruments, minus the costs directly attributable to the issue. Goodwill refers to the difference calculated between the fair value of the acquisition price of investments in subsidiaries, associates or businesses, and the fair value of the assets and liabilities of these companies or businesses on the date of their acquisition. Goodwill is recorded in the assets and is subject to impairment tests, pursuant to IAS 36, at least once a year, and is not amortised. Impairment losses relative to goodwill are not reversible. Furthermore, whenever it is detected that the fair value of the acquired net assets is higher than their acquisition cost (negative goodwill), the differential is recognised through profit or loss. Goodwill is allocated to the cash generating units to which it belongs, for the purpose of conducting impairment tests. When the Group reorganises its corporate structure, implying an alteration of the composition of its cash generating units, to which goodwill has been imputed, the reorganisation process should involve the reallocation of the goodwill to the new cash generating units. The reallocation is made through an approach of relative value, in view of the new cash generating units arising from the reorganisation Summary of the main accounting policies The most significant accounting policies used in the preparation of the consolidated financial statements were as follows: a) Accrual basis GCA follows the principle of accrual based accounting in relation to most of the items in its consolidated financial statements. Hence, the costs and income are recorded as they are generated, independently of the time of their payment or receipt. Notes 12

13 b) Transactions in foreign currency Assets and liabilities denominated in foreign currency are converted into Euros at the exchange rate in force on the reporting date indicated by Banco de Portugal. Income and costs relative to transactions in foreign currency are recorded in the period when they occur, at the exchange rates in force on the day when they were carried out. Additionally, the following accounting procedures are used: - the spot exchange rate position for each currency, which corresponds to the net balance of the assets and liabilities of any specific currency, is revalued daily pursuant to the fixing exchange rates indicated by Banco de Portugal, and recorded against profit or loss; - the forward position of a currency, which corresponds to the net balance of the forward transactions awaiting settlement, is revalued at the market forward exchange rate, or, if such does not exist, at a rate calculated based on the market interest rate for this currency and for the residual term of the transaction. The difference between the balances converted into Euros at the revaluation rates used and the balances converted to the contracted rates corresponds to revaluation of the forward exchange position, and is recorded through profit or loss. Non-monetary assets and liabilities measured at fair value are converted at the exchange rates of the date when the fair value was determined, with the currency conversion differences being stated through profit or loss. The currency conversion differences of financial assets available for sale are, however, recognised in other comprehensive income, and likewise the currency conversion differences relative to cash flow hedges. - Exchange rates on the reporting date: ISO Code Currency Exchange Rate FIXAUD AUD - Australian Dollar FIXBRL BRL Brazillian Real FIXCAD CAD - Canadian Dollar FIXCHF CHF - Swiss Franc FIXDKK DKK - Danish Krone FIXGBP GBP - Pound sterling FIXRUB RUB - Russian Ruble FIXUSD USD United States Dollar FIXZAR ZAR South African Rand FIXCNY CNY - Yuan Renmimbi of China FIXCVE CVE - Cape Verde Escudo FIXJPY JPY - Japanese Yen FIXMOP MOP - Macau Pataca FIXNOK NOK Norwegian Krone FIXSCP SCP Scottish Pound FIXSEK SEK Swedish Krona FIXBNG BGN Bulgarian Lev FIXCZK CZK - Koma Czech FIXHKD HKD -Hong Kong Dollar FIXHUF HUF - Hungarian Forint FIXIDR IDR - Indonesian Rupiah 14, FIXKRW KRW - Won South Korea 1, FIXLTL LTL - Lithuanian Litas FIXLVL LVL - Latvian Lats FIXNZD NZD - New Zealand Dollar FIXPHP PHP - Philippines Peso FIXPLN PLN - Polish Zloty FIXSGD SGD - Singapore dollar FIXTHB THB - Thailand Baht Notes 13

14 c) Credit to customers Credit to customers includes loans to customers and other securitised loan operations (commercial paper) not intended for sale in the short term, which are recorded on the date when the credit amount is advanced to the customer, being recognised at nominal value. Subsequently, the credit and accounts receivable are recorded at amortised cost, being submitted to periodic impairment tests. The interest component, including that relative to any premiums/discounts, is disclosed in the accounts autonomously in the respective net income accounts. Income is recognised when received and distributed by monthly periods. Whenever applicable, the external commissions and costs imputable to the contracting of the operations underlying the assets included in this category should also be divided into periods over the maturity period of the credit, pursuant to the effective rate method. The interest is recognised pursuant to the accrual principle, where the commissions and costs associated to the credit is divided into periods over the life of the operations, regardless of when they are charged or paid. GCA classifies instalments of principal or interest that remain unpaid once 30 days have elapsed after their due date as overdue credit. Credit with overdue instalments are denounced under the terms defined in the approved credit manual, with the entire debt being considered overdue at that time. Credit to customers is decrecognised on the balance sheet when (i) GCA's contractual rights relative to the respective cash flow expire; (ii) GCA has substantially transferred all the risks and benefits associated to its ownership; or (iii) even if GCA retains part, but not substantially all, of the risks and benefits associated to its ownership, control over the credit has been transferred. Guarantees provided and irrevocable commitments Liabilities for guarantees provided and irrevocable commitments are recorded as off-balance sheet items at risk value, where any flows of interest, commissions or other income are stated through profit or loss over the life of the operations. Impairment GCA periodically analyses the credit to customers and other amounts receivable to detect any evidence of impairment. A financial asset is considered impaired if, and only if, there is evidence that the occurrence of an event (or events) has had a measurable impact on the expected future cash flow of this asset or group of assets. For purposes of calculation of impairment of the granted credit, GCA has segmented its portfolio as follows: Notes 14

15 - Credit granted to companies; - Mortgage loans; - Consumer credit; - Credit granted through credit cards to individuals; - Other credit to individuals; - Off-balance sheet items. Moreover, liabilities relative to commercial paper, operations in foreign currency and financial lease contracts were also included. Pursuant to the impairment model in force at GCA for the portfolio of credit to customers, the existence of impairment loss is analysed in individual terms, on a case-by-case basis, and in collective terms. When a group of financial assets is assessed together, the future cash flows of this group are estimated based on the contractual flow of the assets of this group and on the historical data relative to losses on assets with similar credit risk characteristics. Whenever GCA considers this necessary, the historical information is updated based on current observable data, so as to reflect the effects of current conditions. The selection criteria of the customers subject to individual analysis were as follows: - All customers / Economic Group (GER) with liabilities of more than 1,000,000 euros; and - Customers / GER with overdue credit (for more than 90 days) of more than 50,000 euros; - Customers / GER with classification equal to or above indications and liabilities of more than 500,000 euros; - Customers / GER with current account exposure or overdraft of more than 500,000 euros and equal to or above 90% of the contracted limit in the last 18 months; - Customers / GER with liabilities of more than 500,000 euros without associated asset-backed guarantee or with Loan-to-Value (LTV) above 80%; - Customers / GER with restructured credit and exposure of restructured credit of more than 500,000 euros. The evidence of impairment of an asset or group of assets defined by GCA is related to the observation of various events referred to as "loss events", in particular of the following: - Situations of default on the contract, namely payment in arrears of the principal and/or interest; - Significant financial difficulties of the debtor; - Significant alteration of the net worth of the debtor; - Occurrence of adverse alterations, namely: - of payment conditions and/or capacity; Notes 15

16 - of the economic conditions of the sector in which the debtor is placed, with impact on capacity to comply with obligations. Impairment losses for customers that do not show indications of impairment correspond to the product of the probability of accumulated indications at 12 months (PI), based on the time of permanence in a state of default without indications of impairment, with the maximum between zero and difference between the book value of the respective credit on the reference date and the updated value of the estimated future cash flow of these operations. The PI corresponds to the probability of an operation or customer entering into a situation of indications of impairment during a period of emergence. This period is equivalent to the time which elapses between the occurrence of an event causing losses and the time that the existence of this event is detected by the Services of GCA (incurred but nor reported). For all segments of the portfolio, GCA considered a period of emergence of 12 months, and the PI was calculated per operation. If there is evidence that GCA has incurred an impairment loss in credit and other amounts receivable, the amount of the loss is determined by the difference between the book value of these assets and the present value of their estimated future cash flow, discounted at the original interest rate of the financial asset or assets. The book value of the asset or assets is reduced by the balance of the account of impairment losses. For loans with a variable interest rate, the discount rate used to determine any impairment loss is the current interest rate, determined by the contract. Impairment losses are recorded against profit or loss. When, in a subsequent period, the amount of the impairment losses attributed to an event is reduced, the previously recognised amount is reversed, and the account of impairment losses is adjusted. The amount of the reversal is recognised directly in the income statement. Annulment of principal and interest GCA periodically writes off, from the assets, credit which is considered uncollectible by using the constituted impairment, after specific analysis by the bodies of the structure responsible for credit monitoring and recovery, and approval of the Executive Board of Directors of GCA. Any recovery of credit written off from the assets is reflected as a deduction to the balance of impairment losses reflected in the income statement under the heading Impairment of credit net of reversals and recoveries. Pursuant to the policies in force at GCA, interest of overdue credit that is not backed by assets (unsecured) is annulled three months after the due date of the operation or first instalment in arrears. The interest that is not recorded, relative to the credit referred to above, is only recognised during the year when it is collected. The overdue interest of credit secured by a mortgage or other assets is not annulled. Nevertheless, for credit secured by assets and mortgage with overdue instalments of principal that have remained unpaid for more than six months and twelve months, respectively, the calculation and recording of interest on the outstanding principal is interrupted. Notes 16

17 The recovery of interest written off from the assets is also reflected as credit in the heading Impairment of credit net of reversals and recoveries. d) Other financial assets and liabilities Financial assets and liabilities are recognised on the transaction date, i.e. on the date when the purchase or sale commitment is undertaken. The classification of financial instruments on the initial date of recognition depends on their characteristics and the intention of acquisition. Financial assets are initially recognised at fair value plus their transaction costs, except for financial assets held for trading, which are recognised immediately through profit or loss. These categories of assets are derecognised when (i) GCA's contractual rights to receive their cash flow expire; (ii) GCA has substantially transferred all the risks and benefits associated to their ownership; or (iii) even if GCA retains part, but not substantially all, of the risks and benefits associated to their ownership, GCA has transferred control over the assets. i) Financial assets held for trading at fair value through profit or loss Financial assets held for trading include income earning securities traded on active markets, acquired for the purpose of sale or repurchase in the short term, as well as derivatives. Trading derivatives with net value receivable (positive fair value) are included under the heading of financial assets held for trading. Trading derivatives with net value payable (negative fair value) are included under the heading of financial liabilities held for trading. Financial assets at fair value through profit or loss include fixed and variable yield securities trade in active markets that the Group has decided to record and measure at fair value through profit or loss, being classifiable in the context of point 9 b) i of IAS 39, in order to prevent or significantly reduce an inconsistency in measurement or recognition. Financial assets and liabilities held for trading and financial assets at fair value through profit or loss are initially recognised at fair value. Gains and losses arising from subsequent measurement at fair value are recognised through profit or loss. The interest inherent to financial assets is calculated in accordance with the effective interest rate method and recognised in the income statement under the heading Interest and similar income. Dividends are recorded under the respective income statement accounts when the entitlement to their payment is established. The fair value of financial assets traded in active markets is their bid-price or closing market price on the reporting date. If a market price is not available, the fair value of the instrument is estimated based on valuation techniques, which include price assessment models or discounted cash flow techniques. Notes 17

18 ii) Financial assets available for sale Financial assets available for sale include equity and debt instruments that are not classified as financial assets held for trading, at fair value through profit or loss, investments held to maturity, credit or loans and accounts receivable. Financial assets available for sale are measured at fair value, except for equity instruments not listed on an active market and whose fair value cannot be measured reliably, which remain recorded at cost. Gains and losses relative to subsequent variation of fair value are reflected under a specific equity heading, the "Fair value reserve", until their sale (or up to the recognition of impairment losses), at which time they are transferred to profit or loss. Currency conversion gains or losses of debt instruments are recognised directly through profit or loss for the period, while currency conversion gains or losses of equity instruments are recognised directly in reserves. The interest inherent to financial assets is calculated in accordance with the effective interest rate method and recorded in the income statement under the heading Interest and similar income. Dividends are recorded under the respective income statement accounts when the entitlement to their payment is established. iii) Investments held to maturity Investments held to maturity are investments that have a fixed yield, with known interest rate at the time of the issue and determined repayment date, where it is in the Group s interest to keep them until their repayment. The financial investments held to maturity are recorded at acquisition cost. The interest inherent to financial assets and the recognition of the differences between the acquisition cost and the nominal value (premium or discount) is calculated in accordance with the effective interest rate method and recorded in the income statement under the heading Interest and similar income. Following the divestment of public debt securities in 2013, before their maturity/repayment date, that had been recorded in the portfolio of Investments held to maturity, the Group was barred from recording any financial asset in the portfolio during the financial year of 2013 and in the two subsequent years, in conformity with the rules stipulated in the international accounting standard (IAS 39 Financial Instruments). As a result of this contamination, the assets that were not divested and were stated in this portfolio had to be reclassified in 2013 to the portfolio of Financial assets available for sale, with the restriction being maintained for 2014 and With the ending of the inhibition from accounting in the portfolio of investments held to maturity in 2015, in conformity with the rules stipulated in the international accounting standard (IAS 39 Financial Instruments), the Group was once again able to record financial assets assets in that portfolio in The investments that in 2016 were reclassified from Financial assets available for sale to Investments held to maturity are recorded at fair value as at the reclassification dates. The Notes 18

19 adjustments that were made in the meantime to the acquisition cost, as well as to the corresponding revaluation reserve, are amortised through the income statement, with their effect being null. iv) Investments in credit institutions Only the amounts receivable from other credit institutions are recorded in this heading. These are financial assets with fixed or determinable payments, not listed on an active market and not included in any other category of financial asset. These assets are initially recognised at their fair value, minus any commissions included in the effective rate and plus all incremental costs directly attributable to the transaction. Subsequently, these assets are recognised in the balance sheet at amortised cost, minus impairment losses. The interest is recognised based on the effective rate method, which enables calculating the amortised cost and distributing the interest over the period of the operations. The effective rate is the rate which is used to discount the estimated future cash flow associated to the financial instrument on the date of its initial recognition. The effective interest rate calculated for a financial asset of this nature is not altered in subsequent reporting periods. v) Sale operations with repurchase agreement A repurchase agreement is defined as an agreement to transfer a financial asset to another party in exchange for money or other retribution and a concurrent obligation to acquire the financial asset at a future date for the same amount of money, or another exchanged retribution including interest. Securities sold with a repurchase agreement are kept in the portfolio in which they were originally recorded. The funds received are recorded, on the settlement date, in a specific liability account, with the respective interest being divided into periods through the effective interest rate method. vi) Purchase operations with resale agreement A purchase with a resale agreement is defined as an agreement by which an institution purchases a financial asset with the commitment to resell this asset as a predetermined price and at a particular established date or at a date to be established. Financial assets acquired with a resale agreement at a fixed price, or at a price equal to the purchase price plus the interest inherent to the period of the operation, are not recognised on the balance sheet, with the acquisition cost being recorded as loans to other credit institutions. The difference between the purchase value and the resale value is treated as interest and is deferred over the life of the agreement, through the effective interest rate method. Notes 19

20 vii) Other financial liabilities An instrument is classified as a financial instrument when there is a contractual obligation of its settlement being made against the submission of money or another financial asset, independently of its legal form. Other financial liabilities, which essentially include funds of credit institutions, customer deposits and issued debt, are initially stated at fair value, which corresponds to the consideration received net of transaction costs, and are subsequently stated at amortised cost. As established in Decree-Law 182/87, of 21 April, the Mútuo Guarantee Fund was created, whose operation was regulated by Decree-Law 345/98, of 9 November. The latter sought to reconvert the Mútuo Guarantee Fund, so as to direct its objectives towards (i) guaranteeing the reimbursement of deposits constituted at Caixa Central and in its associated Caixas de Mútuo; and (ii) promoting and carrying out actions aimed at assuring the solvency and liquidity of these institutions, with a view to defending the Sistema Integrado do Mútuo (SICAM). vii) Impairment of financial assets GCA periodically conducts impairment tests on its financial assets, and likewise for credit to customers and other amounts receivable as mentioned in Note 2.4.c). When there is evidence of impairment in a financial asset or group of financial assets, the impairment losses are recorded against profit or loss. For listed securities and investment funds, it is considered that there is objective evidence of impairment in a situation of continued devaluation or significant loss of value in the market price of the securities. Continued devaluation or significant loss of value is considered a depreciation of value for a period of time above 12 months or concerning a value above 30%, respectively. For unlisted securities, objective evidence of impairment is considered the existence of an events with impact on the estimated value of the future cash flow of the financial asset, provided that it can be reasonably estimated. If, in a subsequent period, the amount of the impairment losses attributed to an event is reduced, the previously recognised value is reversed through adjustment of the account of impairment losses. The amount of the reversal is recognised directly in the income statement. For financial assets available for sale, in the event of objective evidence of impairment, arising from a significant or prolonged reduction of the fair value of security or from financial difficulties of the issuer, the accumulated loss in the fair value revaluation reserve is removed from the equity and recognised through profit or loss. Impairment losses recorded for fixed income securities may be reversed through profit or loss, if there is a positive change in the fair value of the security arising from an event which has occurred after the determination of the impairment. Impairment losses relative to variable income securities cannot be reversed, hence any potential capital gains arising after the recognition of impairment losses are reflected in the fair value reserve. Regarding variable income securities for which impairment has been recorded, subsequent negative variations in fair value are always recognised through profit or loss. Notes 20

21 e) Derivative financial instruments Derivative financial liabilities are recorded at their fair value on the date of their contracting. Furthermore, they are reflected under off-balance sheet headings at their notional value. Derivative financial instruments are subsequently measured at their respective fair value. Fair value is calculated: Based on prices in active markets (for example, with respect to futures traded on organised markets); Based on models which incorporate valuation techniques accepted in the market, including discounted cash flow and options valuation models. Derivatives are recorded at fair value, with the monthly calculated profit or loss being recognised in income and costs for the year, in the heading "Earnings of assets and liabilities at fair value through profit or loss". Positive and negative revaluation is recorded under the headings of "Financial assets held for trading" and "Financial liabilities at fair value through profit or loss", respectively. GCA does not have any hedge derivative financial instruments in its balance sheet. Derivatives that are embedded in other financial instruments are treated separately from the main instrument, whenever: i) their economic features and their risks are not related to the economic features and risks of the main instrument; and ii) the main instrument is not measured at fair value through profit or loss. These embedded derivatives are disembedded (separated from the host contract), with the fair value variations recognised through profit or loss. f) Other tangible assets The tangible assets used by GCA for the development of its activity are stated at acquisition cost (including directly attributable costs) minus accumulated depreciation and impairment losses. The acquisition cost includes the purchase price of the asset, the expenses directly attributable to its acquisition and costs incurred to prepare the asset so as to place it in condition for use. The financial costs incurred in relation to loans obtained for construction of tangible assets are recognised as part of the cost of constructing the asset. The depreciation of tangible assets is recorded on a systematic basis over the estimated period of useful life of the asset: Years of useful life Properties for own use 50 Expenses in rented buildings 10 Information technology and office equipment 4 to 10 Furniture and interior installations 6 to 10 Notes 21