Notes to the Financial Statements. Banco de Bogotá and Subsidiaries

Transcription

1 Notes to the Financial Statements Banco de Bogotá and Subsidiaries At june 30, 2015 december 31 and january 1, 2014 Gerencia de Consolidación e IFRS

2 At June 30, 2015 (Compared to figures from December 31 and January 1, 2014) (In millions of Colombian Pesos, except for the exchange rate and net earnings per share which are in Colombian Pesos) 1. Reporting Entity Banco de Bogotá S.A. (Parent Company) is a private entity whose headquarters are in the city of Bogotá D.C. at Calle 36 No It was incorporated by Public Deed No of November 15, 1870 issued by the Second Notary of Bogotá D.C. The Colombian Financial Superintendence renewed the operating license indefinitely by means of Resolution No / September 24, The duration established in the Bylaws is until June 30, 2070, but it may be dissolved or extended before said term. The Bank's corporate purpose is to enter into and carry out all the transactions and contracts legally authorized for commercial banks, subject to the requirements and limitations of Colombian law. At June 30, 2015, the Bank and its subsidiaries operate with thirty seven thousand seven hundred and sixty three (37,763) employees through a contract of employment, seven hundred and fifty two (752) with a training contract and two thousand seven hundred and thirty two (2,732) temporary employees. In addition, the Group has 3,669 individuals outsourced with specialized companies. It has 1,521 offices, 10,519 correspondent banks, 3,462 ATMs, 2 agencies abroad in New York and Miami and 1 branch office with a license to carry out local banking transactions in Panama City. The consolidated financial statements include the financial statements of the Bank and the following subsidiaries (hereinafter the Group): Name of Subsidiary Main Activity Place of Business Direct Holding (1) Indirect Holding (1) National Subsidiaries Fiduciaria Bogotá S.A. Entering into mercantile trust agreements and fiduciary mandates without transferring ownership, pursuant to legal provisions. Its main corporate purpose is to acquire, transfer, encumber, manage movable assets and real estate and invest, as a debtor or creditor, in all kinds of credit operations. Bogotá, Colombia 94.99% Almaviva S.A.(2) and subsidiary Almaviva is a customs agent and a comprehensive logistics operator. Its main corporate purpose is the deposit, storage and custody, management and distribution, purchase and sale at the expense of its clients, of domestic and foreign goods and products; as well as the issue of certificates of deposit and warrants. Bogotá, Colombia 94.92% 0.88% Megalínea S.A. Technical and administrative services company. Its corporate purpose is the management and pre-legal collection, legal collection out of court collection on loans. Bogotá, Colombia 94.90%

3 2 Name of Subsidiary Main Activity Place of Business Direct Holding (1) Indirect Holding (1) National Subsidiaries Porvenir S.A.(3) and subsidiary Porvenir is a pension and severance funds administrator. Its corporate purpose is the administration and management of the pension funds authorized by law and severance funds, which constitute private equity separate from the equity of the entity administrating them, in compliance with the legal provisions that regulate the matter. Corficolombiana provides services specialized in private banking, investment banking, and cash and equity investments. The corporate purpose of the Corporation is to carry out all the acts and contracts authorized for this type of lending companies by the General Regulation of the Financial System or any other special provisions or regulations that may replace, amend or add to them. Bogotá, Colombia 36.51% 10.40% Corficolombiana S.A. and subsidiaries Bogotá, Colombia 38.19% Corficolombiana also has a holding in entities in different sectors, such as the financial, energy and gas, construction and infrastructure, agricultural and hotel service sectors, among others. Casa de Bolsa S.A. (4) Stock brokerage and administration of securities funds. Its corporate purpose is the administration of mutual funds, the administration of securities, proprietary trading, stock brokerage and consultancy on the capital market in the conditions determined by the Board of Directors of the Central Bank of Colombia. Bogotá, Colombia 22.80% 38.95% Foreign Subsidiaries Leasing Bogotá Panama S.A. and subsidiaries Banco de Bogotá Panama S.A. Bogotá Finance Corporation. Corporación Financiera Centroamericana S.A. (Ficentro) (5) Its corporate purpose consists of holding in other entities of the financial sector and in investment activities. Through its subsidiaries, it provides a wide variety of financial services to individuals and institutions, mainly in Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Panama. Entity with an international license to carry out banking business abroad. It operates in the Republic of Panama, and the Bank consolidates the Subsidiary Banco de Bogotá (Nassau) Limited. This is a financial corporation and its corporate purpose is the issuance of securities at variable rates guaranteed by the Parent Company. Over the last few years, the Company has kept investment as the main income-generating activity. Financial Institution authorized to place but not to receive funds from the public. It is supervised by Panama's Ministry of Finance. It is in the business of collecting on loans and managing assets received for sale. Panama, Republic of Panama Panama, Republic of Panama Cayman Islands Panama, Republic of Panama % % % 49.78% 49.78% (1). The Banks percentages of direct and indirect holding in each of the subsidiaries have not varied over the last year. (2). Indirect holding through Banco de Bogotá Nassau Ltd. with a percentage of 0.88% for a total of 95.81%. (3). Indirect holding through Fiduciaria Bogotá, with a percentage of 10.40% for a total of 46.91%. (4). Indirect holding through Corficolombiana, with a percentage of 38.95% for a total of 61.75%. (5). Indirect holding through Corficolombiana, with a percentage of 49.78% for a total of 99.56%. The Group is controlled by Grupo Aval Acciones y Valores S.A.

4 3 2. Statement of Compliance with Accounting and Financial Reporting Standards in Colombia The Group's consolidated financial statements attached hereto have been prepared in accordance with the accounting and financial reporting standards accepted in Colombia, which include: At January 1, 2013, the International Financial Reporting Standards (IFRS), included in the Annex to Decrees 3023 / 2013 and 2267 / 2014 issued by the Colombian Government, except: i) recognition in other comprehensive income in equity, without affecting the income for the accounting period, of the difference resulting between measuring the loan portfolio provisions pursuant to Chapter II of the Basic Accounting and Financial Bulletin issued by the Colombian Financial Superintendence) in the individual or separate financial statements and the measurement of the impairment of the loan portfolio according to IFRS; and ii) the wealth tax incurred annually and the option of its recognition charged to equity reserves, in accordance with Law 1739 / December The implementation of the International Financial Reporting Standards for entities of public interest, such as banks, was required in Decree 2784 issued by the Colombian Government in December It is mandatory for accounting management and preparation of financial statements of entities of public interest, among other entities, as of January 1, 2015, with a transition period for the preparation of the opening statement of financial position at January 1, 2014, for the purposes of comparison. However, after that, Law 1739 / 2014 set forth the accounting treatment of the wealth tax and the Colombian Financial Superintendence ordered the recording of the resulting adjustment of loan portfolio provisions in other comprehensive income, as indicated in the above paragraph. The Group's latest financial statements issued in accordance with the Colombia's previously accepted accounting principles (previous GAAP) are those issued at December 31, On February 27, 2015, the Independent Auditor issued his unqualified opinion. The financial statements were authorized by the Board of Directors and Legal Representative on October 26, 2015, to be presented at the General Meeting of Shareholders for the approval thereof. 3. Significant Accounting Policies In line with Colombian legislation, the Company must prepare separate and consolidated financial statements. Separate financial statements serve as the basis for distributing dividends and appropriating funds on behalf of the shareholders. Consolidated financial statements are submitted to the General Meeting of Shareholders for Group management purposes. Below is a summary of the significant accounting policies, which have been consistently applied to all the periods presented and to the preparation of the opening statement of financial position for purposes of transition to the IFRS. a) Basis of Measurement The consolidated financial statements have been prepared based on historical cost, except for the following items, which have been measured using an alternate basis on each balance sheet date. Financial Derivatives Item Financial instruments classified at fair value Certain components of the loan portfolio classified at fair value Noncurrent Assets Held for Sale Biological Assets Financial assets in concession agreements Inventories Basis of Measurement Fair Value through Profit or Loss Fair value through profit or loss and, for equity instruments designated in the initial recognition, at fair value through other comprehensive income Fair Value through Profit or Loss Fair value minus cost of sale Fair value minus cost of sale Fair Value through Profit or Loss Lower value between cost and net realizable value

5 4 b) Use of Accounting Judgments and Estimates with a Significant Effect on Financial Statements The Group makes estimates and assumptions that affect the amounts recognized in the financial statements and the book value of assets and liabilities within the next accounting period. The judgments and estimates are continuously evaluated and are based on the Group's experience and other factors, including the expectation of future events believed to be reasonable. The Group also makes certain judgments other than those that involve estimates in the process of applying accounting policies. Judgments with the most important effects on the amounts recognized in the consolidated financial statements and the estimates that cause a significant adjustment to the book value of assets and liabilities in the upcoming year include the following: i. Business Model The Group applies significant judgments to determine its business model to manage financial assets and assess whether the financial assets meet the conditions defined in the business model in order to be classified at fair value or amortized cost. Financial assets classified at amortized cost can only be sold under limited circumstances in non-recurring and immaterial transactions in relation to the total portfolio in situations such as when the asset no longer complies with the Group's investment accounting policies, adjustments in the maturing structure of its assets and liabilities, need to finance significant capital disbursements and stationary liquidity needs. ii. Impairment of the Loan Portfolio The Group regularly reviews its loan portfolio to assess its impairment and determine the amount of said impairment, analyze its reasonableness and record it against the period's income. This evidence can include data indicating that there has been an adverse change in the debtors' performance in each loan portfolio (commercial, consumer, mortgage, microcredit and leasing), in the Group or in the country, or in the local conditions of the economy correlated with defaults on the Group's assets. Management uses estimates based on historical experiences with loans that have similar risk characteristics and objective evidence of similar impairments on loan portfolios when their future cash flows mature. The methods and assumptions used to estimate the amount and timeliness of future cash flows are reviewed regularly to reduce any difference between loss estimates and the actual experience of loss. A 10% increase in the current experience of loss compared to the current estimates used (increase in the Probability of Default - PD - of each client/transaction) would result in an increase in the loan portfolio provision of COP 57,701 and COP 49,562 at June 30, 2015 and December 31, 2014, respectively. For the transactions analyzed individually, loss due to impairment is based on future discounted cash flow estimates of individual loans considering their probability of collection and the realization of any asset held as collateral on said loans. A 10% increase in the current experience of loss compared to the current future discounted loan cash flows that are individually significant, which can arise from differences in amounts and the timeliness of future cash flows would result in an increase in the loan provision of COP 107,836 and COP 106,880 at June 30, 2015 and December 31, 2014, respectively. iii. Fair Value of Financial Instruments The fair values of financial instruments are estimated according to the fair value hierarchy, classified in three levels that reflect the importance of the variables used in this measurement.

6 5 Information on the fair values of financial instruments classified by levels using observable data for levels 1 and 2 and non-observable data for level 3, is provided in Note 5. Establishing what constitutes as "observable" requires a significant judgment by the Group. The Group considers observable data as market data that are already available, which are regularly updated or distributed, reliable and verifiable and reflect the assumptions that the market players would use to fix the price of the asset or liability. iv. Deferred Income Tax The Group evaluates the possibility of building deferred income tax assets over time. This represents income taxes that can be recovered through future deductions from taxable income, and they are recorded in the statement of financial position. Deferred income tax assets are considered to be recoverable when the relative tax benefits are considered to be probable. Future tax income and the amount of tax benefits considered to be probable in the future are based on mid-term plans prepared by management. The business plan is based on management expectations that are believed to be reasonable under the circumstances. At June 30, 2015 and December 31, 2014, the Group estimates that deferred income tax asset entries will be recoverable based on estimates for future taxable income. Deferred tax liabilities with regard to investments in subordinated are recognized over temporary differences associated with profits not distributed by the subsidiaries, except when the Group controls the dividend policy of the subsidiary and it is probable that the temporary difference will not be reversed in the foreseeable future. See Note 21. v. Valuation of Biological Assets The valuation of the Group's biological assets in long-term crops is determined based on reports prepared internally by the Group's companies, by experts in the development of said crops and in the preparation of valuation models. Due to the nature of these crops from comparable markets, the fair value of these assets is determined based on models of cash flow deducted from net future cash flows of each crop, considering the estimated future amounts of products to be harvested, the current prices of said products and the estimated costs of their growth, maintenance and future collection, discounted at risk-free interest rates adjusted by the risk premiums required in these circumstances. See Note 16. vi. Assessment Due to Impairment of the Cash-Generating Units with Distribution of Capital Gains The Group's management assesses the impairment of the capital gains recorded in its consolidated financial statements on a yearly basis closing on November 30, and whenever there is any indication that one of the Group's cashgenerating units for which the capital gains were distributed may have been impaired based on studies carried out for this purpose by independent experts hired for said purpose and in accordance with IAS 36 - Impairment of Assets. These studies are conducted based on valuation of the groups of cash-generating units that have the different capital gains assigned in their acquisition, by the discounted cash flow method, taking into account factors such as: the economic situation of the country and the sector in which the Group operates, historical financial information, and forecast growths of the Company's income and costs over the next five years, then later, indefinite growth taking into account their indexes of profit capitalization, discounted at risk-free interest rates that are adjusted by the risk bonuses required in the circumstances of each company. The assumptions used for these valuations are disclosed in Note 20.

7 6 The methods and assumptions used for the valuation of the different cash-generating units that have capital gains assigned were reviewed by management. Based on this review, it concluded that at December 31, 2014, it was not necessary to record any impairment, taking into account that its recoverable amounts are significantly higher than its book values. Additionally, at June 30, 2015, cashgenerating units with distribution of capital gains that had presented impairment ratios had not been presented. vii. Estimate for Legal Processes The Group estimates and records a provision for legal processes, with the goal of covering possible losses from labor, civil suit, business or fiscal cases, or other circumstances. This is based on management's opinion, supported by the opinions of external legal advisors when necessary, and when losses are considered probable, which can be reasonably quantified. Due to the nature of many claims, cases and/or proceedings in some cases it is not possible to make an accurate prediction or to reasonably quantify the amount of loss. Therefore, the differences between the real amount of the actual disbursements and the amounts initially provisioned and estimated are recorded in the period in which they are identified. See Note 26. viii. Employee Benefits The measurement of pension obligations and other long-term obligations depend on a wide variety of long-term assumptions and premises established over actuarial bases, including estimates of the present value of forecast future payments of the benefits, considering the probability of potential future events, such as increases in the minimum wage and demographic experience. These premises and assumptions may have an effect on the amount and on future contributions if there is any variation. The discount rate allows future cash flows to be established at the present value on the date of measurement. The Group establishes a long-term rate that represents the market rate of high-quality fixed-income investments or government bonds in the currency in which the benefit will be paid, and it considers the opportunity and amounts of future payments of benefits for which the Group has selected government bonds. The pension plan is described in Note 25. The Group uses other key premises to value actuarial liabilities, which are calculated based on the Company's specific experience combined with published statistics and market indicators (See Note 25, which describes the most important assumptions used in actuarial calculations and the corresponding sensitivity analyses). c) Reporting Currency and Presentation The Group's administration considers the Colombian peso to be the currency that best represents the economic effects of transactions, events and conditions, and for that reason, the accompanying financial statements and disclosures are presented in millions of Colombian Pesos as its reporting currency. The figures reported in the separate financial statements of the Group's controlled companies are expressed in the currency of the primary economic environment (reporting currency) where each entity operates and they are translated for the effects of consolidation with Colombian Pesos. All the effects of translation are recorded in other comprehensive income in equity according to IAS 21. "Effects of Variations in Foreign Currency Exchange Rates".

8 7 d) Consolidation and Equity Method In line with Colombian legislation and the International Financial Reporting Standards, the Group must prepare separate and consolidated financial statements. Separate financial statements serve as the basis for distributing dividends and appropriating funds on behalf of shareholders. The consolidated financial statements are presented to the General Meeting of Shareholders and they include the assets, liabilities, equity, income, expenses and cash flows of the controlling company and its subsidiaries as if it were a single economic entity. i. Controlled Entities According to the International Financial Reporting Standards IFRS 10, the Group must prepare consolidated financial statements with its controlled entities. The Group has control over another entity if and only if it meets all the following conditions: - Power over the investee providing it with the present capacity to guide its relevant activities that affect its performance significantly. - Exposure or entitlement to variable returns from its involvement in the investee. - Capacity to use its power over the investee entity to influence the amount of the investor's returns. In the process of consolidation, the Group combines the assets, liabilities and income of the controlled entities, before standardizing their accounting policies and translating the financial statements of subsidiaries abroad to Colombian Pesos. In this process, any reciprocal transactions and unrealized earnings between them are eliminated. The share of non-controlling interest in the controlled entities are presented in equity separately from the shareholder equity of the Group's controlling company. The financial statements of the controlled companies abroad in the process of consolidation have their assets and liabilities translated to Colombian Pesos at the closing exchange rate, the statement of income at the average exchange rate of the month and equity at the historical exchange rate. The resulting net adjustment is included in equity as an "adjustment for the conversion of the financial statements" in the "other comprehensive income" account. The accompanying financial statements include the assets, liabilities, equity and income of the Parent Company and its controlled companies. The following are the details of the shares in each of them at June 30, 2015 and December 31, 2014: June 30, 2015 Entity % Shareholding Assets Liabilities Equity Net income Banco de Bogotá S.A. (Parent Company) COP 72,685,659 58,529,629 14,156,031 1,206,393 Almacenes Generales de Depósito Almaviva S.A. and subsidiaries ,051 48,426 60,625 4,277 Fiduciaria Bogotá S.A ,719 68, ,213 32,797 Corporación Financiera Colombiana S.A. and subsidiaries ,819,924 13,542,800 4,277, ,836 Sociedad Administradora de Pensiones y Cesantías Porvenir S.A. and subsidiaries ,166, ,953 1,252, ,030 Banco de Bogotá S.A. - Panama and Subsidiary ,964,375 3,776, ,569 11,254 Bogotá Finance Corporation Leasing Bogotá S.A. Panama and subsidiaries ,703,519 42,789,056 7,914, ,340 Corporación Financiera Centroamericana S.A Ficentro (1) 0 Megalinea S.A ,249 9,220 3, Casa de Bolsa S.A ,523 34,135 28, ,800, ,712,533 28,088,300 2,056,105 Eliminations (13,308,697) (724,492) (12,584,205) (1,049,669) Consolidated COP 134,492, ,988,041 15,504,095 1,006,436

9 8 Entity % Shareholding December 31, 2014 Assets Liabilities Equity Net income Banco de Bogotá S.A. (Parent Company) COP 67,173,080 53,472,148 13,700, ,628 Almacenes Generales de Depósito Almaviva S.A. and subsidiaries ,985 47,285 58,962 11,370 Fiduciaria Bogotá S.A ,579 64, ,804 30,433 Corporación Financiera Colombiana S.A. and subsidiaries ,567,048 11,903,769 4,223, ,930 Sociedad Administradora de Pensiones y Cesantías Porvenir S.A. and subsidiaries ,963, ,855 1,189, ,097 Banco de Bogotá S.A. - Panama and Subsidiary ,864,722 2,675, ,572 4,209 Bogotá Finance Corporation Leasing Bogotá S.A. Panama and subsidiaries ,653,963 38,714,717 6,939, ,722 Corporación Financiera Centroamericana S.A Ficentro Megalinea S.A ,054 11,669 2, Casa de Bolsa S.A ,181 34,713 28, ,660, ,700,081 26,523,233 1,426,799 Eliminations (12,078,697) 1,742,051 (11,552,390) (720,264) Consolidated COP 120,581, ,442,131 14,970, ,535 Entity % Shareholding January 01, 2014 Assets Liabilities Equity Net income Banco de Bogotá S.A. (Parent Company) COP 57,412,815 46,074,977 11,337,838 1,386,712 Almacenes Generales de Depósito Almaviva S.A. and subsidiary ,338 56,312 44,027 17,176 Fiduciaria Bogotá S.A ,178 55, ,713 42,542 Corporación Financiera Colombiana S.A. and subsidiaries ,712,903 14,269,532 2,443,371 (261,141) Sociedad Administradora de Pensiones y Cesantías Porvenir S.A. and subsidiary ,682, ,545 1,035,671 64,766 Banco de Bogotá S.A. - Panama and Subsidiary ,011,959 1,882, ,767 22,544 Bogotá Finance Corporation Leasing Bogotá S.A. Panama and subsidiary ,995,338 29,913,806 5,081, ,833 Corporación Financiera Centroamericana S.A Ficentro (1,914) Megalinea S.A ,273 5,064 2, Casa de Bolsa S.A ,704 21,232 28,472 1, ,211,887 92,925,125 20,286,763 1,476,232 Eliminations (10,312,191) (1,093,206) (11,405,396) (766,450) Consolidated COP 102,899,696 91,831,919 8,881, ,782 ii. Standardization of Accounting Policies The Bank carries out the standardization to apply standard accounting policies for transactions and other similar events that have taken place in similar circumstances. The following standardizations were carried out for the preparation of the consolidated financial statements: Leasing Bogotá S.A. Panama June 30, 2015 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 50,763,048 42,864,982 7,898, ,458 Standardization adjustments: Purchase accounting reversion based on regulations applied by subsidiaries (Purchase Price Allocation) 272,358 (71,926) 344,284 12,853 Other standardization adjustments (1) (331,887) (4,000) (327,887) 22,029 Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 50,703,519 42,789,056 7,914, ,340

10 9 December 31, 2014 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 45,722,660 38,790,683 6,931, ,155 Standardization adjustments: Purchase accounting reversion based on regulations applied by subsidiaries (Purchase Price Allocation) 228,659 (75,717) 304,376 27,258 Other standardization adjustments (1) (297,356) (249) (297,108) (50,691) Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 45,653,963 38,714,717 6,939, ,722 January 01, 2014 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 35,129,139 30,003,689 5,125,450 0 Standardization adjustments: Purchase accounting reversion based on regulations applied by subsidiaries (Purchase Price Allocation) 109,286 (92,561) 201,847 0 Other standardization adjustments (1) (243,087) 2,678 (245,764) 0 Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 34,995,338 29,913,806 5,081,533 0 (1) These are the adjustments of goodwill, investments and loan provisions. Banco de Bogotá S.A. Panamá June 30, 2015 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 3,964,376 3,776, ,568 9,774 Standardization adjustments (1) ,480 Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 3,964,376 3,776, ,568 11,254 December 31, 2014 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 2,864,722 2,675, ,572 11,753 Standardization adjustments (1) (7,544) Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 2,864,722 2,675, ,572 4,209 January 01, 2014 Assets Liabilities Equity Income for the Period Balances according to IFRS reported by the subsidiary COP 2,015,900 1,883, ,766 0 Standardization adjustments (1) (3,941) (942) (2,999) 0 Balances based on the technical regulatory framework applicable to the Bank for the preparation of consolidated financial statements COP 2,011,959 1,882, ,767 0 (1) These are the adjustments of investments and loan provisions.

11 10 iii. Investments in Associates and Joint Ventures Investments in Associates Investments in associates (entities over which there is significant influence, but no control). It is understood that there is significant influence over another entity if there is directly or indirectly 20% or more of the power to vote in the investee, unless it can be clearly demonstrated that said influence does not exist. These investments are recorded using the equity method and they are periodically adjusted for changes in the investor's share in the net assets of the investee. The investor s participation in the statement of income of the investee is included in the investor s statement of income, and its share the investee s other comprehensive income is included in the investor s other comprehensive income. Joint Agreements A joint agreement is that by which two or more parties maintain joint control in the distribution of control decided in the agreement. That is to say, only when decisions on relevant activities require the unanimous consent of the parties that share control. IFRS 11 classifies joint agreements into: joint operations and joint ventures, depending on the contractual rights and obligations of each investor. In joint operations, the parties that have joint control of the agreement are entitled to the assets and obligations with respect to the liabilities related to the agreement. In joint ventures, the parties that have control of the agreement are entitled to the net assets of the agreement. Joint operations are included in the Group's separate financial statements based on its proportional and contractual share of each of the assets, liabilities, income and expenses according to the terms of the agreement. The Group's joint ventures are recorded using the equity method in the same way as the investments in associates described in the previous paragraph. e) Presentation of Financial Statements The accompanying financial statements are presented with the following aspects in mind: i. Statement of Financial Position The statement of financial position is presented to show the different asset and liability accounts arranged according to their liquidity, considering that, for a financial entity, this form of presentation provides more relevant reliable information. Accordingly, each of the financial assets and liabilities notes reveals the amount expected to be collected or paid within twelve months and after the next twelve months. ii. Statement of Income of the Period and Other Comprehensive Income These statements are presented separately as permitted by IAS 1 "Presentation of Financial Statements". In addition, the statement of income is presented based on the nature of expenses, which is the most common model in financial entities as it provides more reliable and relevant information.

12 11 iii. Statement of Cash Flow Statements of cash flow are presented using the indirect method by which operating activities are first presented, reporting net earnings. This amount is then adjusted to account for the effect of non-monetary transactions for all types of accruals that do not generate cash flows. Likewise, it is modified for the effect of entries of results classified as investments or financing. Interest income and expenses are presented as components of operating activities. f) Transactions in Foreign Currency Transactions in foreign currency are translated into Colombian Pesos using the prevailing exchange rate on the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into the reporting currency using the prevailing exchange rate on the cutoff date for the statement of financial position and non-monetary assets in foreign currency are measured at the historical exchange rate. Profit or loss resulting from the translation affect the statement of income. At June 30, 2015 and December 31, 2014, the rates were COP 2, in pesos and COP 2, in pesos, respectively. g) Cash and Cash Equivalents Cash and cash equivalents include cash, bank deposits, and other short-term investments in active markets with maturity in three months or less, following the date of acquisition. For a financial investment to qualify as a cash equivalent, it must fulfill the short-term payment commitments, as well as for investment purposes or similar; be easily translated into a specific amount of cash; and be subject to an insignificant risk of changes in value. h) Financial Assets The Group recognizes its financial assets and liabilities when it becomes one of the parties of the agreement that generates the financial asset or liability. All financial assets are recognized initially more or less at fair value, in the case of financial assets that are not recorded at fair value through profit or loss, transaction costs directly attributable to the acquisition. Regular investment purchases and sales are recognized on the procurement date, on which the Bank or its controlled companies agree to purchase or sell the asset. Financial assets at fair value with an impact on income are initially recorded at fair value and transaction costs are recorded in expenditure when incurred. Financial assets classified at amortized cost are recorded in their acquisition or approval at transaction value in the case of investments or nominal value in the case of loan portfolio that, unless there is evidence otherwise, match the fair value thereof, plus the transaction costs directly attributable to their acquisition or approval, minus the commissions received. If the fair value of a financial asset in the initial recording is different from the transaction price, the difference between fair value and the transaction price is recorded as a gain or loss. This is the case of the mandatory investments to be made by the entities in Class A and B Agricultural Development Securities.

13 12 The Group's financial assets include cash and short-term placements, loan portfolios and capital lease transactions, investments in debt securities, commercial debtors and other accounts receivable in debt and equity securities in listed and non-listed companies and derivative transactions. i. Financial Investment Assets Financial investment assets are classified as measured later at amortized cost or fair value based on the: Business model of the entity to manage the portfolios. Characteristics of contractual cash flow. According to the Group's business model, a financial asset is classified as measured at amortized cost if the following two conditions are met: The asset is held in a business model whose objective is to hold onto the assets to obtain the contractual cash flows. The contractual conditions of the financial asset give rise, on specific dates, to cash flows that are only payments of principal and interest on the amount of principal pending payment. Any other financial assets that do not meet the conditions aforementioned are classified as measured at fair value. Following the initial recording, all financial assets classified "at fair value in the statement of income" are measured at fair value". The net income resulting from changes in fair value are presented as net in the statement of income in the account "net changes in financial assets of financial debt assets". In turn, for financial assets classified as "at amortized cost", following initial recording, reimbursements of principal, plus or minus accumulated amortization (calculated using the effective interest rate method) of any difference between the initial amount and the reimbursement value upon maturity and minus any decrease due to impairment loss are adjusted by crediting the statement of income. Income from dividends on financial assets in equity instruments is recognized in the statement of income, in the net income account in equity instruments, when it is established that the Bank is entitled to receiving payment thereof, regardless of the decision made to record the variations in fair value. Financial assets other than investments in associates and joint ventures, both in debt instruments and in equity instruments measured at fair value, are classified according to the Group's policies and business models with respect to these instruments, also considering the option provided by the International Financial Reporting Standards "IFRS 9" of the equity instruments between: Measured at fair value through profit or loss, when considered trading securities. Measured at fair value through other comprehensive income, when considered strategic and there is no intention of sale in the short-term. The classification of assets measured at fair value through profit or loss and the designation of investments in equity instruments as measured at fair value through other comprehensive income was determined based on the events and circumstances on the date of transition to IFRS. The Group values most of its investments using the information provided by the INFOVALMER S.A. pricing service. The service provides input for the valuation of investments (prices, rates, curves, margins, etc.), and has methods for the valuation of approved investments in accordance with Decree 2555 / 2010, as well as the instructions provided in the Basic Legal Bulletin of the Colombian Financial Superintendence.

14 13 Estimating Fair Value According to IFRS 13 "Fair Value Measurement", fair value is the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accordingly, the fair value measurements of the Group's financial investment assets are made as follows: The information provided by the INFOVALMER S.A. pricing service for instruments whose valuation input is published on a daily basis is used in accordance with approved investment valuation methods. The fair value of financial assets that are not listed on an active market is determined using valuation techniques. The Group uses a variety of methods and assumptions based on the existing market conditions of each reporting date. The valuation techniques include the use of recent comparable transactions in equal conditions, reference to other substantially equal instruments, discounted cash flow analysis, options price models and other valuation techniques that are commonly employed by market players, taking maximum advantage of market data and minimizing the use of non-observable data. Impairment According to IAS 39, the Group evaluates whether there is objective evidence at the end of the reporting period that a financial asset or a group thereof measured at amortized cost is impaired. Significant economic difficulties of the debtor, probability of the debtor filing for bankruptcy or financial restructuring and late payment are considered indicators of financial asset impairment. ii) Loan Portfolio and Capital Lease Transactions The loans granted under the various authorized categories are recorded. The resources used in the granting of the loans come from its own resources, the public in the form of deposits and other foreign and domestic funding sources. They are financial assets with fixed or determinable payments that are not listed on an active market and they are usually originated when loaning funds to a debtor. Loans are presented at principal value pending collection, minus unearned interest and commissions (if applicable) and impairment losses, except in the case of loans for which the fair value option has been chosen. Unearned interest and commissions are recorded as income during the life of the loans using the effective interest method. The following transactions are presented in the loan portfolio and capital leasing: - Customer loans, - Assets provided that are classified as capital leases according to the IAS 17, - Prepayments for purchasing assets to provide in the capital lease, - Assets for placement in the capital lease, - Imports in the course of assets to provide in the capital lease, - Interests receivable, - Employee loans, - Letters of credit for collateral, - Letters of credit for deferred payment, and - Payment on behalf of customers.

15 14 The Group measures the following types of loans at amortized cost. Credit Card Type of Loan Revolving Credit Overdraft Loans in RVU, so that granting costs are in COP Loans in foreign currency, so that granting costs are in COP Amortization Term Term of enrollment in the Bank. Average term of the payments in which use is deferred. Considering that the term of the card must never be exceeded. The cost begins to amortize once the credit card is activated, regardless of whether or not it is used. During the limit period During the limit period During the credit period During the credit period The costs to grant the loan are not calculated for the lines of credit that mature up to 6 months following the issue thereof. In rating the loan portfolio, four (4) categories are considered: Commercial Loans granted to individuals or legal entities for the development of organized business activities, other than the loans granted in the microcredit category. Consumer Loans that, regardless of their amount, are granted to individuals to finance the acquisition of consumer goods or the payment of services for non-commercial or business purposes, as opposed to those granted within the microcredit category. Mortgage Loans that, regardless of the amount, are granted to individuals, and are for the purchase of new or used housing, or for the construction of individual homes. Microcredit Loans made up of the active loan operations referred to in Article 39 of Law 590 / 2000, or the regulations that amend, replace or add to it, as well as those carried out with small businesses in which the main source of repayment of the borrowing comes from the income derived from their activities. The borrower's debt balance may not exceed one hundred and twenty (120) current minimum monthly legal salaries at the time of the approval of the respective asset loan operation. The debt balance is understood to be the amount of current borrowings for which the corresponding small business is responsible to the financial and other sectors. This balance is in the operator records database consulted by the respective creditor, excluding mortgages for home financing, and adding the value of the new borrowing.

16 15 A micro-business is understood to be a unit of economic production, operated by individuals or legal entities in activities related to business, farming and livestock, industry, trade or services, whether rural or urban, whose workforce does not exceed ten (10) workers, and whose total assets are less than five hundred (500) current minimum monthly legal salaries. Accrual of Interest According to Paragraphs 29 and 30 of IAS 18, income from ordinary activities resulting from the thirdparty use of the entity's assets that produce interest, royalties or dividends are recorded according to the bases established in Paragraph 30, provided that: a) The entity is likely to receive the economic benefits associated with the transaction. b) The amount of income from ordinary activities can be measured reliably. Income from ordinary activities is recorded according to the following: Interest is recorded using the effective interest method. The effective interest method calculates the amortized cost of an asset and allocates the interest cost or income during the relevant period. The effective interest rate equals exactly the estimated future payments or cash received during the expected life of the financial instruments, or if appropriate, a shorter period, at the initial net book value of the asset. In order to calculate the effective interest rate, the cash flows are estimated considering all the contractual terms of the fine without considering future credit losses and considering the initial balance of the transaction or loan granted, the transaction costs and the premiums granted, minus commissions and discounts received that are an integral part of the effective rate. From the legal standpoint, interests on late payments are agreed contractually and as such can be assimilated to variable interests incurred on account of debtor default. To this effect, these interests are incurred at the time that the contractual obligation to do so arises, regardless of future credit losses, as established by the definition of the effective interest rate. Therefore, this balance is part of the client's total debt, which is evaluated to determine the impairment using the procedures established to do so, either through individual or collective evaluation. Suspension of Accruals Interest is accrued when there are estimated future flows to be recovered, in line with the provisions set forth in Paragraph 29 of IAS 18, which calls for accrual whenever the entity is likely to receive the economic benefits associated with the transaction. In accordance with the above, the following applies: a) The accrual of interest is suspended on loans evaluated individually or collectively that are one hundred percent provisioned, since there are no future flows to be recovered. b) For all other partially impaired loans, whether individually or collectively, interest will continue to be accrued at the original rate of the loan, which in the case of loans evaluated individually for impairment, is the rate at which the discount of future flows expected to be recovered was made. Impairment According to IAS 39, the Bank and its controlled companies evaluate at the end of each period whether there is objective evidence at the end of the reporting period that a financial asset or a group thereof measured at amortized cost is impaired. Significant economic difficulties of the debtor, probability of the debtor filing for bankruptcy or financial restructuring and late payment are considered indicators showing that the financial asset is impaired.

17 16 When there is objective evidence that there has been an impairment loss of the value in the loan portfolio at amortized cost, the amount of the loss is measured as the difference between the asset s carrying value and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted with the original effective interest rate of the financial asset (that is, the effective interest rate computed at the time of the initial entry). The asset s carrying value is reduced directly. The amount of the loss is recorded in the statement of income. To evaluate the impairment, the Group assesses the impaired loans considered significant individually; all other loans are evaluated collectively. Impairment of the Loan Portfolio Evaluated Individually To determine loan impairment loss, clients with balances greater than or equal to COP 2,000 have been defined as individually significant loans, at the consolidated level of all the Group's entities and for all credit risk concepts to which the client is exposed. They are considered impaired when, based on current or past events and information when analyzing the debt profile of each debtor, the collateral provided, the financial information and information from the credit reporting bureaus, it is likely that the Bank and/or subsidiaries cannot recover all the amounts due in the original contract, including the agreed interest and commissions. Impairment of the Loan Portfolio Evaluated Collectively Loans that are not subject to individual analysis to evaluate impairment are included in a collective impairment analysis, regardless of whether they are in arrears or they are considered significant or not. This analysis determines the level of the losses incurred in the loan portfolio. The collective evaluation method comes from statistical analyses based on experience in losses observed in the portfolio of each entity and includes the following aspects: Segmentation of the portfolio in similar groups according to levels of loss and client and/or loan characteristics. PD (probability of default) estimates based on the occurrence of the loss event over a time horizon, which must consider the identification period for losses incurred. LGD (loss given default) estimates based on the recovery observed given a loss event. LIP (loss identification period) estimates. The value of money over time is taken into account in order to estimate recovery rates. Expected recovery flows are discounted at the interest rate of placement of the defaulted loans and, if the data of the original rates is not available, a discount rate related to the average placement rate is used as the best estimate. PD, LGD and LIP are defined by the areas of Credit Risk of each of the Group's entities and they are in charge of establishing the frequency and method for validation, calibration and revision of the parameters and the model. Four fundamental factors are taken into account to quantify the losses incurred: exposure, probability of default, the loss identification period and severity. Exposure at default (EAD) is the amount of risk incurred at the time of counterparty default.