Statutory Auditor s Report 5. Statement of Financial Position 11. Statement of Income and Other Comprehensive Income 13

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3 Table of Contents Statutory Auditor s Report 5 Financial Statements Statement of Financial Position 11 Statement of Income and Other Comprehensive Income 13 Statement of Changes in Shareholders Equity 15 Statement of Cash Flows 16 Notes Notes to the Financial Statements 20 Financial Statement Certification 85 3

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5 KPMG S.A.S. Teléfono 57 (4) Carrera 43 A No. 16 A Sur 38 Fax 57 (4) Medellín Colombia FREE TRANSLATION OF THE REPORT ISSUED IN SPANISH) STATUTORY AUDITOR S REPORT To the Shareholders AdCap Colombia S.A. Comisionista de Bolsa: Report on the financial statements I have audited the accompanying financial statements of AdCap Colombia S.A. Comisionista de Bolsa (the Company), which comprise the statement of financial position as at December 31, 2016 and the statements of income (loss) and other comprehensive income, changes in stockholders equity and cash flows for the year then ended and their respective notes that include the summary of significant accounting policies and other explanatory information; furthermore I audited the collective investment funds, as indicated below and that are managed by the Company. Management's responsibility regarding the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Accounting and Financial Reporting Standards accepted in Colombia. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Statutory Auditor s responsibility for the audit of the financial statements My responsibility is to express an opinion on the financial statements based on my audit. I obtained the necessary information and carried out my audit in accordance with Information Assurance Standards accepted in Colombia. Such standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence supporting the amounts and disclosures in the financial statements. The procedures selected depend on the statutory auditor's judgment, including the assessment of the risk of material misstatement in the financial statements. In making this risk assessment, the statutory auditor considers the internal control relevant to the preparation and fair presentation of the financial statements, in order to design audit procedures that are appropriate under the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. KPMG S.A.S. sociedad colombiana por acciones simplificada y firma miembro de la red de firmas miembro KPMG S.A.S. independientes de KPMG afiliadas a KPMG International Cooperative ( KPMG International ), una entidad suiza. Nit

6 2 I believe that the audit evidence I have obtained provides a reasonable basis for my audit opinion. Opinion In my opinion, the above mentioned financial statements, taken accurately from books and attached to this report, present fairly, in all material respects, the financial position of the Company as at December 31, 2016, the results of its operations, and its cash flows for the year then ended, in conformity with Accounting and Financial Reporting Standards accepted in Colombia, applied on a consistent basis with previous year. Other matters The financial statements as at and for the year ending December 31, 2015 are submitted only for comparison purposes and were audited by other public accountant, in accordance with auditing standards generally accepted in Colombia and in his report, dated March 4, 2016, expressed an unqualified opinion thereon. Report about other legal and regulatory requirements 1. Based on the results of my tests, I believe during 2016: a) The Company s bookkeeping has been performed in conformity with legal rules and accounting pronouncements. b) The operations recorded in the books and management performance are in conformity with the bylaws and decisions of the General Shareholders Meeting. c) The correspondence, the vouchers of accounts and the books of minutes and record of shares have been properly maintained. d) The Company has adopted adequate measures of internal control, which include the risks management systems implemented, maintenance and custody of the Company s own assets and those of third parties in its possession. e) The Company has fulfilled the standards and instructions of the Financial Superintendence of Colombia regarding to the implementation and impact on the statement of financial position and the statement of operations of the Risks Management Systems that apply. f) The management report prepared by management agrees with the accompanying financial statements, which includes evidence about free circulation of sellers or suppliers invoices. The information contained in the contribution returns submitted to the Social Security System, specifically the information on affiliates and their salary base for determining contributions, has been prepared from the accounting records and supporting 6

7 3 a) documentation. The Company is up to date in payment of contributions to the Social Security System. 2. In compliance with the sections and of Chapter III, Title I, Part I of Legal Basic Circular Letter 029 of 2014 of the Financial Superintendence of Colombia, I have audited the financial statements as at December 31, 2016 of the collective investment funds listed below, whose reports are issued independently: Unqualified reports Fondo de Inversión Colectiva Abierto Invertir Ahorro Plus Fondo de Inversión Colectiva Abierto Invertir Ecopetrol Fondo de Inversión Colectiva Abierto Invertir Bancolombia Fondo de Inversión Colectiva Abierto Invertir ETF S&P 500 Fondo de Inversión Colectiva Abierto con Pacto de Permanencia Invertir Multiplazos 90 Fondo de Inversión Colectiva Abierto con Pacto de Permanencia Invertir Multiplazos 180 Fondo de Inversión Colectiva Invertir AdCap Global Fondo de Inversión Colectiva Abierto con Pacto de Permanencia Invertir Gestionado Fondo de Inversión Colectiva Abierto Invertir Cemargos Fondo de Inversión Colectiva Cerrado con Plazo de Redención Invertir en Alternativos Clase 2 En liquidación Fondo de Inversión Colectiva Cerrado con Plazo de Redención Invertir en Alternativos Clase 1 En liquidación I carried out follow up to the answers provided by the management to the recommendation letters addressed to the Company s management and there are no outstanding material issues that can affect my opinion March 6, 2017 Gina Patricia Giraldo Zuluaga Statutory Auditor of AdCap Colombia S.A. Comisionista de Bolsa Registration T Member of KPMG S.A.S. 7

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9 Financial Statements 9

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11 ADCAP COLOMBIA S.A. COMISIONISTA DE BOLSA STATEMENT OF FINANCIAL SITUATION AS OF DECEMBER 31ST, 2016 (With comparative figures as of December 31st, 2015) (Amounts expressed in thousand Colombian Pesos) NOTES ASSETS Current Assets Cash and cash equivalents 6 $ 14,849,325 $ 13,286,130 Monetary market operations 7 5,546,832 9,120,634 Investments 7 23,127,717 4,915,044 Trade and other receivables 8 1,318,972 3,902,036 Accounts receivable from related and associated parts 30 1, ,748 Assets for current taxes 10 1,314,439 1, Expenses paid in advance 9 277, ,442 Other non-financial assets 41,000 41,000 46,477,004 33,167,906 Non-Current Assets Investments 7 713, ,154 Equipment , ,816 Intangible assets , ,025 Other accounts receivables 8 13,816 30,381 Deferred tax assets 10 3,645,108 2,880,692 5,057,671 5,014,068 TOTAL ASSETS $ 51,534,675 $ 38,181,974 LIABILITIES AND EQUITY Current liabilities Loans and borrowings 13 $ - $ 66,864 Monetary market operations 14 19,009,202 7,196,112 Trades and other payables , ,315 Accounts payable to related parts ,425 68,460 11

12 Employee benefits 16 2,204,862 1,611,009 22,235,115 9,530,760 Non-Current Liabilities Loans and borrowings 13-94,009 TOTAL LIABILITIES 22,235,115 9,624,769 EQUITY Share Capital 17 1,379,057 1,291,472 Share placement premium 17 13,459,311 11,707,597 Own shares re-purchased (13,313) (13,313) Other capital reserves 18 14,112,789 13,739,026 Retained Earnings - 461,037 Results of the period (967,369) 112,983 Comprehensive income 27 1,329,085 1,258,403 TOTAL EQUITY 29,299,560 28,557,205 TOTAL LIABILITIES AND EQUITY $ 51,534,675 $ 38,181,974 Jorge Iván Abreo García Angela Lucia Cadavid Sierra Gina Patricia Giraldo Zuluaga Legal Representative Public Accountant Statutory Auditor s report Professional Card No T Professional card No T Member of KPMG S.A.S. (Refer to my Statutory Auditor s report issued on March 6th, 2017) 12

13 ADCAP COLOMBIA S.A. COMISIONISTA DE BOLSA STATEMENT OF RESULTS AND OTHER COMPREHENSIVE INCOME YEAR ENDED AS OF DECEMBER 31ST, 2016 (With comparative figures as of December 31st, 2015) (Amounts expressed in thousand Colombian Pesos) NOTES Results from regular activities Income for commissions $ 8,874,358 $ 10,799,097 Investments yield for own account 11,678,768 5,047,977 Profit (loss) in derivatives 4,597,702 (1,482,382) Income from exchange market brokerage 828,016 6,409,290 Income from services rendered 136, ,519 Total results from regular activities 19 26,115,368 20,878,501 Direct costs and expenses Participations 20 2,167, ,525 Services 21 4,115,536 2,955,117 Total costos y gastos directos 6,283,472 3,218,642 Gross profit 19,831,896 17,659,859 Other income 22 85, ,767 Administrative expenses 24 (20,197,695) (17,419,083) Other expenses 23 (317,463) (1,731,012) Results from operation activities (597,957) (1,332,469) Other non-operational costs and expenses 26 (870,970) (185,867) Financial costs 25 (5,743) (15,790) (Loss) before taxes (1,474,670) (1,534,126) Income (expenses) from taxes ,301 1,647,109 Profit $ (967,369) $ 112,983 Other comprehensive income 13

14 Other comprehensive income to be reclassified in results From further periods: Net profit from financial instruments measured at equity variation $ 70,682 $ 384,179 Total comprehensive income of the year ($ 896,687) $ 497,162 Notes attached are integral part of financial statements. Jorge Iván Abreo García Angela Lucia Cadavid Sierra Gina Patricia Giraldo Zuluaga Legal Representative Public Accountant Statutory Auditor s report Professional Card No T Professional card No T Member of KPMG S.A.S. (Refer to my Statutory Auditor s report issued on March 6th, 2017) 14

15 ADCAP COLOMBIA S.A. COMISIONISTA DE BOLSA STATEMENT OF CHANGES IN EQUITY YEAR ENDED AS OF DECEMBER 31ST, 2016 (With comparative figures as of December 31st, 2015) (Amounts expressed in thousand Colombian Pesos) Initial balance as of January 1st, 2015 NOTES Capital Share placement premium Own shares repurchased Legal Otras reservas de capital By fiscal provision For repurchase of shares Reserves Accrued Results Other comprehensive income Total equity 1,175,847 8,324,168-14,256 13,010, , ,000 13,327, , ,224 24,560,046 Changes in the period: Issue of shares 116,568 3,383, ,499,997 Appropriation of profits ,097 7, ,510 (411,510) - Other comprehensive income , ,179 Repurchased shares (943) Results of the period , ,983 Final balance as of December 31st, ,291,472 11,707,597-13,313 13,414, , ,000 13,739, ,020 1,258,403 28,557,205 Changes in the period: - - Issue of shares 87,585 1,751, ,839,299 Appropriation of profits , , ,763 (574,020) - (200,257) Other comprehensive income ,682 70,682 Results of the period (967,369) - (967,369) Final balance as of December 31st, ,379,057 13,459,311-13,313 14,011,242 1, ,000 14,112,789 (967,369) 1,329,085 29,299,560 Notes attached are part of financial statements. Jorge Iván Abreo García Angela Lucia Cadavid Sierra Gina Patricia Giraldo Zuluaga Legal Representative Public Accountant Statutory Auditor s report T.P T Professional card No T Member of KPMG S.A.S. (Refer to my Statutory Auditor s report issued on March 6th, 2017) 15

16 CASH FLOW STATEMENT YEAR ENDED AS OF DECEMBER 31ST, 2016 (With comparative figures as of December 31st, 2015) (Amounts expressed in thousand Colombian Pesos) Note Cash flow from operation activities Profit ($ 967,369) $ 112,983 Adjustments to reconcile net profits with net cash provided from operation activities Depreciation , ,209 Loss from sale of assets 17,387 3,680 Amortization of intangible assets , ,018 Deferred tax 10 ($ 764,416) ($ 1,891,528) Income tax , ,419 $ 8,543 ($ 1,103,202) Changes in assets and liabilities: Investments ($ 14,283,862) ($ 6,905,772) Accounts receivable 2,941,777 1,201,750 Expenses paid in advance 34,322 ($ 20,903) Purchases from intangible assets 12 ($ 171,540) ($ 222,890) Other financial liabilities 11,813,090 7,196,112 Other accounts payable 364, ,075 Employee benefits payable and other provisions 593, ,926 1,291,914 1,964,298 Interest from financial obligations (5,743) - Income tax paid ($ 523,938) 719,748 Net cash (used in) provided by operation activities ($ 190,850) $ 1,693,827 Cash flow from investment activities Purchase of voluntary investments - ($ 7,151) Amounts from the sale of assets , ,269 Amounts from the assignment of leasing agreements - 172,293 Acquisition of equipment 11 ($ 157,331) ($ 216,515) Net cash provided by investment activities 75, ,896 Cash flow from financing activities Amounts from the issue of shares 1,839,299 3,499,997 Payment of obligations from financial leasing ($ 155,130) ($ 349,817) Financial leasing - 215,214 16

17 Net cash provided by financing activities 1,684,169 3,365,394 Increase of net cash and cash equivalent 1,358,163 4,287,851 Effect of variation from exchange difference (205,032) 1,035,266 Cash equivalent to cash in the beginning of the year 13,286,130 7,963,013 Cash and cash equivalent as of December 31 $ 14,849,325 $ 13,286,130 Notes attached are integral part of financial statements. Jorge Iván Abreo García Angela Lucia Cadavid Sierra Gina Patricia Giraldo Zuluaga Legal Representative Public Accountant Statutory Auditor s report Professional Card No T Professional card No T Member of KPMG S.A.S. (Refer to my Statutory Auditor s report issued on March 6th, 2017) 17

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19 Notes to the Financial Statements

20 AdCap Colombia S.A. Comisionista de Bolsa Notes to Financial Statements, as of December 31st, 2016 (With comparative figures as of December 31st, 2015) (All the figures are expressed in thousand Colombian pesos, except for the net profit per share and the par value of the stock). Note 1. Reporting Entity. AdCap Colombia S.A. (hereinafter the broker or AdCap Colombia ) is a stockbroker company whose purpose is to perform brokerage activities involving securities, currencies and financial derivatives; to manage collective investment funds and third-party portfolios; to execute marginaccounts and correspondent contracts; to carry out independent operations; and to perform investment banking activities. AdCap Colombia has defined 4 business lines for carrying out the activities mentioned above: Equity management, institutional customers and trading, portfolio management, and investment banking. By means of public deed No dated December 9 th, 1982 issued by Medellin Notary s Office No. 11, the company was incorporated under the name of Asesores en Valores Dyner Echavarría Velásquez and has been authorized to operate until By means of public deed No. 471 dated February 24 th, 1988, the Company s name was changed to Asesores en Valores S.A. Comisionistas de Bolsa. The Company s main domicile is located in Medellín but it has a branch in Bogota where it performs exchange transactions through Colombia Stock Exchange. Pursuant to resolution No dated January 18 th, 1999, the Colombian Financial Superintendency granted the company authorization to incorporate and manage open collective funds, which started operating on January 26 and 28, 1999, under the names of Invertir con Asesores (Investing with Asesores) and Invertir 180 con Asesores (Investing 180 with Asesores), respectively. By means of Resolution 100 dated February 5 th, 2015, the Colombian Financial Superintendency approved the regulations for the subscription and placement of shares, which were offered to Advanced Capital International Ltd. With the acquired shares, Advanced Capital International Ltd obtained, through the mentioned mechanism, 20.63% of outstanding shares. And, in January 2015, Advanced Capital International Ltd. completed the acquisition of 51% of outstanding shares, thus becoming the controlling company of Asesores en Valores S.A. Comisionista de Bolsa. Later, by means of public deed No. 483 dated March 18 th, 2015, the Company s trade name was changed to AdCap Colombia S.A. Comisionista de Bolsa. In year 2016, the brokerage company capitalized COP$ 1,839 million to assure compliance with external requirements on minimum technical equity needed to be an exchange market broker. On January 27 th, 2016, the Financial Superintendency approved capitalization of the brokerage company and, on that same date, its parent company authorized all net resources needed, thus completing 54.11% of stockholding. By the end of year 2016, the brokerage company had 133 (132 in 2015) employees directly employed by the company. 20

21 Note 2. Grounds for the presentation of financial statements. a. Technical Regulations Financial statements have been prepared according to the Financial Information and Accounting Norms Accepted in Colombia (NCIF, for its initials in Spanish), as set forth in Law 1314 of 2009, governed by Regulatory Decree No of 2015, as amended by Decree 2496 of 2015 and Decree 2131 of The NCIF norms are based on the International Financial Information Norms (NIIF, for its initials in Spanish), and its interpretations, issued by the International Accounting Standards Board IASB; basic norms correspond to the ones officially translated into Spanish and issued by the IASB as of December 31 st, The Company has applied the following exceptions (as contemplated in Title 4 Special Regimes of Chapter 1, Decree 2420 of 2015) to these financial statements: International Accounting Standard 39 and NIIF Standard 9 relating to classification and valuation of investments; for these cases, the company still applies provisions of Basic Accounting and Financial Document issued by Colombia Financial Superintendency (SFC). Additionally, the Company has applied the following guidelines according to laws and norms in force in Colombia: Article 10 of Law 1739 dated December 23 rd, 2014, which allows recognizing the wealth income affecting the equity reserves instead of recognizing expenses, as contemplated in NIC standard 37. The following exceptions set forth in External Document 036 issued by Colombia Financial Superintendency on December 12 th, 2014, for supervised and controlled entities. a. The brokerage company recognizes in Other Comprehensive Income the net positive difference seen when NIIF standards were first applied and changes are reported under Code Adjustments for Applying NIIF Standards for the First Time in the Only Financial Information Catalogue, with supervision purposes. b. Net positive differences seen during the application of NIIF standards for the first time shall not be distributed to compensate losses, conduct capitalization processes, distribute profits and/or dividends or to be recognized as reserves; and such standards shall only be used when effectively performed with third parties other than related parties, as contemplated in NIIF standards. c. Net positive differences seen during the application of NIIF standards for the first time, shall not be computed to comply with reasonable requirements of technical equity, minimum capital required for operations, and the observation of all other legal controls, 21

22 according to the nature of each entity. For legal effects in Colombia, the main financial statements are the individual financial statements. (b) Measurement Basis Financial statements of AdCap Colombia have been prepared according to the historical cost basis, except for the following important items included in the financial situation statement: Derived financial instruments are measured at the reasonable value. Financial instruments at the reasonable value with changes in results are measured at the reasonable value according to the price provided by the official price supplier. (c) Functional and presentation currency The amounts included in financial statements of the Company have been expressed in the currency within the primary economic environment where the company operates (Colombian pesos). Financial statements have been expressed in Colombian pesos, which is the functional currency of the Company and the presentation currency, as well. All the information is presented in thousand Colombian pesos and has been rounded up to the nearest unit. (d) Use of estimations and judgments Presentation of financial statements according to the Financial Information and Accounting Norms Accepted in Colombia, requires accounting judgments, estimations, and assumptions from the Management that may affect income and expenses, assets and liabilities, and related disclosures, as well as disclosure of contingent liabilities on the closing date of the period of report. In this sense, the uncertainty about such assumptions and estimations could end up in results that could require significant adjustments to the amounts in the book of affected assets or liabilities. Taxes Assets from deferred taxes are recognized for all unused fiscal losses, provided that there is a future available tax profit against which such losses can be compensated. Determination of the amount of assets from deferred taxes that may be recognized requires a significant degree of judgment by the Management in relation to the opportunity and the level of future tax profits to be reached and to the future strategies of fiscal planning to be applied. The compensation right with future income does not expire in case of fiscal losses and is given an amortization term of 5 years in the case of excessive presumptive profit over net profit. 22

23 The brokerage company has a net deferred tax in the amount of COP$ 3,645,108 (COP$ 2,880,692 in 2015) (Note 10). By the closing date of year 2016, management projections on the possibility of having future taxable profits increased significantly in relation to those of 2015, and based on the new expectations the brokerage company recognized total value of accrued fiscal losses to be amortized. Reasonable Value of Financial Instruments. In order to determine the reasonable value of certain financial instruments, the regulations issued by the Financial Superintendency demanded the use of prices provided by a price supplier. This implies the recognition of adjustment for valuation through the use of an objective basis set forth by a third party who applies the techniques allowed by NIIF Standard 13. Negotiable debt securities (or securities available for sale): These securities are valued according to the price provided by the price supplier assigned as official for such segment. In exceptional cases where, on the date of valuation, there is not a reasonable value set according to provisions above, such valuation shall be made on an exponential basis from the Internal Rate of Return. The reasonable value of such investment should be estimated by adding the present value of future flows by concept of profits and capital. By the end of December 2016, for all financial instruments classified at the reasonable value with changes in results, the price provided by the official supplier was used. There were no significant estimations by the Management. Participation values registered in the National Registry of Securities and Issuers (RNVE, for its initials in Spanish): They are valued according to the price set by the official valuation price suppliers. Relevant estimations and assumptions are reviewed on a regular basis. Revisions of accounting estimations are recognized in the period where the estimation has been revised and in any other future period affected. Note 10 Use of Fiscal Losses. Note 3. Significant Accounting Policies. Accounting policies set below have been applied consistently for the preparation of financial statements, according to the Financial Information and Accounting Norms Accepted in Colombia (NCIF), unless otherwise contemplated. a) Recognition of income from regular activities. Income is recognized to the extent it is probable that the Broker receives economic benefits and that the income can be reliably measured, independently from the moment in which payment is made. Income is measured based on the reasonable value of the consideration received or to be received, taking into account the payment conditions defined in the contract and not including taxes. The specific recognition criteria listed below shall also be complied with for the income to be recognized: 23

24 i. The income amount from ordinary activities should be reliably measurable; ii. It is probable that the Broker receives the economic benefits associated to the transaction; iii. The degree of realization of the transaction, at the end of the term in which it is reported, can be reliably measured; iv. The costs already incurred in the provision, as well as the ones pending to be incurred until completing the provision, shall be reliably measured. The recognition criteria shall apply for income from the Broker s ordinary activities, coming from: Stock market and exchange market brokerage commission contract (brokerage contract commission). Collective investment fund management contract (management commission). Third-party portfolio management contract (management commission). Correspondent contract (correspondent banking commission). Bond placement brokerage. Monetary market operations. Management of securities. Financial consultancy contracts (service provision). Independent purchase and sale of securities (profit from the sale of securities). Independent purchase and sale of dollars and derivatives (profit from the sale of dollars and derivatives). The income from ordinary activities is measured by using the reasonable value of the counterpart (received or to be received), derived from the income. The income from ordinary activities is recognized in the accounting term in which the service is provided. Brokerage contract commission - The commission charge is determined in accordance with the negotiation and calculated for each product. The commissions are recognized in the moment the operation is liquidated: The income from variable and fixed income negotiations are subject to internal commission policies in which minimum and maximum limits are established. Collective investment and third-party portfolio fund management contract commission - The commission charge is contractually determined and calculated for each collective investment fund or portfolio. These commissions are recognized on a daily basis and they are calculated based on the portfolio value on the previous day of each client list. The charge of the management commission is calculated considering the following aspects: i. The charge percentage is broken down in the specifications of each client list or portfolio. ii. The percentage is applied to the volume invested by the client. This volume is determined in units. 24

25 iii. The commission is discounted on a daily basis from the managed amount, applying the commission percentage established in the contract (this is a compound effective yearly rate). Service provision and fees - The service provision and the fees are recognized based on the degree of completion (or degree of progress) of the contracts. When the results of a contract cannot be reliably measured, the income is only recognized up to the limit of the incurred expense that meets the conditions to be recovered. Interests - For all the financial instruments measured based on their amortized cost, the earned interest is recorded by using the effective interest rate method, which is the interest rate that exactly deducts the future flows of cash payments or charges estimated over the expected validity term of the financial instrument, or a shorter term, as the case may be, in relation to the net carrying amount of the financial asset or liability. The earned interest is included in the financial income line of the statement of income. Dividends In the case of investments in shares, the dividends are recognized when the Broker s right to collect dividends is materialized, which generally occurs when the shareholders approve the dividends in the Shareholders Meeting. c) Taxes Current taxes The income tax current assets and liabilities are measured based on the amounts expected to be recovered from or paid to the tax authority. The tax rates and the fiscal regulations used for calculating said amounts are those that have been approved or whose approval procedure is close to be completed as of the closing date of the reporting term. The Management periodically evaluates the stances assumed by the Broker in the income tax returns with regard to the situations in which the applicable tax standards are subject to interpretation in order to build provisions as appropriate. Deferred income tax The deferred income tax is recognized by using the method of the liabilities on the temporary differences arising between the tax bases of both assets and liabilities, and their corresponding carrying amounts as of the closing date of the reporting term. The deferred tax liabilities are recognized for all the taxable temporary differences, except: When the deferred tax liabilities arise from the initial recognition of a surplus or an asset or liability in a transaction that does not constitute a business combination and that, at the moment of the transaction, does not affect neither the accounting profit nor the tax profit or loss. With regard to the temporary taxable differences relating to the investments in subsidiaries, associates or interests in joint ventures, when the opportunity of the reversion of such temporary differences can be controlled, and when it is probable that said temporary differences will not be reversed in the near future. 25

26 Deferred tax assets are recognized for all the temporary deductible differences and for the future compensation of tax credits and unused tax loss carryforwards, to the extent the existence of future available tax profits is probable so that said deductible temporary differences can be compensated against them and/or said tax credits and tax loss carryforwards can be used, except: When deferred tax assets related to the temporary difference arise from the initial recognition of an asset or liability in a transaction that does not constitute a business combination and that, at the moment of the transaction, does not affect either the accounting profit or the tax profit or loss. With regard to deductible temporary differences related to the investments in subsidiaries, associates and interests in joint ventures, the deferred tax assets are recognized only to the extent it is probable that temporary differences will be reversed in the near future, and that the existence of future available tax profits is probable so that those differences can be compensated. The carrying amount of the deferred tax assets is reviewed on every reporting term closing date and it is reduced to the extent the existence of sufficient available tax profit is not probable any longer, allowing total or partial use (recovery) of those deferred tax assets. Non-recognized deferred tax assets will be reassessed on every reporting term closing date and they are recognized to the extent the existence of future available tax profits becomes probable, allowing the recovery of said deferred tax assets that were not previously recognized. Deferred tax assets and liabilities are measured at the tax rates expected to be applicable in the fiscal year in which the assets are realized or the liabilities are canceled, based on the tax rates and tax rules approved as of the reporting term closing date, or whose approval procedure is close to be completed for said date. The deferred tax related to items recognized outside the results is also recognized outside of it. These items are recognized in correlation to the underlying transactions to which they are related, either in the other integral results or directly in the equity. Deferred tax assets and liabilities are compensated if there is a legally enforceable right to compensate the current tax assets against the current tax liabilities, and if the deferred taxes are related to the same tax authority. AdCap Colombia recognizes deferred tax assets based on the economic projection, which show a result that such a tax will be recovered in three years, with which the company hopes to compensate such amount from year 2017 on. Sales Tax. The income from ordinary activities, the expenses and the assets are recognized excluding the amount of any sales tax, except: When the sales tax incurred in an asset acquisition or in a service provision is not recoverable from the tax authority, case in which the sales tax is recognized as part of the asset acquisition cost or as part of the expenditure, as the case may be. Accounts receivable and payable that are already listed including the sales tax amount. 26

27 The net amount of the sales tax that can be recovered from the tax authority or that has to be paid to the tax authority is presented as an account receivable or an account payable in the statement of financial position, as the case may be. Wealth Tax. Law 1739 of 2014 has set the new wealth taxes for natural and juridical persons which equity, as of January 1 st, 2015, exceeded COP$ 1,000,000,000. This law sets this tax as a temporary charge for taxable years 2015, 2016, and The tax shall be accrued on an annual basis and Article 10 of Law 1739 contemplates that relevant taxpayers shall be entitled to register this tax against equity reserves without affecting the profits of the exercise, in both individual balances and consolidated balances. For years 2015 and 2016, the meeting of shareholders approved the affectation of legal reserves to constitute a fiscal reserve that would allow covering such a tax. d) Foreign Currency. The Broker s financial statement is presented in Colombian Pesos, which is in turn the Broker s functional currency. Transactions and balances in foreign currency Foreign currency transactions are initially recorded by the Broker at the exchange rates of the functional currency as of the date on which the transaction meets for the first time the conditions for being recognized. The monetary assets and liabilities listed in the foreign currency are converted at the closing exchange rates of the functional currency in force on the closing date of the reporting term. The differences arising from the liquidation or conversion of monetary items are recognized in the results. e) Dividend distribution in cash and in assets other than cash. The Broker recognizes a liability for the dividend distributions that will be made for the owners in cash and in assets other than cash when the distribution is authorized by the shareholders through the Shareholders Assembly and, therefore, it ceases to be at the Broker s discretion. According to the Colombian laws, a distribution is authorized when it has been approved by the shareholders. The corresponding amount is directly recognized in the equity. f) Equipment. The equipment is measured based on its net acquisition cost, the accrued depreciations and the accrued losses due to value deterioration, if any. This cost includes the cost of replacing equipment components. For the significant equipment components that need to be periodically replaced, the Broker writes off the replaced component and recognizes the new component as an individual asset with its corresponding and specific service life, and depreciates it as needed. The routine repair and maintenance costs are recognized in the results as they are incurred. The current value of the estimated cost for dismantling an asset after it has fulfilled its service life is included in the cost of the corresponding asset, to the extent the requirements for the recognition of the corresponding provision are met. 27

28 The depreciation is calculated in a linear manner over the estimated service lives of the assets, as follows: Vehicles: Office equipment: IT equipment: Network and communication equipment: Duration of the financial lease contract. 5 years. 3 years. 3 years. An equipment component and any significant part initially recognized is written off when it is sold or when no future economic benefits are expected to be obtained from its use or sale. The profits or losses arising from writing off the asset (calculated as the difference between the net income from the sale and the carrying amount of the asset) are recognized in the statement of results when the asset is written off. The residual values, the service lives, and the depreciation methods for the equipment are prospectively reviewed and adjusted in every closing date of the exercise, as needed. g) Leases The determination of whether an agreement constitutes (or contains) a lease is based on the essence of the agreement as of the signing date. The agreement constitutes or contains a lease if its fulfillment depends on the use of one or several specific assets, and if the agreement grants the right to use the asset or assets, even if that right is not explicitly specified in the agreement itself. The Broker as lessee. As of its signing date, a lease is classified as a financial or operating lease. A lease that substantially transfers all the risks and benefits associated to the ownership of the leased property to the Broker is classified as a financial lease. Financial leases are capitalized at the beginning of the leasing period at the reasonable value of the rented property as of that or at the present value of the minimum lease payments, whichever is lower. Lease payments are distributed among the financial charges and the reduction of the debt. Financial charges are recognized as financial costs in the statement of results. The leased asset depreciates over its service life. Nevertheless, if there is no reasonable certainty that the Broker will obtain the property at the completion of the leasing period, the asset will depreciate over its estimated service life or in the leasing period, whichever is shorter. Operating lease payments are recognized as operating expenses in the statement of results in a linear manner throughout the lease period. h) Intangible Assets Intangible assets that have been separately acquired are initially measured based on their cost. After the initial recognition, intangible assets are recorded based on their cost minus the accrued amortizations and any accrued loss from value deterioration, if any. The internally-generated intangible assets are not capitalized and the disbursement is reflected in the results of the term in 28

29 which it is incurred. The service lives of the intangible assets are assessed as finite or indefinite. Intangible assets with finite service lives are amortized over their economic service lives and are reviewed to determine if they have undergone any value deterioration to the extent there is any indication of the intangible asset having suffered said deterioration. The amortization period and method for an intangible asset with a finite service life are reviewed at least at the closing of each period in which it is reported. The changes in the expected service life or the expected pattern of consumption of the asset are recorded when the amortization period or method is modified, as the case may be, and they are prospectively treated as changes in the accounting estimations. The expense for the amortization of intangible assets with finite service lives is recognized in the statement of results under the expenses category as it may be coherent with the function of the intangible assets. Profits or losses arising from writing off an intangible asset are measured as the difference between the net income from the sale and the carrying amount of the asset, and they are recognized in the statement of results when the asset is written off. The following is a summary of the policies applied to the Broker s intangible assets: Software (Safyr and Alcuadrado): Transactional portal: Between 5 and 7 years. 10 years. Licenses: According to the agreed term, between 2 and 3 years. i) Reasonable Value The Broker measures the financial instruments presented as investments and the investment properties based on their reasonable value as of the closing date of the term in which they are reported. All assets and liabilities for which the reasonable value is measured and disclosed in the financial statement are categorized within the fair value hierarchy, as it is described next, considering the lower-level entry data that is significant for the measurement of the reasonable value as a whole: Level 1 entry data: (unadjusted) quotation prices in active markets for identical assets or liabilities. Level 2 entry data: valuation techniques for which the entry data are different from the quotation prices included in Level 1, but are observable for assets and liabilities, both directly and indirectly. Level 3 entry data: valuation techniques for which the entry data are not observable for assets and liabilities. For assets and liabilities recurrently recognized in the financial statement, at the closing of each term in which they are reported, the Broker determines if transfers have occurred among the fair value hierarchy levels through the reassessment of their categorization, considering the lower-level entry data that is significant for the measurement of the reasonable value as a whole. 29

30 j) Financial instruments: Initial recognition and subsequent measurement. A financial instrument is any contract that leads to a financial asset in an organization and to a financial liability or an equity instrument in another organization. Chapter I-1 of the 1995 Basic Financial and Accounting Document No. 100 (hereinafter CBCF ), issued by the Superintendency, establishes classification, valuation and accounting registration of investments. Organizations subject to inspection and supervision by Colombia Financial Superintendency are required to classify, valuate and record the investments in debt securities, equity securities, investments in securities, and all other economic content rights considered as financial instruments that comprise the organizations own portfolios, the collective investment funds and the portfolios of resources managed on behalf of third parties, as well as the investments in real properties, in accordance with the provisions of such standard. Objective of the valuation of investments - The fundamental objective of investment valuation is the accounting registration and disclosure at the reasonable value of financial instruments. The organizations supervised by the Colombian Financial Superintendency must use the information provided by the price suppliers for valuating all the instruments it applies to, pursuant to provisions of Decree 2555 of 2010, or as amended or added, as well as the instructions established in Chapter IV, Title IV, Part III of the Basic Legal Document. Criteria for valuating investments - The determination of the reasonable value must consider all necessary criteria to assure the fulfillment of the investment valuation objective established in the Superintendency s CBCF and, in all the cases, the following: Objectivity - The determination and allocation of the fair price for an exchange of securities must be performed based on technical and professional criteria that recognize the effects caused by the changes in the behavior of all the variables that can affect said price. Transparency and representation - The fair value of any securities must be determined and allocated with the purpose of revealing a true, neutral, verifiable and representative economic result of the rights incorporated into the corresponding securities. Permanent analysis and assessment - The reasonable value attributed to bonds or securities should be based on the permanent analysis and assessment of the market conditions, the issuers and corresponding issue. The variations in said conditions should be reflected on changes of the previously allocated price, with the regularity established for the valuation of the investments determined in this standard. Professionalism - The determination of the reasonable value of bonds or securities should be based on the conclusions arising from the analysis and study conducted by a prudent and diligent expert, focused on the search, obtainment, knowledge and assessment of all available relevant information, in such a way that the set price reflects the resources that will be reasonably received from its sale. Investment classification - Investments can be classified according to the business model defined by the Broker, as follows: negotiable investments, held-to-maturity investments, and investments available for sale. 30

31 The business model corresponds to the strategic decision made by the Board of Directors on the way and activities through which the corporate purpose will be fulfilled. Negotiable investments - All bonds or securities and, in general, any type of investment that has been acquired with the main purpose of obtaining profits from the short-term fluctuations of the price are classified as negotiable investments. Held-to-maturity investments - The securities or bonds and, in general, any type of investment in relation to which the investor has the purpose of and the legal, contractual, financial and operational capacity to hold them until their maturity or redemption due date are classified as held-to-maturity investments. The purpose of holding the investment corresponds to the positive and unequivocal intention of avoiding the transfer of the bonds or securities. Investments available for sale - The securities or bonds and, in general, any type of investment that is not classified as negotiable investments or as held-to-maturity investments are investments available for sale. The mandatory investments in equity securities that the stock broker companies must held as members of the stock exchange are classified as available for sale, and they should be measured based on their equity variation. These investments cannot be subject to negotiation at any time due to their permanence vocation, and they cannot be reclassified. Adoption of the investment classification - The decision of classifying an investment into any of the three (3) categories described above must be adopted by the Broker at the moment of the acquisition or purchase of such investments. Investment reclassification - For an investment to be held within any of the classification categories indicated above, said investment must fulfill the characteristics or conditions inherent to the class of investment it is part of. Periodicity of the valuation and accounting registration of the same - The valuation of the investments is performed on a daily basis. Likewise, the accounting registration necessary for the recognition of the investment valuation is performed with the same frequency established for the valuation. The valuation is done following the instructions established by the Superintendency in Paragraph 6, Chapter I of the CBCF, as follows: (a) (b) Negotiable debt securities or debt securities available for sale: these securities are valuated in accordance with the price provided by the price supplier appointed as official for the corresponding segment. For the exceptional cases in which there is not a reasonably determined value, on the day of valuation, in accordance with the foregoing, the valuation is made in an exponential manner taking the Internal Rate of Return as the starting point. The reasonable value of the corresponding investment shall be estimated or approximated by means of the calculation of the sum of the present value of the future flows on account of return and capital. Held-to-maturity debt securities: The securities classified as held-to-maturity investments are valuated in an exponential basis based on the Internal Rate 31

32 of Return calculated at the moment of the purchase, on the basis of a 365-day year. (c) Equity securities held by subsidiaries, affiliates or associate companies, and interests in joint ventures: Pursuant to Article 35, Act 222 of 1995, the investments held by subordinate companies are valuated in such a way that, in the ledgers of the parent or controlling company, they are recognized based on the equity method in the separate financial statements. In the cases in which the regulations of the Code of Commerce or other legal provisions do not include the accounting treatment for the investments held by subsidiaries, affiliates or associate companies and interests in joint ventures, it is necessary to comply with the provisions established in the NIC Standard 27, NIC Standard 28, and NIIF Standard 11, among others, as the case may be. Investment recording - The investments are initially registered based on their acquisition cost and, from that same day, they are valuated at the reasonable value, at the Internal Rate of Return (IRR), or at the equity variation, as the case may be. The recording of the changes between the acquisition cost and the reasonable value of the investments is made individually from the purchase date for each value. In the case of the negotiable investments, the recording of these investments is performed in the corresponding Investments at Reasonable Value with Changes in the Results accounts. Any difference between the current reasonable value and the immediately prior to the corresponding value is registered as a higher or lower value of the investment, affecting the results of the period. In the case of debt securities, the outstanding demandable returns are registered as a higher value of the investment. Consequently, the collection of said returns is registered as a lower value of the investment. In the case of the participating securities, when the dividends or profits are distributed in kind, the number of rights of ownership is modified in the ledgers. The dividends or profits received in cash are recorded as an income in the corresponding period. In the case of the held-to-maturity investments, the recording is performed in the corresponding Investments at Amortized Cost accounts. The update of the current value of this type of investments is registered as a higher value of the investment, affecting the results of the period. The outstanding demandable returns are registered as a higher value of the investment. Consequently, the collection of said returns is registered as a lower value of the investment. In the case of the investments available for sale, the recording of these investments is performed in the corresponding Investments at Fair Value with Changes in Other Integral Results accounts. For the debt securities and/or bonds, the procedure is the following: a) Recording of the change in the current value. The difference between the current value on the day of valuation and the immediately prior value is registered as a higher value of the investment and credited to the profit and loss accounts. b) Adjustment at the Market Value. The difference existing between the reasonable value of said investments and the current value is registered in the corresponding Other Integral Results account. The outstanding demandable returns are kept as a higher value of the investment. Consequently, the collection of said returns is counted as a lower value of the investment. When the investments available for sale are transferred, the non-realized profits 32

33 or losses (registered in the Other Integral Results account) are recognized as income or expenses on the date of sale. In the case of equity securities and/ or bonds, the effect of the valuation of the shareholding that corresponds to the investor is recorded in the respective Other Integral Results account and charged or credited to the investment. The dividends that are distributed in kind or cash are registered as an income. The recording of the investments made in global TES (treasury bonds) is made following the general rules applicable to the debt securities investments according to their classification. Suffix 1 (legal currency) is used to record this type of investments. When the coupons are received or the corresponding value reaches its maturity, and also when the global TES are acquired in the primary market or negotiated in the secondary market and their compensation is made in foreign currency, the obligation to deliver the dollars or the right to receive them is registered in the foreign currency position on the date of the negotiation of the TES or the payment of the coupons or redemption of the bond. Suffix 2 (foreign currency) is used to register the mentioned obligation or right. Once the operation in question is compensated, the obligation or right, as the case may be, is deleted decreasing or increasing the available amount in foreign currency, also under Suffix 2 (foreign currency). Pursuant to article 35, Act 222 of 1995, the investments held by subordinate companies are recorded in the ledgers of the parent or controlling company based on the equity method in the separate financial statements. Derivatives - The derivative financial instruments that generate fair price of positive exchange, that is, favorable to the Broker, are registered in the assets, separating the value of the right from the obligation value, except for the case of the options, where the accounting registration is made only in one account. Differently, those that generate fair price of negative exchange, that is, unfavorable to the Broker, are registered in the liabilities, making the same separation. This treatment is applied if the derivative financial instruments are realized with speculative purposes or with hedging purposes. When the fair price for the exchange of the derivative financial instrument generates zero (0), either on the initial date or on another subsequent date, its accounting registration is made in the assets if it is a derivative financial instrument with speculative purposes. But if it is a derivative financial instrument with hedging purposes, its accounting registration, in this case, is made on the corresponding side of the balance (assets or liabilities) provided that it should be registered on the side opposite to the one on which the primary hedged position is registered. In the balance sheet accounts, no net values of favorable and unfavorable balances from different derivative financial instruments should be presented, even if they are of the same type. Thus, for example, no net values of the forward Peso-Dollar operations with fair exchange prices can be presented, but each one of those operations should be registered in the assets or in the liabilities, as the case may be. Given that the derivative financial instruments are valuated from the same day of their signing, their fair exchange price can be different from zero (0) at the closing of the initial date and this is how it is registered on the accounts. Derivative financial instruments with speculative purposes - These instruments are recorded from their signing date based on their fair exchange price. When on the initial date the value of the 33

34 contracts is zero (0), that is to say when no payments or physical deliveries are made between the parties, the income statement is not affected. In the subsequent valuations, the fair exchange price variations are registered in the statement of results in accordance with the rule stated below: Regardless of whether the accumulated variation of the fair exchange price of a derivative financial instrument with speculative purposes is positive (profit) or negative (loss), said variation should remain disclosed on a daily basis in the statement of results, in the corresponding income or expenses sub-account where the derivative financial instrument should be registered, depending on whether it is an accrued profit or and accrued loss, according to the corresponding accounting instructions. The same procedure should be applied to each one of the derivative financial instruments negotiated by the Broker. Repo operations, simultaneous operations, and operations of temporary transfer of securities (TTS) - These operations include an exchange of both securities and money between the parties. Concerning the operation of temporary transfer of securities supported by securities, the exchange is made among securities. In these operations, one party (the transferor or originator of the TTS) conveys securities to the acquirer (receiver in the TTS) and by doing so, the former transfers the ownership of the securities to the latter. In return, the acquirer (or receiver in the TTS) conveys money to the transferor or originator. In the case of the TTS supported by securities, the receiver conveys securities to the originator and by doing so it transfers their ownership. The transfer of the ownership is the main integral part of the legal structure of these operations, which is aimed to protect the counterpart in case of default by the conveyor. Notwithstanding the consideration above, the financial structure of the operations corresponds to a transitory operation in which the vocation of the securities implies the returning to the hands of whom initially conveyed them in ownership. Therefore, the financial reality of the operation demands that the risk remains in the balance of the transferor, the originator or the receiver, as the case may be. Thus, the securities are maintained recorded on the balance of the party who initially conveys them and this party shall valuate them and recognize their intrinsic risks. Moreover, the cash flows generated by the securities within the term of the operation shall be returned to the party who initially conveyed them in the operation in question. Finally, by participating in repo operations, simultaneous operations or operations of temporary transfer of securities, the monetary resources arising from these operations within the balance are registered as an obligation or right, as the position may be. The securities transferred in the context of repo operations, simultaneous operations or operations of temporary transfer of securities are only registered on the balance of the acquirer, the receiver or the originator, as the case may be, in the moment in which there is a breaching of the corresponding operation or when one of the parties involved in the operation is subject to a bankruptcy proceeding, a takeover for liquidation or global debt restructuring agreements. In such an event, the transferor, the originator or the receiver shall also withdraw the securities conveyed in the context of the execution of the mentioned operations from their balance. 34

35 When the Broker, acting as acquirer, originator or receiver, incurs in a short position, it registers in the balance a financial obligation payable to the initial transferor, originator or receiver equivalent to the fair exchange price of the corresponding securities. The returns from the repo operations or from the simultaneous operations are exponentially caused by the parties over the term of the corresponding operation, and they are an expense or an income, as the case may be. In the operations of temporary transfer of securities, the conveyance of the main securities generates the payment of returns by the receiver, and such returns are exponentially caused over the term of the operation. Said returns are an income or an expense for both parties, as the case may be. In the operations of temporary transfer of securities in which monetary resources are conveyed as support for the operation, the payment of returns can be recognized and, in such event, the returns are exponentially caused over the term of the operation. These returns are registered in the parties balances and are an expense or an income for both of them, as the case may be. Credit risk rating provisions or losses - The price of the debt securities and/or bonds, the investments in securities and all other economic content rights, as well as the price of the equity securities and/ or bonds with low or minimum liquidity or without any rate at all, is adjusted on every date of valuation based on the credit risk rating pursuant to the following rules. Apart from the exceptional cases established by the Superintendency, the following instruments are not subject to these rules: the internal or external public debt securities and/or bonds issued by the Nation, the ones issued by the Bank of the Republic, and the ones issued or guaranteed by FOGAFIN (Guarantee Fund of Financial Institutions). The bonds and/or securities rated one or several times by external rating organizations recognized by the Superintendency, or the debt securities and/or bonds issued by institutions rated by said organizations, cannot be recorded with an amount exceeding the following percentages of their net nominal value of the amortizations made up to the date of valuation: Long-term rating Maximum value (%) Short-term rating Maximum value (% B+, BB, BB- Ninety (90) 3 Ninety (90) B+, B, B- Seventy (70) 4 Fifty (50) CCC Fifty (50) DD, EE Zero (0) 5 and 6 Zero (0) For purposes of estimating the provisions on the term deposits, the rating of the corresponding issuer shall be used. The provisions on the investments classified as held-to-maturity and in relation to which a fair exchange price can be established correspond to the difference between the registered value and said price. For debt bonds or securities that do not have an external rating, for debt bonds or securities issued by unrated institutions, or for equity securities or (participating) bonds, the provision amount is determined based on the following rule: 35

36 Category A - Normal risk investment - It comprises issuances that comply with the terms agreed on the security or bond, and this type of investments has an adequate capital and interest payment capacity; as well as those investments from issuers that, according to their financial statements and all other available information, reflect an adequate financial condition. Provision registration is not needed for the securities and bonds in this category. Category B - Acceptable (higher than normal) risk investment - It comprises issuances that present uncertainty factors that could affect the capacity of maintaining an adequate compliance with the debt services. Likewise, this category comprises those investments from issuers that, according to their financial statement and all other available information, present weaknesses that can affect their financial condition. In the case of debt bonds or securities, their recorded value cannot be higher than eighty percent (80%) of their net nominal value of the amortizations made up to the date of valuation. In the case of equity bonds or securities, their recorded net value cannot be higher than eighty percent (80%) of their acquisition cost. Category C - Appreciable risk investments - This category comprises issuances presenting a high or medium probability of breaching in the timely payment of both the capital and the interest. Furthermore, it comprises those investments from issuers that, according to their financial statement and all other available information, present deficiencies in their financial condition that compromise the recovery of the investment. In the case of debt bonds or securities, their recorded value cannot be higher than sixty percent (60%) of their net nominal value of the amortizations made up to the date of valuation. In the case of equity bonds or securities, their recorded net value cannot be higher than sixty percent (60%) of their acquisition cost. Category D - Significant risk investment - This category comprises those issuances that present breaching in the terms of the bond, as well as the investments in issuers that, according to their financial statement and all other available information, present marked deficiencies in their financial condition, and therefore the probability of recovering the investment is highly doubtful. In the case of debt bonds or securities, their recorded value cannot be higher than forty percent (40%) of their net nominal value of the amortizations made up to the date of valuation. In the case of equity bonds or securities, their recorded net value cannot be higher than forty percent (40%) of their acquisition cost. Category E - Uncollectible investment - It comprises those investments from issuers that, according to their financial statements and all other available information, it is deemed that said investments are uncollectible. This category includes the securities and bonds in relation to which there are no financial statements available whose cutoff term is shorter than six months as of the date of valuation, with the regularity established in the security or bond itself, or that there are known facts distorting any of the assertions contained in the financial statement of the organization receiving investment. The net value of the category E investments shall be equivalent to zero. When a supervised institution classifies any of the investments into this category, all the investments from the same issuer shall be included into the same category, unless the issuer demonstrates to the Superintendency the existence of valid reasons for classifying the investments in another category. k) Deterioration of non-financial assets value Table below shows the additional disclosures relating to deterioration of non-financial assets value: Equipment: Note 13 Intangible assets: Note 15 36

37 On each closing date of the period reported, the Broker evaluates if there is any indication that a non-financial asset may be deteriorated in its value. If there is any indication of that or annual evidence of deterioration of value for an asset is required, the Broker will calculate the recoverable price of this asset. The recoverable price of an asset is the higher price between the reasonable price minus sales costs, either of an asset or of a unit generating cash flows and its value in use. That amount is determined for an individual asset, unless the asset does not generate cash flows which are substantially independent from cash flows of other assets or groups of assets. When the price in books of an asset or of a unit generating cash is higher than its recoverable amount, the asset is deemed deteriorated and the price is reduced to its recoverable price. A loss for deterioration of the price previously accepted, is only recovered if there was a change in the assumptions used for determining the recoverable price from the last time such a loss was recognized for deterioration of value. The recovery is limited in such a way that the price in books of the asset or of the generating unit of cash does not exceed either its recoverable price or the price in books being determined, net price of depreciation, if there has not been accepted a loss for deterioration of value for that asset or that cash generating unit in prior periods. l) Cash and cash equivalents Cash and cash equivalents submitted in the statement of financial situation includes cash in petty cash and banks and short-term deposits with a maturity date not exceeding three months from the date of imposition, subject to a non- significant risk of value change. For the statement of cash flows, cash and cash equivalents include cash and short-term savings placements as previously defined, net of liabilities due to non-covered banking amounts; consequently, they are deemed an integral part of the management of cash of the Broker. m) Own shares repurchased Own shares instruments reacquired are recognized at their cost and are deduced from equity. Neither profit nor loss resulted from purchase, sale, issue or cancellation of shares belonging to the Broker are recognized. Any difference between the price in books and the amount received, if shares are issued again, is recognized as a premium in placement of shares. Options on shares exercised during the period being reported are liquidated with the own shares reacquired. n) Corporate Share The excess between the sale price and the par value of sold shares is recognized as a higher value of equity in Premium in placement of shares. Minimum capital According to Law 510 of 1999, absolute amounts of capital that stock exchange brokers should maintain in order to carry out some or all activities allowed by law, as contained in Article 7, Law 45, 1990, were established. The Corporation has a minimum capital which allows it to develop all its activities, authorized by Colombia Financial Superintendency. ñ) Reserves This amount represents appropriations authorized by the General Meeting of Shareholders charged to the results of the year in order to comply with legal provisions or cover expansion plans or financing needs. 37

38 Currently, the reserves of the Company are: 1) Legal reserve: this a mandatory reserve pursuant to the Code of Commerce to protect the Company s equity in case of losses. This is composed through the appropriation of 10% of net annual profits until the balance of the reserve is equivalent 50% of subscribed capital. This reserve cannot be distributed before the Company is liquidated, but it may be used to absorb or reduce net annual losses. The balance in excess of 50% of the subscribed capital can be freely used by the shareholders. o) Employee benefits It is applicable to labor obligations relating to the remuneration caused and paid to the Broker s employees through a permanent or temporary employment contract as a payment for their services. Labor obligations relating to social benefits and contributions established by labor laws. These benefits are classified as follows: (a) Current benefits: Salaries, wages, overtime, recharges, benefits, fees, vacation, bonuses, and other type of incentives or benefits payable within a year. (b) Post-employment benefits: Correspond to contribution plans, in which the Broker makes determined contributions to a separate entity (a fund) and does not have either implicit or legal obligation to make additional contributions, during the term of the employment contract. (c) Benefits for termination or resignation: Benefits for termination will be recognized as a liability and as an expense only when the Broker is committed (in a manner that can be verified) to: Terminate the contract to an employee or group of employees before the normal dates of termination; Pay benefits for termination as a result of an offer made to employees to encourage the voluntary termination of their contracts. This is not applicable to services provided by third parties which contractual relationship occurs for a service provision contract: The Broker acknowledges its labor expenses and labor obligations when the following conditions are met: Service has been provided by the employee. The price of the service provided can be measured in a reliable manner. The service has been duly established in legal provisions or in collective agreements. The service provides an economic benefit in return of the expense of resources. The Broker does not have labor liabilities due to retirement pensions. Labor benefits will be recognized depending on their classification as accumulated or not accumulated. Accumulated ones are caused (for example: retirement savings, retirement savings 38

39 interest, and vacation). Non accumulated ones are registered as incurred (for example: supplies, aids, etc.). Labor obligations to be paid are recognized when the Broker acquires obligations according to terms established in labor law. Therefore, the Broker recognizes the following operations and circumstances as labor expenses and obligations with its employees: (a) Service provided by the employee results in the payment of salaries, which will be paid if the employee has provided his/her service to the Broker, at least every month, based on payroll liquidation, costs or expenses of the period due to salaries and others in the month will be recognized in accounting, no matter the date when the payment is made. If at the closing of the monthly accountable period, payroll expenses of the month have not been paid, a liability is recognized in favor of employees for the unpaid caused value as a payroll to be paid equivalent to the net amount of what has not been paid. (b) Social benefits such as: retirement savings, retirement savings interest, legal bonuses, and vacation are measured based on contractual or legal bases. Measurement is made and recognized on an individual basis not only in intermediate periods but also at the closing of the year. (c) The value of labor obligations for contributions is determined based on labor legislation, according to the provision of service by the employee and his/her monthly remuneration. They refer to sick leaves for work accidents or absences for disease, maternity leave, contributions to social security funds (health, pension, and professional risks), payments to insurance companies and other entities responsible for the management and administration of social security systems, payments to Cajas de compensación Familiar (Family Benefits Funds), Instituto Colombiano de Bienestar Familiar (Colombian Institute of Family Welfare), and SENA. On a monthly basis, there is a calculation of the amount to be paid for vacation, which is updated with the price of the last salary of the employee, recognizing the higher value of such a liability in the statement of results of the period. p) Provisions and contingencies General Considerations Provisions are recognized when (i) the Broker has a legal or implicit current obligation as a result of a past event; (ii) it is probable that for paying the obligation, the Company has to pay with resources that incorporate economic benefits; and (iii) when a reliable calculation of an obligation can be made. In case in which the Broker expects that the provision is reimbursed totally or partially, for example, in virtue of an insurance contract, the reimbursement is considered as a separate asset only in cases in which such a reimbursement is really true. In these cases, the expense resulting from any provision will be present in the statement of results. If the effect of the temporary amount is meaningful, provisions are discounted using a current market rate before taxes, which show the specific risks of liabilities. When a discount is made, the increase of the provision due to the pass of time, is recognized as a financial cost in the statement of results. 39

40 q) Related Parties No one of the transactions incorporate terms and special conditions; the characteristics of transactions are not different from the ones carried out with third parties, neither they imply differences between market prices for similar operations; sales and purchases are made under conditions equivalent to the ones existing for transactions between independent parties. r) Costs and expenses Costs and expenses are recognized in results of the exercise when there is a decrease in economic benefits related to the decrease of assets and an increase of liabilities and its value is measured in a confident manner. Costs and expenses include all necessary expenses for the provision of services, such as depreciation of equipment, personnel services, expenses for service contracts, repairs and maintenance, operation costs, insurances, fees, leasing, among others. Note 4. Norms and Interpretation not adjusted and other norms issued According to provisions of Decree 2496 of December 2015, below there is a list of the norms issued applicable from 2017 (except for NIIF Standard 5, applicable from January 1st, 2018). The impact of these norms is under evaluation by the company s management. Financial Information Norm NIC Standard 1 Presentation of financial statements Topic of the Amendment Disclosing initiative. Relating to presentation of financial statements, the amendment clarifies disclosing requirements. Remarks Some relevant issues indicated in the amendments are as follows: NIC Standard 1: Materiality requirements. Specific lines in the statement of results, integral results, and changes in the financial situation that can be eliminated. Flexibility relating to the order notes to financial statements should be presented. The entity does not need to reveal specific information required by a NIIF standard, if the resulting information is not material information. Application of amendments is not required to be disclosed. 40

41 Financial Information Norm NIIF 9- Financial Instruments Topic of the Amendment Financial Instruments (in its reviewed version of 2014) Remarks Replacement project refers to the following stages: Stage 1-Classification and measurement of financial assets and liabilities. Stage 2- waste methodology Stage 3-Coverage period In July, 2014, IASB finished the reform of accounting financial instruments and NIIF9 standard -. Financial Instruments Accounting was issued- (in its reviewed version of 2014), which will replace NIC 39- Financial Instruments: Acknowledgement and revision after the expiration of the prior one. NIIF Standard 15 Income from contracts with customers Income from contracts with customers. It sets up a model of five stages applicable to the income from contracts with customers. It will replace the following norms and entry interpretations after the date it becomes effective. NIC18 Entry INC 11 Construction contract CINIIF 13 Customers loyalty programs CINIIF 15 Agreements for constructing real estate CNIIF 18 Transfer of assets from customers. SIC31 Barter transactions including advertising services NIC 16 Properties, plant, and equipment NIC 38 Intangible assets Clarification of acceptable depreciation methods Clarification of acceptable amortization methods Companies are prohibited to use a depreciation method based on income for property, plant and equipment amounts. It sets up conditions related to amortization de intangible assets: a) When the intangible asset is expressed as an entry measurement, b) When it is possible to demonstrate that the entry and the consumption of economic benefits of intangible assets are closely linked. 41

42 Financial Information Norm Annual improvements cycle Topic of the Amendment This amendments show topics discussed by IASB, which were further included as amendments to NIIF standards. Remarks NIIF 5, Non- current assets maintained for sale and discontinued operations. Changes in the methods of assets disposition. NIIF 7. Financial instruments: Information to be disclosed (with amendments resulting from amendments to NIIF 1. - Amendments related to service contracts. - Applicability of amendments to NIIF 7 in disclosing of compensations in condensed intermediate financial statements NIC 19 Benefits to employees. Discounts rate: Issues of regional market. NIC 34. Financial Intermediate Information: disclosure of information included in any other place I the Intermediate Financial Report. Other norms issued. According to provisions of Decree 2131 of 2016, table below shows the norms issued applicable from 2018; the norms correspond to the amendments made by the IASB and published in Spanish during the first semester Financial Information Norm NIC Standard 7 Statement of cash flows Topic of the Norm or Amendment Initiative on information to be disclosed Remarks Entities are required to provide information that allows users of financial statements to evaluate changes in liabilities that emerge from financing activities. NIC Standard 12 Income Tax Recognition of assets for deferred taxes due to unrealized loss. To clarify the requirements for recognition of assets for deferred taxes due to unrealized loss in debt instruments measured at the reasonable value. 42

43 NIIF Standard 15 Income from regular activities resulting from contracts with customers. Clarifications. The objective of these amendments is to clarify the IASB intention when developing NIIF 15 requirements, without changing the underlying principles of NIIF Standard 15. Despite the new Norm (NIIF Standard 16; Leasing) was issued in January 2016, it has not been adopted to be applied in Colombia. Note 5. Capital AdCap Colombia has as an objective an efficient, profitable and low risk management of capitals, always focused on the support of businesses. The Broker manages the following policies for the management of capital: Maintain the largest part of its resources in cash, except for those represented by strategic investments in other companies, but previously approved by the Board of Directors. Maintain liquid resources in savings accounts or in short-term debt securities rated as AAA or Securities of the Nation holding good liquidation in monetary market. The capital of the Company shall be deposited in Banks or security issuers, but not exceeding the limit of concentration of 30% with only one issuer. The destination of liquid resources and/or resources represented in high liquidity negotiable securities has the priority of guaranteeing the appropriate compliance with the Company s operations, being always an additional option of work capital to day-by-day amounts the Broker has with the banks. To grant loans to employees only in specific cases authorized by the Management and duly approved by the Board of Directors for those higher than $50,000. Additional to the above, the net capital is used to finance businesses, taking into account the following rates: Fixed Income: AAA Securities: Bank of the Republic + 50 basic points. AA Securities + 2 points: Bank of the Republic basic points. Pension Bonds from the Ministry of Finance: Bank of the Republic basic points. Social Security Pension Bonds / Colpensiones: Bank of the Republic basic points. Yankees and Corporate Bonds in USD: Bank of the Republic. 43

44 Currencies, shares, and ADR s: Treasury Credit Market basic points. No one of these rates may be lower than the remuneration rate of savings accounts. All net resources of the Broker in savings accounts, temporary investments or strategic investments in other companies are considered as capital. The Broker assures the compliance with its objectives by means of procedures duly documented and published which are part of the management system of the Broker under the ISO 9001 Norm, version 2008, on monitoring and daily report on allocation of resources by the financial area and has a controlling parent company with regulatory limitations, which among other duties, supervises the compliance with regulatory limitations relating to minimum and technical capital. The Broker shall comply with external capital requirements according to Decree 2555 of 2010 issued by the Ministry of Finances in Articles , , , , , , , , , , and , Accounting and Financial Basic Document No. 100 (1995) in Chapters 12 and 13, Law 510 of 1999, Article 53 and External Resolution No. 3 dated February 22 nd, 2013 issued by the board of directors of the Bank of the Republic. According to business lines of the Broker and the type of operations it carries out, the following are the main external capital requirements it should comply with: Companies authorized to carry out all activities contained in Article 7, Law 45 of 1990 should accredit a minimum technical capital of $1,237 million Colombian pesos for year 2016 and $1,280 million Colombian pesos for year 2015, respectively. Companies authorized only for commission contracts and activities contained in paragraphs c), d), e), f), and h), Article 7, Law 45 of 1990, should accredit a minimum technical capital of $669 million Colombian pesos for year 2015 and $645 million Colombian pesos for year 2015, respectively. During 2016, the Broker complied with all external capital requirements. During 2017, the Broker capitalized $1,799 million Colombian pesos to comply with minimum technical capital external requirements to become a broker of the exchange market. On January 30, 2017, the Financial Superintendency approved the capitalization of the Broker and the parent company issued relevant net resources on that same date. This is the capital composition of the Company: Investments Nation $ 5,813,226 $ 3,635,248 Private debt 2,038,497 1,949,810 Equity instruments 1,209,640 2,081,873 Cash In national currency 9,268,704 8,945,290 In foreign currency 5,878,325 6,751,093 Total resources $ 24,208,392 $ 23,363,314 44

45 Note 6. Cash and Cash Equivalents Cash and Cash Equivalents Petty cash $ 2,500 $ 2,500 National banks 8,968,500 8,942,790 Foreign banks 3,860,725 69,883 Other financial entities 2,017,600 4,100,547 Total Cash 14,849,325 13,115,720 Deposits abroad to negotiate ADR - 170,410 Total Cash and Cash Equivalents $ 14,849,325 $ 13,286,130 Balances in national banks earn fixed interest rates that show frequent variations according to the market conditions. The cash in foreign banks and other financial entities are found in nonremunerated accounts and the only intention is to facilitate the execution of operations in the exchange market. Cash and cash equivalents do not have restrictions or encumbrances that may restrict their use. Note 7. Operations of Monetary Market and Investments Monetary Market Operations December 31 st, 2016 Date Entity Rate Beginning Maturity Amount in Pesos Legal currency Simultaneous operations Financial corporations 7.50% $ 5,337,857 Real sector 9.00% ,975 Total operations of currency market $ 5,546,832 December 31 st, 2015 Entity Rate Beginning Maturity Amount in Pesos Legal currency Simultaneous operations Real sector 6.20% $ 2,398,351 Real sector 6.00% ,760,869 Real sector 6.20% ,150,127 Real sector 6.20% ,385,271 Real sector 6.20% ,016 $ 9,120,634 45

46 Investments and Operations with Derivatives Operations in cash Purchase and sale rights over currencies - 844,149 Purchase and sale rights over securities - 849,406 Purchase and sale obligations over currencies ,150 Purchase and sale obligations over securities , Financial assets kept to negotiate (granted as warranty) Ministry of Finances and Public Credit 6,923,556 - BBVA Colombia S.A 5,130,080 - Bancolombia S.A. 3,540,206 - Davivienda S.A 1,069,809 - Findeter 1,024,000 - Isagen S.A E.S.P 2,427,460-20,115,111 - Financial assets at the reasonable value with changes in results Ministry of Finances and Public Credit 83,871 1,834,437 Ministry of Finances on behalf and representation of ISS 394,425 46,681 BBVA Colombia S.A 165,424 - Bancoldex 20,442 - Davivienda S.A 1,003,690 - Banco de Bogotá 84,304 - Banco de Occidente 144,162 - Leasing Bancolombia S.A 218,607 - Fics Invertir en Alternativo Clase 1 186,963 - Cementos Argos S.A. - 1,432,755 Bancolombia S.A. 243, ,511 Fondo de Garantías Fogabol 66, ,746 Fondo de Garantías Fogacol 79, ,698 Ecopetrol S.A. 87,382 97,525 Grupo Aval Acciones y Valores S.A. 71,879 64,484 Avianca Holdings S.A. 162,036 23,811 3,012,606 4,914,648 Total short-term investments $ 23,127,717 $ 4,915,044 Investment at equity variation with changes in Other Integral Results Bolsa de Valores de Colombia S.A. 562, ,405 Deceval S.A. 145, ,832 46

47 Cámara de Riesgo Central de Contraparte de Colombia S.A ,107 Cámara de Compensación de Divisas de Col. S.A ,473 Fogansa S.A. 5,948 5,337 Total long-term investments $ 713,827 $ 998,154 Total investments $ 23,841,544 $ 5,913,198 Investment Portfolio by Currency Pesos $ 23,841,544 $ 5,913,198 Total $ 23,841,544 $ 5,913,198 Investment Portfolio by maturity period * December 31 st, 2016 De 0 a 1 years 1-5 years 5-10 years Over 10 years Total Negotiable investments 1,404,857 14,709,052 6,517,995-22,631,904 December 31 st, 2015 De 0 a 1 years 1-5 years 5-10 years Over 10 years Total Negotiable investments 3,728 1,000,835 2,790,550 35,815 3,830,928 * Negotiable investments are not included in equity instruments or investment at equity variation with changes in ORI (Equity Instruments). Portfolio by Issuer s Rating AAA $ 12,802,591 $ 1,950,206 AA+ $ 2,427,460 0 Nation 7,401,853 1,881,118 Issuers without proper corporate government 162,036 23,811 Issuers with proper corporate government 187, ,465 No Rating 146, ,444 $ 23,127,717 $ 4,915,044 The Broker uses valuation techniques that are more appropriate according to the circumstances and over which there are sufficient information available to measure the reasonable value, maximizing the use of entry data seen as relevant and minimizing the use of entry data that cannot be seen. All short-term investments of the Broker as of December 31 st, 2016 and 2015 are in Level 1 and long-term investments are valuated pursuant Document 034, issued by Colombia Financial Superintendency. 47

48 Note 8. Trade and other receivables Commissions $ 127,179 $ 21,248 Collective Investment Fund 390, ,958 Commission Contract in Colombian pesos 295, ,608 Commission Contract in USD 1,992 2,410,253 Third parties portfolio Management 8,635 6,499 Deposits in warranty 44,583 44,583 Advanced to suppliers Fees 9,450 Total Trade and other receivables 878,138 3,822,756 Other Receivables Advances to workers 28,230 50,000 Loans to workers education 5,126 1,034 Loans to workers others 91,286 18,641 Others 316,192 9,605 Total other receivables 440,834 79,280 Total Trade and other receivables 1,318,972 3,902,036 Housing Loans (1) 13,816 30,381 Total trade and other receivables $ 1,332,788 $ 3,932,417 Trades do not earn interest and their average term for payment ranges from 30 to 90 days. 1) Accounts to be paid by workers for housing loans at a term longer than one year are included. These loans provide interest at a fixed rate. Amounts in ledgers could be affected by the changes in debtor s credit risk. Account amount of receivables does not significantly differ from their reasonable value, bearing in mind that they are receivables generated under market conditions; they do not have an active market and most of them have a short-term. A deterioration analysis of the value at each closing date of the period is carried out; it is informedon an individual basis-to the most important customers. Nota 9. Expenses paid in advance Insurances paid in advance $ 162,730 $ 187,315 Maintenance of equipment paid in advance 114, ,127 $ 277,119 $ 311,442 48

49 Nota 10. Current taxes and deffered taxes The main components of the expenditure for taxes on profits for the years ended on December 31 ST, 2016 and 2015, are the following: Statement of results Tax on current profit Income tax Expense $ 189,055 $ 172,829 CREE tax Expense 68,060 62,218 Tax on Occasional profit - 9,372 Deferred Tax on profits Corresponding to the origin and reversion of temporary differences (43,569) (32,484) Acknowledgment of assets for deferred tax for excess of presumptive income to be compensated (720,847) (1,859,044) (Income) expense on profit for continuing operations ($ 507,301) ($ 1,647,109) Conciliation between expenses for tax on profit and the accountable profit multiplied by the demanded rate of AdCap Colombia S.A. for years ended on December 31st, 2016 and 2015, is the following: Accounting Profit (loss) (967,369) 112,983 Difference between accountable and fiscal (667,638) (2,083,596) Tax provision 257, ,044 Fiscal Profit (loss) before taxes (1,377,892) (1,735,569) Plus: Non- deductible expenses (1) 1,419, ,674 Encumbrance to financial movements - 12,712 Valuation to market prices prior year 1,547 7,412 Income for recovering of deductions - 152,725 1,421, ,523 Minus: Valuation at market prices not carried out this year 43,831 1,547 Profit in valuation and sale of shares 1,437,858 41,888 Accounting profit for sale of fixed assets - 268,145 Dividends 153, ,250 1,635, ,830 Total net income (1,592,445) (1,276,876) Presumptive income 756, ,316 49

50 Total fiscal net income 756, ,316 Provision for income tax (25%) 189, ,829 Withholding on our account 1,226,932 1,217,942 Total balance on our account in profit 1,037,877 1,045,113 TAX FOR EQUITY - CREE Net income- Income tax (1,592,445) (1,276,876) Donations - 34,689 Net Income for CREE (1,592,445) (1,276,876) Presumptive Income for CREE 756, ,316 Provision tax for equity CREE (9%) 68,060 62,218 Withholdings on our account 191, ,601 Total balance on our account in CREE 123, ,383 CREE OVERRATE CREE taxable basis 756, ,316 Overrate excluded basis (800,000) (800,000) Overrate taxable basis - - CREE overrate (5%) - - (1) The detail of non-deductible expenses is the following: Difference between accounting and fiscal depreciation - (1,700) Fines and sanctions and interest 220, ,867 Non- deductible payments carried out abroad 19,272 - Wealth tax - 462,825 Automobile tax and other taxes 7,500 11,390 Taxes ( payment payment 2016) 9,524-17,365 Payroll taxes contributions ( payment payment 2017) 1,682 2,977 Donations 3,211 - Loss in sale and withdrawal of goods 53,055 3,879 Limits deductible expenses 411,892 17,948 Balances assumed customers 26,471 14,603 Demands 650,000 - Expenses of prior exercises 15,917 80,250 1,419, ,674 50

51 Presumptive Income is detailed below: Net equity prior year $ 26,900,189 $ 25,532,114 Gross equity prior year 36,420,210 27,633,428 Shares declared in prior year 2,292,024 2,693,018 Minus: Equity Price of shares in national corporations 1,692,903 2,488,234 Presumptive Income basis 25,207,286 23,043,880 Presumptive Income $ 756,219 $ 691,316 The detail of occasional profit tax is the following: Sale Price of Assets owned for more tan two years $ - $ 275,000 Fiscal cost of sold assets - 181,279 Taxable occasional profit - 93,721 Provision tax on occasional profit (10%) $ - $ 9,372 The following is the reconciliation between expense of current tax and the balance on our account of current tax: Tax expenses to current profit ($ 257,115) ($ 244,419) Withholdings in favor of income tax 1,226,932 1,217,942 Withholdings in favor of CREE tax 191, ,601 Balance on favor of current tax 1,161,192 1,144,124 Assets for current tax Balance in favor of current tax 2016 (Income and CREE) $ 1,161,192 $ 1,144,124 Balance in favor of current tax 2015 (Income and CREE) 213,587 83,236 Balance in favor of CREE ,080 33,081 Advance CREE ,834 Balance in favor of VAT 305,476 20,722 Income tax withholding (361,187) (16,997) Industry and Commerce tax-ica (32,297) (22,567) Tax on VAT - (6,867) Income tax Withholdings for GMF (5,412) (9,694) Total assets for current taxes $ 1,314,439 $ 1,087,999 51

52 Composition of assets (liabilities) for deffered tax Deffered income tax corresponds to the following amounts for 2016: ADJUSTMENT NIC 12 DESCRIPTION FISCAL BALANCE NIIF BALANCE FISCAL DIFFERENCES ASSETS DEFFERED TAX Antivirus licenses 1,297,872 1,039, ,068 87,743 Programs and licenses (1,064,183) (559,768) (504,415) (171,501) Net effect in deffered tax of liability temporary differences (83,758) Furniture and equipment 861, , , ,166 Data processing equipment 2,227, ,961 1,879, ,086 Office equipment (CR) (696,161) (97,810) (598,351) (203,439) Computation and Communication equipment (CR) (2,107,125) (217,849) (1,889,276) (642,353) Art Works 41,651 41, Telephone lines 7,674-7,674 2,609 Industry and Commerce tax (1,976) (32,297) 30,321 10,309 Accumulated fiscal loss (Income tax Tariff 25%) 11,375,564-11,375,564 2,843,891 Accumulated fiscal loss (CREE tax Tariff 9%) 2,917,310-2,917, ,557 Excess of presumptive income to be compensated (Income tax Tariff 25%) 1,788,541-1,788, ,135 Excess of presumptive income to be compensated (CREE tax Tariff 9%) 1,496,480-1,496, ,683 Net effect in deferred tax of assets temporary differences 3,728,866 Minus: Net effect in deferred tax of temporary differences (83,758) Total active deferred tax 3,645,108 Income on differed tax corresponds to the following amounts for the year 2015: Adjustment NIC 12 FISCAL BA- FISCAL DIFFE- LIABILITY DESCRITPTION NIIF BALANCE LANCE RENCES DEFFERED TAX Other investments 465, ,748 (36,368) (12,365) Profit not realized in RF Valuation (1,547) (1,547) (526) Transportation Equipment 110, ,058 (340,058) (115,620) Depreciation office equipment (728,488) (66,689) (661,798) (225,011) Depreciation computation and communication equipment (1,980,954) (133,627) (1,847,327) (628,091) 52

53 Improvement in non owned properties 52,405 (52,405) (17,818) Intangibles - programs and licenses 566,025 (566,025) (192,449) Participating securities 61,929 (61,929) (21,056) Net effect in deffered tax of passive temporary differences. (1,212,936) Furniture and equipment 766, , , ,495 Electronic equipment 88,411-88,411 30,060 Data processing equipment 1,495, ,477 1,331, ,731 Telecommunication equipment 590,028 53, , ,505 Depreciation, fleet, and transportation equipment (66,117) (144,679) 78,562 26,711 Goods in leasing 95,500-95,500 32,470 Programs for computers 312, , ,288 Art works 41,651 41, Others 7,674-7,674 2,609 Shares 1,148,891-98,296 33,421 Obligations (leasing) - (160,873) 160,873 54,697 Accumulated fiscal loss (Income tax - Rate 25%) - 9,136, ,136,577 2,284, Accumulated fiscal loss (CREE tax Rate 9%) - 1,240, ,240, , Excess of presumptive income to be compensated (Income tex Rate 25%) - 2,037, ,037, , Excess of presumptive income to be compensated (CREE tax Rate 9%) - 691, ,316 62, Net effect on deferred tax of active temporary differences 4,093,628 Minus: Net effect on deferred tax of temporary differences (1,212,936.00) Total active deferred tax 2,880, Net liability movement by defferred income tax, corresponding to years ended on December 31st, 2016 and 2015 was the following: Balance at the beginning of the year $ 2,880,692 $ 989,164 Effect recognized in Operations Result for temporary differences. 43,569 32,484 Defferred income of net loss and excess of presumptive income 720,847 1,859,044 Balance at the end of the year $ 3,645,107 $ 2,880,692 AdCap Colombia S.A. presents its assets and liabilities for net taxes only if it has been demanded to compensate its assets and liabilities for current taxes and in the case of assets and liabilities or deferred assets, as long as they correspond to taxes to required profit, if they correspond to taxes and profit required by the same fiscal jurisdiction. 53

54 As of December 31st, 2016, AdCap Colombia S.A. had fiscal loss in the amount of $11,376,564 (2015: $9,136,577), which according to taxation law may be used for compensating future taxable profit, if there were any, without limits of time and quantity. In all cases, fiscal loss is annually readjusted. As of December 31st, 2016, AdCap Colombia S.A. maintains an excess of presumptive income in the amount of $1,083,694 (2015 $2,037,735). Excess of presumptive income on ordinary income, obtained form 2013, can only be compensated with net ordinary income obtained within the following 5 years. In all cases, excess of presumptive income on ordinary net income may be readjusted. Income tax return of 2015, 2014, 2013, 2012 and 2011 may be revised by tax authorities within the following 5 years after they were submitted: Bearing in mind that income tax return showed fiscal loss, in the opinion of the Management, if there were any visit or revision, we do not expect significant differences that may result in recognition of contingences in financial statements. From 2013 on, tax on income for equity (CREE) was created. This tax is calculated based on gross income obtained, minus income not constituted of income, costs, deductions, exempt profit and occasional profit at a rate of 9%. For the years 2014 and 2013, in determination of the base for liquidating CREE tax, compensation of fiscal loss or excess of presumptive income is not allowed. Law 1739 of 2014, established an overrate to CREE, which is progressive and temporary from the year 2015 to 2018, starting with 5% in 2015 and for the following years 6%, 8%, and 9%, respectively applicable to taxable basis in the amount of $800 million pesos. Law 1819, December 2016, eliminates income tax for equity (CREE) and in replacement of this, rate increases taxation rate of income tax, which goes from 25% to 34% for the year Transfer prices Tax payers who celebrate operations with economic linked customers or parts related from abroad, are obliged to determine, for effects of tax income, their ordinary and extraordinary income, their costs and deductions, their assets and liabilities, considering profitability margins and prices compared with or among customers economically linked, used for these operations. Independent advisors are carrying out the updating of transfer price study, demanded by taxation dispositions, for demonstrating that operations with economic linked customers from abroad were carried out at market values during For this purpose, the Company will submit an informative statement and will have the referred study available for the end of July, The non- compliance with the transfer price regime may result in penalties and a greater tax on income; however, the Management and its advisors have the opinion that the study will be timely concluded and will not show meaningful changes to the base used to determine the provision of 2016 income tax. Nota 11. Equipment Evolution during 2016 Historical Cost Balance 2015 Additions Additions Balance Improvement to not owned properties $ 317,744 - ($ 317,744) $ - Vehicles 450,058 - (450,058) - Office equipment 164,622 10,955 (2,995) 172,582 Computation and communication Equipment 216, ,376 (15,141) 347,961 Total cost of equipment 1,149, ,331 (785,938) 520,543 54

55 Depreciation Balance 2015 Additions Additions Balance2016 Improvement to not owned properties ($ 265,338) ($ 52,406) $ 317,744 $ - Vehicles (144,680) (61,488) 206,168 - Office equipment (66,689) (32,718) 1,597 (97,810) Computation and Communication Equipment (133,627) (94,315) 10,093 (217,849) Total depreciation Equipment (610,334) (240,927) 535,602 (315,659) Equipment, Net $ 538,816 $ 204,884 Evolution during the exercise 2015 Historical cost Balance 2014 Additions Withdrawals Balance 2015 Improvement to not owned properties $ 317,744 - $ - $ 317,744 Vehicles 670, ,214 ($ 435,956) 450,058 Office equipment 172,566 - ($ 7,944) 164,622 Computation and Communication Equipment 263,449 1,301 ($ 48,024) 216,726 Total cost equipment 1,424, ,515 ($ 491,924) 1,149,150 Depreciation Balance 2014 Additions Withdrawals Balance 2015 Improvement to not owned properties ($ 132,669) ($ 132,669) $ - ($ 265,338) Vehicles ($ 277,533) ($ 101,105) 233,958 ($ 144,680) Office equipment ($ 34,420) ($ 34,785) 2,516 ($ 66,689) Computation and Communication Equipment ($ 77,465) ($ 78,651) 22,489 ($ 133,627) Total cost properties and equipment ($ 522,087) ($ 347,210) 258,963 ($ 610,334) Net, Equipment $ 902,472 $ 538,816 At the end of the accounting period, there was an evaluation of the existence of deterioration indications of the brokerage s equipment. No indications were found that the recoverable amount of these liabilities could be lower than their accountable price. In 2016, financial leasing of vehicles was assigned; in virtue of these contracts, employees became the owners of those vehicles, and employees assumed the vehicle, its rights and obligations with the leasing company. Additionally, the brokerage donated goods and equipment in the amount of $5,

56 Amount in books Assignment amount Donation Net Profit (loss) Transportation equipment $ 243,891 $ 232,950 - $ 10,941 Furniture, equipment, and computation $ 1,338 equipment 1, Furniture, equipment, and computation 5,047 5,048 0 equipment - Loss in sale of properties and equipment $ 250,276 $ 232,950 $ 5,048 $ 12,279 The broker purchased the multi-risk policy No ; the object of this policy is to cover material damage or damages caused by robbery to electronic and office equipment. The insured amount is 500,000. This policy is annually renewed and for years 2016 and 2015, it was purchased to Suramericana de Seguros. Note 12. Intangible assets Amounts paid for software licenses and development of applications are registered as intangibles. Movement of intangibles: Cost Balance 2015 Additions Withdrawals Balance 2016 Software $ 662,045 $ 98,099 - $ 760,144 Licenses 206,218 73, ,660 Total cost of intangibles 868, ,540-1,039,804 Amortization Balance 2015 Additions Withdrawals Balance 2016 Software (207,458) (153,507) - (360,965) Licencias (94,780) 104,023) - (198,803) Total amortization intangible assets (302,238) (257,530) - (559,768) Net Intangibles $ 566,025 $ 480,036 Cost Balance 2014 Additions Withdrawals Balance 2015 Software $ 559,456 $ 102,589 - $ 662,045 Licencias 85, , ,218 Total cost of intangible assets 645, , ,263 Amortization Saldo 2014 Adiciones Retiros Saldo 2015 Software ($ 78,065) ($ 129,393) - ($ 207,458) Licencias ($ 31,155) ($ 63,625) - ($ 94,780) 56

57 Total amortization of intangible assets ($ 109,220) ($ 193,018) - ($ 302,238) Net Intangible assets $ 536,153 $ 566,025 At the end of the accounting period, there was an evaluation of the existence of deterioration indications of the broker s intangible assets. No indications were found that the recoverable amount of these assets could be lower than their accountable price. Note 13. Loans and Borrowings Interest rate Due date Borrowings and loans at short term Renting Colombia DTF % 24/07/2017 $ - $ 32,048 Banco de Occidente DTF + 4.5% 27/01/2017 $ - 34,816 $ - 66,864 Borrowings and loans at long term Renting Colombia DTF % 24/07/ ,018 Banco de Occidente DTF + 4.5% 27/01/ ,991-94,009 Total Loans and borrowings $ - $ 160,873 These debts correspond to (vehicles) leasing contracts, which were paid in Accountable amount of financial liabilities does not significantly differ from its reasonable price, considering that they are financial liabilities generated under market conditions do not have an active market and most of them have a short term. Note 14. Operations of monetary market Simultaneous operations Financial sector $ 5,089,208 $ 4,816,396 Broker corporations 13,919,994 2,379,716 $ 19,009,202 $ 7,196,112 The increase in financial liabilities for the end of year 2016, corresponds to the opportunity the broker has of carrying out operations of monetary market, all this in compliance with its corporate purpose. Note 15. Trade accounts payable and other accounts payable Costs and expenses payable Services $ 311,732 $ 587,661 57

58 Others (1) 604, $ 916,626 $ 588,315 (1) Amounts payable for transaction agreement with every customer $350,000; accounts payable in virtue of advising in the amount of $253,000 to Mr. Enrique Velasquez Echeverri; and lower amounts for 1,894. Trade accounts payable do not generate interest and are normally paid in 60 days. Note 16. Benefits to employees Labor Obligations Payroll to be paid $ 1,249,478 $ 918,136 Savings for retirement 173, ,307 Interests on savings for retirement 19,520 22,524 Consolidated vacation 291, ,315 Bonus (1) 250,000 - Total Labor Obligations 1,983,794 1,338,282 Withholdings and contributions of payroll Caja de Compensación Familiar, ICBF and SENA 39,881 38,199 Health contributions 53,354 46,425 Pension contributions 94, ,123 Other payroll withholdings 32,837 4,980 Total withholdings and payroll contributions 221, ,727 Total Net Liability for Benefits to Employees $ 2,204,862 $ 1,611,009 (1)It corresponds to bonus provision, amount to be paid in March, according to employees performance evaluation. The broker pays its employees social legal bonuses; it also pays demanded contributions for pension, health, professional risks, Caja de Compensación Familiar, Instituto Colombiano de Bienestar Familiar, and SENA The amount of payroll to be paid corresponds to the model of variable remuneration of extralegal and not salary connotation, which is linked to the compliance with commercial goals of sale force and operates on the broker s account. This model consists in taking as a base- gross income generated by advertising and discounting direct costs associated to business, plus an equilibrium point of each advertising in function of its salary. 20% and 40% will be paid on this amount, according to the final result, if it is positive and complies with an established minimum amount. Note 17. Equity The following table shows the detail of subscribed and paid shares Authorized share (common) 13,000,000 13,000,000 Par value $100 (one hundred pesos) 58

59 Common subscribed and paid shares at the beginning of the year 12,924,143 11,758,465 Shares subscribed during the year 875,857 1,165,678 Common shares subscribed and paid at the end of the year. 13,800,000 12,924,143 Capital subscribed and paid at the beginning of the year 1,291,472 1,175,847 Capital suscrito y pagado de acciones suscritas en el año 87, ,568 Reclassification of own shares in portfolio - (943) Subscribed and paid capital at the end of the year $ 1,379,057 $ 1,291,472 Premium in placement of shares at the beginning of the year 11,707,597 8,324,168 Premium of subscribed shares during the year 1,751,714 3,383,429 Premium in placement of shares at the end of the year $ 13,459,311 $ 11,707,597 Premium for shares issued in the year $ 2,000 $ 2,903 For 2016, the Broker capitalized $1,839,299 corresponding to 875,857 shares at $2,100; $100 of par value and $2,000 of Premium in placement of shares, equivalent to $87,585 and $1,751,714 respectively; as appears in Minutes of Assembly No. 64, January 12 th, During 2015 $3,499,997 corresponding to 1,165,678 shares at $3, were capitalized, $100 of par value and $2, of Premium in placement of shares, equivalent to $116,568 and $3,383,429, respectively; as appears in Minutes of Assembly No. 60, July 17 th, Dividends cash paid The Broker did not distribute profits during 2016 and In the general assembly of shareholders which took place in March of those years, it was approved to distribute profits according to the assembly to increase reserves. Note18. Other reserves of capital Appropriation of net profit $ 14,011,242 $ 13,414,370 Fiscal dispositions 1, ,656 Repurchase of shares 100, ,000 Other reserves of capital $ 14,112,789 $ 13,739,026 Note 19. Result of common activities Source Business Current % Amount Margin accounts 1,582,581 1,164,941 36% Own position 6,495,590 3,403,297 91% Sales & Trading Institutional Shares 1,577, , % Institutional Fixed Income 5,736,625 2,896,528 98% Total Sales & Trading 15,391,884 8,184,522 88% 59

60 Corporative 1,444,645 1,618,943-11% Total Corporativo 1,444,645 1,618,943-11% Wealth Management Investment Fund 5,063,275 7,568,526-33% Correspondent 128, ,707-50% Transactional 2,330,899 1,991,159 17% Intermediation Dollar 101, ,838-13% Others 63,357 35,234 80% Total Wealth Management 7,687,461 9,970,464-23% Own Resources 1,591,378 1,104,572 44% Total Income common activities 26,115,368 20,878,501 25% Note 20. Participations Comprehensive salary Participations $ 1,979,872 $ 1,171,198 Flexible Institutional Contributions 81,220 82,304 Common salary participations 75,821 42,452 Voluntary contributions to employer funds 31,023 31,513 Institutional contributions - 22,931 Commissions Participation recovering (1) - (1,087,623) $ 2,167,936 $ 263,525 (1) Corresponds to recovery of retired people. Note 21. Services Intermediation and management $ 2,853,559 $ 1,666,101 infra-structure Communication 656, ,890 Bloomberg 517, ,007 Telecommunication 87, ,119 $ 4,115,536 $ 2,955,117 Note 22. Other income Profit in sale of equipment $ 17,827 $ 98,286 Recoveries (1) 67,478 59,481 Total Other income $ 85,305 $ 157,767 60

61 (1) In 2016, the Broker paid expenses recovering as shown below: Other income of lower reduction 37,440 10,514 Recovering of sick leaves 27,004 8,768 Recovering of costs and expenses 3,034 40,199 Total Recoveries $ 67,478 $ 59,481 Note 23. Other expenses Banking expenses 248, ,822 Encumbrance to financial movements 23,005 21,410 Difference in exchange 11,616 1,051 Operative risk 10,705 1,211,594 Assumed balances 9,553 - Donations 8,258 22,022 Taxes and assumed balances 5,158 24,025 Interest for delayed payment Taxes to equity and wealth - 230,477 Total Other expenses $ 317,463 $ 1,731,012 Note 24. Administration expenses Benefits to employees (1) $ 12,526,730 $ 10,593,214 Fees 2,127,461 1,405,373 Several(2) 1,709,042 1,796,015 Leasing 1,275,163 1,448,084 Commissions 842, ,549 Insurance 434, ,395 Contributions, affiliations 378, ,478 Amortization of intangible assets 257, ,018 Taxes and rates 252, ,025 Depreciation of properties and equipment 240, ,209 Maintenance and repairs 114, ,230 For sale of equipment 30, Legal ones 6,893 37,705 Adjustment and installation Deteriorations (provisions) - 3,680 Total administrative expenses $ 20,197,695 $ 17,419,083 (1)Expenses for benefits to employees 61

62 Salaries $ 7,810,581 $ 6,436,513 Social security 1,638,477 1,357,464 Social bonuses 1,014, ,051 Housing Money help 759, ,355 Mobilization help 584, ,252 Other benefits to employees 416, ,258 Benefits for termination or withdrawal 285, ,718 Voluntary contributions 17,160 35,603 $ 12,526,730 $ 10,593,214 (2) This amount is composed by VAT expenses for $693,595 ( $779,205), travel expenses for $276,810 ( $257,191), management of real estate for $162,268 ( $155,512), utilities for $127,804 ( $125,769) and others for $448,565 ( $478,338) such as advertising, cleaning elements, and cafeteria, among others. Note 25. Financial Costs Other interests on low obligations $ 5,743 $ 12 Interests on leasing contract - 12,689 Interests on renting contracts - 3,089 $ 5,743 $ 15,790 Note 26. Other costs and non- operative expenses Fines, sanctions, and judicial disputes $ 870,970 $ 185,867 These non- operative expenses correspond to expense for payment of sanctions to Colombia Financial Superintendency in the amount of $ for operations in margin accounts and balances in foreign currency, and $49,280 for operations of margin accounts and format 230, as well as the payment of $45,000 to Securities Market Self-regulator for Anticipated Terminated Agreement; besides the payment for transaction agreement to a customer in the amount of $650,000; the expense of 2015 corresponds to sanctions paid to Colombia Financial Superintendency and Chamber of Exchange Compensation in the amount of $150,000 and $35,867 respectively. Note 27. Components of other comprehensive income Net profit for financial instruments measured at equity variation $ 1,329,085 $ 1,258,403 Since these are securities and /or participation amounts, the effect of valuation of participation which corresponds to the Broker is accounted in the corresponding account of not carried out loss and profit (ORI), charged to payment to the investment. Dividends which are divided in kind or in cash are registered as an income, adjusting the corresponding account of not carried out loss and profit account (maximum until its 62

63 accumulated value) and, if necessary, also the value of the investment in the amount of surplus on that account. Note 28. Objectives and policies of risk management AdCap Colombia S.A., through its quality management systems, identifies the Verification process, through macro processes and processes, in which the Comprehesive Management of Risk is found. Likewise, within the structure of risk management, according to legal dispositions in force and to general guidelines of its main management bodies, AdCap Colombia has a risk management system which principal objective is to preserve efficiency and effectiveness of comprehensive management of the company and its operative capacity, as well as to maintain its resources. Within this system, risks are managed in such a way that it allows reducing costs and damages caused by them, based on the analysis of the strategic context, as well as the determination of methods for the treatment and monitoring of its risks, with the purpose of preventing or avoiding the materialization of events, which may affect the normal development of processes and the compliance with the company objectives, or, in case that this does not result as reasonably possible, to mitigate its impact. This risk management system has the following principles: Principle of independence Principle of transparency Principle of liquidity Principle of profitability Principle of security And some general procedures: To identify threats faced by the entity and sources of the same. To self-evaluate risks existing in its processes, identifying and giving priority to them through a valuation exercise, bearing into consideration factors of its environment and the nature of its activity. To measure the probability of occurrence of risks and impact on the entity resources (economic, human, among others), as well as on its credibility and good name, in case of materializing it. This measure could be qualitative and quantitative when there are historical data. To identify and evaluate with conservative criterion, existing controls and its effectiveness, through a valuation process carried out, based on the experience and reasonable analysis and objectives of events occurred. To construct risk maps, which result adequate, which should be periodically updated, allowing visualizing them according to the vulnerability of their organizations. To implement, prove, and maintain a process for managing the continuity of the operation of the entity, which includes elements such as prevention and urgencies attention, crisis management, contingent plans to respond to failures and specific interruptions of a system or process and return capacity to a normal operation. To disclose among officers participating in corresponding processes, risk maps and policies defined for their management. 63

64 To manage risks in an integral way, applying different strategies which allow taking them to tolerable levels. For each risk, the alternative showing the best relation between the expected benefit and the cost for its treatment should be selected. Among possible strategies, there are the ones to avoid risks, mitigate them, share them, transfer them, accept them or take advantage of them, as necessary. To register, measure, and report loss for risk To make a follow-up through appropriate bodies, according to the action field of each one of them, setting up verification reports or actions that the management of the entity and head deems convenient. To define preventive and corrective actions derived from the following-up process and evaluation of risks (improvement plans) In relation to the structure defined for the integral evaluation of risk, risk managing area is an area which acts functionally and organizationally independent from areas in charge of business. The manager belongs to a hierarchical level with decision power, which allows him/her properly companies with his/her functions paying attention to AdCap Colombia S.A s own nature and structure. The compliance officer, also, in charge of managing SARLAFT, directly depends from the Board of Directors. The function of these areas is to manage the market risk, liquidity, credit, and counterpart, operative and risk of money laundering and terrorism financing through identification, measurement, control, and monitoring of such risks through the functions written in management manuals of each one of the risks, which are approved by the Board of Directors of the Company. Likewise, the Board of Directors has defined functions and responsibilities before each one of risk management systems and procedures to follow-up and continuously evaluate risks, such as size, structure and diversity of the entity business so require it, to approve limits of risk exposition for business lines and operations, in an individual and consolidated way, and to be informed by the risk committee on the exposition of the risk assumed by the Brokerage and its results, all this transversal to all systems On the other hand, AdCap Colombia S.A has a risk committee which depends on the Board of Directors of the entity, which among its functions shall propose risk manuals with its objectives, policies, procedures, and mechanisms for risk management, limits of risk exposition by business lines and operations, in an individual and consolidated way and the allocations of the counterpart for being approved by the Board of Directors; such a committee verifies and proposes to the Board of Directors, the methodology to identify, measure, monitor, control, report and disclose different types of risks of the current and future business lines and operations as well as models, parameters, and arenas which will be used for carrying out the measurement, control, and monitoring of risks proposed by the risk management. Before the operational risk management, it orders action plans for operative risks events on which a high impact or frequency is determined and information on different risk management systems of the Company, provided by the risk area and the Compliance officer, is received, and provides its opinion on topics he /she deems that additional management is necessary. Credit risk / Counterpart Description of Exposition to Risk AdCap Colombia S.A. as a Broker is exposed to the counterpart risk understood as (according to definition taken from Chapter XXVII, Accounting Basic Document of Colombia Financial Superintendency) the 64

65 contingency to which the entity is subject before the non-compliance of one of several operations by its counterparties (Denomination which includes customers of a Broker, as well as those with whom a Broker celebrates operations on its own account or through third parties on values or assets for which they have been authorized, either in a negotiation system, exchange, or desk market) and to have to cover such a noncompliance with its own resources or materialize a loss in its balance. Description of objectives, policies and processes for risk management Counterpart Risk Management System SARIC- is designed for according to the structure, size, corporate purpose and nature of authorized activities carried out by the entity - managing counterpart risks (RIC, abbreviation in Spanish) in an efficient way and efficiency using available resources setting up policies procedures, and controls, and evaluation of stages and elements of SARIC (abbreviation in Spanish) in order to make adjustments to business lines or products and the ones of the market All this instrumented through 11- M-012 COUNTERPART RISK MANAGING SYSTEM MANUAL, approved by AdCap Colombia Board of Directors. Additionally, we are trying to find a counterpart risk managing strategy, in agreement with the other risk managing systems of the Company and internal control, acknowledging the high interrelation the counterpart risk has with other types of risks such as market, liquidity, and operative risks, among others to which the company is exposed in virtue of its activities. Methods used for measuring the risk AdCap Colombia carries out the measure of its risks through SARIC Matrix, which looks for identifying the possible counterpart risk, resulting from the position assumed by our customers and its own position, in which the following are identified as possible risk factors: Type of counterpart: a. Entities supervised by Colombia Financial Superintendency b. Customers linked to the Company, which could be natural or juridical persons c. Operation conditions: there is a differentiation among Leverage operations: Operations in the Exchange market such as Repos, Simultaneous operations, Margin accounts, coverage derivatives, speculation derivatives. Non-leverage operations: Operations in the Exchange market carried out in spot market such as purchase and sale of securities. d. Operations which counterpart is a central risk chamber of a counterpart authorized by Colombia Financial Superintendency; it should be understood that the risk profile of the counterpart correspond to the lowest one. In order to obtain the total exposition to counterpart risk, a qualitative methodology is used, in which risk generated from the collection process of information are organized, classified and managed; besides, evaluating and classifying the aspects participating in the risk level of its counterparties and their variables, which are considered important for preparing the Matrix, (Type of operations Term for compliance, agents, norms, and applicable controls, compensations and liquidation, liquidity, frequency and impact of each 65

66 one of the identified risks). From this, a grading of inherent and residual risk is obtained, classified in a measurement scale and from this the risk profile of the Company is obtained Description of changes in the exposition to risk. According to risk factors identified for the counterpart risk management, in relation to December 31st, before December 31st, 2016, the following changes appeared in the exposition to counterpart in each one of them: For counterpart risk a. Entities supervised by Colombia Financial Superintendency. For counterpart management, every three months, there are allocations for fixed term securities in the negotiation system MEC and for Exchange operations through Set-FX platform, which are determined through a model of qualitative risk, which considers variables obtained from financial information reported by these entities to Colombia Financial Superintendency, which are approved by the Board of Directors of the Company. In relation to December 2015 and ending on December 31st, 21016, - in general allocations in force for fixed profit operations were increased in a 16% of counterparts evaluated at the amount level. At the level of entities, allocations were increased in 84%, stayed in 1% and reduced to 1% -74 evaluated entities-. In relation to allocations assigned for operating exchanges in the SET-FX platform, allocations were increased to 58% of counterparties: they were maintained at 30% of the same, and were reduced at 12% of counterparties -33 entities evaluated -. b. Customers linked to the Company who can be natural or juridical persons at the same time According to the methodology described in Document 030, October 2013, since the year 2015, there was carried out the implementation of the grading procedure of customers as counterparts of the company. With this purpose, customers were graded according to their classification in the type of operations they carry out: - Customers with leverage allocations: The grading is determined with a model which incorporates quantitative, qualitative variables, and payment capacity. - Customers with non- leverage operations: Grading is set up according to qualitative variables and the payment behavior with the Company. Such a grading is monthly made on customers created and updated in the corresponding month Operation conditions: Leverage nature operations Repos: In December, 2016, AdCap Colombia S.A. s customers had a level of repos liabilities in shares in the amount of $ 11,213,854 with an over-collateral of 48.55%. In December 2016 such level decreased in relation to December 2015 (about 9.3%). Likewise, the maximum terms of compliance increased from 91 to 119 days. Simultaneous Operations: Simultaneous operations were performed by AdCap Colombia Margin Account customers and the firm s own position. On December 31 st, 2016, passive simultaneous operations were in force over the following fixed-income securities: BISG1099A15, CDTBCB90DP, CDTBGA95V, CDTBGAS0V, CDTFDT90P, TFIT , TUVT , valued in the amount of $19,045,302 and active simultaneous operations in the following 66

67 fixed-come securities: CDTBSAS0V and TFIT , valued in the amount of $5,541,732. On this same date (2015), passive simultaneous operations were in force over fixed-income securities valued in the amount of $7,228,505 corresponding to the following securities: TFIT , TFIT y TFIT , and active simultaneous operations over public debt fixed-income securities in the amount of $ 1,754,130; for this reason, passive simultaneous operations increased 163% in 2016, compared to 2015, for the cut-off date described above. Margin Accounts: As of December 31 st, 2016, AdCap Colombia had a customer overnight position in margin accounts for $ 1,835,271 over fixed-income security (TES) TFIT As of December 31 st, 2015, AdCap Colombia had a customer with operations in margin accounts, who operated a volume of $ 8,699,642 and showed an overnight position for the same concept over the following fixed-income securities (TES): TFIT , TFIT , TFIT , and TFIT Coverage Derivatives and Speculation Derivatives. As of December 31 st, 2016, AdCap Colombia positions were recorded over 33 contracts with an Exchange Rate of $ 3,963,612 and 3 future contracts over TES 24 for $ 1,764,000. On this same date (2015), positions were recorded over 43 contracts with an Exchange Rate of $ 6,782,863, corresponding to TRMF16F and a contract over TES 24 for $ 548,610. These operations are used to mitigate the counterpart s risk because since they are standardized derivatives, their liquidation and compensation are performed by the Counterpart s Central Risk Chamber. Non-Leveraged Operations: Stock market operations carried out in the spot market, such as purchase and sale of bonds. As of December 31 st, 2016, the own position showed a portfolio with 69.60% in fixed-income securities, followed by currencies with 25.09% and 5.31% in variable income. Portafolio PP 2016 Portafolio PP 2016 Portafolio PP % 9.61% 59.12% Renta Fija Dólar Renta Variable 67

68 Renta Variable % 0.49% 0.00% 5.47% 5.94% 6.60% 7.22% 12.00% 13.40% 46.52% AOBV PFAVH AVDV ECOPETROL FCCO PFAVAL PFVBGTA PFBCOLOM FOGANSA ETERCOL 42.43% of the position in fixed-income was concentrated in coverage futures; 33.65% in nation s securities (8-year maturity); in securities of the financial sector (maturities of 1, 2, 3, 4, 9, and 10 years); 3.02% in pension funds (maturities of 3, 5, and 6 years); and 1.18% in portfolios with 1-year maturity. It should be noted that the position in securities of the nation and pension bonds are deemed under Nation credit risk. Composition of fixed-income portfolio was 59.08% in mandatory shares and 40.92% in securities listed in stock exchange (ECOPETROL, PFAVAL, AVDV, PFBCOLOM, and PFAVH). Such securities do not bear credit content but share content. Participation in dollars is in line with current devaluation of the Colombian peso; however, a correction is expected during the first semester this year. On the same date (2015), own position showed a portfolio of 59.11% in variable-income securities, followed by currencies with 31.2% and a fixed income of 9.6%. 74% of fixed-income position was focused on the nation s securities; 15% (with maturities of 2, 3, 4, 7, 8, and 12 years) in the financial sector s securities (with maturities of 1 and 8 years), and 10.3% in pension bonds (maturities of 3 and 6 months and 1, 3, and 5 years). It should be noted that the position in the nation s securities and pension bonds shows a Nation credit risk and only 15% of the fixed-income position was invested in financial sector s bonds. Portfolio composition in variable-income was 88% in mandatory shares and 12% in securities with stock market price (ECOPETROL, PFAVAL, PFBANCOLM, and PFAVH). Such securities do not bear credit content but share content. 68

69 Renta Fija % 16% 74% Nación Financiero Pensional Description of the changes in objectives, policies and processes for risk management Following the methodology described in External Document No 30 dated October 29 th, 2013 issued by the Colombian Financial Superintendency, where a new Chapter (XXVII) is included, the regulations relating to counterpart s risk management have been set. AdCap Colombia S.A., as of December 2014, established objectives, policies, procedures, and controls for counterpart s risk management at the Brokerage Company through the 11-M-012 (Manual, Counterpart s Risk Management System), that is amended in 2016 to include the risk matrix of the counterpart, functions of supervision bodies, and documentation, among other aspects. Summary of quantitative data about the Broker s exposure to risks. As of December 31 st, 2016, represented in the passive position of its customers in leveraged operations (Repo over stocks, derivatives, margin accounts) and non-leveraged operations, AdCap Colombia showed the following positions: Non-leveraged operations Customers Value of the customers position on purchase and sale, as of December 30 th, 2016: $ ,47. Leveraged operations Value of Repos over shares Guarantees constituted over Repos Global Guarantee approved for operation of margin accounts and derivatives * Guarantees Margin accounts Guarantees Derivatives $11,213, $21,794,735.,4 $ 42,330,000 $2,393, $ 686,843.9 *Global guarantee approved grants a bank draft amount depending on the level of guarantee demanded by each operated product (derivatives, long-term TES, medium-term TES, short-term TES, and stocks). 69

70 Description of Risk Concentrations. Description of the method through which management determines concentrations. On a daily basis, the Risk Area performs the measurement of concentration over investments made by the firm s own position in relation to an individual issuer or a group of issuers (measured as an Economic Group) in order to verify that the value of all risks acquired and kept with the same issuer does not exceed 30% of its technical equity and that all AdCap Colombia concentration situations do not exceed 8 times the value of its technical equity. Such a measurement is performed based on the valuation at the market price of the positions taken by the firm, according to the recorded portfolio from which results are recorded in a daily risk report and reported to the President and the members of the Risk Committee Description of the common characteristics for the concentration The common characteristics for measuring the individual issuer s concentration or the concentration of a group of issuers (Economic Group) are performed according to the parameters set in Article of Decree 2555, Liquidity Risk. Description of Risk Exposure. AdCap Colombia S.A., as a brokerage company, is exposed to the liquidity risk understood as the contingency of failing to timely and efficiently comply with current and future expected and unexpected cash flows, without affecting the brokerage company s normal course of daily operations or its financial condition. This contingency (funding liquidity risk) is expressed in the insufficiency of net assets available for this purpose and/or the need for assuming unusual funding costs. In turn, the firm s capacity to generate or eliminate financial positions at market prices is limited either because there is not an appropriate market depth or because there are drastic changes in rates and prices (market liquidity risk). (Definition taken from Chapter VI of Basic Accounting Document issued by Colombia Financial Superintendency). Description of objectives, policies and processes for risk management AdCap Colombia S.A. Board of Directors, according to External Document 042 of 2009 issued by the Colombian Financial Superintendency, adopted through 11-M-007 (Manual: Liquidity Risk Management System) the company s risk management policies that are binding upon AdCap Colombia S.A. officers. General policies include the execution of activities performed by AdCap Colombia officers according to principles such as independence, transparency, liquidity, profitability, and safety, the Manual of Conduct, and the manuals corresponding to the brokerage company s risk management. Likewise, the Liquidity Risk Management System Manual includes the identification of the liquidity risk to which the entity is exposed to in virtue of the type of positions assumed and the products and markets addressed. Measurement procedures are adjusted to the standard measurement according to records of Annex II, Chapter VI, Basic Accounting Document issued by the Colombian 70

71 Financial Superintendency; this manual sets functions and responsibilities of the organizational structure (within the Liquidity Risk Management System elements) for the due management of this risk. The manual also sets the mechanisms to disclose the information relating to the LRMS and the alert indicators. Methods used to measure the risk. AdCap Colombia uses a standard methodology to measure liquidity requirements and determine the liquidity risk indicator (LRI) of the firm s own position, according to the guidelines contemplated in Annex II, Chapter VI, Basic Accounting Document issued by the Colombian Financial Superintendency. Description of the changes in risk exposure. As of December 31 st, 2016, AdCap Colombia had a Liquidity Risk Indicator (amount) of $14,142,329.63, that increased 14.2% compared to the same indicator recorded as of December 31 st, 2015 ($16,485,603.66), mainly due to an increase of third parties liquidity requirement. Band 2 (2 to 7 days) Variación High Quality Net Assets (ALAC for its initials in Spanish) 14,572, ,044, % Adjusted Net Assets (ALA for its initials in Spanish) 16,750, ,167, % Liquidity Risk Indicator (Amount) 14,142, ,485, % Liquidity Risk Indicator (Rate) Description of the changes in objectives, policies and processes for risk management. In October 2016, a modification to the Liquidity Risk Management System Manual was approved to added policies and procedures for managing liquidity risks, highlighting the following sections: Daily assignment of liquidity amounts is incorporated according to the measurement of the Liquidity Risk Indicator corresponding to Band 2 (2 7 days), with the purpose of assuring compliance with the limit set for such indicator. The limit for the Liquidity Risk Indicator of AdCap Colombia S.A. is made explicit, accrued for one to seven calendar days, which should always be equal to or above zero (0)-IRLmand equal to or above 100%, in the case of an IRLr rate. The indicator of balances found for third parties and their respective alert levels is added. Description of changes in the methods used to measure risks. During 2016, no changes were made to the methodology established for measuring the liquidity risk of AdCap Colombia. 71

72 Summary of quantitative data on the risk exposure of AdCap Colombia High Quality Net Assets (ALAC, for its initials in Spanish) 30/12/ /12/2015 Variación $ 14,572, $ 14,044, % Adjusted Net Assets (ALA, for its initials in Spanish) $ 16,750, $ 16,641, % Liquidity Risk Indicator (Amount Band 1) $ 15,452, $ 16,583, % Liquidity Risk Indicator (Amount Band 2) $ 14,142, $ 16,485, % Liquidity Risk Indicator (Rate Band 2) 6.42 veces veces -94% Position found from Customers and Simultaneous Operations $ 14, $ 155, % Information to be disclosed on the way AdCap Colombia manages liquidity risk. Information to be disclosed on the analysis of maturities for financial assets kept to manage liquidity risk: VPN BAND Variation Up to one month (AVAILABLE+ NET STOCKS) $ 15,199, $ 15,040, % More than month and less than three months $ 1,217, $ 3, % More than three months and less than one year $ 186, $ % Between one and five years $ 20,334, $ 1,322, % More than five years $ 6,434, $ 2,504, % TOTAL ASSETS KEPT FOR LIQUIDITY MANAGEMENT $ 43,372, $ 18,871, % Description of Risk Concentrations. Description of the way the Management determines concentrations and description of the common characteristics for concentration. It was established to determine a daily amount for the operation of the firm s own position, defined according to the Liquidity Risk Indicator (LRI) consumption of each asset acquired and the firm s availability of resources through the estimation of liquidity requirements for the own position and the position of third parties: LRI consumption for variable-income operations. LRI consumption for fixed-income operations. If purchased to an affiliate and sold to another affiliate. If purchased to an affiliate and sold to a non-affiliate. 72

73 If purchased by AdCap to a non-affiliate and then sold by AdCap to another non-affiliate. Operations under commission contract. Risk exposure associated to instruments with common characteristics. 30/12/ /12/2015 Variation Own Net Liquidity Requirement (1 day) $ 1,295, $ % Third Party Net Liquidity Requirement (1 day) $ 82, $ 58, % Additionally, negative flows of the firm s own position amounted to $ 6,602,209.63, which decreased 52% compared to /12/ /12/2015 Variation NEGATIVE FLOWS IN OWN ACCOUNT $ 6,602, $ 13,826, % Market Risk. Exchange Rate Risk. Description of Risk Exposure. AdCap Colombia S.A., as a brokerage company, is exposed to the Exchange Rate Risk understood as the loss it may suffer due to its positions in foreign currencies, both in treasury book and banking book. It should be noted that the positions taken in securities other than the ones in Colombian pesos are limited to securities in American dollars and the acquisition of currencies. Description of the objectives, policies and processes for risk management. AdCap Colombia S.A. board of directors, according to provisions of Chapter XXI of Basic Accounting Document issued by the Colombian Financial Superintendency, adopted (through 11-M-001- MARKET RISK MANAGEMENT SYSTEM MANUAL) general policies on market risk management; the manual includes the stock price risk management policies that are binding upon AdCap Colombia S.A. officers. General policies include the execution of activities performed by AdCap Colombia officers according to principles such as independence, transparency, liquidity, profitability, and safety, the Manual of Conduct, and the manuals corresponding to the brokerage company s risk management. Likewise, the Market Risk Management System Manual includes the identification of the market risk associated to the exchange rate risk factor and, in general, to the risk factors in virtue of the type of positions assumed and the products and markets addressed. Methods used to measure risk. 73

74 The measurement procedures are adjusted to the standard measurement according to provisions of Chapter XXI of the Basic Accounting Document issued by the Colombian Financial Superintendency. Description of the changes in risk exposure. Exchange Rate VPN Position Variation Sensitivity 31/12/2016 $ 5,714, $ 314, % 31/12/2015 $ 8,466, $ 372, Variation -15.7% Compared to December 31 st, 2015, the firm s position relating to the negotiation of securities in foreign currency decreased 100%; therefore, the exchange rate risk exposure only occurred for the long positions in American dollars, showing a VAR decrease (15.7%) of the exchange rate. This sensitivity has been calculated under a factor of 5.5% for positions in American dollars. Description of risk concentrations. Description of the method through which management determines concentrations. For internal policy, AdCap Colombia s own position does not take positions in foreign currency securities. Concentrations of positions taken by the firm in foreign currency only reflect when the operation to purchase a security shows compliance before the completion of the sale operation. Concerning the negotiation of foreign currency securities, it is performed through a Distribution Desk, but without assuming risks or own position, and the exchange rate risk is transferred during the intermediation process. The negotiation of currencies is performed within the limits set in the roadmap subscribed by the Currency trader, establishing the maximum overnight position that can be taken and the intraday and overnight Stop Loss levels as the maximum estimated loss. Additionally, the adjustment concerning appreciation or depreciation of the position in dollars is reflected in the company s results as effect of the exchange difference. Description of the common characteristics for concentration. Exposure to exchange rate risk occurs when currencies (American dollars) are acquired and/or fixedincome securities in American dollars are negotiated; this is the common characteristic in both values. Interest Rate Risk. Description of Risk Exposure. AdCap Colombia S.A., as a Brokerage Company, is exposed to the interest rate risk understood as the risk associated to the adverse movement of the market interest rates over the positions taken in fixed-income securities by the firm. 74

75 Description of the objectives, policies and processes for risk management. AdCap Colombia S.A. board of directors, according to provisions of Chapter XXI of Basic Accounting Document issued by the Colombian Financial Superintendency, adopted (through 11-M-001- MARKET RISK MANAGEMENT SYSTEM MANUAL) general policies on market risk management; the manual includes the stock price risk management policies that are binding upon AdCap Colombia S.A. officers. General policies include the execution of activities performed by AdCap Colombia officers according to the organizational structure of the company and principles such as independence, transparency, liquidity, profitability, and safety, the Manual of Conduct, and the manuals corresponding to the brokerage company s risk management. Likewise, the Market Risk Management System Manual includes the identification of the market risk associated to the exchange rate risk factor and, in general, to the risk factors in virtue of the type of positions assumed and the products and markets addressed. Methods used to measure risk. The measurement procedures are adjusted to the standard measurement according to provisions of Chapter XXI of the Basic Accounting Document issued by the Colombian Financial Superintendency, constituted as the Annex to the Market Risk Management System Manual. Description of changes in risk exposure. VPN Position Variation Interest Rate Sensitivity Variation 31/12/2015 $ ,11 $ ,28 4,11% 31/12/2016 $ ,90 $ ,23 447% As of December 31 st, 2016, AdCap Colombia recorded fixed-income positions in Colombian pesos in the amount of $ 28,129,809.90, which generated a compensated sensitivity of $1,363, corresponding to the interest rate. According to the methodology used and the maturities of the securities comprising the portfolio for securities with amended length between 0 and 1, the change of the interest rate represents a variation between 233 and 274 basic points for fixed-income securities in legal currency, 274 basic points for securities indexed under UVR, and 100 basic points for securities in foreign currency. For fixed-income securities with amended length between 1 and 3.6, the change of the interest rate accounts for a variation between 211 and 222 basic points for fixed-income securities in legal currency, between 220 and 250 basic points for securities indexed under UVR and between 75 and 90 basic points for securities in foreign currency and for fixed-income securities with amended length between 3.6 and 20, the interest rate accounts for a variation between 211 and 222 basic points for securities in legal currency, between 170 and 220 basic points for securities indexed under UVR and between 60 and 75 basic points for securities in foreign currency. Compared to December 31 st, 2015, the position of the firm in relation to fixedincome securities increased 40% and, in turn, increased the interest rate risk exposure in 447% for 75

76 having taken more long-term positions than short-term positions, which configures the coverage of the position. Description of risk concentrations. Description of the method through which management determines concentrations. Concentration of positions taken by the firm in fixed-income securities is determined according to the roadmap subscribed by each trader of the Own Position Desk to indicate which fixed-income securities (public debt, private debt, standardized derivatives, pension bonds) can be operated by each of them, the maximum limit of intraday and overnight positions assumed by each trader, and the stop loss levels defined for each one of them. Description of the common characteristics for concentration. Exposure to interest rate occurs when fixed-income securities are acquired either agreed at a fixed or at a variable rate, over which the risk exposure is calculated based on the maturity date of securities. Analysis of sensitivity for types of market risk. As of December 31 st, 2016, the Own Position Portfolio, from the Delta Normal method, with a degree of confidence of 99%, obtained a VaR of 38.4 million Colombian pesos for the real portfolio and a VaR of 43.5 million Colombian pesos for the portfolio stressed with an increase of 15% volatility. This represents an increase of 13.23% of the maximum loss (VaR) estimated for this portfolio. Such VaR increased about 190% with respect to that of December 31 st, 2015, when a VaR of million Colombian pesos was obtained for the real portfolio and million Colombian pesos for the stressed portfolio. Equity Price Risk Stocks. Description of the risk exposure. AdCap Colombia S.A., as a brokerage company, is exposed to the Stock Price Rate Risk, as the risk associated to keeping stock positions in the treasury book. Description of the objectives, policies and processes for risk management. AdCap Colombia S.A. board of directors, according to provisions of Chapter XXI of Basic Accounting Document issued by the Colombian Financial Superintendency, adopted (through 11-M-001- MARKET RISK MANAGEMENT SYSTEM MANUAL) general policies on market risk management; the manual includes the stock price risk management policies that are binding upon AdCap Colombia S.A. officers. General policies include the execution of activities performed by AdCap Colombia officers according to the brokerage company s organizational structure and principles such as independence, 76

77 transparency, liquidity, profitability, and safety, the Manual of Conduct, and the manuals corresponding to the brokerage company s risk management. Likewise, the Market Risk Management System Manual includes the identification of the market risk associated to the share price risk factor and, in general, to the risk factors in virtue of the type of positions assumed and the products and markets addressed. Methods used to measure the risk. The measurement procedures are adjusted to the standard measurement according to provisions of Chapter XXI of the Basic Accounting Document issued by the Colombian Financial Superintendency, which is enclosed as an Annex to the MARKET RISK MANAGEMENT SYSTEM MANUAL. Description of changes in risk exposure. VPN Position Variation Net sensitivity by stock price Variation 30/12/2015 $ ,01 $ , % 30/12/2016 $ ,23 $ , % As of December 31 st, 2016, AdCap Colombia recorded variable-income positions in the amount of $500, that generated a net sensitivity of $73,635 corresponding to the volatility of stock prices of the portfolio long positions. As of December 31 st, 2015, the firm s position before the negotiation of stocks decreased 0.49% which resulted in a decrease corresponding to the exposure to the stock price risk which, according to the standard measurement methodology, is applied a sensitivity factor of 14.7% per stock. Description of risk concentrations. Description of the method through which management determines concentrations. Concentration of positions taken by the firm in stocks is determined according to the roadmap subscribed by the Own Position Desk trader; it indicates the maximum limit of intraday and overnight positions assumed by the trader and the stop loss levels defined for each horizon. Likewise, the IRL consumption account of the position assumed should be taken into consideration and whether or not the stock is limited for operations by the Risk Committee. Description of the common characteristics for the concentration. Exposure to the stock price risk occurs when variable income securities are acquired; securities over which the interest rate risk exposure is calculated based on the volatility of each stock and concentration is measured according to the type of issuer and the economic group to which it belongs. 77

78 RISK DIVERSIFICATION EFFECT. Due to the short and long positions taken on different investment instruments, the exposure to risk in each factor is netted and compensated so that the effect of diversification reduces the total Risk Value of the brokerage company. Risk Factors INTEREST RATE SENSITIVITY EXCHANGE RATE SENSITIVITY STOCK PRICE SENSITIVITY SENSITIVITY OF COLLECTIVE FUNDS SHARES VPN NET SENSITIVITY VPN NET SENSITIVITY Variation of Net Sensitivity $ 28,129, $ 1,363, $52,347, $ 249, % $ 5,714, $ 314, $ 8,466, $ 372, % $ 500, $ 73, $ 503, $ 73, % $ 253, $ 37, $ 481, $ 70, % TOTAL VAR $ 1,788, $ 766, % Management of the SARLAFT (Money Laundering and Terrorist Financing Risk Management) System. According to the regulations set forth by Colombia Financial Superintendency and pursuant to the instructions contemplated in Legal Basic Document (Part 1, Title IV, Chapter IV), our entity shows positive results relating to the management executed with the SARLAFT (Money Laundering and Terrorist Financing) system, which are consistent with the norms in force, the policies and methodologies adopted by our Board of Directors, and the recommendations contemplated in the international standards concerning this issue. AdCap Colombia S.A. Comisionista de Bolsa has developed and implemented a Money Laundering and Terrorist Financing risk management system as integral part of its corporate culture; such system is in compliance with regulatory requirements demanded for the optimum performance of the system. The SARLAFT system of the company is based on four stages required by the regulatory body; it comprises the elements and instruments needed for its proper operation; for this purpose, the policies have been published and revealed through manuals within the Quality Management System. Additionally, the ML/TF risk management system allows to reasonably identify, measure, control, and monitor all risks through the methodology developed, which estimations and considerations include the probability of occurrence and the impact to set the risk profile in an integral manner and divided into risk factors. The Money Laundering and Terrorist Financing risks have been managed following the international and national recommendations, always within the concept of permanent improvement. The entity 78

79 offers necessary technical and human tool to implement the policy on customer knowledge, user control, operation monitoring, and all other instruments needed to identify unusual operations and report suspicious operations to the UIAF (Information and Financial Analysis Unit). On the other hand, the company has an annual training program addressed to its officers; the program is used to spread the directions concerning the regulatory system and the control mechanisms of the SARLAFT system; al in compliance with provisions of legal norms and pursuant to the amounts and characteristics required by the Legal Basic Document issued by Colombia Financial Superintendency. Our policies include the support and the cooperation with authorities according to the legal system in force. Finally, as a support to the activities of the Compliance Officer s team, the internal audit and the auditors office, as a way of complying with the ML/TF risk management process, promote the proper application and execution of the SARLAFT system. Compliance Officer. In order to comply with the functions set forth in legal regulations in relation to the commitment acquired to the SARLAFT system, the Board of Directors of AdCap Colombia S.A. has appointed a Compliance Officer who is duly registered with the Colombia Financial Superintendency. The compliance officer is a highly experienced person with decision-making capacities and duly supported by a human and technical work team which allows him to cover all areas of management and by the company s directors as well. Money Laundering and Terrorist Financing Risk Management. The activities deployed concerning the SARLAFT system have been executed according to the methodologies adopted by the company; this allowed us to continue mitigating risks; the results have been obtained by applying the control systems designed for each risk factor defined by Colombia Financial Superintendency (customers, products, channels, and jurisdictions), keeping an acceptable profile; this aspect can be verified with the lack of events or situations that could be contrary to the good reputation of AdCap Colombia concerning the SARLAFT system. Stages of the Money Laundering and Terrorist Financing Risk Management System. Following the international recommendations and the national regulations on the SARLAFT System, the ML/TF risks identified by our brokerage firm have been managed within the concept of permanent improvement and focused on the reasonable reduction of risk factors in the company. The company continues with this management. For this reason, it has technological tools which have allowed it to implement the policy on customer knowledge, among others, with the purpose of identifying unusual operations and reporting suspicious operations to the UIAF (Information and Financial Analysis Unit), according to law. It should be noted that our entity has improved the functions that support the development of the SARLAFT system, associated to the different applications and analysis methodologies that allow 79

80 implementing the supervision management and the prevention of Money Laundering and Terrorist Financing risks. This risk management system has been strengthened by the segmentation developed by our entity using data mining tools that allow us to identify (by each risk factor: customer, product, channel, and jurisdiction) risks and supervise the operations conducted in our company as an attempt to detect unusual operations based on the segment profile. On the other hand, our entity keeps its institutional training program addressed to its officers; the program is used to disclose the directions concerning the regulations and control mechanisms about Money Laundering and Terrorist Financing, by promoting and strengthening the SARLAFT culture and the supervision environment. Elements of the Money Laundering and Terrorist Financing Management System. In compliance with provisions of legal norms and pursuant to the amounts and characteristics required by applicable regulations, AdCap Colombia S.A. Comisionista de Bolsa has timely presented the reports and institutional reports to the UIAF (Information and Financial Analysis Unit) according to legal terms; in the same manner, the company has provided to competent authorities the information required according to law, given that our policies have set the procedures to support and cooperate with authorities within the legal system. AdCap Colombia S.A. keeps a policy that states that the operations of our company should be processed within the highest standard on ethics, control, transparency, and legality, always supported by good financial practices and in compliance with the law as a way of reaching commercial goals; from practical standpoint, these aspects have resulted in the implementation of criteria, policies, and procedures used for the management of SARLAFT risks, intended to reduce the risks, as traditionally done by the company. Our SARLAFT system operates as a complement to the commercial work developed by our company, bearing in mind that the control is integral part of the commercial management; the system uses these processes to timely fulfill the customers needs and requirements. According to the results obtained from the different stages relating to the SARLAFT system and the reports of supervision entities, internal auditor and auditor s office, as well as statements of the Board of Directors with respect to the quarterly reports presented by the Compliance Officer, the entity keeps a proper management of the ML/TF risk management. Our company has analyzed the reports prepared by the internal audit and the auditor s office concerning the SARLAFT system, with the purpose of following the recommendations intended to the optimization of the system. According to the reports received, the SARLAFT management results of the entity have been deemed as satisfactory. Auditing and Control. The revision of the compliance with control mechanisms designed and implemented within the 80

81 SARLAFT system of the Brokerage Company, has been included in the internal audit processes as a specific program based on the auditing procedures. Following the instructions given by Colombia Financial Superintendency, the auditor s office of the company has implemented the control processes needed to detect eventual events of violation of instructions contemplated in the Organic Statute of the Financial System (EOSF, for its initials in Spanish) and Colombia Financial Superintendency relating to the Money Laundering and Terrorist Financing Risk Management System. Conclusion. During 2016, AdCap Colombia S.A. conducted activities inherent to the Money Laundering and Terrorist Financing Risk Management System, as continuation of the management conducted in prior periods and complying with the recommendations made by the Board of Directors and relevant supervision bodies. Our management of the Money Laundering and Terrorist Financing Risks was conducted following the system structure and focused on the proper risk management methodology, as described in this Note. Our management reflects the permanent commitment of our officers as part of the SARLAFT culture developed by our company. Adcap Colombia S.A. holds its commitment to manage risks relating to Money Laundering and Terrorist Financing, as part of its Corporate Responsibility before society and the regulatory entities. Operating Risk Management System (SARO, for its initials in Spanish). AdCap Colombia S.A. has implemented good market practices according to Basel recommendations and in compliance with norms in force; the company has implemented an Operating Risk Management System (SARO, for its initials in Spanish), pursuant to provisions of Chapter XXIII of Basic Accounting and Financial Document (External Document No. 100 of 1995) issued by Colombia Financial Superintendency. This system includes a body dependent on the Risk Management which is the Credit and Operating Risk Direction responsible for supporting the management of each area with the purpose of reducing errors and identifying improvement opportunities. Guidelines have been described in the Operating Risk Management System Manual that contains policies, procedures, and methodologies for its management, duly approved by the Board of Directors. With the purpose of keeping the risk exposure at a tolerable level, the company keeps a permanent cycle of identification, measurement, control, monitoring, and formulation of actions plans, which results in the residual operating risk profile under the company, adjusted to the result of the creation of new processes, products, and permanent monitoring over different events that may (or may not) imply losses from internal or external failures presented during In the same manner, the Risk Management, together with the Human Management area, offers guidance to the staff entering the company and offers annual training to the staff with the purpose of improving competences with 100% coverage; the company acknowledges that each officer is the first control system for the identification and prevention of risk events. 81

82 Note 29. Contingencies Legal Status. The company is currently operating on a regular basis according to the permits and authorizations given by Colombia Financial Superintendency. The entity is currently in full force according to the legal and statutory norms and it complies with its tax, labor, and contractual obligations and, in general, with the Colombian regulations applicable to its activity. As of December 2016, the company was responding the following actions: Lawsuits against the company filed by customers before Arbitration Courts, due to issues relating to Repo operations over Interbolsa S.A. executed in year A consumer s protection action with Colombia Financial Superintendency, filed against the company by a customer by issues relating to advisory in year Labor lawsuit against the company, filed by a former employee who worked for the company between 2010 and Two lawsuits filed by the company against two customers who failed to comply with their repurchase obligations (Repo operations) in year One special appeal with the Supreme Court of Justice, filed by the brokerage company against judgments contrary to the company. Two lawsuits filed by the brokerage company against insurance companies for events relating to operations executed by a former employee of the company in year One lawsuit filed by the brokerage company against insurance companies for events relating to Repo operations executed through the company in year Two petitions of extrajudicial evidence made by a stockholder of the company. According to the opinion given by the attorneys, the actions above can be hardly lost; for this reason, the company reveals the contingencies but does not reveal the provision. UGPP requirement to declare and/or correct in year Potential contingency of labor claims based on the Integral Flexible Remuneration System implemented by the company in that year. Based on the opinion given by its attorneys and labor advisors, the company s Management is aware of a potential obligation to pay a penalty between 10% and 30%; therefore, it has been classified as a contingent obligation that should be revealed and recognition of provision was not conducted. Note 30. Transactions with Related Parties Until December 2014, the company was controlled by Avinsas S.A.S. which owned 80.34% outstanding shares; during December 2014 and January 2015, 2,664,409 shares were issued and placed and were purchased by Advanced Capital International Ltd. and the new shareholder purchased 3,922,095 shares from outstanding ones; in this manner, as of the closing date of January 2015, Advanced Capital International Ltda. became the controlling partner with a shareholding of 51%. With the capitalization conducted in 2016, the shareholding increased to 54.11%. Table below shows the transactions made with related parties. 82

83 Name Type of Operation AVINSAS S.A.S. ADVANCED CAPITAL INTERNATIONAL LTD. Assignment FIC Transactions 89,496 5,217 Expense Leasing Agreement 40,024 1,039,270 Income Refund of legal fees - 6,948 Accounts Assignment of rights receivable - 343,000 Accounts Refund of fiduciary commission, receivable Bogota 1, Accounts Refund of travel expenses, Directors - payable 68,460 Expense Hotels - 6,906 Expense Air tickets - 60,378 Expense Taxis Expense Exchange difference - 1,051 Fiduciary balance Transactions commission contract (to cover Fiduciaria Bogota invoice) 3,245 1,651 ADCAP SECURITIES URUGUAY AGENTE DE VALORES S.A. Income Consultancy Agreement 594, ,449 Expense Exchange difference 10,057 1,932 Expense Consultancy contract commissions - 43,879 ADCAP SECURITIES LLC Accounts receivable Income Subsidiary Agreement (Financial Service Referral Agreement) Subsidiary Agreement (Financial Service Referral Agreement) 36,028 36,

84 ADCAP SECURITIES LTD Accounts payable Income Expense Information provision agreement Recovery of shared salary costs Consultancy activities for the development of subsidiary activities and implementation of new businesses 104,425 17, , Income Exchange difference 72,322 - Board of Directors Remuneration Board of Directors fees $ 67,000 $ 57,214 Key Managerial Staff s Remuneration Employees Benefits $ 2,092,345 $ 1,710,447 Benefits for termination of labor contract 36, ,511 Total remuneration paid to key managerial staff $ 2,128,513 $ 1,927,958 Values disclosed in table below have been recorded as expenses during the reported period relating to the key managerial staff. Note 31. Future Events. According to Minute No. 70 dated January 12 th, 2017 and January 16 th, 2017 issued by the Shareholders Meeting and pursuant to Minute No. 343 dated January 16 th, 2017 issued by the Board of Directors, the issue of 831,000 shares (not subject to right of first refusal) was approved at a price of COP$ 2, for a total of COP$ 1,799,979, and a par value of COP$ 100 each and COP$ 2, for share placement premium, generating an increase of the subscribed and paid-up capital of COP$ 1,446,300 equivalent to COP$ 14,463,000 shares, 9,430 of which were repurchased shares. In January 30 th, 2016, Colombia Financial Superintendency approved capitalization of the brokerage company and on this same date, its parent company drew relevant net resources for this purpose. Note 32. Approval of Financial Statements. Separate financial statements and notes to financial statements herein attached have been approved by the Board of Directors and the Legal Representative, according to provisions of Minutes No. 345 dated 28 february and 6 march, 2017, to be submitted before the General Meeting of Shareholders for relevant approval, but financial statements can be approved and amended by the General Meeting of Shareholders. 84

85 Certification of Financial Statements Undersigned Legal Representative and Public Accountant, who were responsible for the preparation of the financial statements, do hereby certify that: That we have verified the statements contained in the financial statements for our issue of the financial statement as of December 31 st, 2016, including the statement of results and other integral results, the statement of changes in equity, and cash flow statements for the year ended on that date; that we have verified the figures contained in the financial statements and do hereby certify that they are true and correct. Express and implied statements are as follows: Existence: Assets and liabilities of AdCap Colombia S.A. Comisionista de Bolsa really exist on the date stated above, and transactions recorded have been performed during the year. Integrity: All economic facts performed have been recorded. Rights and obligations: Assets represent potential future economic benefits and liabilities represent potential future economic sacrifices obtained or assumed by AdCap Colombia S.A. Comisionista de Bolsa as of the date stated above. Valuation: All elements have been recorded by appropriated amounts. Presentation and disclosure: Economic facts have been correctly classified, described, and revealed. Jorge Iván Abreo García Representante Legal Angela Lucia Cadavid Sierra Public Accountant Professional License No T 85

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