SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS, NEW CHILEAN GAAP FOR COOPERATIVES AND OLD CHILEAN GAAP FOR COOPERATIVES Significant Differences between IFRS and New Chilean GAAP for Cooperatives As of 1 January 2017, savings and loan credit unions must apply the regulatory accounting framework described in the Accounting Standards Compendium (the "Compendium") issued by the SBIF, in accordance with Circular letter No.162 issued by the SBIF on 19 August 2015 ("New Chilean GAAP for Cooperatives"). Any accounting matters not dealt with by the Compendium must be treated in accordance with Chilean Generally Accepted Accounting Principles (GAAP), which are the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (IASB), and adopted by the Chilean Accountants College A.G. The principles of New Chilean GAAP for Cooperatives and IFRS differ in certain significant respects. The Issuer has not prepared a quantitative reconciliation of specific differences between New Chilean GAAP for Cooperatives and IFRS. Had such an effort been undertaken, other potentially significant differences might have been identified and disclosed herein. The following paragraphs summarise the areas in which differences between New Chilean GAAP for Cooperatives and IFRS could be significant to the Issuer's financial position and results of operations as of 30 June 2017. The Issuer has not prepared financial statements in accordance with IFRS and, accordingly, cannot offer any assurance that all existing differences have been identified. In addition, the Issuer cannot estimate the net effect that applying IFRS would have on the Issuer's financial position, results of operations or any component thereof. As a result, it may be that, for example, the total shareholders' equity, prepared on the basis of New Chilean GAAP for Cooperatives, is materially different from the total shareholders' equity that would have been prepared under IFRS. Differences in the presentation of the financial statements as well as differences in the information provided in the notes to the financial statements have not been reported. As stated above, New Chilean GAAP for Cooperatives, as prescribed by the Compendium differs in certain respects from IFRS. The differences are: Loan loss allowances The allowance for loan losses under New Chilean GAAP for Cooperatives is calculated using models which are in accordance with IFRS for loans collectively evaluated for impairment. The individually significant loans are provisioned for using prescribed percentages as required by the SBIF. Under IFRS, the allowance for loan losses established for individually significant loans is calculated by using an incurred loss model as required by IFRS International Accounting Standard 39, Financial Instruments ("IAS 39"). Allowance for contingencies on off-balance sheet items In accordance with New Chilean GAAP for Cooperatives, provisions are recognised on off-balance sheet amounts including unrestricted lines of credit, other contingent loans and other guarantees, prescribing specific rules for calculation of such provisions. Under IFRS, the recognition of contingencies provisions on off-balance sheet items is not permitted by IAS 39 or IAS 5, "Contingent assets and liabilities". Suspension of recognition of income on an accrual basis Under New Chilean GAAP for Cooperatives, the Issuer does not recognise income on an accrual basis for certain loans included in the impaired portfolio. Under IFRS, this is not permitted and interest must be recognised based on the effective interest rate. Assets received in lieu of payment The Compendium requires that the initial recorded value of assets received in lieu of payment should be the value agreed upon with a borrower as a result of the loan settlement, or the value awarded in an auction, as applicable. These assets are required to be written off one year after their acquisition, if these assets have not been previously disposed of. IFRS requires that assets received in lieu of payment should initially be accounted for at fair value. Subsequent measurement depends on the classification provided for that type of asset. - 105 -
Significant Differences between IFRS and Old Chilean GAAP for Cooperatives The following paragraphs summarise the areas in which differences between Old Chilean GAAP for Cooperatives and IFRS could be significant to the Issuer's financial position and results of operations as of 31 December 2016. The Issuer has not prepared financial statements in accordance with IFRS and, accordingly, cannot offer any assurance that all existing differences have been identified. In addition, the Issuer cannot estimate the net effect that applying IFRS would have on the Issuer's financial position, results of operations or any component thereof. As a result, it may be that, for example, the total shareholders' equity, prepared on the basis of Old Chilean GAAP for Cooperatives, is materially different from the total shareholders' equity that would have been prepared under IFRS. Differences in the presentation of the financial statements as well as differences in the information provided in the notes to the financial statements have not been reported. As stated above, Old Chilean GAAP for Cooperatives differs in certain respects from IFRS. The significant differences are: Price Level Restatement Pursuant IAS 29 "Financial Information in Hyperinflationary Economies", a price level restatement must be applied only when an entity's functional currency is that of a hyperinflationary economy (defined as an economy experiencing 100 per cent. inflation in three years). Since the Chilean economy does not meet these requirements, the price level restatement had to be eliminated as of 1 January 2017. Pursuant to the provisions of the Compendium, the price level restatement recognised until 31 December 2016 was not reversed. Currency of Presentation Pursuant to Old Chilean GAAP for Cooperatives, amounts presented in the Issuer's financial statements are expressed in constant Chilean pesos. Pursuant to IFRS, all Chilean peso amounts or later must be expressed in nominal Chilean pesos, except in the case of hyperinflationary economy, considering there is no change in functional currency. Allowance for loan losses Allowance for loan losses under Old GAAP was previously recognised under specific instructions issued by the SBIF. The impairment approach under IAS 39 Financial Instruments differs from Old Chilean GAAP for Cooperative. General loan loss provisions are no longer permitted and impairment losses can only be provided for when there is objective evidence of an incurred loss. Valuation at amortized cost of financial instruments, except those measured at fair value Loans and other financial instruments, except those measured at fair value, were recognised by using a nominal interest rate method under Old Chilean GAAP for Cooperatives. Under IFRS, financial instruments (except those measured at fair value) are measured at amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment. The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. Post-employment benefit provision Under Old Chilean GAAP for Cooperatives, severance compensation that the Issuer had to pay to employees was provisioned by applying the present value method of the benefit's accrued cost, with a real annual discount rate. Under IFRS, the obligation of the post-employment benefit plan is measured by using the projected unit credit method, which includes variables such as employee turnover rate, expected wage growth and the probability of use of this benefit, discounted at the current rate for long term investments as per IAS 19 "Employee Benefits" requirements. - 106 -
Renegotiations of written-off loans Under Old Chilean GAAP for Cooperatives, when a renegotiation of written-off loans was made, a loan recovery was recognised. Under IFRS, any renegotiation of a loan already written-off does not give rise to recognition of income, as long as the operation continues under an impaired classification; accordingly, payments received are treated as recoveries of written-off loans. Consequently, the renegotiated loan is recognised if it is no longer considered to have an impaired condition. The same criterion must be followed in case a loan is granted to pay a written-off loan. Provision for reimbursement of insurance premiums Under Old Chilean GAAP for Cooperatives, no provisions were required to be recognised in connection with the future reimbursement of insurance premiums related to policy waivers and loan prepayments. Under IFRS, a provision has to be recognised based on the payment and collection records of the products portfolio that originated such commissions. Significant Differences between New Chilean GAAP for Cooperatives and Old Chilean GAAP for Cooperatives The following is a description of the principal effects or adjustments arising from the adoption of New Chilean GAAP for Cooperatives. Previously, the financial statements of the Issuer had been prepared in accordance with accounting standards contained in the Updated Compilation of Standards issued by the SBIF that apply to savings and loan credit unions valid until 31 December 2016 ("Old Chilean GAAP for Cooperatives"). For a quantitative description of these effects and adjustments, see Note 2 to the Issuer's interim financial statements. Price Level Restatement Pursuant to the Compendium and IAS 29 "Financial Information in Hyperinflationary Economies", a price level restatement must be applied only when an entity's functional currency is that of a hyperinflationary economy (defined as an economy experiencing 100 per cent. inflation in three years). Since the Chilean economy does not meet these requirements, the price level restatement had to be eliminated as of 1 January 2017. Pursuant to the provisions of the Compendium, the price level restatement recognised until 31 December 2016 was not reversed. Currency of Presentation Pursuant to Old Chilean GAAP for Cooperatives, amounts presented in the Issuer's financial statements for the years ending 31 December 2015 and 31 December 2016 are expressed in constant Chilean pesos. Pursuant to New Chilean GAAP for Cooperatives, all Chilean peso amounts as of and for any period ended 1 January 2017 or later must be expressed in nominal Chilean pesos. Loans Unless otherwise specified, all references herein to loans are to loans before deductions for loan loss allowances. Overdue loans include only the portion of principal and interest that is overdue for 90 or more days and do not include the instalments of the loans that are not overdue or that are overdue for fewer than 90 days, unless (i) any portion of the loan is overdue for 180 days or more, in which case the entire loan is considered past due, or (ii) legal proceedings have been commenced for the entire outstanding balance according to the terms of the loan, in which case the entire loan is considered past due within 90 days of initiation of such proceedings. The Issuer presents information on "delinquent" loans only as of 30 June 2017 based on the instructions set forth in the Compendium. "Delinquent" loans are loans in respect of which the Issuer has evidence indicating that the borrower will not perform its payment obligations in accordance with the terms and conditions of the loan. For purposes of assessing the Issuer's loan portfolio, the Issuer assesses certain loans on an individual basis and other loans on a collective basis. The Issuer performs individual assessments of loans that the Issuer considers significant relative to the Issuer's loan portfolio, based on - 107 -
the amount of the loan, its size, complexity and the credit profile of the borrower. The Issuer's individually assessed loans are considered delinquent loans when they are classified as C or D loans according to the categories set forth by the SBIF. The Issuer assesses on a collective basis all of its loans that it does not assess individually, grouping them according to certain common characteristics such as the amount of the loan and the borrower's credit profile. Generally, the Issuer performs collective assessments for low value individual operations. The Issuer's collectively assessed loans are delinquent loans when (i) they are 90 days or more overdue or (ii) they are restructured past due loans until it reclassifies them as performing loans based on the Issuer's periodic reassessment of such loans. Post-employment benefit provision Until 31 December 2016, severance compensation that the Issuer had to pay to employees was provisioned by applying the present value method of the benefit's accrued cost, with a real annual discount rate. From 1 January 2017 onwards, the obligation of the post-employment benefit plan is measured by using the projected unit credit method, which includes variables such as employee turnover rate, expected wage growth and the probability of use of this benefit, discounted at the current rate for long term investments as per IAS 19 "Employee Benefits" requirements. Renegotiations of written-off loans Until 31 December 2016, when a renegotiation of written-off loans was made, recording a loan recovery was allowed. From 1 January 2017 onwards, any renegotiation of a loan already written-off does not give rise to recognition of income, as long as the operation continues under an impaired classification. Therefore, effective payments received are treated as recoveries of written-off loans. Consequently, the renegotiated loan is recognised if it is no longer considered to have an impaired condition, or if any income from that loan is recovered. The same criterion must be followed in case a loan is granted to pay a written-off loan. Provision for reimbursement of insurance premiums Until 31 December 2016, no provisions were required to be recognised in connection with the future reimbursement of insurance premiums related to policy waivers and loan prepayments. The Issuer has established a provision to comply with IFRS, based on the payment and collection records of the products portfolio that originated such commissions. Suspension of interest on accrual basis Until 31 December 2016, recognition of interest income and readjustments took into account the suspension of accrual in the following ways: (a) (b) (c) starting on the date on which a credit, partial payment or unpaid instalment is 90 days due and until all amounts due are paid or renegotiated; suspension of accrual of loans classified in the D1 and D2 categories, from the classification date and until they are reclassified in a risk category lower than C4; for credits that have been classified during one year as being in the C4 category, accrual is suspended starting on the date on which a year has passed and until they are reclassified in a lower risk category. From 1 January 2017 onwards, recognition of interest on an accrual basis is suspended for nonperforming loans included in the impaired portfolio in accordance with the following: Loans subject to suspension Individual evaluation: Loans classified in the D1 and D2 categories Individual evaluation: Loans classified in the C1 and C4 categories Suspended Accrual is suspended by the sole fact of the loan being in the impaired portfolio Accrual is suspended due to the loans having been in the impaired portfolio for three months - 108 -
Group evaluation: Any loans, except for those with collateral reaching at least 80 per cent. Accrual is suspended when payment of the loan or one of its instalments has been overdue for six months - 109 -