Annual Report 2007

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0 A n n u a l R e p o r t 2 0 0 7 Comparatives – Where necessary, comparative figures have been adjusted to conform with changes in presentation. Cash and Cash Equivalents – This item includes balances with less than three months’ maturity when eligible for discounting with the Central Bank of Ecuador (the “Central Bank”) and money market instruments that are highly liquid and readily convertible to known amounts of cash with insignificant risk of changes in value. Generally, all cash and cash equivalent items appear at their nominal value. Money market instruments that qualify as cash equivalents are classified as available-for-sale financial assets and measured at fair value. Loans and Advances to Banks – The amounts reported under receivables from customers consist mainly of loans and advances issued. The amounts reported under advances to banks include current account balances. All loans and advances to banks as well as loans and receivables to customers fall under the category “loans and receivables” and are carried at amortized cost, using the effective interest method. Amortized premiums and discounts are accounted for over the respective terms in the income statement under net interest income. Impairment of loans is recognized on separate allowance accounts. Allowance for losses on loans and advances and impairment of available-for-sale financial assets • Assets Carried at Amortized Cost – The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant (specific impairment) and collectively for those financial assets that are individually insignificant (impairment for individual insignificant loans). If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether individually significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (impairment for collectively assessed loans). Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (specific impairment). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. For the purposes of the evaluation of impairment for financial assets consisting of individually insignificant loans, the loans are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtor’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. • Renegotiated Loans – Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. • Assets Classified as Available-for-Sale – The Bank invests in securities with fixed interest rates. Impairments on these investments are recognized when objective evidence exists that the issuer is unable or unwilling to service these obligations. The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. In determining whether an available-for-sale financial asset is impaired the following criteria are considered: • Deterioration of the ability or willingness of the debtor to service the obligation; • Political situations which may significantly impact the debtor’s ability to repay the loan; • Additionaleventsthatmakeitunlikelythatthecarryingamount may be recovered. Intangible Assets – Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and/or to bring to use the specific software. These costs are amortized on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years. Property and Equipment – Land and buildings comprise mainly the Bank and its offices. All property and equipment are stated at historical cost less scheduled depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 20 years Leasehold improvements 5 years Furniture and fixtures 7 years IT and other equipment 3 years The assets’ residual carrying values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater that its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. The Resolutions Codification of the Ecuadorian Superintendency of Banks and Insurance and the Banking Board require that land and building values be adjusted every five years to market prices using a technical valuation performed by independent experts appointed by the Bank’s Directors and previously approved by the controlling authority. The Bank has not performed an evaluation of its property since it possesses no assets whose age exceeds five years. Also the Bank has not identified any events or changes in circumstances that indicate that the carrying amount may not be recoverable. Contingent Assets and Liabilities – Contingent assets and liabilities are not recognized in the financial statements, but are only disclosed in a note to the financial statements, except in those cases where the possibility of an outflow or inflow of resources corresponds to loans. Any change in probabilities is recognized in the financial statements, that is, if in the case of liabilities it is probable or, in the case of assets, virtually certain that there will be either an outflow or inflow of resources. Income Tax • Current Income Tax – Income tax payable on profits is calculated on the basis of the Ecuadorian Tax Law and is recognized as an expense in the period in which the profit arises. The applied income tax rate for <strong>2007</strong> was 25%. • Deferred Income Tax – Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements prepared in conformity with IFRS. Deferred tax assets and liabilities are determined using tax rates (and laws) that have been enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The principal temporary differences arise from deferred commission income, depreciation of other equipment and from allowances for impairment losses on loans to customers. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or a liability in a transaction other than a business combination that at the time of the transaction affects neither the profit (before tax) for the period according to IFRS, nor the taxable profit or loss. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset when it is probable that future taxable profits will be available against which these losses can be utilized. Deferred tax assets are recognized where it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred tax related to fair value re-measurement of available-forsale investments, which is charged directly to equity, is also credited or charged directly to equity and subsequently recognized in the income statement together with the deferred gain or loss. The income tax expense included in the accompanying financial statements represents the total current and deferred income tax. F i n a n c i a l S tat e m e n t s 1 Employee Profit-Sharing and Child and Family Tax (INNFA) – Current employee profit-sharing and the Child and Family tax (INNFA) are recognized in income based on taxable income for the year. Deferred INNFA tax and the employee profit-sharing are recognized for the effect of temporary differences arising as a consequence of the different means of measuring assets and liabilities based on accounting and tax criteria and unused tax credits deductible from future taxable earnings, calculated in accordance with current tax rates. The deferred tax liability for INNFA and the employee profit-sharing is generally recognized for the temporary taxable differences, and the deferred assets for INNFA and the employee profit-sharing are generally recognized for the temporary deductible differences, based on the existence of future taxable earnings, against which such temporary deductible differences may be used. Liabilities to Banks and Customers – Liabilities to banks and customers are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method. All financial liabilities are derecognized when they are extinguished – that is, when the obligation is discharged, cancelled or expires. Debt Securities – The balance sheet item “debt securities” contains commercial papers issued in the Ecuadorian bond market, recognized initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. They are subsequently stated at amortized cost and any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the debt instruments using the effective interest method. Provisions – Provisions for legal claims are recognized when: • it is more likely than not that an outflow of resources will be required to settle the obligation; and • the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow of resources will be required in a settlement is determined by considering the class of obligations as a whole. Provisions are measured at the present value of the expenditures. The increase in the present value of the obligation due to the passage of time is recognized as an interest expense. Post-Employment Benefits – It is mandatory to pay employees a certain amount of post-employment benefits, which depend upon several factors such as the number of years of service and compensation. The liability recognized in the balance sheet is the present value of the defined post-employment benefit obligation at the balance sheet date, together with adjustments for unrecognized actuarial gains or losses and past service costs. The obligation is calculated annually by an independent actuary. The present value of the obligation is determined by discounting the estimated future cash outflows, taking into account mortality tables and salary increases using an interest rate of 6.5%. Subordinated Debt – Subordinated debt consists mainly of liabilities to shareholders and other international financial institutions which in the event of insolvency or liquidation are not repaid until all non-subordinated creditors have been satisfied. There is no obligation to repay early. Following initial recognition at acquisition cost, the subordinated debt is recognized at amortized cost. Premiums and discounts are accounted for over the respective terms in the income statement under net interest income.
Page 1 and 2: Annual Report 2007
Page 3 and 4: Mission Statement 4 Letter from the
Page 5 and 6: Letter from the Board of Directors
Page 7 and 8: ProCredit Holding has an investment
Page 9 and 10: the group as a whole, expressed in
Page 11 and 12: ProCredit in Latin America Microfin
Page 13 and 14: Name Banco Los Andes ProCredit Boli
Page 15 and 16: • The bank’s paid-in capital in
Page 17 and 18: Political and Economic Environment
Page 19 and 20: small and very small businesses. De
Page 21 and 22: Deposits and Other Banking Services
Page 23 and 24: M a n a g e m e n t B u s i n e s s
Page 25 and 26: In the bank’s Local Financial Sta
Page 27 and 28: tions of “client advisor” and
Page 29 and 30: agement. As a result, although it o
Page 31 and 32: B r a n c h N e t w o r k 1
Page 33 and 34: • Staff training programmes were
Page 35 and 36: Business Ethics and Environmental S
Page 37 and 38: Luis Enrique Fueres has a small wor
Page 39 and 40: Segundo Mesías Atapuma, Restaurant
Page 41 and 42: F i n a n c i a l S tat e m e n t s
Page 49: • IFRIC 13, Customer Loyalty Prog
Page 53 and 54: Restricted Availability - Liquidity
Page 55 and 56: e held in March 2008. Dividends dec
Page 57 and 58: 12. Liabilities to customers Liabil
Page 59 and 60: Legal Reserve - In accordance with
Page 61 and 62: December 31, 2006 Up to 1 - 3 3 - 1
Page 63 and 64: 3. Capital risk Technical Capital -
Page 65 and 66: 27. Contingent liabilities and comm
Page 67: Sangolquí Av. General Enríquez No

Annual Report 2007

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