Annual Report 2007

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 2007 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.