Financial Information Required by the Superintendency General of Financial Entities Consolidated Financial Statements December 31, 2011 (With corresponding figures for 2010) (With Independent Auditors Report Thereon) (Translation into English of the original Independent Auditors Report issued in Spanish)
CONSOLIDATED BALANCE SHEET As of December 31, 2011 (With corresponding figures for 2010) (In colones) 2010 Note 2011 (restated) ASSETS Cash and due from banks 4 & 31 156,623,951,285 153,746,459,718 Cash 12,207,450,074 12,327,391,158 Central Bank of Costa Rica 111,083,861,205 101,682,950,086 Local financial entities 204,886,513 110,723,123 Foreign financial entities 20,084,609,964 3,327,318,159 Other cash and due from banks 13,043,143,529 36,298,077,192 Investments in financial instruments 5 & 31 66,707,450,981 53,676,743,407 Held for trading 6,056,240,549 15,310,641,283 Available for sale 59,379,848,888 37,731,919,212 Accrued interest receivable 1,271,361,544 634,182,912 Loan portfolio 6 & 31 908,633,665,328 786,714,983,237 Current 856,190,690,394 711,884,287,309 Past due 49,404,206,622 73,228,326,088 In legal collections 12,575,445,146 10,405,974,640 Accrued interest receivable 3,961,465,545 4,139,085,724 (Allowance for loan losses) 6-b (13,498,142,379) (12,942,690,524) Accounts and fees and commissions receivable 7 7,379,699,134 6,892,668,986 Fees and commissions 114,814,718 173,597,724 Accounts receivable for brokerage transactions 716,456 1,131,488 Accounts receivable for related party transactions 3 432,183,509 372,125,506 Deferred tax 14 619,047,808 373,421,686 Other accounts receivable 6,947,228,519 6,579,098,109 (Allowance for doubtful accounts and fees and commissions receivable) 7 (734,291,876) (606,705,527) Foreclosed assets 8 3,308,457,102 6,079,334,149 Assets and securities acquired in lieu of payment 8,912,227,073 8,575,391,872 Other foreclosed assets 875,658,123 89,596,598 (Allowance for impairment and per legal requirement) (6,479,428,094) (2,585,654,321) Investments in other companies, net 1,898,649,484 1,721,010,645 Property and equipment, net 9 12,952,038,500 11,997,005,326 Investment property 10 2,757,886,818 2,682,142,231 Other assets 11 6,722,419,004 5,783,105,031 Deferred charges 644,103,663 114,002,031 Intangible assets 2,463,301,892 3,204,949,126 Other assets 3,615,013,449 2,464,153,874 TOTAL ASSETS 1,166,984,217,636 1,029,293,452,730 Continued
CONSOLIDATED BALANCE SHEET As of December 31, 2011 (With corresponding figures for 2010) (In colones) 2010 Note 2011 (restated) LIABILITIES AND EQUITY LIABILITIES Obligations with the public 12 & 31 672,959,112,735 651,767,091,376 Demand 221,744,664,008 208,840,050,050 Term 445,864,854,973 437,820,288,884 Other obligations with the public 2,655,946,404 1,901,287,553 Finance charges payable 2,693,647,350 3,205,464,889 Obligations with entities 13 & 31 326,941,047,369 229,065,141,383 Demand 880,820,863 4,431,671,743 Term 323,511,093,090 220,081,843,793 Other obligations with entities 1,358,955,302 3,754,268,825 Finance charges payable 1,190,178,114 797,357,022 Accounts payable and provisions 15 22,111,152,730 19,667,658,630 Accounts payable for brokerage services 579,508,151 458,888,744 Deferred tax 14 3,938,007,142 4,086,775,743 Provisions 15-a 4,143,428,485 3,827,686,113 Other sundry accounts payable 13,450,208,952 11,294,308,030 Other liabilities 16 334,237,634 573,498,653 Deferred income 210,100,773 333,493,529 Allowance for stand-by credit losses 6-c 109,553,925 225,787,883 Other liabilities 14,582,936 14,217,241 TOTAL LIABILITIES 1,022,345,550,468 901,073,390,042 EQUITY Share capital 69,477,602,250 69,477,602,250 Paid-in capital 17-a 69,477,602,250 69,477,602,250 Non-capitalized capital contributions 17-b 33,038,181,350 23,036,181,350 Equity adjustments 3,222,965,819 3,508,802,841 Surplus from revaluation of property and equipment 17-c 4,046,716,566 4,020,443,293 Adjustment for valuation of available-for-sale investments 17-e (306,715,007) (150,170,599) Adjustment for translation of financial statements (517,035,740) (361,469,853) Capital reserves 17-d 10,019,687,160 9,482,764,991 Prior period retained earnings 17-f 22,714,711,256 18,034,746,367 Income for the year 6,165,519,333 4,679,964,889 TOTAL EQUITY 144,638,667,168 128,220,062,688 TOTAL LIABILITIES AND EQUITY 1,166,984,217,636 1,029,293,452,730 DEBIT MEMORANDA ACCOUNTS 19 165,185,567,047 125,191,940,391 TRUST ASSETS 20 233,899,063,557 214,516,742,307 TRUST LIABILITIES 9,344,886,462 3,309,342,747 TRUST EQUITY 224,554,177,095 211,207,399,560 OTHER DEBIT MEMORANDA ACCOUNTS 22 5,742,010,236,962 6,282,891,226,601 Own accounts 5,209,113,024,302 5,791,889,696,836 Third-party accounts 153,583,132,840 172,725,652,004 Own custody accounts 31,144,682,490 6,798,206,893 Third-party custody accounts 348,169,397,330 311,477,670,868 The notes are an integral part of these consolidated financial statements.
CONSOLIDATED INCOME STATEMENT For the year ended December 31, 2011 (With corresponding figures for 2010) (In colones) Note 2011 2010 Finance income Cash and due from banks 16,310,959 57,817,592 Investments in financial instruments 3,569,940,445 2,611,715,502 Loan portfolio 25 59,171,291,172 62,100,716,045 Finance leases 6,406,256,852 5,528,879,147 Gain on available-for-sale financial instruments 5 472,623,311 666,044,015 Gain on derivative instruments 5,838,935 11,902,997 Other finance income 1,733,632,802 1,626,872,309 Total finance income 71,375,894,476 72,603,947,607 Finance expense Obligations with the public 26-a 19,729,067,778 24,675,754,995 Obligations with financial entities 26-b 5,619,398,111 4,738,673,653 Foreign exchange losses and "development units" 27 304,488,119 8,353,710,176 Loss on available-for-sale financial instruments 5 268,923,028 76,054,333 Loss on derivative instruments 6,282,502 43,853,982 Other finance expense 175,878,730 103,943,063 Total finance expense 26,104,038,268 37,991,990,202 Allowance for impairment of assets 6-b, 6-c, 7 6,314,906,845 5,752,631,539 Recovery of assets and decrease in allowances and provisions 3,082,242,852 3,857,152,628 GROSS FINANCE INCOME 42,039,192,215 32,716,478,494 Other operating income Service fees and commissions 28 13,293,453,016 13,020,462,938 Foreclosed assets 143,146,547 352,232,565 Gain on investments in other companies 188,451,198 176,744,342 Gain on sale of investment in subsidiary 37-1,067,050,848 Foreign currency exchange and arbitrage 4,425,278,207 4,244,314,284 Other income with related parties 3,346,490 44,409,040 Other operating income 7,487,738,305 4,681,296,254 Total other operating income 25,541,413,763 23,586,510,271 Other operating expenses Service fees and commissions 1,769,836,882 1,060,253,903 Foreclosed assets 4,982,605,480 2,566,558,146 Loss on investments in other companies 419,000,409 - Sundry assets 59,653,214 108,430,054 Provisions 1,340,805,742 1,440,351,309 Foreign currency exchange and arbitrage 50,659,569 1,000,854 Other operating expenses 5,925,093,147 3,319,390,069 Total other operating expenses 14,547,654,443 8,495,984,335 GROSS OPERATING INCOME 53,032,951,535 47,807,004,430 Administrative expenses Personnel expenses 29 23,489,254,299 22,483,655,881 Other administrative expenses 30 19,418,700,007 18,728,072,307 Total administrative expenses 42,907,954,306 41,211,728,188 NET OPERATING INCOME BEFORE TAXES AND STATUTORY ALLOCATIONS 10,124,997,229 6,595,276,242 Income tax 14 (3,397,002,678) (2,413,281,205) Deferred tax 14 302,537,668 1,152,767,944 Statutory allocations (328,090,717) (222,371,931) INCOME FOR THE YEAR 6,702,441,502 5,112,391,050 The notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended December 31, 2011 (With corresponding figures for 2010) (In colones) Note Share capital Non-capitalized capital contributions Revaluation surplus Adjustment for translation of financial statements Equity adjustments Changes in the fair value of available-for-sale investments Total equity adjustments Capital reserves Prior period retained earnings Total Balance at December 31, 2009, previously reported 69,477,602,250 3,031,781,350 3,994,170,019 (88,775,420) 67,635,339 3,973,029,938 9,056,248,082 30,968,557,583 116,507,219,203 Correction of fundamental errors 17-f - - - - - (2,939,720,468) (2,939,720,468) Balance at December 31, 2009, restated 36 69,477,602,250 3,031,781,350 3,994,170,019 (88,775,420) 67,635,339 3,973,029,938 9,056,248,082 28,028,837,115 113,567,498,735 Adjustment for translation of financial statements - - - (272,694,433) - (272,694,433) - - (272,694,433) Income for the year - - - - - 5,112,391,050 5,112,391,050 Legal and other statutory reserves 17-d - - - - - 426,516,909 (426,516,909) - Adjustment for valuation of available-for-sale financial instruments, net of deferred tax - - - (217,805,938) (217,805,938) - - (217,805,938) Adjustment to deferred tax for depreciation of revaluation of property and equipment - - 26,273,274-26,273,274 - - 26,273,274 Additional non-capitalized contributions in cash 17-b - 10,004,400,000 - - - - - 10,004,400,000 Additional capital contributions from prior period retained earnings 17-b - 10,000,000,000 - - - (10,000,000,000) - Balance at December 31, 2010, restated 69,477,602,250 23,036,181,350 4,020,443,293 (361,469,853) (150,170,599) 3,508,802,841 9,482,764,991 22,714,711,256 128,220,062,688 Adjustment for translation of financial statements - - - (155,565,887) - (155,565,887) - - (155,565,887) Adjustment for valuation of available-for-sale financial instruments, net of deferred tax - - - - (156,544,408) (156,544,408) - - (156,544,408) Adjustment to deferred tax for depreciation of revaluation of property and equipment - - 26,273,273 - - 26,273,273 - - 26,273,273 Legal and other statutory reserves 536,922,169 (536,922,169) - Income for the year - - - - - - - 6,702,441,502 6,702,441,502 Additional non-capitalized contributions in cash 17-b - 10,002,000,000 - - - - - 10,002,000,000 Balance at December 31, 2011 69,477,602,250 33,038,181,350 4,046,716,566 (517,035,740) (306,715,007) 3,222,965,819 10,019,687,160 28,880,230,589 144,638,667,168 The notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31, 2011 (With corresponding figures for 2010) (In colones) Note 2011 2010 Cash flows from operating activities Income for the year 6,702,441,502 5,112,391,050 Items not requiring cash Net foreign exchange gain and "development units" (570,819,518) (2,415,648,497) Loss on allowance for loan losses 3,321,826,290 1,817,608,778 Allowance expense - employer obligations 101,189,505 2,331,359,430 Loss on other allowances 4,136,916,722 1,867,110,030 Expense for reserve for credit card points awarded 1,387,988,981 655,000,000 Depreciation and amortization 9 & 11 1,519,087,656 946,339,136 Deferred tax expense (income) 14 (210,043,782) (1,152,767,944) Net gain (loss) on investments in other companies 224,971,706 (176,744,343) Loss on disposal of assets 36,530,514 97,562,552 Gain on sale of subsidiary - (1,067,050,848) Interest income (69,147,488,469) (70,178,192,839) Interest expense 25,348,465,889 29,414,428,648 Income tax 14 3,397,002,678 2,413,281,205 (23,751,930,326) (30,335,323,642) Net (increase) decrease in assets Trading securities (919,067,813) (3,589,076,722) Loans and cash advances (126,864,667,346) (9,285,884,014) Accounts and fees and commissions receivable (779,801,484) (165,284,095) Foreclosed assets (1,122,896,726) 491,437,489 Net increase (decrease) in liabilities Demand and term obligations 23,881,602,737 (20,821,150,194) Other accounts payable and provisions 935,665,200 2,150,692,048 Other liabilities (239,261,019) (2,477,819,139) (128,860,356,777) (64,032,408,269) Interest collected 68,687,930,016 70,765,369,044 Interest paid (25,467,462,336) (30,147,896,997) Taxes paid (1,912,442,637) (2,497,097,654) Net cash flows used in operating activities (87,552,331,734) (25,912,033,876) Cash flows from investing activities Increase in financial instruments (except held for trading) (2,581,965,542,853) (2,486,623,706,505) Decrease in financial instruments 2,569,497,978,582 2,471,644,190,900 Acquisition of property and equipment 9 (1,697,782,555) (375,122,871) Increase in investments in other companies due to cash contributions (561,120,000) (2,761,000,000) Sale of investment in subsidiary, net of cash paid - 3,238,597,015 Other assets (2,971,324,172) 2,303,563,536 Acquisition of investment property - (1,144,338,405) Net cash flows used in investing activities (17,697,790,998) (13,717,816,330) Cash flows from financing activities Other new financial obligations 293,310,256,726 472,259,220,834 Settlement of obligations (195,184,642,427) (473,673,459,375) Cash capital contributions 17-b 10,002,000,000 10,004,400,000 Net cash flows from financing activities 108,127,614,299 8,590,161,459 Net increase (decrease) in cash and cash equivalents 2,877,491,567 (31,039,688,747) Cash and cash equivalents at beginning of year 153,746,459,718 184,786,148,465 Cash and cash equivalents at end of year 156,623,951,285 153,746,459,718 The notes are an integral part of the consolidated financial statements. - -
December 31, 2011 (With corresponding figures for 2010) 1. Summary of operations and significant accounting policies (a) Reporting entity Grupo BNS de Costa Rica, S.A. (the Corporation) was organized in October 1998 in the Republic of Costa Rica. It is regulated by the National Financial System Oversight Board (CONASSIF), the Board of Directors of the Central Bank of Costa Rica, and the Superintendency General of Financial Entities (SUGEF). The address of the Corporation s registered office is Sabana Norte, Avenida de las Américas, San José, Republic of Costa Rica. The Corporation, through its subsidiaries, is dedicated to brokerage and financial intermediation activities, securities trading, investment fund management, the leasing of assets, investment banking, and other activities permitted under the Internal Regulations of the Central Bank of Costa Rica. Grupo BNS de Costa Rica, S.A. is owned by Corporación Mercabán de Costa Rica, S.A. (18.6367% ownership interest) and BNS Internacional, S.A. (Panama) (81.3559% ownership interest), which in turn are wholly-owned by Scotia International Limited. The latter is wholly-owned by The Bank of Nova Scotia. As of December 31, 2011, the Corporation has 1,270 employees (2010: 1,211), operates 38 branches and 19 in-store branches (2010: 37 branches and 17 in-store branches), and has a network of 122 automated teller machines (2010: 110) managed by Scotiabank de Costa Rica, S.A. The Corporation s website is www.scotiabankcr.com. (b) Basis of preparation i. Statement of compliance The consolidated financial statements have been prepared in accordance with accounting regulations issued by CONASSIF, SUGEF, the National Securities Commission (SUGEVAL), and the Superintendency General of Insurance (SUGESE).
2 The consolidated financial statements were authorized for issue by the Board of Directors on March 22, 2012. ii. Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: available-for-sale and held-for-trading assets are measured at fair value; property is stated at revalued cost. Methods used for fair value measurement are discussed in note 1-f (vi). (c) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation has the power to directly or indirectly govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences. As of December 31, the consolidated financial statements include the financial figures of the following subsidiaries: Name Ownership interest 2011 2010 Scotiabank de Costa Rica, S.A. 100% 100% Scotia Valores, S.A. 100% 100% Scotia Leasing de Costa Rica, S.A. 100% 100% Scotia Sociedad de Fondos de Inversión, S.A. 100% 100% Scotia Trust de Costa Rica, S.A. 100% 100% Corporación Privada de Inversiones (CPI), S.A. 100% 100% Scotia Agencia de Seguros, S.A. 100% 100% Corporación Privada de Inversiones de Centroamérica, S.A. (domiciled in Panama) 100% 100% Scotia Leasing Panamá, S.A. (domiciled in Panama) 100% 100% Scotia Leasing Nicaragua, S.A. (domiciled in Nicaragua, formerly Arrendadora Interfin Nicaragua, S.A.) 100% 100% Arrendadora Interfin El Salvador, S.A. de C.V. (domiciled in El Salvador) - 100% Scotia Leasing Honduras, S.A. (domiciled in Honduras) 100% 100% Scotia Leasing Guatemala, S.A. (domiciled in Guatemala) 100% 100%
3 In preparing the consolidated financial statements, the individual financial statements of the controlling company and its subsidiaries were consolidated line by line. The carrying amounts of the controlling company s investments in its subsidiaries and the balances arising from intra-group transactions were eliminated. As explained below, the financial statements of Financiera Arrendadora Centroamericana, S.A. (FINARCA) and Arrinsa Leasing, S.A. de C.V. were not included in the consolidated financial statements as of December 31, 2011 and 2010. The Corporation s investments in those subsidiaries were accounted for by the equity method. CONASSIF regulations stipulate that irrespective of control, the controlling company must consolidate the financial statements of any subsidiary in which it holds an ownership interest of 25% or more. This was not done in the case of FINARCA or Arrinsa Leasing, S.A. de C.V., both of which are wholly-owned subsidiaries of the Corporation, because the incorporation of those entities into the financial group has not been approved by SUGEF. Failure to include the financial statements of those subsidiaries in the Corporation s consolidation process does not comply with International Financial Reporting Standards (IFRSs). The Corporation s 50% ownership interest in IBP Operadora de Pensiones Complementarias, S.A. was valued by the proportionate consolidation method until October 31, 2010, date on which the Corporation disposed of this entity. As discussed in note 37, on November 5, 2010, CONASSIF authorized the exclusion of IBP Operadora de Pensiones Complementarias, S.A. from the Corporation as a result of the sale of the Corporation s ownership interest in that subsidiary. The Corporation plans to terminate the operations of the subsidiaries FINARCA and Arrinsa Leasing, S.A. de C.V. once the leases in effect as of December 31, 2011 have been fully recovered. Additionally, management plans to terminate the operations of Corporación Privada de Inversiones (CPI), S.A., Corporación Privada de Inversiones de Centroamérica, S.A., and Scotia Trust de Costa Rica, S.A.
4 (d) Functional and presentation currency The consolidated financial statements and notes thereto are presented in colones ( ), which is the monetary unit of the Republic of Costa Rica, in accordance with CONASSIF and SUGEF regulations. The accounting records of the Costa Rican subsidiaries are kept in colones. The accounting records of foreign subsidiaries are kept in U.S. dollars (US$), with the exception of FINARCA, which keeps its records in Nicaraguan cordobas. (e) Foreign currency Foreign currency transactions Assets and liabilities held in foreign currency are translated to colones at the exchange rate ruling at the balance sheet date, except transactions with contractually agreed exchange rates. Transactions in foreign currency during the year are translated at the exchange rates ruling at the dates of the transactions. Translation gains or losses are recognized in profit or loss. i. Monetary unit and foreign exchange regulations The parity of the colon with the U.S. dollar is determined in a free exchange market under the supervision of the Central Bank of Costa Rica (BCCR) by using exchange rate bands. As of December 31, 2011, the exchange rate was established at 505.35 and 518.33 to US$1.00 for the purchase and sale of U.S. dollars, respectively (2010: 507.85 and 518.09, respectively). ii. Valuation method for assets and liabilities As of December 31, 2011, assets and liabilities denominated in U.S. dollars, Canadian dollars, and euros were valued at the buy rates of 505.35 to US$1.00 (2010: 507.85 to US$1.00), 493.585 to CAD$1.00 (2010: 507.85 to CAD$1.00), and 651.60 to 1.00 (2010: 673.66 to 1.00), respectively, in accordance with regulations established by CONASSIF.
5 iii. Financial statements of foreign subsidiaries The financial statements of foreign subsidiaries have been translated as follows: Monetary assets and liabilities have been translated at the closing exchange rate. Equity has been translated at the exchange rate in effect on the date of the transactions (historical rates). Income and expenses have been translated at average exchange rates for the year. The effect of translation of the financial statements of foreign subsidiaries is presented in the Adjustment for financial statement translation account in equity. Accumulated gains or losses arising on translation in prior years are presented in the Prior year retained earnings account. Financial statement translation gave rise to a translation adjustment for the year ended December 31, 2011 of 155,565,887 (2010: 272,694,433). (f) Financial assets and liabilities A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. The Corporation s instruments include cash and due from banks (cash and cash equivalents), investments in financial instruments, loan portfolio, receivables, derivative instruments, demand and term deposits, obligations, and payables, as discussed below. i. Recognition The Corporation initially recognizes loans and advances, deposits, and debt instruments issued on the date at which they are originated. Regular purchases and sales of financial assets are recognized on the trade date at which the Corporation commits to purchase or sell the asset. All financial assets and liabilities are initially recognized on the trade date at which the Corporation becomes a party to the contractual provisions of the instrument.
6 ii. Classification Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks, and highly liquid financial assets with original maturities of less than two months, which are subject to insignificant risk of changes in their fair value, and are used by the Corporation in the management of its short-term commitments. Cash and cash equivalents are carried at cost in the balance sheet. Loan portfolio The loan portfolio includes loans, which are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and generally provide funds to a borrower. Loans are initially measured at fair value plus origination costs. The loan portfolio also includes finance leases, which mainly correspond to leases of vehicles, computer hardware, and machinery and equipment. Finance leases are recognized by the finance method, which recognizes finance leases at the present value of the future cash flows of the corresponding agreement. The difference between the total contractual amount and the cost of the leased asset is recorded as unearned interest and amortized to loan interest income accounts over the life of the lease by the effective interest method. Restructured loans are financial assets for which the Corporation has changed the original term, interest rate, monthly payment, or collateral as a result of borrower payment difficulties. The loan portfolio is presented at the value of outstanding principal. Interest on loans is calculated based on the outstanding principal and contractual interest rates, and is accounted for as income on the accrual basis of accounting. The Corporation follows the policy of suspending interest accruals on loans when principal or interest is more than 90 days past due. Non-accrual loans are stated at their estimated recovery value by applying the policy for impairment.
7 Investments in financial instruments Investments in financial instruments are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held for trading or available for sale. Under current regulations, held-for-trading instruments are investments in open investment funds that the Corporation holds for the purpose of shortterm profit taking. Available-for-sale assets are financial assets that are not held for trading purposes, originated by the Corporation, or held to maturity. Availablefor-sale assets include certain debt securities. Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Corporation has the positive intent and ability to hold to maturity. However, according to regulations, entities regulated by SUGEF, SUGEVAL, SUPEN, and SUGESE are barred from holding investments in financial instruments classified as held to maturity. Securities purchased under reverse repurchase agreements Reverse repurchase agreements are generally short-term financing transactions backed by securities in which the Corporation purchases securities at a discounted market price and agrees to sell them to the debtor on a specific date in the future and at a stated price. The difference between the purchase and resale price is recognized as income by the effective interest method. Market prices of the underlying securities are monitored. In the event of a permanent and material reduction in the value of a specific security, the Corporation adjusts the amortized cost of the security against profit or loss.
8 Derivative financial instruments Derivative financial instruments are recognized initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The Corporation holds no derivative financial instruments for trading purposes. Instruments held correspond to financial instruments to hedge interest rate risk. Any valuation gains or losses are recorded in profit or loss. Deposits and debt instruments Deposits and debt instruments are part of the Corporation s main sources of debt funding. Deposits and debt instruments are initially measured at fair value plus any directly attributable transaction costs, and subsequently measured at their amortized cost using the effective interest method. iii. Derecognition A financial asset is derecognized when the Corporation loses control over the contractual rights that comprise that asset. This occurs when the rights are realized, expire, or are surrendered. A financial liability is derecognized when it is extinguished. iv. Offsetting Financial assets and liabilities are offset and the net amount presented in the financial statements when the Corporation has a legal right to set off the recognized amounts and intends to settle on a net basis, except the cases for which SUGEF regulations do not permit such treatment. v. Amortized cost measurement The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.
9 All non-trading financial assets and liabilities and originated loans and receivables are measured at amortized cost less impairment losses. Premiums and discounts are included in the carrying amount of the related instrument and amortized against finance income (expense). vi. Fair value measurement The fair value of financial instruments is based on their quoted market prices at the balance sheet date without any deduction for transaction costs. The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions, and other risks affecting the specific instrument. Valuation techniques include the net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, and other valuation models. The Corporation selects the valuation model that most adequately reflects the fair value of each class of financial instrument based on its complexity. Unlike market prices, fair values cannot be implicitly determined using professional judgment. Models used are revised periodically to update market factors and allow the Corporation to determine the fair value of its financial instruments. Management of the Corporation considers such valuations necessary and appropriate to ensure that its instruments are accurately presented in the financial statements. vii. Gains and losses on subsequent measurement Gains and losses arising from a change in the fair value of available-forsale assets are recognized directly in equity unless the investment is considered to be impaired, in which case the loss is recognized in profit or loss. When the financial assets are sold, collected, or otherwise disposed of, the cumulative gain or loss recognized in equity is transferred to profit or loss.
10 (g) Foreclosed assets Foreclosed assets include assets received as partial or total satisfaction of loans that are not recovered under the contractual repayment terms. Foreclosed assets are recorded at the lower of the following: The book balance corresponding to principal, current interest and interest on loan arrears, insurance, and administrative expenses derived from the loan or account receivable being settled. The market value on the date the asset was recognized. If foreclosed assets are not sold within two years from the date of acquisition, completion of production, or retirement, as appropriate, an allowance should be recorded equivalent to the asset s carrying amount. The allowance for foreclosed assets acquired after June 2010 or thereafter is established gradually by booking one-twenty-fourth of the value of such assets each month until the allowance is equivalent to 100% of the assets carrying amount. (h) Property and equipment i. Own assets Property and equipment is stated at cost, net of accumulated depreciation and amortization. Significant improvements are capitalized, while minor repairs and maintenance that do not extend the useful life or improve the asset are directly expensed when incurred. Property is subject to revaluation adjustments at least once every five years based on an appraisal made by an independent appraiser. ii. Subsequent costs Costs incurred to replace a component of an item of property and equipment are capitalized and accounted for separately. Subsequent costs are only capitalized when they increase the future economic benefits. All other costs are recognized in profit or loss when incurred.
11 iii. Depreciation Depreciation and amortization are recognized in profit or loss on a straight-line basis over the estimated useful lives of the assets, as follows: Buildings Vehicles Furniture and equipment Computer hardware Leasehold improvements 50 years 10 years 10 years 5 years 10 years (i) Investment property Investment property is initially recognized at cost. Transaction costs are included at initial recognition. Subsequent to initial recognition, investment property is adjusted to fair value. Gains or losses arising from changes in the fair value of investment property are recognized in profit or loss in the period in which the gains or losses arise. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm s length transaction after proper marketing wherein the parties had each acted knowledgeably and without compulsion. When no prices quoted in an active market are available, valuation is performed considering the total amount of estimated cash flows expected to be generated by the leases. The valuation of property is determined by applying a rate of return that reflects the specific inherent risks to the annual net cash flows. (j) Other assets Leasehold improvements are amortized straight line over the life of the lease. Software is carried at cost and amortized straight line over five years. Leased assets are carried at cost and amortized straight line based on the category of property and equipment.
12 (k) Goodwill acquired Goodwill acquired arises on business acquisitions. Goodwill acquired represents the excess of the cost of the acquisition over the value of the assets and liabilities of the acquiree. The Chart of Accounts approved by CONASSIF stipulates that goodwill must be tested for impairment and that any impairment loss in respect of goodwill must be recognized in profit or loss as a decrease in goodwill acquired. This notwithstanding, as of July 1, 2010, goodwill acquired must be amortized to profit or loss straight line over a maximum estimated useful life of five years. (l) Impairment of non-financial assets The carrying amounts of the Corporation s non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit or loss for assets carried at cost, and treated as a revaluation decrease for assets recorded at revalued amounts. The recoverable amount of an asset is the greater of its net selling price and value in use. The net selling price is equivalent to the value obtained in an arm s length transaction. Value in use is the present value of future cash flows and disbursements derived from continuing use of an asset and from its disposal at the end of its useful life. If in a subsequent period the amount of the impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss or the statement of changes in equity, as appropriate. (m) Accounts payable Accounts payable are carried at cost.
13 (n) Provisions A provision is recognized in the balance sheet if, as a result of a past event, the Corporation has a present legal or constructive obligation and it is probable that an outflow of economic benefits will be required to settle the obligation. The provision made approximates settlement value; however, final amounts may vary. The estimated value of provisions is adjusted at the balance sheet date, directly affecting profit or loss. (o) Legal reserve In accordance with the Internal Regulations of the National Banking System (IRNBS) of Costa Rica, banking entities must establish a legal reserve equivalent to 10% of earnings for the tax year ended in December. That reserve is calculated annually and applied semiannually. For Costa Rican non-banking entities, the reserve is determined based on current commercial legislation, which stipulates that 5% of each year s earnings must be appropriated to a reserve, up to 20% of share capital. (p) Revaluation surplus Property is subject to revaluation adjustments at least once every five years based on an appraisal made by an independent appraiser authorized by the corresponding professional association. Revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized. The entire surplus is realized upon retirement or disposal of the assets. The transfer of revaluation surplus to retained earnings is not recorded through profit or loss. (q) Allowance for loan losses SUGEF defines a credit operation as any operation formalized by a financial intermediary and related to any type of underlying instrument or document, whereby the entiy assumes a risk. Credit operations include loans, finance leases, factoring, guarantees, advances, checking account overdrafts, bank acceptances, accrued interest, and open letters of credit. The loan portfolio of the subsidiary Scotiabank de Costa Rica, S.A. is valued in accordance with the provisions established in SUGEF Directive 1-05. The most relevant provisions of the directive are summarized in note 31.
14 Increases in the allowance for loan losses resulting from application of SUGEF Directive 1-05 are included in the accounting records under prior approval from SUGEF, in conformity with article 10 of IRNBS. The allowance for stand-by credit losses is presented in the liability section of the balance sheet under Other liabilities. For all other subsidiaries, the Corporation s classification and analysis criteria are used. All criteria are based on an individual analysis of the quality of guarantees, the customer s creditworthiness, and the debt servicing of each customer, among other factors. The Corporation requires that all loans be classified based on risk of default and lending conditions and that a minimum allowance be established for each classification. (r) Finance income and expense Finance income and expense are recognized in profit or loss as they accrue, taking into account the effective yield or interest rate. Finance income and expense include amortization of any discount or premium during the term of the instrument until maturity. (s) Fee and commission income Fee and commission income arises on services provided by the Corporation. Fees and commissions are recognized as the related services are performed. In the event that a commission is deferred, it is recognized over the term of the service and calculated using the effective interest method if the amount of the commission exceeds the costs incurred to provide the service. In the case of loan fees, cost analyses performed by the Corporation show that direct costs incurred to provide the service exceed income earned. Accordingly, loan fees are recognized as income in profit or loss when collected. (t) Operating lease payments Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.
15 (u) Income tax i. Current Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous years. ii. Deferred Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. In accordance with IAS 12, temporary differences are identified as either taxable temporary differences (which result in future taxable amounts) or deductible temporary differences (which result in future deductible amounts). A deferred tax liability represents a taxable temporary difference, while a deferred tax asset represents a deductible temporary difference. A deferred tax asset is recognized only to the extent that there is a reasonable probability that it will be realized. (v) Basic earnings per share Basic earnings per share is a measure of an entity s performance over the reporting period and is computed by dividing the profit attributable to ordinary and preferred shareholders by the weighted average number of ordinary and preferred shares outstanding during such period. (w) Severance benefits Costa Rican legislation requires the payment of severance benefits to employees in the event of death, retirement, or dismissal without just cause, equivalent to 7 days salary for employees with between 3 and 6 months of service, 14 days salary for employees with between 6 months and 1 year of service, and an amount prescribed by the Employee Protection Law for employees with more than 1 year of service, up to a maximum of 8 years.
16 Pursuant to the Employee Protection Law, all employers must contribute 3% of monthly employee salaries during the entire term of employment. Contributions are collected through the Costa Rican Social Security Administration (CCSS) and are then transferred to pension fund operators selected by employees. Amounts equivalent to 4% and 3% of salaries paid to member employees are transferred to the Employees Association and a compulsory retirement savings account, respectively, as advance severance payments. Employees are not entitled to severance benefits if they resign or are dismissed with just cause. (x) Trusts Assets managed by the Corporation as trustee are not considered part of the Corporation s equity and, therefore, are not included in the financial statements. Fee and commission income derived from trust management is recognized on the accrual basis. (y) Use of estimates The preparation of the consolidated financial statements requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Material estimates that are particularly susceptible to significant changes are related to determination of the allowance for loan losses, determination of the fair value of financial instruments, determination of the useful lives of property and equipment, accounting for contingent liabilities, and determination of provisions for credit card miles.
17 2. Collateralized or restricted assets As of December 31, collateralized or restricted assets are as follows: 2011 2010 Cash and due from banks: Minimum cash reserve 110,986,665,590 98,276,194,560 Collections and payments on behalf of third parties 155,953,365 23,220,592 Guaranty Fund of the National Stock Exchange 240,392,670 266,564,287 Drafts and transfers payable 4,422,537,683 - Subtotal 115,805,549,308 98,565,979,439 Investments: Clearing house guaranty 989,538,552 1,387,299,284 Guarantee deposit for public utility payment collection services 186,616,050 232,258,500 Investments assigned under repurchase agreements 3,106,420,543 2,150,741,694 Legal department guarantees 7,649,550 1,904,438 Subtotal 4,290,224,695 3,772,203,916 Loans: Requirement for deposit-taking in demand accounts per article 59 of IRNBS (Law No. 1644) 35,156,152,899 32,419,897,170 Subtotal 35,156,152,899 32,419,897,170 Other: Accrued interest receivable on committed investments 27,235,525 49,870,153 Subtotal 27,235,525 49,870,153 Other assets: Guarantee deposits 97,667,678 125,627,836 Subtotal 97,667,678 125,627,836 Total collateralized or restricted assets 155,376,830,105 134,933,578,514
18 Pursuant to Costa Rican financial legislation, the subsidiary Scotiabank de Costa Rica, S.A. maintains a minimum cash reserve in BCCR. As of December 31, 2011 and 2010, that reserve is calculated as a percentage of third-party deposits (see note 4). 3. Balances and transactions with related parties As of December 31, the consolidated financial statements include balances and transactions with related parties, as follows: 2011 2010 Assets Cash and due from banks 1,322,042,421 373,111,882 Loan portfolio 496,847,910 567,792,191 Accounts and accrued interest receivable 432,183,509 372,125,506 Investments in other companies 1,898,649,484 1,690,557,483 Total assets 4,149,723,324 3,003,587,062 Liabilities Obligations with the public 1,496,783,416 519,388,778 Other financial obligations 279,180,519,761 188,783,568,458 Other accounts payable and provisions 336,724,130 471,003,158 Other liabilities 69,367,890 312,593,945 Total liabilities 281,083,395,197 190,086,554,339 Expenses Finance expense 4,992,820,336 3,677,667,342 Operating expenses 419,000,409 39,381,525 Total expenses 5,411,820,745 3,717,048,867 Income Finance income - 25,256,173 Operating income 198,741,866 290,920,823 Total income 198,741,866 316,176,996
19 As of December 31, 2011, compensation paid to key personnel of the Corporation s subsidiaries amounts to 1,118,472,282 (2010: 967,793,702). As of December 31, 2010, Accounts payable and provisions includes the amount of 309,168,486 corresponding to the Corporation s stake in Arrinsa Leasing, S.A. de C.V., which was negative as of that date; accordingly, it is presented as a liability due to the fact that it represents an obligation with third parties (see note 15). For the year ended December 31, 2011, the Corporation made capital contributions to the subsidiary Arrinsa Leasing, S.A. de C.V.; therefore, its stake in the equity of that entity is included under Investments in other companies. 4. Cash and due from banks As of December 31, cash and due from banks (cash and cash equivalents) is as follows: 2011 2010 Cash 12,207,450,074 12,327,391,158 Demand deposits in BCCR 111,083,861,205 101,682,950,086 Demand deposits in local financial entities 204,886,513 110,723,123 Demand deposits in foreign financial entities 20,084,609,964 3,327,318,159 Notes payable on demand 2,245,023,554 1,856,883,789 Restricted cash and due from banks 240,392,670 377,316,143 Subtotal 146,066,223,980 119,682,582,458 Highly liquid short-term investments 10,557,727,305 34,063,877,260 Total 156,623,951,285 153,746,459,718
20 Pursuant to current banking legislation, the subsidiary Scotiabank de Costa Rica, S.A. must maintain a minimum cash reserve in BCCR for each biweekly period. The minimum cash reserve is calculated biweekly based on average daily balances of specific operations subject to this requirement. The corresponding amount is deposited and remains restricted in BCCR and must meet two conditions: 1) the average minimum cash reserve required at the end of a biweekly period must be covered by the biweekly average of end-of-day checking account deposits with a delay of two biweekly periods, and 2) during the reserve control period, the end-of-day balance of deposits in BCCR must be greater than 97.5% of the minimum cash reserve required in the prior two biweekly periods. As of December 31, 2011, the required minimum cash reserve (corresponding to the average for the second half of December) amounts to 110,986,665,590 (2010: 98,276,194,560). As of December 31, 2011, highly-liquid short-term investments include securities acquired under reverse repurchase agreements for a total of 300,143,645 and US$4,060,922 (2010: 7,563,571,248 and US$23,181,365). Those securities bear interest at 7.32% per annum (2010: at rates ranging between 4.85% and 5.25% per annum) in colones and at rates ranging between 2% and 2.27% per annum (2010: between 0.10% and 0.70% per annum) in U.S. dollars, and are included in cash equivalents. 5. Investments in financial instruments As of December 31, investments in financial instruments are classified as follows: 2011 2010 Held for trading 6,056,240,549 15,310,641,283 Available for sale 59,379,848,888 37,731,919,212 Subtotal 65,436,089,437 53,042,560,495 Accrued interest receivable 1,271,361,544 634,182,912 Total 66,707,450,981 53,676,743,407
21 As of December 31, held-for-trading investments are as follows: 2011 2010 Open investment funds in colones managed by local entities 1,900,559,085 7,914,487,063 Open investment funds in U.S. dollars managed by local entities 4,155,681,464 7,223,343,823 Open investment funds in euros managed by local entities - 172,810,397 Total 6,056,240,549 15,310,641,283 As of December 31, available-for-sale investments are as follows: 2011 2010 Local issuers: Costa Rican Government 41,125,673,492 26,875,237,318 BCCR 11,003,506,175 7,548,918,772 Financial entities 4,411,292,905 3,307,763,122 Private issuers 1,521,790,000 - Repurchase agreements 1,217,612,316 - Subtotal local issuers 59,279,874,888 37,731,919,212 Foreign issuers: Financial entities 99,974,000 - Subtotal foreign issuers 99,974,000 - Total 59,379,848,888 37,731,919,212 As of December 31, 2011, investments in financial instruments in the amount of 1,183,804,152 (2010: 1,621,462,221) secure operations with several local institutions (see note 2).
22 Additionally, the Corporation has investments in the amount of 3,106,420,543 (2010: 2,150,741,694) that secure repurchase agreements for 2,655,946,404 (2010: 1,901,287,553) (see note 12). As of December 31, 2011, available-for-sale investments bear interest at rates ranging between 5.06% and 17.07% (2010: between 4.72% and 17.07%) in colones and between 0.74% and 3.96% (2010: 1.47% and 5.23%) in U.S. dollars. For the year ended December 31, realized gains and losses on available-for-sale financial instruments are as follows: 2011 2010 Realized gains on the sale of availablefor-sale financial instruments 472,623,311 666,044,015 Realized losses on the sale of available-for-sale financial instruments (268,923,028) (76,054,333) 203,700,283 589,989,682 6. Loan portfolio (a) Loan portfolio by origin As of December 31, the loan portfolio by origin is as follows: 2011 2010 Loans originated by the Corporation 813,120,481,810 655,824,569,338 Loans purchased 105,049,860,352 139,694,018,699 Subtotal 918,170,342,162 795,518,588,037 Accrued interest receivable 3,961,465,545 4,139,085,724 Allowance for loan losses (13,498,142,379) (12,942,690,524) Total 908,633,665,328 786,714,983,237 As of December 31, 2011, annual interest rates on loans ranged between 8% and 25% (2010: between 7% and 27%) in colones and between 3.5% and 14.25% (2010: between 3% and 14.50%) in U.S. dollars.
23 (b) Allowance for loan losses As of December 31, movement in the allowance for loan losses is as follows: 2011 2010 Opening balance 12,942,690,524 14,852,194,339 Allowance expense 5,912,943,898 5,310,760,504 Settlements against allowance (2,721,415,852) (2,925,340,788) Decrease in allowance (2,591,117,608) (3,446,879,920) Allowance reclassified to allowance for stand-by credit losses - (83,397,320) Translation effect for allowances in foreign currency (44,958,583) (764,646,291) Closing balance 13,498,142,379 12,942,690,524 (c) Allowance for stand-by credit losses As of December 31, movement in the allowance for stand-by credit losses is as follows: 2011 2010 Opening balance 225,787,883 198,605,552 Allowance expense 144,999,998 23,079,572 Decrease in allowance (259,057,800) (69,351,900) Translation effect for allowances in foreign currency (2,176,156) (9,942,661) Allowance reclassified from allowance for loan losses - 83,397,320 Closing balance 109,553,925 225,787,883
24 7. Accounts and fees and commissions receivable As of December 31, accounts and fees and commissions receivable are as follows: 2011 2010 Fees and commissions 114,814,718 173,597,724 Accounts receivable for brokerage transactions 716,456 1,131,488 Accounts receivable for related party transactions 432,183,509 372,125,506 Deferred tax and income tax receivable 619,047,808 373,421,686 Sundry credit card receivables 17,470,308 68,652,173 Advance payments to suppliers 38,561,627 23,256,854 Other expenses to be recovered 825,588,171 625,743,024 Insurance policies due from customers 4,488,591,097 4,555,166,233 Accounts receivable for credit operations 341,165,624 230,234,745 Accounts receivable for attachments 170,131,330 296,165,350 Accounts receivable for vehicle taxes 64,267,060 92,349,152 Other sundry accounts receivable 1,001,453,302 687,530,578 Subtotal 8,113,991,010 7,499,374,513 (Allowance for doubtful accounts and fees and commissions receivable) (734,291,876) (606,705,527) Total 7,379,699,134 6,892,668,986
25 As of December 31, movement in the allowance for doubtful accounts and fees and commissions receivable is as follows: 2011 2010 Opening balance 606,705,527 1,167,597,659 Allowance expense 243,142,949 418,791,463 Settlements against allowance (117,115,669) (788,279,604) Decrease in allowance - (157,882,851) Translation effect for allowances in foreign currency 1,559,069 (33,521,140) Closing balance 734,291,876 606,705,527 8. Foreclosed assets As of December 31, foreclosed assets are presented net of the allowance for foreclosed assets, as follows: 2011 2010 Assets and securities acquired in lieu of payment Real property 7,904,707,935 7,610,620,111 Personal property 1,007,519,138 964,771,761 Other foreclosed assets 875,658,123 89,596,598 Subtotal 9,787,885,196 8,664,988,470 (Allowance for impairment and per legal requirements) (6,479,428,094) (2,585,654,321) Net total 3,308,457,102 6,079,334,149 As of December 31, movement in the allowance for foreclosed assets is as follows: 2011 2010 Opening balance 2,585,654,321 1,330,471,559 Allowance expense 3,893,773,773 1,600,292,307 Charges against allowance for retirements or sales - (345,109,545) Closing balance 6,479,428,094 2,585,654,321
26 The expense for the allowance for foreclosed assets is recorded as part of expenses for foreclosed assets in the consolidated income statement. 9. Property and equipment As of December 31, 2011, property and equipment is as follows: 2010 Additions Retirements 2011 Cost Land 1,405,990,980 135,998,107-1,541,989,087 Buildings and facilities 4,715,528,912 89,824,698-4,805,353,610 Furniture and equipment 2,470,401,549 65,323,955 (2,824,505) 2,532,900,999 Computer hardware 1,699,979,044 1,388,419,880 (75,293,704) 3,013,105,220 Vehicles 248,455,709 18,215,915 (10,919,573) 255,752,051 Other - - - - Subtotal 10,540,356,194 1,697,782,555 (89,037,782) 12,149,100,967 Accumulated depreciation (3,457,826,072) (619,420,945) 37,524,291 (4,039,722,726) Cost, net 7,082,530,122 1,078,361,610 (51,513,491) 8,109,378,241 Revaluation Cost 5,882,383,495 - (47,352,687) 5,835,030,808 Accumulated depreciation (967,908,291) (86,797,922) 62,335,664 (992,370,549) Revaluation, net 4,914,475,204 (86,797,922) 14,982,977 4,842,660,259 Net value 11,997,005,326 991,563,688 (36,530,514) 12,952,038,500 Depreciation expense for 2011 amounted to 635,250,886 and was charged against profit or loss.
27 As of December 31, 2010, property and equipment is as follows: 2009 Additions Retirements 2010 Cost Land 1,405,990,980 - - 1,405,990,980 Buildings and facilities 4,715,528,912 - - 4,715,528,912 Furniture and equipment 2,277,137,991 195,466,742 (2,203,184) 2,470,401,549 Computer hardware 1,530,198,342 179,656,129 (9,875,427) 1,699,979,044 Vehicles 342,345,987 - (93,890,278) 248,455,709 Other - - - - Subtotal 10,271,202,212 375,122,871 (105,968,889) 10,540,356,194 Accumulated depreciation (3,042,676,577) (423,555,832) 8,406,337 (3,457,826,072) Cost, net 7,228,525,635 (48,432,961) (97,562,552) 7,082,530,122 Revaluation Cost 5,882,383,495 - - 5,882,383,495 Accumulated depreciation (880,321,713) (87,586,578) - (967,908,291) Revaluation, net 5,002,061,782 (87,586,578) - 4,914,475,204 Net value 12,230,587,417 (136,019,539) (97,562,552) 11,997,005,326 Depreciation expense for 2010 amounted to 511,142,410 and was charged against profit or loss. Pursuant to local regulations and IAS 16, assets must be revaluated at least once every five years. Accordingly, the fair values of land, buildings, and facilities owned by the subsidiary Scotiabank de Costa Rica, S.A. were assessed through appraisals made by independent appraisers as of May 31, 2010. Those appraisals determined that the carrying amounts of land, buildings, and facilities as of that date approximate the fair values of the assets. As a result, no adjustment was included in the accounting books for revaluation of fixed assets.
28 10. Investment property In September 2010, the subsidiary Scotia Leasing Costa Rica, S.A. acquired a building located in Pasadena, Texas, USA. The building is leased to the U.S. General Services Administration (see note 34). As of December 31, 2011, the Corporation s consolidated financial statements present this building as an asset under Investment property since rental income derived from the lease constitutes economic benefits that flow directly to the Corporation and the agreement subscribed between the parties guarantees dependable short- and long-term income for the Corporation consistent with the capital appreciation of the location of the leased asset. 11. Other assets As of December 31, other assets are as follows: 2011 2010 Deferred charges Leasehold improvements (operating leases) 644,103,663 114,002,031 Subtotal - deferred charges 644,103,663 114,002,031 Intangible assets Goodwill acquired, net of amortization 2,331,432,999 3,183,295,816 Software 131,868,893 21,653,310 Subtotal - intangible assets 2,463,301,892 3,204,949,126 Other assets Prepaid interest and fees and commissions 251,480,702 67,717,298 Advance tax payments 628,054,780 371,484,049 Prepaid insurance policy 1,334,598,598 1,070,141,432 Other prepaid expenses 334,553,672 355,144,100 Stationery, office supplies, and other materials 47,187,815 29,280,544 Goods in transit (imports) 14,742,388 - Library and artwork 19,535,415 17,720,958 Construction-in-progress 96,109,040 60,238,998 Software under development 60,858,142 8,362,093 Other sundry assets 2,724,916 2,724,915 Pending transactions 727,500,303 355,711,651 Security deposits 97,667,678 125,627,836 Subtotal - other assets 3,615,013,449 2,464,153,874 Total other assets 6,722,419,004 5,783,105,031
29 As of December 31, expenses charged against profit or loss for amortization of other assets are as follows: 2011 2010 Amortization of leasehold improvements 144,276,086 69,823,815 Amortization of software 13,783,756 6,037,780 Amortization of goodwill acquired 666,123,714 333,061,857 Total expense for amortization of other assets 824,183,556 408,923,452 As of December 31, goodwill acquired is as follows: 2011 2010 Subsidiary dedicated to investment banking 842,326,831 1,082,991,643 Subsidiaries dedicated to finance leases 1,401,851,168 1,981,719,173 Acquisition of insurance company 87,255,000 118,585,000 2,331,432,999 3,183,295,816 As of December 31, movement in goodwill acquired is as follows: 2011 2010 Opening balance 3,183,295,816 4,462,937,549 Effect of acquisition of investment property by the subsidiary Scotia Leasing Costa Rica, S.A. (179,339,102) 179,339,102 Effect of sale of subsidiary dedicated to pension fund management - (1,125,918,980) Amortization (666,123,715) (333,061,855) Closing balance 2,337,832,999 3,183,295,816 For the purpose of impairment testing, goodwill acquired is allocated to the Corporation s cash-generating units. The recoverable amounts of the Corporation s cash-generating units are based on value in use.
30 Impairment testing of goodwill acquired a) Financial intermediation business The total carrying amount of the assets comprising the cash-generating unit for the financial intermediation business is 1,058,012,425,380 (approximately US$2,093,623,083). That total includes an intangible asset with an indefinite useful life that has a carrying amount of 842,326,831 (approximately US$1,668,819). Recoverable amounts estimated using the value in use method for assets comprising this cash-generating unit exceed the carrying amounts of the respective assets. For value in use calculations, all assets that contribute to the generation of projected cash flows are considered to be assets comprising the cashgenerating unit, i.e. investments, loan portfolio, accounts receivable, fixed assets, and other assets. Cash flows are projected for a five-year period based on assumptions established by the Corporation. Cash flows are extrapolated for an additional 10-year period under the assumption that the useful life of the essential asset (loan portfolio) is 15 years. The discount rate applied to cash flows is 6.17%, which is a weighted percentage of (i) an annual cost of equity of 15% and (ii) an annual borrowing rate of 5.52%, taking into consideration the Corporation s financial structure. The following main assumptions were used to project and extrapolate cash flows: Investments in financial instruments: 3% increase each year through the fifth year. Loan portfolio: 8% increase each year through the fifth year. Accounts receivable, fixed assets, and other assets: 1% increase each year through the fifth year. Cash flow extrapolation: annual growth rate of 5%.
31 The results of management s assessment are particularly sensitive to changes in the following factors: Discount rate: An increase of 100 basis points in the discount rate would reduce the recoverable amount by 131,134,912,866 (approximately US$259,493,246). Loan portfolio growth: A decrease of 100 basis points in the growth rate would increase the recoverable amount by 47,230,137,330 (approximately US$93,460,250). b) Leasing business For the purpose of impairment testing, goodwill acquired is allocated to the cashgenerating units of Scotia Leasing de Costa Rica, S.A. The recoverable amounts of Scotia Leasing de Costa Rica, S.A. s cash-generating units are based on value in use. The total carrying amount of the assets comprising the cash-generating unit for the leasing business is 79,125,340,277 (approximately US$156,575,324). That total includes an intangible asset with an indefinite useful life that has a carrying amount of 1,401,851,168 (approximately US$2,774,020). Recoverable amounts estimated using the value in use method for assets comprising the cash-generating unit exceed the carrying amounts of the respective assets. For value in use calculations, all assets that contribute to the generation of projected cash flows are considered to be assets comprising the cashgenerating unit, i.e. lease portfolios (third-party and own leases), accounts receivable, fixed assets, and other assets. Cash flows are projected for a five-year period based on assumptions determined by the Corporation. The discount rate applied to cash flows is 4.27%, which is a weighted percentage of (i) an annual cost of equity of 15% and (ii) an annual borrowing rate of 3.58%, taking into consideration the Corporation s financial structure.
32 The following main assumptions were used to project and extrapolate cash flows: Lease portfolios for both third-party and own leases: steady growth of 6% each year through the fifth year. Accounts receivable, fixed assets, and other assets: a 1% increase each year through the fifth year. The results of management s assessment are particularly sensitive to changes in the following factors: Discount rate: An increase of 100 basis points in the discount rate would reduce the recoverable amount by 3,828,385,781 (approximately US$6,923,046). Loan portfolio growth: A decrease of 1 percentage point in the growth rate would increase the recoverable amount by 508,732,367 (US$1,000,732 approximately). c) Insurance business The total carrying amount of the assets comprising the cash-generating unit for the insurance business is 1,427,917,546 (approximately US$2,825,601). That total includes an intangible asset with an indefinite useful life that has a carrying amount of 87,l255,000 (equivalent to US$172,633). During the year ended December 31, 2011, there have been no significant changes -and no significant changes are expected in the immediate future- that have an adverse effect on the subsidiary in terms of the legal, economic, technological, or market environment in which the subsidiary operates, and that indicate that the future performance of the insurance business will differ with respect to the earnings obtained as of December 31, 2011. As of December 31, 2011, the insurance business generated earnings in the amount of 639,941,054. Management tested the above assets for impairment in accordance with the guidelines of IAS 36. The results of that impairment testing showed no evidence of impairment in the carrying amounts of the assets. Values assigned to the key assumptions represent management s opinion regarding trends in the financial services industry, the leasing industry, and the local pension plan management business, and are based on internal and external sources as well as historical data.
33 If there is any evidence of impairment, the impairment loss is to be recognized against intangible assets and then against fixed assets. However, the scope of IAS 36 explicitly excludes the impairment of financial assets. Amortization For the year ended December 31, 2011, the systematic amortization of goodwill acquired gave rise to an amortization expense in the amount of 666,123,714 (2010: 333,061,857). 12. Obligations with the public As of December 31, demand and term obligations with the public are as follows: 2011 2010 Demand obligations Deposits Checking accounts 145,967,782,737 124,515,010,977 Certified checks 107,546,179 22,098,850 Savings deposits 31,128,143,418 29,674,278,041 Matured term deposits 1,214,569,630 1,853,887,282 Overnight deposits 37,356,724,790 50,944,711,123 Subtotal 215,774,766,754 207,009,986,273 Other obligations with the public Drafts and transfers 4,663,548,673 367,881,507 Cashier s checks 1,098,248,943 1,438,961,679 Banking mandates 155,953,365 23,220,591 Sundry demand obligations 52,146,273 - Subtotal 5,969,897,254 1,830,063,777 Total 221,744,664,008 208,840,050,050 Term obligations Deposits Deposits from the public 417,520,063,309 417,205,743,057 Term deposits pledged as guarantees 28,344,791,664 20,614,545,827 Subtotal 445,864,854,973 437,820,288,884 Total 445,864,854,973 437,820,288,884 Other obligations with the public Tri-party repurchase agreements term buyer position 2,655,946,404 1,901,287,553 Total 2,655,946,404 1,901,287,553 Charges payable 2,693,647,350 3,205,464,889 Total obligations with the public 672,959,112,735 651,767,091,376
34 The fair value of deposits in checking and savings accounts corresponds to the amount payable on demand, which is equivalent to their carrying amounts. Those deposits earn interest at variable rates based on average account balances. As of December 31, 2011 and 2010, balances corresponding to the issue of commercial paper and standardized bonds are included in current term deposit accounts. As of December 31, 2011, term deposits include standardized bonds for 3,300,000,000 and US$45,084,698 (2010: 14,828,994,574 and US$18,528,761), bearing interest at rates ranging between 9.89% and 10.33% (2010: between 7.75% and 10.33%) in colones, and between 1.85% and 3.80% (2010: between 2.45% and 3.80%) in U.S. dollars. Term deposits made through banks have terms ranging from a minimum of 31 days to a maximum of five years. As of December 31, 2011, certificates of deposit bear interest at rates ranging between 4.9% and 11.25% per annum (2010: between 5.75% and 14% per annum) in colones and between 0.55% and 5.45% per annum (2010: between 0.5% and 6.25% per annum) in U.S. dollars. Additionally, the Corporation raises funds by selling financial instruments under agreements whereby the Corporation commits to repurchase those financial instruments on a specific date in the future and at a predetermined price plus interest. As of December 31, 2011, those agreements amount to 2,655,946,404 (2010: 1,901,287,553).
35 (a) Deposits from customers by cumulative amount and number of customers As of December 31, 2011, deposits from customers by cumulative amount and number of customers are as follows: Number of customers Cumulative amount Demand Obligations with the public Deposits from the public 86,737 214,560,197,125 Restricted and inactive deposits 124 5,637,107,312 Other obligations with the public - 1,547,359,571 Subtotal 86,861 221,744,664,008 Obligations with entities Deposits from other financial entities 130 628,740,295 Subtotal 130 628,740,295 Total demand obligations with customers 86,991 222,373,404,303 Term Obligations with the public Deposits from the public 7,061 403,131,650,714 Deposits from other financial entities 10 13,215,512,295 Deposits from State-owned entities 4 1,172,900,299 Restricted and inactive deposits 1,043 28,344,791,665 Other obligations with the public - 2,655,946,404 Subtotal 8,118 448,520,801,377 Obligations with entities Deposits from other financial entities 3 589,854,152 Subtotal 3 589,854,152 Total term obligations with customers 8,121 449,110,655,529
36 As of December 31, 2010, deposits from customers by cumulative amount and number of customers are as follows: Number of customers Cumulative amount Demand Obligations with the public Deposits from the public 70,197 205,156,098,995 Restricted and inactive deposits 270 1,853,887,278 Other obligations with the public - 1,830,063,777 Subtotal 70,467 208,840,050,050 Obligations with entities Deposits from other financial entities 15 4,230,282,678 Subtotal 15 4,230,282,678 Total demand obligations with customers 70,482 213,070,332,728 Term Obligations with the public Deposits from the public 7,223 409,783,692,942 Deposits from other financial entities 11 4,600,658,372 Deposits from State-owned entities 2 2,821,391,735 Restricted and inactive deposits 906 20,614,545,835 Other obligations with the public - 1,901,287,553 Subtotal 8,142 439,721,576,437 Obligations with entities Deposits from other financial entities 4 441,919,248 Subtotal 4 441,919,248 Total term obligations with customers 8,146 440,163,495,685
37 13. Obligations with entities As of December 31, obligations with entities are as follows: 2011 2010 Demand obligations Checking accounts of local financial entities 628,740,295 4,230,282,678 Overdrafts on demand accounts in local financial entities 252,080,568 201,389,065 Subtotal 880,820,863 4,431,671,743 Term obligations Term deposits received from local financial entities 589,854,152 441,919,248 Loans payable to foreign financial entities 44,630,569,900 31,065,843,679 Obligations with financial entities that are related parties 278,290,669,038 188,574,080,866 Subtotal 323,511,093,090 220,081,843,793 Other obligations with entities Issued letters of credit 1,358,955,302 3,754,268,825 Subtotal 1,358,955,302 3,754,268,825 Subtotal obligations with financial entities 325,750,869,255 228,267,784,361 Charges payable for obligations with financial and non-financial entities 1,190,178,114 797,357,022 Total 326,941,047,369 229,065,141,383 As of December 31, 2011, obligations with financial entities bear interest at rates ranging between 8% and 11% per annum (2010: between 8.50% and 12% per annum) in colones and between 0.597% and 5.40% per annum (2010: between 0.788% and 5.95% per annum) in U.S. dollars.
38 Maturities of obligations with entities As of December 31, obligations with entities mature as follows: 2011 2010 Less than one year 194,836,792,992 194,210,176,486 Between one and two years 30,948,322,016 16,796,298,410 Between two and three years 18,474,909,181 1,907,295,146 Between three and four years 26,461,283,431 168,480,245 Between four and five years 52,238,766,276 15,185,534,074 More than five years 2,790,795,359 - Subtotal 325,750,869,255 228,267,784,361 Charges payable for obligations with financial and non-financial entities 1,190,178,114 797,357,022 Total 326,941,047,369 229,065,141,383 14. Income tax As of December 31, income tax expense for the year is as follows: 2011 2010 Current 3,397,002,678 2,413,281,205 Deferred (302,537,668) (1,152,767,944) Total income tax - net 3,094,465,010 1,260,513,261
39 As of December 31, the difference between income tax expense and the amounts computed by applying the corresponding income tax rate to pretax income is reconciled as follows: 2011 2010 Expected income tax 3,037,499,169 1,910,098,518 Plus (less): Nondeductible expenses 1,219,009,402 1,062,656,951 Nontaxable income (1,024,900,089) (797,835,198) Effect of tax treatment for leases 132,298,832 43,398,608 Deductible income for statutory allocations (98,427,215) (66,711,579) Effect of negative tax base of certain subsidiaries 114,862,488 250,008,311 Tax credits for prior period losses of certain subsidiaries (3,644,215) (622,134) Tax on net assets of certain subsidiaries 3,631,632 452,385 Effect of tax rates in foreign jurisdictions 16,672,674 11,835,343 3,397,002,678 2,413,281,205 As of December 31, 2011 and 2010, deferred tax is attributable to unrealized gains on investments in available-for-sale financial instruments, finance leases, allowances, and revaluation surplus. A deferred tax asset represents a deductible temporary difference. A deferred tax liability represents a taxable temporary difference.
40 As of December 31, deferred tax is attributable to the following: 2011 2010 Deferred tax assets Tax treatment for leases 229,607,400 - Unrealized gains on valuation of investments 121,009,980 55,981,630 Allowances 268,430,428 317,440,056 Total 619,047,808 373,421,686 Deferred tax liabilities Revaluation of assets 825,987,673 852,260,946 Unrealized gains on valuation of investments 7,795,875 6,340,138 Tax treatment for leases 3,104,223,594 3,228,174,659 Total 3,938,007,142 4,086,775,743 Movement in deferred tax assets is as follows: As of Included in As of December 31, Included in changes in December 31, 2010 profit or loss equity 2011 Unrealized gains on valuation of investments 49,641,492 (20,129,506) 65,583,782 95,095,768 Allowances 317,440,056 (30,891,291) - 286,548,765 Tax treatment for leases (3,228,174,659) 353,558,465 - (2,874,616,194) Revaluation of assets (852,260,946) - 26,273,273 (825,987,673) (3,713,354,057) 302,537,668 91,857,055 (3,318,959,334) As of Included in As of December 31, Included in changes in December 31, 2009 profit or loss equity 2010 Unrealized gains on valuation of investments (22,066,777) (23,427,823) 95,136,092 49,641,492 Allowances 134,556,375 182,883,681-317,440,056 Tax treatment for leases (4,221,486,745) 993,312,086 - (3,228,174,659) Revaluation of assets (878,534,219) - 26,273,273 (852,260,946) (4,987,531,366) 1,152,767,944 121,409,365 (3,713,354,057)
41 15. Accounts payable and provisions As of December 31, accounts payable and provisions are as follows: 2011 2010 Accounts payable for brokerage services 579,508,151 458,888,744 Deferred tax 3,938,007,142 4,086,775,743 Provisions 4,143,428,485 3,827,686,113 Other sundry accounts payable: Derivative financial instruments - Position - 66,300,584 Professional fees 758,025 - Creditors - goods and services 2,511,446,853 1,872,386,535 Tax liability 1,518,695,904 1,227,612,355 Employer contributions 47,312,540 75,957,508 Court-ordered withholdings 9,848,061 - Tax withholdings 311,659,062 378,506,347 Employee withholdings 813,847,693 809,793,476 Other third-party withholdings 548,495 7,181,199 Statutory allocations or surplus 319,090,717 221,798,923 Due to related parties 336,724,130 - Clearing house operations 1,290,240,831 1,509,443,450 Accrued vacation 297,512,631 316,527,338 Accrued statutory Christmas bonus 208,892,605 178,555,189 Contributions to Superintendency budgets - 1,220,375 INS insurance policies 2,394,140,547 1,455,731,032 Term deposits 1,467,133,703 779,963,470 Credit balances of credit card customers 427,405,413 306,032,753 Outstanding stale checks 224,613,522 297,633,079 Public utility and tax payment collection services 234,088,305 340,443,605 Other sundry accounts payable 1,036,249,915 1,449,220,812 Subtotal 13,450,208,952 11,294,308,030 Total accounts payable and provisions 22,111,152,730 19,667,658,630 As discussed in note 3, the balance of other sundry accounts payable as of December 31, 2010 included the amount of 331,298,363, corresponding to an adjustment made to the investment in the subsidiary Arrinsa Leasing, S.A. de C.V., which presented a deficit in equity.
42 a) Provisions As of December 31, provisions are as follows: 2011 2010 Provisions for employer obligations 93,288,780 162,830,490 Provisions for pending litigation 2,939,720,468 2,939,720,468 Other provisions 1,110,419,237 725,135,155 Total provisions 4,143,428,485 3,827,686,113 As of December 31, movement in provisions is as follows: 2011 2010 Provisions for employer obligations: Opening balance 162,830,490 213,037,962 Provisioned 101,189,505 2,331,359,430 Used (170,731,215) (2,381,566,902) Closing balance 93,288,780 162,830,490 Provisions for pending litigation: Opening balance 2,939,720,468 2,939,720,468 Closing balance 2,939,720,468 2,939,720,468 Other provisions: Opening balance 725,135,155 71,743,964 Provisioned 1,474,081,824 1,370,400,740 Used (1,088,797,742) (717,009,549) Closing balance 1,110,419,237 725,135,155 Total provisions: Opening balance 3,827,686,113 3,224,502,394 Provisioned 1,575,271,329 3,701,760,170 Used (1,259,528,957) (3,098,576,451) Total provisions 4,143,428,485 3,827,686,113
43 16. Other liabilities 17. Equity As of December 31, other liabilities are as follows 2011 2010 Deferred finance income 209,182,683 333,493,529 Other deferred finance income 918,090 - Allowance for stand-by credit losses 109,553,925 225,787,883 Operations pending settlement 14,582,936 14,217,241 Total 334,237,634 573,498,653 a) Share capital As of December 31, 2011 and 2010, the Corporation s share capital is represented by 47,583,591,250 ordinary registered shares of 1.00 par value each and 47,300,000 preferred shares of US$1.00 par value each, for total preferred stock of US$47,300,000 (equivalent to 21,894,011,000), for a total share capital of 69,477,602,250. At a Special Preferred Shareholders Meeting held on October 21, 2010, an agreement was reached to convert the 47,300,000 preferred registered shares in U.S. dollars into an equal number of ordinary registered shares in U.S. dollars. At an Extraordinary Shareholders Meeting held on October 22, 2010, an agreement was reached to recognize and accept the conversion of preferred registered shares in U.S. dollars into ordinary registered shares in U.S. dollars. Additionally, shareholders agreed to convert the issue currency of the 47,583,591,250 ordinary registered shares in colones to U.S. dollars. As a result of these agreements, share capital would become represented by 139,234,757 ordinary registered shares of US$1.00 par value each, for a total of US$139,234,757. As of December 31, 2011, the conversion of shares is pending approval by CONASSIF.
44 b) Non-capitalized capital contributions At an Extraordinary General Shareholders Meeting held on December 2, 2010, shareholders agreed to increase share capital by US$39,991,203, as follows: Cash contributions from shareholders in the amount of US$20,000,000 (equivalent to 10,004,400,000). Capitalization of prior period retained earnings for a total of 10,000,000,000 (equivalent to US$19,991,203). An additional cash contribution in the amount of US$20,000,000 (equivalent to 10,002,000,000) was made in May 2011. As of December 31, 2011, CONASSIF has not yet approved the above capital increases. Accordingly, such contributions are booked as non-capitalized capital contributions. c) Revaluation surplus As of December 31, 2011 and 2010, revaluation surplus corresponds to the increase in the fair value of property owned by the subsidiaries. The fair value of property is adjusted based on appraisals made by independent appraisers. d) Legal reserve Under article 154 of IRNBS, the subsidiary Scotiabank de Costa Rica, S.A. must allocate 10% of its net earnings for each period to a legal reserve. For all other subsidiaries, the legal reserve is determined based on current commercial legislation, which stipulates that 5% of each year s earnings must be appropriated to a reserve, up to 20% of share capital. No further appropriation is required once the legal reserve reaches 20% of share capital. As of December 31, 2011 and 2010, the consolidated financial statements include an appropriation to the legal reserve in the amount of 536,922,169 and 426,516,909, respectively.
45 e) Unrealized gain or loss The subsidiaries record available-for-sale investments at market value. Any adjustment to those values is recognized as an unrealized gain or loss in the Capital adjustments account in the statement of changes in equity. f) Prior period retained earnings As discussed in note 35, as of December 31, 2011, the subsidiary Scotiabank de Costa Rica, S.A. elected to book a provision for 2,939,720,468 corresponding to the estimated amount resulting from the income tax adjustment related to the tax years running from 2000 through 2005 for Banco Interfin, S.A. (merged with Scotiabank de Costa Rica, S.A. in 2007). This balance was booked against prior period retained earnings considering the accounting criteria and other guidelines issued by SUGEF for similar cases. 18. Basic earnings per share As of December 31, the calculation of basic earnings per share was based on the net profit attributable to shareholders, as follows: 2011 2010 Ordinary shares: Profit or loss 4,590,346,046 3,501,357,533 Weighted average number of shares (denominator) 47,583,591,250 47,583,591,250 Profit or loss per ordinary share 0.096 0.074 Preferred shares: Profit or loss 2,112,095,456 1,611,033,517 Weighted average number of shares (denominator) 47,300,000 47,300,000 Profit or loss per preferred share 44.653 34.060 19. Memoranda accounts In the normal course of business, the Corporation has contingencies off the balance sheet that involve a certain degree of credit and liquidity risk.
46 As of December 31, memoranda accounts are as follows: 2011 2010 Performance bonds 33,658,347,330 38,917,082,984 Bid bonds 1,058,739,189 1,575,117,565 Other guarantees 2,031,276,064 1,947,816,130 Letters of credit issued but unused 9,793,369,234 7,946,132,834 Pre-approved lines of credit 106,801,961,798 66,427,369,456 Credits pending disbursement 11,841,873,432 8,378,421,422 Total 165,185,567,047 125,191,940,391 Pre-approved lines of credit correspond to unused credit available to credit card customers. 20. Trust assets The Corporation has subscribed trust agreements whereby it agrees as trustee to manage and act as custodian for funds in accordance with the instructions contained in the agreements. These funds received from trusts and customers for management are duly segregated from the Corporation s equity and, therefore, do not appear in its consolidated financial statements. The Corporation does not guarantee these assets and thus is not exposed to any related credit risk. As of December 31, trust capital is invested in the following assets: 2011 2010 Cash and due from banks 7,932,609,017 9,271,835,545 Investments in financial instruments 61,016,223,874 44,724,806,033 Loan portfolio 1,588,441,797 4,421,132,068 Accounts and fees and commissions receivable 2,944,913,033 2,444,277,412 Foreclosed assets 2,354,948,683 958,770,313 Investments in other companies 142,500 366,858,456 Property and equipment 29,529,551,206 29,529,551,206 Other assets 120,599,688,256 122,799,511,274 Investment property 7,932,545,191 - Total 233,899,063,557 214,516,742,307
47 21. Sureties As of December 31, 2011 and 2010, the Corporation has issued no sureties. 22. Other memoranda accounts As of December 31, other memoranda accounts are as follows: 2011 2010 Other own debit memoranda accounts Guarantees received in the Corporation s custody 634,786,356,772 631,354,032,611 Guarantees received in the custody of third parties 2,098,792,027,619 2,579,658,603,208 Lines of credit granted but unused 180,443,494,342 169,050,846,926 Write offs 7,669,122,453 6,351,847,491 Unearned interest on nonaccrual loans 1,918,121,447 1,503,446,437 Supporting documentation 961,082,787,966 965,009,919,700 Other memoranda accounts 1,324,421,113,703 1,438,961,000,463 Subtotal 5,209,113,024,302 5,791,889,696,836 Third-party debit memoranda accounts Third-party assets and securities in custody 86,020,622,542 86,438,422,590 Assets of funds managed by the Corporation (note 24) 51,620,146,784 40,746,815,257 Management of individual portfolios by brokerage firms 15,942,363,514 45,540,414,157 Subtotal 153,583,132,840 172,725,652,004 Own debit memoranda accounts for custodial activities Trading securities in custody 25,599,762,260 2,843,279,850 Trading securities pledged as a guaranty (guaranty trust) 2,880,972,000 2,041,092,500 Repurchase agreements pending settlement 2,663,948,230 1,913,834,543 Subtotal 31,144,682,490 6,798,206,893 Third-party debit memoranda accounts for custodial activities Cash and accounts receivable 3,899,609,187 7,949,622,756 Trading securities in custody 164,067,962,286 160,801,662,088 Trading securities received as a guaranty (guaranty trust) 51,373,875,248 47,760,075,517 Trading securities pledged as a guaranty (guaranty trust) 43,176,789,330 32,836,864,920 Trading securities pending receipt 141,814,000 - Repurchase agreements pending settlement 85,509,347,279 62,129,445,587 Subtotal 348,169,397,330 311,477,670,868 Total other debit memoranda accounts 5,742,010,236,962 6,282,891,226,601
48 Management of funds and securities on behalf of third parties includes banking mandates, such as assets received under simple custody and under agreements in which the entity acts as agent or custodian. As of December 31, 2010, memoranda accounts also included an interest rate hedge ( operations at notional amounts subject to an interest rate swap ) in U.S. dollars for a notional amount of US$4,000,000 and maturing in December 2011. 23. Tri-party repurchase agreements and term operations The Corporation enters into agreements to buy and sell securities at certain future dates (tri-party repurchase agreements and term operations). Those agreements are comprised of securities that one party has committed to sell and the other party has committed to buy on an agreed-upon date and at a stated price. The difference between the contractual value and the value of the security represents an additional guarantee for the operation and corresponds to a portion of the security held in custody. As of December 31, 2011 and 2010, the structure of tri-party repurchase agreements and term operations on the Corporation s own behalf and on behalf of third parties is as follows:
49 Own Tri-party repurchase agreements 31 to 60 days 61 to 90 days 91 to 180 days 2011 Total 2010 Total 1 to 30 days Colones: Purchases 2,082,085,274 - - - 2,082,085,274 1,242,143,109 Total colones 2,082,085,274 - - - 2,082,085,274 1,242,143,109 U.S. dollars: Purchases US$ 1,151,406 - - - 1,151,406 1,322,617 Subtotal - U.S. dollars US$ 1,151,406 - - - 1,151,406 1,322,617 Third parties Tri-party repurchase agreements 31 to 60 days 61 to 90 days 91 to 180 days 2011 Total 2010 Total 1 to 30 days Colones: Purchases 2,082,085,274 - - - 2,082,085,274 1,242,143,109 Total colones 2,082,085,274 - - - 2,082,085,274 1,242,143,109 U.S. dollars: Purchases US$ 1,151,406 - - - 1,151,406 1,322,617 Subtotal - US$ U.S. dollars 1,151,406 - - - 1,151,406 1,322,617 Securities that back tri-party repurchase agreements and term operations are held in the Central Securities Depository Institution of the Costa Rican National Stock Exchange (CEVAL) or in foreign institutions with which CEVAL has custodial agreements.
50 24. Investment fund management agreements As of December 31, the following items pertaining to active investment funds are booked in memoranda accounts: 2011 2010 Assets Liabilities Net assets Net assets In colones: Fondo de Inversión No Diversificado Público Scotia [Scotia Non-diversified Public Investment Fund] 9,400,144,006 3,780,813 9,396,363,193 16,704,347,996 Fondo de Inversión Diversificado Público Scotia [Scotia Diversified Public Investment Fund] 5,261,491,457 1,351,523 5,260,139,934-14,661,635,463 5,132,336 14,656,503,127 16,704,347,996 In U.S. dollars: Fondo de Inversión No Diversificado Público Dólares Scotia [Scotia Non-diversified Public Investment Fund U.S. dollars] US$ 51,869,555 7,862 51,861,693 40,343,251 Fondo de Inversión No Diversificado Exposición al Mercado de Dinero a Nivel Mundial Scotia [Scotia Non-diversified Global Money Market Investment Fund] 2,688,666 2,552 2,686,114 862,267 Fondo de Inversión No Diversificado Exposición al Mercado de Renta Fija Scotia [Scotia Non-diversified Debt Capital Market Investment Fund] 8,276,185 11,620 8,264,565 2,226,664 Fondo de Inversión No Diversificado Exposición al Mercado Accionario USA [Nondiversified U.S. Stock Market Investment Fund] 6,950,251 26,117 6,924,134 2,828,008 Fondo de Inversión No Diversificado Exposición al Mercado Accionario Internacional Scotia [Scotia Non-diversified International Stock Market Investment Fund] 3,413,336 5,203 3,408,133 1,081,479 US$ 73,197,993 53,354 73,144,639 47,341,669 Total in colones 36,990,605,763 26,962,444 36,963,643,657 24,022,467,261 Total 51,652,241,226 32,094,780 51,620,146,784 40,726,815,257
51 Main policies for funds managed by the Corporation are as follows: In the interest of the investor, the Investment Committee sets the policy for selecting securities that comprise the investment funds. Securities are selected to create diversified portfolios that can be managed actively, while respecting the parameters established in the fund management agreements. Investments in securities are executed through SUGEVALapproved investment systems within the National Financial System and on authorized securities exchanges. Securities that back investments in the funds are held in the custody of the subsidiary Scotia Valores, S.A. Fund securities are jointly owned by all investors with signed agreements. Pursuant to CONASSIF regulations, pooled investment funds are valued daily at market prices. Market prices are determined using the SUGEVAL methodology. The corresponding effect is charged against or credited to the Unrealized (negative) goodwill on portfolio valuation account in the fund s net assets. Effective January 23, 2006, SUGEVAL Directive SGV-A-116 stipulates that all fixed income securities, including securities with maturities or remaining amortization periods of 180 days or less and excluding money market or short-term investment funds, must be valued at market prices. For money market or short-term investment funds, returns or losses corresponding to the period from the moment the funds cease to be valued at market prices until maturity are to be distributed by the fund manager using the effective interest method.
52 25. Loan portfolio income As of December 31, loan portfolio income is as follows: 2011 2010 Current loans: Checking account overdrafts 60,318,990 150,144,679 Loans granted with other funds 45,199,105,573 45,723,967,927 Credit cards 5,799,896,275 6,916,812,954 Factoring 81,339,010 58,847,868 Issued letters of credit 5,129,654 2,740,125 Loans to State-owned banks 337,463,386 321,672,353 Loans to related parties - 1,929,403 Other loans 3,257,083 - Subtotal 51,486,509,971 53,176,115,309 Past due loans and loans in legal collections: Loans granted with other funds 7,605,493,626 8,872,340,211 Credit cards 79,287,575 52,260,525 Subtotal 7,684,781,201 8,924,600,736 Total finance income on loan portfolio 59,171,291,172 62,100,716,045 26. Finance expense (a) Obligations with the public As of December 31, finance expense for obligations with the public is as follows: 2011 2010 Demand deposits 1,547,909,382 1,653,079,221 Term deposits 18,154,779,172 22,916,569,495 Obligations for tri-party repurchase agreements and securities lending 26,379,224 106,106,279 Total 19,729,067,778 24,675,754,995
53 (b) Obligations with financial entities As of December 31, finance expense for obligations with financial entities is as follows: 2011 2010 Demand obligations 30,682,247 60,803,033 Term obligations 5,588,715,864 4,677,870,620 Total 5,619,398,111 4,738,673,653 27. Foreign exchange differences Gains or losses arising on translation of balances and transactions denominated in foreign currencies are presented in the income statement as net foreign exchange differences. As of December 31, net foreign exchange losses are as follows: 2011 2010 Foreign exchange gains (losses): Obligations with the public 2,177,763,839 50,221,046,742 Other financial obligations 642,529,405 16,522,728,792 Other accounts payable and provisions 33,848,897 1,483,095,446 Cash and due from banks (799,563,050) (10,769,358,151) Investments in financial instruments (836,558,734) (2,040,627,099) Current loans 178,451,154 (50,886,165,199) Past due loans and loans in legal collections (1,624,989,940) (10,441,770,706) Accounts and fees and commissions receivable (75,969,690) (2,442,660,001) Net foreign exchange losses (304,488,119) (8,353,710,176)
54 28. Service fees and commissions As of December 31, service fee and commission income is as follows: 2011 2010 Income: Drafts and transfers 1,142,583,602 1,167,652,476 Foreign trade - 80,305 Certified checks 9,985 - Trust management 596,717,145 435,259,937 Sundry custodial services 125,519 7,232 Collections 22,006,047 26,513,937 Consignments 87,025 34,752 Other banking mandates 262,743,014 258,896,470 Credit cards 5,796,592,967 5,046,359,663 Investment fund management 465,260,497 266,762,625 Pension fund management - 1,260,647,643 Insurance underwriting 1,394,040,258 1,157,215,875 Brokerage transactions (third parties in local market) 1,093,090,865 1,039,375,693 Brokerage transactions (third parties in other markets) 359,759,505 399,189,698 Foreign currency exchange and arbitrage - 17,757,348 Related party transactions 6,944,178 63,961,758 Investment advice - 4,884,746 Other 2,153,492,409 1,875,862,780 Total 13,293,453,016 13,020,462,938
55 29. Personnel expenses As of December 31, personnel expenses are as follows: 2011 2010 Salaries and bonuses, permanent staff 14,516,512,547 14,791,122,854 Salaries and bonuses, contractors - 54,150,860 Compensation for directors and statutory examiners 16,248,181 17,046,054 Overtime 377,531,040 177,866,889 Per diem 457,376,832 438,650,276 Statutory Christmas bonus 1,354,423,183 1,210,334,355 Vacation 2,000,659 61,594,565 Incentives 1,193,992,270 504,907,259 Other compensation 107,172,745 64,119,786 Employer social security taxes 3,497,605,048 3,310,838,556 Refreshments 237,667,555 195,964,781 Uniforms 5,588,429 49,659,514 Training 184,787,400 114,153,618 Employee insurance 195,679,631 213,291,645 Compulsory retirement savings account 716,212,527 631,552,695 Other 626,456,252 648,402,174 Total 23,489,254,299 22,483,655,881 30. Other administrative expenses As of December 31, other administrative expenses are as follows: 2011 2010 Outsourcing 5,568,594,576 6,429,538,493 Transportation and communications 1,044,851,106 1,231,354,119 Infrastructure 7,106,882,728 6,598,208,757 Overhead 5,698,371,597 4,468,970,938 Total 19,418,700,007 18,728,072,307
56 31. Risk management The Corporation has exposure to the following risks from its use of financial instruments and from its intermediation and financial service activities: credit risk; liquidity risk; market risk: a. interest rate risk; and b. currency risk. The Corporation also has exposure to the following operational and regulatory risks: operational risk; capital risk; asset laundering risk; and legal risk. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. The Corporation s consolidated balance sheet is mainly comprised of financial instruments. The Board of Directors is responsible for the establishment and oversight of the Corporation s risk management policies for financial instruments. The Board has established the Asset and Liability Committee (ALCO), the Credit Committee, and the Investment Committee, among others, which are responsible for managing and periodically monitoring the Corporation s risk exposure. The Corporation is also subject to CONASSIF and SUGEF regulations on risk concentration, liquidity, capital structure, etc. Management is responsible for the formulation of the Corporation s risk management strategy and ALCO is responsible for setting guidelines for managing interest rates, accrued interest receivable, the Corporation s foreign currency position, margins, and liquidity. The parent company has also established maximum risk exposure limit guidelines.
57 Credit risk Credit risk is the risk that the debtor or issuer of a financial asset owned by the Corporation will fail to discharge an obligation on time in accordance with the contractual terms and conditions. The Corporation monitors its credit risk on an ongoing basis through reports on the status of the portfolio and its classification. Credit analyses include periodic evaluations of the financial position of the Corporation s customers. The corporate credit manual outlines credit policies, and credit operations must receive prior approval from a committee established according to the limits corresponding to each committee. The Corporation also receives guarantees to manage its risk exposure. The maximum exposure to credit risk is represented by the carrying amount of each financial asset and unused letters of credit, as follows: 2011 2010 Cash and due from banks 156,623,951,285 153,746,459,718 Investments in financial instruments 66,707,450,981 53,676,743,407 Loan portfolio 908,633,665,328 786,714,983,237 Accounts and fees and commissions receivable 7,379,699,134 6,892,668,986 Guarantees granted 36,748,362,583 42,440,016,679 Letters of credit issued but unused 9,793,369,234 7,946,132,834 Total 1,185,886,498,545 1,051,417,004,861 Cash and due from banks corresponds to cash on hand, cash in vaults, and bank deposits. Bank deposits are mainly placed in top-rated financial institutions, and accordingly, credit risk on those deposits is considered to be minimal. The Corporation is exposed to a significant concentration of credit risk in Latin America, specifically in Costa Rica on loans granted to Costa Rican entities. The Corporation manages that risk through periodic analyses of the country s economic, political, and financial environment, and its potential impact on each sector. For such purposes, the Corporation obtains a thorough understanding of its customers and of their capacity to generate sufficient cash flows to honor their debt commitments. Financial assets that represent potential credit risk for the Corporation mainly include bank deposits, investments in financial instruments, and loans. Bank deposits are mainly placed in prestigious financial institutions.
58 The following table shows the Corporation s credit risk and impairment on loans: Customers Banks Stand-by Individually assessed loans with allowance 2011 2010 2011 2010 2011 2010 A1 508,591,440,558 373,655,119,471 35,190,609,151 32,452,060,958 30,514,952,772 25,905,002,308 A2 4,817,775,501 4,383,556,446 - - - - B1 15,096,075,617 12,505,753,651 - - 1,174,608,939 5,699,693,622 B2 1,928,515,871 1,435,059,043 - - - - C1 4,832,976,536 7,681,414,718 - - 30,194,592 1,550,855,794 C2 694,542,422 655,674,687 - - - - D 1,614,071,814 2,293,164,391 - - 171,483,448 - E 26,777,864,401 24,251,270,198 - - 207,269,000 5,100,000 Total 564,353,262,720 426,861,012,605 35,190,609,151 32,452,060,958 32,098,508,751 33,160,651,724 Allowance for loan losses (13,315,499,576) (12,780,430,219) (175,953,046) (162,260,305) (106,621,656) (267,878,856) Carrying amount 551,037,763,144 414,080,582,386 35,014,656,105 32,289,800,653 31,991,887,095 32,892,772,868 Past due loans without allowance A1 6,901,382,897 14,773,341,981 - - - - A2 2,045,983,673 1,099,522,869 - - - - B1 2,065,784,905 2,570,052,140 - - - - B2 318,533,398 624,197,781 - - - - C1 979,493,824 2,280,796,812 - - - - C2 279,768,868 589,032,306 - - - - D 685,316,808 261,660,721 - - - - E 3,712,483,931 3,856,807,681 - - - - Carrying amount 16,988,748,304 26,055,412,291 - - - - Current loans without allowance A1 273,705,860,172 238,414,878,923 - - 117,587,394,942 15,968,918,398 A2 1,882,925,511 1,043,183,441 - - 732,166,182 - B1 17,780,817,645 22,386,498,387 - - 1,432,888,007 271,561,996 B2-46,687,417 - - 88,513,073 - C1 8,284,773,702 16,382,506,414 - - 10,613,391,052 985,017,425 C2-565,816,415 - - 38,332,005 - D 2,764,512,434 2,043,572,691 - - 456,988,216 - E 1,180,298,068 1,308,818,325 - - 2,137,384,819 - Carrying amount 305,599,187,532 282,191,962,013 - - 133,087,058,296 17,225,497,819 Deficit allowance over minimum allowance (6,689,757) (192,574,759) - - (2,932,269) - Carrying amount, net 873,619,009,223 754,425,182,584 35,014,656,105 32,289,800,653 165,076,013,122 50,118,270,687 Restructured loans 8,675,651,980 1,008,055,133 - - - -
59 Individually assessed loans with allowance: According to regulations established in SUGEF Directive 1-05 applicable to the subsidiary Scotiabank de Costa Rica, S.A., all loan operations are assigned a risk classification and the applicable allowance percentages are determined based on that classification. Individually assessed loans with allowance are loan operations for which, after deducting the loan guarantee, there is still a balance to which the percentage determined for the risk classification assigned by the subsidiary will be applied. Other subsidiaries use the Corporation s rating and analysis criteria. All criteria are based on an individual analysis of the quality of guarantees, the customer s creditworthiness, and the debt servicing of each customer, among other factors. The Corporation requires that all loans be classified based on risk of default and lending conditions and that a minimum allowance be established for each classification. Past due loans without allowance: Past due loans without allowance correspond to loan operations for which contractual payments are one day or more past due but have a guarantee greater than or equal to the balance owed to the Corporation. Accordingly, no allowance is established for such loans. Restructured loans: Restructured loans are loans for which the original contractual conditions have been modified due to negotiations with customers or where the Corporation has made concessions that it would not otherwise consider. Once the loan is restructured, it remains in this category irrespective of improvement in the borrower s position after restructuring. Following are the different types of restructured loans: a. Extended loan: Loan operation in which at least one full or partial payment of principal or interest has been postponed to a future date beyond the date stipulated under current contractual conditions. b. Modified loan: Loan operation in which at least one of the current contractual payment conditions has been modified, excluding extensions, additional payments not agreed in the payment schedule, additional payments with the purpose of reducing the amount of installments, or changes in the currency while respecting the agreed maturity date.
60 c. Refinanced loan: Loan operation in which at least one payment of principal or interest is made fully or partially with the proceeds of another loan extended to the borrower or to an individual from its economic interest group by the same financial intermediary or any other entity of the same financial group or conglomerate. In the event of full settlement of the loan operation, the new loan operation is considered to be refinanced. In the event of partial settlement, both the new loan operation and the existing loan operation are considered to be refinanced. Allowance for loan losses: i. Scotiabank de Costa Rica, S.A. Borrower classification The subsidiary Scotiabank de Costa Rica, S.A. must classify its borrowers into the following two groups: a. Group 1: Borrowers with total outstanding balances that exceed the SUGEF limit (2011 and 2010: 65,000,000). b. Group 2: Borrowers with total outstanding balances that are less than or equal to the SUGEF limit (2011 and 2010: 65,000,000). For purposes of borrower classification, the following should be considered when calculating total outstanding balances: a. Balances of back-to-back operations and the portion of bonds, sureties, and letters of credit covered by a previous deposit are excluded; and b. The contingent principal balance should be treated as a credit equivalent. Risk categories The subsidiary Scotiabank de Costa Rica, S.A. must individually classify its borrowers in one of eight risk categories, identified as A1, A2, B1, B2, C1, C2, D, and E, with category A1 representing the lowest credit risk and category E representing the highest credit risk.
61 Borrower classification Analysis of creditworthiness The subsidiary Scotiabank de Costa Rica, S.A. must define effective mechanisms to determine the creditworthiness of borrowers in Group 1. Based on whether the borrowers are individuals or legal entities, those mechanisms should enable the subsidiary to evaluate the following: a. Financial position and expected cash flows: Analysis of the stability and continuity of main sources of income. The effectiveness of the analysis depends on the quality and timeliness of information. b. Experience in the line of business and quality of management: Analysis of management s ability to lead the business with appropriate controls and adequate support from the owners. c. Business environment: Analysis of the main sector variables that affect the borrower s creditworthiness. d. Vulnerability to changes in interest rates and foreign exchange rates: Analysis of the borrower s ability to confront unexpected adverse changes in interest rates and foreign exchange rates. e. Other factors: Analysis of other factors that affect the borrower s creditworthiness. In the case of legal entities, considerations include, but are not limited to, environmental issues, technological aspects, development and operating licenses and permits, representation of products or foreign offices, relationships with significant customers and suppliers, sales agreements, legal risks, and country risk (the latter for foreigndomiciled borrowers). In the case of individuals, the following borrower characteristics may be taken into consideration, among others: marital status, age, level of education, profession, and gender. When a borrower has been assigned a risk rating by a rating agency, that rating should be an additional consideration when assessing the borrower s creditworthiness.
62 The subsidiary Scotiabank de Costa Rica, S.A. must classify a borrower s creditworthiness into four levels: level 1-has the ability to pay, level 2-has minor weaknesses in the ability to pay, level 3-has serious weaknesses in the ability to pay, and level 4-has no ability to pay. For purposes of this classification, the borrower and co-borrower(s) must be assessed jointly. Joint classification of creditworthiness may only be used to determine the allowance percentage for operations in which the parties are borrower and co-borrower. Analysis of historical payment behavior The subsidiary Scotiabank de Costa Rica, S.A. must determine a borrower s historical payment behavior based on the level assigned to the borrower by SUGEF s Credit Information Center (CIC). The subsidiary Scotiabank de Costa Rica, S.A. must classify historical payment behavior into three levels: level 1-good historical payment behavior, level 2-acceptable historical payment behavior, and level 3-poor historical payment behavior Borrower category Borrowers in Group 1 are to be categorized by the subsidiary Scotiabank de Costa Rica, S.A. based on arrears, historical payment behavior, and creditworthiness. Borrowers in Group 2 are to be rated based on arrears and historical payment behavior, as follows: Risk category Allowance percentage Arrears Historical payment behavior Creditworthiness A1 0.5% 30 days or less Level 1 Level 1 A2 2% 30 days or less Level 2 Level 1 B1 5% 60 days or less Level 1 Level 1 or Level 2 B2 10% 60 days or less Level 2 Level 1 or Level 2 C1 25% 90 days or less Level 1 Level 1 or Level 2 or Level 3 D 75% 120 days or less Level 1 or Level 2 Level 1 or Level 2 or Level 3 or Level 4 In all cases, borrowers without valid authorization for a credit check through SUGEF s CIC cannot be rated in risk categories A1 to B2.
63 Likewise, borrowers with at least one loan operation purchased from a financial intermediary domiciled in Costa Rica and regulated by SUGEF must be classified for at least one month in the category of greater risk between the category assigned by the selling bank and the category assigned by the buying bank at the time of the purchase. Direct classification in risk category E The subsidiary Scotiabank de Costa Rica, S.A. must rate borrowers in risk category E who do not meet the conditions to be rated in any of the risk categories defined above, are in bankruptcy, a meeting of creditors, a court protected reorganization procedure, or takeover, or if the subsidiary considers classification in this risk category to be appropriate. Minimum allowance The minimum allowance is equivalent to the total outstanding balance of each credit operation less the weighted adjusted value of the corresponding guarantee, multiplying the resulting amount by the allowance percentage corresponding to the risk category of the borrower or co-borrower in the lowest risk category. If the result of this calculation is negative or zero, the allowance is zero. If the total outstanding balance includes a contingent principal balance, the credit equivalent indicated below should be considered. The adjusted value of guarantees must be weighted with 100% when the borrower or coborrower with the lowest risk category is classified in category C2 or lower, with 80% when classified in category D, and with 60% when classified in category E. Allowance percentages based on borrower risk category are as follows: Allowance Risk category percentage A1 0.5% A2 2% B1 5% B2 10% C1 25% C2 50% D 75% E 100%
64 As an exception in the case of risk category E, the minimum allowance for loans to borrowers whose historical payment behavior is classified in level 3 should be calculated as follows: Allowance Arrears percentage 0 to 30 days 20% 31 to 60 days 50% More than 61 days 100% The sum of the individual allowances for each loan operation constitutes the minimum allowance. In compliance with the provisions of SUGEF Directive 1-05, as of December 31, 2011, the subsidiary Scotiabank de Costa Rica, S.A. must maintain a minimum allowance of 13,598,074,278 (2010: 12,085,012,011). SUGEF External Circular Letter 021-2008 dated May 30, 2008 indicates that the expense for the allowance for loan losses corresponds to the amount necessary to achieve the minimum required allowance. Furthermore, there must be a duly documented technical justification for any excess above the minimum required allowance, which is to be sent to SUGEF with the authorization request. The excess may not surpass 15% of the minimum required allowance for the loan portfolio. This notwithstanding, if any additional allowances are required above that 15%, they must be taken from net earnings for the period pursuant to article 10 of the IRNBS. Since leasing subsidiaries are not regulated entities, those entities are not required to maintain the minimum allowance provided for under SUGEF Directive 1-05. Credit equivalent The following contingent loan operations must be converted to credit equivalents based on the credit risk they represent. The credit equivalent is obtained by multiplying the balance of the contingent principal by the credit conversion factor as follows: a. Bid bonds and export letters of credit without prior deposit: 0.05; b. Other sureties and guarantees without prior deposit: 0.25; and c. Pre-approved lines of credit: 0.50.
65 Allowances for other assets Allowances must be established for the following assets: a. Accounts and accrued interest receivable unrelated to credit operations based on arrears calculated from the first day overdue or the date booked in the accounting records, as follows: Allowance Arrears percentage 30 days or less 2% 60 days or less 10% 90 days or less 50% 120 days or less 75% More than 120 days 100% b. Foreclosed assets held for more than two years for 100% of their value. ii. Leasing subsidiaries Customers are rated in order to validate the type of customer when an analysis is made for purposes of inclusion in the lease portfolio. Customer ratings consider financial aspects, guarantees, environmental risk, and the customer s market segment. However, initial ratings do not affect the calculation of allowances. Allowances for the portfolio are established at each month-end to cover arrears in the portfolio of the subsidiary s own leases, based on the following categories and percentages: Type of customer Arrears Allowance percentage Customer A 0 to 30 days 0.50% Customer B1 31 to 60 days 1% Customer B2 61 to 90 days 10% Customer C 91 to 120 days 20% Customer D 121 to 180 days 60% Customer E 181 days or more 100% Customer F Legal collections 100%
66 For purposes of presentation of the notes by risk category, category F is added to category E. Write-off policy: The Corporation writes off any credit (and any allowance for losses) determined to be uncollectible after analyzing significant changes in the financial conditions of the borrower that prevent the fulfillment of payment commitments, or when it is determined that the guarantee is insufficient to cover the full amount of the credit facility granted or legal recourse to execute the guarantee has been exhausted. Set out below is an analysis of the gross and net (of allowances for loan losses) amounts of individually assessed assets by risk category: 2011 Loans to customers Loans to banks Gross Net Gross Net A1 508,591,440,560 506,538,002,946 35,190,609,151 35,014,656,105 A2 4,817,775,501 4,790,799,324 - - B1 15,096,075,617 14,746,050,503 - - B2 1,928,515,871 1,832,949,197 - - C1 4,832,976,536 4,217,667,003 - - C2 694,542,422 515,053,817 - - D 1,614,071,814 1,006,738,757 - - E 26,777,864,399 17,390,501,597 - - 564,353,262,720 551,037,763,144 35,190,609,151 35,014,656,105 2010 Loans to customers Loans to banks Gross Net Gross Net A1 407,698,338,393 394,832,586,798 32,452,060,957 32,289,800,652 A2 4,383,556,446 4,361,907,099 - - B1 13,653,669,353 13,452,420,934 - - B2 1,524,279,661 1,487,743,972 - - C1 7,736,611,674 6,992,731,013 - - C2 655,675,687 550,336,226 - - D 2,659,709,059 2,033,660,468 - - E 24,495,851,505 15,392,953,406 - - 462,807,691,777 439,104,339,915 32,452,060,957 32,289,800,652
67 Guarantees Collateral: The Corporation accepts collateral guarantees (usually mortgages or chattel mortgages) to secure its loans. The value of those guarantees is established by appraisals made by independent appraisers who determine the estimated market value at the time the credit is granted. Those values are generally not updated unless the credit is individually impaired. Personal or corporate: Sureties are also accepted from individuals or legal entities. An assessment is made of the guarantor s ability to honor the debts in the event the borrower is unable to do so, as well as of the integrity of the guarantor s credit history. Collateral guarantees are not usually provided for loans and advances to banks, investments in financial instruments, or credit card loans. As of December 31, estimated fair values for collateral are as follows: 2011 2010 Individually assessed loans with allowance (including the balance for loans in legal collections): Real property 339,142,934,332 213,239,091,564 Personal property 205,190,478,042 221,510,570,219 Financial instruments 444,172,440 30,624,923,870 Other (trusts) 54,118,567,359 508,628,805 Subtotal 598,896,152,173 465,883,214,458 Past due loans without allowance: Real property 32,692,601,700 94,183,763,839 Personal property 2,381,070,863 3,859,882,109 Financial instruments - 284,443,866 Other (trusts) 5,814,484,544 - Subtotal 40,888,157,107 98,328,089,814 Current loans without allowance: Real property 978,386,611,490 471,215,687,186 Personal property 240,485,399,073 59,109,452,941 Financial instruments 9,307,547,358 26,658,427,759 Other (trusts) 237,694,115,870 444,780,600 Subtotal 1,465,873,673,791 557,428,348,486 Total 2,105,657,983,071 1,121,639,652,758
68 Loan portfolio by type of guarantee As of December 31, the concentration of the loan portfolio by type of guarantee is as follows: 2011 2010 Investment certificates 38,029,946,589 - Assignment of trust agreements 4,151,167,577 84,390,642,265 Collections - 384,101,733 Fiduciary 167,177,531,966 128,799,078,006 Mortgage 500,927,277,103 392,116,572,642 Chattel mortgage 92,476,923,172 79,026,212,111 State banking 35,156,152,899 32,419,897,170 Other 80,251,342,856 78,382,084,110 Total direct loans 918,170,342,162 795,518,588,037 Accrued interest receivable 3,961,465,545 4,139,085,724 Allowance for loan losses (13,498,142,379) (12,942,690,524) Total loan portfolio 908,633,665,328 786,714,983,237 The portion of the portfolio concentrated in State banking corresponds to a loan granted in compliance with article 59 of the IRNBS.
69 Loan portfolio by sector As of December 31, the loan portfolio by sector is as follows: 2011 2010 Agriculture, livestock, hunting, and related activities 5,913,993,050 10,707,778,481 Fishing and aquaculture - 51,631,246 Manufacturing industry 31,920,743,353 60,849,818,623 Electricity, telecommunications, gas, and water 24,150,163,319 14,486,029,457 Construction, purchase, and repair of property 346,123,474,679 354,498,182,369 Trade 148,874,249,732 81,966,361,895 Hospitality 2,334,081,184 1,090,612,765 Transportation 7,364,550,701 11,450,277,525 Stock market or finance 45,406,940,201 21,025,366,574 Real estate, business, and leasing activities 24,591,655,258 28,814,316,688 Education 30,097,669 1,091,305,814 Services 132,684,315,429 65,286,195,830 Consumer 148,776,077,587 144,200,710,770 Total direct loans 918,170,342,162 795,518,588,037 Accrued interest receivable 3,961,465,545 4,139,085,724 Allowance for loan losses (13,498,142,379) (12,942,690,524) Total loan portfolio 908,633,665,328 786,714,983,237
70 Loan portfolio by geographic area As of December 31, the loan portfolio by geographic area is as follows: 2011 2010 Costa Rica 856,589,762,898 749,020,588,331 Rest of Central America 51,778,870,911 34,154,970,838 Rest of North and South America 3,219,109,118 4,383,789,143 Caribbean 329,191,392 351,418,078 United States of America 4,386,546,819 4,560,852,222 Europe 1,412,528,684 1,699,150,588 Africa 46,804,658 - Asia 407,527,682 1,300,147,628 Australia - 47,671,209 Total loan portfolio 918,170,342,162 795,518,588,037 Loan portfolio by arrears As of December 31, the loan portfolio by arrears is as follows: 2011 2010 Current 856,190,690,394 711,884,287,309 1 to 30 days 33,861,444,585 52,679,731,678 31 to 60 days 9,047,857,636 11,128,682,407 61 to 90 days 3,783,117,679 3,584,378,909 91 to 120 days 1,117,065,726 1,917,807,409 121 to 180 days 785,375,213 2,026,699,442 More than 180 days 809,345,783 1,891,026,243 In legal collections 12,575,445,146 10,405,974,640 Total direct loans 918,170,342,162 795,518,588,037 Accrued interest receivable 3,961,465,545 4,139,085,724 Allowance for loan losses (13,498,142,379) (12,942,690,524) Total loan portfolio 908,633,665,328 786,714,983,237
71 Concentration of the portfolio in individual borrowers or economic interest groups As of December 31, portfolio concentration is as follows: No. of customers 2011 2010 Amount No. of customers Amount Less than 5% of capital and reserves 37,043 756,614,335,083 34,221 690,679,610,305 Between 5% and 10% of capital and reserves 31 70,089,651,445 21 33,652,004,165 Between 10% and 15% of capital and reserves 13 53,031,455,965 13 36,328,668,567 Between 15% and 20% of capital and reserves 4 3,278,746,770 3 2,438,407,830 Greater than 20% of capital and reserves 1 35,156,152,899 1 32,419,897,170 Total direct loans 37,092 918,170,342,162 34,259 795,518,588,037 As of December 31, 2011 and 2010, exposures greater than 20% of capital and reserves correspond to a loan granted to State-owned banks in compliance with article 59 of the IRNBS. At the balance sheet date, there are no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. Loans to the Corporation s most important customers or economic interest groups, whose loans individually represent 5% or more of share capital and capital reserves, amount to 157,556,007,089 (2010: 91,785,581,526). Amount and number of loans in non-accrual status As of December 31, loans in non-accrual status are as follows: 2011 2010 Loans in non-accrual status 14,879,749,786 15,819,766,109 Number of loans in non-accrual status 833 1,442
72 Amount and number of loans in legal collections and percentage of total portfolio As of December 31, loans in legal collections are as follows: 2011 2010 Loans in legal collections 12,575,445,146 10,405,974,640 Number of loans in legal collections 448 478 Percentage of total portfolio 1.36% 1.30% Investments by rating As of December 31, investments by risk rating are as follows: 2011 2010 AAA 293,255,284 998,022,000 AA 9,104,728,899 14,840,368,548 A 5,053,500,000 14,727,650,000 BB 53,639,865,992 33,329,805,360 B 5,260,412,317 19,336,227,260 Below B - 1,176,630,485 Unrated 2,642,054,250 2,697,734,102 Total 75,993,816,742 87,106,437,755 Accrued interest receivable 1,271,361,544 634,182,912 Highly-liquid short-term investments (10,557,727,305) (34,063,877,260) Total investments in financial instruments 66,707,450,981 53,676,743,407 As of December 31, 2011 and 2010, unrated investments correspond to securities issued by non-financial State-owned institutions and by banks created under special laws.
73 Investments by geographic area As of December 31, investments by geographic area are as follows: 2011 2010 Costa Rica 66,607,476,981 53,676,743,407 Rest of Central America 99,974,000 - Total investments 66,707,450,981 53,676,743,407 Interest rate risk The Corporation is exposed to the effects of changes in market interest rates on its financial position and cash flows. The Corporation manages this risk by maintaining reasonable interest rate spreads between assets and liabilities. The Corporation also manages the sensitivity of the gap between repricing periods for assets and liabilities to expected changes in rates through weekly gap reports that are analyzed by ALCO. With respect to interest rates, the Corporation monitors market behavior. Interest rates on assets and liabilities are adjusted based on market trends. Lending rates are set based on the following market benchmark rates: in colones, the basic deposit rate of BCCR, and in U.S. dollars, the New York Prime Rate and LIBOR. Most lending rates are variable and adjustable every one to three months for better matching with the deposits portfolio. All deposits have fixed rates and a maximum term of 60 months. The average term is four months. The Corporation follows the policy of including a clause in all loan agreements providing for the periodic repricing of interest rates, and decisions on terms, financing, and loans are made to minimize interest rate risk. The Investment Committee considers the risk of rate fluctuations when making decisions involving the purchase of securities. Interest rate gap measurement The interest rate gap is measured for purposes of analyzing the interest rate risk of financing and investing activities. A simple gap is the difference between the amount of assets, liabilities, and off-balance sheet instruments with interest rates that are expected to reprice within a specific period.
74 A cumulative gap is the net amount of all simple gaps up to, and including, the end date of the reporting period. Interest rate limits are applied to control structural interest rate risk at entity, unit, and currency levels. Sensitivity analysis The Corporation has established limits to manage exposure to interest rate risk by segregating its financial portfolios by local currency and foreign currency because the corresponding benchmark interest rates behave differently. The maximum expected variation in rates for foreign currency operations was determined by calculating volatility with a two-year observation window and a 99% confidence level. This analysis determined a maximum expected variation of 0.0147% and 0.0104% as of December 31, 2011 and 2010, respectively. For operations in local currency, the Corporation has established limits to manage interest rate exposure to a parallel shift in the yield curves of +/- 100 basis points. The annual income limit is designed to protect short-term income. That limit was calculated based on the assumption that all variable interest rates on assets and liabilities that reprice within 12 months of the calculation date will increase or decrease by 1% for operations in both foreign and local currency. In the event that variable interest rates change as indicated above, the Corporation s asset and liability portfolios would increase or decrease by 2,340,533,014 (2010: increase or decrease by 5,279,928,256). The effect of a change in market interest rates on the fair value of fixed-rate portfolios and financial instruments is as follows: Effect on fair value 2011 2010 Positive change Negative change Positive change Negative change Investments (3,616,378,597) 5,703,725,714 (2,293,139,949) 3,575,285,987 Loan portfolio (1,499,641,790) 1,533,734,769 (2,968,968,940) 3,106,186,483 Term deposits (622,903,287) 632,370,355 (630,510,247) 637,742,830 Obligations with entities (158,227,872) 160,408,451 (82,836,787) 84,780,674
75 As of December 31, 2011, the interest rate gap report for the Corporation s assets and liabilities (in thousands of colones), pursuant to SUGEF regulations, is as follows: Days 1-30 31-90 91-180 181-360 361-720 More than 720 Total Local currency Assets Cash and due from banks 38,803,871 - - - - - 38,803,871 Investments 9,372,050 18,869,614 9,850,875 2,766,802 20,419,120 14,319,348 75,597,809 Loan portfolio 85,266,193 71,537,802 10,509,649 10,289,780 20,435,179 31,247,048 229,285,651 Total recovery of assets 133,442,114 90,407,416 20,360,524 13,056,582 40,854,299 45,566,396 343,687,331 Liabilities Demand obligations with the public 47,204,160 150,100 158,011 272,622 149,510 224,265 48,158,668 Term obligations with the public 114,653,414 54,764,256 70,588,021 47,094,715 6,631,354 8,588,916 302,320,676 Obligations with financial entities 1,594,596 150,100 178,711 289,967 229,843 181,597 2,624,814 Total maturity of liabilities 163,452,170 55,064,456 70,924,743 47,657,304 7,010,707 8,994,778 353,104,158 Gap between assets and liabilities (30,010,056) 35,342,960 (50,564,219) (34,600,722) 33,843,592 36,571,618 (9,416,827) Foreign currency Assets Cash and due from banks 92,368,568 - - - - - 92,368,568 Investments 28,934,336 8,684,837 5,971,497 467,262 13,938,789 18,815,849 76,812,570 Loan portfolio 199,774,316 302,982,183 84,208,737 106,069,873 288,778,379 485,021,583 1,466,835,071 Total recovery of assets 321,077,220 311,667,020 90,180,234 106,537,135 302,717,168 503,837,432 1,636,016,209 Liabilities Demand obligations with the public 159,623,840 61,138,588 41,534,249 16,690,025 51,249,865 76,874,797 407,111,364 Term obligations with the public 264,274,940 184,379,339 150,446,527 160,690,129 36,601,439 32,768,696 829,161,070 Obligations with financial entities 26,325,978 48,488,306 37,441,875 10,313,874 31,856,597 109,217,654 263,644,284 Total maturity of liabilities 450,224,758 294,006,233 229,422,651 187,694,028 119,707,901 218,861,147 1,499,916,718 Gap between assets and liabilities (129,147,538) 17,660,787 (139,242,417) (81,156,893) 183,009,267 284,976,285 136,099,491
76 As of December 31, 2010, the interest rate gap report for the Corporation s assets and liabilities (in thousands of colones), pursuant to SUGEF regulations, is as follows: Days 1-30 31-90 91-180 181-360 361-720 More than 720 Total Local currency Assets Cash and due from banks 39,132,725 - - - - - 39,132,725 Investments in financial instruments 16,821,484 2,596,395 2,446,898 4,324,307 5,896,412 4,902,048 36,987,543 Loan portfolio 56,833,887 63,660,333 2,640,410 684,359 1,181,295 2,819,940 127,820,225 Total recovery of assets 112,788,096 66,256,728 5,087,308 5,008,666 7,077,707 7,721,988 203,940,493 Liabilities Demand obligations with the public 47,204,160 251,667 131,667 130,000 381,333 572,000 48,670,827 Term obligations with the public 26,867,164 27,637,814 34,660,014 35,924,672 5,667,362 1,453,832 132,210,858 Obligations with financial entities 154,456 5,000 246,482 503,499 343,439 361,439 1,614,314 Total maturity of liabilities 74,225,780 27,894,481 35,038,163 36,558,171 6,392,134 2,387,270 182,495,999 Gap between assets and liabilities 38,562,316 38,362,247 (29,950,855) (31,549,505) 685,572 5,334,718 21,444,494 Foreign currency Assets Cash and due from banks 3,070,466 - - - - - 3,070,466 Investments in financial instruments 1,300,631 408,347 1,251,696 51,170 1,045,475 1,590,437 5,647,756 Loan portfolio 3,518,477 5,477,219 6,929,964 13,178,825 20,915,944 31,338,144 81,358,573 Total recovery of assets 7,889,574 5,885,566 8,181,660 13,229,995 21,961,419 32,928,581 90,076,795 Liabilities Demand obligations with the public 315,868 30,250,087 4,315,721 5,541,789 5,684,881 8,527,321 54,635,667 Term obligations with the public 782,121 194,903 154,159 123,523 35,746 16,412 1,306,863 Obligations with financial entities 325,493 12,294 32,482 31,516 44,436 74,624 520,843 Total maturity of liabilities 1,423,482 30,457,283 4,502,362 5,696,828 5,765,062 8,618,357 56,463,373 Gap between assets and liabilities 6,466,092 (24,571,718) 3,679,298 7,533,167 16,196,357 24,310,224 33,613,421
77 In 2007, the Corporation acquired an interest rate hedge in U.S. dollars called Operations at notional amounts subject to an interest rate swap. That instrument was liquidated as of December 31, 2011 (2010: notional amount of US$4,000,000). That instrument was created to hedge loans payable against fixed rate mortgages and chattel mortgages so as to protect the Corporation from increases in international rates and to hold fixed rate medium- and long-term liabilities to offset investments in fixed rate securities. As of December 31, 2011 and 2010, the Corporation booked a decrease in the fair value of the hedge against profit or loss in the amount of US$1,184.41 (equivalent to 443,568) and US$60,050 (equivalent to 31,950,985), respectively. Liquidity and financing risk Liquidity risk is the risk that the Corporation will be unable to meet its obligations. The Corporation mitigates this risk by establishing limits on the minimum portion of the Corporation s funds that must be held in highly liquid instruments and establishing composition limits on interbank facilities and financing. The Corporation has designed liquidity indicators, term matching for additional time bands, and concentration and volatility analyses for each source of financing in order to determine and anticipate the volatility of funds.
78 As of December 31, 2011, the Corporation s asset and liability terms are matched as follows (in thousands of colones), pursuant to SUGEF regulations: Demand 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 360 days More than 30 days past due Local currency ASSETS Cash and due from banks 12,744,463 - - - - - - - 12,744,463 Minimum cash reserve in BCCR 8,082,934 3,856,673 1,482,849 2,337,839 4,930,496 3,301,561 1,011,173-25,003,525 Investments in financial instruments 2,581,072 1,663,887 1,248,203 6,500,044 4,472,330 1,506,315 19,669,378-37,641,229 Loan portfolio 10,707,275 14,868,465 11,970,333 9,651,699 10,035,146 6,990,739 50,423,727 3,948,650 118,596,034 Total recovery of assets 34,115,744 20,389,025 14,701,385 18,489,582 19,437,972 11,798,615 71,104,278 3,948,650 193,985,251 LIABILITIES Obligations with the public 56,032,819 29,230,803 10,242,388 15,461,617 34,684,944 23,093,935 7,080,570-175,827,076 Obligations with financial entities 639,969 - - 150,100 158,011 272,622 373,775-1,594,477 Charges payable - 1,586,455 - - - - - - 1,586,455 Total maturity of liabilities 56,672,788 30,817,258 10,242,388 15,611,717 34,842,955 23,366,557 7,454,345-179,008,008 Gap (22,557,044) (10,428,233) 4,458,997 2,877,865 (15,404,983) (11,567,942) 63,649,933 3,948,650 14,977,243 Total
79 Demand 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 360 days More than 30 days past due Foreign currency, expressed in colones ASSETS Cash and due from banks 20,266,031 - - - - - - - 20,266,031 Minimum cash reserve in BCCR 27,627,080 8,423,555 6,989,256 8,601,201 12,691,543 13,539,326 5,757,707-83,629,668 Investments 4,593,453 9,976,254 4,158,380-2,889,606 25,691 17,980,566-39,623,950 Loan portfolio 28,336,841 21,873,112 29,539,464 32,105,058 53,682,196 67,637,471 548,356,945 22,004,688 803,535,775 Total recovery of assets 80,823,405 40,272,921 40,687,100 40,706,259 69,263,345 81,202,488 572,095,218 22,004,688 947,055,424 LIABILITIES Obligations with the public 161,289,308 50,048,250 40,193,296 50,365,848 74,627,135 79,641,844 33,850,173-490,015,854 Demand obligations for management of third-party funds 240,852 41,409,314 49,637,923 38,792,740 42,518,781 19,657,526 130,540,301-322,797,437 Charges payable 315 2,297,056 - - - - - - 2,297,371 Total maturity of liabilities 161,530,475 93,754,620 89,831,219 89,158,588 117,145,916 99,299,370 164,390,474-815,110,662 Gap (80,707,070) (53,481,699) (49,144,119) (48,452,329) (47,882,571) (18,096,882) 407,704,744 22,004,688 131,944,762 Total
80 As of December 31, 2010, the Corporation s asset and liability terms are matched as follows (in thousands of colones), pursuant to SUGEF regulations: 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 360 days More than 30 days past due Demand Total Local currency ASSETS Cash and due from banks 13,347,699 - - - - - - - 13,347,699 Minimum cash reserve in BCCR 8,647,192 3,523,612 1,380,484 2,537,980 4,970,121 5,195,657 1,004,884-27,259,930 Investments in financial instruments 8,212,188 7,537,012 200,234 154,538 993,199 3,207,449 14,024,366-34,328,986 Loan portfolio 9,762,506 9,921,942 9,751,857 9,173,049 11,128,354 7,039,229 67,083,245 4,593,637 128,453,819 Total recovery of assets 39,969,585 20,982,566 11,332,575 11,865,567 17,091,674 15,442,335 82,112,495 4,593,637 203,390,434 LIABILITIES Obligations with the public 52,830,519 24,637,754 9,209,893 16,927,129 32,947,738 34,065,315 6,553,982-177,172,330 Obligations with financial entities 4,165,294 288,333 163,333 93,333 341,514 470,147 1,307,486-6,829,440 Charges payable - 2,148,787 - - - - - - 2,148,787 Total maturity of liabilities 56,995,813 27,074,874 9,373,226 17,020,462 33,289,252 34,535,462 7,861,468-186,150,557 Gap (17,026,228) (6,092,308) 1,959,349 (5,154,895) (16,197,578) (19,093,127) 74,251,027 4,593,637 17,239,877
81 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 360 days More than 30 days past due Demand 1 to 30 days Total Foreign currency, expressed in colones ASSETS Cash and due from banks 8,058,688 - - - - - - - 8,058,688 Minimum cash reserve in BCCR 23,673,446 8,022,069 6,619,865 8,060,745 11,600,789 9,231,637 3,807,714-71,016,265 Investments 7,614,445 25,936,616 796,313 406,234 1,505,776 270,137 16,882,115-53,411,636 Loan portfolio 26,798,690 22,990,512 16,155,041 20,421,923 48,833,624 45,112,976 467,260,205 23,630,884 671,203,855 Total recovery of assets 66,145,269 56,949,197 23,571,219 28,888,902 61,940,189 54,614,750 487,950,034 23,630,884 803,690,444 LIABILITIES Obligations with the public 156,009,663 54,193,778 44,057,576 53,754,028 76,376,959 61,592,592 25,404,700-471,389,296 Demand obligations for management of third-party funds 266,377 26,426,765 23,068,525 13,408,922 106,054,222 15,709,141 34,651,410-219,585,362 Charges payable - 1,854,035 - - - - - - 1,854,035 Total maturity of liabilities 156,276,040 82,474,578 67,126,101 67,162,950 182,431,181 77,301,733 60,056,110-692,828,693 Gap (90,130,771) (25,525,381) (43,554,882) (38,274,048) (120,490,992) (22,686,983) 427,893,924 23,630,884 110,861,751
82 The Corporation monitors its liquidity position on a daily basis and maintains liquid assets in excess of its liquid liabilities. Additionally, the Corporation reviews its matching of terms on a weekly basis and formulates deposit-taking, financing, and investment strategies so as to minimize any existing gaps. The Corporation also has liquidity risk, investment risk, and corporate risk policies in place to assist ALCO in making decisions that affect liquidity. ALCO is responsible for the strategic management of the investment portfolio. Investment portfolios are managed locally with overall guidance and oversight provided by the regional Treasury Department of Grupo BNS. The Corporation s limit structure is as follows: Portfolio limits are applied to each investment portfolio. Sensitivity limits and issuer limits may also be applied, depending on the type of instruments held and the size and complexity of the portfolio. Concentration limits and sublimits are applied to investment portfolios based on the type of instrument held, the type of issuer (governmental or corporate entity), investment quality, currency, and country. Concentration limits are specified in the authorization and management agreements. Quality criteria are specified in the authorizations based on ratings assigned to instruments and issuers as well as on type of issuer, approved markets, currency, and term of the instruments. The Treasury Department maintains a portfolio of short-term liquid assets, largely made up of liquid investments, advances to banks, and other inter-bank facilities to ensure that the Corporation has sufficient liquidity to meet its short-term needs.
83 Residual contractual maturities of financial liabilities As of December 31, nominal cash flows of financial liabilities are as follows (in thousands of colones): 2011 Year Nominal cash flows 1 2 3 4 5 Thereafter Balance Demand obligations with the public 213,465,213 213,465,213 213,465,213 - - - - - Term obligations with the public 445,864,855 455,255,808 413,205,567 25,812,475 5,814,871-9,209,350 1,213,545 Obligations with entities 266,928,173 345,838,848 188,017,618 36,965,990 30,654,551 31,925,578 54,297,841 3,977,270 926,258,241 1,014,559,869 814,688,398 62,778,465 36,469,422 31,925,578 63,507,191 5,190,815 2010 Year Nominal cash flows 1 2 3 4 5 Thereafter Balance Demand obligations with the public 208,840,050 208,840,050 209,872,225 - - - - - Term obligations with the public 437,820,289 447,168,117 414,084,867 23,215,901 5,545,825-3,131,199 1,190,325 Obligations with entities 229,065,141 232,413,035 189,439,134 27,560,189 6,578,322 3,010,551 1,686,243 4,138,596 875,725,480 888,421,202 813,396,226 50,776,090 12,124,147 3,010,551 4,817,442 5,328,921 Currency risk The Corporation is exposed to currency risk when the value of its assets and liabilities denominated in foreign currency is affected by exchange rate variations and the corresponding amounts are mismatched. As of December 31, 2011 and 2010, the Corporation has monetary assets and liabilities that are denominated in currencies other than the Costa Rican colon. Currency risk is controlled by limits established by management and a daily restriction imposed by BCCR, which allows a maximum variation of 4% over total equity expressed in U.S. dollars.
84 The Corporation is exposed to the effects of exchange rate fluctuations and, therefore, reviews its exposure limits on a daily basis. The Corporation also uses indicators to monitor the sensitivity of its net foreign currency position to expected changes in the exchange rate with respect to the capital base. (a) Monetary position in foreign currency As of December 31, 2011, assets and liabilities denominated in foreign currency are as follows: Assets Cash and due from banks Investments in financial instruments Loan portfolio Accounts and fees and commissions receivable Foreclosed assets U.S. dollars 200,497,139 Euros 69,653,054 - - - 1,405,857,785-138,154-10,235,681 328,430 2011 Canadian dollars 2,263,721 47,210-608,870 Investments in other companies 720,955 - - - Other assets 6,002,868 - - - Investment properties 6,897,115 - - - Total assets 1,700,193,027 2,310,931 747,024 120 Liabilities Obligations with the public 971,891,915 2,133,097 1,042,739 - Obligations with entities 500,636,172 - - - Other accounts payable and provisions 15,206,158 582,559 - - Other liabilities 494,979 - - - Total liabilities 1,488,229,224 2,715,656 1,042,739 - Excess of assets over liabilities 211,963,803 (404,725) (295,715) 120 Yen 120 - - - -
85 As of December 31, 2010, assets and liabilities denominated in foreign currency are as follows: 2010 Canadian U.S. dollars dollars Euros Yen Assets Cash and due from banks 154,649,343 520,247 459,881 11,220 Investments in financial instruments 101,934,085 205,753 256,524 - Loan portfolio 1,300,791,880 20,378,574 1,494,868 - Accounts and fees and commissions receivable 9,546,085 60,064 - - Investments in other companies 5,504,037 - - - Other assets 1,470,712 35,000 - - Investment properties 7,779 - - - Total assets 1,573,903,921 21,199,638 2,211,273 11,220 Liabilities Obligations with the public 932,232,644 1,378,839 619,317 - Obligations with entities 436,601,186-1,397,138 - Other accounts payable and provisions 9,532,834 541,066 - - Other liabilities 930,898 - - - Total liabilities 1,379,297,562 1,919,905 2,016,455 - Excess of assets over liabilities 194,606,359 19,279,733 194,818 11,220 (b) Monetary positions are not hedged. The Corporation considers its positions to be acceptable since it can buy or sell U.S. dollars or other currencies in the market when necessary. Ordinary and preferred shares in foreign currency As of December 31, 2010, the Corporation s equity included preferred shares for a total of US$47,300,000 (equivalent to 21,894,011,000). At an Extraordinary Shareholders Meeting held on October 22, 2010, an agreement was reached to recognize and accept the conversion of preferred registered shares in U.S. dollars into ordinary registered shares in U.S. dollars. Additionally, shareholders agreed to convert the issue currency of the 47,583,591,250 ordinary registered shares in colones to U.S. dollars. Accordingly, as of December 31, 2011, share capital amounts to US$139,234,757 (equivalent to 69,447,602,250).
86 (c) Term matching for assets and liabilities in foreign currency As of December 31, 2011, the terms of assets and liabilities in foreign currency are matched as follows (in thousands of colones), pursuant to SUGEF regulations: Demand 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 360 days More than 30 days past due ASSETS Cash and due from banks 40,103 - - - - - - - 40,103 Minimum cash reserve in BCCR 54,669 16,669 13,831 17,020 25,114 26,792 11,394-165,489 Investments 9,090 19,741 8,229-5,718 51 35,580-78,409 Loan portfolio 56,074 43,283 58,453 63,530 106,228 133,843 1,085,103 43,543 1,590,058 Total recovery of assets 159,936 79,693 80,513 80,551 137,060 160,686 1,132,077 43,543 1,874,058 LIABILITIES Obligations with the public 319,164 134,280 112,270 105,929 289,346 192,097 46,211-1,199,296 Obligations with financial entities - 66,723 104 58 230,592 10,356 94,664-402,497 Charges payable - 8,244 - - - - - - 8,244 Total maturity of liabilities 319,164 209,248 112,373 105,987 519,937 202,453 140,875-1,610,037 Gap (159,228) (129,555) (31,860) (25,436) (382,877) (41,767) 991,202 43,543 264,022 Total
87 As of December 31, 2010, the terms of assets and liabilities in foreign currency are matched as follows (in thousands of colones), pursuant to SUGEF regulations: Demand 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days More than 365 days More than 30 days past due ASSETS Cash and due from banks 15,868 - - - - - - - 15,868 Minimum cash reserve in BCCR 46,615 15,796 13,035 15,872 22,843 18,178 7,498-139,837 Investments 14,993 51,071 1,568 800 2,965 532 33,242-105,172 Loan portfolio 52,769 45,270 31,811 40,213 96,158 88,831 920,075 46,531 1,321,658 Total recovery of assets 130,246 112,138 46,414 56,885 121,966 107,541 960,815 46,531 1,582,535 LIABILITIES Obligations with the public 307,196 106,712 86,753 105,846 150,393 121,281 50,024-928,206 Obligations with financial entities 525 52,037 45,424 26,403 208,830 30,933 68,232-432,382 Charges payable - 3,651 - - - - - - 3,651 Total maturity of liabilities 307,721 162,399 132,177 132,250 359,223 152,214 118,256-1,364,239 Gap (177,475) (50,262) (85,763) (75,365) (237,257) (44,673) 842,560 46,531 218,296 Total
88 Sensitivity analysis As of December 31, 2011 and 2010, the sensitivity analysis for the net position in foreign currency (total assets in foreign currency - total liabilities in foreign currency) is based on the buy reference rate for the U.S. dollar because the position in U.S. dollars represents 99.5% of the total net position in foreign currency. Also, the U.S. dollar is the vehicle currency through which other currencies are traded. The analysis determined a maximum expected variation of 13.67 to US$1.00 and a maximum expected increase of 206.70 to US$1.00 (2010: 157.83). The maximum variation is determined by analyzing daily variations with a 514-day observation window. The maximum increase is represented by the difference between the buy reference rate for the U.S. dollar and the exchange rate band ceiling in MONEX. Considering the Corporation s foreign currency position in U.S. dollars, an increase or decrease in the exchange rate of the colon with respect to the U.S. dollar would give rise to maximum foreign exchange gains or losses of 49,474,861,416 and 3,271,994,947, respectively (2010: 31,332,079,687 and 2,713,739,653, respectively), as follows: 2011 2010 Effect on profit or loss Increase in exchange rate Assets 390,914,319,364 252,560,608,193 Liabilities (341,439,457,948) (221,228,528,506) Net 49,474,861,416 31,332,079,687 Decrease in exchange rate Assets 25,852,920,879 21,874,824,267 Liabilities (22,580,925,932) (19,161,084,614) Net 3,271,994,947 2,713,739,653
89 Operational risk Operational risk is the risk of direct or indirect potential losses associated with the Corporation s processes, personnel, technology, and infrastructure, or external factors other than credit, market, and liquidity risks. This risk is inherent to the sector in which the Corporation operates and to all of its main activities. This risk may take various forms, particularly failures, errors, business interruptions, or inappropriate employee conduct, and may result in financial losses, sanctions imposed by regulatory authorities, or damage to the Corporation s reputation. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by standards for the management of operational risk in the following areas: appropriate segregation of duties; requirements for the effective reconciliation and monitoring of transactions; compliance with legal and regulatory requirements; documentation of controls and procedures; communication and application of guidelines for business conduct; risk mitigation, including insurance where this is effective; reporting of operational losses and proposed remedial action; comprehensive plan to restore activities and ensure that services are provided, including plans to resume key operations and the use of internal or external facilities; development of contingency plans; employee training; and personnel development through leadership and performance strategies. Compliance with the Corporation s policies is supported by a program of periodic reviews undertaken by the supporting department for each unit, by the Compliance Department, and by Internal Audit. The results of those reviews are discussed with the management of each business unit, with summaries submitted periodically to the Audit Committee and to the Board of Directors.
90 Capital risk Costa Rican banking legislation requires the financial group to maintain a capital surplus at all times (i.e. a ratio of one or more obtained by dividing the sum of transferable surpluses of the companies in the group plus the individual surplus of the controlling company by the absolute value of the sum of individual deficits). The capital surplus or capital deficit of a financial group or conglomerate is calculated as the individual surplus or deficit of the controlling company plus the transferable surpluses and minus the individual deficits of the companies in the financial group or conglomerate. The individual surplus of each company in the financial group is calculated as the excess of the capital base over the respective minimum capital requirement for each type of company stipulated in the CONASSIF prudential standard. The Corporation analyzes its regulatory capital with consideration for the following: a) Primary capital (Tier I capital): ordinary and preferred paid-up capital plus reserves. b) Secondary capital (Tier II capital): calculated as the sum of equity adjustments for property revaluations up to a maximum of 75% of the balance of that account, adjustments to the fair value of available-for-sale financial instruments, non-capitalized contributions, prior period retained earnings, and profit or loss for the period, less statutory deductions. Deductions: Investments in other companies and loans granted to the controlling company of the same financial group or conglomerate are to be deducted from the sum of primary and secondary capital. Risk-weighted assets: Assets and contingent liabilities are weighted according to the risk grade established by regulations plus a price risk adjustment per capital requirements. The Corporation s policy is to maintain a strong capital base so as to maintain a balance between share capital and return on investment. Throughout the year, the Corporation has complied with capital requirements and no significant changes were made to its capital management strategy.
91 As of December 31, 2011 and 2010, the capital adequacy ratio has been kept above the statutory ratio of 10%, maintaining a normal risk rating. Asset laundering risk The Corporation, through its subsidiaries, is exposed to the risk that products and services could be utilized to conceal funds derived from illegal activities. This situation could lead to sanctions for violation of Costa Rican legislation on asset laundering prevention (Law No. 8204 and related regulations) and could damage the Corporation s reputation. The Corporation has implemented controls to reduce and prevent the laundering of assets in the form of policies and procedures that adhere to the highest standards and are consistent with both international standards and parent company policies. Those policies include the Know Your Customer asset laundering prevention policy and the Know Your Employees policy. All personnel receive ongoing antiasset laundering training. The Corporation periodically monitors customer accounts based on risk rating in order to identify potential suspicious transactions and to report suspicious transactions to the financial intelligence unit when necessary. Legal risk Legal risk is the risk of losses due to the incorrect application of, erroneous interpretations in the application of, or failure to apply Costa Rican laws and regulations. Noncompliance with laws and regulations could lead to warnings from local regulatory authorities, economic sanctions, and/or penalties that could damage the Corporation s reputation. 32. Fair value Fair value estimates are made at a specific date based on relevant market information and information concerning the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale a particular financial instrument at a given date. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Estimates could vary significantly if changes are made to those assumptions.
92 In conformity with IFRSs, underlying the definition of fair value is a presumption that an enterprise is a going concern without any intention to liquidate, curtail materially the scale of its operations, or undertake a transaction on adverse terms. Fair value is not, therefore, the amount that an enterprise would receive or pay in a forced transaction, involuntary liquidation, or distress sale. As of December 31, the fair value of financial instruments is as follows: 2011 Carrying amount Fair value Cash and due from banks 156,623,951,285 156,623,951,285 Investments: Held for trading 6,056,240,549 6,056,240,549 Available for sale 59,379,848,888 59,379,848,888 Loan portfolio 908,633,665,328 981,399,701,274 Demand deposits 217,322,126,325 218,887,252,658 Term deposits 445,864,854,973 456,175,261,740 Financial obligations 326,941,047,369 340,666,007,045 2010 Carrying amount Fair value Cash and due from banks 153,746,459,718 153,746,459,718 Investments: Held for trading 15,310,641,283 15,310,641,283 Available for sale 37,731,919,212 37,731,919,212 Loan portfolio 786,714,983,237 801,814,475,741 Demand deposits 208,840,050,050 211,406,396,876 Term deposits 437,820,288,884 448,475,655,590 Financial obligations 229,065,141,383 227,316,471,857
93 The following assumptions were used by management to estimate the fair value of each class of financial instrument both on and off the balance sheet: (a) (b) (c) The carrying amounts of cash and due from banks, accrued interest receivable, accounts receivable, demand deposits and customer savings deposits, accrued interest payable, and other liabilities approximate fair value because of the short maturity of these instruments. Fair values of securities are determined based on the reference price for the share or bond published on securities exchanges and in electronic stock information systems. The fair value of loans is determined by creating portfolios with similar financial characteristics. The fair value of each class of loan is calculated by discounting cash flows expected until maturity. The discount rate is determined by comparing market benchmark rates, the results of analyses of the rates used by other local financial institutions, and projections made by the Corporation s management, such that an average rate is determined that reflects the inherent credit and interest rate risks. Given that the portfolio is relatively new and largely comprised of mortgage loans for terms of longer than five years, applying the present value method gives rise to a difference in fair value, which diminishes as the portfolio matures. Assumptions related to credit risk, cash flows, and discounted interest rates are determined by management using available market information. The fair value of term deposits was calculated by discounting committed cash flows. The discount rate used represents the average market rate determined by management based on the term, amount, and currency of deposits with similar maturities.
94 33. Concentration of assets and liabilities by geographic region As of December 31, assets and liabilities are concentrated by geographic region as follows: 2011 2010 Assets: Costa Rica 1,079,491,475,969 959,964,814,248 Rest of Central America 58,024,292,294 38,110,496,781 Rest of North and South America 4,479,607,565 4,614,536,961 Caribbean 346,482,484 379,681,603 United States of America 22,514,043,897 22,943,498,732 Europe 1,671,956,093 1,928,436,089 Africa 47,067,940 - Asia 409,291,394 1,304,039,024 Australia - 47,949,292 Total assets 1,166,984,217,636 1,029,293,452,730 Liabilities: Costa Rica 665,433,963,777 650,232,124,142 Rest of Central America 9,867,649,981 9,239,363,655 Rest of North and South America 53,898,557,293 6,822,901,815 Caribbean 241,088,570,635 199,322,831,829 United States of America 33,434,063,744 30,791,986,090 Europe 17,884,345,426 2,949,301,803 Africa 86,003,082 65,541,918 Asia 652,396,530 1,649,338,790 Total liabilities 1,022,345,550,468 901,073,390,042
95 34. Agreements Agreements subscribed by the subsidiary Scotia Valores, S.A. with third parties and in effect as of December 31, 2011 are summarized below. Agreement with the Costa Rican National Stock Exchange for services for the Bloomberg system. Agreement with BN Valores, Puesto de Bolsa, S.A. commissions for the execution of brokerage transactions and the custody of securities. Agreement with EFG Capital Market Ltd., Bulltick LLC, American Express Bank Ltd., Bear Stearns Companies Inc., and ITAU Bank Limited for brokerage services and the custody of securities. Agreement with Lidersoft for professional IT services. The subsidiary Scotia Valores, S.A. currently participates in the Market-Makers Program of the Costa Rican National Stock Exchange. The subsidiary Scotia Valores, S.A. buys and sells securities internationally through foreign institutions from which it contracts brokerage and custodial services. Leases: a) Leases as lessee: As of December 31, 2011, the Corporation has leases through its subsidiaries, the most important of which are: i. Operating leases for commercial buildings and spaces for branch and ATM locations; and ii. Warehouses, mainly to hold assets received in lieu of payment or assets in foreclosure.
96 The main clauses of those lease agreements are as follows: Most leases are denominated in U.S. dollars; Leases are operating leases with security deposits, and any improvements become the property of the lessor on expiration or termination of the agreement; Leases contain automatic renewal clauses; and Leases may be terminated by either party provided that advance notice is given in accordance with the time period established in the respective agreement. For leases in effect as of December 31, 2011, projected lease payments for the upcoming years are as follows: 2012 582,703,816,355 2013 604,471,159,669 2014 549,481,958,277 2015 373,690,087,094 2016 217,762,797,717 Thereafter 463,445,935,313 Total 2,791,555,754,425 b) Leases as lessor: As of December 31, 2011, the Corporation has one lease operating agreement for the building (investment property - note 10) located in Pasadena, Texas, USA owned by the subsidiary Scotia Leasing Costa Rica, S.A. The building is leased to the U.S. General Services Administration for a 15-year term expiring in September 2023. Monthly lease payments amount to US$55,733 ( 28,164,672).
97 As of December 31, the Corporation s loan portfolio includes finance lease agreements. Those leases are recovered as follows: 2011 2010 Accounts receivable for leases, gross 107,268,620,241 94,686,172,926 Income from unearned interest (11,294,150,619) (12,026,012,565) 95,974,469,622 82,660,160,361 Recoveries Less than 1 year 33,756,531,071 28,463,373,337 Between 1 and 5 years 62,217,938,551 54,196,787,024 95,974,469,622 82,660,160,361 Accounts receivable for leases, gross (including income from unearned interest) Less than 1 year 40,120,930,865 35,272,082,818 Between 1 and 5 years 67,147,689,376 59,414,090,108 107,268,620,241 94,686,172,926 35. Contingencies (a) Tax In the first half of 2008, the Large Taxpayer Administration audited the income tax returns filed and income tax payments made by the subsidiary Scotiabank de Costa Rica, S.A. (the subsidiary) for the tax years running from 2000 through 2005. Initially, the audit covered several aspects that were later dismissed. However, unintentional arithmetic errors made by the subsidiary gave rise to differences between the subsidiary s calculation and the Tax Court s calculation of the proportion of deductible expenses, which resulted in a notice of deficiency.
98 The Tax Court handed down a decision on the administrative proceedings related to the income tax adjustment, thereby exhausting administrative recourse. Accordingly, the subsidiary paid a total of 642,502,531, which includes principal ( 331,155,211) and interest ( 311,347,320), for the income tax adjustments corresponding to the aforementioned periods. Notwithstanding, the payment was made under protest and the amount corresponding to the fine was not paid since both the fine and the interest were challenged before the Tax Administration. No decision has yet been handed down in relation thereto. Management and the legal counsel and tax advisors consider that it is more likely than not (exceeding 50%) that a favorable final ruling will be handed down on the case. Accordingly, management does not consider it necessary to book a provision therefor. Income tax returns of Banco Interfin (merged with Scotiabank de Costa Rica, S.A. in 2007) for the 1999-2005 tax years were audited by Tax Authorities in 2007. On November 12, 2007, the subsidiary received a notice of deficiency for 6,679,899,566 because the Tax Authorities did not accept the method used to calculate the income tax liability. This was in spite of the fact that in prior years the same Tax Authorities had authorized that method, which was in effect until 2006. The subsidiary filed an administrative appeal before the Large Taxpayer Administration and subsequently filed an appeal before the Tax Court, which is still pending resolution. The Tax Administration remitted the interest on income tax corresponding to the 2000, 2001, 2002, 2003, 2004, and 2005 tax years. The tax advisors estimate that obtaining a favorable outcome is probable based on the regulations for the determination of nondeductible expenses provided under Decision No. 16-05 of the Tax Administration; the fact that the methodology applied to calculate the tax base had been previously agreed by the banking sector and regulatory and tax authorities; and particularly, the soundness of the technical arguments in respect of the lawfulness and diligence of management s defense and the fact that the tax adjustments were substantially unfounded. Notwithstanding, management has applied conservative criteria and, in 2011, booked a provision in the amount of 2,939,720,468 (see note 36), corresponding to a reliable estimate of the possible tax obligation. This decision was communicated to SUGEF.
99 Banco Interfin filed its final income tax return and paid the amount of 545,136,230 in September 2007 as a result of its merger by absorption with Scotiabank de Costa Rica, S.A. from October 1 of that year. At the 2007 yearend, the subsidiary declared the aforementioned sum as a tax credit, which was applied in the 2008 income tax return. In 2010, the Large Taxpayer Administration filed administrative proceedings since it considers that the final income tax return of Banco Interfin was not provisional and, therefore, no tax credit should be recognized in favor of the subsidiary Scotiabank de Costa Rica, S.A. The Large Taxpayer Administration challenged the tax credit, and after hearing the corresponding arguments, the Tax Court still maintains the opinion that the tax return filed by Banco Interfin is provisional. As a result of the above and given that the prior cases in the Tax Court uphold the opinion of management and dismiss the thesis of the Tax Administration, no provision has been booked therefor because there is a high probability of a favorable outcome. (b) Other On February 5, 2010, the subsidiary Scotia Leasing Guatemala, S.A. received a notice of deficiency from the Guatemalan Tax Administration (SAT) in connection with the Optional Income Tax Regime and the Extraordinary and Temporary Tax for Guatemalan Peace Agreements for the tax year running from January 1 to March 31, 2007. The amount of the tax claimed by the SAT is Q1,051,075 plus penalties and interest charges (approximately 70,463,079). This subsidiary appealed the notice of deficiency and presented its arguments and related evidence on March 19, 2010. In the opinion of management and legal counsel of the subsidiary, the outcome of the appeal will be favorable. Accordingly, no provision therefor has been booked in the financial statements as of December 31, 2011. The Large Taxpayer Administration issued a notice of deficiency in respect of the 2009 income tax return filed by the subsidiary Scotia Valores, S.A. for a total of 185,092,106 due to incorrect presentation of nontaxable income and nondeductible expenses in the calculation of taxable net income. On November 29, 2011, this subsidiary filed an administrative appeal against that notice of deficiency because the subsidiary considers it is against the provisions of article 1, article 7, and article 23 of the Income Tax Law and article 11 of the Regulations thereto.
100 The Corporation s management and tax advisors consider that it is more likely than not (exceeding 50%) that a favorable final ruling will be handed down on the case. Accordingly, management does not consider it necessary to book a provision therefor. 36. Restatement of the 2010 financial statements As discussed in notes 17-f and 35, the subsidiary Scotiabank de Costa Rica, S.A. applied conservative criteria and booked a provision against prior period retained earnings for the payment of a possible tax obligation corresponding to the 2000-2005 period in the amount of 2,939,720,468, considering the accounting criteria and other guidelines issued by SUGEF in respect of similar cases. As a result, retained earnings as of December 31, 2009 and 2010 decreased from 30,968,557,583 to 28,028,837,115 and from 25,654,431,724 to 22,714,711,256, respectively. 37. Significant events Sale of 100% ownership interest in IBP Pensiones Operadora de Pensiones Complementarias, S.A. On July 20, 2010, a share purchase agreement was subscribed whereby Banco Popular y de Desarrollo Comunal acquired 100% of the shares of IBP Pensiones Operadora de Pensiones Complementarias, S.A. The sale was authorized by regulatory entities on November 5, 2010 and is effective as of November 10, 2010. Banco Popular y de Desarrollo Comunal paid the total of 6,477,194,030 for the shares purchased. Of that amount, 3,238,597,015 (50%) corresponded to the Corporation. The total gain derived from the sale of the subsidiary is 1,067,260,670, after deducting the cost of the investment and the contingency (a provision for 50,000,000) provided for in the share purchase agreement for possible expenses to be incurred on file updates. In addition, a stand-by guarantee for a total of 433,027,834 was provided for in the purchase negotiation. Such amount was deposited in an asset holding, management, and guarantee trust in Banco IMPROSA, S.A. Those funds will be released in accordance with the terms and conditions established in the trust agreement. Fifty percent (50%) of that sum corresponds to the Corporation and was not included in the calculation of the gain from the sale of the subsidiary.
101 38. Profitability indicators Profitability indicators required by CONASSIF are as follows: 2011 2010 Return on assets (ROA) 0.63% 0.49% Return on equity (ROE) 4.93% 4.27% Debt to equity ratio 7.70% 7.70% Financial margin / productive assets from intermediation activities 4.27% 2.65% Ratio of average interest-earning assets to total average assets 99.81% 100.30% 39. Transition to International Financial Reporting Standards (IFRSs) Through various resolutions, CONASSIF (the Board) agreed to partial adoption starting January 1, 2004 of IFRSs promulgated by the International Accounting Standards Board (IASB). In order to regulate application of those standards, the Board issued the Terms of Accounting Regulations Applicable to Entities Regulated by SUGEF, SUGEVAL, and SUPEN, and to Non-financial Issuers (the Regulations). On December 17, 2007, the Board approved a comprehensive revision of those Regulations. On May 11, 2010, the Board issued private letter ruling CNS 413-10 to revise the Accounting Regulations Applicable to Entities Regulated by SUGEF, SUGEVAL, SUPEN, and SUGESE and to Non-financial Issuers (the Regulations), which mandate application by regulated entities of IFRSs and the corresponding interpretations issued by the IASB in effect as of January 1, 2008, except for the special treatment indicated in Chapter II of the aforementioned Regulations. Pursuant to the Regulations and in applying IFRSs in effect as of January 1, 2008, any new IFRSs or interpretations issued by the IASB, as well as any other revisions of IFRSs adopted that will be applied by regulated entities, will require the prior authorization of the Board.
102 Following is a summary of some of the main differences between the accounting standards issued by CONASSIF and IFRSs, as well as the IFRSs and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) yet to be adopted: a) IAS 1: Presentation of Financial Statements The presentation of financial statements required by the Board differs in some respects from presentation under IAS 1. Following are some of the most significant differences: SUGEF standards do not allow certain transactions, such as clearing house balances, gains or losses on the sale of financial instruments, income taxes, etc. to be presented on a net basis. Given their nature, IFRSs require those balances to be presented net to prevent assets and liabilities or profit or loss from being overstated. Interest receivable and payable is presented in the main asset or liability account rather than as other assets or liabilities. b) Revised IAS 1: Presentation of Financial Statements The revised Standard introduces the term total comprehensive income, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statement of comprehensive income. Revised IAS 1 became mandatory for 2009 financial statements. These changes have not been adopted by the Board. c) IAS 7: Statement of Cash Flows The Board has only authorized preparation of the cash flow statement using the indirect method. The direct method is also acceptable under IAS 7. d) IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors SUGEF authorized the booking of notices of deficiency received from Tax Authorities against prior period retained earnings.
103 e) IAS 12: Income Taxes The Board has not included all deferred income tax items in SUGEF s Chart of Accounts. Consequently, entities have been required to recognize those items in accounts considered to be inappropriate under IAS 12, e.g. deferred tax income is not included in the Deferred tax expense account in the income statement. f) IAS 16: Property, Plant and Equipment The Standard issued by the Board requires the revaluation of property through appraisals made by independent appraisers at least once every five years, eliminating the option to carry these assets at cost or to revalue other types of assets. Additionally, SUGEF has allowed certain regulated entities to convert (capitalize) revaluation surplus into share capital. IAS 16 only permits realization of revaluation surplus through the sale or depreciation of the asset. As a result of this treatment, regulated entities must recognize the effect of any impaired fixed assets in profit or loss, since the effect cannot be credited to equity. Moreover, under IAS 16, impairment is charged against revaluation surplus, and any difference is recognized in profit or loss. Additionally, under IAS 16, depreciation continues on property, plant and equipment, even if the asset is idle. The Standard issued by the Board allows entities to suspend the depreciation of idle assets and reclassify them as foreclosed assets. g) IAS 18: Revenue The Board has allowed regulated financial entities to recognize loan closing fees and commissions collected prior to January 1, 2003 as revenue. Additionally, the Board has permitted the deferral of 25%, 50%, and 100% of loan fees and commissions for transactions completed in 2003, 2004, and 2005, respectively. IAS 18 prescribes deferral of 100% of those fees and commission over the loan term.
104 The Board has also allowed deferral of the net excess of loan fee income minus expenses incurred for activities such as assessment of the borrower s financial position, evaluation and recognition of guarantees, sureties, or other collateral instruments, negotiation of the terms of the instrument, preparation and processing of documents, and settlement of the operation. IAS 18 does not allow deferral on a net basis of such income. Instead, it prescribes deferral of 100% of loan fee income and permits the deferral of only certain incremental transaction costs, rather than all direct costs. Accordingly, when costs exceed income, loan fee income is not deferred, since the Board only allows the net excess of income over expenses to be deferred. This treatment does not conform to IAS 18 and 39, which prescribe separate treatment for income and expenses (see comments on IAS 39). h) IAS 21: The Effects of Changes in Foreign Exchange Rates The Board requires that the financial statements of regulated entities be presented in colones as the functional currency. i) IAS 27: Consolidated and Separate Financial Statements The Board requires that the financial statements of a parent be presented separately, measuring its investments by the equity method. Under IAS 27, a parent is required to present consolidated financial statements. A parent need not present consolidated financial statements when the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use, provided certain other requirements are also met. However, in this case, IAS 27 requires that investments be accounted for at cost. In the case of financial groups, the holding company must consolidate the financial statements of all of the companies of the group in which it holds an interest of twenty-five percent (25%) or more, irrespective of control. For such purposes, proportionate consolidation should not be used, except in the consolidation of investments in joint ventures. Amended IAS 27 (2008) requires accounting for changes in ownership interests in a subsidiary, while maintaining control, to be recognized as an equity transaction. When the entity loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognized in profit or loss. The amendments to IAS 27 became mandatory for 2010 financial statements. These changes have not been adopted by the Board.
105 j) IAS 28: Investments in Associates The Board requires consolidation of investments in companies in which an entity holds twenty-five percent (25%) or more equity interest, irrespective of any considerations of control. Such treatment does not conform to IAS 27 and IAS 28. k) Revised IAS 32: Financial Instruments: Presentation Revised IAS 32 provides new guidelines clarifying the classification of financial instruments as liabilities or equity (e.g. preferred shares). SUGEVAL determines whether those shares fulfill the requirements of share capital. l) Amendments to IAS 32: Financial Instruments - Presentation and IAS 1: Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation The amendments to the Standards require puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation to be classified as equity if certain conditions are met. These changes have not been adopted by the Board. m) IAS 37: Provisions, Contingent Liabilities and Contingent Assets SUGEF prescribes recognition of a provision for possible losses on contingent assets. This type of provision is prohibited under IAS 37. n) IAS 38: Intangible Assets The commercial banks listed in article 1 of the Internal Regulations of the National Banking System (Law No. 1644) may present organization and installation expenses as an asset in the balance sheet. However, those expenses must be fully amortized using the straight-line method over a maximum of five years. This is not in accordance with IAS 38. o) IAS 39: Financial Instruments - Recognition and Measurement The Board requires that the loan portfolio be classified pursuant to SUGEF Directive 1-05 and that the allowance for loan losses be determined based on that classification. It also allows excess allowances to be booked. IAS 39 requires that the allowance for loan losses be determined based on a financial analysis of actual losses. The Standard also prohibits the booking of provisions for contingent accounts. Any excess allowances must be reversed through profit or loss.
106 Revised IAS 39 introduced changes with respect to classification of financial instruments which have not been adopted by the Board. Those changes include the following: The option of classifying loans and receivables as available for sale was established. Securities quoted in an active market may be classified as available for sale, held for trading, or held to maturity. The fair value option was established to designate any financial instrument to be measured at fair value through profit or loss, provided a series of requirements are met (e.g. the instrument has been measured at fair value since the original acquisition date). The category of loans and receivables was expanded to include purchased loans and receivables that are not quoted in an active market. The Board has also allowed capitalization of direct costs incurred for assessment of the borrower s financial position, evaluation and recognition of guarantees, sureties, or other collateral instruments, negotiation of the terms of the instrument, and preparation and processing of documents, net of income from loan fees. However, IAS 39 only permits capitalization of incremental transaction costs, which are to be presented as part of the financial instrument and may not be netted against loan fee income (see comments on IAS 18). Regular purchases and sales of securities are to be recognized using settlement date accounting only. Depending on the type of entity, financial assets are to be classified as follows: a) Pooled portfolios Investments in pooled investment funds, pension plans and retirement savings accounts, and similar trusts are to be classified as available for sale. b) Own investments of regulated entities Investments in financial instruments by regulated entities are to be classified as available for sale.
107 Own investments in open investment funds are to be classified as trading financial assets. Own investments in closed investment funds are to be classified as available for sale. Entities regulated by SUGEVAL and SUGEF may classify other investments in financial instruments as held-for-trading instruments, provided there is an express statement of intent to trade them within 90 days from the acquisition date. Banks regulated by SUGEF may not classify investments in financial instruments as held to maturity. The above classifications do not necessarily adhere to IAS 39. The amendment to IAS 39 clarifies the existing principles that determine whether specific risks or portions of cash flows are eligible for designation in a hedging relationship. The amendment, which becomes mandatory for 2010 financial statements, will be applied prospectively. This amendment has not been adopted by the Board. p) IAS 40: Investment Property IAS 40 allows entities to choose between the fair value model and the cost model to measure their investment property. The Standard issued by the Board only allows entities to use the fair value model to measure this type of assets, except in the cases for which no clear evidence is provided to determine their value. q) Revised IFRS 3: Business Combinations Revised IFRS 3 (2008) incorporates the following changes: The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations. Contingent consideration will be measured at fair value, with subsequent changes therein recognized in profit or loss. Transaction costs, other than share and debt issue costs, will be expensed as incurred. Any pre-existing interest in the acquiree will be measured at fair value, with the gain or loss recognized in profit or loss.
108 Any non-controlling (minority) interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis. Revised IFRS 3, which becomes mandatory for 2010 financial statements, will be applied prospectively. This Standard has not been adopted by the Board. r) IFRS 5: Non-current Assets Held for Sale and Discontinued Operations The Board requires an allowance be booked for 100% of the carrying amount of assets that have not been sold within two years. IFRS 5 requires that such assets be recorded and measured at the lower of cost or fair value, discounting the future cash flows of assets to be sold in more than one year. Accordingly, assets could be understated, with excess allowances. s) Amendments to IFRS 7: Financial Instruments: Disclosures In March 2009, the IASB issued certain amendments to IFRS 7, Financial Instruments: Disclosures, which require enhanced disclosures about fair value measurements and liquidity risk in respect of financial instruments. The amendments require that fair value measurement disclosures use a three-level fair value hierarchy that reflects the significance of the inputs used in measuring fair values of financial instruments. Specific disclosures are required when fair value measurements are categorized as Level 3 (significant unobservable inputs) in the fair value hierarchy. The amendments require that any significant transfers between Level 1 and Level 2 of the fair value hierarchy be disclosed separately, distinguishing between transfers into and out of each level. Furthermore, changes in valuation techniques from one period to another, including the reasons therefore, are required to be disclosed for each class of financial instruments. Further, the definition of liquidity risk has been amended and it is now defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
109 The amendments require disclosure of a maturity analysis for non-derivative and derivative financial liabilities, but contractual maturities are required to be disclosed for derivative financial liabilities only when contractual maturities are essential for an understanding of the timing of cash flows. For issued financial guarantee contracts, the amendments require the maximum amount of the guarantee to be disclosed in the earliest period in which the guarantee could be called. These amendments have not been adopted by the Board. t) IFRS 9: Financial Instruments IFRS 9, Financial Instruments, deals with classification and measurement of financial assets. The requirements of this Standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The Standard contains two primary measurement categories for financial assets: amortized cost and fair value. The Standard eliminates the existing IAS 39 categories of held to maturity, available for sale, and loans and receivables. For an investment in an equity instrument which is not held for trading, the Standard permits an irrevocable election, at initial recognition, on an individual share-byshare basis, to present all fair value changes in other comprehensive income. No amount recognized in other comprehensive income would ever be reclassified to profit or loss at a later date. The Standard requires that derivatives embedded in contracts with a host contract that is a financial asset within the scope of the Standard not be separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortized cost or fair value. This Standard requires entities to determine whether presenting the effects of changes in the credit risk of a liability designated at fair value through profit or loss would create an accounting mismatch based on facts and circumstances at the date on which the financial liability is initially recognized. The Standard is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. This Standard has not been adopted by the Board. u) IFRS 10: Consolidated Financial Statements This Standard provides a revised control definition and an application guidance therefor. This IFRS supersedes IAS 27 (2008) and SIC 12, Consolidation- Special Purpose Entities, and is applicable to all investees.
110 Early application is permitted. Entities that apply this IFRS earlier must disclose that fact and apply IFRS 11, IFRS 12, IAS 27 (as amended in 2011), and IAS 28 (as amended in 2011) simultaneously. An entity is not required to make adjustments to the accounting for its involvement with an investee when entities that were previously consolidated or unconsolidated in accordance with IAS 27 (2008), SIC-12, and this IFRS, continue to be consolidated or continue not to be consolidated. When application of this IFRS results in an investor consolidating an investee that is a business that was not previously consolidated, the investor must: 1) determine the date when the investor obtained control of that investee on the basis of the requirements of this IFRS; and 2) measure the assets, liabilities, and noncontrolling interests as if acquisition accounting had been applied from that date. If (2) is impracticable, then the deemed acquisition date must be the beginning of the earliest period for which retroactive application is practicable, which may be the current period. The Standard is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. This Standard has not been adopted by the Board. v) IFRS 11: Joint Arrangements This Standard was issued in May 2011 with an effective date of January 1, 2013. The Standard addresses the inconsistencies in the accounting for joint arrangements and requires a single accounting treatment for interests in jointly controlled entities. This Standard has not been adopted by the Board. w) IFRS 12: Disclosure of Interests in Other Entities This Standard was issued in May 2011 with an effective date of January 1, 2013. This Standard requires an entity to disclose information that enables users of financial statements to evaluate the nature and financial effects of its interests in other entities, including joint arrangements, associates, structured entities, and off balance sheet activities. This Standard has not been adopted by the Board.
111 x) IFRS 13: Fair Value Measurement This Standard was issued in May 2011 and clarifies the definition of fair value, establishes a single procedure for measuring fair value, and defines the measurements and applications required or permitted by IFRSs. This Standard is to be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted. This Standard has not been adopted by the Board. y) IFRIC 10: Interim Financial Reporting and Impairment This Interpretation prohibits the reversal of an impairment loss recognized in a previous interim period in respect of goodwill, an investment in an equity instrument, or a financial asset carried at cost. IFRIC 10 applies to goodwill, investments in equity instruments, and financial assets carried at cost from the date that the entity first applied the measurement criteria of IAS 36 and IAS 39 (i.e. January 1, 2004). The Board permits the reversal of allowances. z) IFRIC 12: Service Concession Arrangements This Interpretation gives guidance on the accounting by operators for public-to-private service concession arrangements. This Interpretation applies to both: infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement; and existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement. This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board. aa) IFRIC 13: Customer Loyalty Programmes This Interpretation gives guidance on the accounting by entities that grant loyalty award credits to customers as part of a sales transaction which, subject to meeting any further qualifying conditions, the customers can redeem in the future for free or discounted goods or services. This Interpretation became mandatory for annual periods beginning on or after January 1, 2011 and has not been adopted by the Board.
112 bb) IFRIC 14, IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction This Interpretation applies to all post-employment defined benefits and other long-term employee defined benefits. Also, it considers the minimum funding requirements to fund a post-employment or other long-term defined benefit plan. It also addresses when a minimum funding requirement might give rise to a liability. IFRIC 14 becomes mandatory for 2011 financial statements with retrospective application required. This Interpretation has not been adopted by the Board. cc) IFRIC 16: Hedges of a Net Investment in a Foreign Operation This Interpretation allows entities that use the step-by-step consolidation method to choose an accounting policy that hedges currency risk to determine the amount of the cumulative foreign currency translation reserve that is reclassified to profit or loss on the disposal of a net investment in a foreign operation, which is equivalent to the amount that would have been reclassified had the entity used the direct method of consolidation. This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board. dd) IFRIC 17: Distributions of Non-cash Assets to Owners This Interpretation gives guidance on the accounting of distributions of non-cash assets to owners at the beginning and end of the reporting period. If, after the end of a reporting period but before the financial statements are authorized for issue, an entity declares a dividend to distribute a non-cash asset, it must disclose: a) the nature of the asset to be distributed; b) the carrying amount of the asset to be distributed as of the end of the reporting period; and c) whether fair values are determined, in whole or in part, directly by reference to published price quotations in an active market or are estimated using a valuation technique, and the method used to determine fair value and, when a valuation technique is used, the assumptions applied.
113 This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board. ee) IFRIC 18: Transfers of Assets from Customers This Interpretation gives guidance on the accounting of transfers of items of property, plant and equipment by entities that receive such transfers from their customers. This Interpretation also applies to agreements in which an entity receives cash when that amount of cash must be used only to construct or acquire an item of property, plant and equipment, and the entity must then use the item either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to both. This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board. ff) IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments This Interpretation gives guidance on the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability. This Interpretation became mandatory for annual periods beginning on or after July 1, 2010 and has not been adopted by the Board.