| | C. | Use of estimates and judgments |
The preparation of consolidated financial statements requires the Bank's management to make judgments, estimates and assumptions that affect the application of accounting policies and the recognized amounts of assets, liabilities, income and expenses.
The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgments or changes in assumptions are disclosed in the notes to the consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.
The significant accounting policies that the Bank uses in preparing its consolidated financial statements are detailed below:
| | 1. | Impairment testing of CGU including goodwill: |
The Bank tests goodwill recognized upon business combinations for impairment at least annually. The impairment test for goodwill involves estimates and significant judgments, including the identification of cash generating units and the allocation of goodwill based on the expectations of which the Bank will benefit from the acquisition. The fair value of the acquired companies is sensitive to changes in the valuation models assumptions. Adverse changes in any of the factors underlying these assumptions could lead the Bank to record a goodwill impairment charge. Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. See Note 8, for further information related to carrying amount, valuation methodologies, key assumptions and the allocation of goodwill.
Deferred tax assets and liabilities are recorded on deductible or levied temporary differences originating between tax and accounting bases, taking into account the valid tax rules applicable in each country where The Bank has operations. Due to the changing conditions of the political, social and economic environment, the constant amendments to tax legislation and the permanent changes in the tax principles, determining the tax bases for the deferred tax involves difficult judgments to estimate future gains, offsets or tax deductions.
The determination of the deferred tax is considered a crucial accounting policy, since its determination involves future estimations of gains that may be affected by changes in economic, social and political conditions, and tax authorities.
For more information relating to the nature of deferred tax assets and liabilities recognized by The Bank, please see Note 11.
| | 3. | Provisions and contingent liabilities: |
The Bank is subject to contingent liabilities, including those arising from judicial, regulatory and arbitration proceedings and tax and other claims arising from the conduct of the Bank’s business activities. These contingencies are evaluated based on management’s best estimates and provisions are established for legal and other claims by assessing the likelihood of the loss actually occurring as probable, possible or remote. Provisions are recorded when all the information available indicates that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation before the statement of financial position date and the amounts may be reasonably estimated. The Bank engages internal and external experts in assessing probability and in estimating any amounts involved.
Throughout the life of a contingency, the Bank may learn of additional information that can affect assessments regarding probability or the estimates of amounts involved; changes in these assessments can lead to changes in recorded provisions.
The Bank considers the estimates used to determine the provisions for contingent liabilities are critical estimates because the probability of their occurrence and the amounts that the Bank may be required to pay are based on the Bank’s judgment and its internal and external experts, which will not necessarily coincide with the future outcome of the proceedings. For further information regarding legal proceedings and contingencies and its carrying amounts. See Note 20.
| | 4. | Impairment for credit risk: |
Determining the allowance for loan losses requires a significant amount of management judgment and estimates in, among others, identifying impaired loans, determining customers’ ability to pay and estimating the fair value of underlying collateral or the expected future cash flows to be received. The Bank assesses if an asset or a group of financial assets is impaired and if impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The estimates are considered as critical accounting judgments because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses (as reflected in the provisions) and actual losses would require the Bank to record provisions which, if significantly different, could have a material impact on its future financial condition and results of operations. The Bank’s assumptions about estimated losses are based on past performance, past customer behavior, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses. (see section Risk Management).
| | 5. | Fair value of financial assets and liabilities: |
Financial assets and liabilities recorded at fair value on the Bank’s statement of financial position include debt and equity securities and derivatives classified at fair value through profit or loss and equity securities which the Bank has made an irrevocable election to present in other comprehensive income changes in its fair value.
To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 Fair value measurement specifies different levels of inputs that may be used to measure the fair value of financial instruments. In accordance with this standard, financial instruments are classified as follows:
Level 1: Assets and liabilities are classified as Level 1 if there are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
Instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions.
Level 2: Assets and liabilities are classified as Level 2 if In the absence of a market price for a specific financial instrument, its fair value is estimated using models whose input data are observable for recent transactions of identical or similar instruments.
Level 3: Assets and liabilities are classified as level 3 if unobservable input data were used in the measurement of fair value that are supported by little or no market activity and that are significant to the fair value of these assets or liabilities.
All transfers between the aforementioned levels are assumed to occur at the end of the reporting period
The measurement of the fair value of financial instruments generally involves a higher degree of complexity and requires the application of judgments especially when the models use unobservable inputs (level 3) based on the assumptions that would be used in the market to determinate the price for assets or liabilities.
For further details, as carrying amount and sensitivity disclosures, please see Note 29 ‘Fair value of assets and liabilities’.
For the periods ended December 31, 2017 and 2016 there have been no significant changes in estimates and judgements made at end-year other than those indicated in financial statements.
| | 6. | Measurement of Employee benefits: |
The measurement of post-employment benefit obligations and long-term employee benefits carries a wide variety of premises and it is dependent upon a series of assumptions of future events. The projected unit credit method is used to determine the present value of the obligation for the defined benefits and its associated cost. Future measurements of obligations may differ to those presented in the financial statements, among others, due to changes in economic and demographic assumptions and significant events. For further information, see Note 18.
| | 7. | Consolidation of structured entities: |
Structured entity (SE) is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
To determine whether the Bank controls and consequently consolidates an entity that has been designed as a SE, the Bank assesses the design and the purpose of the entity. It is also considered whether the Bank, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others.
Whenever there is a change in the substance of the relationship with the SE the Bank performs a re-assessment of control to determine if consolidation is applicable.
The total assets of unconsolidated SE in which the Bank had an interest at the reporting date and its maximum exposure to loss in relation to those interests is presented in Note 23 unconsolidated structured entities.
