Lima, 4 July 2018

S.B.S. Resolution No. 2608-2018

The Superintendent of Banking, Insurance and
Private Administrators of Pension Funds

WHEREAS:

That numeral 13 of article 349 of the General Law of the Financial System and the Insurance System and Organic Law of the Superintendency of Banking and Insurance, Law No. 26702 and its amendments, hereinafter General Law, states that the Superintendency has the attribution to issue general rules to specify the preparation, presentation and publicity of financial statements, and any other complementary information, ensuring that the real economic-financial situation of the companies under its supervision is reflected;

That numeral 1 of article 354 of the General Law states that the Superintendency may require supervised entities to constitute provisions and reserves for assets and contingencies that entail credit and market risk, in accordance with the general rules it issues on the matter;

That numeral 2 of article 354 of the General Law states that the Superintendency has the power to establish the methodology that allows adjusting to market value the investments made by companies;

That the Chart of Accounts for Insurance System Companies was approved by SBS Resolution No. 348-95 and its amending rules;

That the Regulation for the Classification and Valuation of Investments of Insurance Companies was approved by SBS Resolution No. 7034-2012 and its amending rules;

That it has been considered necessary to amend the aforementioned Regulation and the Chart of Accounts for Insurance System Companies, in order to establish specific guidelines for the evaluation of impairment, as well as for the treatment of exchange differences;

That, likewise, it is necessary to amend the External Audit Regulation, approved by SBS Resolution No. 17026-2010 and its amending rules;

That, in order to gather the opinions of the general public regarding the proposed rule, the prepublication of the draft resolution was ordered on the electronic portal of this Superintendency, under the provisions of the Thirty-Second

Final and Complementary Provision of the General Law and Supreme Decree No. 001-2009-JUS and its amending rules;

With the approval of the Superintendencies of Insurance, Risks, Economic Studies and Legal Advice; and,

In use of the attributions conferred by numerals 7, 9 and 13 of article 349 of the General Law;

RESOLVES:

Article One.- Amend the Regulation for the Classification and Valuation of Investments of Insurance Companies, approved by article one of SBS Resolution No. 7034-2012 and its amending rules, in accordance with the following:

1. Replace literal a) of numeral 2 of article 10 "Subsequent measurement of investments" in accordance with the following text:

"Article 10.- Subsequent measurement of investments (…) 2. Available-for-sale investments a) Valuation at fair value (or at cost) The valuation of available-for-sale investments shall be made at fair value, in accordance with the guidelines established in article 11. Equity instruments that do not have quoted prices in active markets and whose fair value cannot be reliably estimated shall be measured at cost. In the case of debt instruments, prior to valuation at fair value, companies must update accounting at amortized cost applying the effective interest rate methodology and, based on the amortized cost obtained, gains and losses from the change to fair value must be recognized."

2. Replace literal c) of numeral 2 of article 10 "Subsequent measurement of investments" in accordance with the following text:

"Article 10.- Subsequent measurement of investments (...) 2. Available-for-sale investments (...) c) Impairment losses When one or more of the investment instruments classified as available-for-sale investments have suffered an impairment of value, in accordance with the provisions of article 12, the loss must be recognized in the result for the year. The amount of the impairment loss of debt instruments shall be calculated as the difference between their amortized cost and their fair value determined in

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accordance with article 11 of the Regulation, less any impairment loss previously recognized in the result for the year or of previous years.

In the case of equity instruments, the amount of the impairment loss shall be calculated as the difference between their acquisition cost and their fair value determined in accordance with article 11 of the Regulation, less any impairment loss previously recognized in the result for the year or of previous years.

For equity instruments not traded in an active market that are measured at cost, the amount of the impairment loss shall be calculated as the difference between their acquisition cost and the present value of the expected future cash flows, discounted at the market rate of return for other similar securities. The methodology and assumptions used to estimate the flows must be reviewed periodically by the company itself and the respective control bodies.

In estimating impairment of equity instruments, consideration must be given to the fact that the book value must not exceed the proportional share in the accounting equity of the investee.

The amount of the loss that has previously been recognized in Other Comprehensive Income must be reclassified to the result for the year."

3. Amend subsection d) of paragraph 2 of Article 10 "Subsequent measurement of investments", in accordance with the following text:

"Article 10.- Subsequent measurement of investments

(...)

2. Available-for-sale investments

(...)

d) Reversal of impairment losses Impairment losses recognized in profit or loss for the year or in prior years, corresponding to investments in debt instruments, shall be reversed through profit or loss for the year, provided that the increase in the fair value of said instrument can be verifiably and objectively associated with a favorable event occurring after the loss. Companies must document all objective evidence of the subsequent favorable event that justifies the increase in the value of the instrument, which must be available to this Superintendency.

Impairment losses recognized in profit or loss for the year or in prior years, corresponding to investments in equity instruments, shall not be reversed through profit or loss for the year, but rather through Other Comprehensive Income.

In the case of equity instruments measured at cost, impairment losses may not be reversed."

4. Replace subsection b) of paragraph 3 of Article 10 "Subsequent measurement of investments" in accordance with the following text:

"Article 10.- Subsequent measurement of investments

(...)
3. Held-to-maturity investments
(...) b) Impairment losses

When one or more of the investment instruments classified as held-to-maturity investments have suffered an impairment of value, in accordance with the provisions of Article 12, the loss must be recognized in profit or loss for the year.

The amount of the impairment loss shall be calculated as the difference between its book value (amortized cost) at the time the impairment is determined and the present value of the future cash flows expected to be recovered given the risk conditions that have been identified, discounted at the original effective interest rate (purchase IRR) if it is an investment instrument with a fixed rate, or the effective interest rate prevailing for the period (the rate at the date to which the financial statements refer), determined according to the contract, if it is an investment instrument with a variable rate. The carrying amount of the instrument shall be reduced and the amount of the loss shall be recognized in profit or loss for the period.

In this regard, the company must consider that the amount of the loss to be recognized for impairment of value is not less than the difference between the amortized cost and the fair value at the evaluation date."

5. Replace Article 12 "Evaluation of evidence of impairment" in accordance with the following text:

"Article 12.- Evaluation of evidence of impairment

Companies shall evaluate, at the date of preparation of quarterly financial statements, whether there is evidence that an instrument classified as available-for-sale investment, held-to-maturity investment or investment in subsidiaries, associates and interests in joint ventures, records an impairment of value. An impairment of value is considered to exist if there is objective evidence of impairment as a consequence of an event that has occurred after the initial recognition of the investment instrument and said event, causing the loss, has an impact on the future cash flows of the instrument that can be reliably estimated.

The accounting recognition of the impairment and its reversal must follow the guidelines established in Article 10 of this Regulation.

The identification and quantification of the impairment of value shall be the responsibility of the Risk Unit. The results of the impairment analysis must be collected in a Report, which must be brought to the attention of the Risk Committee or whoever performs said function, and be available to the Superintendency.

For the purposes of the evaluation of impairment, the following shall be taken into account:

a) Instruments classified as available-for-sale investments and held-to-maturity investments The identification of impairment for instruments classified as available-for-sale investments and held-to-maturity investments shall be carried out by applying the "Standard Methodology for the Identification of Impairment of Value of Available-for-Sale Investments and

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Held-to-Maturity Investments", which is detailed in Annex I that forms part of this regulation.

In the event that a company wishes to apply an internal methodology for identifying impairment of value that is more sophisticated and different from the methodology of the aforementioned Annex I, it must request prior authorization from this Superintendency, submitting the following documentation:

i) Authorization request signed by the General Manager.

ii) Internal methodology for identifying impairment of value.

iii) "Report supporting the internal methodology for identifying impairment of value", which must contain, at a minimum, the following:

• Detail of the qualitative and quantitative criteria for identifying the impairment of value of available-for-sale investments and held-to-maturity investments.

• Support for the choice of each criterion.

• Sources of information to collect the qualitative or quantitative criteria.

• Justification for the use of the methodology (reasons why the proposed methodology is considered to identify impairment of value more precisely).

• Other aspects relevant to the impairment methodology.

iv) Copy of the minutes of the Risk Committee where the approval of the methodology indicated in point ii is recorded.

Any update, modification or changes that the entity wishes to make to the internal methodology must also be authorized prior to its application. To this end, the company must attach the following documentation:

i) Authorization request signed by the General Manager.

ii) Update, modification or changes in the internal methodology for identifying impairment of value.

iii) “Report supporting the update, modification or changes in the internal methodology for identifying impairment of value”, which must contain, at a minimum, the following:

• Detail of the modifications in the qualitative and quantitative criteria for identifying impairment of value of available-for-sale investments and held-to-maturity investments.

• Support for the modification of each criterion.

• Sources of information to collect the qualitative or quantitative criteria that have been modified.

• Justification for the modification of the methodology (reasons why the changes in the methodology are considered to serve to identify impairment of value more precisely).

• Other relevant aspects related to the modifications in the impairment methodology.

iv) Copy of the minutes of the Risk Committee where the approval of the changes in the methodology indicated in point ii is recorded.

The Risk Unit shall be responsible for documenting the impairment assessment under the standard methodology or the methodology that has been authorized by the Superintendency.

b) Investments in subsidiaries, associates and interests in joint ventures

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The company must assess whether there is any indication that an investment in subsidiaries, associates and interests in joint ventures may have been impaired, considering the guidelines established in IAS 36.

Companies must document the aforementioned assessment and keep it at the disposal of the Superintendency.”

6. Replace Article 13 “Exchange difference” in accordance with the following text:

“Article 13.- Exchange difference

In the case of investments at fair value through profit or loss, gains or losses from exchange differences shall be recognized in the profit or loss for the year.

In the case of available-for-sale investments, gains or losses from exchange differences related to the amortized cost of debt instruments shall affect the profit or loss for the year, provided that they are not instruments used for hedging purposes. For this purpose, the following procedure shall be followed:

• First, the difference between the following must be determined:

  i. The amortized cost in national currency at the reporting date, using the closing accounting exchange rate; and,

  ii. The amortized cost of the previous period at the closing exchange rate of the previous period, plus interest accrued from the previous reporting date to the reporting date, at the average or closing exchange rate of the period, minus interest collected from the previous reporting date to the reporting date, at the exchange rate of the transaction date.

Such difference must be recognized as a gain or loss from exchange difference, in profit or loss accounts for the year.

• Second, the fair value of the investment at the reporting date must be determined and expressed in local currency at the closing accounting exchange rate, where the difference between the fair value in local currency and the amortized cost in national currency (resulting from the adjustment in the previous point) at the reporting date must be recognized as a gain or loss from fluctuation in value, as applicable, in equity accounts (unrealized gain or loss), presented in other comprehensive income.

In the case of equity instruments classified in the available-for-sale investments category, gains or losses from exchange differences shall be presented in other comprehensive income, recorded in equity accounts, provided that they are not hedging operations.

In the case of investment instruments classified as held-to-maturity investments, gains or losses from exchange differences shall be recognized in the profit or loss for the year, provided that they are not hedging operations.

In the case of investments in subsidiaries, associates and interests in joint ventures, the guidelines established in IAS 21 “The Effects of Changes in Foreign Exchange Rates” shall be applied.

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In all the cases described, the recording of gains or losses from exchange differences of operations for hedging purposes shall be made in accordance with the provisions on the matter issued by the Superintendency.”

7. Amend the Fifth final and complementary provision, in accordance with the following:

“Fifth.- Requirement of adjustments for impairment and additional provisions When, in the opinion of the Superintendency, there is any distortion in the calculation of the valuation of investments or operations under the scope of this Regulation, the company shall be required to justify the calculations made or proceed to make the adjustments for impairment or constitute additional provisions.”

8. Replace the title of the Annex “Standard Methodology for the Identification of Impairment of Value of Financial Instruments” with the following: Annex I “Standard Methodology for the Identification of Impairment of Value of Available-for-Sale Investments and Held-to-Maturity Investments”. Likewise, replace the content of the methodology in accordance with the following:

“ANNEX I STANDARD METHODOLOGY FOR THE IDENTIFICATION OF IMPAIRMENT OF VALUE OF AVAILABLE-FOR-SALE INVESTMENTS AND HELD-TO-MATURITY INVESTMENTS

Companies must apply the methodology quarterly, on the occasion of the preparation of their quarterly financial statements, to all debt and equity instruments classified in the categories of available-for-sale investments and held-to-maturity investments.

I. Debt instruments

Companies must evaluate, for the entire portfolio of debt instruments subject to impairment, the occurrence of the following situations:

1. Weakening in the financial situation or financial ratios of the issuer and its economic group.

2. Downgrade in any of the credit ratings of the instrument or of the issuer by at least two (2) "notches", with respect to the rating at the time of acquisition of the instrument; where a "notch" corresponds to the minimum difference between two risk ratings within the same rating scale.

3. Interruption of transactions or of an active market for the financial asset, due to financial difficulties of the issuer.

4. Observable data indicate that since the initial recognition of a group of financial assets there is a measurable decrease in their estimated future cash flows, even if it cannot yet be identified with individual financial assets of the group.

5. Decrease in value due to regulatory changes (tax, regulatory or other governmental).

6. Significant decrease in fair value below its amortized cost. It will be considered a significant decrease if the fair value at the closing date has decreased by at least 40% below its amortized cost.

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7. Prolonged decrease in fair value. It will be considered that there is a prolonged decrease if the fair value at the closing date has decreased by at least 20% compared to the amortized cost of twelve (12) months earlier and, the fair value at the closing date of each month during the period of twelve (12) previous months, has always remained below the amortized cost corresponding to the closing date of each month.

The fair value to be used for the purposes of evaluating criteria 6 and 7 is that considered for the purposes of the valuation of available-for-sale debt instruments, in accordance with the criteria established in article 11° of this Regulation, regardless of the accounting classification of the debt instrument. However, if the decrease in the fair value of the debt instrument is entirely a consequence of an increase in the risk-free interest rate, this decrease should not be considered as an indication of impairment.

If at least two (2) of the situations described above are met, it will be considered that impairment exists and, consequently, the company must determine the amount of any impairment loss in accordance with the provisions of article 10° of the Regulation.

If at least two (2) of the situations described above have not occurred, it will be sufficient for any of the following specific situations to be present to consider that impairment exists:

1. Breach of contractual clauses, such as interruption in the payment of interest or principal.

2. Forced renegotiation of the contractual conditions of the instrument due to legal or economic factors linked to the issuer.

3. Evidence that the issuer is in a process of forced restructuring or bankruptcy.

4. When the risk rating of an instrument that was classified as investment grade is reduced to a rating that is below investment grade.

The company will determine the amount of any impairment loss in accordance with the provisions of article 10º of the Regulation.

II. Equity instruments

Companies must evaluate, for equity instruments subject to impairment, the occurrence of the following situations:

1. When the risk rating of a debt instrument of the issuer that was classified as investment grade is reduced to a rating that is below investment grade.

2. Significant changes have occurred in the technological, market, economic or legal environment in which the issuer operates, which may have adverse effects on the recovery of the investment.

3. Weakening in the financial situation or financial ratios of the issuer and its economic group.

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4. Interruption of transactions or of an active market for the financial asset, due to financial difficulties of the issuer.

5. Observable data indicate that since the initial recognition of a group of financial assets there is a measurable decrease in their estimated future cash flows, even if it cannot yet be identified with individual financial assets of the group.

6. Decrease in value due to regulatory changes (tax, regulatory or other governmental).

If at least two (2) of the situations described are met, it will be considered that impairment exists and, consequently, the company must determine the amount of any impairment loss in accordance with the provisions of article 10° of the Regulation.

If at least two (2) of the situations described above have not occurred, it will be sufficient for any of the following specific situations to be present to consider that impairment exists:

1. Significant decrease in fair value below its acquisition cost. It will be considered a significant decrease if the fair value at the closing date has decreased by at least 40% below its cost value. As acquisition cost, the initial cost shall always be taken as reference, regardless of whether an impairment of value for the analyzed equity instrument has been previously recognized.

2. Prolonged decrease in fair value. It shall be considered a prolonged decrease if the fair value at the closing date has decreased by at least 20% compared to the fair value twelve (12) months earlier and, the fair value at the closing date of each month during the period of twelve (12) months prior, has always remained below the acquisition cost.

3. Non-compliance by the issuer with statutory provisions related to the payment of dividends.

4. Evidence that the issuer is in a process of forced restructuring or bankruptcy.

The fair value to be used for the purpose of evaluating the situations indicated in numerals 1) and 2), is the fair value considered for the valuation of available-for-sale equity instruments, in accordance with the guidelines established in article 11°. The aforementioned numerals 1 and 2 are not applicable to equity instruments classified in the available-for-sale category and valued at cost due to the absence of a reliable fair value.

The company shall determine the amount of any impairment loss in accordance with the provisions of article 10° of the Regulation.

This Superintendency may carry out its own analysis of the instruments that make up the investment portfolio in debt and equity instruments and determine which instruments, in its criteria, have suffered impairment of value and require companies to recognize it, in accordance with the provisions of article 10° of the Regulation.”

Article Second.- Modify the Chart of Accounts for Companies of the Insurance System, in accordance with the provisions of the attached Annex, which is published in

the electronic Portal of this Superintendency (www.sbs.gob.pe), in accordance with the provisions of Supreme Decree No. 001-2009-JUS.

Article Third.- Replace numeral 3) in section II of Annex I “Complementary Reports by External Audit Firms”, approved by SBS Resolution No. 17026-2010 and its amending norms, in accordance with the following text:

"II. REPORTS APPLICABLE TO INSURANCE AND REINSURANCE COMPANIES (…) 3. Review of the investment portfolio Based on a sample, the report shall contain, at least, the following aspects:

a. Verification of the valuation of investments in accordance with the norms established by the Superintendency;

b. Review of compliance with the constitution of gains and losses from valuation, losses from impairment of value, as well as reversals from impairment, in accordance with current norms. For the impairment of value of available-for-sale and held-to-maturity investments, compliance with the methodology established or authorized by the Superintendency must be reviewed;

c. Review of the existence of policies and procedures regarding the administration of market risks incurred by the company, which are duly approved by the competent body and include the aspects required by the Superintendency in its related norms;

d. Concentration of investments in economic groups and in sectors or economic activities; and,

e. Review of the annexes and reports used, cross-checking the information with the financial statements, that said information is duly approved by the competent body and presented to the Superintendency in accordance with what is required by the related norms.

(…)”

Article Fourth.- Modify the denomination of procedure No. 154 of the Single Text of Administrative Procedures – TUPA of the Superintendency of Banking, Insurance and AFP approved by SBS Resolution No. 1678-2018 and amending norm, to the following: “Authorization to use and/or modify an internal methodology for identifying the impairment of value of investments of insurance companies”. Likewise, modify the referred procedure No. 154, whose text is annexed to this Resolution and is published on the institutional portal (www.sbs.gob.pe).

Article Fifth.- This resolution shall enter into force as of 1 October 2018.

Register, communicate and publish.

SOCORRO HEYSEN ZEGARRA
Superintendent of Banking, Insurance and
Private Administrators of Pension Funds

ANNEX
MODIFICATIONS TO THE CHART OF ACCOUNTS FOR COMPANIES OF THE INSURANCE SYSTEM

Modify the “Conceptual Accounting Framework” in accordance with the following:

1. Modify literals g) and h) of numeral 2 “Available-for-sale investments” of section I “Classification categories” of the section “Financial Investments”, in accordance with the following:

“g) Gains or losses from exchange differences related to the amortized cost of debt instruments shall affect the result of the year (items 46 or 56), provided that they are not instruments used for hedging purposes. While in the case of equity instruments, exchange differences shall be recognized in equity accounts (accounts 3801 or 3802), provided that they are not hedging operations.

h) When there is impairment of debt instruments, the following must be done: i) the unrealized loss recorded as "Other Comprehensive Income" shall be transferred to income statement accounts, affecting item 46 against item 38; ii) the value of the debt instrument shall be shown in the corresponding accounts of items 11 and 17 and accounts 1109 or 1709; and iii) the reversal of the impairment, when applicable, shall affect account 5609 against accounts 1109 or 1709. In the case of impairment of equity instruments, the following must be done: i) the unrealized loss recorded as "Other Comprehensive Income" shall be transferred to income statement accounts, affecting item 46 against item 38; ii) impairment losses shall be reversed, when applicable, through equity accounts (3801)."

2. Amend literal e) of numeral 3 "Investments held to maturity" of section I "Classification Categories" of the subsection "Financial Investments", as follows:

"e) The amount of the impairment loss shall be calculated as the difference between its book value (amortized cost) at the time the impairment is determined and the present value of the future cash flows expected to be recovered given the risk conditions that have been identified, discounted at the original effective interest rate (purchase IRR) if it is an investment instrument with a fixed rate, or the effective interest rate in force for the period (the rate as of the date to which the financial statements refer), determined according to the contract, if it is an investment instrument with a variable rate. The carrying amount of the instrument shall be reduced and the amount of the loss shall be recognized in profit or loss for the period. The methodology and assumptions used to estimate the flows must be reviewed periodically by the company itself and the respective control bodies. The company must consider that the amount of the loss to be recognized for impairment shall not be less than the difference between the amortized cost and the fair value at the valuation date."

3. Amend literal a) of section II "Impairment" of the subsection "Financial Investments", as follows:

"a) Companies shall evaluate, at the date of preparation of quarterly financial statements, whether there is evidence that an instrument classified as available-for-sale investment, held-to-maturity investment, or investment in subsidiaries, associates and interests in joint ventures, records an impairment of value. An impairment of value is considered to exist if there is objective evidence of impairment as a consequence of an event that has occurred after the

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initial recognition of the investment instrument and such event, causing the loss, has an impact on the future cash flows of the instrument that can be reliably estimated."