Convergence of the Information and Accounting Regime towards International Financial Reporting Standards

"2016 - Year of the Bicentennial of the Declaration of National Independence" COMMUNICATION "A" 6114 12/12/2016 TO FINANCIAL ENTITIES:
Ref.: Circular
CONAU 1 - 1191
Convergence of the Information and Accounting Regime towards International Financial Reporting Standards.

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We address you to communicate the criteria that financial entities must observe in the framework of convergence towards IFRS.
In this regard, starting from the fiscal years initiated on 01/01/18, entities must begin to record their operations and equity variations and prepare their financial statements in accordance with the International Financial Reporting Standards issued by the International Accounting Standards Board and adopted to date by Technical Resolution No. 26 of the Argentine Federation of Professional Councils of Economic Sciences, its modifications, and the adoption circulars approved, whose effective date is prior to 31/12/18. This accounting framework is based on the application of IFRS, for separate and consolidated financial statements with the only transitional exception of point 5.5 "Impairment" of IFRS No. 9 "Financial Instruments" and taking into account the clarifications and additional requirements established in the Annex to this Communication. Regarding provisions for uncollectible risk, the regulations on "Minimum Provisions for Uncollectible Risk" will remain in force, and a specific schedule for convergence towards the model to be adopted based on international best practices will be disseminated in due course. In this regard, based on what is provided by the Organic Charter of this Institution (art. 14 inc. e) and the Financial Entities Law (art. 36), as new International Financial Reporting Standards, modifications, or repeals of current standards are approved, and once these changes are adopted through Adoption Circulars of the FACPCE, the Central Bank will rule on their approval for financial entities. Generally, the advance application of any IFRS will not be admitted, unless specifically admitted at the time of adoption.

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Regarding the presentation of the Information Regime Business Plan and Projections and Capital Self-Assessment Report for the 2017/2018 period, it is clarified that projections and stress test results for the 2018 period must be reported without considering the impact of the application of IFRS. However, along with the qualitative information presented regarding each section, they must report for that period the expected impact on the projected data from the application of IFRS. We salute you attentively. CENTRAL BANK OF THE ARGENTINE REPUBLIC Ricardo O. Maero Estela M. del Pino Suárez Main Manager of Information Regime and Information Centers General Manager of Information Regime and Protection of Users of Financial Services
ANNEX

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1 IFRS 9. Financial Instruments.
1.1 Point 5.5 "Impairment" (points B5.5.1 to B5.5.55).
In line with statements made by various international supervisors regarding the need to better understand the repercussions of IFRS 9 in terms of impairment in the banking sector, the application of section 5.5 of IFRS 9 (points B5.5.1 to B5.5.55) is exempted.
By exempting the application of the provisions on impairment, those provisions included in another section of the standard or in other standards that refer to them must not be applied (for example, IFRS 9 point 5.4.1.a. credit-adjusted effective interest rate, B8D to B8G of IFRS 1). In this regard, the competent areas of this Central Bank will focus on the analysis of the impact on classification, provisioning, and collateral standards for the purpose of transitioning from the current provisioning model to the model to be adopted based on international best practices, proposing in due course a differentiated implementation schedule.
1.2 Point 3.2 Derecognition of asset accounts.
For the purpose of applying the derecognition provisions of IFRS 9, the evaluation must be carried out both at the consolidated level, as provided in point 3.2.1, and at the individual level.
1.3 Calculation of the effective interest rate on financial assets measured at amortized cost, at fair value through other comprehensive income, and on financial liabilities.
For the purpose of calculating the effective interest rate of assets and liabilities that require it for their measurement, the principles, definitions, and examples included in IFRS 9 must be taken into account.
Entities whose systems do not allow assigning transaction fees and costs to financial assets or liabilities individually may temporarily - until 31/12/2019 - perform a global estimation of the calculation of the effective interest rate on a group of financial assets or liabilities with similar characteristics where their application is appropriate, provided that this does not affect the integrity of the regulations on "Minimum Requirements for Management, Implementation, and Control of Risks Related to Information Technology, Information Systems, and Associated Resources for Financial Entities". B.C.R.A. GENERAL FRAMEWORK FOR CONVERGENCE TOWARDS IFRS
Annex to
Comm. "A"
6114

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To present amortized cost balances taking into account the effective interest rate, adjustment items - at the financial product level - will be used that also allow maintaining the record of contractual balances.
This Central Bank will work, jointly with the IFRS Technical Commission, to define homogeneous criteria in the consideration of transaction fees and costs in the effective interest rate.
2 IFRS 9 "Financial Instruments" - IFRS 13 "Fair Value Measurement".
The approval by the Board of Directors of a financial entity of financial statements that include assets and liabilities measured at their fair value as a subsequent measurement criterion implies the existence of:

• Appropriate supporting documentation for such measurement.
• Existence of a written accounting policy approved by the same administrative body, describing the valuation method or technique adopted.
• Application of monitoring and confirmation mechanisms at the management level that this accounting policy has been applied in the preparation of the financial statements.
  3 IAS 16 – Property, Plant and Equipment – Use of the Revaluation Model.
  The provisions in the previous section will also apply in cases where the entity has opted for the use of the revaluation model for the measurement of elements of property, plant, and equipment.
  As provided in IAS 16, the application of the revaluation method will be carried out for all elements that make up the same class, for which the entity must define which are the classes of assets and what elements constitute them.
  The approval of financial statements in which the revaluation model has been applied to an asset or class of assets will imply that the Board of Directors:
• Has confirmed that the comparison of the value measured based on the revaluation model with its recoverable amount has been carried out and, if applicable, its effects have been accounted for as established in the IFRS.
  B.C.R.A. GENERAL FRAMEWORK FOR CONVERGENCE TOWARDS IFRS
  Annex to
  Comm. "A"
  6114

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• In cases where it is not necessary to perform the comparison with the recoverable amount because no signs of impairment have been identified, has approved a report that contemplates an exhaustive and well-founded analysis of the considered elements that supports that conclusion. Such report must be discussed and approved by the entity's Board of Directors, prior to the approval of the financial statements.
• At the close of each fiscal year, verified that it has been properly documented that there have been no significant variations in the fair values of assets measured based on the revaluation model, or of the existence of such changes and therefore regarding the need to account for a new revaluation.
• Has the mandatory participation of an independent external appraiser. This appraiser acts as an advisor to the Board of Directors, who assumes final responsibility for the measurement. The Board of Directors is in turn responsible for the presentation of the supporting documentation and methodology followed for the measurement prepared by the appraiser to its Audit Committee, the Supervisory Commission, and external auditors with a view to the issuance of their respective reports on the entity's financial statements.
• The variations generated in the value of assets resulting from the use of the revaluation method will be recorded in accordance with the provisions of IAS 16. The balances at the end of each period recorded in the accumulated "other comprehensive income" in equity will be considered computable for the purpose of determining the Entity's Computable Equity Responsibility.
  In the application of the measurement criteria previously referred to, the supporting documentation must meet conditions such that they do not originate a limitation in the scope of the task that must be explicitized by the external auditor in their audit report on such statements. 4 IAS 40 – Investment Property and IAS 38- Intangible Assets. When the measurement criterion is fair value or revaluation method, the same provisions established in point 3 must be observed. 5 First-time Adoption of International Financial Reporting Standards – IFRS 1. B.C.R.A. GENERAL FRAMEWORK FOR CONVERGENCE TOWARDS IFRS
  Annex to
  Comm. "A"
  6114

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Entities must apply this standard completely with respect to the financial statements corresponding to the fiscal years initiated on 01/01/18, as well as the interim financial information of that period. To this end, the transition date is understood to be 01/01/17 (or 31/12/16) and the opening Statement of Financial Position corresponds to that same date. In this sense, when entities prepare their opening Statement of Financial Position, they must apply the mandatory exceptions of Appendix B, and may apply the exemptions provided in Appendices C to E that form part of IFRS 1. This includes the application of points D5 to D8B of IFRS 1 regarding the use of deemed costs. To this end, when this criterion is used, the provisions of point 3 of this standard must be taken into account, including the regulatory treatment of the counterpart recorded in unallocated results. The presentation of the opening Statement of Financial Position will be carried out together with the presentation of the first interim Statement of Financial Position corresponding to the first quarter of 2018. 6 IAS 27 – Separate Financial Statements. Investments in subsidiaries, associates, and joint ventures in the Separate Statement of Financial Position must be measured using the equity method provided in IAS 28, in line with what is provided by Technical Resolution No. 26. 7 Reconciliation of Assets and Liabilities due to the Application of IFRS as of 31/12/16 Regarding the balances at this date, entities must use, for the purpose of presenting the IFRS reconciliation, the same accounting policies that will be used in the first IFRS-based financial statements and adoption of exceptions and exemptions that will be applied to the opening financial statements, taking into account the application issues established by the BCRA. The decisions adopted must be exposed in a note in the mentioned information requirement. The objective of this provision is that the reconciliations at that date are assimilable, in their main aspects, to what will be the opening Statement of Financial Position. B.C.R.A. GENERAL FRAMEWORK FOR CONVERGENCE TOWARDS IFRS
Annex to
Comm. "A"
6114