Norms for the Accounting Recognition of Losses on Loans and Accounts Receivable of Insurance Companies

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 1 of 3 CDSSF-74/1998 NCS-009 NORMS FOR THE ACCOUNTING RECOGNITION OF LOSSES ON LOANS AND ACCOUNTS RECEIVABLE OF INSURANCE COMPANIES Approval: 29/10/1998 Validity: 01/01/1999

The Board of Directors of the Superintendence of the Financial System, based on literal c) of Article 10 of the Organic Law of the Superintendence of the Financial System, issues the:

NORMS FOR THE ACCOUNTING RECOGNITION OF LOSSES ON LOANS AND ACCOUNTS RECEIVABLE OF INSURANCE COMPANIES

CHAPTER I OBJECTIVE

Art. 1.- The objective of these Norms is to regulate the recognition of losses through the write-off of balances of loans and accounts receivable.

The term insurance companies includes insurance companies incorporated in El Salvador; branches of foreign insurers; and cooperative associations that provide insurance services.

CHAPTER II LOSSES ON LOAN PORTFOLIO

Art. 2.- Loans with real collateral that are more than twenty-four months old, and those without real collateral that are more than twelve months old without reporting capital recoveries, which are not in the process of judicial execution, must be recognized as a loss.

Art. 3.- Loans must also be recognized as losses if they are in any of the following situations: a) When there is a lack of executive document to initiate recovery through the judicial route; b) When, after twenty-four months of initiating judicial action, it has not been possible to attach assets; c) In cases where a first-instance judgment has been issued in favor of the debtor; d) When there is no evidence that the debtor has acknowledged their debt in the last five years; e) When, in the opinion of the insurance company, there is no possibility of recovery.

CHAPTER III LOSSES ON ACCOUNTS RECEIVABLE

Art. 4.- The following accounts must be recognized as losses when they are older than twelve (12) months or have not recorded movement in that period: a) Accounts receivable for bonds and other services; b) Legal costs, except where there is an ongoing process; c) Advances to personnel;

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 2 of 3 CDSSF-74/1998 NCS-009 NORMS FOR THE ACCOUNTING RECOGNITION OF LOSSES ON LOANS AND ACCOUNTS RECEIVABLE OF INSURANCE COMPANIES Approval: 29/10/1998 Validity: 01/01/1999 d) Cash shortages; and e) Other shortages.

CHAPTER IV ACCOUNTING APPLICATION OF LOSSES AND RECOVERIES

Losses on Loans

Art. 5.- Loan balances of principal and interest must be written off against the restructuring reserve up to the amount of reserves established; the non-reserved difference, if any, will be debited to the corresponding expense account.

Losses on Accounts Receivable

Art. 6.- Accounts receivable must be written off entirely against the results accounts, through a debit to non-operational expenses and a credit to the accounts receivable account.

Recording in Off-Balance Sheet Accounts

Art. 7.- The amount of written-off loans plus their corresponding interest and accounts receivable must be represented in the corresponding off-balance sheet account until their recovery is achieved.

For any recovery of written-off assets, the corresponding decrease in the off-balance sheet accounts must be made.

Recoveries

Art. 8.- Recoveries of assets that have been recognized as losses will be applied based on the following order: a) Interest from previous periods; b) Interest from the current period; c) Principal.

Art. 9.- Cash recoveries of assets that have been recognized as losses must be recorded as follows: a) When the recovery occurs in the same period in which the write-off was made, this write-off must be reversed, and then normal portfolio recovery procedures will be followed; b) If the recovery is made in an economic period subsequent to the write-off, it will result in a debit to liquidity and a credit to the corresponding non-operational income account.

Art. 10.- In-kind recoveries of assets that have been recognized as losses must be recorded as follows:

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 3 of 3 CDSSF-74/1998 NCS-009 NORMS FOR THE ACCOUNTING RECOGNITION OF LOSSES ON LOANS AND ACCOUNTS RECEIVABLE OF INSURANCE COMPANIES Approval: 29/10/1998 Validity: 01/01/1999 a) When the recovery occurs in the same period in which the write-off was made, this write-off must be reversed, and then the procedures regulated in the “Norms for the Accounting of Extraordinary Assets of Insurance Companies” will be followed; b) If the recovery is made in an economic period subsequent to the write-off, it will result in a debit to extraordinary assets and a credit to the corresponding equity account.

CHAPTER V OTHER PROVISIONS AND VALIDITY

Art. 11.- The deadlines established for the recognition and recording of write-offs are maximum; therefore, insurance companies may reduce them.

Art. 12.- The recognition of losses on loans and accounts receivable must be performed at least before publishing the financial statements of each semester.

Art. 13.- The write-offs regulated in these Norms do not affect the rights of the creditor; therefore, the creditor may continue judicial or extrajudicial actions to recover the debt; nor do they exclude the requirements established in the Income Tax Law to be considered deductible expenses.

Art. 14.- When there is a lack of executive document as referred to in literal a) of Article 3 of these Norms, the insurance company must investigate in order to deduce responsibilities; from this, it must inform the Superintendence of the Financial System, so that this body takes the corresponding administrative actions.

Art. 15.- Matters not contemplated in these Norms will be resolved by the Board of Directors of the Superintendence of the Financial System.

Art. 16.- These Norms will enter into force as of January 1, 1999.