Technical Standards for the Registration of Extraordinary Assets of Insurance Companies

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THE COMMITTEE OF STANDARDS OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 85 of the Insurance Companies Law stipulates that the Superintendence shall establish the manner in which the accounting of insurance companies shall be kept, as well as the criteria for consolidating their operations and financial statements; a regulatory power that, by virtue of the entry into force of the Law on Supervision and Regulation of the Financial System, was transferred to the Central Reserve Bank, through its Committee of Standards.

II. That Article 95, first paragraph, of the Insurance Companies Law, establishes that the extraordinary assets acquired by insurance companies in accordance with what is provided in Article 94 of said Law, must be liquidated within a period of two years counted from the date of their acquisition. In justified cases, this period may be extended by the Superintendence of the Financial System for up to one hundred and eighty days.

III. That Article 2, first paragraph, of the Law on Supervision and Regulation of the Financial System establishes that the Financial Supervision and Regulation System has as its objective to preserve the stability of the financial system and ensure its efficiency and transparency, as well as to ensure the security and solidity of the members of the financial system in accordance with what is established by said Law, other applicable laws, regulations, and technical standards issued for this purpose, all in concordance with international best practices on the matter.

IV. That Article 35, letter f), of the Law on Supervision and Regulation of the Financial System establishes that it is the obligation of the supervised entities the adequate accounting disclosure of the economic and financial reality, having to have the backing of their internal and external audits.

V. That Article 99, third paragraph, letter a), of the Law on Supervision and Regulation of the Financial System, establishes that it corresponds to the Committee of Standards of the Central Reserve Bank of El Salvador the approval of technical standards, instructions, and provisions that the laws regulating the supervised entities establish must be issued to facilitate their application, especially those relative to solvency requirements, liquidity, provisions, reserves, classification of risky assets, criteria for establishing the need for consolidation, good corporate governance practices, transparency of information, and on any other aspect inherent to risk management by the supervised entities.

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VI. That in accordance with Article 101, fourth paragraph, of the Law on Supervision and Regulation of the Financial System, the powers to approve, modify, and repeal technical standards that must be complied with by the members of the financial system and other supervised entities are transferred to the Central Reserve Bank of El Salvador.

THEREFORE,

by virtue of the regulatory powers conferred upon it by Article 99 of the Law on Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR THE REGISTRATION OF THE EXTRAORDINARY ASSETS OF INSURANCE COMPANIES

CHAPTER I OBJECT, SUBJECT, AND TERMS

Object Art. 1.- These norms have as their objective to establish uniform practices for the accounting registration and valuation of extraordinary asset transactions of insurance companies.

Subjects Art. 2.- The subjects obliged to comply with the provisions established in these Norms are: a) Insurance companies incorporated in El Salvador; b) Branches of foreign insurance companies established and authorized in the country; and c) Cooperative associations providing insurance services incorporated in the country.

Terms Art. 3.- For the purposes of these Norms, the terms indicated below have the following meaning: a) Extraordinary assets: Those guarantees or movable and immovable property referred to in Article 94 of the Insurance Companies Law; b) Central Bank: Central Reserve Bank of El Salvador; c) Entity: Subject obliged as referred to in Article 2 of these Norms; d) Law: Insurance Companies Law; and e) Superintendence: Superintendence of the Financial System.

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CHAPTER II REGISTRATION OF EXTRAORDINARY ASSETS AND CONSTITUTION OF RESERVES

Case of acquisition of extraordinary assets by dation in payment Art. 4.- In cases of acquisition by dation in payment, the acquisition value shall be that decided by the contracting parties, which must be established in the corresponding notarial instrument. The value thus determined is the one that will be registered in account 1905 EXTRAORDINARY ASSETS and the corresponding obligations will be credited to the debtor's account.

Art. 5.- When the value determined in the deed of dation in payment is greater than the sum of the capital balance, interest registered in asset accounts, legal costs, taxes, rights, and professional fees necessary to acquire ownership of the goods, the difference must be applied to account 4901090 09 Other extraordinary expenses - Others. This accounting entry must be made on the same date that the acquisition value is registered. The balances owed by the debtor will be established taking into account the reference date of the deed of dation in payment. If after the previous accounting application, the book value of the asset is greater than the market value, it must be adjusted to this latter value; the resulting difference will be registered in account 4901090 09 Other extraordinary expenses – Others. This accounting entry must be made on the same date that the acquisition value is registered. The agreement accepting the dation in payment must refer to all balances owed by the debtor, including interest that is registered in off-balance sheet accounts.

Case of acquisition by judicial adjudication Art. 6.- In cases of judicial adjudication, the value of the extraordinary asset will be the total of the debt registered in asset accounts, understood as the sum of the capital balance, interest registered in asset accounts, legal costs plus taxes, rights, and professional fees necessary to acquire ownership of the goods. The value thus determined is the one that will be registered in account 1905 EXTRAORDINARY ASSETS, separating in a sub-account the adjudication value and in another the remaining balance owed by the debtor; and the corresponding obligations will be credited to the aforementioned debtor. The acquisition value will be determined taking into account the date of the judicial adjudication. Interest that remains registered in off-balance sheet accounts shall not be counted as part of the value of the asset.

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Art. 7.- When the value determined according to the first paragraph of the previous article is greater than the market value, the difference must be applied to account 4901090 09 Other extraordinary expenses Others. This accounting entry must be made on the same date that the acquisition value is registered.

Case of purchase and sale Art. 8.- The entity, to make effective credits in its favor or to secure its rights as a creditor, may purchase movable and immovable goods of any class. The acquisition value will be determined by the sum of the value paid to the seller, plus taxes, rights, and notarial expenses to acquire ownership of the goods. The value thus determined is the one that will be registered in account 1905 EXTRAORDINARY ASSETS.

Art. 9.- When the market value results in being less than the value paid for the acquisition, the asset must be accounted for at market value; the resulting difference will be registered in account 4901090 09 Other extraordinary expenses – Others. This accounting entry must be made on the same date that the acquisition value is registered.

Prohibition of Recognition of Profits Art. 10.- In the different cases of acquisition of extraordinary assets, when a value less than market value results, no profit shall be registered for the acquisition.

Market Value Art. 11.- For the purposes of these norms, market value, mentioned in the previous articles, will be considered the expert appraisal of the goods, when pertinent, carried out by an expert duly registered with the Superintendence.

Treatment of Reserves Art. 12.- As a consequence of the receipt of an extraordinary asset, the specific cleanup reserves corresponding to the owed value may be released through application to the income account 5802010 Provisions for loans. In the case that an extraordinary asset has remained in such quality for a period greater than that established in Article 95 of the Law, the entity in question is obliged to constitute a provision charged to expenses.

CHAPTER III ON THE REMOVAL OF EXTRAORDINARY ASSETS

Art. 13.- Extraordinary assets may lose that quality for the following causes:

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a) By sale; b) By transfer to fixed assets; or c) By destruction.

Cash sale or with financing Art. 14.- The removal of an extraordinary asset due to sale will cause an increase in liquidity or in the loan portfolio, as applicable, and a decrease in account 1905 EXTRAORDINARY ASSETS, by the corresponding book value. If the sale is for cash and its value is greater than the gross book value of the asset, the resulting difference must be registered in account 5901020 Gains on sale of extraordinary assets. If the sale is with financing and its value is greater than the gross book value of the asset, the difference must be registered in account 290109 Various. In each case, the balance of this account will be amortized in proportion to the recovered loaned capital, which will cause a charge to that account and a credit to account 5901020 Gains on sale of extraordinary assets. In the contrary case, if the sale value were less than the gross book value of the asset, the difference must be registered in account 4901020 Losses on sale of goods. In the event that the extraordinary asset had a provision constituted, it must be liquidated as income for reserve release, in the Various Provisions account.

Acquisition by the entity Art. 15.- When an extraordinary asset is acquired by the entity, based on what is established in Article 95, last paragraph, of the Law, it will be transferred to the corresponding account by the gross book value at the date of transfer. The provision that such asset had constituted must be liquidated as income for reserve release, in account 5802090 Various Provisions.

Destruction of the Extraordinary Asset Art. 16.- When the asset is destroyed for any cause, the net value of insurance recoveries must be liquidated against the provision if it had been constituted; otherwise, the loss must be recognized.

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CHAPTER IV OTHER PROVISIONS AND VALIDITY

Art. 17.- The values and accounting practices established in these norms do not affect the legal relationship between debtors and creditors; therefore, the entity's right to pursue its debtors until recovering their credits is not modified. In the case of judicial adjudications, the entity must keep control in off-balance sheet accounts of the balances owed by the debtors.

Art. 18.- Entities must keep auxiliary records, according to the model of Annex No. 1 of these Norms, duly updated.

Art. 19.- When groups of extraordinary assets are acquired, the value of each must be individualized and the reserves corresponding to them.

Sanctions Art. 20.- Non-compliance with the provisions contained in these Norms will be sanctioned in accordance with what is established in the Law on Supervision and Regulation of the Financial System.

Repeal Art. 21.- These Norms repeal the "Norms for the Accounting of Extraordinary Assets of Insurance Companies" (NCS -010), approved by the Board of Directors of the Superintendence of the Financial System in Session No. CD-17/1999, of February 25, 1999, whose Organic Law was repealed by Legislative Decree No. 592 containing the Law on Supervision and Regulation of the Financial System, published in the Official Journal No. 23, Volume No. 390, of February 2, 2011.

Unforeseen Aspects Art. 22.- Aspects not provided for in regulatory matters in these Norms will be resolved by the Central Bank through its Committee of Standards.

Validity Art. 23.- These Norms will enter into force as of the fifteenth of July two thousand twenty-six.

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Annex No.1 ENTITY: __________________________________________ Balances in thousands of United States dollars

Date

Description of the Transaction

Approval

Location or Address

Acquisition Reserve Constituted

Extension Management Commercialization

Removal Form

Value

Note SSF Expiration

Auction

Cause

Price

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Instructions (1) Date of the transaction (2) Description of the transaction, identifying the references of the ex-debtor (3) Number and date of the agreement of the JD or Committee that approved the acquisition, sale, conservation, or removal by destruction (4) The sufficient data to locate it (5) Purchase, dation in payment, adjudication, or cancellation of a Financial Leasing contract (6) Acquisition value plus additions (7) The reserve registered in account 1999020 Extraordinary assets (8) Number and date of the note containing the extension, if any (9) Expiration of the extension (10) Date and base price of the last auction (11) Actions aimed at selling it (12) State the cause of the removal, which can be sale, conservation, or destruction (13) Price of the sale of the extraordinary asset