From ColGAAP to IFRS | Special Report

From ColGAAP to IFRS
ANALYSIS BANCOLOMBIA: COLOMBIAN EQUITY RESEARCH – Special Report
May 4, 2015
A New Accounting and Financial Language
Colombian companies will start reporting financial statements under IFRS in 1Q15, which
has generated uncertainty regarding the new metrics each company will have in
comparison to previous years and the impact this could have on valuation, liquidity,
solvency and profitability ratios, among others.
In our view, what really matters is that the fundamental value doesn’t change. Cash
flow is the same under the ColGAAP and the IFRS, which means valuations, ratings and
target prices won’t change. However, there would be variations in financial multiples and
ratios that could cause uncertainty and volatility in the equity market.
Comparison Metrics Wouldn’t Be Plain Vanilla
After undertaking a deep analysis of the impact the new accounting framework would
have on financial statements one thing is true: comparability won’t be easy. The reason is
simple: the IFRS allows different accounting procedures for the same type of assets,
leaving to management the choosing of procedure that better matches their economic
reality. With this in mind, companies in the same sector can use different accounting
methodologies for their long-lived assets, for example, which will create a completely
different scenario for their ratios and financial multiples.
This means that corporations can choose from different sets of procedures and methods
to express their financial statements according to their economic realities and
preferences. Hence, before making any financial comparison or calculating valuation
multiples we recommend a deeper analysis on the accounting policies used by the
company subject of analysis to assure that investors are comparing apples to apples. In
the following segment some of the main alternatives corporations have to determine their
accounting policy will be explained.
With this in mind, analysts have to be very careful in the process of making comparable
ratios such as P/E, EV/EBITDA, ROE, and ROA, among others.
Analysts
More Information is Always Better
Under the IFRS Colombian enterprises will comply with a more strict set of procedures
that require more information on key aspects such as: i) related-party transactions, ii)
remuneration of key personal, iii) deeper information by business lines, iv) quarterly
information with notes to financial statements, among others. All this changes will allow
for a better understanding and estimation of financial results.
IFRS application schedule in Colombia
Dec 2013
Dec 2014
Comparative Financial Statements
Annual and Quarterly
(Transition G1,G2,G3)
Dec 2015
Initial Financial Statements
Annual and Quarterly
(Aplication G1,G3)
(Transition G2)
Dec 2016
Initial Financial Statemets
Trimestrales y Anual
(Aplication G2)
Source: Decree 2784, EY, Bancolombia
1
Name:
Phone:
E-mail:
Jairo Julián Agudelo Restrepo
(574) 6047048
[email protected]
Name:
Phone:
E-mail:
Juan Camilo Dauder
(574) 604 98 21
[email protected]
Name:
Phone:
E-mail:
Maria Paula Cortés
(571) 353 66 00 ext 37387
[email protected]
Name:
Phone:
E-mail:
Diego Buitrago Aguilar
(571) 746 39 84 ext 37307
[email protected]
Name:
Phone:
E-mail:
Germán Zúñiga Saavedra
(574) 604 70 45
[email protected]
Name:
Phone:
E-mail:
Federico Pérez García
(574) 604 81 72
[email protected]
From ColGAAP to IFRS | Special Report
May 4, 2015
IFRS Application in Colombia
The International Financial Reporting Standards –IFRS– represent a unique set of highquality accounting rules created in the European Union looking for providing capital
market solutions to the difficulties that arose amid the more complex information
requirements resulting from the economic and market internationalization process of the
last decades. The IFRS represent a great opportunity for corporations to advance in the
consolidation of a common accounting and financial language and a more robust tool for
internal control while demanding more transparency, improving technical support and
increased use of resources. This set of rules started being used in 2005, initially by listed
European companies, and since then it has spread through 138 different jurisdictions as
well as different kinds of corporations.
Now, after several years of technical and institutional arrangements, planning and work,
Colombian companies listed on the Colombian Stock Exchange are ready to release their
first set of financial results (1Q15) under the IFRS.
Legal and Institutional Framework
Since 2009 has Colombia advanced in defining a legal and institutional framework to
support the IFRS application. The pillars of said framework are the following:

Law 1314 of 2009: Through this law the application of IFRS in Colombia was
accepted. It also defined the competent authorities for directing, guiding and
supervising the principles, norms and interpretations related to the application of the
standards. Importantly, this law also establishes the independence of the Colombian
Fiscal Accounting from the IFRS.

Strategic management: The Consejo Técnico de la Contaduría Pública (Public
Accounting Technical Council) is in charge of defining the procedures and
conditions necessary for a proper application of the IFRS in Colombia. It established
3 groups for the application of the standards according to key variables such as size
and importance of each company. The difference among the three groups is the
deadline to release their financial information under the IFRS.
Group 1: i) Security issuers, ii) public interest companies and iii) companies with
specific features. In regard to the latter features defined for a mandatory application
are: i) corporations with more than 200 employees, ii) corporations with assets over
30,000 monthly minimum wages (COP18,000mn/USD7.2mn), and iii) companies
meeting any of the following 4 characteristics: i) being a subordinate of a foreign
company with full IFRS application, ii) being a subordinate of a local company that
must apply the IFRS, iii) being the holding or having a joint venture with one or more
foreign companies with full IFRS application, and iv) a company with imports or
exports representing more than 50% of sales and purchases. This set of companies
would release their 1Q15 financial results under the IFRS.
Group 2: Companies whose revenues are equal or above 15,000 monthly minimum
wages (COP9,000mn/USD3.6mn). In Colombia this segment is better known as
PYMES (SMEs) and according to the law they can carry out a procedure based on
IASB standards or voluntarily decide to apply the standards considered for Group 1.
Group 3: Individuals and corporations as indicated in the article 499 of the fiscal law
(Simplified Regime) and SMEs not meeting the requirements of Group 2. These
companies are enforced to apply a simplified accounting standard established in the
decree 2706, which is a compilation of the IFRS for SMEs and ISAR regulations
issued by UNCTAD (United Nations Conference on Trade and Development).
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From ColGAAP to IFRS | Special Report
May 4, 2015

Decree 2784 of 2012: Provided more clarification about companies in Group 1 and
defined the application schedule as seen in the first page of this report.

Decrees 3019 – 3022 and 3023 of 2013: Through these regulators created the
legal and technical framework for really small businesses (microempresas) as well
as the one for companies in the groups 1 and 2 being modified and regimented.
Moving from ColGAAP to IFRS
Although the IFRS will provide markets with more standardized information this won’t
derive in an entirely comparable base of financial statements. While it’s true that the IFRS
provide a general framework that simplifies the vast universe of the GAAPs around the
world, in the mentioned framework corporations have room to address their own
accounting policies.
This means that corporations can have their pick from different sets of procedures and
methods to express their financial statements according to their own economic realities
and preferences. Hence, before making any financial comparison or valuation multiples
we recommend a deeper analysis on the accounting policies used by the company
subject of analysis, in order to assure that investors are comparing apples to apples. In
the following segment some of the main alternatives corporations have to determine their
accounting policy will be explained.
Main Changes – Overview

Economic groups’ related parties and segments: The IFRS demand
corporations to reveal several aspects that the ColGAAP don’t, turning into a more
rigorous standard. Among the most important differences we highlight that the IFRS
demand the revelation of aspects like: i) Relation with subsidiaries, ii) remuneration
of key personnel and iii) clearer disclosure on related-party transactions, among
others.
Regarding the first aspect it’s worth considering that the IFRS define a subsidiary as
a company in which the parent owns above 50% of the property, or holds control
due to the existence of any other kind of agreement between the partners. In this
case the IFRS establish that the subsidiary has to be consolidated into the financial
statements. The IFRS also define other categories like associates and joint venture,
included into the parent’s financial statements through the equity method, while
financial instruments are to be included at reasonable value when the holding of the
parent company is below 20%.
It is also worth having in mind that the IFRS demand the publishing of information on
the segments comprising the business of the company subject to the application of
the standard. These segments are designated according to their cash generation
capacity and are called cash generation units (unidades de generación de efectivo,
UGE). UGEs are demanded to have separated financial information that is regularly
evaluated for the decisive authorities into each company.

Inventory valuation methods: While the ColGAAP allowed FIFO and LIFO, in the
IFRS the use of LIFO is strictly forbidden. Under the IFRS the inventory is valued at
the lower value between cost and the net realizable value. Hence its value can or
cannot reflect market value. Inventory write-ups are allowed, but only to the extent
that a previous write-down to net realizable value had been recorded.
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From ColGAAP to IFRS | Special Report
May 4, 2015

Long-lived assets: In regard to asset valuation, while in the ColGAAP a revaluation
of assets must be determined at the end of the period when acquired and it’s
necessary to update its value at least every three years through experts’
assessment, under the IFRS companies can reveal assets value through any of two
methods: historic cost and asset revaluation. Importantly, whatever the method
used, performing a regular impairment test is necessary. The impairment test
checks if the recovery value of the asset (value in use or market value) is higher
than the book value, and if it is not, the company will have to do an impairment of
the difference. The impairment will be accounted as a loss in the P&L statement.
Companies that pick historic cost usually have less chances of seeing impairments,
given that historic cost is usually lower than asset revaluation or fair value.
There are also differences in the way depreciation is treated. While in the ColGAAP
depreciation is determined through the adoption of one or several methods like
straight line, sum of the digits of the years, or production units, the IFRS demand
depreciation to be categorized by components or segments which opens room for
different useful lives and methods which take into consideration the features of the
asset.
Finally, we highlight that the IFRS consider the capitalization of certain costs as an
extra value of the asset. Among those we highlight: i) Costs attributable to the
acquisition, construction or production of an asset can be capitalized as part of the
effective cost of the asset, ii) it is also possible to capitalize the financial expenses
incurred in when a loan is taken exclusively for acquiring an asset if the returns
obtained for the temporary investment of the funds are discounted and, iii) the
measurable costs of replacing a component of an asset that will likely bring future
economic benefits can also be capitalized. In this case the cost of the component to
be replaced has to be impaired.
It is important to bear in mind that under the ColGAAP, companies reflect their longlived assets in two different accounts: i) their historical cost in property, plant and
equipment, and ii) the additional value under appraisals. With this in mind,
companies that decide to reflect their assets at historical cost would have a
downward pressure on assets and equity, as they will eliminate the appraisals
related to their PPE.

Intangibles: The IFRS also demand an alternative management of intangibles
although overall it is quite similar to the ColGAAP; the main difference comes from
the amortization of goodwill. In regard to R&D costs (research and development) the
IFRS are clear in mentioning that R costs cannot be capitalized and then those will
always be considered expenses. The IFRS allow the capitalization of development
costs if technical and economic feasibility is demonstrated in advance. Although it is
quite similar to the ColGAPP approach, the IFRS are more exhaustive in demanding
a demonstration of the intention of completing the asset intended to be developed
and the ability for it to be sold in the future. In the IFRS marketing and advertising
costs are recognized as expenses, as in the ColGAAP.
As mentioned before, the main difference lies on the amortization of goodwill which
is allowed under the ColGAAP but not IFRS. This will have a positive effect on the
P&L of Colombian enterprises as net income will be higher keeping other variables
constant. However, goodwill is tested for impairments as explained in PPE.
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From ColGAAP to IFRS | Special Report
May 4, 2015

Taxes: Perhaps one of the main changes the IFRS application will bring to financial
statements is the recognition of deferred assets or deferred liabilities resulting from
the differences of the application of the standards and the fiscal accounting. This
would be particularly relevant in Colombia as the fiscal accounting will be presented
under the ColGAAP, while financial accounting will go under the IFRS.
With this in mind, we would probably see a decrease in equity that will be
compensated by an increase in long-term debt (deferred tax), given that fiscal
assets are usually lower than IFRS assets, as a method to decrease income taxes.
Given the aforementioned impact, we foresee an increase in debt ratios such as
debt/equity.
In addition, it is also important to bear in mind that under the IFRS companies must
reflect their property tax for the full year in 1Q, in addition to the wealth tax for those
companies who decided to present it in their P&L, creating a downward pressure on
the bottom line for 1Q15.

Provisions and contingencies: Under the IFRS provisions must include the
estimated value of the possible obligation taking into consideration the time value of
money, something not considered in the ColGAAP.

EBITDA: In Colombia is usual to find the EBITDA calculation starting from operating
income and adding all the non-cash expenses such as depreciation and
amortization of intangibles to get to the EBITDA. Under the IFRS, the calculation
starts with net income, adding back taxes, financial expenses, depreciation and
amortization, meaning that other non-operating income or expenses would be
included in the EBITDA calculation. With this in mind, we would find different values
of EBITDA that should not have a relevant impact on financial statements, multiples
or valuation.
Table 1: Summary of financial indicators and aspects to consider under the
IFRS
Financial Indicator
Current Ratio
Aspects to consider in adoption of IFRS
a) Use restrictions on equity
b)Securities or portfolio with maturity longer than 3 months
c) Effect of classifying the statement of financial position in current and non-current or in order of liquidity
Indebtedness
a) Loans to related parties, partners or shareholders
b) Accounts payable balances and maturity
c) NPV valuation of transactions at sub-market rates
d) Recognition of provisions if requirements of IAS 37 are met
e) Actuarial liability is calculated using the method of the projected credit unit in accordance with IAS 19
Inventory Turnover Recognition and measurement of inventories
a) Valuation at the lower between cost and net realizable value (NRV)
b) Spare parts, ongoing maintenance equipment, and ancillary equipment used for more than one period, should be
reclassified to property, plant and equipment
Receivable Turnover Recognition and measurement of debtors
a) Treatment of installment sales
b) Determination of impairment in accordance with IAS 39
c) Valuation at amortized cost of loans to employees
Source: Grupo Bancolombia, BVC
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From ColGAAP to IFRS | Special Report
May 4, 2015
Sectorial and Corporate Particularities
When analyzing the IFRS implementation we found that beyond the overall reporting
framework one of the most challenging aspects is how to apply these principles to fit the
reality of a specific industry or company. Following, we highlight those aspects we have
found to be the most relevant for companies in each specific industry.
Utility Companies
As a capital intensive industry utility companies will see a great impact in the changes
related to property, plant and equipment. We also see that as many of the companies in
the sector are/were closely related to state ownership, and then to particular pension
regimes, another major impact would come from the side of labor benefits and pension
liabilities. Other influential topics are deferred taxes, commodity derivatives, debt and
provisions.
In regard to property, plant and equipment, as in every industry, utility companies will
decide on reporting based on historical cost or reasonable value. Companies will have to
take into consideration the components scheme for defining useful life and consequently
depreciation expenses. Here it’s important to consider the impact that concession
contracts will have on useful life and which expenses could be capitalized. Digging into
the last topics we found that in the segments of power transmission and distribution,
expenses related to grid extension can be capitalized as well as those related to
maintenance works that can enhance assets’ useful life.
As for the labor benefits and pension liabilities the IFRS demand an actuarial estimation
of the fair NPV of the company’s obligations considering several factors including wage
expected growth, post-employment benefits, mortality rates, and discount rates at market
prices, among others. The big difference is that the ColGAAP only recognize pension
liabilities and labor benefits in the P&L at the time the benefit is obtained. All the above
could increase estimated liabilities.

Celsia: In the light of the recent acquisitions, some regulatory aspects, and the cash
generation features of the business, they decided to adopt attributed cost
(reasonable value) as the method for PPE valuation. The aforementioned is
expected to impact (increase) depreciations despite the increase in the useful life of
assets. It is also expected to make accounting depreciation larger than the fiscal one
opening room for deferred liabilities, aspect highlighted by the company as one of
the most relevant consequences of the IFRS application.
It was also important the registration of the pension commitment of EPSA which
opened room for increased liabilities considering that the IFRS demand its actuarial
calculation to be accounted immediately in contrast with the more gradual
registration allowed by the ColGAAP. This situation also opens room for the
generation of a financial expense but the company clarified it’s not material.
Another impact the company highlighted is related to the wealth tax which the IFRS
demand to be totally revealed once announced in contrast to the partial registration
allowed by the ColGAAP. On this the company also clarified that their decision was
to record it through the P&L instead of equity. This registration will have place every
year.
In conclusion, we foresee an increase in liabilities that would be compensated by a
lower equity on the balance sheet, which will probably increase the debt/equity ratio.
On the P&L front, we expect a down pressure on the bottom line due to: i) higher
depreciations, as explained above, and ii) the impact of the wealth tax.
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From ColGAAP to IFRS | Special Report
May 4, 2015

ISAGEN: Similar to Celsia, ISAGEN described in its website that the most relevant
effects of the IFRS application, in both complexity and financial impact, were the
registration of PPE at market value and the technical determination of useful lives. It
was followed by an increased level of deferred income taxes resulting from the
differences between the IFRS and the Colombian fiscal accountability and
retirement benefits. The company also described other minor effects in long-term
employee benefits, financial obligations, debtors and account payable, and equity.
Overall, in the opening balance the company presented in 2010, the IFRS
application derived in a net negative effect on assets and a net positive effect on
liabilities that combined resulted in a net negative effect on equity. In the P&L the
overall net effect was negative primarily due to deferred tax, larger depreciation and
wealth tax.
With this in mind, we foresee a negative impact on ISAGEN’s bottom line for 1Q15,
as well as a potential increase in debt ratios such as debt/equity. The impact on
profitability margins such as ROE and ROA are hard to estimate as equity will be
lower due to the deferred liability, as well as the net income which will also be lower
on higher depreciations.

ISA: The company presented to investors the main aspects behind the IFRS
application on its accounting reports in a conference call. They started by indicating
that this is not the first time they apply the standards as they already have had
experiences in Brazil, Chile and Peru, since 2010.
It was also highlighted that the recognition as a financial asset of the electric
transportation in Brazil and the road concessions in Chile, was introduced in 2013
by Colombia’s National Accounting Office making its treatment closer to IFRS.
Overall, ISA mentioned that in the opening balance sheet its consolidated assets
(end of 2014) fell by 5% driven by: i) elimination of valuations and inflation
adjustments, ii) the adoption of depreciated reposition cost, iii) elimination of
deferred debt costs, iii) elimination of goodwill amortization, and iv) reclassification
of debt costs at a lower debt value.
In regard to liabilities, the company highlighted a 4% increase explained by: i) the
recognition of a deferred liability in Colombia, ii) total amortization of the pension
liability and the long-term employment benefits in Colombia, iii) the consolidation of
INTERCHILE, and iv) the reclassification of debt costs as a lower value of the debt.
All these facts derived in a one-time 26% decrease in equity.
As for the P&L the company mentioned that there was a 5% decline in net profits
explained by the net effect of: i) larger depreciations of fixed assets (-), ii) lower
deferred tax expense (+), iii) adjustment on actuarial calculation and long term
employment benefits (+).
Finally, the company presented a comparison between some of its key financial
indicators in GAAPs, indicating an almost neutral effect on ROA, a sensitive
increase in ROE, and a mild reduction in EBIT, EBITDA and net margins.
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From ColGAAP to IFRS | Special Report
May 4, 2015
Oil & Gas
The most remarkable adjustments in the oil and gas industry are related to the handling of
the costs of licenses, concessions, permits, exploration, development and dismantling.
Also important are the changes that would come from joint ventures and commodity
derivatives.
About cost accounting we highlight the following:
i) Acquisition costs of licenses and concessions are classified as intangible assets and
can be amortized through the straight line method taking into consideration any criteria
between the duration of the license and the duration of the exploration works. It’s also
important to consider that in the case of inactivity or perspective of no use of the assets
tied to the respective license the remaining value must be impaired and registered in the
P&L as an expense. If a discovery takes place, amortization must be interrupted and the
remaining costs added to exploration expenses.
ii) Costs related to hydrocarbon reserves acquisition can be capitalized as tangible or
intangible assets depending on the features of the asset amortized through the production
units method according to the depletion of proved, developed and non-developed
reserves.
iii) Exploration costs can be capitalized and would be classified as intangible or tangible
assets depending on the stage and results of the exploratory process; if exploration
succeeds, those assets must be reclassified as tangible assets, if not, the remaining value
of the asset must be charged to results.
iv) Costs related to development, production, infrastructure, and dismantling can be
capitalized as well as those related to the debts on assets in construction.
v) Major maintenance works can be capitalized and amortized in the period until the next
major scheduled maintenance.
As for derivatives it’s worth considering that any active buy-sell position used for risk
management has to be accounted as financial instrument measuring its reasonable value
marking to market. The net gain/loss is presented in the P&L.
It is worth bearing in mind that Canacol Energy and Pacific Rubiales are already
presenting their financial results under the IFRS for which no change would be reflected.
However, Ecopetrol would have impacts coming from this new accounting methodology.
Cement
On their balance sheet, cement companies will have the main impact coming from the
accounting of long-lived assets: i) property, plant and equipment, and ii) intangibles; while
on their P&L the main impact will come from the new estimation of depreciation, which will
depend on two factors: i) longer useful lives, and ii) the property, plant and equipment
calculation methodology.
On their balance sheet the first and most important thing to analyze will be the decision
made by each company regarding the valuation of long-lived assets which offers three
options: i) at historical cost, ii) asset revaluation and iii) at fair value .The first one
generates a lower value of PPE, the last one reflects a fair value which is usually bigger,
while asset revaluation lays in between. Each component can have its own valuation
methodology which is why they can use historical cost for machinery and equipment,
while using revaluation cost for land, for example. Depending on the management’s
decision we can have a positive or negative impact on their balance sheet coming from
this adjustment alone.
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From ColGAAP to IFRS | Special Report
May 4, 2015
It is important to mention that under the ColGAAP, companies are partly reflecting their
PPE at fair value given that the cost of the assets is reflected under PPE, while the
additional value is reflected on appraisals. With this in mind, if companies decide to reflect
their assets at historical cost, we can see a downward pressure on their assets and equity
from the elimination of the appraisals linked to that specific asset.
On their P&L, the key point would be the useful life used to depreciate their assets. Under
the IFRS, depreciation is in line with the economic life of the different assets, while under
the ColGAAP the depreciation was estimated through different methodologies that do not
allow the expansion of the useful life. With this in line, net income could be affected by
management’s decision of reflecting assets at historical cost or fair value.
CLH: CLH is currently presenting its financial statements under the IFRS which is
why they will not have an impact coming from this adjustment.
Cementos Argos: Cementos Argos’ management made the decision in advance of
expanding the useful life of long-lived assets, which is why the impact of
depreciation is reflected on their P&L since 2014.
Depreciation under the IFRS could be half of what companies are depreciating
under the ColGAAP if the decision is to reflect PPE at its historical cost. However, if
the decision is to reflect it at fair value, the potential impact of longer useful lives will
be offset by the bigger value to depreciate as PPE will be acquisition cost +
appraisals.
On the balance sheet the most important impact will come from the accounting of its
PPE which will be reflected at asset revaluation, historical cost or a slightly
combination of both, leading to a decrease in assets and equity (keeping all other
factors stable) given the elimination of the appraisals linked to those assets.
In addition, the company will have a reclassification of assets. Currently, Cementos
Argos reflects its investment portfolio in Grupo Sura and Bancolombia, mainly, in
two different accounts, first in permanent investment where they reflect the
acquisition cost, and second in appraisals where they reflect the valuation in the
market price of the stock. Under the IFRS we will find effects reflected on a specific
account which is (investment at fair value through another overall result), keeping
assets and equity equal.
Another impact will come from the registration of its preferred shares, which
according to the IFRS would have a small portion going to long-term debt as the
present value of the minimum dividend granted to investors.
In terms of taxes, Cemargos decided to pass the wealth tax through its balance
sheet, for which the impact would be registered as a lower value of equity, rather
than a lower bottom line as it will not affect the P&L.
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From ColGAAP to IFRS | Special Report
May 4, 2015
Infrastructure
Companies in this sector are quite different as they have construction, concessions, real
estate or a combination of these, even though the IFRS would have five main variables to
keep in mind:
i) Fair value: It is not mandatory for the IFRS to hire an external entity to valuate a
company property, nevertheless locally it is necessary; globally, around 55% of valuations
are made by outsourcing companies. Management must be responsible of good results
no matter whether an external valuation was done. Properties under construction have to
be valuated trough fair value method, unless it’s well demonstrated that is not possible to
reach a reliable value.
ii) Consolidation and joint arrangements: Nowadays certain projects are constructed
under a separate vehicle; using for example a SPV where a separate financial statement
is created, depending on the ownership, each SPV could be treated differently. If the
stake is between 20% and 50% it is known as an associated company, and the equity
method would be used for accounting purposes. On the other hand, if the stake is greater
than 50% it will be considered as a subsidiary, where full consolidation will be used.
Depending on each accounting measures, the impact on financial statements would be
different.
iii) Joint arrangements: This is a common practice on the real estate and construction
sector; both companies maintain a joint control (50%-50%). Joint arrangements are
classified in two different groups: joint operation and joint business. In this case the equity
method will be used as either company has control over the entity.
iv) Construction contracts: It is important to identify revenues and costs distribution among
activities within the construction contract, the IFRS account for two types of contracts: i)
Fix price where the contractor meets a fix amount or price for whole contract or product
unit, and ii) marginal cost where the contractor receives income as a % of completion of
those works already made including certain rate. Revenues and costs are recognized to
the contractor if: a) it is possible to estimate the contract result in a reliable manner
according to the percentage built, b) if it’s not possible to measure, the recognition is
made over cost incurred, and c) if the result is a loss, then the whole loss is recognized.
Measure of partial works could be recognized through physical measurement, according
to the costs incurred or total cost forecast.
v) Debt agreements: Companies will disclosure covenants information such as
compliance levels, when a company fails to meet covenants they could change the
financial liabilities classification in terms of time periods.
It is worth having in mind that the consolidation of the SPVs would have a strong impact
on consolidated financial results, given that those vehicles usually have high levels of
leverage, meaning that we will probably see a strong increase in assets and liabilities,
pressuring debt ratios to the roof.
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From ColGAAP to IFRS | Special Report
May 4, 2015
Holdings
Grupo Sura and Grupo Argos, being holding companies, will have some specific impacts
coming from the consolidation of their portfolio of enterprises, which will have a relevant
impact on the estimation of earnings and balance sheet assets and liabilities.

Grupo Sura: The company had been reporting the individual financial statements in
quarterly results, with the arrival of international accounting will report its
consolidated financial statements.
This leads to a variation on the way in which we had seen the recognition of the
revenues from Suramericana and Sura Asset Management; in the individual
financial statements they were introduced through the equity method, now, under
IFRS and taking into account that Grupo Sura will publish its consolidated financial
statements, we will see the consolidation (line by line) of both investee companies.
According to IFRS Grupo Sura will apply the equity method for the companies in
which it holds 20% to 50% share; this means that the equity method will be
registered for the investments in Grupo Argos, Grupo Nutresa and Grupo
Bancolombia. In this vein, the holding’s earnings will increase since under
COLGAAP the company recorded only the dividends received from the three
aforementioned companies and, consequently, the P/E ratio of the company will
contract.
Segment reporting means that financial statements will reflect information by
business or geographical area. In this respect, Grupo Sura will break down
information by business (insurance, health, asset management and corporate,
among others) and, probably, by entity (Suramericana and Sura Asset
Management).
In the opening balance, portfolio investments will be recorded at market price and
will not be exposed to market fluctuations.
Under IFRS the company will have to register the debt component of preferred
shares as a liability; this component is calculated as the net present value of the
minimum guaranteed preferred dividend, that in the case of Grupo Sura is COP
162,5/per share (0,5% of subscription price). The movement is estimated to be
around USD 100mn - 120mn (a minor affectation), so we expect equity to diminish
and liabilities to increase in this magnitude as well.

Grupo Argos: Grupo Argos as a holding company will have the same impact of its
main two pillars, Cementos Argos and Celsia, which both have exposure mainly to
the accounting policy they will use to reflect the value of its long-lived assets,
intangible assets, as well as the impacts of the determination of the deferred tax
calculated on assets and liabilities under the method established by the international
standards.
In this line, Grupo Argos has a differentiation with Cementos Argos regarding the
way they will reflect the wealth tax. Cementos Argos decided to reflect this wealth
tax on its balance sheet, which means its P&L will not be hurt. However, Grupo
Argos decided to reflect it in its P&L, so they will have to convert Cementos Argos’
financial statements in order to print the wealth tax on Cemargos’ P&L and not on its
balance sheet, to then consolidate its financial results. With this in mind, we believe
net income from Grupo Argos would be affected by this decision, given that in 1Q15
they has to reflect the FY2015 wealth tax.
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From ColGAAP to IFRS | Special Report
May 4, 2015
Additional impacts come from:
Consolidation of its investment portfolio in Grupo Sura. Under the ColGAAP, Grupo
Argos reflects the dividends coming from this investment on its P&L, while reflecting
the investment at the average market price of the previous month or quarter in their
balance sheet. Both impacts would change under the IFRS. First, they will reflect not
only the dividends coming from its investment, but the portion of net income linked
to its stake through the equity method, improving Grupo Argos’ P&L leaving all other
factors constant. Secondly, they will reflect its investment at book value on their
balance sheet, and as Grupo Sura usually trades below 1x P/BV, the net impact of
this change would be positive for Grupo Argos’ assets and equity.
Boceas. Grupo Argos currently has BOCEAS (bonds convertible into preferred
shares) for about COP534,000mn with maturity on November 27th, 2015. This
financial instrument is reflected as a liability under the ColGAAP but is reflected as
equity under the IFRS which means we can see stronger financial indicators as net
debt/equity, or net debt/EBITDA, among others.
Preferred shares: Under the IFRS the company has to register the debt component
of preferred shares as a liability; this component is calculated as the net present
value of the minimum guaranteed preferred dividend, which in the case of Grupo
Argos is COP4/per share above the dividend distributed to ordinary shareholders.
Taking this into consideration with a discount rate of 10%, we calculate a total value
of approximately COP7,000mn that will be out of equity and reflected as a long-term
liability.
As stated before when we talk about the cement industry, the most important impact
would be their decision of reflecting its long-lived assets, mainly property, plant and
equipment at historical cost or fair value. Cementos Argos has decided to reflect
part of its PPE at historical cost, mainly machinery related with the core business
which will eliminate from their balance sheet an important portion of its appraisals
linked to those assets that would be reflected at historical cost. This negative impact
in terms of the balance sheet would also affect the consolidation of Grupo Argos,
given that its assets and equity could be negatively impacted, leaving other factors
constant.
Financials
One of the most significant impacts for the banking industry is related to the methodology
for the loan loss reserves. The local model of credit risk management, which fulfills the
guidance and recommendations of the Basel Committee, implements the expected losses
model; on the other hand, the provisioning scheme proposed by the IFRS is based on an
incurred losses model, by which provisions are recognized only if there is objective
evidence that a loss event has already occurred and if it can be reliably estimated; this
means that the effects of future credit loss events cannot be considered even when they
are expected. Although this is a simple method to apply, in the event of increased portfolio
risk it is not possible to recognize the higher expected losses until the loss events have
occurred. Thus, Colombian banks will report lower levels of portfolio provisions as lower
cost of risk. In this sense we received guidance from Davivienda, which expects to revert
a third of its total provisions.
An additional impact will come through the implementation of IAS 9 and using the
amortized cost method, loan origination costs (as sales force and credit bureaus fees,
among others) will be recorded as an asset and are deferred and amortized over the
expected life of the loan. Before applying international accounting, Colombian banks
recorded those origination costs directly in the profit and loss statement.
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From ColGAAP to IFRS | Special Report
May 4, 2015
No goodwill amortization is registered under the IFRS; only annual impairment tests are
required. Davivienda’s goodwill amortization from acquisitions of Granbanco, Corredores
Asociados and the Central American subsidiaries (Costa Rica, El Salvador and
Honduras) amounted to COP79,700mn in 2014, which represents 7.5% of annual net
income; since Davivienda estimates that current goodwill will be classified 30% as
intangible assets with finite useful life (3-20 years) and 70% as goodwill, we can expect
an important decrease in the bank’s amortization expense. On the other hand, Grupo Aval
recognized amortizations for COP166,700m in 2014, 6.5% of total net income, attributable
to the acquisitions of BAC Credomatic, BAC Panamá, Banco de Bogotá, Banco de
Occidente, Banco Popular, AV Villas, among others; although the management has not
given any information, a complete or at least fairly significant decrease in amortization
expense is also expected.
Reclassification of home leasing to mortgage portfolio. This leads to lower provisions due
to the mortgage guarantee.
In this context, net income will benefit from lower amortizations, and will help offset the
negative effects of the tax reform (let’s remember that Davivienda and Grupo Aval will
register the wealth tax to equity, while Bancolombia will recognize it to the P&L).
Another impact is that in accordance with the IFRS’ definition of control, Corficolombiana,
Banco de Bogotá and Grupo Aval will consolidate Promigas. Income from Promigas will
come through the “income from non-financial sector” line rather than the “dividend
income” line.
Consumption
Companies in the consumption sector are expected to see its major effects in items like
goodwill and brands recognition, inventories, PPE, and coverage accounting.
With goodwill and brands each accounting for about 10% of assets around the world any
change in regard to this topic is expected to be influential. As previously indicated,
goodwill and branding in the IFRS are treated in IAS38 and are a key subject among
intangibles’ management. Overall, no goodwill amortization is allowed under the IFRS but
annual impairment tests are required.
For instance, in Grupo Exito’s 2014 annual results, goodwill coming from its historical
acquisitions of Carulla Vivero, Spice Investments Mercosur, Super Inter, among others,
rose to COP2bn/USD822mn, that would not be amortized under the IFRS, and instead
will be tested for a yearly impairment. This difference according to our numbers could lead
to lower amortizations on the P&L for about COP90,571mn/USD37mn, representing 19%
of 2014 net income. In the case of Grupo Nutresa, goodwill represented a total of
COP1.48bn/USD602mn at the end of 2014, with amortizations to the P&L for
COP78,657mn/USD32mn, representing 21% of net income for FY2014.
On the same front, we have appraisals linked to its PPE of COP1.37bn for Grupo Exito
and COP1.43bn for Grupo Nutresa, which will go to PPE and print higher depreciations
on the P&L or would be eliminated depending on the way each company will reflect its
PPE at fair value or historical cost. As an example, in the following table you will see two
comparisons, Grupo Exito vs. Cencosud (Chile) and Grupo Nutresa vs. Nestle, to see the
difference in depreciation of useful lives.
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From ColGAAP to IFRS | Special Report
May 4, 2015
Table 2 – Grupo Exito and Grupo Nutresa’s depreciation lives comparison
Grupo Éxito*
Cencosud
Grupo Nutresa*
Nestle
Construction and buildings
20
25 - 60 years
20 years
20-40 years
Machinery and equipment
10
7-20 years
10 years
10-25 years
Transportation equipment
10
1-5 years
5 years
3-8 years
Office equipment
10
7-15 years
10 years
3-10 years
Computers and POS scanning equipment
5
3-7 years
5 years
3-10 years
*Grupo Exito and Grupo Nutresa, Colombian useful lives methodology.
Source: Grupo Bancolombia, Grupo Exito, Grupo Nutresa, Cencosud, Nestle
With this in mind, keeping other variables constant, we believe that the bottom line of
consumption companies will have a positive impact on its P&L, as the elimination of the
amortization of goodwill, at the same time that the expected increase in useful lives and
its positive impact on depreciations, will lead to better results, which will also have a
positive impact on profitability margins such as return on equity and return on assets, and
P/E multiples.
However, as we mentioned before, this positive impact will depend on management’s
decision on how to reflect PPE on the balance sheet, at historical cost or at fair value.
With this in mind, we believe that Grupo Nutresa will have a net effect on its bottom line,
given that the potential decrease in the amortization of goodwill and higher useful lives will
be offset by higher depreciations coming from reflecting its PPE at fair value.
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From ColGAAP to IFRS | Special Report
May 4, 2015
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From ColGAAP to IFRS | Special Report
May 4, 2015
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