Translation of independent auditors’ report and ...Deposits in the Peruvian Central Bank 1,032,869...

Translation of independent auditors’ report and consolidated financial

statements originally issued in Spanish - Note 31

Intergroup Financial Services Corp. and Subsidiaries

Consolidated financial statements as of December 31, 2011 and 2010, together with Independent Auditors’ Report

Translation of independent auditors’ report and consolidated financial

statements originally issued in Spanish - Note 31


Consolidated financial statements as of December 31, 2011 and 2010

together with Independent Auditors’ Report

Contents

Independent Auditors’ report

Consolidated financial statements

Consolidated balance sheets

Consolidated statements of income

Consolidated statements of changes in shareholders’ equity

Consolidated statements of cash flows

Notes to the consolidated financial statements

Translation of independent auditors’ report originally issued in Spanish

- Note 31

Independent Auditors’ Report

Miembro de Ernst & Young Global Inscrita en la partida 11396556 del Registro

de Personas Jurídicas de Lima y Callao

To the Shareholders of Intergroup Financial Services Corp.

We have audited the accompanying consolidated financial statements of Intergroup Financial

Services Corp. (a holding company incorporated in Panama, subsidiary of IFH Perú Ltd.) and its

Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2011 and 2010,

and the consolidated statements of income, changes in shareholders’ equity and cash flows for the

years then ended, and the summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with accounting standards prescribed by the Superintendencia de Banca,

Seguros y AFP (SBS) for Peruvian financial and insurance entities, and for such internal control as

Management determines is necessary to enable the preparation of financial statements that are free

from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our

audits. We conducted our audit in accordance with generally accepted audit standards for financial

and insurance entities in Peru. Those standards require that we comply with ethical requirements

and plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the consolidated financial statements. The procedures selected depend on the

auditor's judgment, including the assessment of the risks of material misstatement of the

consolidated financial statements, whether due to fraud or error. In making those risk assessments,

the auditor considers internal control relevant to the entity's preparation and fair presentation of

the consolidated financial statements in order to design audit procedures that are appropriate under

the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

entity's internal control. An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by Management, as well as

evaluating the overall presentation of the consolidated financial statements.

Translation of independent auditors’ report originally issued in Spanish

- Note 31

Independent Auditors’ Report (continue)

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.

Opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all materials

respects, the consolidated financial position of Intergroup Financial Services Corp. and Subsidiaries

as of December 31, 2011 and 2010, as well as its consolidated financial performance and its

consolidated cash flows for the years then ended, in accordance with accounting principles

prescribed by SBS for Peruvian to financial and insurance entities.

Lima, Peru,

March 12, 2012

Countersigned by:

___________________________

Victor Tanaka

C.P.C.C. Register No. 25613

Translation of consolidated financial statements originally issued in Spanish - Note 31


Consolidated balance sheets As of December 31, 2011 and 2010

Note 2011 2010 S/.(000) S/.(000)

Assets

Cash and due from banks 5

Cash and clearing 1,146,420 1,019,846

Deposits in the Peruvian Central Bank 1,032,869 3,075,793

Deposits in domestic and foreign banks 218,477 349,835

Restricted funds 84,619 112,519

Interest accrued on cash and due from banks 979 2,865 ______________ _____________

2,483,364 4,560,858

Inter-bank funds 34,421 50,008

Fair value through profit or loss and available–for–sale

investments, net 6 3,599,278 2,809,600

Loan portfolio, net 9 13,731,269 11,750,308

Held-to-maturity investments, net 7 1,106,402 806,928

Real estate investment, net 8 424,255 653,283

Investment in associates, net 10 36,093 31,074

Property, furniture and equipment, net 11 444,248 481,962

Accounts receivable and other assets, net 12 796,469 707,698

Deferred Income Tax asset, net 17 56,449 34,930 ______________ _____________

Total assets 22,712,248 21,886,649 ______________ _____________

Off-balance sheet accounts 20

Contingent assets 29,714,183 27,182,074

Other off-balance sheet assets accounts 38,335,745 35,853,304 ______________ _____________

68,049,928 63,035,378 ______________ _____________

Note 2011 2010 S/.(000) S/.(000)

Liabilities and equity

Deposits and obligations 13 13,041,820 11,878,629

Inter-bank funds 7,002 3,005

Deposits from financial entities 113,297 140,325

Due to banks and correspondents 14 1,704,664 2,258,886

Accounts payable, provisions and other liabilities 12 648,515 532,840

Deferred Income Tax liability, net 17 2,227 1,106

Bonds and other obligations 15 2,643,449 3,092,939

Technical reserves for premiums and claims 16 2,178,079 1,869,622 _____________ _____________

Total liabilities 20,339,053 19,777,352 _____________ _____________

Equity 18

Equity attributable to Intergroup’s shareholders:

Capital stock 799,581 799,581

Capital surplus 268,077 268,077

Treasury stock (214,996) (72,678)

Unrealized results, net 22,833 26,129

Retained earnings 1,483,832 1,076,359 ____________ _____________

2,359,327 2,097,468

Minority interests 13,868 11,829 _____________ _____________

Total equity 2,373,195 2,109,297 _____________ _____________

Total liabilities and equity 22,712,248 21,886,649 _____________ _____________

Off-balance sheet accounts 20

Contingent liabilities 29,714,183 27,182,074

Other off-balance sheet liabilities accounts 38,335,745 35,853,304 _____________ _____________

68,049,928 63,035,378 _____________ _____________

Translation of consolidated financial statements originally issued

in Spanish - Note 31

The accompanying notes are an integral part of these consolidated statements.


Consolidated statements of income For the years ended December 31, 2011 and 2010

Note 2011 2010 S/.(000) S/.(000)

Financial income 21 2,459,299 2,147,897

Financial expense 21 (561,764) (449,704) __________ __________

Gross financial margin 1,897,535 1,698,193

Provision for loan losses, net of recoveries 9(e) (402,380) (391,427) __________ __________

Net financial margin 1,495,155 1,306,766

Fee income from financial services 22 566,656 496,465

Expenses related to financial services 22 (66,120) (53,562)

Result from insurance underwriting, net 23(a) (64,061) (47,532) __________ __________

Operating margin 1,931,630 1,702,137

Administrative expenses 24(a) (1,015,852) (973,950) __________ __________

Net operating margin 915,778 728,187

Provision for contingencies and others (13,542) (22,135)

Depreciation of property, furniture and

equipment 11(a) (71,048) (69,205)

Amortization of intangibles 12(e) (17,970) (25,265)

Amortization of interest premium (3,375) (3,925)

Impairment of assets, net of reversals - (656) __________ __________

Operating income 809,843 607,001

Other income, net 25 115,775 90,682 __________ __________

Income before income tax 925,618 697,683

Income Tax 17(b) (223,308) (195,428) __________ __________

Net income 702,310 502,255 __________ __________

Attributable to:

Intergroup’s shareholders 698,466 499,095

Minority interest 3,844 3,160 __________ __________

702,310 502,255 __________ __________

Basic and diluted earnings per share

attributable to Intergroup (stated in Nuevos

Soles) 26 7.710 5.472 __________ __________

Weighted average number of outstanding

shares (in thousands) 26 90,589 91,206 __________ __________

Translation of consolidated financial statements originally issued in Spanish - Note 31

The accompanying notes are an integral part of these consolidated financial statements.


Consolidated statements of changes in shareholders’ equity For the years ended December 31, 2011 and 2010

Number of shares

(in thousands) Attributable to Intergroup’s equity holders _____________________________ ___________________________________________________________________________________________________________

Issued In treasury

Capital

stock

Capital

surplus

Treasury

stock

Unrealized

results, net

Retained

earnings Total

Minority

interest

Total

shareholders’

equity S/.(000) S/.(000) S/.(000) S/.(000) S/.(000) S/.(000) S/.(000) S/.(000)

Balance as January 1, 2010 93,615 (2,098) 799,581 268,077 (66,983) 43,925 764,766 1,809,366 13,270 1,822,636

Declared and paid dividends, Note 18(a) - - - - - - (255,690) (255,690) - (255,690)

Dividends paid to minority shareholders’ in Subsidiaries - - - - - - - - (1,369) (1,369)

Net variation of unrealized results on available-for-sale

investments, net of Income Tax - - - - - (7,654) - (7,654) (345) (7,999)

Net variation of unrealized results on derivative financial

instruments, net of Income Tax - - - - - (10,142) - (10,142) (72) (10,214)

Net variation of treasury stock held by Subsidiaries,

Note 18(b) - 605 - - (5,695) - 68,716 63,021 - 63,021

Acquisition of minority interest, Note 3(b) - - - - - - - - (3,195) (3,195)

Net income - - - - - - 499,095 499,095 3,160 502,255

Other - - - - - - (528) (528) 380 (148) _________ _________ __________ __________ __________ __________ __________ __________ __________ __________

Balance as of December 31, 2010 93,615 (1,493) 799,581 268,077 (72,678) 26,129 1,076,359 2,097,468 11,829 2,109,297 _________ _________ __________ __________ __________ __________ __________ __________ __________ __________

Change in accounting policy of Subsidiary - - - - - 1,445 (4,822) (3,377) (24) (3,401)

Declared and paid dividends, Note 18(a) - - - - - - (291,900) (291,900) - (291,900)

Dividends paid to minority shareholders’ in Subsidiaries - - - - - - - - (1,586) (1,586)

Net variation of unrealized results on available-for-sale

investments, net of Income Tax - - - - - (12,384) - (12,384) (262) (12,646)

Net variation of unrealized results on derivative financial

instruments, net of Income Tax - - - - - 7,643 - 7,643 55 7,698

Net variation of treasury stock held by Subsidiaries, Note

18(b) - (1,599) - - (142,318) - 8,453 (133,865) - (133,865)

Realized gain on real estate investments - - - - - - (2,644) (2,644) - (2,644)

Net income - - - - - - 698,466 698,466 3,844 702,310

Other - - - - - - (80) (80) 12 (68) _________ _________ _________ _________ _________ _________ _________ __________ _________ __________

Balance as of December 31, 2011 93,615 (3,092) 799,581 268,077 (214,996) 22,833 1,483,832 2,359,327 13,868 2,373,195 _________ _________ __________ __________ __________ __________ __________ __________ __________ __________




Consolidated statements of cash flows For the years ended December 31, 2011 and 2010

2011 2010 S/.(000) S/.(000)

Reconciliation of net income with cash provided by operating activities

Net income 702,310 502,255

Net income adjustments

Plus (minus)

Provision for loan losses, net 402,380 391,427

Impairment of assets, net of reversals - 656

Depreciation of property, furniture, equipment and realizable assets 71,048 69,205

Amortization of intangibles 17,970 25,265

Amortization of interest premium 3,375 3,925

Amortization of lease payment to related entity 4,641 4,704

Provision for assets received as payment and seized through legal actions 80 14

Deferred Income Tax, Note 17 (4,030) (8,625)

Income from sale and valuation of investments, net, Note 21 (113,912) (125,611)

Depreciation of real estate investments, Note 21 6,631 14,533

Income from purchase and sale of real estate investments, Note 21 (685) (3,802)

Gain from sale of assets received as payment and seized through legal

actions, Note 25 (304) (6,192)

Net changes in asset and liability accounts

Decrease (increase) in receivable accrued interest 34,531 (63,704)

(Decrease) increase in payable accrued interest (43,544) 64,027

Decrease (increase) in restricted funds 27,900 (42,560)

Net increase in other assets (101,244) (21,817)

Net increase (decrease) in other liabilities 101,423 (2,676)

Increase in technical reserves 308,457 345,355 __________ __________

Net cash provided by operating activities 1,417,027 1,146,379 __________ __________



Consolidated statements of cash flow (continued)

The accompanying notes are an integral part of these consolidated financial statements.

2011 2010 S/.(000) S/.(000)

Cash flows from investing activities

Purchase of property, furniture and equipment (32,823) (68,160)

Sale of assets received as payment and seized through legal actions 1,222 10,420

Purchase of intangibles (37,972) (19,602) __________ __________

Net cash used in investing activities (69,573) (77,342) __________ __________

Cash flows from financing activities

Net increase in loan portfolio (2,425,898) (2,466,780)

Decrease (increase) in real estate investments 231,207 (76,973)

Net (increase) decrease in held-to-maturity investments (296,178) 159,981

Net increase in investments (813,847) (61,029)

Collection of dividends net of associate investments decrease 7,461 5,797

Net increase in deposits and obligations 1,160,123 474,025

Net (decrease) increase in deposits from financial entities (27,028) 32,395

Net (decrease) increase in due to banks and correspondents (504,771) 1,018,307

Net (decrease) increase in bonds and other outstanding obligations (452,329) 1,641,136

Net decrease (increase) in receivable inter-bank funds 15,587 (50,008)

Net increase (decrease) in payable inter-bank funds 3,997 (236,951)

Payment of dividends (291,900) (255,690)

Payment of dividends to minority shareholders (1,586) (1,369) __________ __________

Net cash (used in) provided by financing activities (3,395,162) 182,841 __________ __________

Net (decrease) increase in cash (2,047,708) 1,251,878

Balance of cash at the beginning of year, Note 3(ae) 4,445,474 3,193,596 __________ __________

Balance of cash at end of year, Note 3(ae) 2,397,766 4,445,474 __________ __________




Notes to the consolidated financial statements As of December 31, 2011 and 2010

1. Business activity

Intergroup Financial Services Corp. (henceforth "Intergroup" or “the Company”) is a limited liability

holding corporation incorporated in the Republic of Panama on September 19, 2006, as the result of

the restructuring of its shareholder IFH Perú Ltd. (henceforth “IFH”, a holding corporation incorporated

in 1997, in The Bahamas), during 2007. As of December 31, 2011, IFH directly and indirectly holds

68.93 percent of Intergroup’s issued capital stock and 71.28 percent of Intergroup’s shares

representative of its issued capital stock (directly and indirectly 70.80 percent and 71.95 percent,

respectively, as of December 31, 2010).

Intergroup’s legal domicile is 50 Street and 74 Street, ST Georges Bank Building, Republic of Panama.

On the other hand, its Management and administrative offices are located at Av. Carlos Villarán 140,

Urb. Santa Catalina, La Victoria, Lima, Peru.

As of December 31, 2011 and 2010, Intergroup holds 99.29 percent and 100 percent of the capital

stock of Banco Internacional del Perú S.A.A. – Interbank (henceforth “the Bank”) and of Interseguro

Compañía de Seguros S.A. (henceforth “Interseguro”), respectively. Intergroup and its Subsidiaries

operations are concentrated in Peru. Their main activities and balances of assets, liabilities and equity

are described in Note 2.

The consolidated financial statements as of December 31, 2011 and 2010, have been approved by

Management on March 12, 2012, and will be submitted for approval by the Board of Directors. In

Management’s opinion, the accompanying consolidated financial statements will be approved by the

Board of Directors without modifications.

2. Subsidiaries’ activities

The detail and business activities of Intergroup’s Subsidiaries are described below:

(a) Banco Internacional del Perú S.A.A. - Interbank and Subsidiaries

The Bank is incorporated in Peru and is authorized by the SBS, to perform multiple banking

activities in accordance with Peruvian legislation. The Bank's operations are governed by the

General Act of the Financial and Insurance System and the Organic Act of the SBS - Act 26702

(henceforth the “Banking and Insurance Act”) that establishes the requirements, rights,

obligations, guarantees, restrictions and other operation conditions that financial and insurance

entities must comply with.


in Spanish - Note 31 Notes to the consolidated financial statements (continued)

2

As of December 31, 2011, the Bank has 241 offices and a branch established in Panama (233

offices and a branch established in Panama as of December 31, 2010). Additionally, it holds 100

percent of:

Subsidiary Activity

Interfondos S.A. Sociedad Administradora de

Fondos

As of December 31, 2011 and 2010, manages

mutual funds and investment funds with equity

book values of approximately S/.2,161 million and

S/.2,524 million, respectively.

Internacional de Títulos Sociedad Titulizadora S.A. -

Intertítulos S.T.

As of December 31, 2011 and 2010, manages

securitization funds with combined assets of

approximately S/.1,105 million and S/.1,027

million, respectively.

Inversiones Huancavelica S.A. Real estate activities.

Contacto Servicios Integrales de Crédito y

Cobranzas S.A.

Collection services.

Corporación Inmobiliaria de La Unión 600 S.A. Real estate activities.

(b) Interseguro Compañía de Seguros S.A. and Subsidiaries

Interseguro was incorporated in Peru and began its operations in 1998 and is authorized by the

SBS to offer life insurance products, annuities and others as authorized by Peruvian law, such as

accident insurance. Interseguro’s operations are governed by the Banking and Insurance Act.

Likewise, during 2008 Interseguro obtained approval to operate as an insurance company which

conducts both classes: life insurance risks and general risks.

Interseguro has the following subsidiaries:

Subsidiary Activity

Real Plaza S.A. An entity engaged in the administration of ten

shopping and entertainment malls called “Centro

Comercial Real Plaza”, located in the cities of

Chiclayo, Trujillo, Huancayo, Arequipa, Juliaca and

various districts of Lima. As of December 31, 2011

and 2010, Interseguro holds 100 percent of its

capital stock.

Centro Comercial Estación Central S.A. Began operations in March 2010 and is dedicated

to the administration of the mall called "Centro

Comercial Estación Central" located in Lima

downtown. As of December 31, 2011 and 2010,

Interseguro holds 75 percent of its shares, and the

remaining 25 percent belongs to Real Plaza S.A.



3

Subsidiary Activity

Interproperties Perú S.A. An entity engaged in all activities related to real

estate and the construction industry. As of

December 31, 2011 and 2010, Interseguro holds

100 percent of its capital stock.

Patrimonio en Fideicomiso - D.S. 093-2002-EF,

Interproperties Perú - Interseguro

A special purposes entity, see paragraph (c) below.

(c) Patrimonio en Fideicomiso D.S. 093-2002- EF, Interproperties Perú

On April 23, 2008, this equity trust fund was incorporated with the contribution of several assets

from some of the entities of the Company’s economic group for the purpose of creating a real

estate administration independent of each of the investors considered as originators, through

which the various real estate projects approved by the managing committee are structured,

executed and developed, and through which these originators or trustees, as applicable, are able

to invest in real estate projects.

The subsidiaries that consolidate their financial information with Intergroup and that contributed

assets to the equity trust fund are: (i) Corporación Inmobiliaria de la Unión 600 S.A., a subsidiary

of the Bank, and (ii) Interseguro Compañía de Seguros S.A. Intergroup has also directly

contributed with assets to the equity trust fund. During 2011, it was performed the

reorganization of the real estate investments maintained for the entities of the Company’s

economic group in order to have a more effective structure and subsequently issue debt

guaranteed by those investments to allow the development of real estate projects. As part of this

reorganization, the following operations were performed.

- Interproperties Holding was constituted in September 2011 – see Note 6(k) – with the

contributions of real estate investments made by Corporación Inmobiliaria de la Unión

600 S.A. and Intergroup. The transaction generated an income of approximately

S/.3,020,000 for Corporación Inmobiliaria de la Unión 600 S.A. which has been recorded

in the “Financial income” caption of the consolidated statements of income.

- In November 2011, Interseguro sold at market values part of its real estate investments

managed by Interproperties Perú to Interproperties Holding, thus generating an income of

approximately S/.80,059,000, which has been recorded in the “Financial income” caption

of the consolidated statements of income.

In accordance with the applicable accounting principles, this entity is a Special Purpose Entity

(SPE) which must be consolidated by Intergroup. As of December 31, 2011, Interseguro

maintains assets contributed to this SPE (Intergroup, Interseguro and Corporación Inmobiliaria

de la Unión 600 maintained contributed assets as of December 31, 2010). The assets



4

contributed by the subsidiaries mentioned above are included in the accompanying consolidated

financial statements in the caption “Real estate investment, net”. See Note 8.

The table below presents a summary of the audited individual financial statements of the Bank,

Interseguro and the SPE (for the amounts that affect Intergroup and its Subsidiaries), before

eliminations for consolidation with Intergroup, as of December 31, 2011 and 2010; and for the years

then ended:

Banco Internacional del

Perú S.A.A. - Interbank

Interseguro Compañía de

Seguros S.A.

Patrimonio Interproperties __________________________ __________________________ _________________________

2011 2010 2011 2010 2011 2010

S/.(000) S/.(000) S/.(000) S/.(000) S/.(000) S/.(000)

Total assets 19,997,763 19,332,087 2,690,341 2,320,060 287,667 662,603

Total liabilities 18,042,205 17,665,062 2,284,164 1,957,749 33,394 283,410

Shareholders’ equity, net 1,955,558 1,667,025 406,177 362,311 254,273 379,193

Operating income 666,060 626,398 187,460 84,502 12,855 21,646

Net income 540,928 497,541 187,460 84,502 13,338 12,674

3. Accounting principles and practices

In the preparation and presentation of the accompanying consolidated financial statements,

Management has complied with the regulations established by the SBS and effective in Peru as of

December 31, 2011 and 2010, for financial entities (Intergroup, the Bank and its Subsidiaries) as well

as for insurance entities (Interseguro and its Subsidiaries). The significant accounting principles and

practices used in the preparation of the accompanying consolidated financial statements are described

below:

(a) Basis for presentation, use of estimates and accounting changes -

(i) Basis of presentation and use of estimates

The accompanying consolidated financial statements have been prepared into Nuevos

Soles from the Company and its Subsidiaries accounting records, which are maintained in

nominal monetary terms at the transaction’s date, in accordance with SBS regulations in

force in Peru as of December 31, 2011 and 2010 and, in a supplemental manner in the

absence of specific SBS regulations, with the International Financial Reporting Standards

(IFRS) approved in Peru through resolutions issued by the Consejo Normativo de

Contabilidad (CNC) at those dates. These accounting principles are consistent with the

standards applied in 2010, except as explained in paragraph (ii) below.

As of the date of the financial statements, the CNC has authorized the application of the

2009 versions of IFRS 1 to 8 and IAS 1 to 41, pronouncements 7 to 32 of the Standing

Interpretations Committee (SIC), the International Financial Reporting Interpretations

Committee (IFRIC) 1 to 19; as well as amendments as of May 2010 of IAS 1 and 34, IFRS

1, 3 and 7, IFRIC 13 and; transition requirement for amendments resulting from

application of IAS 27. However, IFRS 4, 7 and 8 have not been approved by the SBS for



5

their application by Peruvian financial and insurance entities as explained in paragraph

(ag.1) below.

Intergroup prepares its consolidated financial statements following the accounting

principles generally accepted in Peru for financial and insurance entities, because its

principal Subsidiaries prepare and present their financial statements in accordance with

these standards. In accordance with SBS standards and customary practice in the

Peruvian financial market, the Company and its Subsidiaries use the Nuevo Sol as their

functional and reporting currency.

The accounting records of the Bank’s international branches are maintained in the

currency of the country of their incorporation and their balances are translated into

Nuevos Soles for consolidation purposes with its headquarters using the exchange rates

prevailing as of the date of each balance sheet. The resulting translation differences are

recognized in the consolidated statements of income. Likewise, the branch’s accounting

principles used in its financial statements were standardized to the SBS accounting rules

in Peru.

The preparation of consolidated financial statements requires Management to make

estimates and assumptions that affect the reported amounts of consolidated, assets and

liabilities, the disclosure of contingent assets and liabilities at the reporting date, as well

as the consolidated income and expense figures reported during the current period. Actual

results may differ from those estimates. The most significant estimates included in the

accompanying consolidated financial statements relate to the valuation and impairment

determination of investments, provision for loan losses, useful life and recoverable value

of property, furniture and equipment, real estate investments and intangibles, the

valuation of derivative instruments, technical reserves for premiums and claims and the

calculation of deferred Income Tax. The accounting criteria for each of these estimates

are described in this note.

(ii) Changes in accounting policies

Applicable starting in financial year 2011

(ii.1) At the meeting of the IFRIC held in November 2010, it was concluded that the

workers’ profit sharing shall be treated under IAS 19 “Employee Benefits” instead

of IAS 12 “Income Tax”. Consequently, an entity is only compelled to recognize a

liability when the employee has rendered services; therefore, under this

consideration the deferred workers’ profit sharing shall not be calculated as it

corresponded to future services that shall not be construed as obligations or rights

under IAS 19 and the current workers’ profit sharing shall be recorded as a

personnel expense in the consolidated statements of income. In Peru, the standard

practice was to calculate and record the deferred workers’ profit sharing in the

consolidated financial statements.



6

On January 21, 2011, the SBS issued the Multiple Official Letter No. 4049-2011,

which established that the accounting treatment of workers’ profit sharing since

2011 must follow the IFRIC standard. According to what was established by the

SBS, this modification was applied prospectively without affecting the financial

statements for the year 2010, as described below:

- The balance as of December 31, 2010, of the deferred workers’ profit

sharing in the deferred asset and liability accounts, net, was eliminated thus

affecting the respective equity accounts.

- For comparison purposes with the financial information of 2011, the

entirety of the “Workers’ profit sharing” caption of the consolidated

statements of income corresponding to the year 2010, was reclassified into

the “Administrative expenses” caption, as part of personnel expenses.

Likewise and for comparison purposes, in the balance sheets of 2010, the

balance of the deferred workers’ profit sharing included in the deferred

asset and liability accounts was reclassified into the “Account receivable

and other assets, net” or “payable accounts provisions and other liabilities”

captions, as appropriate. Only the deferred Income Tax calculated at the 30

percent rate was left in the aforementioned caption.

Applicable starting in financial year 2010

(ii.2) Through SBS Resolution No.11356-2008, issued on November 19, 2008, the SBS

approved the new “Regulation for the evaluation and classification of debtors and

allowance requirements”; which went into effect since July 1, 2010, except for the

section related to the pro-cyclical rule which went into effect as explained below.

The main changes introduced by this Resolution are:

- Establishes new types of loan portfolio classification, expanding the existing

four categories (commercial, consumer, micro-business and mortgage) to

eight (corporate credits, large business loans, medium business loans, small

business loans, micro-business loans, revolving consumer loan, non

revolving consumer loan and mortgage loans) differentiated mainly by the

amount of the customer's revenues and the amount of the loan. See further

detail in Note 3(e).

- Separates the loan portfolio in retail and non-retail borrowers. Retail

borrowers include individuals or companies with direct and indirect loans

classified as consumer (revolving and non-revolving), micro-business, small

business or mortgage loans. Non-retail borrowers are individuals or



7

companies with direct or indirect loans classified as corporate, large-

business or medium business loans.

- Establishes credit conversion factors to determine the “Exposure equivalent

to credit risk” for indirect loans. The factors can vary from 0, 20, 50 and

100 percent, depending on the type of loan, which is the base of the

allowance calculation.

- Establishes new provision percentages for the credits classified as normal;

see Note 9(d)(i).

- Establishes the pro-cyclical provisioning requirement whose purpose is to

increase the generic provisions for loans classified as normal, especially for

consumer loans – see Note 9(d) – based on the behavior of curtained local

macro-economic variables. This requirement was in force from December 1,

2008 to August 31, 2009, and then was activated since September 1, 2010

through.

- For loans with delinquencies above 90 days, the Bank must estimate its

expected loss for each borrower’s loan. Such estimation will be performed

considering the actual economic situation and the transaction condition,

including the collaterals value, type of credit, borrower’s economic sector,

among other factors. The Bank must state as specific provision the largest

amount between the expected loss and the provision estimation according

to the general procedure; see paragraph (e).

As of July 31, 2010, due to the adoption of the SBS Resolution No. 11356-2008,

the Bank recorded an additional provision for loan losses for approximately

S/.21,348,000.

(b) Business combinations and consolidation principles -

Business combinations between entities under common control are recorded using the “Pooling

of interests” method. The business combinations carried out by Intergroup have been recorded

using this method, because the exchanges of shares that have been carried out since the

Company was incorporated have not meant an effective change in control over the Subsidiaries

now grouped into Intergroup.

In accordance with the pooling of interest method, the captions of the financial statements of the

consolidated companies, both in the period in which the consolidation occurs as well as the other

periods presented in comparative form, are included in the consolidated financial statement of

the Company, which is the one that continues as if they had been consolidated since the

beginning of the oldest period that is presented.



8

The accompanying consolidated financial statements include the financial statements of

Intergroup Financial Services Corp. and its Subsidiaries over which it exercises control through

its direct and indirect participation; see Note 2. All the Subsidiaries were consolidated for the

years presented without standardizing accounting principles with those of the entities which are

not regulated by SBS.

The minority interest was determined based on the participation of the minority shareholders in

the Subsidiaries’ net shareholders’ equity, and if is presented separately in the consolidated

balance sheets and in the consolidated statements of income.

(c) Financial instruments -

Financial instruments are classified as assets, liabilities or equity according to what is indicated in

their respective contractual arrangements. Interest, dividends, gains and losses related to

financial instruments classified as an asset or liability are recorded as income or expense.

Financial instruments are offset when the companies have a legally enforceable right to offset

them and Management has the intention to either settle them on a net basis or to realize the

asset and settle the liability simultaneously.

Financial assets and liabilities reported on the consolidated balance sheets include cash and due

from banks, inter-bank funds, investments (except real estate investments and investments in

associates), loans, accounts receivable and all liabilities. All derivative instruments and indirect

loans are also considered financial instruments.

The specific accounting policies for recognition and measurement of each of these items are

disclosed in the respective accounting policies described in this note.

(d) Recognition of revenues and expenses -

Financial revenues and expenses are recorded in the results of the period in which they are

earned and incurred, based on the effective term of the underlying operations that generate

them and the interest rates freely agreed upon with the clients; except for interest generated by

loans that have been sold, refinanced, restructured and loans under legal collection; as well as

loans classified as doubtful or loss, which are recognized as income as collected. When

Management determines that the debtor’s financial condition has improved and the loan is

reclassified as a standing loan or in a normal category, as having a potential problem or as

substandard, such interest is recorded on an accrual basis according to the current legislation.

Interest revenues include interest accrued on fixed income investments classified as investments

at fair value trough profit or loss, available-for-sale investments and held-to-maturity

investments, as well as the recognition of income due to discounts and premiums on financial

instruments.

Dividends are recognized as income when declared.



9

Commissions on financial services are recognized as income when collected.

Premiums are recognized as income when they become enforceable in accordance with the

contractual conditions entered into with policyholders.

Premiums revenue corresponding to the period contracted and / or accrued under insurance

contracts are recognized in the date of the origination of the coverage without considering the

status of the collection of the premium. Coverage begins at the date of acceptance of the

insurance application by Interseguro and the collection of the premium, which may be for the

whole or for the fractionated amount of the premium or the deferred amount in the case of single

premium.

Expenses on reinsurance and commissions and other income and expenses related to the

issuance of insurance policies are recognized at the same time as premium income.

Income and expenses from accepted reinsurance and coinsurance operations are recognized

when the corresponding settlements are received and approved and not necessarily while the

insurance is in force.

Renting income and the corresponding cost are recognized when accrue and are recorded in the

periods in which they are related.

Payment for key rights of the tenants at the initial entering moment to the shopping centers to

develop their operations, are recognized by using the accrued method based on the duration of

the lease.

Income from services billed but not provided to the customer as of the date of the balance sheets

is recognized as deferred income in the “Accounts payable, provisions and other liabilities”

caption of the consolidated balance sheets.

Other revenues and expenses are recognized on an accrual basis.

(e) Loan portfolio and allowance for loan losses -

Direct loans are recorded when the related funds are provided to the customers. Operations with

credit cards are recorded as loans for the amount consumed and/or withdrawn. Indirect loans

(contingent loans) are recorded when the related supporting documents are issued.

In the case of financial leases, the Bank recognizes the present value of the lease payments as a

loan. The difference between the total amount of installments receivable and their present value

is recorded as unearned interest that is recognized over the term of the lease agreement using

the effective interest method, which reflects a constant periodic rate of return. The Bank does

not grant operating leases.



10

The allowance for loan losses was determined following guidelines established by SBS which were

in force at the closing balance sheets dates and includes the following three components: (i) the

allowance for loan losses which results from the classification of the loan portfolio, (ii) the pro-

cyclical rule activated by the SBS based on the behavior of local macro-economic variables, and

(iii) the over-indebtedness provisions for retail borrowers.

The allowance for loan losses from the classification of the loan portfolio is determined based on

the revision that Management periodically performs over the loan portfolio, classifying it in one

of the following categories: normal, with potential problems, substandard, doubtful or loss,

depending on the non-payment risk grade of each debtor.

For non-retail loans, the classification in the aforementioned categories takes into consideration

several factors, such as the payment history of the particular loan, the history of the Bank’s

dealings with the borrower, operating history, borrower’s repayment capability and availability of

funds of the borrower, status of any collateral and guarantee, the borrower’s financial

statements, general risk of the economic sector, the borrower’s risk classification made by other

financial institutions and other relevant factors. For retail loans, the classification is based on

how long payments are overdue.

Calculation of the allowance is made considering the risk classifications assigned using specific

percentages, which vary depending upon whether the customer’s debts are secured by preferred

self-liquidating guarantees – LWPSLG (cash deposits and rights over letters of credit) or by

preferred guarantees that may be readily liquidated – LWRLPG (treasury bonds issued by the

Peruvian National Government, marketable securities listed within the Selective Index of the Lima

Stock Exchange, among others) or by other preferred guarantees – OPG (primary pledge on

financial instruments and properties, primary pledge on agricultural or mining concessions,

insurance on export credits, among others), which are considered at their net realizable value as

determined by independent appraisers. Likewise, for credits affected by counterparty

substitution of financial or insurance institutions (CACS), the provision requirement for the

secured amount depends on the risk classification of the counterparty, regardless of the risk

classification of the customer debtor.

The allowance for customers classified as doubtful or loss for more than 36 months or 24

months, respectively, is computed without considering the value of the guarantees.

As explained in paragraph 3(a)(ii)(ii.2), for past due loans over 90 days, the expected loss is

estimated and if it is greater than the provision recorded, the Bank must record additional

provisions.



11

As of December 31, 2011 and 2010, the allowance includes the types of credits and provision

rates for each risk category. The detail of the credit types and risk category rates is presented in

Note 9(d). Likewise, as of December 31, 2011 and 2010 the calculation of the allowance for loan

losses on indirect credits, as mentioned in paragraph 2(a)(ii)(ii.2), is established accordingly to

the credit conversion factor.

The pro-cyclical provision is recorded for loans classified as normal, and according to the

percentages established by the SBS. As of December 31, 2011 and 2010, the Bank maintains a

pro-cyclical allowance that amounts to S/.100,150,000 and S/.86,282,000, respectively.

The allowance for risk of over-indebtedness of retail borrowers is required by Resolution SBS No.

6941-2008, issued on August 25, 2008, “Regulation for managing the risk of over-indebtedness

of retail borrowers”. This rule requires that financial entities shall establish an over-indebtedness

risk management system that will enable them to reduce the risk prior to and after granting the

loan; as well as constant monitoring of the loan portfolio to identify over-indebted debtors, in

order to determine if additional provisions are required. For provisioning purposes, the financial

entities that fail to comply with this rule to the satisfaction of the SBS, must calculate the

exposure equivalent to the credit risk by applying a 20 percent factor to the unused amount of

revolving credit lines for micro-business and consumer loans lines, and on the basis of said

amount, compute the allowance according to the debtor’s classification. In applying this

regulation, the Bank has established provisions for approximately S/.17,629,000 and

S/.15,250,000 as of December 31, 2011 and 2010, respectively.

The allowance for loan losses for direct loans is presented as an asset deduction, while the

allowance for indirect loans is presented as a liability; see Note 9(e).

(f) Accounts receivable from insurance operations (premiums) -

The accounts receivable from insurance operations are expressed at their nominal value related

to the period provided in insurance contracts and are recognized at the beginning of the

coverage period. In case of the non-payment of dues, the SBS establishes the suspension of the

coverage and authorizes the Company to automatically resolve the insurance contract or to

suspend the coverage, in which case shall recognized an allowance for doubtful accounts as

described in paragraph (g) below. Management uses both considerations for the recognition of

impairment of accounts receivable for insurance operations.

The accounts receivable from insurance operations include receivable accounts from pension

fund administration entities (AFP) related to individual capitalization accounts from deceased or

disabled affiliates of the survivorship and disability insurance contract, which are excluded of the

term established in the Regulation of premiums payments of insurance contracts.

The individual capitalization accounts from the survivorship and disability insurance contracts

include the funds paid in by affiliates until the date of the claim occurrence as well as a

recognition bonus, if applicable. Accounts receivable from AFPs related to this concept are



12

recorded in the “Claims on premiums assumed” caption of the consolidated statements of

income; Note 23(a). The recording of these accounts is based on the report sent by the pension

fund administration entities of the updated value of the funds paid in and the recognition bonus.

Additionally, accounts receivable from insurance operations include balances receivable

desincumbrance insurance premiums, which are estimated monthly, according to the average of

actual sales for the last three months.

(g) Allowance for doubtful accounts for receivables generated by insurance activities -

Outstanding premiums that have not been paid for over 90 days and that whose contracts are

not automatically resolved, whether in the case of fractional share or one-time fee, are

considered doubtful to determine the appropriate allowance. The allowance is determined on a

case-by-case basis considering all fees, both due and defaulted, deducting from the premium

subject to the allowance for the corresponding Value Added Tax. This allowance is recorded as

expense in the caption “Other technical expenses” caption of the consolidated statements of

income.

Allowance for doubtful accounts from reinsurers and coinsurers and other receivable accounts,

are mainly calculated by using certain percentages set out by SBS, considering the aging of such

accounts and their last movements, and are recorded in the "Other income, net" caption of the

consolidated statements of income. Receivable accounts from reinsurers and coinsurers that

have not had any movement for three months or longer are provisioned at a 50 percent rate,

while those which have not had any movement for six months or longer are provisioned at 100

percent rate.

(h) Foreign currency transactions -

Transactions in foreign currency include those carried out in a currency different from the

functional currency. Transactions in foreign currency are initially recorded in the functional

currency using the exchange rates in effect on the dates of the transactions. Monetary assets

and liabilities denominated in foreign currency are subsequently translated into the functional

currency using the exchange rate in effect at the consolidated balance sheet date. Any gains or

losses from exchange differences resulting from the settlement of these transactions and the

translation of monetary assets and liabilities in to foreign currency at the exchange rates in

effect on the consolidated balance sheet date are recognized in the consolidated statements of

income. Non-monetary assets and liabilities denominated in foreign currency are translated to

the functional currency at the exchange rate prevailing at the transaction date.



13

(i) Derivative financial instruments -

SBS resolutions No. 1737-2006 and No. 514-2009 and their amendments establish criteria for

the accounting entry of transaction with derivatives classified as for trading and hedging, as well

as of embedded derivatives for banking and insurance entities, respectively, as detailed below:

Trading -

Derivative financial instruments are initially recognized in the consolidated balance sheets at

their cost and are subsequently carried at fair value, recognizing an asset or liability in the

consolidated balance sheets as corresponds, and any resulting gain and loss in the consolidated

statements of income. Also, derivatives are recorded in the off-balance sheet accounts at the

notional amount of the currency committed. See Note 20.

Fair values are determined based on market exchange rates and interest rates.

Hedging -

A derivative financial instrument that seeks to economically hedge a specific risk is treated as a

hedging instrument if, on its trading date, it is expected that changes in its fair value or cash

flows will be highly effective in offsetting changes in the fair value or cash flows of the item

hedged from the inception. This expectation must be documented when the derivative instrument

is first traded and throughout the period during which the hedge is in effect. A hedge is

considered as highly effective if it is expected that changes in the fair value or cash flows of the

hedged item and the hedging instrument are correlated in a range between 80 and 125 percent.

As of December 31, 2011 and 2010, the Company and its Subsidiaries held cash flow hedging

instruments whose classification was authorized by the SBS. See Note 20. For this type of

hedging instruments, the effective portion of changes in the fair value of hedging derivatives is

recognized in the consolidated shareholders’ equity, and any gain or loss related to the

ineffective portion is recognized immediately in the consolidated statements of income. Amounts

accumulated in the consolidated statements of changes in shareholders’ equity for hedging cash

flows are transferred to the consolidated statements of income in periods when the hedged item

is recorded in the consolidated statements of income.

In the event that the SBS considers the documentation insufficient or finds weaknesses in the

methodology applied, it may require that the hedging accounting be eliminated and that the

derivative financial instrument be recorded as for trading.

If the hedge instrument expires, is sold, terminated or exercised, or in the moment at which the

hedge does not comply with the hedging accounting criteria, the hedge relationship is

prospectively terminated, and the balances recorded in the consolidated balance sheet are

transferred to the income statement for the period in which the hedged item is kept.



14

Embedded derivatives -

Derivatives incorporated into a main or host contract from the acquisition of financial

instruments are known as "embedded derivatives ". These derivatives are separated from the

main contract when their risks and economic characteristics are not closely related to the host

contract’s risks and when the host contract is not recorded at fair value through profit and loss.

These embedded derivatives are separated from the host instrument and measured at fair value

with the changes in fair value recorded in the consolidated statements of income.

As of December 31, 2011 and 2010, the Company and its Subsidiaries maintain some

instruments classified as held-to-maturity investments that include an embedded derivative

related to issuer’s repurchase option. The Company and its Subsidiaries do not require separate

embedded derivatives because the option execution allows the substantial recovery of amortized

cost of these instruments according to the SBS standards requirements.

During 2010, the Company paid the two hedging derivatives (credit default swaps) it maintained,

thus recognizing a loss of S/.2,178,000, that has been charged to the results of the year. See

Note 21.

(j) Investments at fair value through profit or loss, available-for-sale and held-to-maturity

investments -

SBS resolutions No. 10639-2008 and No. 513-2009 and their amendments, establish the criteria

for the classification and valuation of investments in their different categories as follows:

- The criteria for the classification -

(i) Investments at fair value through profit and loss -

This category has two sub-categories: (i) investment instruments acquired for

trading and (ii) investment instruments at fair value through profit and loss since

their inception. An investment instrument is classified as acquired for trading if it is

acquired for the purpose of being sold or repurchased in the short term, or if it is

part of a portfolio of identified financial instruments that are managed together

and for which there has been demonstrated a recent pattern of taking gains in the

short term.

(ii) Available–for-sale investments -

Investments held for an indefinite period and are sold for purposes of liquidity or

changes in interest rates, exchange rates or capital cost; or do not qualified to be

classified neither at fair value through profit and loss or held-to-maturity.

Investments in equity securities which do not have a quoted market value, and

whose fair value cannot be reliable measured, are valued at their cost.



15

(iii) Held-to-maturity investments -

Investment instruments to be classified in this category must meet the following

requirements:

- To be acquired or reclassified for the purpose of being held until their

maturity date with the exception of the cases where their sale, assignment

or reclassification are allowed by the SBS.

- Companies must have the financial capacity and the intent to hold

investment instruments until their maturity.

- Must have risk classifications as required by the SBS.

In order to classify these investments in this category, companies must assess

whether they have the financial capacity to maintain such investment instruments

until their maturity when they decide to classify an instrument and at the closing of

each annual period.

- Recognition date of transactions -

The transactions have been recorded using the trading date, that is, the date at which the

reciprocal obligations that must be performed within the term established by regulations

and practice in the market in which the operation takes place.

- Initial recognition -

Initial recognition of investments at fair value through profit and loss is at fair value,

recognizing any transaction costs related to these investments as expense.

The initial recognition of available-for-sale investments and held-to-maturity investments

is made at fair value, including those transaction costs that are directly attributable to the

acquisition of these investments.

- Amortized cost -

Any premium or discount of the debt instruments classified as available-for-sale

investments and held-to-maturity investments is considered in the calculation of the

amortized cost applying the effective interest rate methodology, recognizing accrued

interest in the “Income from marketable and held-to-maturity investments” account of the

“Financial income” caption in the consolidated statements of income, as applicable.

- Valuation -

(i) Investments at fair value through profit and loss:

The book value is updated daily to fair value through its individual valuation,

recognizing any resulting gain or loss in the “Financial income and expense”

caption in the consolidated statements of income, as applicable.



16

(ii) Available-for-sale-investments:

The valuation is at fair value and any unrealized gains and losses in comparison

with the amortized cost are recognized in the consolidated statements of changes

in shareholders’ equity.

When an instrument is sold or the gains or losses previously recognized as part of

consolidated shareholders’ equity are realized, they are transferred to the

consolidated results for the period. On the other hand, when Management believes

that the decrease in fair value is permanent or if there is credit impairment, it

records the respective allowances to the consolidated results for the period.

(iii) Held-to-maturity investments:

These investments are recorded at amortized cost using the effective interest

method, and are not carried at fair value.

Impairments are recorded individually for negative changes in the credit capacity of

the issuer, analogous to the treatment of direct loans, directly affecting the

consolidated results of the period.

When these investments are sold without fulfilling the established requirement in

the resolution and similar financial instruments are again acquired from the same

issuer, they may not be recorded in this category without express authorization

from the SBS.

In the case of insurance entities, exceptionally, they could make advance sales of

investments recorded in this category for reasons of assets and liabilities matching,

based on what is established by SBS Resolution No. 562-2002 "Regulations on the

Establishment of Mathematical Reserves of Insurance on the Basis of Assets and

Liabilities Matching of Insurance Companies ", as well as SBS Circular

No. 643-2010" Selling of Held-to-maturity Investments for Reasons of Assets and

Liabilities Matching".

Held-to-maturity investments include real estate projects that generate a yield

similar to a debt instrument; see paragraph (k) below.

- Recognition of exchange rate differences -

Any gains or losses from currency exchange differences related to the amortized cost of

debt instruments affect the consolidated results of the period, while those related to the

difference between the amortized cost and fair value are recorded in the consolidated

shareholders’ equity as part of the unrealized gain or loss. In the case of equity

instruments, they are considered non-monetary items and, consequently, remain at their

historical cost in local currency, which means that any exchange differences are part of



17

their valuation and are recognized as part of the unrealized gains or losses in the

consolidated shareholders’ equity.

- Recognition of dividends -

Dividends are recognized in the results of the period when they are declared.

- Reclassification of instruments from available-for-sale investments to held-to-maturity

investments -

During May 2011, Interseguro reclassified certain instruments to the category of held-to-

maturity investments. The amortized cost of these investments, amounted to

S/.269,284,000, out of which approximately S/.6,216,000 correspond to the unrealized

losses that results from the comparison of the fair value and the amortized cost at the

reclassification date. In accordance with SBS Resolution No. 513-2009, the book value of

the investment’s fair value at that date shall become its new amortized cost. The

unrealized gain or loss accounted until the date of the reclassification in the equity shall

be carried to the results of the period during all the remaining life of the held-to-maturity

investment by using the effective interest rate method. Any difference between the new

amortized cost and the held to maturity amount shall be amortized over the remaining life

of the instrument using the effective interest rate method, similarly to the amortization of

a premium or a discount.

Through communication sent on June 15, 2011, Interseguro informed the SBS about the

aforementioned reclassification.

SBS resolutions No. 10639-2008 (for the banking business) and No. 513-2009 (for the insurance

business) established that if the SBS considers it necessary to establish any additional allowance

for any type of investment, this provision will be determined on the basis of each individual

security, and must be recorded in the results of the period for which the SBS requires such

allowance.

(k) Investments in real estate projects -

Corresponds to disbursements made to build third-party-owned real estate projects, where the

Company and its Subsidiaries obtain the rights to the rent over a fixed term. These projects are

recorded in their original currency and their profitability is estimated based on the project’s

expected rate of return, which is reviewed by the SBS. As established by the SBS, such

investments are classified as “Held-to-maturity investments, net”, and amortized over the

contracts’ term using the effective interest method.



18

(l) Investments in real estate, net -

Investments in real estate correspond to land and buildings acquired by the Company and its

subsidiaries for leasing property surplus or available for sale. They are valued at their acquisition

or construction cost, whichever the lowest. Depreciation of buildings is computed using the

straight-line method considering an estimated useful life of 33 years in the case of buildings

constructed on owned lots and the duration terms of the contracts in the case of buildings

constructed under surface rights.

Income from real estate leases and key rights are recognized as the installments stipulated in the

lease agreement are accrued and is presented, according to SBS rules, in the “Financial income”

line item in the consolidated statements of income. The depreciation expenses and expenses

directly related to the maintenance of the leased assets are presented in the ”Financial expense”

line item in the consolidated statements of income, see, Note 21.

(m) Investments in associates, net -

Investments in associates - those in which more than 20 percent but less than 50 percent of

capital is controlled by the Company or there is a significant influence but not control - are

recorded under the equity method. According to this method, investments are initially recorded

at cost, including cost of transactions that arises from its acquisition. Their book value is

subsequently increased or decreased to recognize the participation of the Company and its

Subsidiaries in these entities’ profits and losses, also incorporating the effects to the valuation

adjustments that are recorded in the affiliates’ shareholders’ equity considering any impairment

that is identified in the investment’s value.

(n) Property, furniture and equipment, net-

Property, furniture and equipment are recorded at acquisition cost, plus a voluntary revaluation

made by the Bank in prior years, authorized by SBS, minus the accumulated depreciation. Given

that the aforementioned revaluation was made by the Bank solely one time, there does not exist

any intention that the revalued assets were accounted at their fair value; therefore, the revalued

value is considered to be the acquisition cost.

Depreciation is calculated on a straight-line basis over the following years by asset type:

Years

Buildings and facilities Between 10 and 33

Furniture and equipment Between 4 and 10

Vehicles 5

Leasehold improvements 5



19

In-transit equipment and work in progress amounts include assets in transit or under

construction, respectively, and are accounted for at cost, which includes the acquisition or

construction cost together with other costs directly attributable to the asset. These assets are

not depreciated until they are received or finished and placed into service.

Maintenance and repair costs are recorded as expenses. Significant improvements are capitalized

only when these disbursements improve the condition of the asset and extend its useful life

beyond its original standard performance. The cost and accumulated depreciation of assets sold

or retired are eliminated from the corresponding accounts and the related gain or loss is included

in the consolidated results of the period.

(o) Assets received as payments and seized through legal actions, net -

Assets received as payment and seized through legal actions (which include assets from

terminated leasing contract due to non-payment) are initially recorded at the value assigned to

them trough a legal proceeding, out-of-court settlement, market value or at the unpaid value of

the debt whatever the lowest. At the time of the initial recognition, a provision equivalent to 20

percent of the determined value must be recorded; for this purpose it is permitted to reclassify

the allowance for loan losses that was originally provided for the related loan.

Afterwards, additional provisions shall be recorded using the following guideline:

- Non real estate assets - A uniform monthly provision will be provided starting from the

first month of seizure or recovery, until reaching a provision of one hundred percent in the

value of the seized or recovered asset.

- Real estate assets – A monthly provision over the net book value will be provided starting

from the twelfth month. Additionally, the SBS Resolution No. 1535-2005 allows the

granting of an extension of six months, in which case uniform monthly provisions must be

provided for at the end of each month over the net book value obtained in the eighteenth

month. In both cases the provisions will be provided until reaching a provision of one

hundred percent in the value of the seized or recovered asset after three and a half years

since the date the Bank started to provide provisions.

An annual update of the market value of seized assets, which should be determined by an

independent appraiser, is required and necessarily implies the constitution of an

impairment provision when necessary.

As of December 31, 2011 and 2010, the net book value of assets received as payment and

seized through legal actions includes assets seized prior to December 31, 1994 for

approximately S/.7,890,000 for which, in accordance with Legislative Decree 770 (which is no

longer in force), the Bank recorded an equity reserve. These assets are not considered in the

accounting treatment explained in the paragraphs above, pursuant to SBS authorization.



20

(p) Intangible assets with finite useful lives -

The intangible assets with finite useful lives that are included in the “Accounts receivable and

other assets, net” caption of the consolidated balance sheets, are mainly costs incurred in

connection with the acquisition of computer software used in its operations and other minor

intangible assets. The amortization expense is calculated following the straight-line method in a

period of 5 years; see Note 12(e).

(q) Bonds and other obligations -

Liabilities arising from the issuance of bonds and other obligations are accounted of their face

value, recognizing accrued interest in the consolidated results of the period. Discounts or

premiums resulting from differences in nominal versus fair values at the time of issuance are

deferred and recorded in the “Accounts receivable and other assets, net” and “Accounts payable,

provisions and other liabilities” captions of the consolidated balance sheets, and are amortized

over the maturity of the bonds and obligations outstanding through the effective interest

method.

(r) Severance indemnity deposits -

The severance indemnity deposits of the personnel of the Subsidiaries constituted in Peru, which

is presented in the "Accounts payable, provisions and other liabilities" caption, consists of the

whole of the compensatory rights at the consolidated balance sheets’ date with a debit to profit

and loss as accrued. Payments made to satisfy these amounts are deposited in the financial

system institutions chosen by the employees themselves.

(s) Technical reserves for premiums -

Mathematical reserves of annuities, disability and survivorship pensions from old regime system,

annuities reserves and complementary insurance for high-risk jobs and life insurance -

These reserves are recorded over the basis of actuarial calculations performed by Interseguro’s

Management, in accordance with the methodologies established by SBS, which also permit the

recording of additional reserves. This reserve is equivalent to the present value of all future

payments that Interseguro shall give to the insured party and beneficiaries, including those

expired payments not yet made.

The annuities reserves are determined in conformity with the methodology established by SBS

Resolution No. 562-2002, modified by SBS Resolution No. 978-2006, through which it is

approved the use of the mortality table “RV-2004 Modified”, for the retirement contracts sold

starting from August 2006 and “RV-85” for the retirement contracts prior to that date. The

mortality tables MI-85 and B-85 are used for the calculation of the reserve of disability and

survivorship contracts, respectively.



21

In 2010, SBS published Resolution No. 17728-2010, approving the use of mortality tables RV-

2004 B-85 modified and adjusted and B-85 adjusted for the calculation of mathematical reserves

for annuities for retirement and survivorship, respectively, whose applications are available for

trading as of June 1, 2011.

Interseguro constitutes additional reserves for annuities contracts issued annuities from 2010,

which are determined according to a methodology that incorporates actuarial life tables for MI-

2006 and B-2006 (based on the Chilean experience) for disabled policyholders and their

beneficiaries; as well as tables RV-2004 modified and adjusted and RV-2004 modified for non-

disabled policyholders. These reserves amount to approximately S/.25,246,000, and

S/.13,662,000, as of December 31, 2011 and 2010, respectively.

The disability and survivorship al pensions from the old retirement system and complementary

insurance for high-risk jobs are determined in accordance with the methodology established by

SBS Resolution No.309-93 according to the different types of claims and their conditions.

The mathematical reserves of life insurances are calculated according to the methodology

considered in the development of said products which is contained in the respective technical

notes approved by SBS. This methodology varies according to the characteristics of the product

and the defined coverage.

The adjustments to the technical reserves are recorded with a charge in the caption “Adjustment

of technical reserves for premiums” of the consolidated statements of income.

The survivorship and mortality tables and rates applied by the Company relate to the

determination of these technical reserves are disclosed in Note 16(f).

Unearned premium reserve -

The unearned premium reserve is determined in accordance with SBS Resolution No.1142-1999,

issued on December 31, 1999, and its details and/or amendments established by SBS Resolution

No.779-2000. It establishes that the calculation must be performed for each policy or certificate

of coverage, applying to the basis of calculation the portion of risk not accrued by number of

days. In the event that the reserve of unearned premiums is insufficient to cover future risks for

the period of coverage not extinguished at its date of calculation, it shall be constituted a reserve

for insufficient premiums, thus being applicable the dispositions issued by the SBS.

(t) Technical reserves for claims -

Interseguro records the reserves based on loss estimated claims, even though the final

adjustment has not been made. Any difference between the estimated amount of the claim and

the final disbursements is recorded in the results of the year in which the final adjustment is

made. Technical reserves for claims are presented net of the reinsurance corresponding to

premiums ceded.



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The disability and survivorship claims from the new regime are determined according to the

methodology established by SBS Circular No.603-2003, pursuant to the different types of claims

and their status. The reserve rate used by Interseguro is determined and communicated by SBS

monthly.

The technical reserve for claims also includes the reserve of claims incurred but not reported

(IBNR), whose purpose is to meet the costs of the incurred claims at the date of the consolidated

balance sheets, but are not reported to Interseguro yet, for the insurance products of group life,

collective life, supplementary insurance for high-risk jobs, compulsory traffic accident insurance

and survivorship and disability contracts. This estimation is calculated by applying certain

percentages established by SBS over the basis of the amount of retained claims recorded during

the last twelve months as of the date of the calculation of the estimation (for insurances with

durations of one year or longer) or to the monthly average amount of retained claims recorded

during the last six months as of the date of the calculation (for insurance products with durations

of less than one year).

In relation with the compulsory traffic accident insurance, Interseguro determines, if is

technically necessary, additional reserves than those required by the SBS for IBNR.

These reserves are determined using the “Chain Loadder” statistic method. As of December 31,

2011 and 2010, these reserves amounted to S/.1,612,000 and S/.994,000, respectively.

The amount of these reserves is recorded charging the caption “Result from insurance under

writing, net” of the consolidated statements of income.

(u) Income Tax and workers’ profit sharing -

Income Tax and current wotkers’ profit sharing -

Income tax and worker’s profit sharing are calculated, individually, per Subsidiary, based on the

taxable income determined for each Subsidiary. Intergroup is not subject to the Income Tax; see

Note 19(a).

Deferred Income Tax -

The deferred Income Tax is accounted for in accordance with IAS 12 “Income Tax”. In this sense,

the deferred Income Tax and workers’ profit sharing recognize the effects of temporary

differences between the carrying amounts of assets and liabilities for accounting purposes and

the amounts determined for tax purposes. Deferred assets and liabilities are measured using the

tax and workers’ profit sharing rates that are expected to be in force in the years in which such

temporary differences are expected to be recovered or settled. The measurement of deferred tax

assets and deferred tax liabilities reflects the tax consequences that arise from the manner in

which the Subsidiaries expect, at the consolidated balance sheet dates, to recover or settle the

carrying amount of its assets and liabilities.



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Deferred tax assets and liabilities are recognized regardless of when the temporary differences

are likely to reverse. Deferred tax assets are recognized when it is probable that sufficient

taxable income will be generated against which the deferred tax assets can be offset. At each

consolidated balance sheet date, the Subsidiaries assess unrecognized deferred assets and the

carrying amount of deferred tax assets recognized. The Subsidiaries may recognize a previously

unrecognized deferred tax asset to the extent that it has now become probable that future

taxable income will allow the deferred tax asset to be recovered. Likewise, the carrying amount

of a deferred tax asset is reduced when it is no longer probable that sufficient future taxable

income will be available to allow the benefit related to the deferred tax asset to be used in part or

in full.

According to IAS 12, the Subsidiaries determine their deferred income tax considering the tax

rate applicable to their non-distributed earnings; any additional tax on distribution of dividends is

recorded at the date at which the liability is recorded.

(v) Impairment of long-lived assets -

When events or economic changes indicate that the value of a long-lived asset may not be

recoverable, Management reviews such assets in order to verify whether there exists any

permanent impairment. When the book value of the asset exceeds its recoverable value, an

impairment loss is recognized in the consolidated statements of income. The recoverable value is

the highest of the net sales price and its value in use. The net sale price is the amount that can be

obtained from the sale of an asset on a free market, while the value in use is the present value of

the estimated future cash flows generated from the continuous use of an asset and its disposal at

the end of its useful life. In Management’s opinion, there is no evidence of impairment of assets

as of December 31, 2011 and 2010.

(w) Reporting by segments -

A business segment is a group of activities and operations engaged in providing products or

services that are subject to risks and returns that are different from those of other business

segments. Management of the Company and its Subsidiaries has determined that they operate in

mainly three business segments: banking, real estate and insurance; see Note 28.

(x) Fiduciary operations -

Assets and revenues from fiduciary operations in which there is a commitment to return such

assets to a client and in which the Company and its Subsidiaries participate as a trustee, have

been excluded from these consolidated financial statements, on the grounds that such assets are

not owned by the Company and its Subsidiaries. Such assets have been recorded, for control

purposes, in the off-balance sheet accounts.



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(y) Allowances -

Allowances are recognized when the Company and its Subsidiaries have a present obligation

(legal or implicit) as a result of past events, it is probable that an outflow of resources will be

required to settle the obligation, and a reliable estimate of the amount can be made. Allowances

are reviewed at each consolidated balance sheet date and adjusted to reflect the best estimate

based on current information. When the effect of the time value of money is material, the

amount recorded as a provision is equal to the present value of future payments required to

settle the obligation.

(z) Contingencies -

Contingent liabilities are not recorded in the consolidated financial statements. They are

disclosed in the notes to the consolidated financial statements, unless the possibility of an

outflow of economic benefits is remote.

Contingent assets

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Translation of independent auditors’ report and ...Deposits in the Peruvian Central Bank 1,032,869...

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