Accounting Memorandum Initial Assessment IFRS 9

Preparer: Kallpa Generación S.A.

Samay I S.A.

Reference: Assessment of the potential impacts of the new standard for financial
instruments, IFRS 9 – Financial Instruments

Date: December 31, 2017

1. Objective

This memorandum has been prepared in order to identify the potential impacts of the application of the new standard
IFRS 9 “Financial Instruments” for:

a) Kallpa Generación S.A.1 and

b) Samay I S.A.

IFRS 9 replaces the previous standard IAS 39 “Financial Instruments: Recognition and Measurement” and is effective
from January 1, 2018. Earlier application is permitted. In general, IFRS 9 should be applied retrospectively. However,
the entities can use a practical expedient to not restate the comparative period presented in the financial statements,
recognizing the cumulative effect in retained earnings as of January 1, 2018. Furthermore, the new hedge accounting
requirements are generally applied prospectively.

The standard introduces changes which are related to the classification of financial assets as well as hedge
accounting but the largest impact for non-financial entities is likely to be the new approach for measuring impairment
using an expected loss approach.

It is important to mention that the assessment contained in this memo is effected in order to ensure that the Group as
a whole can comply with the requirements of IAS 8 “Accounting Policies, Changes in Accounting estimates and
Errors” for the Group consolidated financial statements as of December 31, 2017. IAS 8 requires, in paragraph 30,
the disclosure of qualitative and quantitative impacts of new IFRS that are issued but not yet effective.

Additionally, this memo serves as support documentation of the diagnostic of IFRS 9 for statutory purposes of the
Companies.

2. Structure

The principal requirements of IFRS 9 can be divided in the following topics: a) Classification and Measurement, b)
Impairment, and c) Hedge Accounting. This memorandum has been structured explaining the following for each of the
main topics:

o Differences compared to IAS 39

o Potential impacts identified for each Company (classified as high, medium, low or NA)
o Description of the impacts
o Challenges and next steps

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On August 16, a merger between Kallpa Generación S.A. and Cerro del Aguila S.A. occurred being CDA the acquirer or surviving
entity and Kallpa the acquired or absorbed entity. Then CDA was renamed Kallpa Generación S.A..

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 3. Principal changes of IFRS 9 by main topic Formatted: Border: Top: (Single solid line, Auto, 0.5 pt Line
width)
The table below summarizes the main changes of IFRS 9 compared to IAS 39:

Classification and IFRS 9 introduces a new model for the classification (based on Business Model
Measurement Assessment and SPPI*-test) and measurement of financial assets and, in some cases, the
required treatment will be different from IAS 39. For example, if an entity has complex
financial instruments, externally regulated capital requirements, or are sensitive to the
potential income statement impacts of re-measurement.

Key aspects of the new model include:

• 3 categories for financial assets: fair value through profit or loss (FVTPL), fair
value through other comprehensive income (FVOCI) and amortized cost
• FVTPL is a residual category
• Option to use FVTPL if it eliminates or substantially reduces a measurement
inconsistency (i.e. accounting mismatch)
• Recognition of changes in own credit risk through OCI for financial liabilities
designated at FVTPL
• Option to recognize equity instruments not “held for trading” as FVOCI without
recycling to PL.
• Elimination of the exception to recognize non-quoted equity instruments at cost.
• Measurement of some prepayable financial assets with negative compensation at
amortized costs, instead of FVTPL

A summary of the classification of financial assets is included in Appendix 1 of this

document.

*analysis if the asset´s contractual cash flows represent solely payments of principal and
interest

Impairment IFRS 9’s new impairment model is a move away from IAS 39’s incurred credit loss
approach to an expected credit loss model and, therefore, no longer requires a credit event
to have occurred before credit losses are recognized. Earlier recognition of impairment
losses is likely to result and for entities with significant lending activities, an overhaul of
related systems and processes will be needed.

Key aspects of the new model include:

• Three-stage general impairment model for financial assets that are performing,
underperforming or non-performing
• Impairment based on expected (i.e. rather than incurred) losses calculated using
potential credit loss and probability of default
• Practical expedient to use lifetime expected losses for trade receivables, contract
assets and lease receivables held by non-financial institutions if they do not
contain a significant financial component
• Policy choice to apply the three-stage general impairment model or the simplified
model for trade receivables, contract assets and lease receivables containing a
significant financial component
• Measurement of some prepayable financial assets with negative compensation at
amortized costs, instead of FVTPL (According to IFRS 9 amendment issued on
October, 2017 and effective for annual reporting periods on or after January 1,
2019, but earlier application is permitted).

Hedging Hedge accounting under IAS 39 has been often criticized as being complex and rules-
based, ultimately not reflecting an entity’s risk management activities. Therefore, a more
principle-based standard will align hedge accounting more closely with the risk
management.

Less stringent quantitative testing requirements and a broader scope means that IFRS 9’s
new hedging guidance will be a welcome change for most. While all entities applying hedge

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 accounting will require updates to documentation and processes, those that previously did
not qualify for hedge accounting may find that they can under IFRS 9.

Key aspects of the new model include:

• Simplified requirements for quantitative analysis and closer alignment to the
entity’s risk management activities
• Ability to hedge risk components of non-financial items (e.g. greater ability to
hedge commodity or other risk exposures)
• Flexibility in hedging groups of items (i.e. net positions)
• Separate (ongoing) project to address open portfolio (macro) hedging

4. Summary of impacts identified due to the transition to IFRS 9

Topic Applicable? Accounting Impact on Comment

Impact Processes&Systems and
Internal Controls

For more details, see

analysis chapter 6.1

It must be mentioned that

6.1. Financial
there are no changes in
asset: Debt Yes No
the measurement basis
instruments
as compared to IAS 39.
There will be some
documentation work
(business model).

IFRS 9 does not allow an

exemption to measure
equity instruments at cost
if the fair value cannot be
reliably measured. Equity
instruments must be
measured at fair value.

Equity instruments must

6.2. Financial be measured at FVTPL.
assets: Equity instruments not
1. Classification and measurement

Not applicable
Equity held for trading, instead
instruments held for strategic
purposes, can be
classified as FVOCI
(policy choice on an
instrument by instrument
basis).

The Companies do not

maintain equity
instruments.

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 The only change
concerning financial
liabilities is related to own
credit risk when the
liability is measured at fair
value: Fair value changes
are presented separately
in OCI instead of profit
and loss unless doing so
would introduce an
accounting mismatch

Amounts in OCI relating

to own credit are not
recycled to profit or loss
6.3. Financial
even when the liability is
liabilities
Not applicable derecognized and the
designated at
amounts are realized.
fair value
However, IFRS 9 does
allow transfers within
equity.

The Companies do not

maintain financial
liabilities measured at
FVTPL. The Companies
only maintain Accounts
payable (third and
related parties), Short
and long-term debt with
financial entities, senior
notes issued and lease
liabilities..

6.4. Only applicable for Kallpa

Renegotiation Yes Generación S.A. –
of borrowings For more details, see
analysis 6.4.

7.1.
Impairment For more details, see
Yes
(simplified analysis chapter 7.1.
approach)
2. Impairment

7.2. IFRS 9 contemplates an

Impairment accounting policy to be
Not applicable
(general adopted by the
approach) Companies to apply the
general approach for

4

Accounting
8. Hedge
3. Hedge
Yes
Accounting
5. Differences compared to IAS 39 – Classification and measurement
This section compares IFRS 9 with IAS 39 considering the classification and measurement of financial assets.
Classification and measurement
Financial Liabilities Financial Assets
IAS 39 IAS 39 contains 2
classification categories:
1. At amortized cost,
2. At fair value through
profit and loss (FVTPL)
Renegotiated borrowings 
the difference between the
original and modified cash
flows was amortized over the
remaining term of the
modified liability by re-
calculating the effective
interest rate.
IFRS 9
trade receivables or
contract cost assets with
a significant financing
component and lease
receivables.
The Companies do not
hold trade receivables
or contract assets with
a significant financing
component or lease
receivables for which
there is an option (on an
instrument by
instrument basis) to
apply the general
approach.
The Companies do not
have Intercompany
Loans for which the
general approach must
be applied obligatory.
No For more details, see
analysis chapter 7.
Formatted: Border: Bottom: (Single solid line, Auto, 0.5 pt
Line width, From text: 2 pt Border spacing: )
Equity
IAS 39 contains 4 principal classification IAS 39 allows an
categories for financial assets: entity to measure
investments in equity
1. Held to maturity, instruments at cost if
2. Loans and Receivables, the fair value cannot
3. Available for sale, be reliably measured
4. FVTPL (unquoted equity
a) held for trading instruments).
b) designated
Embedded derivatives in financial assets are
separated if the requirements are fulfilled.
IFRS 9 contains 3 principal classification IFRS 9 does not allow
categories for financial assets: an exemption to
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 IFRS 9 retains the
existing classification
requirements of IAS 39
 The only change
concerning financial
liabilities is related to
own credit risk when the
liability is measured at
fair value: Fair value
changes are presented
separately in OCI
instead of profit and loss
unless doing so would
introduce an accounting
mismatch
 Amounts in OCI relating
to own credit are not
recycled to profit or loss
even when the liability is
derecognized and the
amounts are realized.
However, IFRS 9 does
allow transfers within
equity.
 Renegotiated borrowings
– gains or loss must be
recognized in P/L at the
time of renegotiation.
measure equity
SPPI- Business Modell instruments at cost if
Test the fair value cannot
1. At amortized √ Hold to collect be reliably measured.
cost contractual cash Equity instruments
flows must be measured at
2. At FVTPL Default category fair value.
3. At FVOCI √ Both held to
collect and sell Equity instruments
not held for trading,
 Classification generally based on business instead held for
model and cash flow characteristics (SPPI- strategic purposes,
Test) can be classified as
 Financial assets measured at FVTPL as a FVOCI (policy choice
default category (derivatives not meeting the on an instrument by
requirements to apply hedge accounting and instrument basis).
equity instruments are always classified in
that category, except equity instruments
which are not held for trading and the entity
has elected to apply the option to classify this
equity instruments in the category FVOCI).
Embedded derivatives in financial assets are
never separated and the whole hybrid instrument
is assessed for classification.
On October 12, 2017, the IASB issued an
amendment to IFRS 9 concerning financial assets
with negative compensation. Such assets, mainly
debt instruments can be measured at amortized
cost instead of FVTPL, if the negative
compensation is “a reasonable compensation for
early termination of the contract” and the “held to
collect” business model is applicable. IFRS 9 does
not define “reasonable compensation”, therefore
judgement is required.
Negative compensation arises where the
contractual terms permit the borrower to prepay
the instrument before its contractual maturity, but
the prepayment amount could be less than unpaid
amounts of principal and interest.
Examples of prepayment features with potentially
negative compensation in debt instruments are:
 the prepayment option may be contingent on
the occurrence of a trigger event (for
example, sale or fall in value of collateral of a
loan)
 The prepayment option may be held by only
one party to the contract or both parties
 Prepayment may be permitted or required (in
particular circumstances)
 The compensation formula may differ. In
many cases judgement will be required to
assess whether the compensation meets the
test of being “reasonable compensation for
early termination of the contract.”
The amendment is effective for annual periods beginning
on or after 1 January 2019 (one year later than the
effective date of IFRS 9) with early adoption permitted.
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 Retrospective application is required, subject to relevant
transitional reliefs.

6. Impacts identified for each Company

6.1 Classification and measurement of financial assets

The composition of financial asset as of December 31, 2017 for each Company is as follows:

1. Samay I S.A.

Type of financial asset Amounts Comment

(in thousand of US$)
Current assets:

Cash and cash equivalents: 


a) Petty cash 2
b) Checking accounts 6,826 Checking accounts are hold in different local
financial entities and the funds have free
withdrawal option. The accounts are held in
soles and US dollars and bear interests at
current market rates.

Restricted Cash 5,216 The objective is to maintain a debt service

Trade receivables (COES)
reserve account to guarantee the payment of
the Syndicated loan obligation, principal and
interest.
55,778 Accounts due from customers for energy and
capacity sales in the ordinary course of
business. The accounts are mainly
denominated in soles, have current maturity
and do not generate interests, except in the
case of payment delays.

Other receivables: .

a) VAT* 14,300 VAT credit corresponds to the disbursements

b) Insurance indemnity 17,182 related to diesel purchase for Samay´s
c) Guarantee deposits 5 operation.
d) Loans to employees 1 Insurance indemnity is related to turbine
e) Other 74 repairs

*Does not meet the definition of a financial

assets

Non current assets 

Other receivable* 67 Non-current portion of VAT
*Does not meet the definition of a financial
assets

2. Kallpa Generación S.A.

Type of financial asset Amounts Comment

(in thousand of US$)

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 Current assets:

Cash and cash equivalents: 


c) Petty cash 7
d) Checking accounts 46,732 Checking accounts are hold in different local
financial entities and the funds have free
withdrawal option. The accounts are held in
soles and US dollars and bear interests at
current market rates.

Trade receivables Accounts from customers for energy and

capacity sales in the ordinary course of
a) Non-regulated customers 34,427 business. The accounts are denominated in
b) Regulated customers 31,134 US dollar (non-regulated customers), have
c) COES 478 current maturity and do not generate interests,
d) Other 124 except in the case of payment delays.

Balance of trade receivables as of September

30, 2017 correspond to approximately 32 non-
regulated customers and 8 regulated
customers).

Other receivables: .

a) Income Tax 6,108

b) Receivables from related 4,633
parties** IVA corresponds to final payments made to
c) Advances to suppliers* 1,035 EPC Contractors during the construction of
d) Receivables from 48 Cerro del Aguila Hydroelectric plant.
personnel *Does not meet the definition of a financial
e) Guarantee deposits 20 instrument.
f) Other receivable 522 **Management service and reimbursement of
expenses – NO IC Loans
*** Does not meet the definition of a financial
assets

ANALYSIS OF BUSINESS MODEL AND SPPI-TEST:

Analysis Business Model Test SPPI-Test Classification

Cash The Companies hold the accounts Conclusion: At amortized cost
in order to collect contractual cash Meet the SPPI-test
flows.

Conclusion:
Business Model “hold to collect”
Restricted Cash Conclusion: This account gives rise to At amortized cost
Business Model “Hold to collect” cash flows that are solely
payments of principal and
interest of syndicated loan
obligation and these funds
are not interest bearing.

Trade receivables The intention of the Companies is
to hold the receivables to collect
the contractual cash flows. There
are no factoring agreements in
Conclusion:
Meet the SPPI
The principal is the amount At amortized cost
resulting from a transaction
in the scope of IAS 18 /
IFRS 15. The trade
receivables do not include a

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 place which could change the significant financing
conclusion. component and therefore
the interest element is zero
Conclusion: (in case of current trade
Business Model “hold to collect” receivables).

There is one single cash

flow due to the sale of
energy and capacity (the
principal).

Other receivables The intention of the Companies is
to collect the contractual cash
flows.
Conclusion:
Business Model “hold to collect”
Conclusion:
Meet the SPPI-test, despite
the fact that the interest
element is zero.
Same as described above At amortized cost
in Trade receivables.
Conclusion:
Meet the SPPI-test, despite
the fact that the interest
element is zero.

As illustrated in the above table, there are no material impacts expected concerning the classification and
measurement of financial assets due to the types of financial assets held by the entities. None of the entities hold
complex financial assets or enters in complex financing transaction such as securitization transactions, factoring-
arrangements etc.:

As summarized in the table below, there are no changes of measurement categories:

Financial assets IAS 39 IFRS 9

1) Cash and cash equivalents Loans & Receivables amortized cost
2) Restricted cash Loans & Receivables amortized cost
3) Trade receivables* Loans & Receivables amortized cost*
4) Other receivables Loans & Receivables amortized cost

*Interest element is zero due to the fact that there is no significant financing component under IFRS 15, the invoices must be paid
within 30 days (approx.). Therefore, the trade receivables can be recognized at their transaction amount, without discounting.

As an overall impact, the potential impact is classified as:

Samay
Low
Kallpa

6.1 Challenges and next steps

a) Update the accounting policies according to IFRS 9,

b) Revision of Business Model-Test in case of changes, for example, factoring agreements.

6.4 Renegotiation of borrowings

On May 2016, Kallpa Generación S.A. had raised capital by issuing public debt instruments under
Rule144A/Regulation S, for an amount of US$ 350 million (the “New Notes”) to refinance its debts (short-term loans,
local bonds, Syndicate Loan and Financial Leases for Kallpa II and III) at a more attractive interest rates, extending
maturity dates and taking advantage of its investment grade rating.

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Kallpa Generación S.A. had evaluated based on quantitative (10% Present Value-test) as well as qualitative factors if
there was a substantial modification of the terms of the existing financial liability.. The result of the aforementioned
analysis was a no substantive modification of the existing debt terms without de-recognition of the original financial
liability (a detailed analysis was performed in the Technical Accounting Memorandum as of June 30, 2016).

The difference between the original and modified cash flows was amortized over the remaining term of the modified
liability by re-calculating the effective interest rate, with no recognition of a gain or loss at the date of modification.

IFRS 9 requires that entities must recognize a gain or loss at the date of modification when a financial liability
measured at amortized cost is modified without this resulting in derecognition. The gain or loss is calculated as the
difference between the original contractual cash flows and the modified cash flows discounted at the original effective
interest rate. As a result, the carrying amount of Kallpa´s notes due 2026 as of December 31, 2017 of US$ 329,432
thousand, for which a new effective interest was calculated at the time of the change in terms, will be recalculated
from the date of the change in terms. If the new standard had been applied at balance sheet date, the
carrying amount of said liabilities would have increased by the amount range of US$ 13,000 – US$15,000 thousand
with a corresponding decrease in equity.

This matter was discussed by the IASB and IFRS IC due to the fact that IFRS 9 only specifies the accounting for
modifications of financial assets that do not result in derecognition but not for financial liabilities that do not result in
derecognition. On October 2017, the outcome of these discussions was included in the Basis for Conclusions that
accompany the amendment to IFRS 9 for prepayment features with negative compensation:

“Modification or exchange of a financial liability that does not result in derecognition

[BC4.252.] Concurrent with the development of the amendments to IFRS 9 for prepayment features with negative
compensation, the IASB also discussed the accounting for a modification or exchange of a financial liability measured
at amortized cost that does not result in the de-recognition of the financial liability. More specifically, at the request of
the Interpretations Committee, the Board discussed whether, applying IFRS 9, an entity recognizes any adjustment to
the amortized cost of the financial liability arising from such a modification or exchange in profit or loss at the date of
the modification or exchange.

[BC4.253] The IASB decided that standard-setting is not required because the requirements in IFRS 9 provide an
adequate basis for an entity to account for modifications and exchanges of financial liabilities that do not result in
derecognition. In doing so, the Board highlighted that the requirements in IFRS 9 for adjusting the amortised cost of a
financial liability when a modification (or exchange) does not result in the derecognition of the financial liability are
consistent with the requirements for adjusting the gross carrying amount of a financial asset when a modification
does not result in the derecognition of the financial asset.”

Kallpa Generación S.A. will suffer an impact on the transition date to IFRS 9 due to the fact that the current
accounting policy is not in line with IFRS 9. IFRS 9 must be applied retrospectively therefore modification gains and
losses arising from financial liabilities that are still recognized at the date of initial application (e.g. 1 January 2018 for
calendar year end companies) would need to be calculated and adjusted through opening retained earnings on
transition.

Under the new standard there is no change to the accounting for costs and fees when a modification occurs. When
an instrument has been modified (but not substantially), any fees and costs incurred are recognized as an adjustment
to the carrying amount of the liability and are amortized over the remaining term of the modified liability.

The Company has performed the calculation retrospectively and determined an adjustment net of the corresponding
deferred income tax of US$ 9,695 thousands as of January 01, 2018. (For further details, see the calculation in the
Excel file sheet).

7. Differences compared to IAS 39 – Impairment

Impairment

IAS 39 a) Impairment model

IAS 39 contemplates an impairment model based on incurred losses. This means, that an entity does
not recognize an impairment loss until there is an objective evidence that a loss has incurred.

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