UBI Banca Group

epayments, plus or minus the cumulative amortisation using the effective interest criterion
on any difference between that initial amount and the maturity amount, and minus any
reduction (arising from an impairment or uncollectability).
The effective interest criterion is a method of calculating amortised cost of an asset or liability
(or group of assets and liabilities) and of distributing the interest income or expense over its
relative life. The effective interest rate is the rate that exactly discounts the estimated flow of
future cash payments or receipts until the expected maturity of the financial instrument. To
determine the effective interest rate, the cash flows must be estimated taking into
consideration all the contractual conditions of the financial instrument (e.g. payment in
advance, a purchase option or similar), but future impairments of the loan are not considered.
The computation includes all fees and basis points paid or received between parties to the
contract which are integral parts of the effective interest, the transaction costs and all other
premiums or discounts.
At each reporting date or when interim reports are prepared, any objective evidence that a
financial asset or group of financial assets has suffered impairment loss is assessed. This
circumstance occurs when it is probable that a company may not be able to collect amounts
due on the basis of the original contracted conditions or, for example, in the presence of:
(a) significant financial difficulties of the issuer or debtor;
(b) an infringement of the contract such as default or failure to pay interest or repay
principal;
(c) the lender, because of the economic or legal factors relating to the financial difficulties of
the debtor, granting a concession to the latter which the lender would not otherwise have
considered;
(d) the probability of the beneficiary declaring procedures for loan restructuring;
(e) the disappearance of an active market for that financial asset due to financial difficulties;
(f) available data which indicate a substantial decrease in expected future cash flows for a
similar group of financial assets since the time of the initial recognition of those assets,
although the decrease cannot yet be identified with the single financial assets of the group.
The measurement of non-performing loans (loans which, according to Bank of Italy definitions,
are non performing, impaired, restructured and past due, including exposures in arrears for
between 90 and 180 days secured by property mortgages) is performed on a case-by-case
basis. The remaining loans are measured using collective statistical methods which group
uniform classes of risk together.
The method for calculating the impairment losses recognised on non-performing loans is
based on discounting expected future cash flows for principal and interest, taking account of
any guarantees attached to positions and of any advances received. The basic elements for
determining the present value of cash flows are the identification of the estimated receipts, the
relative maturity dates and the discount rate to apply. The amount of the loss is equal to the
difference between the recognised value of the asset and the present value of expected future
cash flows, discounted at the original effective interest rate.
The measurement of performing loans relates to asset portfolios for which no objective
evidence of impairment exists and which are therefore valued collectively. Percentage rates of
loss calculated from historical data series are applied to the estimated cash flows from the
assets, grouped into uniform classes with similar characteristics in terms of credit risk for the
network banks of the Group, according to Basel 2 regulations, to which appropriate corrective
factors are applied to give a measurement consistent with the relative accounting standard.
If a loan is subject to individual measurement and shows no objective impairment loss, it is
placed in a class of financial assets with similar credit risk characteristics and subjected to
collective measurement.
Permanent impairment that is found is immediately recognised in the income statement under
the item 130 “Net impairment losses on a) loans and receivables” as are reversals of part or all
of the impairment losses previously recognised. Reversals of impairment losses are recognised
where there is an improvement in credit quality sufficient to provide reasonable certainty of
prompt collection of the principal and the interest according to the original conditions of the
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