Read Microsoft Word - N.DOC text version

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Financial Statements December 31, 2007 and 2006 (With Statutory and Independent Auditors' Reports Thereon) (Free Translation from Spanish Language Original)

Statutory Auditor's Report (Free Translation from Spanish Language Original)

The Stockholders Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat: In my capacity as Statutory Auditor, and in compliance with the provisions of Article 166 of the General Corporation Law and the bylaws of Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat ("the Afore"), I hereby submit my report on the accuracy, sufficiency and fairness of the information contained in the accompanying financial statements, furnished to the General Stockholders' Meeting by the Board of Directors, for the year ended December 31, 2007. I have obtained from the directors and management of the Afore such information on the operations, documentation and accounting records as I considered necessary in the circumstances. In addition, I have examined the balance sheet of the Afore as of December 31, 2007, and the related statements of operations, changes in stockholders' equity and changes in financial position for the year then ended, which are the responsibility of the Afore's management. My examination was carried out in accordance with auditing standards generally accepted in Mexico. As discussed in note 2 to the financial statements, the Afore prepares and presents its financial statements in accordance with the accounting criteria established by the National Retirement Savings System Commission (CONSAR) for management companies of mutual funds specializing in retirement funds ("Afores") in Mexico, which in general conform to Mexican Financial Reporting Standards issued by the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF). These accounting criteria include particular rules, which in certain respects differ from such standards.

(Continued)

2

In my opinion, the accounting and reporting criteria and policies followed by the Afore, and considered by management in preparing the financial statements presented at this meeting, which are described in note 2 to the financial statements, are adequate and sufficient under the circumstances and have been applied on a basis consistent with that of the prior year. Accordingly, such information is a fair, reasonable and sufficient representation of the financial position of Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat as of December 31, 2007, and of the results of its operations, the changes in its stockholders' equity, and the changes in its financial position for the year then ended, in conformity with the accounting criteria established by the CONSAR for Afores in Mexico. Very truly yours,

George Macrae Scanlan Martin Statutory Auditor

Mexico City, February 15, 2008.

Independent Auditors' Report (Free Translation from Spanish Language Original)

The Board of Directors and Stockholders Scotia Afore, S. A. de C. V. Grupo Financiero Scotiabank Inverlat: We have examined the accompanying balance sheets of Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat ("the Afore") as of December 31, 2007 and 2006 and the related statements of operations, changes in stockholders' equity and changes in financial position for the year ended December 31, 2007 and the initial period of operations from November 1 to December 31, 2006. These financial statements are the responsibility of the Afore's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in accordance with the accounting criteria for management companies of mutual funds specializing in retirement funds ("Afores") in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting criteria used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 2 to the financial statements, the Afore is required to prepare and present its financial statements in accordance with the accounting criteria established by the National Retirement Savings System Commission (CONSAR) for Afores in Mexico, which in general conform to Mexican Financial Reporting Standards issued by the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF). These accounting criteria include particular rules, which in certain respects differ from such standards.

(Continued)

2

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat as of December 31, 2007 and 2006, the results of its operations, the changes in its stockholders' equity and the changes in its financial position for the year ended December 31, 2007 and the initial period of operations from November 1 to December 31, 2006, in conformity with the accounting criteria established by the CONSAR for Afores in Mexico, as described in note 2 to the financial statements. KPMG CARDENAS DOSAL, S. C.

Alejandro De Alba Mora

February 15, 2008.

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Balance Sheets December 31, 2007 and 2006 (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise)

Assets Investments in special reserve: Siefore Básica 2 * Siefore Básica 1 * Restatement of investment in the special reserve Investments in the minimum capital stock: Siefore Básica 2 * Siefore Básica 1 * Restatement of investment in the minimum capital stock Total investments (note 2c) Cash equivalents: Banks (note 7) Cash investments (note 7)

2007

2006

Liabilities and Stockholders' Equity Liabilities: Other obligations (note 7) Provisions for sundry obligations Total liabilities

2007

2006

$

6,682 11,432 3,335 100 4,000 630 26,179

50,421 13,089 4,664 100 4,000 284 72,558

$

2,038 5,660 7,698

12,315 7,458 19,773

940 2,000 2,940

1,685 ­ 1,685

Stockholders' equity (note 6): Paid in capital stock: Fixed historical * Fixed restated Variable historical * Variable restated Deficit Adjustments for liabilities for post-retirement labor obligations Net loss Total stockholders' equity

56,000 2,629 45,400 1,750 (16,289) (265) (33,517) 55,708

56,000 2,629 25,400 1,191 ­ ­ (16,289) 68,931

Sundry debtors: Sundry debtors Uncollected fees Officers and employees

308 767 299 1,374

32 ­ ­ 32 Commitments (note 9)

Other investments (note 3): Investments in service companies Other investments

5,877 382 6,259

5,877 ­ 5,877

Fixed assets: Furniture and equipment, net Prepaid expenses and deferred charges, net: Deferred taxes (note 5) Prepaid expenses, net and deferred charges (note 4) Promotion personnel compensation

1,251

­

18,937 3,616 2,850 25,403

6,572 1,980 ­ 8,552 88,704 Total liabilities and stockholders' equity $ 63,406 88,704

Total assets

$

63,406

Debit memorandum accounts Authorized capital stock* Shares issued (authorized number) Housing contributions* Siefores' shares, third parties' position (number) Siefores' shares, own position (number) Fovisste housing contributions Worker shares under management (number) Cumulative collections* Cumulative transfers* Accrual for retirement * Thousands of historical pesos $ $

2007 101,400 101,400 434,073 2 23,084,164 45 772,830,691 72,141 ­ 2,346

2006 81,400 81,400 48,423 2 67,609,527 ­ 82,637,284 2 150 ­

$ $ $ $

See accompanying notes to financial statements. "These financial statements have been prepared in accordance with the account grouping rules established by the National Retirement Savings System Commission under the strict responsibility of the undersigning officers."

______________________________ Pablo Magaña Arana Chief Operating Officer

________________________________ José Luis Espinosa Plascencia Administrative and Treasury Manager

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Statements of Operations Year ended December 31, 2007 and initial period of operations from November 1 to December 31, 2006 (Thousands of constant Mexican pesos as of December 31, 2007, except valuation price) 2007 Revenues: Fee revenues Other income Equity in earnings of subsidiaries Total revenues Expenses: Remuneration of staff Benefits Compensation of board of directors and statutory auditors Professional fees Prepaid rentals Promotional expenses Other operating and administrative expenses (note 7) Fees paid Administrative services Sundry taxes (note 5) Depreciation and amortization Non-deductible expenses Monetary position gain or loss Total expenses Net loss $ $ 13,775 201 4,775 18,751 2006 33 363 2,459 2,855

27,850 7,021 367 3,736 498 1,028 11,922 456 4,378 (7,459) 246 409 1,816 52,268 (33,517)

3,591 553 ­ 1,023 526 563 17,756 8 391 (6,003) 32 5 699 19,144 (16,289)

Following is a detail of the total outstanding shares of the Invesment Companies managed by the Afore at December 31, 2007 and 2006:

Issue

Number of outstanding shares 2007 2006

Valuation price 2007 2006

Total amount* 2007 2006

Sociedad de Inversión Básica 2: Afore's own position Workers' position Sociedad de Inversión Básica 1: Afore's own position Workers' position Total Siefores: Afore's own position Workers' position

SCOTAB2 SCOTAB2

8,350,082 741,478,763

50,520,514 76,846,844

$ 1.096965 1.096965

1.035289 1.035289

$

9,160 813,376

52,303 79,559

SCOTAB1 SCOTAB1

14,734,082 31,351,928

17,089,013 5,790,440

1.155098 1.155098

1.029880 1.029880

$

17,019 36,215

17,600 5,963

23,084,164 772,830,691

67,609,527 82,637,284 Total Siefores

$

26,179 849,591 875,770

69,903 85,522 155,425

$

* Thousands of historical pesos See accompanying notes to financial statements. "These financial statements have been prepared in accordance with the account grouping rules established by the National Retirement Savings System Commission under the strict responsibility of the undersigning officers."

______________________________ Pablo Magaña Arana Chief Operating Officer

_______________________________ José Luis Espinosa Plascencia Administrative and Treasury Manager

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Statements of Changes in Stockholders' Equity Year ended December 31, 2007 and initial period of operations from November 1 to December 31, 2006 (Thousands of constant Mexican pesos as of December 31, 2007)

Paid in capital stock Fixed Variable restated restated Item related to stockholder decisions: Initial capital stock contribution Item related to comprehensive loss: Net loss Balances at December 31, 2006 Items related to stockholder decisions: Transfer of prior year's loss Capital stock contribution (note 6a) $

Deficit

Adjustments for labor obligations

Net loss

Total stockholders' equity

$

58,629

26,591

­

­

­

85,220

­ 58,629

­ 26,591

­ ­

­ ­

(16,289) (16,289)

(16,289) 68,931

­ ­ ­

­ 20,559 20,559

(16,289) ­ (16,289)

­ ­ ­

16,289 ­ 16,289

­ 20,559 20,559

Items related to comprehensive loss: Net loss Recognition of additional labor obligation, net of deferred tax of $164 (note 4)

­

­

­

­

(33,517)

(33,517)

­ ­

­ ­ 47,150

­ ­ (16,289)

(265) (265) (265)

­ (33,517) (33,517)

(265) (33,782) 55,708

Balances at December 31, 2007

$

58,629

See accompanying notes to financial statements.

"These financial statements have been prepared in accordance with the account grouping rules established by the National Retirement Savings System Commission under the strict responsibility of the undersigning officers."

______________________________ Pablo Magaña Arana Chief Operating Officer

________________________________ José Luis Espinosa Plascencia Administrative and Treasury Manager

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Statements of Changes in Financial Position Year ended December 31, 2007 and initial period of operations from November 1 to December 31, 2006 (Thousands of constant Mexican pesos as of December 31, 2007)

2007 Operating activities: Net loss Add charges (deduct credits) to operations not requiring (providing) funds: Depreciation and amortization Equity in earnings of subsidiaries Deferred income tax and employee statutory profit sharing Funds used in operations (Investing in) net financing from operating accounts: Sundry debtors Prepaid expenses and deferred charges Other obligations Provisions for sundry obligations Funds used in operating activities Funds provided by financing activities through capital stock contributions Investing activities: Decrease (increase) of investments in special reserve and in the minimum capital stock of siefores Acquisition of investments in service companies and other investments Acquisition of furniture and equipment Funds provided by (used in) investing activities Increase in cash and equivalents Cash equivalents: At beginning of year and period At end of year and period $ $ (33,517) 246 (4,775) (12,365) (50,411)

2006 (16,289) 32 (2,459) (6,572) (25,288)

(1,342) (4,727) (10,277) (2,063) (68,820)

(32) (2,012) 12,315 7,458 (7,559)

20,559

85,220

51,154 (382) (1,256) 49,516 1,255

(70,099) (5,877) ­ (75,976) 1,685

1,685 2,940

­ 1,685

See accompanying notes to financial statements. "These financial statements have been prepared in accordance with the account grouping rules established by the National Retirement Savings System Commission under the strict responsibility of the undersigning officers."

______________________ Pablo Magaña Arana Chief Operating Officer

______________________________ José Luis Espinosa Plascencia Administrative and Treasury Manager

SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements December 31, 2007 and 2006 (Thousands of constant Mexican pesos as of December 31, 2007) These financial statements have been translated from the Spanish language original solely for the convenience of foreign/English-speaking readers.

(1)

Description of businessThe principal activity of Scotia Afore, S. A. de C. V., Grupo Financiero Scotiabank Inverlat ("the Afore") is to open, administer and operate individual retirement savings accounts in conformity with the Law of the Retirement Savings System (LSAR), the Social Security and the National Workers' Housing Fund Institute as well as the provisions or general criteria issued by the National Retirement Savings System Commission (CONSAR), and to invest the workers' funds in Scotia Siefore Básica 1, S. A. de C. V. (Siefore Básica 1) and Scotia Siefore Básica 2, S. A. de C. V. (Siefore Básica 2), ("the Siefores"), managed by the Afore. The Afore was incorporated and registered before the Ministry of Finance and Public Credit (SHCP) on July 11, 2006. The CONSAR authorized the Afore to operate as a management company of mutual funds specializing in retirement funds through official document D00/100/136/2006 dated September 1, 2006 and it began operations on November 1 of the same year. The Siefores were organized and commenced operations on the same dates as the Afore and adhere to the provisions issued by the CONSAR in Circular 15-12, detailed below: The CONSAR through Circular 15-12, issued the General Rules that establish the Investment Regime by which Investment Companies which Specialize in Retirement Funds must abide ("the Rules") in order to generate greater yield and, thus, better pensions for workers. The Rules allow for investments in instruments with capital protected at maturity with yields associated with variable income indices. Also, investment in foreign securities is allowed, which will bring about diversification and will reduce the risk of investment concentrations.

(Continued)

2 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

Accordingly, the formation of an Investment Company called "Sociedad de Inversión Básica 2" (Basic Investment Company 2) was authorized for investing the funds of workers 56 years of age or less. This Investment Company may invest in Debt Instruments or Foreign Debt Securities with principal protected at maturity, associated with one or several of the stock market indices or related sub-indices of countries that are members of the Technical Committee of the International Organization of Securities Commissions (IOSCO) and the European Union allowed by the Rules as well as in debt instruments or foreign debt securities with variable income components so that they perform as debt instruments or foreign debt securities with principal protected at maturity associated with one or more of the aforementioned indices. Likewise, the formation of an Investment Company called "Sociedad de Inversión Básica 1" (Basic Investment Company 1) was authorized for investing the funds of workers 56 years of age or older, of workers under 56 years of age who elected to invest their funds in this company and of workers who failed to choose a Pension Fund Administrator and were therefore assigned to this Investment Company. Investments can only be made in debt securities. Consequently, workers under the age of 56 that invest their funds in a "Sociedad de Inversión Básica 2" may at any time request that their funds be transferred to a "Sociedad de Inversión Básica 1". Moreover, the Rules also provide for the creation of "Sociedades de Inversión Adicionales de Aportaciones Voluntarias" or Additional Investment Companies of Voluntary Contributions and of "Aportaciones Complementarias de Retiro" or Supplementary Retirement Contributions, to further diversify the investment in foreign instruments and securities in order to promote these voluntary saving forms that may increase the worker's pension. On March 8, 2007 amendments and additions were made to the General Rules to which retirement savings fund administrators (Afores) and fund management operators included in the national SAR database will be subject for transferring workers' individual retirement savings accounts. Those revisions will be phased in during 2008.

(Continued)

3 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

On August 1, 2007 the General Rules were published to establish the Investment Regime to which investment companies specializing in retirement savings funds (Siefores) will be subject. Those rules provide for the option to operate additional Basic Investment Companies for investing workers' funds based on the worker's age, investment profile and life cycle, which will be referred to as "Sociedad de Inversión Básica 3", "Sociedad de Inversión Básica 4" and "Sociedad de Inversión Básica 5". Should Retirement Savings Fund Administrators (Afores) create any new basic Siefores, they are required to modify both the investment regime of the basic Siefores and the corporate purpose. Application of the Rules is not mandatory, while the creation of new Siefores is dependent on the business needs and strategies of each Afore. Therefore, the aforementioned Rules provide that Afores may operate several investment companies specializing in retirement savings funds (Siefores), each having a different investment regime, based on their various risk levels, different terms, sources and destination of the funds invested in each investment company, so as to provide workers with new and better savings options, according to each worker's specific characteristics and needs. (2) Summary of significant accounting policies(a) Financial statement presentation and disclosureOn Febrary 15, 2008, Pablo Magaña Arana (Chief Operating Officer) and José Luis Espinosa Plascencia (Administrative and Treasury Manager), authorized the issuance of the accompanying audited financial statements and notes thereon. In accordance with the General Corporations Law and the Afore's bylaws, the stockholders and the CONSAR are empowered to modify the financial statements after issuance. The accompanying financial statements for 2007 will be submitted to the next Stockholders' Meeting for approval.

(Continued)

4 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

The accompanying financial statements have been prepared based on the LSAR and in conformity with the accounting criteria for Afores in Mexico, established by the CONSAR, composed of particular rules that identify and delimit the entity and determine the quantification, valuation and disclosure bases for financial information. In general, the accounting criteria established by the CONSAR conform to Mexican financial reporting standards (FRS) issued by the Mexican Board for Research and Development of Financial Reporting Standards (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera or CINIF), and include particular rules relating to accounting, valuation, presentation and disclosure, which depart from such standards. The CONSAR accounting criteria depart from FRS mainly in that: - - Revenues from fees on contributions to the Afore are recorded in income when collected instead of as earned. The mandatory investments in the Siefores are considered monetary items.

- The presentation of the balance sheet and statement of operations differs from that of FRS. The financial statements of the Afore are expressed in Mexican pesos of constant purchasing power as of the date of the most recent balance sheet presented, using factors derived from the Investment Unit (UDI), which is a unit whose value is determined by the Banco de México (Banco Central) based on the inflation. The UDI values used in 2007 and the initial period of operations in recognizing the effects of inflation were as follows: Inflation rate 3.80% 0.80% -

Date December 31, 2007 December 31, 2006 November 1, 2006

UDI 3.932983 3.788954 3.757300

(Continued)

5 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

The preparation of financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. (b) Cash equivalentsCash equivalents consist of checking accounts in Mexican pesos and temporary investments. Interest income is recognized in the results of operations under "Other income", on an accrual basis. (c) Investments in special reserve and minimum capital stock of SieforesBoth the investments in the special reserve and the minimum capital are represented by shares of the Siefores, which are marked to market on a daily basis with any unrealized gain or loss recorded in the statement of operations under "Equity in earnings of subsidiaries" ($4,775 and $2,459 in 2007 and 2006, respectively). When sold, the difference between the average cost of the shares sold and their selling price is recognized in the same statement of operations caption, sub-account "From Siefore sales" and the previously recognized gain or loss is simultaneously cancelled. Special reserve of Siefores - As of December 31, 2007, in accordance with the amendments to Circular CONSAR 02-7, published on June 14, 2007, which establishes the criteria applicable for setting up the special reserve required by the Retirement Savings System Law (LSAR, Spanish acronym), the special reserve must be created considering that, for each SIEFORE operated by the Afore, the Afore must invest in that institution at least an amount equal to 0.8 percent of the net assets related to that Siefore.

(Continued)

6 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

- As of December 31, 2006, the special reserve had to be at least equal to the greater of eight million UDIS, or the product of 0.9 times the maximum percentage value at risk of Siefore Básica 2, multiplied by the aggregate of the net assets of the Siefores managed by the Afore. - For each additional Siefore operated, the Afore concerned had to invest in that institution at least an amount equal to 1.0 percent of the Net Assets related to that Siefore, up to $900. The special reserve referred to in this rule is independent of the Afore's minimum fixed paid-in capital stock not subject to withdrawal and the statutory reserve required by the General Corporation Law. Minimum capital stock of Siefores The aforementioned circular CONSAR 02-06 establishes a new minimum fixed paidin capital stock amount of $100 that must be held by Siefores as of December 31, 2007. Through December 31, 2006, the minimum fixed paid-in capital stock amount that had to be contributed by the Afore was $4,000 for Siefore Básica 1 and $100 for Siefore Básica 2. Such capital must be subscribed and paid-in at the time the articles of incorporation are executed, and held at all times. (d) Investments in service companies and other entitiesThe Afore owns one share of the company that Operates the National SAR Database (Empresa Operadora de la Base de Datos Nacional del SAR or PROCESAR), and one equity interest of the Mexican Association of Retirement Savings Fund Administrators (Asociación Mexicana de Afores or AMAFORE), which are recorded at cost and adjusted for inflation by applying UDI factors. (e) Furniture and equipmentThe furniture and equipment are initially recorded at their acquisition cost, and restated for inflation by applying UDI factors. (Continued)

7 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

Depreciation and amortization are computed on adjusted asset values using the straight-line method, over the estimated useful life of the assets. (f) Income tax (IT) and employee statutory profit sharing (ESPS)IT and ESPS payable for the year were determined in conformity with tax regulations in force. Deferred IT and ESPS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and asset tax (AT) carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Pensions, seniority premiums, post-retirement benefits and obligations for payments upon termination of labor relationshipThe Afore has a defined contribution pension plan, with the related contributions being recognized directly as expenses on the statement of income under "Personnel Compensation" and "Personnel Benefits" (see note 4). Additionally, a defined benefit plan is in place covering the seniority premiums and compensation to which employees are entitled in accordance with the Federal Labor Law, and the obligations related to life insurance plans for retirees. The net periodic cost and vested seniority premium, life insurance and compensation benefits are charged to operations for the year, based on independent actuarial computations of the present value of these obligations, based on the projected unit credit method, using net discount rates. Amortization of unrecognized prior service cost is based on the estimated average service lives of existing employees entitled to the benefit plans.

(Continued)

8 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

(h)

Inflation adjustment of capital stock and deficitThis adjustment is determined by multiplying stockholder contributions and the deficit by inflation factors derived from UDI, which measure accumulated inflation from the dates of origin through the most recent year end. The resulting amounts represent the constant value of stockholders' equity.

(i)

Monetary position gain (loss)Monetary position gains and losses are determined by multiplying the difference between monetary assets and liabilities at the beginning of each month by inflation factors through year end. The aggregate of these results represents the monetary gain or loss for the year arising from inflation, which is reported in results of operations for the year.

(j)

Fee revenueRevenues from fees charged on the worker contributions under management are recognized in income when collected.

(k)

Memorandum accountsMemorandum accounts are mainly used for recording and controlling instruments that represent the investments in shares of Siefores made by the Afore for its own account or on behalf of workers. Even though the savings for housing are managed by the INFONAVIT, the Afore keeps record of and controls such funds.

(l)

ContingenciesLiabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount thereof can be reasonably estimated. When a reasonable estimation cannot be made, qualitative disclosure is provided in the notes to the financial statements. Contingent revenues, earnings or assets are not recognized until their realization is virtually assured. (Continued)

9 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

(3)

Other investmentsAs of December 31, 2007, other investments consist of $5,877 (same amount as in 2006) and $382 related to investments in PROCESAR and AMAFORE, respectively.

(4)

Pensions, seniority premiums, post-retirement benefits and obligations for payments upon termination of labor relationshipBeginning in March 2007, the Afore created a defined contribution pension plan. The current plan calls for both Afore and employee contributions, which may be fully withdrawn by employees when reaching the age of 55 and completing 10 years of service. As of December 31, 2007, the charge to operations for the Afore's contributions to the defined contribution pension plan amounted to $402. The cost, obligations and assets of the seniority premium benefits and life insurance plans have been determined based on computations prepared by independent actuaries as of December 31, 2007. The components of the net periodic cost and labor obligations at nominal value for the year ended December 31, 2007 are as follows: 2007 Seniority premiums Service cost Interest cost Return on plan assets Amortization of transition liability Net periodic cost $ 39 (1) 1 39 === Life insurance for retirees 94 1 (2) 1 94 ===

$

(Continued)

10 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise) At December 31, 2007, the seniority premium and life insurance obligations are analyzed as follows: Life insurance for retirees 81 (96) (15)

Seniority premiums Projected benefit obligations (PBO) Plan assets at market value PBO over (under) plan assets Unamortized items: Variances in assumptions and adjustments for experience Transition liability Net projected asset Present benefit obligations Plan assets Net liability Additional liability Intangible asset Reduction in stockholder's equity ($8, net of deferred taxes) $ $ $ $ $ 61 (40) 21

(15) ( 6) ==== 59 (40) 19 ==== 19 ( 6) 13 ====

32 (17) ====

$

The following is an analysis of movements of the plan assets to meet the labor obligations at December 31, 2007 (nominal): Contributions to the fund Return on plan assets Balance at year end $ $ 132 4 136 === (Continued)

11 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise)

At December 31, 2007, the severance compensation obligations are analyzed as follows (nominal): PBO Unamortized items: Transition liability Variances in assumptions and adjustments for experience Net projected liability $ 1,577 (614) (790) $ 173 ==== 1,215 1,215 ==== 1,042 (614)

Present benefit obligations Plan assets Net liability

$ $

Additional liability Intangible asset Reduction in stockholder's equity ($265, net of deferred taxes)

$

$

428 ====

The net cost of severance compensation for the year ended December 31, 2007 amounted to $584. The discount, compensation increase and return rates used for the actuarial projections for the year ended December 31, 2007 are as follows: Yield on plan assets Discount rate Rate of increase in compensation Medical expense increase rate Estimated inflation rate 4.75% 4.00% 1.25% 3.00% 4.00%

(Continued)

12 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

At December 31, 2007, the amortization period of unrecognized items is 9.55 years for seniority premium, 18.13 years for life insurance, and 9.74 years for severance compensation. (5) Income tax (IT), asset (AT) taxes and employee statutory profit sharing (ESPS)Under current Mexican tax law, corporations must pay the greater of their IT or AT. For determining taxable income for IT purposes there are specific rules relating to the accrual of revenues, the deductibility of expenses and the recognition of the effects of inflation. The AT Law provides that AT is not payable in the initial year of operations and for the next two years. Accordingly, the Afore incurred no AT in 2007 and in the initial period of operations from November 1 to December 31, 2006. ESPS is determined in accordance with tax regulations in force. For fiscal year ended December 31, 2007, the Afore had no tax base for ESPS purposes. Furthermore, in conformity with the relevant law in force, the Afore was exempt from ESPS for the initial period of operations from November 1 to December 31, 2006 (first fiscal year). The net credit presented under "Sundry taxes" for the year ended December 31, 2007 and the initial period of operations from November 1 to December 31, 2006, is analyzed as follows: 2007 Deferred IT and ESPS credit Other taxes, mainly non-recoverable value added tax $ 12,201 (4,742) $ 7,459 ===== 2006 6,572 (569) 6,003 ====

A summary reconciliation in nominal pesos between accounting and taxable income for the year ended December, 2007 and the initial period of operations from November 1 to December 31, 2006 is shown on the following page.

(Continued)

13 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise)

2007 Loss for the period Accounting effects of inflation, net Result in nominal pesos Differences between accounting and taxable loss: Tax effect of inflation Deferred IT and ESPS Equity in the results of subsidiaries Prepaid expenses Expense accruals Non-deductible expenses Other Tax loss $ (33,517) 1,168 (32,349) (1,783) (12,201) (222) (3,236) (14,095) 2,024 133 $ (61,729) ======

2006 (16,289) 1,228 (15,061) (1,624) (6,331) ­ (1,908) 18,566 5 (133) (6,486) =======

In accordance with the IT Law, tax losses, restated for inflation, may be carried forward to offset the taxable income of the ten succeeding years. Tax losses for fiscal year 2007 and the initial period of operations from November 1 to December 31, 2006, adjusted for inflation at December 31, 2007, amounted to $63,409 and $6,937, respectively. Deferred taxes: Deferred IT and ESPS assets and the favorable effect on the results of operations for the year ended December 31, 2007, and for the initial period of operations from November 1 to December 31, 2006, are analyzed on the next page.

(Continued)

14 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

Increase (decrease)

2007 (Asset) liability for deferred IT and ESPS: Tax loss carryforwards Expense accruals Recognition of additional liability from labor obligations Prepaid expenses Valuation allowance $

Deferred taxes:

2006 2,558 7,324 (753) 9,129 (2,557) 6,572 ===== 6,572

2007 16,542 (5,625) 164 (1,273) 9,808 2,557 12,365 =====

$

19,100 1,699 164 (2,026) 18,937 18,937 ===== 12,201

In results of operations In stockholders' equity: Recognition of additional liability for labor obligations

$

164 $ 12,365 =====

6,572 =====

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Other considerations In accordance with Mexican tax law, the tax authorities are entitled to examine transactions carried out during the five years prior to the most recent income tax return filed. In accordance with the Income Tax Law, companies carrying out transactions with related parties residing in the country or abroad are subject to certain requirements as to the determination of prices, since such prices must be similar to those that would be used in arm's-length transactions. (Continued)

15 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise)

On October 1, 2007, new laws were published, a number of tax laws were revised, and, additionally, a presidential decree was issued on November 5, 2007, which will be applicable beginning January 1, 2008. The most significant changes are: (i) derogation of the Asset Tax Law, and (ii) a new tax (business flat tax or IETU), which is based on cash flows and contains certain restrictions on tax deductions and, additionally, tax credits are granted mainly in connection with inventories, salaries taxed for IT purposes and social security contributions, tax losses arising from accelerated deduction, recoverable asset tax, and deductions related to fixed asset investments, deferred charges and expenses. The IETU rate will be 16.5% for 2008, 17% for 2009 and 17.5% for 2010 and thereafter. Accordingly, the Afore will continue to determine and pay IT incurred for the year. Should the IETU incurred for the same year exceed the IT, the IT actually paid may be credited against the IETU, with any excess being payable. If IETU is incurred, the payment will be considered final, not subject to recovery in subsequent years (with certain exceptions). However, according to management's financial projections, IETU will not be incurred by the Afore in 2008; therefore, deferred taxes as of December 31, 2007 were prepared on an IT basis. (6) Stockholders' equityThe principal characteristics of stockholders' equity are described below. (a) Structure of capital stockOn February 9, 2007, at the Stockholders' Meeting a resolution was passed to increase the variable portion of capital stock by $20,559 ($20,000 nominal), through the issue of 20,000,000 common, registered Series "F" shares, with no par value. After the above increase, the Afore's fixed and variable portions of capital stock as of December 31, 2007 are comprised of 56,000,000 (same as in 2006) and 45,400,000 (25,400,000 in 2006) unamortizable common, registered Series "F" shares with no par value, respectively.

(Continued)

16 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007, except as noted otherwise)

(b) Comprehensive lossThe comprehensive loss reported in the statements of stockholders' equity represents the results of the Afore's activities during the year ended December 31, 2007 and the initial period of operations from November 1 to December 31, 2006 and represents the net loss for the year and the period, and in 2007 includes the negative effect of the additional liability for labor obligations. (c) Restrictions on stockholders' equity­ Five percent of the Afore's net income for the year must be appropriated to the statutory reserve, until it reaches one-fifth of capital stock. In case of capital refunds or distribution of earnings to the stockholders, income tax is payable on the amounts refunded or distributed in excess of the amounts determined for tax purposes.

­

(7)

Related party transactionsTransactions and balances with related parties for the year ended December 31, 2007 and the initial period of operations from November 1 to December 31, 2006 were as follows: 2007 Balances: Banks Investments Expense accruals $ 940 2,000 ====== 2006 426 10,575 ======

Transactions: Commissions paid Expense accruals

$

186 ======

8 10,575 ======

(Continued)

17 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

(8)

Comprehensive risk managementThe policies and procedures for the Afore's comprehensive risk management are contained in the comprehensive risk management manual in conformity with the provisions of Circulars 62-1 and 62-2 issued by the CONSAR. These policies acknowledge various types of risks: - Financial risks: market, credit, liquidity and global risks. - Operational risks: operational processes, legal and technological risks. Market risk Market risk relates to potential losses from risk factors affecting the price of positions such as interest and exchange rate fluctuations, and price indices, among others. Credit risk The risk associated with the potential loss resulting from the failure by a counterparty to make a payment in any transaction with the Afore. Liquidity risk Liquidity risk is the potential loss resulting from the premature or forced sale of assets at unusual discounts to meet the Afore's obligations, or when a position may not be timely sold, purchased or covered by establishing an equivalent opposite position. Global risk The global risk is the total loss that results from aggregating financial risks, that is, market, credit and liquidity risks.

(Continued)

18 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007)

Operational risk The risk of operational processes represents the potential loss from noncompliance with the necessary policies and procedures in managing the individual accounts of workers and the investment of their funds in accordance with internal and external standards. Legal risk Represents the potential loss from failure to comply with the applicable legal and regulatory provisions, the issuance of adverse regulatory and judicial resolutions and the application of sanctions in connection with the operations of the Afore. Technological risk Technological risk represents the potential loss from damage, interruption, alteration or failure in the physical and informatics systems, computer applications, networks and any other distribution channel required for executing the Afore's operational processes. According to the provisions of Circulars 62-1 and 62-2, the Board of Directors of the Afore creates a Financial Risk Committee, responsible for proposing the policies and procedures manual and the financial risk exposure limits. The Financial Risk Committee approves the methodology used for measuring, monitoring, limiting, controlling and disclosing the various types of financial risks to which the Afore is exposed as well as the models, parameters and scenarios for measuring and controlling such risks. Exposure to market, credit and liquidity risks are reviewed using various control procedures, such as the daily monitoring of investments and counterparties. (9) CommitmentsFines and penalties imposed by the CONSAR on the Siefores managed by the Afore, shall be attributed to the Afore so as to safeguard the workers' interests, without adversely affecting their funds. The Afore provides administrative services to the Siefores at no cost and based on an indefinite-term agreement executed for such purpose. (Continued)

19 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007) (10) Recently issued accounting standardsThe CINIF has issued the following FRS, effective for years beginning after December 31, 2007, and which do not provide for earlier application. (a) FRS B-10 "Effects of inflation"- FRS B-10 supersedes Bulletin B-10 and its five documents of amendments, as well as the related circulars and INIF (Interpretation of Financial Reporting Standards) 2. The principal considerations established by this FRS are: (i) the change in the value of the Investment Unit (UDI) may be used for determining the inflation for a given period; (ii) an entity is only required to recognize the effects of inflation when operating in an inflationary economic environment (accumulated inflation equal to or higher than 26% in the most recent three-year period); and (iii) the accounts of Gain or Loss from Holding Nonmonetary Assets (RETANM - Spanish abbreviation), Monetary Position Gains or Losses (REPOMO - Spanish abbreviation), and Deficit/Excess in Equity Restatement, will be reclassified to retained earnings, when the unrealized portion is not identified. Since accumulated inflation over the past three years is less than 26%, the Afore will cease recognizing the effects of inflation on the financial information beginning in 2008 and until such time as an inflationary scenario, as defined above, returns. Afore's average monetary position gain or loss over the past two years resulted in a charge to income of $1,258. (b) FRS D-3 "Employee benefits"- FRS D-3 supersedes Bulletin D-3, the portion applicable to Employee Statutory Profit Sharing (ESPS) of Bulletin D-4 and INIF (Interpretation of Financial Reporting Standards) 4. The principal considerations established by this FRS are: (i) a maximum of five years is established for amortizing unrecognized/unamortized items, and the option is provided for immediate recognition of actuarial gains or losses in results of operations; (ii) recognition is eliminated of an additional liability and related intangible asset and any related item as a separate component of stockholders' equity; (iii) severance benefits are to be recognized directly in results of operations; and (iv) ESPS, including deferred ESPS, is to be presented in the statement of income as ordinary operations. Furthermore, FRS D-3 requires the use of the asset and liability method required by FRS D-4 for determining deferred ESPS, stating that any effects arising from the change should be recognized in retained earnings, without restating prior years' financial statements.

(Continued)

20 SCOTIA AFORE, S. A. DE C. V. Grupo Financiero Scotiabank Inverlat Notes to Financial Statements (Thousands of constant Mexican pesos as of December 31, 2007) The Afore estimates that the initial effects of this new FRS in the year 2008 will be an expense of $1,485 for the seniority premiums, life insurance and severance liabilities. (c) FRS D-4 "Taxes on Income"- FRS D-4 supersedes Bulletin D-4 and Circulars 53 and 54. The principal considerations established by this FRS are: (i) the balance of the cumulative IT effects resulting from the initial adoption of Bulletin D-4 in 2000 is reclassified to retained earnings; (ii) AT is recognized as a tax credit (benefit), rather than as a tax prepayment; and (iii) the accounting treatment of ESPS incurred and deferred is transferred to FRS D-3, as mentioned in paragraph (b) above. Management estimates that the initial effects of this new FRS will not be material. (d) FRS B-2 "Statement of cash flows"- FRS B-2 supersedes Bulletin B-12 and paragraph 33 of Bulletin B-16. The principal considerations established by this FRS are: (i) the statement of cash flows replaces the statement of changes in financial position; (ii) cash inflows and cash outflows are reported in nominal currency units i.e. the effects of inflation are disregarded; (iii) two alternative preparation methods (direct and indirect) are established, without stating preference for either method. Furthermore, cash flows from operating activities are to be reported first, followed by cash flows from investing activities and lastly cash flows from financing activities; (iv) captions of principal items are to be reported gross; and (v) disclosure is required of the composition of items deemed cash equivalents. The promulgation of this FRS will have no effect until the National Retirement Savings System Commission (CONSAR) adopts FRS B-2 since there is currently a specific criterion that governs the presentation of the statement of changes in financial position.

Information

Microsoft Word - N.DOC

29 pages

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate

1127735