Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Ecopetrol S.A. is a mixed economy company, with a commercial nature, constituted in 1948. Dedicated to commercial or industrial activities arising from or related to the exploration, production, refining, transportation, storage, distribution, and selling of hydrocarbons, their by-products and associated products on its own or through its subsidiaries (“Ecopetrol”, the “Company” or Ecopetrol Business Group).

11.51% of Ecopetrol S.A.’s shares are publicly traded on the Colombian, New York, Lima and Toronto Stock Exchanges. The remaining shares (89.49% of the total outstanding shares) are owned by the Ministry of Finance and Public Credit.

The address of the principal office of Ecopetrol S.A. is Bogotá – Colombia, Carrera 13 No. 36-24.

IFRS have been adopted in Colombia for the periods beginning January 1, 2015, in conformity with Law 1314 of 2009, Regulatory Decree 2784 of December 2012, Decrees 3023 and 3024 of 2013 and Decree 2615 of 2014.

These interim consolidated financial statements for the three month period ended March 31, 2015 and 2014 have been prepared in accordance with International Accounting Standard (IAS) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements. These are the Group´s first IFRS condensed consolidated interim financial statements for part of the period covered by the first IFRS annual financial statements and IFRS 1 First-time adoption of International Financial Reporting Standards has been applied. Effects originated in application of IFRS are set out in note 4.

These interim consolidated financial statements were approved by the Administration of the Company on June 22, 2015. The Consolidated financial statements for the years ended December 31, 2014 and 2013 have been prepared in accordance with Public Accounting Regime issued by the Contaduría General de la Nación (CGN – National Accounting Office) and other legal dispositions, which were considered as previous Generally Accepted Accounting Principles (previous GAAP). Previous GAAP differs in certain respects from IFRS, as disclosed in Note - 4 - First time adoption of International Financial Reporting Standards - IFRS.

Principal accounting policies are set out in note 3 to these interim consolidated financial statements.

For presentation purposes, the interim consolidated financial statements were prepared by consolidating all companies set out in Exhibit 1, which are those that Ecopetrol is able to control directly or indirectly. Control is achieved when the Company:

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

When the Company has less than a majority of the voting rights of an investee, it still has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:

All intragroup assets and liabilities, equity, income, expenses and cash flows relating transactions between entities of the Group were eliminated on consolidation.

The consolidated financial statements have been prepared on a historical cost basis except for financial assets that are measured at fair value through profit or loss and / or through other comprehensive income at the end of each reporting period, as explained in the accounting policies below.

Historical cost is generally based on fair value of the consideration given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In estimating the fair value of an asset or liability, the Group takes into account the characteristic of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

Transactions included in these financial statements are valued and presented in Colombian pesos, the currency of the primary economic environment in which Ecopetrol operates. This is also its functional currency.

The statement of profit or loss and statement of cash flows of subsidiaries with functional currencies different from Ecopetrol’s functional currency are translated at the exchange rates at the dates of the transaction or based on the monthly average rate. Assets and liabilities are translated at the closing rate and other equity items are translated at exchange rates at the moment of the transaction. All resulting exchange differences are recognized in other comprehensive income.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

In preparing the financial statements of Ecopetrol, transactions in currencies other than the entity’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the date and variations presented on translation are recognized in financial results, net. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.

In the consolidated statement of financial position, assets and liabilities are classified according to their nature between current, being those with a maturity date equal or less than twelve months, and non-current, being those with a maturity date greater than twelve months.

Net earnings per share is calculated based on net earnings for the period attributable to the controlling stockholders, divided by the weighted average number of subscribed shares in circulation during the period. There are no potentially dilutive securities.

The accounting policies indicated below have been applied consistently for all the periods presented, unless otherwise stated.  

The preparation of financial statements requires that the Company’s management make estimates about the carrying amounts of assets, liabilities, income, expenses and commitments recognized in the Financial Statements. These estimates are carried out based on the best available information on the matters under review. Revisions to accounting estimates are recognized prospectively in the period in which the estimate is revised.

The following are the critical judgments and estimations that have the most significant effect on the amounts recognized in the consolidated financial statements.

The reserves audit process is conducted annually as of December 31 in accordance with the United States Securities and Exchange Commission (SEC) definitions and rules set forth in Rule 4-10(a) of SEC Regulation S-X and the disclosure guidelines contained in the SEC’s Modernization of Oil and Gas Reporting final rule.

The estimated reserve amounts are based on the average prices during the 12-month period prior to the ending date of the period covered in the report, determined as the unweighted arithmetic averages of the prices in effect on the first-day-of-the-month for each month within such period, unless prices were defined by contractual arrangements, as required by the SEC regulations.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Reserves estimates are prepared using geological, technical and economic factors, including projections of future production rates, oil prices, engineering data and length and amount of future investments with a certain degree of uncertainty. These estimates that are based on conditions in existence as of the date of the report which could significantly differ from other conditions during the year or in future periods. Any changes in regulatory and/or market conditions could materially change the quantity and value of our reserves.

Changes to estimates of proved developed reserves affect prospectively the amounts of depreciation, depletion and amortisation charged and, consequently, the carrying amounts of exploration and production assets. It is expected, however, that in the normal course of business the diversity of the asset portfolio will limit the effect of such revisions. The outcome of, or assessment of plans for, exploration or appraisal activity may result in the related capitalised exploration drilling costs being recognised in in the Consolidate statement of profit and loss that period.

Information about the carrying amounts of exploration and production assets and the amounts charged to income, including depreciation, depletion and amortisation, is presented in Note 14.

According to environmental and oil regulations, the Ecopetrol Business Group must recognize the costs for the abandonment of oil extraction and transportation facilities, which include the cost of plugging and abandoning wells, dismantling facilities and environmental remediation in the affected areas.

The estimated costs of dismantling and removing these facilities are recorded in the functional currency of each company at the time of the installation of the assets. The estimated obligations created for the abandonment and dismantling are subject to annual reviews and adjusted to reflect the best available estimate, due to technological changes and political, economic, environmental and security issues, and also relations with stakeholders.

The calculations of these estimates are complex and involve significant judgments made by Management, such as internal projections of costs, future inflation and discount rates. We consider that the retirement costs and obligations are reasonable, based on the experience of the Ecopetrol business group and market conditions; nevertheless, significant variations in external factors used for the calculation of the estimate could significantly impact the financial statements.

The determination of the expense, liability and adjustments relating to our pension plans and other retirement benefits requires us to use judgment in the determination of actuarial assumptions. These include the number of active employees with indefinite term contracts, retirees and their heirs, pension benefits, healthcare and education expenses, the number of temporary employees who will remain with us until retirement, voluntary retirement plans and pension bonds. The calculation of pension bonds is maintained to comply with our pension obligations, pursuant to Decrees 1748 of 1995, 1474 of 1997, and 876 of 1998, as well as Law 100 of 1993 and its regulatory decree.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

These actuarial assumptions include estimates of future mortality, withdrawal, changes in compensation and discount rates as well as the estimated rate of return on pension bonds and other plan assets. These assumptions are reviewed annually for actuarial valuation purposes and may differ materially from the actual results due to the changing economic and market conditions, regulatory events, court rulings, higher or lower retirement rates, or longer or shorter life expectations of employees.

We consider that the assumptions used for the recognition of our obligations under defined benefit plans are reasonable based on our experience and market conditions.

During annual impairment testing management must make reasonable and supportable assumptions and estimates with respect to, among other factors, (1) the fair value of reserves, (2) oil fields’ production profiles and future production of refined and chemical products, (3) future investments, taxes and costs, (4) future capital expenditures and useful life for properties and (5) future prices, among other factors. Any change in the variables used to prepare such assumptions and estimates may have a significant effect on the results of the impairment tests.

Ecopetrol performs annual impairment tests of goodwill in reference to fair value. Goodwill, for impairment testing purposes, is allocated to each of the cash-generating units (or groups of cash generating units) that are expected to benefit from the synergies of the combination.

Fair value is determined using the discounted free cash flow methodology that requires significant assumptions and estimates to be made. The Company considers that the assumptions and estimates used are reasonable and supportable based on the current market conditions and are aligned to the risk profile of the related assets. However, different assumptions and estimates may be used which would lead to different results. Valuation models used are sensitive to changes in the underlying assumptions. For example, sales volumes and prices that will be paid for the purchase of raw materials are assumptions that may vary in the future. Adverse changes in any of these assumptions could lead to recognition of goodwill impairment.

We are subject to claims for regulatory and arbitration proceedings, tax assessments and other claims arising in the normal course of business. Management and legal counsel evaluate these situations based on their nature, the likelihood that they materialize, and the amounts involved, to decide on any changes to the amounts accrued and/or disclosed. This analysis, which may require considerable judgment, includes assessment of current legal proceedings brought against us and claims not yet initiated. In accordance with management’s evaluation and guidance provided by IFRS, we create provisions to meet these costs when the liability is probable and reasonable estimates of the liability can be made.

Ecopetrol considers that the payments required to settle the quantities related to the claims, in case of loss, will not vary significantly from the estimated costs, and therefore will not have a material adverse effect on our financial statements taken as a whole.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in our financial statements and their respective tax bases. Deferred taxes on assets and liabilities are calculated based on enacted or substantively enacted statutory tax rates that will be applied to our taxable income during the years in which temporary differences between the carrying amounts and tax bases are expected to be reversed.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

The classification of financial instruments depends on the nature and purpose for which the financial assets or liabilities were acquired and is determined at the time of initial recognition. All regular way purchases or sales of financial instruments are recognized and derecognized on a trade date basis. Regular purchases or sales of financial assets are those that require delivery of assets within the time frame established by regulation or agreement in the marketplace.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets through profit or loss and through other comprehensive income are stated at fair value. Financial instruments at amortized cost, loans and trade receivables, other receivables and financial assets held-to-maturity are measured at amortized cost using the effective interest method.

Equity investments available for sale that do not have a market quotation price and which fair price cannot be reliably measured are measured at cost less any loss for impairment identified at the end of each reporting period

Fair value

The fair value hierarchy is based on the level of market available information which includes the security liquidy and availability of exchange prices or indicators generated from market operations (rates, curves, volatilities and other required valuation variables).

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Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, level 1 inputs include marketable securities that are actively traded.

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly. For the Company, Level 2 inputs include quoted prices for similar assets, prices obtained through third-party broker quotes, and prices that can be corroborated with other observable inputs for substantially the same term as the contract.

Level 3: Unobservable inputs. The Company does not use Level 3 inputs for any of its recurring fair –value measurements. Level 3 inputs may be required for the determination of fair value associated with certain non-recurring measurements of non-financial assets and liabilities. The Company uses Level 3 inputs to determine the fair value of certain non-recurring non-financial assets.

Effective interest method

The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments (including all fees, transaction costs and other premiums or discounts that are included in the calculation of the effective interest rate) through the expected life of the financial instrument (or, when appropriate, at a shorter period), to the net carrying amount on initial recognition.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Impairment

Financial assets at amortized cost are assessed for impairment indicators at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated future cash flows of the investment have been affected. For financial assets measured at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

De-recognition of financial assets and financial liabilities

Ecopetrol derecognizes a financial asset when the contractual rights to the cash flows from the asset expire and when it transfers substantially all the risks and rewards of ownership of the asset to another party. If neither the risks nor rewards of ownership are transferred and the Company continues to control the transferred asset, its retained interest in the asset and any associated liability for amounts it may have to pay continue to be recognized. If all the risks and rewards of ownership of a transferred financial asset are retained, the financial asset and any collateralized borrowing for the proceeds received are recognized.

Cash and cash equivalents include negotiable investments and special funds with maturity dates that fall within ninety (90) days of their acquisition and are subject to minimal risks of changes in value.

Financial assets at fair value through profit or loss are financial assets held for trading acquired principally for the purpose of selling them in the short term. Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on re-measurement recognized in profit or loss.

Loans to employees are initially recognized using the present value of the future cash flows, discounted at the current market rate of return for similar loans. If the interest rate is less than the current market rate, fair value will be less than the amount of the loan. This difference is recorded as a benefit to employees.

Available for sale financial assets are equity instruments of other non-controlled or non-strategic companies where the Company does not exercise any type of control or significant influence thereon and where the Company does not intend to sell the instruments in the short term. They are recognized at their fair value and unrealized losses or profits are recognized in other comprehensive income. At the time of sale or impairment of the assets the related adjustments are attributed to the results of the period.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Financial assets with fixed or determinable payments that are not quoted in an active market are classified as current, except for those that have a maturity date longer than twelve months from the statement of financial position date, which are classified as non-current. Loans and receivables, including trade and other receivables, are measured initially at fair value and then at amortized cost using the effective interest rate method.

Financial liabilities correspond to the financing obtained by the Company through bank credit facilities and bonds, accounts payable to suppliers and creditors.

Bank credit facilities and bonds are initially recognized at their fair value, net of transactions costs incurred, and subsequently carried at amortized cost. The difference between the amount received and its nominal value is recognized in the results of the period during the time of amortization of the financial obligation, using the effective interest rate method.

Accounts payable to suppliers and creditors are short term financial liabilities recorded at their face value, since they do not differ significantly from their fair value.

Ecopetrol may enter into hedging agreements to reduce exposure to the fluctuations of international crude oil and products prices and foreign exchange and interest rates. We do not use derivative financial instruments for speculative purposes. Ecopetrol has established control activities to assess, approve and monitor derivative financial instruments. During the past few years, these types of instruments have not been recurrent or have not generated any significant impact on the financial statements.

During 2014, exchange rate derivative were utilized, however, these instruments did not meet the necessary requirements for the application of hedge accounting and the impact with respect to the fair value movements was recognized directly in the results of the period.

Inventories include assets extracted, in production process, transformed or acquired for any reason, for the purpose of being sold, transformed and consumed in the production process, or as part of services delivered.

Crude oil is valued at its production cost, including necessary expenses incurred to transport the inventory to its current locations.

The cost of inventories is determined under the weighted average method, which includes acquisition costs (deducting commercial discounts, rebates obtained and other similar amounts), transformation, as well as other costs incurred in order to deliver the inventories to their current location and conditions, such as transportations costs.

Inventories of consumables (spare parts and supplies) are recognized as inventory and subsequently charged to expense, maintenance or projects, as such elements are consumed.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Ecopetrol makes an evaluation of the net realizable value of inventories at the end of the period, recording, with charge to profit and loss, an impairment to the value when they are overvalued. When the circumstances that previously caused impairment cease to exist, or when there is clear evidence of an increase in the net realizable value due to a change in economic circumstances, the amount thereof is then reversed.

Associates and joint ventures are considered related parties. Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost. The Company's investment in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss.

The Company's share of the profit or loss of its associates and joint ventures is recognized in the statement of income and its share of reserve movements is recognized in the Company reserves.

Unrealized gains on transactions between the Company and its associates and joint ventures are eliminated to the extent of the Company's interest.

Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Company.

An associate is an entity over which the Group has significant influence but not control. Generally these entities are those in which a equity interest is maintained from 20% to 50% of the voting rights. See Exhibit I for a detail of these companies.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

Joint operation contracts are entered into between Ecopetrol and third parties in order to share risk, secure capital, maximize operating efficiency and optimize the recovery of reserves. In these joint operations, one party is designated as the operator to execute the expense and investment budget and report to partners according to their participation interests. Furthermore, each party takes its share of the hydrocarbons (crude oil or gas) produced according to its agreed participation.

When Ecopetrol participates as a non-operator partner, it records the assets, liabilities, revenues, costs and expenses based on information reported by the operators. When Ecopetrol is the direct operator of the joint venture contracts, it records its percentage of the assets, liabilities, revenues, costs and expenses, based on each partner’s participation interests in the line items corresponding to assets, liabilities, expenses, costs and revenues.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Non-current assets and disposals groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is expected to qualify for recognition as a completed sale within one year from the date of classification and the asset (or disposal group) is available for immediate sale in its present condition. These assets are measured at the lower of their carrying amount and fair value less costs to sell.

Recognition and measurement

Property, plant and equipment are presented at cost less accumulated depreciation and accumulated losses for impairment. Tangible components related to natural and the environmental resources are part of property, plant and equipment.

All directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management are considered capitalizable. Such costs are mainly: a) purchase price, including import duties and non-refundable purchase taxes; b) costs of employee benefits arising directly from the construction or acquisition; c) all directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; d) borrowing costs incurred in loans directly attributable to the acquisition and construction of assets and; e) the initial estimate of the costs of dismantling and removing the item.

Spare parts and servicing equipment are carried as inventories and recognised as an expense as they are consumed. Major spare parts and stand-by equipment that the entity expects to use during more than one period are recognized as property, plant and equipment.

Any gain or loss arising from the disposal of a property, plant and equipment item is recognized in profit or loss in the period incurred.

Subsequent disbursements

All disbursements made on the existing assets in order to increase or extend the initial expected useful life, increase productivity or productive efficiency, that allow a significant reduction of operating costs, increase the level of reserves in exploration or production areas or replace a part or component of an asset that is considered critical for the operation are considered additions or improvements and are recognized as property, plants and equipment.

The costs of the day-to-day servicing, repair or maintenance of an item of property, plant and equipment are recognised as expense when incurred. However, major inspections performed, are capitalized.

Depreciation

Property, plant and equipment is depreciated using the straight-line method, except for those associated with Exploration and Production activities which are depreciated using the technical units-of-production method. Technical useful lives are updated annually considering factors such as: additions or improvements (due to parts replacement or critical components for the asset’s operation), technological advances, obsolescence and other factors; the effect of this change is recognised in future periods. Depreciation of an asset commences when it is available for use.

Useful lives are determined based on the period over which an asset is expected to be available for use, physical exhaustion, technical or commercial obsolescence and legal limits or restrictions over the use of the asset.

Lands are recorded independently of buildings and facilities and have indefinite useful lives therefore they are not subject to depreciation.

Depreciation methods and useful lives are reviewed annually by business units and adjusted if appropriate.

Investment properties

As investment property is recognized when the property owned by the Company is used to obtain income, appreciations or both, rather than in the production or supply of goods or services, for administrative purposes or for their sale in the ordinary course of operations.

The acquisition cost of an investment property consists of its purchase price and any directly attributable disbursement. Cost model is used for measurement after initial recognition.

Recognition and measurement

Ecopetrol uses the successful efforts method to account for exploration and production of crude oil and gas activities, also considering IFRS 6 – Exploration for the evaluation of mineral resources.

Exploration costs

All costs associated with exploration and evaluation are capitalized as exploration and evaluation assets pending determination of whether the exploration drilling is successful or not; if determined to be unsuccessful all costs are expensed.

Exploration costs are those incurred with the objective of identifying areas that are considered to have prospects of containing oil and gas reserves, including geological and geophysical (G&G), seismic costs, exploratory wells, exploratory-type stratigraphic test wells, among others. Exploratory wells costs are recognised as assets pending determination of commercial viability and if not are expensed as exploration expenses. Other expenditures are expensed when incurred.

An exploration and evaluation asset is classified as such once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Before reclassification, assets are assessed for impairment, and any resulting impairment is recognised. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest its carrying value is below its recoverable value.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Development costs

Development costs correspond to those costs incurred to obtain access to proved hydrocarbon reserves and to provide facilities for extracting, treating, gathering and storing. When a project is approved for development, the accumulated value of the acquisition and exploration costs is classified as natural and environmental resources and costs subsequent to the exploration phase are capitalized as development costs of the properties that contain such natural resources assets. All development costs are capitalized, including drilling costs of unsuccessful development wells.

Production costs

Production costs are those incurred to operate and maintain productive wells as well as the corresponding equipment and facilities. The production activity includes extraction of oil and gas to the surface, its gathering, treatment and processing as well as storage in the field. Production costs are expenses at the time they are incurred unless they add reserves, in which case they are capitalized.

Production and support equipment is recognised at historical cost and is part of property, plant and equipment and subject to depreciation.

Capitalized costs also include dismantlement, retiring and restoring costs, as well as the estimated cost of future environmental obligations. The estimation includes plugging and abandonment costs, facility dismantling and environmental recovery of areas and wells. Changes arising in new abandonment liability estimations and environmental recovery are capitalized to the related asset.

Capitalized costs include net income obtained by the sale of crude oil from extensive testing, since they are considered necessary to complete the asset.

Depletion

Depletion of natural and environmental resources are determined using the unit-of-production method, using proved developed reserves as a base. Depletion factors are reviewed annually, based on the reserve report.

Reserves are audited by internationally recognized external consultants and approved by the Company’s Board of directors. Proved reserves consist of the estimated quantities of crude oil and natural gas demonstrated with reasonable certainty by geological and engineering data to be recoverable in future years from known reserves under existing economic and operating conditions, that is, at the prices and costs that apply at the date of the estimate.

Impairment

Assets associated to exploration, evaluation and production are subject to review annually for possible impairment in their recoverable value. See policy 3.11 – Impairment of assets.

Borrowing costs related to the acquisition, construction or production of a qualifying asset that requires a substantial period of time to get ready for its intended use are capitalized as part of the cost of that asset when it is probable that future economic benefits associated with the item will flow to the Company and costs can be measured reliably. The other borrowing costs are recognized as finance costs in the period in which they are incurred.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimates being accounted for prospectively.

Expenditures on research activities are recognized as an expense in the period in which they are incurred.

Goodwill is the excess of the purchase price over the fair value of the identifiable assets and liabilities of acquired companies, measured at the acquisition date. The carrying amount of goodwill is not amortized and is reviewed annually for possible impairment losses.

For the purposes of impairment testing, the discounted cash flow method is used to assess impairment of goodwill. If the net present value is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the Cash Generating Units (CGU) or group of CGUs and then to the other assets of the CGU or group of CGUs. Any impairment loss is recognized directly in profit or loss. Once an impairment loss on goodwill is recognized, it is not reversed in subsequent periods.

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership. All other leases are classified as operating leases.

Assets held under finance leases, when Ecopetrol is the lessee, are recognized in the statement of financial position at an amount equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payment. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

In order to evaluate the recoverable amount of tangible and intangible assets, Ecopetrol compares the carrying amount with its recoverable amount at the end of each reporting period or earlier, if there is any indication that an asset may be impaired.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

In order to make an impairment analysis, the assets are grouped into cash generating units (CGU), provided that those assets individually considered do not generate cash inflows that, to a great extent, are independent from those generated by other assets or CGUs. The grouping of assets in different CGUs requires the exercise of professional judgment and the consideration, among other parameters, of the business segments. In this sense, in the segment of Exploration and Production, each CGU corresponds to each one of the different contractual areas commonly called “fields”; by exception, in those cases in which the cash inflows generated by several fields are interdependent on each other, those fields are grouped into a single CGU. In the case of the Refining and Petrochemicals segment, the CGU´s correspond to each one of the refineries of the group and for the segment of Transportation each pipeline is taken as an independent CGU.

The recoverable value is the higher of the fair value less costs of sale and value in use. If the recoverable amount of an asset (or of a CGU) is lower than its net book value, its book value (or that of the CGU) is reduced to its recoverable amount, recognizing a loss for impairment of value as expense.

The value in use is determined as the sum of the future discounted cash flows adjusted to the estimated risk. The estimates of future cash flows used in the evaluation of impairment of assets are made with projections of commodity prices, supply and demand estimates and the margins of the products. In case of assets or cash generating units engaged in the evaluation and exploration of reserves, proved, probable and possible reserves are considered, with a risk factor associated to them also being considered.

Once a loss for impairment of value has been recorded, future amortization expense is calculated on the basis of the adjusted recoverable value.

Impairment losses may be reversed, except those corresponding to goodwill, only if the reversal is related to a change in estimates used after the loss for impairment was recognized. These reversals shall not exceed the book value of the assets net of depreciation or amortization that would have been determined if the impairment had never been recognized.

In the reclassification of any non-current asset to non-current assets held-for-sale, the book value of these assets is revised to its fair value less costs to sell. No other provision for depreciation, depletion or amortization is recorded if the fair value less costs to sell is less than the book value.

Provisions are recognized when Ecopetrol has a present obligation (legal or constructive) as a result of a past event, it is probable that Ecopetrol will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where applicable, they are recorded at present value.

Disbursements related to the conservation of the environment for current or future operations, are accounted for as expenses or assets, as it may correspond. Disbursements related to operations of the past that do not contribute to the obtaining of current or future income, are charged to expenses.

The creation of these provisions coincides with the identification of an obligation related to environmental remediation and Ecopetrol has adequate information to determine a reasonable estimate of the respective cost.

Contingent liabilities are not recognized but are subject to disclosure in the explanatory notes whenever the outlay of resources is possible, including those which values cannot be estimated.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Asset retirement obligation

Liabilities associated to the retirement of assets are recognized when there are current obligations, either legal or implied, related to the abandonment and reclamation of wells, facilities, pipelines, buildings and equipment, as the case may be; they must be recognized using the discounted cash flow technique taking into consideration the economic limit of the field or useful life of the respective asset. When it is not possible to determine a reliable estimate in the period in which the obligation originates, a provision is recognized when there is sufficient information available to make the best estimate.

The book value of the provision is reviewed and adjusted annually considering changes in the variables used for its estimate. The increase in the provision due to the passage of time is recognised as an interest expense.

Income tax expense is comprised of income tax payable for the period (including, income tax and complementary taxes and income tax for equality - CREE, as appropriate) and the effect of deferred taxes in each period.

The provision for income tax and complementary taxes and income tax for equality (CREE), as appropriate, is calculated based on the higher of the taxable income and presumptive income (the minimum estimated amount of profitability on which the law expects to quantify and collect the income tax). Taxable profit differs from profit before tax as reported in the consolidated statement of profit or loss, because of items income or expense that are taxable or deductible in other periods, special taxable deductions, taxable losses and income or expenses that are non-taxable or non-deductible according to the applicable tax laws in each jurisdiction. Current tax is calculated by applying the enacted or substantially enacted tax rates, as of the close of the corresponding fiscal year.

Deferred tax is accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in our consolidated financial statements and their respective tax bases. Deferred tax liability is recognized for all temporary differences. Deferred taxes asset is recognized for all deductible temporary differences and for all tax losses to be amortized, insofar there is a reasonable expectation that such differences will be offset against taxable profits.

Deferred taxes on assets and liabilities are calculated based on enacted or substantively enacted statutory tax rates that we believe will be applied to our taxable income during the years in which temporary differences between the carrying amounts and tax bases are expected to be reversed.

Deferred tax asset carrying amounts are reviewed at the end of each reporting period and reduced if it is no longer probable that tax income will be available in the future, that allows full or partial recovery of the asset.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Deferred taxes are not recognized when they arise in the initial recognition of an asset or liability in a transaction (except in a business combination) that, at the time of the transaction, does not affect the accounting or tax profit, or in respect of the taxes on the possible future distribution of accumulated profits of subsidiaries or investments accounted for by the equity method, if at the time of the distribution it may be controlled by Ecopetrol S.A. and it is probable that the retained earnings will be reinvested by the Group companies and therefore, will not be distributed to Ecopetrol S.A.

The Colombian tax regime does not contemplate any taxation on economic groups or consolidated financial situations. There is therefore no obligation under the Colombian tax regime to make the calculation of the deferred taxes based on the consolidated financial statements. Nevertheless, because of the requirement under IFRS to report deferred tax, it is calculated as the sum of the tax calculated in the individual financial statements of the companies of the Ecopetrol Business Group plus or minus deferred taxes on business combinations, intragroup transactions or other adjustments at a consolidated level.

Salaries and benefits for Ecopetrol staff are governed by the Collective Labor Agreement 01 of 1977, and in their absence, by the Substantive Labor Code. In addition to the legally mandated benefits, employees are entitled to fringe benefits which are subject to the place of work, type of work, length of service, and basic salary. Annual interest of 12% is recognized on accumulated severance amounts for each employee, and the payment of indemnities is provided for when special circumstances arise that result in the non-voluntary termination of the contract, without just cause, and in periods other than the probationary period.

Ecopetrol S.A. belonged to the Special Pension Regime, under which allowances are the responsibility of the company and not a Pension Fund. However Act 797 of January 29, 2003 determined that Ecopetrol employees who joined the Company as of that date would be subject to the provisions of the General Pension Regime. Consequently allowances for employees retired as of July 31, 2010 are still Ecopetrol’s responsibility. Likewise, these employees are entitled to such pension bonus if they worked with Ecopetrol prior to January 29, 2003, but whose employment agreement expired without renewal before that date.

All social benefits of employees who joined the Company before 1990 are the responsibility of Ecopetrol, without the involvement of any social security entity or institution. The cost of health services for the employee and his/her relatives registered with the Company is determined by means of a mortality table, prepared based on facts occurring during the year.

For employees who joined the Company subsequent to the entry into effect of Law 50 of 1990, the Company makes periodic contributions for severance payments, pensions and occupational injuries the funds created for these respective obligations.

In 2008, Ecopetrol S.A. partially switched over the value corresponding to monthly pension payments from its pension liabilities, transferring the said liabilities and their underlying amounts to pension-related autonomous equities (PAP, per its acronym in Spanish). The funds transferred, and returns on those funds, cannot be redirected nor can they be returned to the Company until all of the pension obligations have been fulfilled. The switched obligation covers allowances and pensional bonds payments; while health and education remains under the labor liability in charge of Ecopetrol.

Employee-benefits are divided in four groups comprised as follows:

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Benefits to employees in the short term correspond mainly to those which payment will be made in the term of twelve months following the closing of the period in which the employees have rendered their services. This includes mainly salaries, severance, vacations, bonuses and other benefits.

Post-employment benefits of defined contributions correspond to the periodic payments for pensions that the Company makes to the respective funds that assume these obligations in their entirety.

The above benefits are recognized as a liability after deducting any already paid amounts.

In the defined benefits plan, the Company provides the benefits agreed to current and former employees and assumes the actuarial and investment risks.

The following benefits are classified as long-term defined benefit plans recognized in the financial statements according to the valuations made by an independent actuarial:

The liabilities recognized in the balance sheet in respect of these benefit plans is the present value of the defined benefit obligation at the balance sheet date, minus the fair value of plan assets.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using market interest rates, and that have terms to maturity approximating the terms of the related pension obligation.

Actuarial gains and losses arising from changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

There is no service cost for pensions plan as the beneficiaries were retired on as before July 31, 2010. The service cost is generated by the other benefits that includes current employees in the Company, recognized in the income statement, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes curtailments and settlements .

Other long-term benefit is the five-year term bonus which also makes part of the actuarial valuation. This benefit is a cash bonus accrues on a yearly basis and is paid out at the end of each five-year period that an employee works in the Ecopetrol S.A. The company records in the profit and loss statement the service cost, net liability interests and adjustments of defined benefit plan net liability

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Termination benefits are recognized only when a detailed plan exists for such process and there is no possibility to withdraw the offer. The Company recognizes a liability and an expense for termination benefits at the earlier date between the date when the offer of said benefits cannot be withdrawn and the date when the restructuration costs are recognized.

These benefits are not part of the actuarial valuation and they relate mainly to retirement allowances.

Revenue from crude oil and natural gas sales is recognized at the time of transfer of title to the buyer, including risks and rewards of ownership. In the case of refined and petrochemical products, revenue is recognized when products are shipped by the refinery and subsequently adjusted in accordance with the volumes actually delivered. Revenue from transportation services is recognized when products are transported and delivered to the buyer in accordance with sale terms. In other cases, revenue is recognized at the time it is earned and a true, probable and quantifiable right to demand its payment arises.

Under current regulations, Ecopetrol and Refinería de Cartagena S.A, sell regular gasoline and ACPM at a regulated price.

Per Decree 1880 of 2014, the Ministry of Mines and Energy semi-annually calculates and liquidates Ecopetrol’s net position to be stabilized for each fuel by the Fuel Price Stabilization Fund (FEPC). The net position is calculated by summarizing all differentials throughout the half year and the result is an amount in pesos in favor of the Company or the FEPC and chargeable to the FEPC. The differential is calculated as the volume reported by the Company at the time of sale multiplied by the difference between the international parity price and the reference price. The international parity price the daily prices of gasoline and diesel oil of the respective month in pesos, indexed to the Unites States of America Gulf market in accordance with Resolution 18 0522 of 2010 and the Producer Price reference defined by the Ministry of Mines and Energy.

Costs and expenses are presented according to their function; they are detailed in the related disclosures in cost of sales, administrative, operating, projects and other associated expenses.

New standards and interpretations that apply for annual periods beginning on 1 January 2016 or later, and which have not been applied in preparing these consolidated financial statements are as follows:

Ecopetrol does not anticipate that the application of the new and the amended standards will have a significant impact on the consolidated financial statements.

As part of the implementation process of International Financial Reporting Standards (hereinafter ¨IFRS¨) In conformity with the provisions of Law 1314 of 2009, Regulatory Decree 2784 of December 2012 and Decrees 3023 and 3024 of 2013, Ecopetrol S.A. belongs to Group 1 of preparers of financial information and, consequently, the issuance of the first financial statements under Financial Reporting Standards shall be as of December 31, 2015 and opening statement financial position as of January 1, 2014, being the transition date.

In preparing these Financial Statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards (IFRS 1), we applied the following optional and mandatory exemptions from full retrospective application of IFRS:

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Ecopetrol applied the exemption set out above for all business combinations that occurred up to the date of transition. Therefore, it has not restated any business combination that took place before January 1, 2014.

Ecopetrol elected to measure certain land properties at fair value as at the transition date and use that amount as its deemed cost in the opening IFRS balance sheet. Fair value was measured on the basis of a valuation performed by external, independent experts. See Note 4.2 (1) (i)

For other Property, plant and equipment items, useful lives where established according to appraisals and technical support from the operating areas of the Company. Accumulated depreciation was recalculated based on these new useful lives and adjustments were recognized in the opening IFRS balance sheet. For minor property, plant and equipment items such as office equipment, computer equipment and vehicles the Company has considered depreciated or revaluated cost under RCP as deemed cost at transition date, since it is comparable to its depreciated cost in accordance with IFRS. See Note 4.2 (1) (v)

Ecopetrol elected to apply this exemption and therefore has considered the facts and circumstances existing at the date of transition to determine the existence of implied leases in its contracts and agreements.

Ecopetrol S.A.

Notes to Consolidated Financial Statements

All amounts in millions of pesos unless otherwise stated

Ecopetrol elected to apply this exemption and measure its Asset Retirement Obligation as at the date of transition and estimate the cost of the related asset and depreciate it to the transition date.

The Company elected to apply this exemption and adopted as a policy to capitalize borrowing costs under IAS 23 starting on the transition date, January 1, 2014.(See Note 4.2(1)(ii))

The reconciliations that follow reflect the impact of the transition to IFRS on the financial position previously reported by Ecopetrol: