Circular 6/2021 of the Bank of Spain, of 22 December, amending Circular 4/2017 on financial information standards for credit institutions and Circular 4/2019 for credit establishments

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Circular 6/2021, of 22 December, of the Bank of Spain, amending Circular 4/2017, of 27 November, to credit institutions, on public and reserved financial information standards and financial statement models, and Circular 4/2019, of 26 November, to credit establishments, on public and reserved financial information standards and financial statement models. (BOE of 29 December 2021).

I

The main objective of this circular is to update Circular 4/2017, of 27 November, to credit institutions, on public and reserved financial information standards and financial statement models.

First, the modifications incorporated by this circular into Circular 4/2017, of 27 November, reflect changes in the International Financial Reporting Standards adopted in the European Union (IFRS-EU) made pursuant to Commission Regulation (EU) 2021/25 of 13 January 2021, amending Regulation (EC) No 1126/2008 adopting certain International Accounting Standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, regarding International Accounting Standard No. 39 and International Financial Reporting Standards 4, 7, 9 and 16.

The changes mentioned in the previous paragraph are the result of phase 2 of the International Accounting Standards Board (IASB) project to respond to the reform of benchmark interest rates known as IBOR (InterBank Offered Rates). These changes complete those introduced in phase 1 by Commission Regulation (EU) 2020/34 of 15 January 2020, amending Regulation (EC) No 1126/2008 adopting certain International Accounting Standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, regarding International Accounting Standard No. 39 and International Financial Reporting Standards 7 and 9.

Second, the models and instructions for preparing reserved financial statements known as FINREP have been modified by Commission Implementing Regulation (EU) 2021/451 of 17 December 2020, laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council in relation to the reporting of information for supervisory purposes by entities, and repealing Implementing Regulation (EU) No 680/2014. Pursuant to this implementing regulation, changes have been introduced in FINREP, among others, regarding restructured, refinanced or forborne exposures.

This circular makes adjustments to the treatment of restructured, refinanced or forborne exposures set out in Annex 9, on "Credit Risk Analysis and Hedging", of Circular 4/2017, of 27 November, to keep it aligned with that of FINREP.

Third, the European Banking Authority (EBA) Guidelines on lending and loan monitoring (EBA/GL/2020/06) aim, among other things, to improve practices, processes and procedures related to the granting of credit operations. The aforementioned guidelines have been adopted by the Bank of Spain, both for less significant credit institutions and for credit establishments, and by the European Central Bank, with regard to significant credit institutions.

Part of the content of these guidelines is similar to certain points in section I.A), on "Granting of operations", of Annex 9 of Circular 4/2017, of 27 November. To the extent that their content has been incorporated into the aforementioned European guidelines, it is appropriate and convenient to delete these points from Annex 9.

As a consequence of the foregoing, this circular repeals the single additional provision of Circular 4/2019, of 26 November, which refers precisely to the points to be deleted from Annex 9 of Circular 4/2017, of 27 November.

In short, the modifications described in the previous paragraphs preserve the convergence of the accounting regulations of Spanish financial entities with the IFRS-EU framework, subject to what is established in the Commercial Code, while maintaining alignment and avoiding overlaps with the aforementioned European rules and guidelines.

Fourth, this circular modifies Annex 9 of Circular 4/2017, of 27 November, to update the alternative solutions for the collective estimation of credit risk loss coverage and discounts on the reference value of assets acquired or received in payment of debts. This update reflects the evolution of data on operations declared by entities to the Bank of Spain and, furthermore, in the case of alternative solutions, incorporates updated forecasts on future macroeconomic conditions.

Regarding the use of the updated alternative solutions, it should be noted that, in accordance with points 52 and 53 of Annex 9 of Circular 4/2017, of 27 November, the decision to develop internal methodologies for the collective estimation of credit risk loss coverage or to resort to the alternative solutions lies with the entity itself. However, entities may choose not to develop internal methodologies and continue to resort to the alternative solutions as long as they consider that, in application of the principle of efficacy and simplicity of the aforementioned Annex 9, the results obtained are adequate to the reality of their credit operations, the current economic environment and the available prospective information.

Fifth, Circular 4/2017, of 27 November, is modified to incorporate the update of the statistical data requirements of the Economic and Monetary Union (EMU), in accordance with the modifications established by Regulation (EU) 2021/379 of the European Central Bank of 22 January, on the balance sheet items of credit institutions and the monetary financial institutions sector (recast) (ECB/2021/2).

The new information requested in accordance with Regulation (EU) 2021/379 of the European Central Bank consists, on the one hand, in additional data requirements to improve the analysis of monetary and credit evolution and, on the other, in modifications of some of the existing data requirements and definitions to favor better integration with other statistical data sets.

Sixth, Circular 4/2017, of 27 November, is modified to simplify the reporting requirements for reserved financial statements applicable to branches of foreign credit institutions operating in Spain whose head office is located in a Member State of the European Economic Area. In addition, the submission of statement FI 40 is exempted for all branches in Spain of foreign credit institutions.

Finally, specific modifications are made to the individual reserved financial statements of Circular 4/2017, of 27 November, in order to introduce new data requirements to verify compliance with regulations or collect statistical information, as well as to make the technical adjustments and corrections identified as necessary since the last update of said circular.

II

This circular consists of two rules, a transitional provision, a final provision and three annexes.

Rule 1 updates Circular 4/2017, of 27 November, as follows:

– In Rule 64, on "Recognition, valuation and presentation criteria", first, a mention is introduced regarding the need to take into account the specifics of Title II for the presentation of information in reserved statements. Second, the method of determining the gross carrying amount for financial assets at fair value through other comprehensive income is modified, following the changes made in FINREP.

– Rule 67, on "Individual reserved statements", is modified to clarify that statements FI 1 to FI 45 will be prepared applying the instructions for the presentation of reserved financial statements (FINREP) of Commission Implementing Regulation (EU) 2021/451 and to incorporate the correspondence between the categories for classifying operations based on credit risk and the "phases" used in FINREP. In addition, the necessary changes are made to incorporate the simplified regime of reporting requirements for reserved financial statements applicable to branches of foreign credit institutions operating in Spain whose head office is located in a Member State of the European Economic Area.

– Rule 69, on "Reserved statements relating to the statistical requirements of the Economic and Monetary Union", is modified to comply with the update of the EMU statistical data requirements. The new information requested consists, on the one hand, in new data requirements to improve the analysis of monetary and credit evolution and, on the other, in modifications of some of the existing data requirements and information definitions to favor better integration with other statistical data sets. The update involves the modification of some statements, the elimination of one, and the incorporation of six new statements.

– To complete the adaptation to the changes in IFRS-EU as a result of the IBOR reform, the second additional provision, on "Retrospective analysis of the effectiveness of hedging relationships directly affected by the reform of benchmark interest rates", is replaced by one on "Transactions directly affected by the reform of benchmark interest rates". In particular, exceptions are introduced regarding the accounting reflection of the changes required by the IBOR reform in the basis for determining the contractual cash flows of a financial asset or liability, in the documentation of a hedge accounting relationship and in the basis for determining lease payments.

– In Annex 4, on "Individual reserved statements", specific modifications are incorporated to introduce new data requirements to verify compliance with regulations or collect statistical information, as well as to make the technical adjustments and corrections identified as necessary.

– Annex 6, on "Reserved statements relating to the statistical requirements of the Economic and Monetary Union", is replaced by Annex 1 of this circular, which includes the new models.

– Annex 7.1, on "Minimum sectorization in the database", is replaced by Annex 2 of this circular, which includes the updated sectorization.

– Annex 7.3, on "Sectorization in the statements of statistical requirements of the Economic and Monetary Union", is replaced by Annex 3 of this circular, which includes the updated sectorization.

– Regarding Annex 9, on "Credit Risk Analysis and Hedging", first, certain points whose content is included in the EBA Guidelines on lending and loan monitoring (EBA/GL/2020/06) are deleted. Second, adjustments are made to the criteria for reclassifying restructured, refinanced or forborne operations out of the doubtful risk category to keep them aligned with those set out in the reserved financial statements (FINREP) of Commission Implementing Regulation (EU) 2021/451. Third, the tables with the percentages of the alternative solutions for the collective estimation of credit risk loss coverage and discounts on the reference value of assets acquired or received in payment of debts are modified.

Rule 2 updates Circular 4/2019, of 26 November, by repealing its single additional provision, which becomes irrelevant with the entry into force of this circular.

According to the single transitional provision, entities will apply retroactively the exceptions introduced by this circular in the second additional provision of Circular 4/2017, of 27 November. However, entities may opt not to restate the comparative information included in the annual accounts for the 2021 financial year and will only have to restate the hedging relationships interrupted before the initial application date of the aforementioned exceptions.

Finally, according to the single final provision, this circular enters into force the day following its publication in the Official State Bulletin, with the following specifics:

– The new regime of reserved financial statements for branches of foreign credit institutions operating in Spain whose head office is located in a Member State of the European Economic Area will be applied for the first time for data as of 31 January 2022.

– The changes in individual reserved financial statements will be applied for the first time for data as of 31 January 2022 for monthly frequency statements, 31 March 2022 for quarterly frequency statements, 30 June 2022 for semi-annual frequency statements and 31 December 2022 for annual frequency statements.

– The update of the EMU statistical data requirements will be applied for the first time for data as of 31 January 2022 for statements with monthly frequency and 31 March 2022 for those with quarterly frequency.

– The modifications in the criteria to proceed with the reclassification out of the doubtful risk category of restructured, refinanced or forborne operations will apply from 31 December 2021. However, entities may opt to apply them from 30 June 2021.

– The new tables with the alternative solutions for the collective estimation of credit risk loss coverage and discounts on the reference value of assets acquired or received in payment of debts will apply from 30 June 2022.

III

This circular attends to the principles of good regulation required by Article 129 of Law 39/2015, of 1 October, on the common administrative procedure of Public Administrations.

Regarding the principles of legal certainty and administrative efficiency, this circular modifies Circular 4/2017, of 27 November, and Circular 4/2019, of 26 November, to preserve the convergence of the accounting regulations of Spanish financial entities with the IFRS-EU framework, subject to what is established in the Commercial Code, as well as to maintain alignment and avoid overlaps with other European rules and guidelines that serve as a reference for the preparation of financial information.

In this way, the national accounting regulations applicable to financial entities will maintain coherence with the most advanced accounting principles included in the IFRS-EU framework, avoiding the coexistence for the same issuer group of securities in the EU of an accounting framework for consolidated accounts and a different one for individual accounts.

Regarding the principles of necessity and efficacy stipulated in the aforementioned law, this circular serves to update the alternative solutions for the collective estimation of credit risk loss coverage and discounts on the reference value of assets acquired or received in payment of debts, as well as the EMU statistical data requirements.

Deepening in the application of the principle of proportionality, this circular modifies Circular 4/2017, of 27 November, to simplify the reporting requirements for reserved financial statements applicable to branches of foreign credit institutions operating in Spain whose head office is located in a Member State of the European Economic Area.

The principle of transparency is achieved through the prior public consultation to potential affected parties, established by Article 133 of Law 39/2015, of 1 October, and the public hearing and information to interested parties, so that these form part of the processing process of this circular.

IV

The authorizations of the Bank of Spain to issue this circular are the same as those used for the approval of Circular 4/2017, of 27 November, and Circular 4/2019, of 26 November; respectively, the Order of the Ministry of Economy and Finance of 31 March 1989, empowering the Bank of Spain to establish and modify the accounting regulations of credit institutions, and the third additional provision of Order ECE/228/2019, of 28 February, on basic payment accounts, procedure for transfer of payment accounts and requirements of comparison websites.

Additionally, Articles 7 and 10 of Regulation (EU) No 2021/379 of the European Central Bank provide that national central banks shall determine the frequency and timing with which reserved statements relating to the EMU statistical requirements must be received, as well as the rules for information presentation in these statements.

Both the prior public consultation and the public hearing and information have been carried out, through their publication on the Bank of Spain website; giving the opportunity to the recipients of the regulation and to interested parties in general to make their observations.

Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, on the proposal of the Executive Commission, and in accordance with the Council of State, has approved this circular, which contains the following rules:

Rule 1. Modification of Circular 4/2017, of 27 November, to credit institutions, on public and reserved financial information standards and financial statement models.

The following modifications are introduced in Circular 4/2017, of 27 November:

a) In Rule 64, on "Recognition, valuation and presentation criteria":

i. Section 1 is modified, which reads as follows:

"Entities shall prepare reserved financial statements, individual and consolidated, applying the criteria identified in section 4 of Rule 1 of this circular, with the specifics established for the presentation of reserved statements set out in this Title.

Branches of foreign credit institutions whose head office is located in a Member State of the European Economic Area, in the preparation of reserved financial statements, shall use the criteria that, in accordance with section 2 of Rule 2, they apply in the formulation of their public financial information. Branches shall report in detail to the Bank of Spain on the criteria they intend to apply when they differ from those established in Title I, updating such information whenever modifications occur."

ii. Letter b) of section 6 is modified, which reads as follows:

"b) Gross carrying amount: in accordance with Rule 12, the book value of debt instruments before deducting the amount of credit risk adjustments as defined in the following letters:

i) For financial assets held for trading, the gross carrying amount shall be the fair value.

ii) For financial assets measured at fair value through profit or loss that are not to be classified as held for trading, the gross carrying amount shall be the fair value if the instruments are classified as "non-doubtful". If the instruments are classified as "doubtful", the gross carrying amount shall be the fair value after adding any accumulated negative fair value adjustment due to credit risk, not exceeding the fair value of the instrument at initial recognition. The valuation must be performed at the level of individual financial instruments.

iii) For instruments at amortized cost or fair value through other comprehensive income, the gross carrying amount shall be the amortized cost before adjusting for accumulated impairment."

b) In Rule 67, "Individual reserved statements":

i. Section 5 is modified, which reads as follows:

"5. Statements FI 1 to FI 45 shall be prepared by fully applying the criteria for the presentation of information regulated in Commission Implementing Regulation (EU) 2021/451 of 17 December 2020, laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council in relation to the reporting of information for supervisory purposes by entities, and repealing Implementing Regulation (EU) No 680/2014.

In particular, the definition of non-performing that will be used for these statements shall be that established in Article 47bis of Regulation (EU) No 575/2013 of the European Parliament and of the Council and in Annex V of Commission Implementing Regulation (EU) 2021/451. Additionally, the "phase 1" category shall correspond to normal risk, "phase 2" to normal risk under special monitoring and "phase 3" to doubtful risk; with the categories of normal risk, normal risk under special monitoring and doubtful risk being those established in section 11 of Rule 29 and in Annex 9. In any case, the estimation of credit risk coverage shall be made taking into account the classification of risks in these latter categories. Finally, financial assets purchased or originated with credit impairment shall be classified in these phases or presented separately, as appropriate in accordance with Commission Implementing Regulation (EU) 2021/451."

ii. Letter c) of section 6 is modified, which reads as follows:

"c) Statement FI 40, which shall be submitted by entities that do not have to submit reserved consolidated statements in accordance with Rule 68, unless they are part of a consolidatable group that does submit them or are branches in Spain of foreign credit institutions."

iii. Letter f) of section 6 is modified, which reads as follows:

"f) Statements FI 10, FI 11, FI 12, FI 13, FI 15, FI 140.3, FI 141 and FI 143 which shall not be submitted by branches in Spain of foreign entities whose head office is located in a Member State of the European Economic Area. In addition, statement FI 131 shall not be submitted by those branches in Spain of foreign credit institutions whose head office is located in a Member State of the European Economic Area that, in application of what is established in Rule 2, section 2, letter b), have decided to apply the valuation and coverage criteria of the risk"