Circular 4/2017 of the Bank of Spain on Public and Reserved Financial Information Standards and Financial Statement Models

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Circular 4/2017, of November 27, from the Bank of Spain, to credit institutions, on standards for public and reserved financial information, and models for financial statements (BOE of December 6, 2017). [ 1 ]

[1]

Includes the correction of errors and errata published in the BOE of February 15, 2018.

INDEX

Preliminary Title. General Provisions.

Standard 1. Scope of application and object.

Title I. Public financial information.

Chapter one. Content of annual accounts.

Standard 2. Individual annual accounts.

Standard 3. Consolidated annual accounts.

Standard 4. Other individual public financial information.

Standard 5. Other consolidated public financial information.

Standard 6. Content of annual accounts.

Standard 7. Characteristics of information.

Standard 8. Elements of annual accounts.

Standard 9. Events after the reporting date.

Chapter two. Recognition and measurement criteria.

First Section. General criteria.

Standard 10. Fundamental hypothesis.

Standard 11. General recognition criteria.

Standard 12. Definitions of measurement criteria.

Standard 13. Other definitions related to measurement.

Standard 14. Considerations regarding fair value.

Standard 15. Revenue recognition.

Standard 16. Foreign currency transactions.

Standard 17. Selection and change of accounting policies.

Standard 18. Correction of errors and changes in accounting estimates.

Second Section. Financial instruments and other credit exposures.

Standard 19. Definition of financial instruments.

Standard 20. Offset of balances.

Standard 21. Issuance of financial instruments.

Standard 22. Recognition, classification and measurement of financial instruments.

Standard 23. Derecognition of financial assets.

Standard 24. Derecognition of financial liabilities.

Standard 25. Loan commitments, financial guarantees and other commitments granted.

Third Section. Non-financial assets.

Standard 26. Owner-occupied assets and investment property.

Standard 27. Inventories.

Standard 28. Intangible assets.

Fourth Section. Impairment.

Standard 29. Impairment of financial assets and other credit exposures.

Standard 30. Impairment of other assets.

Fifth Section. Hedge accounting.

Standard 31. Hedge accounting.

Standard 32. Hedge of interest rate risk of a portfolio of financial instruments.

Sixth Section. Other criteria.

Standard 33. Leases.

Standard 34. Non-current assets held for sale and discontinued operations.

Standard 35. Employee benefits.

Standard 36. Share-based payment transactions.

Standard 37. Other provisions and contingencies.

Standard 38. Fees and commissions.

Standard 39. Exchanges of assets.

Standard 40. Insurance contracts.

Standard 41. Social welfare funds and activities.

Standard 42. Income tax.

Chapter three. Business combinations and consolidation.

First Section. Control and business combinations.

Standard 43. Control.

Standard 44. Business combinations.

Standard 45. Joint arrangements.

Second Section. Branches.

Standard 46. Integration of branches.

Third Section. Consolidation.

Standard 47. General consolidation criteria.

Standard 48. Full consolidation method.

Standard 49. Equity method.

Standard 50. Foreign operations.

Standard 51. Operations in economies with high inflation rates.

Chapter four. Content of financial statements.

First Section. Statement of Financial Position (Balance Sheet).

Standard 52. Assets.

Standard 53. Liabilities.

Standard 54. Equity.

Second Section. Statement of Comprehensive Income.

Standard 55. Statement of Comprehensive Income.

Third Section. Statement of Changes in Equity.

Standard 56. Statement of Income and Expenses Recognized.

Standard 57. Total Statement of Changes in Equity.

Fourth Section. Statement of Cash Flows.

Standard 58. Statement of Cash Flows.

Fifth Section. Notes.

Standard 59. Notes preparation criteria.

Standard 60. Notes to individual annual accounts.

Standard 61. Notes to consolidated annual accounts.

Standard 62. Related parties.

Title II. Reserved financial information.

Chapter one. Reserved financial statements.

Standard 63. Reserved financial statements.

Chapter two. Preparation criteria.

Standard 64. Recognition, measurement and presentation criteria.

Standard 65. Off-balance sheet exposures and complementary information.

Standard 66. Segmentation of personal balances by holders.

Chapter three. Reserved statements to be submitted to the Bank of Spain.

Standard 67. Individual reserved statements.

Standard 68. Consolidated reserved statements.

Standard 69. Reserved statements relating to the statistical requirements of the Economic and Monetary Union.

Title III. Internal accounting development.

Standard 70. Internal accounting development and management control.

Standard 71. Register of guarantees, powers of attorney and procedures.

Title IV. Presentation of financial information to the Bank of Spain.

Standard 72. Presentation of statements and other information to the Bank of Spain.

Additional Provision first. Indications and correlations.

Additional Provision second. Retrospective analysis of the effectiveness of hedging relationships directly affected by the reform of interest rate benchmarks.

Transitional Provision first. First-time application of this circular to annual accounts.

Transitional Provision second. First-time application of this circular to other public financial statements.

Transitional Provision third. Submission of statements to the Bank of Spain during the year 2018.

Repealing Provision. Repeal of regulations.

Final Provision. Entry into force.

Annex 1. Individual public statements.

Annex 2. Information on branches in Spain of credit institutions whose head office is located in a Member State of the European Economic Area.

Annex 3. Consolidated public statements.

Annex 4. Individual reserved statements.

Annex 5. Consolidated reserved statements.

Annex 6. Reserved statements relating to the statistical requirements of the Economic and Monetary Union.

Annex 7. Segmentation schemes.

Annex 7.1 Minimum segmentation in the database.

Annex 7.2 Segmentation in reserved and public statements.

Annex 7.3 Segmentation in statements of statistical requirements of the Economic and Monetary Union.

Annex 8. Special accounting records.

Annex 8.1 Special accounting records of mortgage activity.

Annex 8.2 Special accounting record of the certificates and internationalization bonds referred to in Article 10 of Royal Decree 579/2014, of July 4.

Annex 8.3 Special accounting record of loans secured by territorial certificates referred to in the single additional provision of Royal Decree 579/2014, of July 4.

Annex 9. Analysis and coverage of credit risk.

I

The objective of this circular is to adapt the accounting regime of Spanish credit institutions to the changes in the European accounting framework resulting from the adoption of two new International Financial Reporting Standards (IFRS) – IFRS 15 and IFRS 9 – which, from January 1, 2018, will modify the criteria for recognizing ordinary income and financial instruments, respectively, with the latter being of special significance for credit institutions.

This circular, therefore, continues the Bank of Spain's strategy of maintaining the compatibility of the accounting regime of Spanish credit institutions with the principles and criteria established by the IFRS adopted by the European Union (IFRS-EU), in accordance with Regulation 1606/2002 of the European Parliament and of the Council of July 19, 2002, on the application of international accounting standards. This strategy is aligned with that set out in the preamble of Law 16/2007, of July 4, on the reform and adaptation of commercial legislation in accounting matters for international harmonization based on European Union legislation.

The Bank of Spain addresses, through this circular, the accounting standards and financial statement models for entities and groups to which its authorization extends, with the aim of adequately developing the Commercial Code for this sector, incorporating criteria compatible with the accounting framework represented by IFRS-EU.

Consolidated public financial statements of groups of credit institutions issuing securities are directly subject to Regulation 1606/2002 of the European Parliament and of the Council of July 19, 2002, and are therefore not within the scope of this circular. Nevertheless, the Bank of Spain considers that these groups' adherence to the policies and criteria set out in this circular would constitute an appropriate application of the IFRS-EU framework, except in those specific issues where the circular – which must necessarily follow what is provided in the Commercial Code, which in turn transposes Directive 34/2013 – incorporates a criterion that has no place in that IFRS-EU framework. Such is the case of the accounting treatment of participations in multi-group entities by proportional integration (paragraph 5 of Standard 47) or the amortization of all intangible assets, including goodwill (paragraph 5 of Standard 28).

Before highlighting the changes introduced by this circular, it is pertinent to note that the modifications incorporated through Circular 4/2016, of April 27, in Annex 9, aimed at strengthening credit risk management, correct classification of operations, robustness of individual and collective coverage estimates, adequate treatment of collateral for accounting purposes, and correct valuation of foreclosed assets, are maintained.

All these changes are aligned with the content of the European Central Bank's guide for credit institutions on non-performing loans, of March 2017, without prejudice to the decisions, recommendations, and guidelines adopted by the European Central Bank in the future regarding credit risk management and supervision, which must be applied by entities under its direct supervision, in accordance with the distribution of prudential competences between the Bank of Spain and the European Central Bank established following the entry into force of Council Regulation (EU) No 1024/2013 of October 15, 2013, which entrusts the European Central Bank with specific tasks regarding policies related to the prudential supervision of credit institutions.

Regarding the criteria for classifying operations based on their credit risk, it is important to highlight their conformity with the definitions of non-performing exposures and exposures with forbearance measures included in the European regulation for the preparation of supervisory financial information known as FINREP [Commission Implementing Regulation (EU) No 680/2014 of April 16, 2014, laying down implementing technical standards with regard to reporting of information by institutions in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013].

Furthermore, this circular continues to offer alternative solutions for the development of internal methodologies by institutions for the collective estimation of provisions, with a dual objective: i) to facilitate the application of the new expected loss model, which is more complex than the previous incurred loss model, by less complex institutions or for portfolios that are more difficult to model, following the principle of proportionality, and ii) to facilitate the comparison of institutions' own estimates with the results that would be obtained by applying these alternative solutions. These solutions have been updated with the most recent information and experience available to the Bank of Spain, taking into account the new expected loss model.

Finally, it is also worth highlighting that the accounting regime for foreclosed real estate remains substantially unchanged compared to the content in Annex IX of the repealed circular, although some clarifications are introduced. On the one hand, it is emphasized that foreclosed assets must be valued based on current market conditions, without taking into account possible future revaluations. On the other hand, the criteria for classifying foreclosed real estate are integrated into the new Annex 9, maintaining the preference for their recognition as non-current assets held for sale, given the usual purpose of sale in the shortest possible time by credit institutions, as opposed to other possible purposes of continued use less typical of their usual activity.

II

Among the changes introduced in this circular and emanating directly from the modifications of IFRS 9, three stand out. The first consists of the aforementioned change in the impairment model for financial assets, which shifts from being based on incurred loss to being estimated based on expected loss. This change aims to achieve a more adequate valuation of assets and greater timeliness in recognizing their impairment.

The second refers to the modification of the portfolios in which financial assets are classified for measurement purposes. Regarding debt instruments, their contractual characteristics and the business model followed by the institution for their management will determine the portfolio in which they will be classified, and therefore the applicable measurement criterion (amortized cost, fair value with changes in other comprehensive income, or fair value with changes in profit or loss). For their part, investments in equity instruments must be measured at fair value with changes in profit or loss, unless the institution irrevocably opts from the outset to recognize these value changes in other comprehensive income. Finally, other financial assets must be recorded in the balance sheet at their fair value, with changes recorded in profit or loss.

The third change affects the regulation of hedge accounting. The new IFRS 9 regime introduces an additional accounting scheme to the one existing to date, with the latter persisting during a transitional period. The new rules eliminate quantitative effectiveness tests, requiring instead monitoring and adjustment of the percentage that the hedging instrument represents relative to the hedged item (hedge ratio). It will be up to the institution to voluntarily opt to maintain the hedge accounting criteria it has been using so far or to switch to the new system.

Regarding the modifications derived from the adaptation to IFRS 15, mention should be made of the new model for recognizing ordinary income other than that arising from financial instruments, which will be based on the identification of each contract's obligations, the determination of its price, the allocation of this price to the identified obligations, and finally, the recognition of income at the point in time when control of the assets is transferred, if this happens at a specific moment, or over time as that transfer occurs.

All these modifications entail changes in both the reserved financial statements that institutions must submit to the supervisor and the public financial statements. To reduce burdens on institutions and facilitate the comparability and reconciliation of information, the models for consolidated and individual public statements have been adapted to the models for consolidated reserved statements established in Commission Implementing Regulation (EU) 2017/1443 of June 29, 2017, amending Commission Implementing Regulation (EU) No 680/2014 of April 16, 2014, to adapt it to IFRS 9, and to the models for individual reserved statements established in Regulation (EU) 2017/1538 of the European Central Bank of August 25, 2017, amending Regulation (EU) 2015/534 on the presentation of financial information for supervisory purposes (ECB/2017/25).

As a final modification derived from European legislation that affects reserved statements, the approval of Regulation (EU) 2016/1384 of the European Central Bank of August 2, 2016, amending Regulation (EU) No 1011/2012 (ECB/2012/24), on statistics on securities holdings (ECB/2016/22), makes it necessary to modify the details regarding the holding of securities in various consolidated and individual reserved statements.

The breadth and depth of the changes derived from IFRS 9 on financial instruments suggest that the update of Circular 4/2004, of December 22, to credit institutions, on standards for public and reserved financial information, and models for financial statements, should be implemented on this occasion through a new circular, rather than addressing them, as hitherto, through partial modifications of that circular. In this way, internal coherence is intended to be guaranteed and its understanding and application facilitated. Therefore, this new accounting circular replaces Circular 4/2004, of December 22.

The structure of this circular is very similar to that of the repealed circular: a preliminary title, which regulates the scope of application and object; four titles, which regulate, respectively, public financial information, reserved financial information, internal accounting development, and the presentation of financial statements to the Bank of Spain; an additional provision, dedicated to the preparation of indications and correlations; three transitional provisions, which address the issues arising from the changes that will occur as a result of the first application of the circular; a repealing provision; and a final provision, regarding its entry into force. In addition, the circular includes nine annexes: six relating to the formats of public and reserved statements, one annex relating to segmentation criteria, one annex grouping the special accounting records that issuers of certain securities must keep, and finally, a last annex dedicated to the analysis and coverage of credit risk.

Preliminary Title. General Provisions.

The circular maintains its scope of application unchanged with respect to the repealed circular. Regarding public financial information, it constitutes the development and adaptation for credit institutions, branches of foreign credit institutions, and groups of credit institutions of the accounting standards established in the Commercial Code, without prejudice to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of July 19, 2002, and the accounting information regulations provided for in the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of October 23.

As for reserved financial information, this circular establishes the criteria that credit institutions and consolidatable groups of credit institutions must follow in the preparation of the information they must submit for supervisory purposes.

Title I. Public financial information.

This title consists of four chapters. The first chapter, on the content of annual accounts, contains two standards that determine which entities and groups must prepare annual accounts, individual and consolidated, and two other standards that establish that, regardless of the obligation to prepare and publish these annual accounts, all entities and groups of credit institutions must periodically publish other information through their respective professional associations, in which all the criteria of this circular must be applied. Finally, it addresses the content of annual accounts, establishes the characteristics that financial information must meet (relevance, faithful representation of economic phenomena, clarity, conciseness, understandability, comparability, verifiability, and timeliness), collects the definitions of the elements of annual accounts (assets, liabilities, equity, expenses, income, gains, and losses), and sets the criteria to be applied to events occurring after the reporting date and before its preparation.

The second chapter, relating to recognition and measurement criteria, contains six sections, with the following content:

First Section. General criteria: contains the standards describing the fundamental hypothesis on which financial information will be prepared (going concern), and the main criteria on which it will be based (recognition, non-offsetting, correlation of income and expenses, and accrual). In addition, the general measurement criteria common to all types of assets and liabilities, including fair value, are defined, along with more general issues, such as criteria for income recognition (aligned with IFRS 15), valuation of foreign currency transactions, selection and changes in accounting policies, and correction of errors and changes in accounting estimates.

Second Section. Financial instruments and other credit exposures: contains the standards of a specific nature for the accounting treatment of financial instruments.

The definitions and characteristics of the three types of instruments (financial assets, financial liabilities, and equity instruments) are included, as well as the guidelines for distinguishing between the latter two from the issuer's perspective, which are based on the economic substance of the instrument rather than its legal form. The cases in which financial instruments may be offset for the purposes of their presentation in the balance sheet are also established.

The portfolios in which financial instruments will be classified for measurement purposes are defined, which are:

– Financial assets at amortized cost: Includes debt instruments whose contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding, and which the entity manages with a business model whose objective is to hold them to collect these contractual cash flows.

– Financial assets at fair value through other comprehensive income: Will include debt instruments whose contractual terms also give rise to cash flows that are solely payments of principal and interest, but which the entity manages by combining the objective of collecting cash flows with the objective of selling the instruments. In addition, equity instruments that the entity has voluntarily designated at the outset and irrevocably in this portfolio will be recorded in this portfolio. Changes in the fair value of all these assets will be recorded in equity (other comprehensive income). When dealing with investments in debt instruments, the accumulated value changes will remain in equity until the derecognition of the asset, which will entail its reclassification