Circular 1/2014 of the Bank of Spain modifying Circular 4/2004 on financial information standards and financial statement models

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Circular 1/2014, of January 31, of the Bank of Spain, addressed to credit institutions, amending Circular 4/2004, of December 22, on standards for public and reserved financial information, and models for financial statements. (BOE of February 5, 2014)

Law 8/2012, of October 30, on the cleanup and sale of real estate assets of the financial sector, establishes that the Bank of Spain must determine the assets to which the remaining balances of coverages on financings related to real estate promotion and construction, constituted on risks classified as normal as of December 31, 2011, and corresponding to business in Spain, will be assigned. These are assets that were not subsequently applied as a result of reclassification as doubtful, substandard assets, or the adjudication or receipt of assets in payment of debts.

To this end, this circular proposes two categories of assets to which, due to the existence of evidence of impairment, institutions may assign the remaining balance. As a consequence of all this, two reserved statements are abolished and two others are modified.

Therefore, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, and in agreement with the Council of State, has approved this circular, which contains the following regulations:

First Regulation.

In Annex IX, Roman numeral VI is abolished, and Roman numeral V and paragraphs 42 and 43 are given a new wording, which shall read as follows [1]:

«V. PROVISIONS RELATING TO DECREE-LAW 2/2012 AND LAW 8/2012

42. In accordance with what is provided in Article 1 of Law 8/2012, of October 30, on the cleanup and sale of real estate assets of the financial sector, and without prejudice to the preceding sections of this Annex, the remaining balance of coverages constituted on financings related to land for real estate promotion and with constructions or real estate promotions, corresponding to business in Spain, classified as normal risk as of December 31, 2011, must be assigned to those assets that the Bank of Spain determines.

The remaining balance shall correspond to the unused amount as of December 31, 2013 in the constitution of specific coverages, which have become necessary as a result of subsequent reclassifications as doubtful, substandard assets, or the adjudication or receipt of assets in payment of debts, of the financings on which they were originally constituted.

43. Prior to the preparation of accounts for the 2013 fiscal year, and in any case before February 28, 2014, institutions shall submit to the Bank of Spain a report with a detail of the amount constituted for the coverage of the normal risks referred to in the previous section, and of the amounts used as of December 31, 2013, as well as an analysis showing that the unused remainder responds to risks that, as of December 31, 2013, meet the requirements for their classification as «normal risks» defined in this Annex. In the 2013 income statement, the remaining balance shall be credited as recovery of coverages made and unused; and, simultaneously, it shall be charged by at least an identical amount for the coverage or cleanup of:

a) Financial assets classified as doubtful and real estate assets for which a coverage higher than the minimums referred to in this Annex is necessary, for reasons such as those due to impairment greater than estimated in the borrower's payment capacity, to the estimated value of the real rights received as collateral with respect to their market situation, including the cost and time to recover liquidity, or any other circumstances that evidence that, with the public information available as of December 31, 2013, the institution will not recover the total amounts recognized in the balance sheet.

b) Financial assets related to investments in equity instruments not traded on active markets of companies whose most relevant business is linked, directly or indirectly, to the real estate sector, and in which estimates of impairment of their real estate assets may not correspond to market estimates, or the necessary variability or risk that the selling price, costs, and construction times be different from the expected amounts and times has not been considered, in accordance with the public information available as of December 31, 2013.

Prior to their registration, institutions shall submit to the Bank of Spain a detail of the assets and amounts referred to in the aforementioned letters. The coverages constituted as a result of this circular shall be considered minimum for the assets referred to in letter a) above as long as they remain in the category of doubtful or acquired in payment of debts.»

[1]

Text incorporated into Circular 4/2004, of December 22.

Second Regulation.

The following are abolished:

1. Line 1.1.3 in statement T-10-3 and in statement C-6-3.

2. Statements T-17-3 and C-19-3.

Transitional Provision.

Statements T-17-3 and C-19-3 corresponding to December 31, 2013, shall be submitted to the Bank of Spain, before February 28, 2014, without taking into account the application of the remaining balance referred to in the first regulation of this circular.

Final Provision. Entry into force.

This circular shall enter into force the day following its publication in the «Official State Gazette» (Boletín Oficial del Estado).

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