Circular 6/2013 of the National Securities Market Commission on Accounting Standards, Annual Accounts, Public Financial Statements and Reserved Statistical Information States of Banking Asset Funds

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86546 I. GENERAL PROVISIONS NATIONAL SECURITIES MARKET COMMISSION 11163 Circular 6/2013, of September 25, of the National Securities Market Commission, on accounting standards, annual accounts, public financial statements and reserved states of statistical information of Banking Asset Funds.

Royal Decree 1559/2012, of November 15, establishing the legal regime of asset management companies, establishes that Banking Asset Funds (hereinafter, FAB or funds), referred to in the additional tenth provision of Law 9/2012, of November 14, on the restructuring and resolution of credit entities, shall apply, in the preparation of their annual accounts and, in general, of all accounting reports they must submit, the accounting standards and principles contained in the Commercial Code and the General Accounting Plan, approved by Royal Decree 1514/2007, of November 16 (hereinafter, PGC), with the specializations that may be determined by Circular of the National Securities Market Commission (hereinafter, CNMV).

Among the information obligations established by Royal Decree 1559/2012, of November 15, Article 41 includes the obligation that the managing company of the FAB must prepare and publish an annual and semi-annual report for each of the funds it manages. The same article empowers the CNMV to request from the FABs additional information it deems necessary for the exercise of its competencies, as well as to determine the form and content of all information required by the aforementioned article, including, therefore, the semi-annual and annual reports.

Likewise, according to Article 42 of the aforementioned Royal Decree, it is specified that the CNMV may establish the obligation to include in the annual report of the FAB, which the managing company must prepare, any other information or warning it considers appropriate.

This Circular develops only the content and format of the financial and accounting information obligations established by Royal Decree 1559/2012, of November 15, in its Articles 41 to 46. As pointed out in its Article 47, these obligations cease to apply with respect to a specific FAB at the moment when the securities issued by said FAB are admitted to trading on an official secondary market. From then on, these information obligations are replaced by those provided for in these cases in Article 35 of Law 24/1988, of July 28, on the securities market and its implementing regulations, at which point this Circular ceases to be applicable to said FAB, insofar as it refers to the obligations to submit public financial information. However, all FABs, insofar as they are registered with the CNMV, will be subject to the obligation to submit the reserved states of statistical information referred to in the eighteenth provision of this Circular.

The regulatory adaptation in accounting matters of FABs has been addressed in this Circular considering their legal and operational nature and idiosyncrasy, and taking into account the accounting principles and standards contained in the Commercial Code and the General Accounting Plan.

Therefore, this Circular does not include those accounting regulatory developments already provided for by the PGC and for which no adaptation has been considered necessary, but only those accounting treatments that FABs must apply to those transactions and events that, due to their specificity, are not contemplated or addressed with sufficient detail in the corresponding regulatory developments of commercial legislation. cve: BOE-A-2013-11163

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86547 In this sense, the merger and spin-off of FABs referred to in Article 38 of Royal Decree 1559/2012, of November 15, shall be accounted for in accordance with the provisions of the PGC. For the same reason, in the complete treatment of certain aspects of financial statements, such as taxes, the determination of the existence of control, joint control or significant influence, or hedge accounting, on which it has been considered that they do not present any specificity with respect to the generality of entities, the Circular refers, expressly or implicitly, to the general regime provided for them in the PGC. The result of this approach is specific accounting standards emanating from the basic principles and criteria contained in the PGC and which do not differ from the accounting standards provided for therein, which must be fully complied with.

One of the presentation criteria worth noting is the classification of assets and liabilities in the balance sheet by nature and taking into account their liquidity, without distinguishing between current and non-current assets and liabilities. This attends to the specificity of these structures and the nature of their assets and liabilities. Although they do not have the status of credit institutions, they share with them to a large extent a similar typology of assets and liabilities, which materialize, on the asset side, in credit rights and real estate, and on the liability side in mainly financial debts, in the form of bonds or loans obtained. Hence, it has been decided to import for these purposes the classification criteria of Circular 4/2004, of November 22, of the Bank of Spain, on Public and Reserved Financial Information Standards, and models of financial statements of credit institutions.

Additionally, it has been considered that such classification, between current and non-current, is not relevant, because given the merely instrumental or pass-through nature of the liabilities, which have as their only guarantee and means of collection the transferred assets, it will not be evident, especially in the, possibly, more subordinated ones, when the payment obligation arises and when its maturity or liquidation is expected. Regarding assets, these are structures with a singular and exclusive purpose, which is none other than to maximize investor returns, through the ordinary exploitation and throughout their operating cycle, of both real estate and credit rights, which in substance reflects a business model oriented towards the holding and management of assets, and which therefore justifies their classification as current. Therefore, it has been considered more relevant and less complex to eliminate the distinction between current and non-current and classify them by nature, providing additional information on maturities in notes or annexed statements.

Another aspect worth highlighting, which represents a difference with Circular 2/2009, of March 25, of the CNMV, which regulates the accounting of Securitization Funds, is the existence of a section in the balance sheet relating to equity. This is because the legal configuration granted to these structures contemplates the possibility of contributions in the form of equity. Thus, paragraph 4 of Article 29 of Royal Decree 1559/2012, of November 15, refers to the "initial equity of the FAB [which] shall integrate assets and, where applicable, assets and liabilities", and paragraph 1 of Article 31 of the same Royal Decree contemplates in letter d) that "contributions from institutional investors, who shall have the right to the remainder, if any, arising upon the liquidation of the fund," may be made. Likewise, the additional tenth provision of Law 9/2012, of November 14, itself, provides for the constitution of FABs as aggregations of assets and liabilities "which will constitute separate estates" and requires that managing companies publish annual and semi-annual information so that "all circumstances that may influence the determination of the value of the estate..." are publicly known.

Consequently, it is contemplated that FABs may have equity, positive or negative, which makes it unnecessary to import from the aforementioned Circular the mechanism of loss pass-through to liabilities, based on their degree of subordination, which was an exceptional but necessary treatment in Securitization Funds, given the need to preserve by regulatory imperative a null equity and results throughout their life. cve: BOE-A-2013-11163

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86548 When qualifying as equity or liability for accounting purposes a certain contribution made by an institutional investor or a financial instrument issued by the FAB, this circular has attended to the economic substance of the operation, regardless of the legal form used. To this end, it has started from the definition of equity in the PGC, where it is defined as "the residual part of the company's assets, after deducting all its liabilities." Additionally, it has been considered that instruments or contributions that meet the condition of holding a residual interest in the net assets are those that, among other conditions established in the tenth provision, are the most subordinated and whose only obligation for the fund is to reimburse their holders the proportional part corresponding to them from their net assets, either solely and exclusively at the time of the fund's liquidation, or additionally, when the holder decides, exercising the option granted by the instrument. To this end, for their classification as equity, such instruments or contributions must not generate for the fund any other obligation to pay in cash or other financial assets.

In this sense, if the holder or contributor has the right to receive automatically a predetermined remuneration, provided there are distributable benefits, including an amount for the total or part of them, the financial instrument or contribution will have the status, for accounting classification purposes, of financial liability. For their accounting classification as equity instruments, the distribution obligation must be conditioned to some approval mechanism by one of the representation bodies that the regulations provide for regarding FABs, whether the board of directors of the managing company, the syndicate of holders of securities issued by the fund, or committees or other representative bodies of investors created under the authority of letter o) of paragraph 1 of Article 36 of Royal Decree 1559/2012, of November 15.

Finally, the distinction between inventories and investment property must be mentioned. This latter category is relatively recent in our Spanish accounting regulations, having been imported from international financial reporting standards, specifically IAS 40 Investment Property. The distinction is not peaceful in doctrine, so managing companies must carefully apply professional judgment.

Without it being possible to give specific rules addressing all possible situations, the key factor is to evaluate what the main purpose of the property is. When it concerns properties under construction with the purpose of their promotion and sale in the ordinary course of business, they shall be classified as inventories. In those cases where the property is held with the intention of generating rental income, the appropriate classification is investment property. And in the case of a completed property, which is neither intended for sale in the ordinary course of business nor for obtaining rents, but is held with the purpose of taking advantage of fluctuations in its market value, its classification as investment property is also appropriate. This last scenario is the most problematic to identify, and in which managing companies must carefully analyze, at the time of initial recognition, all facts and circumstances, as well as their business model, before concluding whether their main purpose is sale, in the ordinary course of business, or holding for an indefinite period to obtain capital gains, benefiting from possible increases that may occur in the future in their market price.

This Circular regulates exclusively the individual, annual, semi-annual and quarterly information that FABs must submit, not contemplating that they must prepare and submit consolidated financial statements to the CNMV, taking into account that the Commercial Code, which acts as the basic standard, only establishes the obligation to consolidate for companies, not being applicable to FABs, structures with the nature of funds that lack legal personality. cve: BOE-A-2013-11163

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86549 The additional tenth provision of Law 9/2012, of November 14, requires that the managing company publish, for each of the FABs, an annual report and a semi-annual report, in order that, in an updated manner, all circumstances that may influence the determination of the value of the estate and the prospects of the institution, as well as compliance with applicable regulations, are publicly known.

Consequently, the information breakdowns contained in this Circular seek, taking into account the specificities inherent to FABs, to regulate the accounting treatment of all those transactions and events that are estimated to be most common in their ordinary business; to facilitate greater transparency to the market; and to allow their aggregated monitoring and evolution at the European level.

The deadlines for submitting public financial information are required on a semi-annual basis, and the reserved states of statistical information are required on a quarterly basis.

The content of this Circular is structured in eighteen provisions, distributed in six chapters, a transitional provision and a final provision.

The first chapter of the Circular collects the general provisions, specifically, the object and scope of application of the Circular and the manner of presenting information to the CNMV.

Taking as a basis the general accounting principles contained in the PGC, the second chapter collects the specific accounting criteria that take into consideration the special characteristics of FABs. Likewise, this chapter includes clarifications regarding the presentation of information derived from the application of accounting standards.

The third chapter establishes the models of semi-annual public statements to be submitted to the CNMV and their submission deadline. The set of public statements includes, in addition to the main financial statements provided for by the PGC, with the necessary adaptations due to the specific nature of FABs, certain statements incorporating additional breakdowns on the assets and liabilities of FABs with the objective of providing greater transparency and information to investors. These additional information breakdowns must also be supplied as part of the notes to the annual accounts.

The fourth chapter refers to the annual accounts. The models to which the balance sheet, income statement, cash flow statement, statement of recognized income and expenses, and statement of changes in equity must adhere are those provided for in the third chapter for public financial information. This chapter also includes certain minimum information breakdowns to be included in the notes, additional to those provided for in the PGC, and which derive from the specific nature of FABs.

The fifth chapter refers to the management report to be included in the annual and semi-annual reports.

Finally, the sixth chapter, in line with the initiatives marked by the European Central Bank and for better control and supervision of Securitization Funds and other similar structures, such as FABs, incorporates the models of quarterly statistical information to be submitted by the managing companies of said funds.

This Circular is issued under the authority of Article 41 of Royal Decree 1559/2012, of November 15, which empowers the CNMV to request from FABs the information it deems necessary for the exercise of its competencies, as well as to determine the form and content of, among other obligations, the annual and semi-annual report, of Article 42 which allows it specifically to establish information obligations in the annual report of the FAB, and of Article 45 of the same norm, which requires FABs to apply the standards and accounting principles contained in the Commercial Code and the PGC, with the specializations determined by Circular of the CNMV. cve: BOE-A-2013-11163

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86550 In virtue thereof, after receiving the mandatory reports from the Accounting and Auditing Institute and the Advisory Committee, the Council of the CNMV in its meeting of September 25, 2013, has ordered the following:

CHAPTER ONE General Provisions

First Provision. Object and scope of application.

1. This Circular aims to regulate the specific accounting standards, as well as the content and form of presentation of the annual accounts, semi-annual public financial statements and reserved quarterly states of statistical information of Banking Asset Funds (hereinafter, FAB or funds).
2. Compliance with this Circular is subject to those FABs, regulated in Law 9/2012, of November 14, on the restructuring and resolution of credit entities, and in Royal Decree 1559/2012, of November 15, establishing the legal regime of asset management companies, that do not have issued securities admitted to trading on an official secondary market. As an exception, all FABs registered with the National Securities Market Commission (hereinafter, CNMV), even if their issued securities are admitted to trading on an official secondary market, must submit the reserved quarterly states of statistical information, in accordance with what is established in the eighteenth provision of this circular.

Second Provision. Applicable accounting framework in the preparation of financial information.

1. The specific accounting standards that FABs must apply in the preparation of the information they must submit shall be those contained in this Circular.
2. In matters not provided for by this Circular, the accounting standards and principles contained in the Commercial Code and in the General Accounting Plan, approved by Royal Decree 1514/2007, of November 16 (hereinafter, PGC), shall apply. In particular, the merger and spin-off of FABs referred to in Article 38 of Royal Decree 1559/2012, of November 15, shall be accounted for in accordance with recording and valuation standards 19th and 21st of the PGC.
3. The recording and valuation standards included in this Circular for certain operations do not authorize FABs to carry them out when, due to their nature, they were not permitted, either due to limitations imposed by current regulations, by the deed of incorporation or contractual issuance agreement, by their prospectus, or because specific authorization was required for them.
4. FABs whose equity is structured in independent compartments shall keep separate accounts in their accounting that differentiate the assets and liabilities, equity and income and expenses attributable to each compartment, without prejudice to the uniqueness of their annual accounts.

Third Provision. Auxiliary development of accounting data.

1. Accounting records must contain the necessary detail regarding the characteristics of assets, liabilities, equity, income and expenses so that all information contained in the different statements to be submitted, both public and reserved, can be clearly derived from them, which will maintain the necessary correlation both among themselves and with that accounting base.
2. The managing company will establish adequate policies, methods and procedures that ensure the correct valuation and monitoring of asset and liability risks and will have detailed documentation on the operations carried out by the FAB. cve: BOE-A-2013-11163

OFFICIAL STATE GAZETTE No. 256 Friday, October 25, 2013 Sec. I. Page 86551

Fourth Provision. Form of presentation of information.

1. The managing companies of FABs will submit the semi-annual public financial statements and the reserved states of statistical information to the CNMV within the deadlines and conditions established in chapters three and six of this Circular, without prejudice to the obligation to submit annual accounts and the audit report in the terms established by Royal Decree 1559/2012, of November 15.
2. The semi-annual public financial statements corresponding to the closing of the fiscal year, which will necessarily correspond to the natural year, will be understood as presented to the CNMV with the provisional nature implied by the subsequent formulation of the annual accounts by the administrative body of the managing company of the FAB. In the event that the approved annual accounts contain differences with respect to the semi-annual statements submitted to the CNMV, the managing company will be obliged to submit the corrected statements within ten business days following their approval, highlighting and explaining the variations introduced.
3. The presentation to the CNMV of the models of public financial statements and reserved states of statistical information must be made electronically via the CIFRADOC/CNMV service, approved by Agreement of the CNMV Council of September 15, 2006, or another similar system, in accordance with the technical requirements established by the CNMV at any given time. The information must be presented signed by a person of the managing company who possesses the authority to do so.
4. The presentation currency for the annual accounts of FABs and the statements included in this Circular, to be submitted to the CNMV, shall be the euro.
5. The managing company may not modify in its semi-annual public or quarterly reserved statements the models of statements established in Annexes I and II of this Circular, nor suppress any of its items, which must always appear, even if their value is zero.

CHAPTER TWO Specific Accounting Criteria

Fifth Provision. Scope of application of specific accounting criteria. The provisions of this Chapter establish the specific accounting criteria to be applied for the recognition and valuation of FAB operations that by their nature are not expressly regulated in the PGC or that, even if they are, require greater concreteness or detail. The basic accounting principles, general accounting definitions, as well as the general valuation and recording criteria applicable are those contained in the PGC.

Sixth Provision. Credit Rights