Circular 7/2016 of the Bank of Spain on Accounting Specifics for Banking Foundations and Amendments to Circulars 4/2004 and 1/2013

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Circular 7/2016, of November 29, of the Bank of Spain, which develops the accounting specifics that banking foundations must apply, and which amends Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards and financial statement models, and Circular 1/2013, of May 24, on the Risk Information Central. (BOE of December 3, 2016) (Correction of errors BOE of March 29, 2017)

Law 26/2013, of December 27, on savings banks and banking foundations (hereinafter, Law 26/2013, of December 27), introduced a significant change in the legal framework for savings banks in our country, requiring those that exceeded certain limits, defined in terms of their territorial scope of operation or business volume, to transform into banking foundations and lose their status as credit institutions. One of the fundamental objectives of the aforementioned law is that these banking foundations focus their attention on the development of their social work.

Likewise, the aforementioned law has established special obligations for those banking foundations that exceed certain limits of participation in the capital of credit institutions. Thus, if such participation reaches 30%, banking foundations must submit to the Bank of Spain, for approval, a management protocol for their financial participation and an annual financial plan. In the event that participation reaches 50% or another percentage that allows them control, these foundations have the duty to strengthen the financial plan, incorporating an investment diversification plan, and to establish a reserve fund to meet possible needs for own resources of the participated credit institution.

Royal Decree 877/2015, of October 2, developing Law 26/2013, of December 27, and Bank of Spain Circular 6/2015, of November 17, regulate, respectively, the aforementioned reserve fund and the obligations of banking foundations arising from their participations in credit institutions.

Additionally, Law 26/2013, of December 27, establishes the functions attributed to the Bank of Spain regarding banking foundations within the framework of its competencies as the authority responsible for the supervision of the participated credit institution. The Bank of Spain must ensure that banking foundations comply with the rules contained in the aforementioned law derived from their participation in the credit institution and, in particular, must assess the influence of the banking foundation on the sound and prudent management of said entity.

Banking foundations are obliged to keep orderly accounting, in accordance with what is stipulated in Law 50/2002, on foundations. On the other hand, Order ECC/2575/2015, of November 30, which determines the content, structure, and publication requirements of the annual corporate governance report, and establishes the accounting obligations of banking foundations, empowers the Bank of Spain to develop the financial information standards and models for these foundations. In this sense, given the special nature of this type of entity, of a foundational character, but also with relevant financial activity, this circular adapts the accounting regulations applicable due to their foundational character to the particularities arising from the obligations involved in their participation in credit institutions.

In particular, the accounting regime that banking foundations will apply in their individual and consolidated annual accounts is specified, the need to identify in internal accounting the composition and realization of the reserve fund that certain banking foundations must establish is determined, and additional information to be included in the notes is developed.

Likewise, modifications are introduced in Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards and financial statement models, to clarify and update the content of some standards and statements, in line with the latest modifications in definitions and formats for the preparation of supervised financial information statements in the European Union (known as «FINREP»), as well as to simplify the information obligations of credit institutions.

Finally, Circular 1/2013, of May 24, on the Risk Information Central, is modified to update the regulations applicable to the situation of risk holders, improve information on the situation of restructured and refinanced operations, and clarify the concepts of guarantors and insurers and sureties, as well as the treatment of receivables from regulated fees.

Consequently, in exercise of the powers conferred upon it, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, has approved this circular, which contains the following rules:

INDEX

Rule 1. Object.

Rule 2. General regime of the individual annual accounts of banking foundations.

Rule 3. General regime of the consolidated annual accounts of banking foundations.

Rule 4. Identification in internal accounting of the composition and realization of the reserve fund.

Rule 5. Content of the notes.

Rule 6. Submission to the Bank of Spain of reserved individual statements.

Rule 7. Submission to the Bank of Spain of public annual accounts.

First Final Provision. Modification of Circular 4/2004.

Second Final Provision. Modification of Circular 1/2013.

Third Final Provision. Entry into force.

Normative references used in this circular:

Law 50/2002: Law 50/2002, of December 26, on foundations.

Law 26/2013: Law 26/2013, of December 27, on savings banks and banking foundations.

Royal Decree 1514/2007: Royal Decree 1514/2007, of November 16, approving the General Accounting Plan.

Royal Decree 1159/2010: Royal Decree 1159/2010, of September 17, approving the rules for the formulation of consolidated annual accounts and modifying the General Accounting Plan approved by Royal Decree 1514/2007, of November 16, and the General Accounting Plan for Small and Medium-sized Enterprises.

Royal Decree 1491/2011: Royal Decree 1491/2011, of October 24, approving the rules for adapting the General Accounting Plan to non-profit entities and the model of the action plan for non-profit entities.

Royal Decree 877/2015: Royal Decree 877/2015, of October 2, developing Law 26/2013, of December 27, regulating the reserve fund that certain banking foundations must establish; modifying Royal Decree 1517/2011, of October 31, approving the regulation developing the consolidated text of the Law on Audit of Accounts, approved by Royal Decree 1/2011, of July 1; and modifying Royal Decree 1082/2012, of July 13, approving the regulation developing Law 35/2003, of November 4, on Collective Investment Institutions.

Circular 4/2004: Bank of Spain Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards and financial statement models.

Circular 1/2013: Bank of Spain Circular 1/2013, of May 24, on the Risk Information Central.

Circular 6/2015: Bank of Spain Circular 6/2015, of November 17, to savings banks and banking foundations, on certain aspects of remuneration and corporate governance reports of savings banks that do not issue securities admitted to trading on official securities markets and on the obligations of banking foundations arising from their participations in credit institutions.

Rule 1.

Object.

This circular aims to regulate the regime of annual accounts, individual and consolidated, of banking foundations regulated in Law 26/2013, as well as that of the reserved statements they must submit to the Bank of Spain.

Rule 2.

General regime of the individual annual accounts of banking foundations.

1. In the formulation of their individual annual accounts, banking foundations will apply what is provided in Royal Decree 1491/2011, with the particularities contemplated in this circular.

2. Suppletorily, in everything not specifically regulated by Royal Decree 1491/2011 and by this circular, the General Accounting Plan will apply in the terms provided in Royal Decree 1514/2007, as well as sectoral adaptations and resolutions of the Accounting and Audit Institute approved under the final provisions first and third, respectively, of the aforementioned royal decree.

3. The structure of the individual annual accounts of banking foundations (including the formats of the balance sheet, income statement, and notes) must adapt to the normal model regulated in Royal Decree 1491/2011. To formulate their individual annual accounts, banking foundations may not use the abbreviated and simplified models regulated in the aforementioned royal decree.

Rule 3.

General regime of the consolidated annual accounts of banking foundations.

1. Banking foundations with participations in commercial companies, including credit institutions, in which they maintain a position of control in the terms provided in Article 42 of the Commercial Code, must formulate consolidated annual accounts in accordance with what is provided in said code and in Royal Decree 1159/2010, with the particularities provided in this circular.

For the purposes of preparing the consolidated annual accounts of banking foundations, regarding the elements of assets, liabilities, income, expenses, and other items of the accounts of the participated credit institution, prior valuation homogenization before incorporation into the foundation's annual accounts will not be performed.

2. Notwithstanding the above, in the event that, as of the closing date of the fiscal year, any of the group companies had issued securities admitted to trading on a regulated market of any Member State of the European Union, international financial reporting standards adopted by European Union regulations will apply for the formulation of consolidated annual accounts.

3. In any case, the structure of the consolidated annual accounts of banking foundations (balance sheet, income statement, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes) must adapt to the content and formats established in Chapter Four, on «Content of Financial Statements», of Circular 4/2004.

Rule 4.

Identification in internal accounting of the composition and realization of the reserve fund.

Banking foundations that, in accordance with Royal Decree 877/2015, must establish a reserve fund will have to identify in their internal accounting: i) the detail of the equity items that make up the established reserve fund, and ii) the detail of the items that record the assets in which said fund is realized, in accordance with what is provided in Circular 6/2015. The aforementioned assets will be registered accounting in the balance sheet items that correspond to them by nature.

Rule 5.

Content of the notes.

1. In the notes of the individual and consolidated annual accounts, banking foundations, in addition to the information they must detail in accordance with what is provided in rules 2 and 3, must include the following points, insofar as they are applicable to them in accordance with Law 26/2013:

a) With regard to the management protocol that banking foundations referred to in Article 43 of Law 26/2013 are obliged to prepare, it must be reported whether it has been approved by the Bank of Spain and, if so, the date of such approval. Likewise, an explicit reference to the section of the foundation's website where said protocol is published will be included.

Additionally, the notes must inform about the essential elements of the content of the management protocol, such as: i) the strategic criteria for managing the participation in the credit institution; ii) the relationships between the foundation's board of trustees and the governing bodies of the participated credit institution, and iii) the criteria governing operations between the foundation and the participated credit institution, as well as the mechanisms provided to avoid possible conflicts of interest.

b) With regard to the financial plan that banking foundations referred to in Article 44 of Law 26/2013 are obliged to prepare, it must be reported in the notes whether it has been approved by the Bank of Spain and, if so, the date of such approval. Likewise, foundations must indicate in the notes whether they are obliged to submit a strengthened financial plan to the Bank of Spain, in accordance with the provisions contained in Law 26/2013.

2. In the case of foundations acting in concert, in accordance with Article 43.2 of Law 26/2013, the information on the management protocol and financial plan prepared jointly in accordance with what is established in the sixteenth rule of Circular 6/2015 must appear in the notes of each of them, in accordance with what is established in the aforementioned paragraphs.

3. Banking foundations will include in the notes the information related to section 13.2, «Application of equity elements to own purposes», of the notes model established by Royal Decree 1491/2011, which includes both information on the goods and rights that form part of the foundational endowment or social fund, and those directly linked to the fulfillment of own purposes, as well as information on the destination of rents and income. However, regarding the latter, they will not include the model appearing in said section on «the degree of fulfillment of the destination of rents and income», given the particularity established for banking foundations in the additional provision third of Law 26/2013.

Rule 6.

Submission to the Bank of Spain of reserved individual statements.

1. Banking foundations referred to in Article 44 of Law 26/2013 obliged to present a strengthened financial plan must submit to the Bank of Spain the following reserved individual statements, in accordance with the formats included in Annex 1:

The remaining banking foundations must submit to the Bank of Spain exclusively the individual statements FB.1 and FB.2.

The aforementioned statements must be submitted no later than March 31 of each year and must refer to December 31 of the previous fiscal year.

2. The presentation of the reserved individual statements to the Bank of Spain must be made by electronic transmission, in accordance with the technical specifications communicated for this purpose.

Regardless of the responsibility of the banking foundation and the members of the board of trustees, the reserved individual statements must be electronically signed by the president or, whenever the board of trustees has expressly designated them as responsible for these purposes, by the general manager, the secretary of the board of trustees, or both.

3. The Bank of Spain may develop technical applications and correlations that will be published on its website, to facilitate the preparation of the reserved individual statements.

Rule 7.

Submission to the Bank of Spain of public annual accounts.

All banking foundations will send to the Bank of Spain the individual annual accounts and, if applicable, the consolidated annual accounts, with the corresponding audit reports, within 10 business days following their approval by the board of trustees.

First Final Provision. Modification of Circular 4/2004.

The following modifications are introduced in Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards and financial statement models [1]:

1. In rule four, paragraph 4 is replaced by the following text:

«4. The dissemination of the primary individual financial statements referred to in paragraph 1 will be carried out by the Spanish Banking Association, the Spanish Confederation of Savings Banks, or the National Union of Credit Cooperatives, clearly and prominently indicating that the published statements have been formulated applying the public financial information standards of this circular.»

2. In rule five, paragraph 2 is replaced by the following text:

«2. The dissemination of the primary consolidated financial statements referred to in paragraph 1 will be carried out by the Spanish Banking Association, the Spanish Confederation of Savings Banks, or the National Union of Credit Cooperatives, clearly and prominently indicating that the published statements have been formulated applying the public financial information standards of this circular.»

3. In rule sixty-four, on «Recognition, Valuation, and Presentation Criteria», the following modifications are made:

a) Letter j) of paragraph 15 is replaced by the following text:

«j) “Maximum recoverable amount”: the lower amount between the “Recoverable amount” of effective real guarantees, calculated in accordance with what is provided in Annex IX, and the gross book value of financial assets or the nominal value after applying conversion factors for off-balance sheet exposures. This calculation will be performed transaction by transaction.»

b) In paragraph 15, four new letters are inserted: k), l), m), and n), with the following text:

«k) “Excess of gross exposure over the maximum recoverable amount of effective real guarantees”: the amount of the positive difference between the gross book value of financial assets and the maximum recoverable amount of effective real guarantees. This calculation will be performed transaction by transaction. When operations do not have effective real guarantees, this amount will coincide with that of the gross exposure.

l) “Excess of exposure after applying conversion factors over the maximum recoverable amount of effective real guarantees”: the amount of the positive difference between the nominal value after applying conversion factors for off-balance sheet exposures and the maximum recoverable amount of effective real guarantees. This calculation will be performed transaction by transaction. When operations do not have effective real guarantees, this amount will coincide with the nominal value after applying conversion factors.

m) “Excess of gross exposure over the maximum recoverable amount of effective real guarantees and risk-free personal guarantees”: the amount of the positive difference between the gross book value of financial assets and the sum of the maximum recoverable amount of effective real guarantees and the amount of risk-free personal guarantees. This calculation will be performed transaction by transaction. When operations do not have effective real guarantees nor risk-free personal guarantees, this amount will coincide with that of the gross exposure; and, when the maximum recoverable amount of effective real guarantees plus the amount of risk-free personal guarantees is greater than the amount of the gross exposure, it will be zero.

n) “Excess of exposure after applying conversion factors over the maximum recoverable amount of effective real guarantees and risk-free personal guarantees”: the amount of the positive difference between the nominal value after applying conversion factors for off-balance sheet exposures and the sum of the maximum recoverable amount of effective real guarantees and the amount of risk-free personal guarantees. This calculation will be performed transaction by transaction. When operations do not have effective real guarantees nor risk-free personal guarantees, this amount will coincide with the nominal value after applying conversion factors; and, when the maximum recoverable amount of effective real guarantees plus the amount of risk-free personal guarantees is greater than the nominal value after applying conversion factors, it will be zero.»

4. In rule sixty-seven, on «Reserved Individual Statements», in the list of statements in paragraph 1, statement FI 101 is renamed to «Information on loans formalized, acquired, or rated in the month (business in Spain)».

5. In rule seventy-one, on «Reserved Statements related to Monetary Union Statistical Requirements», the clause (iv) of letter f) of paragraph 2 is replaced by the following text:

«(iv) Renewable loans and overdrafts: amounts disbursed in renewable loans, even if they are outside the time limits agreed in the contracts, understood as those loans other than those instrumented as credit cards that have the following characteristics: 1) the borrower can use or withdraw funds up to a previously approved credit limit without having to notify the lender in advance; 2) the amount of available credit can increase or decrease as borrowed funds are obtained and returned; 3) the credit can be used repeatedly, and 4) there is no obligation for periodic repayment of funds. Renewable loans include amounts disbursed through lines or credit accounts, even if they have a maturity established in the contract, that have not yet been repaid. This item also includes the amounts of overdrawn amounts in renewable loans (amounts that are outside the quantitative limits agreed in the contracts) and overdrafts (debit balances in current accounts).»

6. In additional provision first, paragraph 6 is replaced by the following text:

«6. The presentation of statements to the Bank of Spain must be made by electronic transmission, in accordance with the technical specifications communicated for this purpose.

Regardless of the responsibility of the entity and the members of its board of directors or equivalent body regarding the truthfulness of all statements submitted to the Bank of Spain, the financial statements, primary, individual, and consolidated, as well as statements FI 1 and FI 2, except for those monthly ones that do not coincide with the end of the quarter, must be electronically signed by the executive president, chief executive officer, or general manager who presides over the management committee of the entity. Alternatively, these statements may be signed by another general manager or equivalent position in the sense of Article 6.6 of Law 10/2014, among whose responsibilities is the preparation of the entity's financial information, for which purpose the entity will inform of this power at the time of requesting its registration in the Register of Senior Executives.

In exceptional cases, the entity may designate another person different from the aforementioned ones with special power and sufficient authority granted by the board of directors. The data of this