Circular 2/2017 of the Bank of Spain modifying Circular 5/2015 on the accounting specifics of SAREB

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Circular 2/2017, of July 28, of the Bank of Spain, modifying Circular 5/2015, of September 30, which develops the accounting specifics of the Asset Management Company from the Banking Restructuring, SA. (Official State Gazette of August 4, 2017)

Section 10 of the Seventh Additional Provision of Law 9/2012, of November 14, on the restructuring and resolution of credit entities, regulated the accounting specifics to be applied by the Asset Management Company from the Banking Restructuring, S.A. (hereinafter, SAREB) in the preparation of its annual accounts, referring to the initial accounting registration of transferred assets, the determination of their updated values, the calculation of impairment adjustments, and the recognition of income generated as a consequence of the orderly management and liquidation of all assets. In accordance with the authorization provided in the aforementioned additional provision, the Bank of Spain developed the aforementioned specifics and, especially, the criteria on which the methodology developed by SAREB to estimate the value of assets should be based, through Bank of Spain Circular 5/2015, of September 30, which develops the accounting specifics of the Asset Management Company from the Banking Restructuring, S.A.

Royal Decree-Law 4/2016, of December 2, on urgent measures in the financial field, has modified letter c) of section 10 of the Seventh Additional Provision of Law 9/2012, with the aim of establishing, among other aspects, a new criterion for the registration of asset impairment for SAREB. Specifically, it is provided that the recognition of impairment adjustments for the decline in value of assets must be charged directly to the entity's net equity, and that these adjustments will remain in net equity until, when the result of the fiscal year is positive, they are allocated to the income statement. The royal decree-law also provided, in its statement of reasons, that the effects of applying the new rule would be treated as a change in accounting policy.

This circular aims to incorporate into Circular 5/2015 the new criteria for the accounting registration of impairment, as well as to specify the rules for its reversal. The adaptation of the content of the Bank of Spain's circulars to higher-ranking norms must be considered per se a matter of general interest. Following the modification introduced by Royal Decree-Law 4/2016, it is therefore necessary to restore this adaptation through the only available instrument: the modification of the Bank of Spain's circular itself following the relevant procedural steps. Consequently, this circular complies with the principles of necessity and efficiency required by Article 129.1 of Law 39/2015, of October 1, on the common administrative procedure of Public Administrations.

Attention is also paid to the principles of proportionality, legal certainty, and efficiency established in the cited norm, because, by regulating what is already established in a higher-ranking norm, without imposing new obligations, the circular has the essential content to address the identified need, seeks to ensure the coherence of the legal system by contributing to the generation of an integrated and clear regulatory framework, and avoids unnecessary burdens.

The principle of transparency in the drafting of this norm is respected through the explanations incorporated in this preamble, the consultation with interested sectors, and the public hearing process through the Bank of Spain's website carried out during its drafting.

This circular consists of a single provision, which modifies the third provision of Circular 5/2015 regarding the recognition of impairment.

Consequently, in exercise of the powers granted, the Board of Governors of the Bank of Spain, upon proposal of the Executive Committee and in agreement with the Council of State, has approved this circular, which contains the following provision:

Single Provision. Modification of Circular 5/2015.

Sections 1 and 2 of the third provision of Circular 5/2015 are modified, which shall read as follows [1]:

«1. At the close of each fiscal year, or whenever the entity must provide public information regarding its financial situation referred to another date, SAREB will assess the need to make impairment adjustments for the decline in value of each of the "asset units." To this end, it must analyze, using the best available information, whether the book value of the "asset unit" (including, if applicable, the accrual of interest for financial assets representing debt and less previously recognized cumulative impairment) is higher than the estimated value of the "asset unit" as a whole, in accordance with the methodology developed by SAREB according to the criteria established in the fourth provision of this circular. The cumulative impairment will be reflected in the balance sheet associated with each "asset unit" as a whole. SAREB will recognize the impairment, net of its tax effect, by charging an account under the heading "Adjustments for changes in value" of net equity. The debit balance of this account will be allocated to the income statement when the result of the fiscal year is positive, for the total amount of this figure. For these purposes, the pre-tax profit of SAREB will be considered, without considering the eventual accrual of remuneration for subordinated financing.

2. The impairment of each "asset unit" may be reversed when it is evidenced that the value of the assets of the "asset unit" has been recovered, in accordance with the methodology developed by SAREB, limited to the value that the "asset unit" would have had if no impairment had been recorded. Such reversal will be made by first reducing the balance of the account under the heading "Adjustments for changes in value" of net equity. Once the balance of this account is zero, it will be credited, if applicable, to the income statement for the amount of the pending reversal.»

[1]

Texts incorporated into Circular 5/2015, of September 30.

Final Provision. Entry into force.

This circular will enter into force the day following its publication in the "Official State Gazette."

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