Circular 2/2020 of the Bank of Spain, of June 11, amending Circular 4/2017 on public and reserved financial information standards and financial statement models for credit institutions

OFFICIAL STATE GAZETTE No. 168 Tuesday, June 16, 2020 Sec. I. Page 40296 I. GENERAL PROVISIONS BANK OF SPAIN 6186 Circular 2/2020, of June 11, of the Bank of Spain, amending Circular 4/2017, of November 27, to credit institutions, on standards for public and reserved financial information and models for financial statements. I The main objective of this circular is to adapt Circular 4/2017, of November 27, to credit institutions, on standards for public and reserved financial information and models for financial statements, to changes in the international legal framework regarding information requirements for credit institutions. II This circular consists of a single provision, two transitional provisions, a final provision, and an annex. The single provision updates Circular 4/2017 in the following manner: – In the framework of the commitment to transparency assumed by the Bank of Spain, rules 4 and 5 are modified to enable the dissemination of public financial statements to be carried out both by the associations of credit institutions and by the Bank of Spain. – With the aim of incorporating into accounting criteria and information reporting the latest developments introduced in international financial reporting standards adopted by the European Union, rules 22 and 44 and Annex 9 are modified. The most relevant change in accounting criteria is the modification of the definition of "business" to facilitate and simplify its application. This definition serves to determine whether the acquisition of a set of assets constitutes the purchase of a business. If the acquired set is treated as a business, an asset for goodwill or income for a negative difference will be recognized. First, it is clarified that to qualify as a business, the acquired set must include, at a minimum, an economic resource and a substantive process that jointly contribute to the delivery of goods or the provision of services to customers. Second, entities are allowed to opt for a "concentration test" to determine, with a simplified analysis, whether the acquired set of assets constitutes a business or not. – To adapt financial statements to the entry into force of Commission Implementing Regulation (EU) No 2020/429 of February 14, 2020, amending Commission Implementing Regulation (EU) No 680/2014 of April 16, establishing implementing technical standards regarding the reporting of information for supervisory purposes by supervised entities in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, as well as Regulation (EU) No 2020/605 of the European Central Bank of April 9, amending Regulation (EU) No 2015/534 of the European Central Bank on the reporting of financial information for supervisory purposes, changes are introduced in rule 67 and Annex 4 of Circular 4/2017. These changes affect the reserved individual financial statements FI 1 to FI 45, whose objective, among other purposes, is to collect common financial information that supervised credit institutions must report to the European Central Bank (ECB) through national authorities. cve: BOE-A-2020-6186 Verifiable at https://www.boe.es

OFFICIAL STATE GAZETTE No. 168 Tuesday, June 16, 2020 Sec. I. Page 40297 – These modifications aim to: i) improve the information reported by institutions regarding doubtful and restructured exposures and adjudicated collateral; ii) complement information on operating and administrative expenses and on income and expenses from commissions; iii) incorporate some minor changes in the information available on leases, as a result of the entry into force of the International Financial Reporting Standard on Leases (IFRS 16). Likewise, regarding the formats of the reserved individual financial statements FI 1 to FI 45, the statements listed in Annex 4 have been replaced by a reference in rule 67 stating that the formats for these statements will be those established with identical numbering in Commission Implementing Regulation (EU) No 680/2014 of April 16, equivalent to what is established in Regulation (EU) No 534/2015 of the European Central Bank of March 17 on the reporting of financial information for supervisory purposes (ECB/2015/13). In this way, the formats of these statements remain aligned at all times with what Implementing Regulation (EU) No 680/2014 establishes at any given moment. – To comply with the Recommendation of the European Systemic Risk Board (ESRB) on the elimination of data gaps on real estate (ESRB/2016/14), Annex 4 modifies the statement "FI 143 Financing related to construction and real estate development (businesses in Spain)", which additionally becomes titled "Loans on commercial real estate (businesses in Spain)", and introduces the new statement "FI 152 Loans to households on residential real estate (businesses in Spain). Complementary information" to, among other data, include information on the loan-to-income ratio of the borrower. However, in order to avoid duplication with other similar information that institutions had already been reporting, statements FI 160-1, FI 160-2, and FI 160-4 are removed from the requirements. – Continuing the line already started in previous circulars, some information requirements to institutions are simplified. In this regard, rule 67 is modified to exempt from reporting statement FI 131 those branches in Spain of foreign credit institutions whose head office is located in a Member State of the European Economic Area that have decided to apply the valuation and credit risk coverage criteria used by their head office and have thus informed the Bank of Spain of this decision. Along with this, in rule 68, the requirements regarding the information that consolidatable groups of credit institutions must report on their dependent entities and joint ventures that form part of the consolidatable group for prudential purposes are reduced, modifying the frequency of statements FC 201-1 and FC 201-2 from quarterly to semi-annual, eliminating statement FC 201-3, and reducing the requirements established in statement FC 201-2. Finally, in Annex 4, in the statement "FI 150-8 Breakdown of other operating income and expenses", the line "Contribution to the Deposit Guarantee Fund and to the FUR" is removed, as these expenses no longer have the status of operating expenses in the reserved individual statements, and statement "FI 150-9 Breakdown of commissions received" is eliminated, as most of the details listed in this statement will be incorporated into statement FI 22, within the framework of the modification of Commission Implementing Regulation (EU) No 680/2014 mentioned above. – Some new information requirements are introduced to verify compliance with national standards or to collect statistical information. In this sense, additional information related to assets acquired in leases is added to statements FI 100-14 and FI 150-3 in Annex 4, which are considered necessary for the preparation of National Accounts in accordance with Regulation (EU) No 549/2013 of the European Parliament and of the Council of May 21, 2013, on the European System of National and Regional Accounts in the European Union, following the entry into force of IFRS 16. Likewise, in rule 68, statement FC 203 is introduced to request, annually, information on the number of employees of dependent financial entities and joint ventures, to comply with the requirements of Regulation (EC) No 716/2007 of the European Parliament and of the Council of June 20, 2007, on Community statistics on the structure and activity of foreign subsidiaries. cve: BOE-A-2020-6186 Verifiable at https://www.boe.es

OFFICIAL STATE GAZETTE No. 168 Tuesday, June 16, 2020 Sec. I. Page 40298 – Finally, this circular introduces the necessary clarifications and corrections in rule 66, "Sectorization of personal balances by holders", in the notes of some financial statements defined in Annexes 4, "Reserved individual statements", 6, "Reserved statements related to statistical requirements of the Economic and Monetary Union", and 7, "Sectorization schemes", which have been identified over the time elapsed since the entry into force of Circular 4/2017. Additionally, in paragraph 7 of section 5 of rule 66, a sector classification change is made for the European Stability Mechanism (ESM), removing the exception of considering the ESM as Public Administration, to use the same sector classification provided for in the 2019 Deficit Excess Protocol Manual and also used by the EBA. Finally, following the United Kingdom's exit from the European Union from February 1, 2020, necessary technical adjustments are made in the notes of statements UEM 5 and UEM 6 so that the Bank of Spain can continue to receive from credit institutions, for transmission to the ECB, data on assets and liabilities with the United Kingdom and in pounds sterling, and Annex 9, part IV, section 151, note a), ii), is modified to include the United Kingdom as a country belonging to group 1 for country risk purposes. The annex of the circular includes the index of Annexes 4 and 5 and the formats for statements FI 100-14, FI 143, FI 150-3, FI 150-8, FI 152, FC 201-2, and FC 203. The circular will enter into force the day following its publication in the Official State Gazette. Immediate validity of the rule is required to allow institutions to comply with the reporting obligations established by ECB Regulation ECB/2020/22, which sets them from June 30. However, the first transitional provision allows the application from January 1, 2020, of the modifications of section 54 of rule 22 and section 2 of rule 44 of Circular 4/2017 collected in letters c) and d), respectively, of the single provision of this circular, relating to the treatment of retained investment in a subsidiary, joint venture, or associate that ceases to be qualified as such and to the definition of business. Additionally, it mandates the application from June 30, 2020, of the modifications collected in items i) to v) of letter m) of the single provision of this circular, relating to the classification based on credit risk of purchased or originated credit-impaired transactions. For its part, the second transitional provision establishes that the first statements to be reported to the Bank of Spain in accordance with the models introduced or modified by this circular will be those corresponding to June 30, 2020, except for statements FI 143 and FI 152, which will be reported for the first time in accordance with the new models with a reference date of December 31, 2020, maintaining the validity of statements FI 160-1, FI 160-2, and FI 160-4 until June 30, 2020. III This circular attends to the principles of necessity, effectiveness, proportionality, legal certainty, and efficiency required by Article 129.1 of Law 39/2015, of October 1, on the common administrative procedure of Public Administrations, as it undertakes necessary changes to maintain the accounting regulation and financial information requirements for credit institutions complete, integrated, and harmonized with the rest of the legal framework, both national and European Union. The principle of transparency is achieved through prior public consultation with potentially affected parties, fixed by Article 133 of Law 39/2015, of October 1, and public hearing of interested parties, both forming part of the processing process of this circular. The authorizations of the Bank of Spain to issue this circular are the same as those corresponding to the approval of Circular 4/2017, that is, those established in the Order of March 31, 1989, which empowers the Bank of Spain to establish and modify the accounting standards of credit institutions. In it, the Minister of Economy and Finance delegated to the Bank of Spain the authorization to establish and modify accounting standards and the models to which the financial statements, both individual and consolidated, of credit institutions must adhere. Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, and in accordance with the Council of State, has approved this circular, which contains the following rules: Single Provision. Amendment of Circular 4/2017, of November 27, to credit institutions, on standards for public and reserved financial information and models for financial statements. The following modifications are introduced in Circular 4/2017, of November 27: a) In rule 4, on "Other individual public financial information", section 4 is modified, which reads as follows: "4. The dissemination of primary individual financial statements shall correspond to the Bank of Spain. It may also 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 standards contained in Title I, 'Public financial information', of this circular." b) In rule 5, on "Other consolidated public financial information", section 1 is modified, which reads as follows: "Regardless of the obligation to formulate and publish consolidated annual accounts, all groups of credit institutions that publish such accounts, as well as those that, although they do not do so by availing themselves of the provision in section 3 of rule 3, publish in a consolidated basis the information regulated in Part Eight of Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013, will report to the Bank of Spain, for its dissemination, their primary consolidated financial statements. These comprise the consolidated balance sheet, income statement, statement of comprehensive income, statement of total changes in equity, and consolidated statement of cash flows. These primary financial statements will adhere to the models contained in Annex 3. Credit institution groups will report the balance sheet, income statement, and statement of comprehensive income semi-annually, unless they publish these statements quarterly, in which case they will report them with this frequency; the statement of total changes in equity and the statement of cash flows will be reported annually. Primary consolidated financial statements must be reported to the Bank of Spain before the end of the month following the one to which they refer. The dissemination of primary consolidated financial statements shall correspond to the Bank of Spain. It may also 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 the accounting standards applied in the preparation of these statements, in accordance with what is established in section 3 of rule 1." cve: BOE-A-2020-6186 Verifiable at https://www.boe.es

OFFICIAL STATE GAZETTE No. 168 Tuesday, June 16, 2020 Sec. I. Page 40300 c) In rule 22, "Recognition, classification and valuation of financial instruments", the first paragraph of section 54 is modified, which reads as follows: "54. When the investment in a subsidiary, joint venture, or associate ceases to be qualified as such, the retained investment, if any, shall be measured at its fair value on the reclassification date, recognizing any gain or loss arising from the difference between its previous carrying amount prior to reclassification and said fair value in profit or loss." d) In rule 44, "Business combinations", section 2 is modified, which reads as follows: "2. A business is an integrated set of assets and activities that can be directed and managed with the purpose of providing goods or services to customers generating a return to the entity in the form of interest, dividends, or other types of income from its ordinary activities. To determine whether the object of the transaction should be qualified as a business, the entity will evaluate whether the set of acquired assets and activities includes, at a minimum, an economic resource and a substantive process that jointly contribute (or have the capacity to contribute) significantly to the delivery of goods or the provision of services to customers. To this effect, the entity will apply the criteria set out in the following two paragraphs, depending on whether the set of acquired assets and activities is generating returns or not. When the set of acquired assets and activities is not generating returns on the acquisition date, an acquired process will be considered substantive only if it is fundamental for the entity to be able to generate returns by developing or transforming other acquired economic resources, such as real estate or intellectual property, and the acquired set includes an organized workforce with the necessary training or experience to execute this fundamental process. When the set of assets and activities is generating returns on the acquisition date, an acquired process will be considered substantive either when it is fundamental to continue generating returns by developing or transforming other acquired economic resources and the acquired set includes a workforce with the characteristics described in the previous paragraph, or when this process applied to other acquired economic resources contributes significantly to the capacity to continue generating returns and is considered unique, scarce, or cannot be replaced without significant cost, effort, or delay in the development of the activity, even if the acquired set does not include an organized workforce. The entity may opt to perform the concentration test described below to determine, with a simplified analysis, whether a set of acquired assets and activities should or should not be qualified as a business. The option to perform the concentration test will be exercised separately for each acquired set. If the entity chooses to perform the concentration test and it is verified, the set of acquired assets and activities will not be qualified as a business, so the transaction will be treated as an acquisition of individual assets (and, if applicable, an assumption of liabilities), in accordance with what is established in letter b) of section 7. If it performs the test and it is not verified, the entity will then have to apply the criteria of the previous paragraphs to evaluate whether the acquired set constitutes a business or not. The concentration test is verified if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. To this effect, gross assets will include the acquired identifiable assets, except cash and equivalents and deferred tax assets, as well as the goodwill that would be generated if the acquired set were qualified as a business, including that corresponding to external partners, but excluding that resulting from the effect of deferred tax liabilities. In this way, the fair value of gross assets will be the amount resulting from adding: i) The fair value of acquired identifiable assets, excluding cash and equivalents, as well as deferred tax assets. ii) The excess of: – The sum of the consideration delivered plus, if applicable, the fair value of previous interests in the acquired set and its external partners. – The net fair value of acquired identifiable assets minus assumed liabilities, excluding deferred tax liabilities." e) In rule 66, "Sectorization of personal balances by holders", the following modifications are made: i) Paragraph 7 of section 5 is modified, which reads as follows: "International and supranational bodies, other than multilateral development banks, shall be classified in the Public Administration sector. These bodies shall not be assigned to any specific country, without prejudice to the fact that in reserved statements, bodies of the European Union shall be classified as residents in EU countries not members of the EMU, except the European Stability Mechanism, which shall be classified as resident in the EMU. The remaining international bodies shall be classified as belonging to the rest of the world." ii) Section 6, a), ii), 6) is modified, which reads as follows: "6) Limited-scope financial institutions and securities lenders: includes instrumental companies, which are mainly dedicated to the issuance of securities, that are subsidiaries of financial entities; other specialized financial entities; and holding companies that do not manage subsidiaries with decision-making autonomy as they are owned by more than one partner or are owned by non-residents." f) In rule 67, "Reserved individual statements", the following modifications are made: i) In section 1, the first paragraph is modified, which reads as follows: "1. Credit institutions and branches in Spain of foreign credit institutions shall send to the Bank of Spain the reserved statements listed below with the periodicity and presentation deadlines indicated for each of them and with the breakdown by templates as shown in the index of Annex 4. For the reporting of the templates for statements FI 1, FI 2, FI 4 to FI 20, FI 22, FI 31, FI 40, FI 43, and FI 45 related in the index of Annex 4, the formats established for templates with identical numbering in Annex IV of Commission Implementing Regulation (EU) No 680/2014 of April 16, establishing implementing technical standards regarding the reporting of information for supervisory purposes by supervised entities in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council, as well as Regulation (EU) No 2020/605 of the European Central Bank of April 9, amending Regulation (EU) No 2015/534 of the European Central Bank on the reporting of financial information for supervisory purposes, shall be used." cve: BOE-A-2020-6186 Verifiable at https://www.boe.es

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