Circular 6/2008 of the Bank of Spain modifying Circular 4/2004 on public and reserved financial information standards and financial statement models

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Circular 6/2008, of November 26, of the Bank of Spain, to credit institutions, modifying Circular 4/2004, of December 22, on standards for public and reserved financial information, and models for financial statements. (BOE of December 10)

Circular 4/2004, of December 22, on standards for public and reserved financial information, and models for financial statements (hereinafter, the Accounting Circular), states that "this Circular, by its very nature, connects both with the International Financial Reporting Standards and with the Spanish accounting framework, and will be subject to adaptation as that global framework evolves over time."

Since the approval of the Accounting Circular, modifications have occurred in both Spanish legislation and the International Financial Reporting Standards, affecting accounting regulations. Therefore, it is necessary to modify the Accounting Circular, fundamentally in the following aspects: definition of the group of credit institutions; formats of public financial statements; treatment of financial instruments, including guarantees, pension commitments, equity-settled payments, and income tax; as well as certain information that must be disclosed in the notes.

This Circular also introduces minor modifications motivated by changes made to the regulations governing the determination and control of own funds, the information requirements of the European Central Bank, the mortgage market, and the National Classification of Economic Activities (CNAE).

Consequently, in exercise of the powers granted, the Bank of Spain has ordered:

First Rule.

The following modifications are introduced into Circular 4/2004, of December 22, to credit institutions, regarding the standards for public and reserved financial information, and models for financial statements.

1. New wording is given to the third paragraph of section 1 of the first rule - Scope of application - which is now drafted as follows:

"1. (...) The consolidatable groups of credit institutions are those groups or subgroups that must comply with any of the consolidated or sub-consolidated own funds requirements established by Law 13/1985, of May 25, on investment coefficients, own funds, and information obligations of financial intermediaries, and its implementing regulations."

2. New wording is given to sections 3, 5, and 6, and the third paragraph of section 4 is modified, all of them from the third rule - Consolidated annual accounts - which are now drafted as follows:

"3. A group of credit institutions exists when an entity holds or may hold, directly or indirectly, control over one or more other entities, provided that the provisions of the first section of the first rule are met and that at least one of the entities is a Spanish credit institution.

For these purposes, an entity is understood to control another when it has the power to direct its financial and operating policies, by legal, statutory, or agreement-based means, with the aim of obtaining economic benefits from its activities. In particular, control will be presumed, unless proven otherwise, when an entity, classified as the parent, is in relation with another entity, classified as the subsidiary, in any of the following situations:

a) It holds the majority of voting rights.

b) It has the power to appoint or remove the majority of the members of the governing body.

c) It may dispose, by virtue of agreements with other shareholders, of the majority of voting rights.

d) It has appointed with its votes the majority of the members of the governing body who hold office at the time the consolidated accounts must be prepared and during the two immediately preceding financial years. In particular, this circumstance will be presumed when the majority of the members of the board of directors, or equivalent body, of the subsidiary are members of the governing body or senior executives of the parent entity or another entity controlled by it. This case will not give rise to consolidation if the entity whose administrators have been appointed is linked to another in any of the cases provided for in the first two letters of this section."

"4. (...) When two or more entities each hold a significant number of voting rights in the same entity, the remaining factors determining the existence of control must be analyzed to determine which entity is the parent."

"5. For the purpose of preparing public consolidated financial statements, groups of credit institutions are formed by a parent entity and one or more subsidiary entities."

"6. The obligation to publish consolidated annual accounts corresponds to the parent entity."

3. New wording is given to section 1 and section 3 of the fourth rule - Other individual public information - which are now drafted as follows:

"1. Credit institutions, regardless of preparing and publishing the individual annual accounts provided for by the Commercial Code, shall submit to the Bank of Spain, for publication, the individual balance sheets, income statements, statements of recognized income and expenses, total statements of changes in equity, and individual cash flow statements adjusted to the models contained in Annex I, applying in full, regardless of the date to which the statements refer, the criteria of Chapters one to four of Title I of this Circular.

Notwithstanding the provisions of the previous paragraph, in the public balance sheets for months that do not correspond to the end of a natural quarter, the balance of the item 'Result for the year' shall be included within the item 'other liabilities'.

The ICO, banks, and savings banks, including the Spanish Confederation of Savings Banks and the branches of foreign credit institutions whose head office is not located in a Member State of the European Economic Area, shall submit the balance sheet monthly, the income statement and the statement of recognized income and expenses quarterly, and the total statement of changes in equity and the cash flow statement annually; credit cooperatives shall submit all statements quarterly, except the total statement of changes in equity and the cash flow statement, which shall be submitted annually; and financial credit establishments shall submit all statements annually."

"3. The statements mentioned in the preceding sections must be sent to the Bank of Spain, at the latest, on the 20th day of the month following the one to which they refer."

4. The first and third paragraphs of section 1 are modified, and section 3 is added, in the fifth rule - Other consolidated public information - which are now drafted as follows:

"1. Regardless of the obligation to prepare and publish consolidated annual accounts provided for by the Commercial Code, all entities that publish such accounts, as well as those that, although they do not do so by availing themselves of the provisions of section 2 of the third rule, publish on a consolidated basis the prudentially relevant information required by Law 13/1985, of May 25, on investment coefficients, own funds, and information obligations of financial intermediaries, and its implementing regulations, shall submit to the Bank of Spain, for publication, the consolidated balance sheets, income statements, statements of recognized income and expenses, total statements of changes in equity, and consolidated cash flow statements adjusted to the models contained in Annex III, applying in full, regardless of the date to which they correspond, the criteria of Chapters one to four of Title I of this Circular."

"1. (...) Groups of credit institutions that include banks, savings banks, or credit cooperatives shall submit the statements, except the total statement of changes in equity and the cash flow statement, semi-annually, unless they publish their statements quarterly, in which case they shall submit them with this frequency; the total statement of changes in equity and the cash flow statement shall be submitted annually. Groups in which the only credit institutions to be consolidated are financial credit establishments shall submit all statements annually."

"3. The statements mentioned in section 1 must be sent to the Bank of Spain before the end of the month following the one to which they refer."

5. A paragraph is added to section 1, and new wording is given to section 2 of the sixth rule - Content of annual accounts - which are now drafted as follows:

"1. (...) The statement of changes in equity consists of two parts: the statement of recognized income and expenses and the total statement of changes in equity."

"2. The balance sheet, income statement, statement of recognized income and expenses, total statement of changes in equity, and cash flow statement of the individual annual accounts shall be adjusted to the models contained in Annex I of this Circular, and those of the consolidated annual accounts to the models in Annex III, with the particularities indicated in section 2 of the fifty-eighth rule for the cash flow statement when prepared using the so-called 'direct method'.

Items in the statements shall not be grouped; however, they may be omitted when they contain no data, and disaggregated when considered necessary to show a true and fair view of the equity, financial position, results, and cash flows."

6. The term "statement of changes in equity" is replaced by "statement of recognized income and expenses" in sections 1 and 10 of the ninth rule - Elements of the annual accounts - in letter b) of the eleventh rule - General recognition criteria - in sections 2, 6, and 7 of the seventeenth rule - Recognition of income, and in letter a) of section 15 of the thirty-first rule - Accounting hedges.

7. Section 7 of the eighteenth rule - Foreign currency transactions is suppressed.

8. The term "remuneration for employees" is replaced by "share-based payment transactions" in letter e) of section 7, a new paragraph is added at the end of letter b) of section 6, and new wording is given to letter a) of section 3, letter a) of section 7, and the first paragraph and letters b) and c) of section 8, all of them from the twentieth rule - Definition of financial instruments - which are now drafted as follows:

"3.a) Their value changes in response to changes in variables, sometimes referred to as underlying assets, such as interest rates, prices of financial instruments and quoted commodities, exchange rates, credit ratings, and indices thereon, provided that when they are non-financial variables, they are not specific to one of the parties to the contract."

"6.b) (...) Hybrid financial instruments are hybrid financial instruments for the issuer and financial instruments for the acquiring entity."

"7.a) Interests in subsidiary, multi-group, and associated entities, which shall be treated in accordance with what is provided in Chapter Three of Title I. In individual financial statements, these interests, as well as those held in entities that form part of the same group, or decision-making unit as defined in indication fourteen of article 200 of the Consolidated Text of the Law on Joint Stock Companies, shall be valued at cost and subject to the provisions of the twenty-ninth rule to determine the existence of impairment evidence."

"8. The following contracts and operations shall be subject to both the presentation criteria indicated in this Section and the disclosure criteria indicated in the sixtieth rule for financial instruments, but shall not be subject to the recognition and valuation criteria of this Section, except as provided for issued credit commitments:

"8. (...) b) Issued financial guarantee contracts, which shall be treated as prescribed in the twenty-fifth rule.

c) Issued credit commitments, which shall be treated in accordance with what is provided in the thirty-seventh rule, unless they can be settled by differences, in cash or with another financial asset, which shall be treated as derivative instruments."

9. New wording is given to section 8, and two new sections 16 bis and 17 bis are included in the twenty-first rule - Issuance of financial instruments - which are now drafted as follows:

"8. Remuneration of financial instruments classified as financial liabilities shall be recorded in the income statement as a financial expense; in any case, remuneration of capital repayable on demand shall be presented in a separate item."

"16 bis. Notwithstanding what is established in section 15, if a hybrid financial instrument contains one or more embedded derivatives, the entity may designate, upon initial recognition, the entire hybrid financial instrument as a financial asset or financial liability at fair value through profit or loss, unless:

a) The embedded derivative or derivatives do not significantly modify the cash flows that would otherwise have been generated by the instrument; or

b) Upon first considering the hybrid instrument, it is evident that separation of the embedded derivative or derivatives is prohibited, such as an early redemption option embedded in a loan that allows the borrower to cancel the loan in advance for an amount approximately equal to its amortized cost.

The provisions of this section are understood without prejudice to the possibility of classifying these instruments in the portfolios of 'other financial assets (or financial liabilities) at fair value through profit or loss' if doing so provides more relevant information in accordance with what is indicated in sections 3.a).(ii) and 7.a).(ii) of the twenty-second rule."

"17 bis. For the purpose of presentation in the financial statements, the amount corresponding to the embedded derivative that is separated for valuation purposes of the main contract shall be included in the derivatives item of the asset or liability that corresponds according to its balance, and the amount of the main contract shall be included in the item that corresponds to it according to its category and type of instrument. When the entire hybrid instrument is valued at its fair value, its amount shall be included entirely in the item that corresponds to the main contract."

10. New wording is given to the second and third paragraphs of section 1, letters a).(i).3), a).(ii), b) and d) of section 3; letters a).(i).4) and a).(ii) of section 7; letter a) and the first paragraph of letter d) of section 12, and a paragraph is added at the end of letter a).(i) of section 7 and letter e) of section 12, all of them from the twenty-second rule - Recognition, classification and valuation of financial instruments - which are now drafted as follows:

"1. (...) Financial assets shall be included, for the purpose of their presentation in the balance sheet according to the type of instrument, in the following items: 'cash and deposits with central banks', 'deposits with credit institutions', 'loans to customers', 'debt securities', 'equity instruments', 'trading derivatives', 'macro-hedging adjustments to financial assets' and 'hedging derivatives'.

Financial liabilities shall be included, for the purpose of their presentation in the balance sheet according to the type of instrument, in the following items: 'deposits from central banks', 'deposits from credit institutions', 'deposits from customers', 'negotiable debt instruments', 'trading derivatives', 'subordinated liabilities', 'short positions in securities', 'other financial liabilities', 'macro-hedging adjustments to financial liabilities', 'hedging derivatives' and 'capital repayable on demand.'"

"(3.a).(i).3) Derivative instruments that do not meet the definition of a financial guarantee contract in the twenty-fifth rule nor have been designated as accounting hedge instruments in accordance with what is indicated in the thirty-first and thirty-second rules."

"(3.a).(ii) Other financial assets at fair value through profit or loss: This category shall include financial assets designated upon initial recognition by the entity. Such designation may only be made if permitted by sections 16 bis and 17 of the twenty-first rule or when doing so provides more relevant information because:

1) It eliminates, or significantly reduces, inconsistencies in recognition or valuation (also known as accounting asymmetries) that would arise from the valuation of assets or liabilities, or from the recognition of their gains or losses, under different criteria.

2) A group of financial assets, or of financial assets and liabilities, is managed and its performance is evaluated on the basis of its fair value, in accordance with a documented risk management or investment strategy, and information about such group is also provided on the basis of fair value to key management personnel, as defined in the sixty-second rule.

Equity instruments whose fair value cannot be estimated reliably shall not be included within this category.

When this option is used, disclosure shall be made in the notes as indicated in section 5 of the fifty-ninth rule and in sections 23 and 23 ter of the sixtieth rule."

"(3.b) Held-to-maturity investment portfolio: This category may include debt securities that are traded in an active market, with fixed maturity and determinable or determinable cash flows, which the entity has, from the beginning and at any subsequent date, both the positive intention and the demonstrated financial capacity to hold until maturity, with the clarifications indicated in the following sections of this rule."

"(3.d) Available-for-sale financial assets: This category shall include debt securities and equity instruments not included in other categories."

"(7.a).(i).4) Derivative instruments that do not meet the definition of a financial guarantee contract in the twenty-fifth rule nor have been designated as hedge instruments in accordance with the thirty-first and thirty-second rules.

The fact that a financial liability is used to finance trading activities does not in itself entail its inclusion in this category."

"(7.a).(ii) Other financial liabilities at fair value through profit or loss. This category shall include financial liabilities designated upon initial recognition by the entity. Such designation may only be made if permitted by sections 16 bis and 17 of the twenty-first rule or when doing so provides more relevant information because:

1) It eliminates, or significantly reduces, inconsistencies in recognition or valuation that would arise from the valuation of assets or liabilities, or from the recognition of their gains or losses, under different criteria.

2) A group of financial liabilities, or of financial assets and liabilities, is managed and its performance is evaluated on the basis of its fair value in accordance with a documented risk management or investment strategy, and information about such group is also provided on the basis of fair value to key management personnel, as defined in the sixty-second rule.

When this option is used, disclosure shall be made in the notes as indicated in section 5 of the fifty-ninth rule and in sections 23 bis and 23 ter of the sixtieth rule."

"12.a) Unless the exceptional circumstances of section e) apply, financial assets and financial liabilities shall not be reclassified into or out of the category of fair value through profit or loss once acquired, issued, or assumed."

"12.d) If, as a result of a change in the entity's intention or financial capacity, or once the two financial years referred to in section 4 of this rule have passed for financial assets previously classified as held-to-maturity investments, some financial assets included in the available-for-sale financial assets portfolio can be reclassified to the held-to-maturity investments portfolio, their fair value at the date of transfer shall become their amortized cost, in which case the gains or losses that had been recorded as valuation adjustments in the entity's equity shall remain in the balance sheet together with those corresponding to available-for-sale financial assets. The assets shall be valued at amortized cost, and both the difference between this and their amount at maturity and the results previously recorded in equity shall be recognized in the income statement over the remaining life of the financial asset using the effective interest method."

"12.e) A financial asset that is not a derivative financial instrument may be reclassified out of the trading portfolio if it ceases to be held with the purpose of its sale or repurchase in the short term, provided that any of the following situations occur:

1) In rare and exceptional circumstances, unless they are assets that could have been included in the credit investments category. For these purposes, rare and exceptional circumstances are those arising from a particular event, which is unusual and highly unlikely to recur in the foreseeable future.

2) When the entity has the intention and financial capacity to hold the financial asset in the foreseeable future or until maturity, provided that upon initial recognition it had met the definition of a credit investment.

In these situations, the reclassification of the financial asset shall be carried out at the fair value on the date of reclassification, without reversing results, and considering this value as its cost or amortized cost, as appropriate. In no case may these financial assets be reclassified back into the trading portfolio."

11. New wording is given to letter a) of section 10 of the twenty-third rule - Derecognition of financial assets - which is now drafted as follows:

"10.a) A financial liability associated shall be recognized for an amount equal to the consideration received. Such liability shall be subsequently valued at its amortized cost, unless it meets the requirements of letter a) of section 7 of the twenty-second rule to be classified as financial liabilities at fair value through profit or loss. By not constituting a current obligation, when calculating the amount of this financial liability, the entity shall deduct, both in individual and consolidated financial statements, financial instruments (such as..."