Spanish PGC

1. Spanish PGC Dr. Clive Vlieland-Boddy

2. Legal Background Spain like many European countries adopted a Napoleonic Code legal system from the early 19thC. This represents a codified legal structure. Basically a book of rules. These rules are the law and tell all what you can and cannot do. How it can and can be done.

3. Accounting in Spain In line with the codified legal system, a structured plan of accounting was created. This has been updated on several occasions the last being in 2007 which updated the 1990 regulations. (Taking effect from Jan 2008) This Spanish GAAP is known as Plan de Contabilidad or PGC. This is again a book of rules that has to be followed. However, it was highly influenced by IFRS.

4. Accountants & Auditors Institute This is a body of supervisors that oversee the PGC. They developed the accounting structures and rules. They monitor and update as required.

5. Quoted Companies All EU companies quoted on any recognised exchange must comply with IFRS. This means that all companies in Spain whose shares are publically quoted on a stock market have to prepare their accounts under the EU recognised IFRS. However, all other businesses have to comply with Spanish GAAP as defined by the PGC.

6. Basic Requirements The PGC set out a structure for the preparation and layout of financial statements. It recognises that there is a difference between SME’s allowing these to prepare abridged accounts. It requires that proper books of accounts are maintained and kept for at least 6 years. Requires accounts to be prepared within 3 months and approved & submitted to the business registry within 1 month.

7. Financial Statements All companies must produce annually a: Balance Sheet – Statement of financial position. Income Statement – A statement of financial activity. Cash Statement – A summary of the cash flows of the business. Statement of Equity – Summary of changes in the shareholders funds. Notes that give detail to enable the reader to fully understand the financial statements.

8. Financial Statements & Taxation As in most countries, the financial statements form the basis of corporate taxation. Deferred taxation exactly the same as IFRS.

9. The Business Registry This is there to safeguard economic activity. Requires the submision by all enterprises of a copy of their financial statements within 4 months of year end. Public can inspect the files. All enterprises require the registry to formally approve their books of accounts.

10. The PGC Structure • This covers the following • Accounting Framework • Recognition & measurement standards • Annual financial statements • Chart of accounts • Definitions • Accounting entries • Format and structure of accounts

11. Basic Principles • Matching / Accruals – match income with its expenditure • Consistency – do the same as last year • Going Concern – the acceptance that the business is to continue • Prudence – the need to be neutral Also consider • Materiality • Substance over legal form • Offsetting

12. Definitions in PGC Virtually all are taken from IFRS Just that PGC is a directive law and has to be obeyed exactly.

13. Fair Value & PGC Recognises fully fair value Requires adjustment is Statement of Equity and not in Income Statement. Uses the term “consideration” which is an old English expression. Accepts that fair value will start with its original cost. All assets and liabilities are to be subject to fair value except investment in group companies jointly controlled companies or associates.

14. Time Value of Money Recognises this and allows for its application to Fair Values.

15. Asset Values PGC Vs IFRS Allows for set up costs to be capitalised Allows cost of financing to buy or create an asset to be capitalised Development expenditure is allowed to be capitalised as it is seen to be similar to research. (IFRS only allows Research as it sees Development as non specific) These are not permitted under IFRS.

16. Non Current Assets held for Resale To be shown as Current Assets Not depreciated Can be netted off against a corresponding liability Income Statement should differentiate between Continued and discontinued operations.

17. Current & Non Current Both assets and liabilities under PGC are treated as IFRS. Current being less than 12 months Non Current being over 12 months.

18. Classification of Assets Loans & Receivables including AR Held to Maturity Investments Financial Assets held for trading at Fair Value Investment in Group Companies Jointly Controlled Entities & Associates Assets available for resale.

19. Classification of Liabilities Debts & AP Financial Liabilities held for trading Other financial liabilities at Fair Value.

20. Share Capital & Reserves Essentially as IFRS Dividends on Redeemable and non voting shares to be shown as finance expense and not dividends.

21. Statement of Changes in Equity • This is to be divided up into two sections. • Any changes in income or expenditure • Any changes in Equity

22. Revenue & Expenditure Recognition The same as IFRS. Employs the risk passing test. Recognises the issue of legal title not always right. Recognises the substance over form test

23. Grants The PGC treats grants in much the same way as IFRS. However, it does add the issue of grants from shareholders. Normally grants from shareholders would appear in Balance Sheet as liabilities. PGC requires that they be included under shareholders equity.

24. Consolidated Accounts Virtually all of the PGC comes from IFRS. Requires the “purchase” method Fair value to be used on the initial acquisition. Balance = goodwill. As per IFRS, goodwill subject to annual impairment test.

25. Changes in Policy or Errors As per IFRS but corrections that effect Profit or Loss are to be shown in Equity not in Income Statement.

26. Net realisable value The net realisable value of an asset is the amount the company can obtain by selling the asset in the market in the ordinary course of business, less the costs necessary to make the sale and, in the case of raw materials and work in progress, the estimated costs to complete the production, construction or manufacture.

27. Fair value Fair value is the amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value shall be determined without deducting any transaction costs incurred on disposal. T The amount a company would receive or pay in a forced transaction, distress sale or involuntary liquidation shall not be considered as fair value.

28. Present value Present value is the amount of the cash inflows and outflows expected to arise on an asset or a liability, respectively, in the ordinary course of business, discounted at an appropriate rate.

29. Residual value (Scrap Value) The residual value of an asset is the estimated amount that the company would currently obtain from disposal of the asset, after deducting the costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Useful life is the period over which an asset is expected to be available for use by the company, or the number of production units expected to be obtained from the asset. In the case of concession assets that revert, the useful life is the shorter of the concession period and the economic life of the asset. Economic life is the period over which an asset is expected to be usable by one or more users, or the number of production units expected to be obtained from the asset by one or more users.

30. Abbreviated Accounts & SME,s Small companies are allowed to prepare abbreviated accounts. Essentially these consist of an abbreviated Balance Sheet, Income Statement, Statement of Equity Changes and Notes. They allow Cash Statement to be omitted.

31. Requirements for Abbreviated Balance Sheet Balance Sheet with less than €2.85m in total assets Net Turnover of less than €5.7m Employees less than 50

32. Requirements for AbbreviatedIncome Statement Total Assets less than €11.4m Net Turnover of less than €22.8m Less than 250 employees.

33. EU & Abbreviated Accounts A summary of all EU countries done in 2011 concluded that most have an allowance for abbreviated accounts for SME’s. It also found that most allowed SME’s to continue with local GAAP. The thresholds for abbreviated accounts varied slightly.

34. Inventory Valuations IFRS only allows FIFO. IFRS recommends the lower of cost or realisable value. PGC recommends weighted average cost or adjusted selling price. In essence there should be no difference to the WAC. Adjusted selling price is not permitted under IFRS. Prudence is seen as key under both.

35. Spanish GAAP for individual companies and IFRS: some antecedents and legal framework Accounting Law of 1990: • In line with international accounting (i.e: leasing in balance) • Accounting result is the base for taxation, with adjustments • Accounting “White book” (2002): • Prepared by National Accounting Body (ICAC) with different key role • players: university, companies, regulators… (also CBSO) Spanish GAAP for individual companies and IFRS some antecedents and legal framework • 14th January 2010 ECCBSO-IIIWG on IFRS impact and CBSO databases • In order to avoid dual system (consolidated accounts with IFRS and • individual accounts with Spanish GAAP • Solution: convergence by Spanish implementation, selecting one • alternative when several available • Law 16/2007(transposition of IFRS to Spanish regulation) • New Commercial Code • New Companies Law • New Chart of Accounts (“Plan Contable”)

36. 2007 Spanish GAAP 2007 New chart of accounts (general accounting plan): • Part I: conceptual framework, nearly identical to the IFRS framework • Part II: recognition and measurement rules • Part III: annual accounts, standard formats and annex • Part IV: chart of accounts (non compulsory) • Part V: accounts, definitions and accounting relations among them 2007 Spanish GAAP: some novelties (1) • 14th January 2010 ECCBSO-IIIWG on IFRS impact and CBSO databases • Conceptual framework: • Recognition principles: some assets and liabilities disappears • Prudence principle priority disappears • Preference of the substance over form • Valuation criteria: also fair value • Extraordinary results disappears (but not totally) • New Financial statements: • Changes in equity (including comprehensive income) and Cash Flow Statement

37.  Disappearance of flows of funds statement •  Two separated books: •  General accounting plan (all companies) SME’s: • For companies with less than 50 employees, that so desires • Without certain operations (financial derivatives, own shares payments…) • Special treatments for SME’s(leasing and taxation) 2007 Spanish GAAP: some novelties (2) • 14th January 2010 ECCBSO-IIIWG on IFRS impact and CBSO databases • That means 3 standard formats: • Normal / Abbreviated / SME • Although last two are nearly the same • Some expenses and incomes go directly to Equity: • Accounts in the chart for the statement of changes in equity • Some examples: subsidies, formation expenses, own shares • operations, fair value of certain financial assets • Changes in criteria (accounting policies) and errors: retroactive application

38. Valuation methods accepted: • Cost (historical cost) / Amortized cost • Value on net sale / Current value / Value on use • Fair value • Fair value (in balance closing, after original measuring): • Only for certain financial assets and liabilities 2007 Spanish GAAP: some novelties (3) • 14th January 2010 ECCBSO-IIIWG on IFRS impact and CBSO databases • Market portfolio: changes on fair value go to P&L account • Available for sale: changes on fair value go to Equity • Classification of financial assets: accordingly to the management of the portfolio / Derivatives regulation • New assets (non current assets held for sale) and • disappearance of others (Formation expenses) First year application (2008): data of 2007 optional disclosure

39. Non current assets held for sale: • Additional information required to companies. Only 1,5% affected • Low impact: 2,3% of total assets • Problems of use by companies (first year, no experience): • Difficulties in using comprehensive income statement • Also using the Changes in equity statement • Lack of data

40. Lack of data and difficulties to use fair value: In flows, to isolate revaluations and operations: movements between profit and loss account and equity Netting both, in P&L and in balance sheet New classification in balance, accordingly to portfolio and valuation system Anyway, limited impact of fair value:

41. Remaining differences with IFRS Biological assets: not included Fair value: only for certain financial assets Microentities and exceptions: leasing and taxation Remaining differences with IFRS 14th January 2010 ECCBSO-IIIWG on IFRS impact and CBSO databases Research costs capitalized

42. Main consequences of application of IFRS on the consolidated financial statements: Borrowing costs not capitalised (accrual). Elimination of reversion fund, replaced by depreciation and amortisation charges over useful life or concession term (in general on straight-line basis) Goodwill no longer amortised in P/L (except goodwill impairment charges) Market valuation of derivative instruments

43. 2008: New General Chart of Accounts in Spain (New Spanish GAAP) presenting 2007 for comparative purposes The new local GAAP essentially adapt IFRS to local individual accounting standards, with exception of transition provisions: Capitalisation of borrowing costs allowed temporarily (until sector adaptation endorsed)

44. Conclusions The PGC appears as a rigid template for financial statements produce for non listed Spanish Companies. It lacks the benefits of shared principals as encompassed in IFRS. It is as if the Spanish accounting system lacks in depth and requires a detailed structure so as to ensure compliance. All EU countries have made allowances for SME’s but most employ IFRS. Will Spain eventually change?

45. Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.