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Conceptual accounting framework and recognition and measurement bases

In relation to the practical application of the Spanish National Chart of Accounts, after a first part which sets out the conceptual accounting framework, part two establishes recognition and measurement bases for the various asset, liability and income statement items.

Following is a brief summary of the main features contained in the conceptual framework and in the most significant recognition and measurement bases introduced by the Spanish National Chart of Accounts currently in force.

Table 1

AREA SPANISH NATIONAL CHART OF ACCOUNTS (SNCA) 
Components of financial statements The financial statements comprise a balance sheet, an income statement, a statement of changes in equity a cash flow statement and notes.
Statement of changes in equity and cash flow statement These are added as new documents to be included in the financial statements along with the balance sheet, income statement and notes. The cash flow statement is to be prepared using the indirect method. The statement of changes in equity has two parts: the statement of recognized income and expense and the statement of total changes in equity.
Requirements concerning information to be included in the financial statements The information included in the financial statements must be relevant and reliable. A quality deriving from reliability is completeness. Also, the financial information must be comparable and clear.
Accounting principles The obligatory accounting principles are: going concern, accrual, consistency, prudence, no offset and materiality.
Offsetting Except when a standard expressly provides otherwise, the no offset principle shall be applied.
The SNCA defines the conditions for being able to present a financial asset and a financial liability and tax assets and tax liabilities for their net amount.
Items included in the financial statements The following items are defined: assets, liabilities, equity, income and expenses, which shall be recognized when the probability criteria regarding the inflow or outflow of resources embodying economic benefits are met and their value can be determined reliably.
The SNCA defines the concepts of historical cost or cost, fair value, net realizable value, value in use and present value, costs to sell, amortized cost, transaction costs, carrying amount and residual value.

Table 2

CONCEPTUAL ACCOUNTING FRAMEWORK

PREPARATION OF FINANCIAL STATEMENTS
Comparative information The balance sheet, income statement, statement of changes in equity and cash flow statement must disclose the figures for the preceding period. The quantitative information in the notes must also refer to the preceding period.
Income statement format The SNCA provides a model using a defined and obligatory vertical format. Companies that do not have a given volume of assets, amount of revenue and number of employees may opt for an abridged model.
Classification of expenses in the income statement Classified on the basis of their nature.
Current/Non-current distinction in the balance sheet Obligatory distinction in the balance sheet between current and non-current items.
Presentation, functional and foreign currencies  Exchange differences are recognized in equity or in profit or loss depending on where the changes in value of the item concerned are recognized.
Exchange differences – Non-monetary items at fair value Exchange gains and losses are recognized in profit or loss for the year in which they arise.
Exchange differences – Monetary items The SNCA lists circumstances that are indicative of high levels of inflation. It refers entities to the Rules for the Preparation of Consolidated Financial Statements, which implement the Commercial Code, for the applicable accounting treatment.
Hyperinflationary economies The SNCA lists circumstances that are indicative of high levels of inflation. It refers entities to the Rules for the Preparation of Consolidated Financial Statements, which implement the Commercial Code, for the applicable accounting treatment.

Table 3

RECOGNITION AND MEASUREMENT BASES

INTANGIBLE ASSETS, PROPERTY, PLANT AND EQUIPMENT AND INVESTMENT PROPERTY
Property, plant and equipment
Intangible assets
Investment property
Tangible items held for use on a lasting basis in the production or supply of goods or services or for administrative purposes.
Identifiable non-monetary assets without physical substance. To be amortized based on their estimated useful lives. When the estimated useful life cannot be reliably estimated, however, they are required to be amortized over a 10-year period by the straight-line method.
Non-current property held to earn rentals or for capital appreciation or both.
Costs of dismantling, removing or restoring assets The initial estimate of the present value of the obligations to dismantle, remove or restore an asset shall be included in its cost.
Capitalization of borrowing costs Certain borrowing costs must be capitalized in the case of non-current assets that will take more than one year to be ready for their intended use. As a general rule, interest can only be capitalized before the asset has been brought into use.
Asset swaps Swaps with a commercial substance. The asset received is recognized at the fair value of the asset given up plus the monetary amounts delivered as consideration, unless there is clearer evidence of the fair value of the asset received and up to the limit of the latter value.
In swaps without commercial substance or in those in which fair value cannot be reliably measured, the asset received is measured at the carrying amount of the asset given up plus the monetary amounts delivered as consideration, up to the limit, if available, of the fair value of the asset received if this value is lower.
Non-monetary capital contributions The assets received are measured at their fair value at the date of contribution, unless it may be treated as a swap without commercial substance. There are specific rules if the contribution consist directly or indirectly on a business.
For the contributor, the rules relating to financial instruments shall apply.
Impairment losses Impairment losses arise when the carrying amount of an asset exceeds its recoverable amount.
Impairment losses are recognized and reversed through profit or loss.
Major repairs to property, plant and equipment The effect of costs of major repairs is taken into account when determining the carrying amount of property, plant and equipment. These costs are amortized over the period remaining until the repair is made. When the repair is made, its cost is recognized as a replacement if the related recognition criteria are met.
Research and development expenditure Research expenditure. Period expense, although it may be capitalized in certain circumstances.

Development expenditure.Se activarán cuando cumplan las condiciones establecidas para la activación de gastos de investigación.

Start-up costs Period expense.

Table 4

INVENTORIES AND NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE

INVENTORIES

Definition Refers expressly to inventories in the rendering of services.
Trade and financial discounts Trade discounts, rebates and other similar directly attributable items are deducted in determining the costs of purchase.
Borrowing costs Borrowing costs are included in the acquisition or production cost of inventories that necessarily take more than one year to get ready for their sale.
NON-CURRENT ASSETS (DISPOSAL GROUPS) CLASSIFIED AS HELD FOR SALE
Non-current assets classified as held for sale A non-current asset is classified as held for sale if its carrying amount will be recovered largely through a sale transaction rather than through continuing use.

Table 5

INCOME TAX

 
Consideration of temporary differences These are differences arising from the different values for accounting and tax purposes attributed to assets, liabilities and certain equity instruments, to the extent that they have a bearing on the tax charge. Temporary differences include, but are not limited to, timing differences. Based on the balance sheet method.

Table 6

LONG TERM EMPLOYEE BENEFITS AND PROVISIONS

LONG TERM EMPLOYEE BENEFITS
Classification of pension plans for the purposes of their accounting treatment Draws a distinction between long-term defined contribution plans and long-term defined benefit plans.
PROVISIONS
Measurement Present value of the best possible estimate of the expenditures required to settle or transfer the obligation, recognizing the adjustments arising from their discounting as a finance cost as incurred. In the case of provisions maturing at one year or less, no discounting is required, provided that the effect of the time value of money is not material.

Table 7

FINANCIAL INSTRUMENTS

 
Loans and receivables – Initial recognition and subsequent measurement Loans and receivables are initially recognized at fair value plus directly attributable transaction costs. They are subsequently measured at amortized cost using the effective interest method.
Marketable securities (other than investments in Group companies and jointly controlled entities These items are initially recognized at the fair value of the consideration paid plus, in the case of held-to-maturity investments and available-for-sale financial assets, the directly attributable transaction costs.
They are subsequently measured at fair value, except for held-to-maturity investments, which are measured at amortized cost using the effective interest method. Investments whose fair values cannot be determined reliably are measured at cost minus valuation adjustments.
Changes in the fair value are recognized in profit or loss, except in the case of available-for-sale financial assets, changes in the fair value of which are recognized in equity until the asset is disposed of or it is determined that it has become impaired.
Investments in Group companies, jointly controlled entities and associates Initially recognized at cost and subsequently measured at cost less any accumulated impairment losses.
Valuation adjustments are made for the difference between the carrying amount and the recoverable amount (i.e. the higher of fair value less costs to sell and the present value of the cash flows). Unless there is better evidence of the recoverable amount, when estimating the impairment an entity shall take into account the equity of the investee adjusted by the unrealized gains existing at the balance sheet date that relate to identifiable items in the balance sheet of the investee.
Held-to-maturity investments – Impairment Difference between the carrying amount and the present value of the discounted cash flows or market value of the instrument.
Available-for-sale financial assets – Impairment Difference between cost or amortized cost minus valuation adjustments recognized previously in profit or loss and the fair value at the measurement date. In the case of investments in equity instruments measured at cost because their fair value cannot be determined reliably, the provisions concerning the impairment of investments in Group companies, jointly controlled entities and associates shall apply.
Financial liabilities held for trading and other financial liabilities at fair value through profit or loss Initial recognition: fair value. Subsequent measurement: fair value without deducting costs to sell. Changes in fair value are recognized in profit or loss.
Transactions involving equity instruments Recognized in equity as a change therein, and in no case may they be recognized as financial assets.
Gains and losses on transactions involving equity instruments No gain or loss may be recognized in the income statement.
Compound financial instruments Their components of liability and equity are recognized, measured and presented separately.
Derivatives Initial recognition: fair value. Subsequent measurement: fair value without deducting costs to sell. Changes in fair value are recognized in profit or loss. Some specific rules apply to some financial instruments designated as hedged items.
Preference shares Not expressly addressed. They could be considered as a liability from an accounting point of view.
Participating loans Does not address participating loans.

Table 8

BUSINESS COMBINATIONS

 
General consideration of business combinations Mergers or spin-offs or business combinations arising from the acquisition of all the assets and liabilities of a company or of a part of a company that constitutes one or more businesses are accounted for using the purchase method.
Acquisitions of shares, including those received through non-monetary contributions in the formation of a company, or other transactions resulting in the acquisition of control without any investment being made are governed by the rules for measuring financial instruments.
Business combinations between Group companies In mergers between group companies in which the parent and a directly- or indirectly-owned subsidiary participate, the businesses acquired are measured at the amount attributed to them, after the transaction, in the consolidated financial statements of the group or subgroup. In the case of mergers between other group companies, where there is no parent/subsidiary relationship between them, the assets and liabilities of the business are measured at the amounts at which they had been carried prior to the transaction in the individual financial statements, and any difference that may be disclosed must be recognized in a reserves account.
In spin-offs involving companies in the same group, criteria equivalent to those applied to mergers must be followed.
Negative difference arising on business combinations If, exceptionally, the value of the identifiable net assets acquired exceeds the cost of the business combination, such excess shall be recognized as income in the income statement, with some exceptions.
Goodwill arising on business combinations Initially measured as the difference between the cost of the business combination and the value of the identifiable assets acquired less the amount of the liabilities assumed, including contingent liabilities.
Goodwill is amortized over its estimated useful life. This is presumed to be 10 years in the absence of evidence to the contrary, with amortization being required to be charged on a straight-line basis.
Reverse acquisitions The rules in the standards for the preparation of consolidated financial statements must be applied.
Separate transactions The acquirer must identify separate transactions not forming part of the business combination and recognize them under the required recognition or measurement rule.

Table 9

JOINT VENTURES

 
Concepts and classification of joint ventures A joint venture is an economic activity controlled jointly by two or more natural or legal persons.
The SNCA distinguishes between jointly controlled operations, jointly controlled assets and jointly controlled entities.
Concept of joint control A by-law established or contractual agreement whereby two or more parties agree to share the power to govern the financial and operating policies of an economic activity so as to obtain economic benefits.
Jointly controlled operations and assets The venturer shall recognize the proportional part of the jointly controlled assets and jointly incurred liabilities and shall recognize in its income statement the assets attributed to the jointly controlled operation controlled by it and the liabilities incurred as a result of the joint venture. Also, it shall recognize its share of the income earned and the expenses incurred by the joint venture, together with the expenses incurred in relation to its interest in the joint venture.
Jointly controlled entities The venturer recognizes its interest in accordance with the rules governing investments in Group companies, jointly controlled entities and associates.

Table 10

SALES OF GOODS AND RENDERING OF SERVICES

 
Trade and financial discounts Revenue is measured at the fair value of the consideration received or receivable, net of discounts and price reductions.
Interest included in the face value of receivables Deducted from the price agreed on, except in the case of trade receivables maturing within no more than one year for which no contractual interest rate has been established, provided that the effect of the time value of money is not material.
Swaps of goods and services In swaps of goods or services of a similar nature and value in the ordinary course of business no revenue is recognized.

Table 11

GRANTS, DONATIONS AND LEGACIES RECEIVED

 
Presentation Repayable grants are recognized as liabilities.
In general, non-repayable grants are initially recognized directly in equity and are allocated to profit or loss in proportion to the related expenses.
Allocation to profit or loss of grants related to assets Property, plant and equipment, intangible assets and investment property recognized as income over the periods and in the proportions in which depreciation on those assets is charged or, where applicable, when the assets are sold, written down for impairment or derecognized.
Inventories and financial assets. the year of the sale, valuation adjustment or derecognition.
Measurement of non-monetary grants Measured at the fair value of the asset received at the date of recognition.
Grants provided by shareholders or owners Must be recognized directly in shareholders’ equity, regardless of the type of grant involved, except for grants received by public-sector companies from the parent public entity for the performance of activities in the public or general interest, which are allocated to profit or loss on the basis of their purpose.

Table 12

SHARE-BASED PAYMENT

 
Concept Transactions which, in exchange for receiving goods or services, including services provided by employees, are settled using equity instruments of the entity or an amount based on the price of the entity’s equity instruments.
Recognition of equity-settled share-based payment transactions The goods or services received are recognized immediately as an asset or as an expense on the basis of their nature. Also, an increase in equity is recognized.
When it is necessary to complete a specified period of service, the items will be recognized as the services are rendered over that period.
Measurement of equity-settled share-based payment transactions Measured at the fair value of the goods or services received with a balancing entry in an equity account. If that fair value cannot be estimated reliably, they are measured at the fair value of the equity instruments granted with reference to the date on which the company receives the goods or the other party renders the services.
Transactions with employees are measured at the fair value of the equity instruments granted at the date on which the resolution to grant them is adopted..
Measurement of cash-settled share-based payment transactions Measured at the fair value of the liability, referring to the date on which the requirements for recognition are met with a balancing entry in a liability account. Until the liability is settled, the entity shall remeasure its fair value at each reporting date, with any changes in fair value recognized in profit or loss.
DISCONTINUED OPERATIONS
Concept This is a component of an entity that either has been disposed of, or is classified as held for sale and represents a separate major line of business or geographical area of operations, is part of a plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale.

Table 13

INTRAGROUP TRANSACTIONS

 
General rule The items in an intragroup transaction must be recognized at their fair value.
Special rules These special rules are only applicable when the items in the transaction are a business and there is no monetary consideration:

1. Contributions in kind: measurement in consolidated financial statements (or individual statements if no consolidation statements are formulated).

2. Mergers and spin-off : measurement:

  • if there is a parent/subsidiary relationship between them the value that should be considered in the consolidated financial statements is used;
  • if that parent/subsidiary relationship does not exist the value in the consolidated financial statements is used also (or individual statements if no consolidation statements are formulated).
  • The effective date for accounting purposes will be the date of the commencement of the fiscal year in which the merger is approved provided it falls after the date on which the companies became part of the group.

3. Capital reduction, distribution of dividends and dissolution of companies.

It should be noted that the Spanish National Chart of Accounts came into force on January 1, 2008, and was applied for the first time in the first reporting period that commenced on or after that date2.

In addition, as has been indicated in section one entitled “Legal Framework”, Royal Decree 602/2016 for the amendment, among other texts, of the Spanish National Chart of Accounts, approved by Royal Decree 1514/2007 of November 16, 2007, was published on December 17, 2016. Strictly from an accounting perspective, mention should be made—in view of their particular importance—of the main amendments envisaged in this draft, which are the following:

  • Companies which are able to issue abridged financial statements and notes to the financial statements, and those entitled to apply the PGC for SMEs, are exempted from the obligation to issue a Statement of Changes in Equity.
  • The treatment applicable to intangible assets is amended to bring it into line with Accounting Audit Law 22/2015 (LAC). The wording of recognition and measurement base 5 on “Intangible assets” is now as follows:

“Intangible fixed assets are assets with a finite useful life which are therefore required to be amortized systematically over the period in which the economic benefits inherent in the asset can reasonably be expected to generate a return for the company.

When the useful life of these assets cannot be reliably estimated, they are to be amortized over ten years, without prejudice to the periods established in specific rules on intangible fixed assets.

These assets are nevertheless to be assessed for indications of impairment at least once a year, with any impairment loss incurred being verified.”

According to the above wording, intangible assets of indefinite useful life no longer exist. They are all considered to have a finite useful life. It is only when this useful life cannot be reliably estimated that they are to be amortized over 10 years.

  • The accounting treatment of goodwill is also amended, with specific provisions not applicable generally to intangibles which are intended to bring the treatment of goodwill into line with the wording of the LAC. The wording of recognition and measurement base 6 on “Specific rules on intangible fixed assets” is now as follows:

Goodwill is to be amortized over its useful life. Useful life is to be determined separately for each cash-generating unit to which goodwill has been allocated.

The useful life of goodwill shall be presumed, in the absence of evidence to the contrary, to be 10 years, with recovery being on a straight-line basis.

In addition, the cash-generating units to which goodwill has been allocated are to be checked for indications of impairment at least once a year, and in the event of any indications being found, testing for impairment losses is to be undertaken in accordance with the provisions of section 2.2 of the rule for tangible fixed assets.

Impairment losses recognized against goodwill are not reversible in subsequent periods”.

  • In relation to the amortization of both (I) intangibles whose useful life cannot be reliably estimated and (II) goodwill pursuant to the two preceding points, the sole transitional provision of the LAC stipulates that they are to be amortized prospectively. It nevertheless leaves the company the option of charging amortization retrospectively against reserves insofar as relates to the portion of the asset’s useful life elapsing between its registration date and the entry into force of the reform.
  • New parameters are established for the preparation of Abridged Financial Statements and for the application of the PGC for SMEs.
  • Finally, amendments to the Rules on the Preparation of Consolidated Financial Statements are made, essentially in relation to the treatment of consolidation goodwill.

2 As regards such first-time application, Royal Decree 1514/2007, of November 16, approving the Spanish National Chart of Accounts, establishes a transitional regime so that companies may adapt thereto by preparing a corresponding opening balance sheet (Transitional Provisions One to Six). The regime also has implications in the aforementioned measurement bases in this connection.