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4. 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:

AREASPANISH NATIONAL CHART OF ACCOUNTS (SNCA)
Components of financial statementsThe financial statements comprise a balance sheet, an income statement, a statement of changes in equity a cash flow statement and notes.
Main objective: True and fair viewThe annual financial statements must be clearly drafted, ensuring that the information they contain can be understood by and is of use to readers for economic decision-making purposes; and they must give a true and fair view of the business's equity, financial position and results of operations.

The systematic and consistent application of the requirements and accounting principles and standards set out in the following sections should result in the annual financial statements giving a true and fair view of the business’s equity, financial position and results of operations. In this respect, the way in which operations are recorded should take into account not only their legal form but, also, the economic reality behind them.
Requirements concerning information to be included in the financial statementsThe 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 principlesThe obligatory accounting principles are: Going concern, accrual, consistency, prudence, no offset and materiality.
Items included in the financial statementsThe following items are defined: Assets, liabilities, equity, income and expenses, which are to be recognized when probability criteria regarding the inflow or outflow of resources embodying economic benefits or returns are met and their value can be determined with an adequate degree of reliability.
Accounting recognition criteria applicable to items in the financial statementsAssets should be recognized in the balance sheet when it is probable that they will generate future economic benefits or revenues for the company in the future, and provided that they can be measured reliably.

Liabilities should be recognized in the balance sheet when it is probable that, upon maturity and in order to settle the obligation, it will be necessary to deliver or surrender resources embodying future economic benefits or revenues, provided that they can be measured reliably.

Income is recognized as the result of an increase in the company’s resources, provided that its amount can be measured reliably.

Expenses are recognized as the result of a decrease in the company’s resources, provided that their amount can be measured or estimated reliably.
Measurement basesThe measurement standards adopted by the Spanish National Chart of Accounts are as follows: Historical cost or cost, fair value (this base having been developed extensively following the reform implemented by Royal Decree 1/2021), net realizable value, value in use and present value, costs to sell, amortized cost, transaction costs attributable to a financial asset or liability, carrying amount or book value and residual value.

RECOGNITION AND MEASUREMENT BASES
PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS, AND INVESTMENT PROPERTY
Property, plant and equipment



Investment property
Tangible assets held for use on a lasting basis in the company’s activities, in the production or supply of goods or services, or for administrative purposes.

Non-current assets consisting of real estate property held to earn rentals or for capital appreciation or both.


As a general rule, all these assets are initially stated at cost, whether this is the acquisition price or production cost.

Subsequent to their initial recognition, they are stated at their acquisition price or production cost less the corresponding accumulated depreciation and, where appropriate, any accumulated impairment losses.
Intangible assetsIdentifiable non-monetary assets without physical substance whose economic value can be measured.

For their initial recognition, the identifiability standard must also be met. This means that either of the following two requirements must be fulfilled: (a) the asset must be separable, or (b) it must derive from legal or contractual rights. In no circumstances can establishment costs, brands, customer lists or similar items generated internally be recognized as intangible assets.

Intangible assets are assets with a defined useful life and they must therefore be amortized systematically over the period for which the economic benefits inherent in them can reasonably be expected to generate revenues for the company.

When the useful life of these assets cannot be reliability estimated, they must be amortized over ten years, without prejudice to the periods stipulated in specific rules applicable to intangible assets.

At least once a year, the possible existence of impairment indicators must be analyzed, to determine whether impairment losses have been incurred.
Costs of dismantling, removing or restoring assetsThe 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 costsCertain 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 swapsSwaps 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 contributionsThe 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 lossesImpairment 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 equipmentThe 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 expenditureResearch expenditure: Period expense, although it may be capitalized in certain circumstances.

Development expenditure: Capitalized when the conditions established for the capitalization of research expenditure are met.
Start-up costsPeriod expense.
GoodwillGoodwill can only be recognized as an asset when its value is realized in an acquisition for consideration, in the context of a business combination.

Its amount must be determined in accordance with the rules on business combinations (the purchase method) and it must be allocated as from the acquisition date to each of the cash-generating units of the acquiror that are expected to benefit from the synergies of the business combination.

Subsequent to initial recognition, goodwill must be stated at its acquisition cost less accumulated amortization and, where appropriate, any accumulated impairment losses recognized.

Goodwill is amortized over its useful life. Useful life is determined separately for each cash-generating unit to which it has been allocated. Goodwill is presumed - in the absence of evidence to the contrary - to have a useful life of ten years and to be recoverable on a straight-line basis.

Impairment losses recognized on goodwill are not reversed in subsequent years.
LEASES
Measurement of leases The Spanish National Chart of Accounts has not yet been adapted to IFRS-EU 16 on Leases. The Spanish Accounting and Audit Institute (ICAC) is analyzing its general implementation, with a variety of different circumstances and possible exceptions being envisaged.
Finance leasesWhen the economic conditions of a lease agreement imply that all the risks and rewards incidental to ownership of the asset forming the object of the lease are substantially transferred. This condition is presumed met in a variety of circumstances.

The lessee records an asset and a financial liability of the same amount, which will be the fair value of the leased asset or, if lower, the present value at the inception of the lease of the minimum lease payments agreed to, including the payment for the purchase option where there exists no reasonable doubt that it will be exercised and any amount which has been guaranteed, directly or indirectly; contingent rents, the cost of services and taxes chargeable by the lessor are excluded.

The total finance charge is distributed over the term of the lease and taken to income on an accrual basis, using the effective interest method. Contingent rents are expensed as incurred.

The lessee must apply to the assets it is required to recognize in the balance sheet as a result of the lease the depreciation, impairment and derecognition criteria corresponding to them based on their nature.
Operating leasesIncome and expenses deriving from operating lease agreements, corresponding to the lessor and the lessee, are to be treated, respectively, as income and expenses for the year of their accrual and taken to income accordingly.

INVENTORIES AND NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE
INVENTORIES
Measurement rulesAs a general rule, they are stated at cost, whether this is the acquisition cost or production cost. All expenses incurred up to the point at which they reach the location from which they will be sold are included.

Exception: For commodity broker-traders, the standard applied is fair value less costs to sell, provided that this eliminates or reduces the “accounting asymmetry” which would arise were these assets not stated at fair value.

Refers expressly to inventories in the rendering of services.
Trade and financial discountsAny directly attributable discount, price reduction or similar is deducted from the amount invoiced by the seller of the inventories. Discounts, returns and similar operations taking place subsequent to the invoice date are recorded under specific headings in the income statement.
Borrowing costsBorrowing 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 saleA 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. There are certain requirements to be met.

These are stated at the lower of book value or fair value less costs to sell. For as long as they are classified in this category, there is no amortization; the corresponding valuation adjustments are required to be recorded where appropriate.

INCOME TAX
Consideration of temporary differencesThese 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.

The accounting treatment given to the tax effect is based on the balance sheet method.

LONG TERM EMPLOYEE BENEFITS
Classification of pension plans for the purposes of their accounting treatmentDraws a distinction between long-term defined contribution plans and long-term defined benefit plans.

PROVISIONS
MeasurementPresent 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.

FINANCIAL INSTRUMENTS
Financial assets measured at fair value through profit and lossThis heading is used when classification under none of the others would be appropriate.

Financial assets held for trading are to be included in this category obligatorily.

For equity instruments which are not held for trading, and are not to be stated at cost, the company can choose irrevocably, at the time of initial recognition, to reflect subsequent changes in fair value in equity directly.

Initial valuation: Fair value, without including directly attributable transaction costs, which are recognized in the income statement for the year.

Subsequent measurement: Fair value without deducting any costs incurred in disposal. Changes in fair value are recognized in profit or loss.

Impairment is not applicable.
Assets stated at amortized costA financial asset is included in this category, even when it is listed for trading on an organized market, if the entity maintains the investment with a view to receiving the cash flows deriving from performance of the contract, and the contractual terms of the financial asset give rise, on specified dates, to cash flows consisting solely of collections of principal and interest on the principal outstanding.

Initial measurement: Fair value plus directly attributable transaction costs.
Subsequent measurement: Interest accrued is recorded in profit and loss in accordance with the effective interest method.

Imputation of adjustments/impairment: The necessary valuation adjustments are made at the year end, wherever there is objective evidence of impairment in value as the result or one or more events occurring subsequent to initial recognition and which generate a reduction or delay in estimated future cash flows, which may result from debtor insolvency (an “incurred loss” criterion, as opposed to IFRS-EU 9, which applies an “expected loss” criterion).

The impairment loss is the difference between the book value and present value of future cash flows, including those deriving from the execution of in rem and in personam guarantees.

The impairment loss, and its reversal, are recognized as an expense or income, respectively, in the income statement.
Financial assets at fair value with changes reported in equityA financial asset is to be included in this category when its contractual terms give rise, on specified dates, to cash flows consisting solely of collections of principal and interest on the amount of principal outstanding, and it is not held for trading and it is not appropriate for it to be carried at amortized cost.

Also to be included in this category are investments in equity instruments for which the irrevocable option has been exercised.

Initial measurement: Fair value plus directly attributable transaction costs.

Subsequent measurement: Fair value without deducting any transaction costs incurred in disposal. Changes occurring in fair value are recorded under equity, on a temporary basis, until the time of their impairment or derecognition, at which point they are taken to income.

Imputation of adjustments/Impairment:

  • Debt instruments: An impairment loss is recorded in the income statement when there is a delay in estimated future cash flows, which may be due to debtor insolvency.

    In the event of a recovery in value, the amount reversed is taken to income.
  • Equity instruments: An impairment loss is recorded in the income statement when there is a decrease in the recoverability of the book value of the asset, evidenced, for example, by a prolonged or significant decline in its fair value.

    In the event of a recovery in value, the amount of the increase is recorded directly against equity (it is not reversed by crediting it to the income statement).

Financial assets at costThe assets to be included in this category include, among others, investments in the equity of group companies, jointly controlled entities and associates, and other investments in equity instruments whose fair value cannot be determined by reference to a price quoted on an active market or cannot be estimated reliably.

Initial measurement: At cost, i.e. at the fair value of the consideration plus directly attributable transaction costs.

In the case of a group company, the initial measurement will be the cost value of the business combination, unless there existed an investment prior to its being classed as a group company (in that case, the cost will be its book value prior to classification as such).

Subsequent measurement: Cost less accumulated impairment losses

Imputation of adjustments/Impairment: Valuation adjustments are made for the difference between the carrying amount and the recoverable amount, which is understood to be the higher of fair value less costs to sell and the present value of future cash flows).

In the case of equity instruments, unless there is more reliable evidence of the recoverable amount of investments in equity instruments, the estimate of the impairment loss is to be calculated based on the equity of the investee and underlying capital gains existing as at the measurement date, net of the tax effect.
Financial liabilities at amortized costThis includes all financial liabilities except when they are required to be stated at fair value with changes reported through profit and loss.

Initial measurement: Fair value, which will be the price of the transaction (fair value of the consideration received less directly attributable transaction costs).

Subsequent measurement: At amortized cost. This is except for payables maturing in no more than one year which were stated at their nominal value upon initial recognition and will continue to be stated for that amount.

Imputation of income: Interest accrued is recognized in the income statement using the effective interest method.
Financial liabilities measured at fair value through profit and lossThis category includes, among others, liabilities held for trading and any designated as such by the company at the time of initial recognition on certain grounds.

Initial measurement: Fair value (i.e. price of the transaction: Fair value of the consideration received). Directly attributable transaction costs are recognized in profit and loss for the year.

Subsequent measurement: Fair value. Changes in fair value are recognized in profit or loss.
Transactions involving equity instrumentsRecognized in equity as a change therein, and in no case may they be recognized as financial assets.
Gains and losses on transactions involving equity instrumentsNo gain or loss may be recognized in the income statement.
Compound financial instrumentsTheir components of liability and equity are recognized, measured and presented separately.
DerivativesInitial 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 sharesThe ICAC Ruling of March 5, 2019 — in which it expands upon the standards applicable in the recognition of financial instruments and other accounting matters related to the regulation, from the mercantile perspective, of capital companies — analyses, among many other issues, the accounting standards applicable to preference shares.
Participating loansParticipating loans on which the interest is contingent are to be included on the assets side as Financial assets at cost.

On the liabilities side, the standard applicable is similar to that applicable to silent participation agreements (cuentas en participación), when the interest on them is contingent. Where the participation loans have the characteristics of an ordinary or regular loan, they are classed as financial liabilities stated at amortized cost.

BUSINESS COMBINATIONS
General consideration of business combinationsMergers 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 companiesIn 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 combinationsIf, 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 combinationsInitially 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 acquisitionsThe rules in the standards for the preparation of consolidated financial statements must be applied.
Separate transactionsThe acquirer must identify separate transactions not forming part of the business combination and recognize them under the required recognition or measurement rule.

JOINT VENTURES
Concepts and classification of joint venturesA 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 controlA 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 assetsThe 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 entitiesThe venturer recognizes its interest in accordance with the rules governing investments in Group companies, jointly controlled entities and associates.

SALES OF GOODS AND RENDERING OF SERVICES
Recognition of incomeIncome is recognized upon the transfer of control of the goods or services promised to the customer.
Process for determining income
  • Step 1: Identify control with customer.
  • Step 2: Identify the separate obligations under the contract.
  • Step 3: Determine the price of the transaction
  • Step 4: Apportion the price of the transaction among the contract obligations.
  • Step 5: Recognize income upon (or in line with) settlement of the obligations by the company.
MeasurementRevenue 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 receivablesDeducted 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 servicesNo revenue is recognized in swaps of homogeneous elements, such as exchanges of finished products or interchangeable goods, taking place between two companies with the aim of being more efficient in their commercial task of delivering the product to their respective customers.

GRANTS, DONATIONS AND LEGACIES RECEIVED
PresentationRepayable 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 assetsProperty, 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 grantsMeasured at the fair value of the asset received at the date of recognition.
Grants provided by shareholders or ownersMust 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.

SHARE-BASED PAYMENT
ConceptTransactions 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 transactionsThe 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.
Recognition of transactions with the option of settlement in cash or in equity instrumentsA liability is recognized to the extent that the entity has incurred a present obligation to settle in cash or in other assets, and where this is not the case, an equity item is recognized. If the option corresponds to the supplier, it is recognized as a composite financial instrument.
Settlement in equity instrumentsMeasured 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. 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.
Settlement in cashMeasured 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, any changes in its value are recognized in profit or loss.

DISCONTINUED OPERATIONS
ConceptThis 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.

INTRAGROUP TRANSACTIONS
General ruleThe items in an intragroup transaction must be recognized at their fair value.
Special rulesThese 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.

An important development in 2019 was the publication of the Resolution of March 5, 2019 of the Spanish Accounting and Audit Institute (ICAC), which elaborates upon the criteria for the presentation of financial instruments and other accounting aspects related to the commercial regulation of corporations. This Resolution establishes the recognition and valuation criteria applicable to transactions such as (i) the acquisition and disposal of own shares; (ii) interest and dividend income; (iii) capital increases or reductions; (iv) other types of shareholder contributions; (v) accounting aspects of special shares (privileged, non-voting, redeemable); (vi) non-monetary contributions; (vii) outstanding paid-in capital; (viii) joint accounts; (ix) restatement of annual accounts; (x) profit distributions; (xi) dissolution and liquidation; (xii) transformation of the corporate form; and (xiii) mergers and spinoffs, among other things.

In general, this Resolution summarizes the doctrine issued by the ICAC in its previous rulings. The main modification is that the ICAC changes its interpretation with respect to the accounting treatment of script dividends for shareholders of a company. Thus, when the company agrees to assign free assignment rights under a shareholder remuneration program that allows shareholders to (i) acquire free shares; (ii) sell such rights in the market; or (iii) sell them to the issuing company itself, the shareholder will recognize the corresponding financial income and the securities received at their fair value. Such accounting treatment was applicable to the financial statements for years beginning on or after January 1, 2020 (without prejudice to the possibility to opt for a retroactive application).

The most recent major reform of accounting legislation was approved by Royal Decree 1/2021 and came into force effective for years commencing as from January 1, 2021. This reform has introduced changes of different types into accounting legislation in order to bring it into line with the latest international accounting standards, and primarily with IFRS-EU 9 on financial instruments and IFRS-EU 15 on the recognition of revenue. The description of measurement standards set out in the above table is based on the Spanish National Chart of Accounts as worded following this reform. Its transitional provisions also regulate the criteria applicable as regards first time application. The ICAC has also published its ruling of February 10, 2021 establishing rules on recognition and measurement and the preparation of financial statements in relation to the recognition of revenue from the supply of goods and services, for the implementation of the above mentioned IFRS-EU 15.