Septiembre 2011

Rules for the preparation of consolidated financial statements

The rules for the preparation of consolidated financial statements are structured in six chapters:

• 
  Parties obliged to present consolidated financial statements
  
• 
  Obligation to present consolidated financial statements, consolidation methods and equity method accounting
  
• 
  Full consolidation
  
• 
  Proportionate consolidation and equity method
  
• 
  Other applicable consolidation rules
  
• 
  Consolidated financial statements
  

Parties obliged to present consolidated financial statements “Parent”, “subsidiary”, “jointly controlled entity” and “associate” are as defined in the Spanish Commercial Code and Spanish National Chart of Accounts.

In order to identify the parent-subsidiary relationship and, therefore, the obligation to present consolidated financial statements, the key concept of control is used, understood to be the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control exists, not only when it is exercised in

real terms, but also when the possibility of its being exercised exists (potential voting rights).

Special purpose entities

Circumstances can arise that give an entity control over another entity, even when it has less than half of the voting rights, or even if it holds no interest in that entity. However, circumstances implying that control (and, therefore, the obligation to present consolidated financial statements) is held may exist, which must be analysed from the standpoint of the group’s share of the risks and rewards of the entity and its capacity to participate in operating and financial decisions of the entity.

Obligation to present consolidated financial statements

All parents of a group must present consolidated financial statements.

If at the reporting date any of the group companies has issued securities listed on a regulated market of any EU Member State, International Financial Reporting Standards (IFRSs) must be applied.

However, there are certain cases in which a parent need not present consolidated financial statements:

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  For reasons of size. An entity need not present consolidated financial statements when for two consecutive years at the reporting date the group companies taken as a whole do not
  

exceed the following thresholds:

Assets EUR 11,400,000

Revenue EUR 22,800,000
Headcount 250 employees

• 
  For reasons of the existence of a subgroup: a parent need not present consolidated financial statements if it is itself a subsidiary of another entity governed by the legislation of any EU Member State, provided that the following conditions are met:
  

• 
  The latter entity owns 50% or more of the shares of the former; and
  

• 
  Owners holding at least 10% of the share capital have not requested the presentation of consolidated financial statements in the six-month period preceding the reporting date.
  

There are also certain other conditions that have to be met in relation to certain disclosures to be included in the notes to the financial statements.

• 
  For reasons of materiality: this condition is met when the entity obliged to present consolidated financial statements holds interests only in subsidiaries that are not material with respect to the
  

fair presentation of the equity, financial position and results of operations of the group companies.

Consolidation methods

There are two consolidation methods:

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  Full consolidation
  
• 
  Proportionate consolidation
  

Entities may also account for investees using the equity method.

Full consolidation

This consolidation method applies to companies over which control is exercised.

This method consists of the inclusion in the balance sheet, income statement, statement of changes in equity and statement of cash flows of the entity presenting consolidated financial statements of all the assets, liabilities, income, expenses, cash flows and other items in the financial statements of the group companies, after having made the appropriate uniformity adjustments and eliminations.

Specifically, there are four types of prior uniformity adjustment:

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  Uniformity of timing
  
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  Uniformity of measurement
  
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  Uniformity relating to intra-group transactions
  
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  Uniformity for performing aggregation
  

There are two major types of elimination:

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  Investment – Equity elimination
  
• 
  Intra-group item and result eliminations
  

Investment – Equity elimination:

This consists of the offset of the carrying amounts representing the equity instruments of the subsidiary owned by the parent against the proportional part of the items of equity of that subsidiary attributable to those equity instruments. This offsetting is performed on the basis of the values resulting from the application of the acquisition method (see section on Business combinations).

This elimination gives rise to the appearance of non-controlling interests, in circumstances in which the parent’s ownership interest in the subsidiary is lower than 100%. The non-controlling interests are calculated on the basis of the proportion that each represents of the share capital of each subsidiary, excluding treasury shares and shares held by their subsidiaries.

If the group companies enter into agreements at the acquisition date with non-controlling interests in relation to the equity instruments

of a subsidiary (put options or future acquisition obligations), the non-controlling interests are measured at that date at the present value of the amount agreed upon and are presented as a financial liability in the consolidated balance sheet.

Intra-group item and result eliminations

The eliminations of this nature include most notably:

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  Elimination of results on intra-group transactions:
  

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  Inventories
  
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  Non-current assets and investment property
  
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  Services
  
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  Financial assets
  

• 
  Reclassification and elimination of results arising from valuation adjustments
  

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  Recognition of grants in equity
  

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  Acquisition from third parties of financial liabilities issued by the group
  

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  Elimination of intra-group dividends
  

Changes in ownership interest that do not result in the loss of control:

When control has been obtained, subsequent transactions that give rise to a change in a parent’s ownership interest in a subsidiary that does not result in the loss of control are accounted for in the consolidated financial statements as equity transactions. Therefore, transactions of this nature do not affect the consolidated income statement.

Loss of control:

However, the loss of control of a subsidiary entails the recognition in the consolidated income statement of the gain or loss arising from the transaction.

Also, if there are income and expenses recognised directly in the equity of the subsidiary since the acquisition date that have not yet been allocated to the consolidated income statement, they must be reclassified to the corresponding line items based on their nature, including any translation differences.

Lastly, if following the loss of control the subsidiary is classified as a jointly controlled entity or associate, the fair value of the investment retained is regarded as the fair value on initial recognition, and the related impact on the consolidated income statement is recognised.

Non-controlling interests in subsequent consolidations:

The equity in the results of subsidiaries recognised in the consolidated income statement and in the consolidated statement of recognised income and expense attributable to non-controlling interests must
be presented separately as attributable profit or loss and not as an expense or income.

When the losses attributable to non-controlling interests exceed the portion of equity, excluding the profit or loss for the period of the related entity, proportionately corresponding to them, this excess must be attributed to the non-controlling interests, even if this means that the related line item has a debit balance.

Proportionate consolidation and equity method

Proportionate consolidation method
This consolidation method applies to jointly controlled entities.

The method consists of combining line by line in the consolidated financial statements the portion of the assets, liabilities, expenses, income, cash flows and other items in the financial statements of the jointly controlled entity corresponding to the percentage of its equity owned by the group companies.

As in the case of full consolidation, this method also requires that uniformity adjustments be carried out and that other adjustments and eliminations of intra-group transactions be recorded.

The consolidated financial statements must not include any item relating to the non-controlling interests of the jointly controlled entities.

Also, if non-monetary contributions have been made to a jointly controlled entity by group companies, the gains and losses resulting therefrom are only recognised in the proportion corresponding to the share capital owned by the other owners of the jointly controlled entity.

Lastly, jointly controlled entities may, optionally, be accounted for using the equity method, instead of applying the proportionate consolidation method, provided that the equity method is applied to all the jointly controlled entities.

Equity method

This method applies to entities over which a significant influence is exercised.

Under this method, the investment in an entity is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee.

As in the case of full consolidation, this method also requires that uniformity adjustments be carried out and that other adjustments and eliminations of intra-group transactions be recorded. Specifically, eliminations relating to intra-group results affect exclusively the percentage of the results of the investee corresponding to the group companies.

If in the initial recognition of an investment using the equity method goodwill arises, the goodwill is included as a whole in the carrying amount of the investment and this must be disclosed.

If the investee incurs a loss, the amount of the investment is written down but by no more than the carrying amount of the investment calculated using the equity method. Once the carrying amount has

been reduced to zero, any additional losses and the related liability are recognised to the extent that payment obligations have been incurred in this connection.

In a new acquisition of shares of the entity accounted for using the equity method, the additional investment and the new goodwill or gain on a bargain purchase are determined in the same way as the initial investment.

Once the equity method has been applied, it is necessary to determine whether impairment losses have to be recognised on the net investment in the investee. The analysis of the impairment of goodwill is not conducted separately, but rather the investment is treated as a whole. The impairment losses are not allocated to any specific asset, including goodwill, which forms part of the carrying amount of the investee.

Other rules applicable to consolidation:

Translation of foreign currency denominated financial statements:
The financial statements of an entity with a functional currency other than the euro (presentation currency) are translated to euros as follows:

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  Assets and liabilities are translated at the closing rate.
  

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  Equity items, including the profit or loss for the period, are translated at the historical exchange rate.
  

• 
  Any differences between the net amount of the assets and liabilities and the equity items are recognised in a line item in equity called “Translation Differences”, net of the related tax effect and after deducting the portion of the differences corresponding to non-controlling interests.
  

In this regard, the functional currency is the currency of the primary economic environment in which the entity operates, i.e. the currency of the area in which the entity generates and uses cash.

Income tax

Consolidated income tax is accounted for by considering temporary differences to be differences between the carrying amounts of assets and liabilities in the consolidated financial statements and their tax bases.

Therefore, if in consolidation amounts are changed or added, the amount of the temporary differences may also change. This might occur principally as a result of uniformity adjustments and

eliminations of results, unrealised gains and losses as a result of the application of the equity method, the recognition of goodwill on consolidation and if the value in the consolidated financial statements attributable to the investment in a subsidiary, jointly controlled
entity or associate differs from the value in the separate financial statements.

Consolidated financial statements

Consolidated financial statements consist of:

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  A consolidated balance sheet
  
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  A consolidated income statement
  
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  A consolidated statement of changes in equity
  
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  A consolidated statement of cash flows
  
• 
  Notes to the consolidated financial statements
  

As in the case of the Spanish National Chart of Accounts, the information included in consolidated financial statements must be relevant, reliable, comparable and understandable.