Septiembre 2011

Financial instruments

(amended by Royal Decree 1159/2010)

Scope

This standard applies to financial assets, financial liabilities and own equity instruments (generally, treasury shares). It also applies to the treatment of hedge accounting and transfers of financial assets and liabilities.

What is a financial instrument?

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial assets and liabilities include:

Financial Assets Financial Liabilities

Cash and cash equivalents Trade payables Trade receivables Bank borrowings

Loans to third parties Debt instruments and other
marketable securities issued Debt securities of other entities Debt with special characteristics

Equity instruments of other
entities
Other financial liabilities

Other financial assets Derivatives with a liability balance
Derivatives with an asset balance

Initial recognition of financial instruments

Financial instruments are initially measured at fair value at the acquisition or issue date, which, in the absence of evidence to the contrary, is the price of the transaction.

Equity investments in Group companies, jointly controlled entities and associates

On initial measurement of investments of this type, the criteria for determining the cost of the combination established in RMS 19 on Business Combinations must also be taken into account. This additional criterion was introduced by Royal Decree 1159/2010, approving the Rules for the Preparation of Consolidated Financial statements (NOFCAC).

For the purposes of measuring financial instruments, the standard indicates that financial assets and liabilities must be classified in one of the following categories:

1. 
   Loans and receivables Trade and non-trade receivables
   

and payables.
Accounts payable. 1

2. 
   Held-to-maturity investments
   

Debt securities with fixed maturity and fixed or determinable payments that are traded in an active market and which the Company has the positive intention and ability to hold to the date of maturity.

3. 
   Held-for-trading financial assets
   

• 
  Acquired or incurred for the purpose of reselling or repurchasing them in the near term.
  

• 
  Form part of a portfolio of financial instruments that are managed to obtain short- term profit.
  

• 
  A derivative financial instrument held for speculative purposes.
  

Held-for-trading 2
financial liabilities.

4. 
   Other financial assets at fair value through profit or loss
   

Hybrid financial instruments or others initially designated for inclusion in this category because:

• 
  They eliminate or reduce accounting mismatches.
  

• 
  They are managed and their performance is evaluated on a fair
  

value bais in accordance with a documented risk management or investment strategy.

Other financial liabilities 3

at fair value through profit or loss.

5. 
   Equity investments in Group companies, jointly controlled
   

entities and associates


Investments in entities either controlled or under significant influence. (These many not be included in other categories for measurement purposes).

6. 
   Available-for-sale financial assets
   

Debt securities and equity instruments of other entities not classified in any of the other categories.

Financial instruments are initially measured at fair value at the acquisition or issue date, which, in the absence of evidence to the contrary, is the price of the transaction.

Subsequent measurement of financial instruments

Financial assets are subsequently measured as follows:

Financial liabilities are subsequently measured as follows:

Amortised cost

Fair value through profit or loss

Own equity instruments (treasury shares)

The cost of treasury shares is deducted from equity and is not recognised as a financial asset of an entity.

Gains or losses arising from treasury share transactions are not recognised in the income statement, but rather they are recognised directly in equity.

The expenses incurred on treasury share transactions are recognised directly in equity as a reduction of reserves.

Hedge accounting

Hedging instruments are instruments that have been designated to hedge a specifically identified risk that may have an impact on the income statement as a result of changes in the fair value or in the cash flows of one or more hedged items.

Hedge accounting means that when certain requirements are met, the hedging instruments and the hedged items must be recognised applying the criteria specified in the standard, thereby offsetting the gains or losses generated by the hedging instrument and the hedged item, in order to achieve a neutral effect on the income statement.

Formal designation and documentation must be made of the hedging relationship at inception of the hedge; the hedge must also be highly effective.

For recognition and measurement purposes, hedging transactions are classified in the following categories:

^{Type of} Definition hedge