Significant accounting innovations

With effect for tax periods beginning from 1.1.2016, the aim of this Royal Decree is the development of the amendments introduced to our accounting system by Law 22/2015, due to the transposing of the Directive 2013/34/EU.

The main changes are:

1.- Simplification of the accounting obligations for small businesses:

• Elimination of the Statement of Changes in Equity, becoming a voluntary document both for companies using the abbreviated form of the General Accounting Plan (PGC) and accounting subjects applying the PGC-SMEs model, and revision of the Annual Report contents;
• Reduction of the contents to be included in Notes to the Annual Accounts. Directive 2013/34/EU sets maximum information content that may be required for small businesses, except for Public Interest Entities. This results in the replacement of the current report model (abbreviated and SMEs) with another one with lower requirements.

2.- Widening of the PGC-SMEs scope. All companies, whatever their legal form, individual or corporation, may apply the PGC-SMEs if they comply, for two consecutive years, at least two of the following conditions:

• Total assets do not exceed four million euros;
• Annual turnover net amount does not exceed eight million euros;
• Average number of employees during the financial year not higher than fifty.

Thus the limits are set equal for both companies being eligible for the PGC SMEs, and being allowed to apply the balance and report abbreviated forms.

3.- Recording and valuation criteria. The only change that has been incorporated for all types of companies concerns intangible assets, especially goodwill. As a result of the transposition of the new criteria established by the Directive to our accounting system, when the useful life of intangible assets cannot be reliably estimated, they shall be amortized within ten years unless another regulation establishes a different period.

As this is not an exceptional situation regarding goodwill, it has been considered appropriate to introduce a presumption, that admits evidence to the contrary, that the fund acquired trade recovers linearly within ten years.

Establishes a transitional regime stating that the goodwill or other intangible asset amortization period, that hasn’t been amortized before, will start the first accounting year from 01/01/2016, and the goodwill reserve shall be reclassified to other reserves account and will be available from that date in the amount exceeding the goodwill book value recorded in the balance sheet. Notwithstanding the foregoing, it also introduces the option to adjust its carrying amount charged to reserves (RD 602/2016 transitory disposition first and second single).

4.- Brief review of NOFCAC (Standards of Preparation of Consolidated Financial Statements).

a) Exemption on grounds of size. It applies compulsorily to small groups and allows Member States to apply it to middle size groups. In view of this scenario, it is considered appropriate to maintain the current limits, making a gradual use of the option given by the Directive.

For Public Interest Entities the Directive provides that, in any case, they are subject to the obligation to consolidate regardless of the size of the group to which they are included as dependents.

b) Goodwill treatment. It states that the amortization of this asset shall be considered for equity participation value adjustments regulated in the NOFCAC article 55.2.

c) Technical improvements:

• An aspect related to the tax effect on consolidated accounts is put into context, meaning that when the functional currency of the subsidiary or business abroad differs from the currency of taxation temporary differences will commonly arise;
• Treatment of the waiver to recognize a deferred tax asset due to participation in a subsidiary, jointly controlled, or associated company is clarified.

5.- Modification of PGC adaptation rules and action plan model for Non-Profit Entities for the purpose of:

• Empower these entities so that they can apply the PGC SMEs in the same terms as those provided to businesses;
• Reflect changes in the area of intangible assets.

6.- For periods beginning from 01.01.2016, the carrying amount of the allowances of greenhouse gases accounted for as intangible assets will be reclassified to inventories. It also regulates how this change shall be made.

7.- It is incorporated in the Law on Auditing (LAC) the abbreviated disciplinary procedure for those cases wherein the date of commencement of the procedure, all the facts are held or known, to appreciate, without entailing any complexity, infringing behaviours as, for example, signing audit reports without being legally qualified to do so or lack of referral or publication of information required (LAC Article 95 bis).

8- Accounting treatment of Sociedad Estatal Loterías y Apuestas del Estado, S.A. (State Lotteries and Gambling) operating licenses. These licenses, reflecting the right of the company to operate games whose operation was ceded by the State shall not be subject to depreciation and their eventual impairment must be analysed at least annually.