Spanish GAAP Vs IFRS

1. Spanish GAAP Vs IFRS Dr. Clive Vlieland-Boddy

2. What is Spanish GAAP? Each country has over the years developed its own methodology of accounting. The basics of double entry remain the same. The principles are however different.

3. Napoleonic Code During the early part of the 19thC Napoleon introduced a code based legal system. He arranged for all laws to be codified into a book of rules. This works well initially but soon becomes outdated by technology and changing attitudes to situations. For example. Slavery!

4. Problems of a book or rules! There will always be a gray area. Abusers try to find loop holes. Needs to be updated or it becomes ineffective. Ignores integrity.

5. Example Tax Planning! Tax planning is allowed so long as the rules are not broken. The rules may state that if you own 51% of a company then you pay tax in that country. What if you pass 1% to a friend!

6. Returning to Spanish GAAP • The accounting system in Spain is set down in a book or rules. • These are known as “Chart of Accounts” • They tell the company and its officers exactly how the financial statements must be created.

7. IFRS This was created under the guidance of Sir David Tweedie in the late 1990’s. Tweedie had previously developed the UK accounting systems from UK GAAP to a more modern and responsible structure. The key issue is that there is no book or rulkes. There are recommendations laid out in International Accounting Standards.

8. Shared Principles The main difference with IFRS is that it relies on the principle of shared principles. It requires all to act responsible, with integrity and honestly. Where as under GAAP, directors look for ways around the rules. Under IFRS, they cannot. Surely passing that 1% to a friend is not acting honestly, with integrity or being responsible!

9. GAAP Convergence • The International Forum on Accountancy Development ("IFAD") was created as a working group between the Basel Committee, the International Federation of Accountants, IOSCO, the large Accounting Firms, OECD, UNCTAD, and the World Bank and regional development banks, which flowed from the East Asian crisis. Its mission was to improve market security and transparency, and financial stability on a global basis. • IFAD completed its work with the publication of GAAP Convergence 2002.

10. Adoption of IFRS in Europe Effective in 2005 • In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. EU countries have the option to: • Require or permit IFRS for unlisted companies. • Require or permit IFRS in parent company (unconsolidated) financial statements. • Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007. • Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007. • The European IAS regulation applies not only to the 27 EU Member States but also to the three members of the European Economic Area (EEA) - Iceland, Liechtenstein, and Norway. • Spain is an EU Member State. Consequently, Spanish companies listed in an EU/EEA securities market follow IFRS since 2005.

11. IFRS for SME Balance sheet Spanish GAAP for SME Balance sheet

12. Single statement of Income statement ECCBSO-IIIWG on IFRS impact and CBSO databases Single statement of comprehensive income or a separate income statement and a statement of comprehensive income Income Statement

13. Example A company wants to depreciate Non Current Assets. The book of rules says it must be on the basis of straight line method over estimated useful life. The directors view the life as being 20 years. However, all other companies depreciate the same assets over 10 years. IFRS would question why are the directyors out of kilter with all its competitors.

14. Applicability of IFRS in Spain Spain has agreed to IFRS of publically quoted companies. SME’s are required to continue using Spanish GAAP. The EU supports IFRS for all companies although it does accept that its application to small companies is not mandatory.

15. Spanish GAAP & IFRS The key differences are: • Fair Value Accounting • Cost of Capital • Goodwill & Intangibles • Other areas

16. Fair Value

17. Cost of Capital

18. Goodwill & Intangibles

19. Other Unrealised foreign Exchange gains Deferred Tax Retirement benefits Treatment of Associated Companies

20. What is an SME • A small to medium sixed company. • The EU issues guidance on what this means.

21. Small Company Art 11 states that a small company is: • Less than 50 employees or • Turnover less than €8.8m or • Total Assets of less than €4.4m

22. Medium Sized Company • Less than 250 employees or • Turnover of less than €38.5m or • Net Assets of less than €19.25m

23. Small Employees < 50 Turnover < €5.7m Assets < €2.85m Medium Employees < 250 Turnover < €22.8m Assets < €11.4m In Spain

24. Conclusions We live in one United States of Europe. IFRS was established at a EU accounting system. It came to maturity as a result of the failure of US GAAP. Why does Spain ignore the real benefits of IFRS. Change will eventually come.

25. EU Report Sept 2011 • On the site is a file called EU 2011 report. • This summarises the current position and where each country in the EU is on the path of convergence.

26. Spanish GAAP Vs IFRS • There is also a reading to down load on the website which I wrote covering this.

27. Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.