Auditing and Accounting

In connection with the war situation in Ukraine, here are a number of issues to be taken into account in the preparation of the annual financial statements and management report (individual and consolidated) for the 2021 financial year:

In the first place, it is necessary to analyze in each work whether this situation may have sufficient relevance to be considered as an event subsequent to year-end, to be reported in the annual accounts. The consideration or not will depend on, among other factors, the situation of the conflict at each moment and its repercussions, the sector of activity of the company and the specific circumstances of each Company/Entity.

If, after the above analysis, it is concluded that we are dealing with a subsequent event that has an impact on our client's financial statements, such subsequent event will in any case be type 2 of those considered in the PGC, i.e., it would be a subsequent event that requires information in the notes to the financial statements, but not an adjustment of the figures in the annual accounts, since these are not events existing at the end of the fiscal year.

In this regard, it should be recalled that PGC Rule 23 differentiates between two types of subsequent events:

Subsequent events that bring to light conditions that already existed at year-end should be taken into account in the preparation of the financial statements.The subsequent events must be taken into account in the formulation of the annual accounts. Depending on their nature, these subsequent events shall give rise in the annual accounts to an adjustment, to information in the notes to the financial statements, or to both. Events subsequent to year-end that reveal conditions that did not exist at year-end shall not give rise to an adjustment to the annual accounts. However, when the events are of such importance that failure to disclose them could distort the ability of users of the annual accounts to evaluate them, information on the nature of the subsequent event shall be included in the notes to the financial statements together with an estimate of its effect or, where appropriate, a statement of the impossibility of making such an estimate.

As regards the information to be disclosed in the notes to the financial statements, whether normal, abridged or for SMEs (note on Subsequent events), PGC establishes that the following shall be reported:

Subsequent events that disclose conditions that did not exist at year-end that are of such significance that failure to disclose them could affect the ability of users of the financial statements to evaluate them. and which are of such importance that, if information on them is not provided, it could affect the ability of users of the annual accounts to evaluate them. In particular, the subsequent event shall be described and the estimate of its effects shall be included. In the event that it is not possible to estimate the effects of the aforementioned event, an express statement to this effect shall be included, together with the reasons and conditions that make such estimation impossible.

Accordingly, entities should assess the significance that the situation is having and/or may have on the entity and accordingly describe in the note on Subsequent events in the notes to the financial statements the nature of the event and an estimate of its economic-financial effects, or make a statement that such an estimate cannot be made and the reasons for this.

Possible disclosures in the December 31, 2021 financial statements that may be required as a result of the war in Ukraine may include, among others:

• Estimates of impairment of financial assets (expected credit losses) and non-financial assets.
• Breach of covenants in loans or other agreements/contracts.
• Generation of situations that result in debt or other instruments having to be repaid early.
• Waivers or changes in the contractual terms of loans or other agreements.
• Supply chain disruption or other business disruptions.
• Suspension or termination of contracts, and the assessment of whether a contract for the sale or purchase of goods or services is an onerous contract.

Other important aspects to be analyzed are:

- Impairment tests: it is expected that the forecasts, projections and associated assumptions used for impairment tests do not reflect the effect of this conflict. The reason for this is that, in measuring the recoverable amount of financial and non-financial assets (and CGUs), it is necessary to use projections that are based on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Such reasonable and supported assumptions must be made at the date of the annual accounts, generally December 31, 2021.

- Consequently, the forecasts, projections and valuations used for the impairment calculations as of December 31, 2021 should be reviewed to ensure that any significant effects of the conflict are not incorporated retrospectively.

However, as mentioned above, it is a different matter if the foreseeable impact on the impairment tests of the event (if this is possible at the date of formulation) is reported as a subsequent event in the corresponding note in the notes to the financial statements.

- Going concern considerations: as established in PGC 23, "in any case, the preparation of the annual accounts must take into account any information that may affect the application of the going concern principle. Consequently, the annual accounts shall not be formulated on the basis of said principle if the managers, even after the close of the fiscal year, determine that they intend to liquidate the company or cease its activity or that there is no more realistic alternative than to do so".

-Management report: As is well known, Article 262 of the LSC, which establishes the contents of the management report, requires reporting on "(...) the important events for the company that occurred after the closing of the fiscal year, (...)".

Thus, a new section 3 entitled "Exception to the general valuation rule" has been included in PGC Recording and Valuation Rule 10, with the following wording:

"Exception to the general rule of valuation.

As an exception to the general rule, intermediaries trading listed commodities may value their inventories at fair value less costs to sell provided that this eliminates or significantly reduces an "accounting mismatch" that would otherwise arise from not recognizing these assets at fair value. In such a case, the change in value shall be recognized in the profit and loss account."

For these purposes, it should be noted that the general rule that is excepted in this new paragraph 3 is the valuation at cost, whether it is the acquisition price or the production cost.

Likewise, the regulation clarifies in its introduction that it will be understood that listed commodities are traded when these assets are acquired for the purpose of selling them in the near future and generating profits from intermediation or price fluctuations, i.e., when commodities are held in stock for trading activities.

In addition, the Fourth Transitional Provision establishes the criteria for the first application of the amendment to the Spanish National Chart of Accounts on the valuation at fair value of inventories in the first fiscal year beginning on or after January 1, 2021, indicating that:

1. The changes in the valuation of inventories approved by this Royal Decree must be applied retroactively, in accordance with the provisions of accounting and valuation standard 22 "Changes in accounting criteria, errors and accounting estimates" of the Spanish National Chart of Accounts.
2. The date of first application will be the beginning of the first fiscal year beginning on or after January 1, 2021.

As the accounting concept of turnover is an important magnitude from a tax point of view, we believe it is interesting to attach a recent Boicac Consultation on the components of turnover.

Consultation 2, BOICAC 126 OF JUNE 2021. On the components of turnover:

Question Asked: A company engaged in the manufacture and sale of footwear receives periodic income from the following activities, among others:

a) Lease of a warehouse.

b) Dividends from:

- A wholly-owned subsidiary dedicated to the footwear sector.

- A corporation considered as an associate owns 30% and is engaged in another line of business.

c) Financial income from loans granted to subsidiaries and associates.

The question raised is whether the aforementioned income should be included as a positive component of net sales.

Summary of response:

Ricac's Resolution of February 10, 2021 on revenue recognition includes in the computation of net sales certain financial income from investees that are subsidiaries or associates of an entity. However, the requirement that the investee be a securities holding company is established because in this case it is understood that such activity should be classified as ordinary. Therefore, financial income does not form part of operating income unless it derives from the ordinary activity of the entity (as is the case of a holding company).

With respect to income from leasing, and the expression "ordinary activity" of the company used in the definition of turnover, it should be noted that on certain occasions in business reality there is the simultaneous performance of several activities, which could be called multi-activity. In this case, it must be understood that the income produced by the different activities of the company will be considered in the computation of the ordinary activities, to the extent that they are obtained on a regular and periodic basis and are derived from the economic cycle of production, marketing or provision of services of the company, that is, from the circulation of goods and services that are the object of the company's traffic.

The SEPIDES Group (SEPI Desarrollo Empresarial S.A) awards to PKF Attest the auditing of the accounts for the financial years 2021, 2022 and 2023.

A new turn of the screw in the price war in the legal sector, where certain firms are finding in the public sector a vein to increase their turnover in a context of crisis.

The public procurement system, which bases its award formula mainly on the economic aspect, favors fierce price competition.

The latest example of this has been the audit service contract of the Sociedad Estatal de Participaciones Industriales (SEPI) for 2021, 2022 and 2023.

Its tender coincides with the moment of intense activity that the agency has been leading as a catalyst in the rescue of companies considered strategic.

The State's investment arm has selected PKF Attest, a professional services firm, to prepare its next three audits.

According to the documentation consulted by this newspaper, the Basque professional services firm will carry out this work for 290,114 Euros, less than half of the budget of 620,745 Euros established by SEPI.

In its work proposal, it proposes to carry out an evaluation of the internal control and of the net worth of SEPI and of all the controlled companies.

PKF has won the bidding process after having validated its economic offer, with a drop of close to 28% with respect to the initial value. On this occasion it has been favored by a series of factors, starting with the low turnout of the tender, to which only three bidders presented themselves.

The other two firms which showed interest in auditing SEPI were Mazars and Grant Thornton.

The former was excluded from the bidding process after failing to provide the required documentation, while the latter's bid was rejected for being "abnormally low".

Despite the fact that public agencies operate with closed budgets, bids below half are often considered disproportionate.

Source and access to the complete article: Confilegal.com