Main new features and changes in the PGC in line with IFRS 9 and IFRS 15.
IFRS 9, modernisation of concepts and new criteria
Like all standards issued by the IASB, IFRS 9 on financial instruments is mandatory for the consolidated financial statements of the listed companies of EU member states as of 1 January 2018, when it became effective.
Most significant changes in IFRS 9 compared to the previous IAS 39
And the most significant changes introduced by IFRS 9 compared with IAS 39, which preceded it, can be outlined as follows:
- Greater emphasis on principles.
- New criteria for the classification of financial assets, based on the SPPI test (only payments of principal and interest) and on the business model.
- Improvement of the conceptual aspects of hedging operations, which must be inserted into the company's risk management strategies.
- And new three-stage impairment model, based on the expected losses from the recognition of the financial asset.
Consequently, IFRS 9 represents a major modernisation; mainly by putting more emphasis on principles and improving some conceptual aspects.
New impairment model considered in IFRS9
This new model based on the expected loss significantly improves the previous model of losses incurred, but it requires a high degree of preparation on the part of companies to obtain and process the appropriate information, deduce the appropriate parameters based on this information and apply criteria appropriately.
In addition, the current pandemic situation requires an added degree of judgement and assessment, so as not to fall into exaggerations of one kind or another, and to consider not only short-term information but also the recovery horizon opened up by the vaccination processes that have recently been initiated.
In general terms, a large part of the new classifications of financial assets and the new conceptual aspects of hedge accounting are added to the PGC. But, for example, the new expected loss criterion is not adopted for the calculation of impairment, as it is understood that it is mainly intended for financial entities that have their own local regulations. The amended PGC also does not mention the IASB's new standard on leases (IFRS 16).
Main objective of the reform of the PGC
The recent reform of the General Accounting Plan, through RD 1/2021 has the objective of adopting to a certain extent the recognition and measurement criteria of IFRS 9 of the IASB, following the Spanish policy of gradual convergence, but not the full adoption of the IASB standards in the general accounting plan. Unlike the approach followed by the accounting circulars of Banco de España that follow the aforementioned international standards, once they have been validated by the European Union, in all cases.
How do changes in the PGC affect listed companies?
Revenue recognition: harmonising the PGC with IFRS 15
Through Spanish Accounting and Audit Institute (ICAC) resolution developing the content of Royal Decree 1/2021, of 12 January, which modifies the general accounting plan, regarding the recognition of ordinary income derived from the delivery of goods and the provision of services, to harmonise it with the international financial reporting standard (IFRS) 15, already adopted by the EU for the consolidated financial statements of listed groups since 2018.
New wording of the Accounting and Valuation Rule 14a of the PGC
With regard to revenue recognition, such modifications are primarily limited to regulating new content to be reported in the annual accounts report. The new wording of the Accounting and Valuation Rule 14 of the PGC, Income from sales and provision of services, establishes that revenue recognition occurs when the transfer of goods or services provided to customers takes place, adopting the process by stages of IFRS 15, namely:
- Identify the contract or contracts with the customer, as a source of rights and obligations between the parties.
- Identify the obligation or obligations to fulfil.
- Determine the price of the transaction, or consideration of the contract.
- Assign the price of the transaction to the obligations to be fulfilled.
- Recognise the income when, or as, the company fulfils a committed obligation through the transfer of goods or the provision of a service.
The fundamental issue addressed by the ICAC Resolution
The application of the accrual principle for the recognition of revenue from sales and provision of services.
The scope of application of the Resolution also extends to non-profit entities with commercial activity obliged to follow the norms of adaptation of the PGC, as well as any other entities whose legal regime refers to the criteria established in the Commercial Code. The Resolution, however, does not modify the criteria regulated in the norms for adapting the PGC to public infrastructure concession companies, approved by Order EHA / 3362/2010, on 23 of December. In principle, a specific transitional regime is not anticipated for the entry into force of this implementing regulation, so the provisions for changes in accounting criteria in NRV 22 of the PGC would be applicable.
The result is a standard that establishes a general framework for the application of the accrual principle in the recognition of revenue from contracts with customers, while at the same time including a relatively extensive list of specific cases, which, logically, will not be exhaustive, given that new issues not foreseen in the standard may always arise, but which may be resolved in view of the content of this Resolution, and by identifying analogies with the specific cases referred to in the standard.
However, it seems foreseeable that the entry into force of the Resolution will not have a significant impact on the income statements of Spanish companies, in view of what has happened in the scope of application of IFRS.
- Study: Financial Instruments: New features of IFRS 9 and its partial effect on the reformed PGC (RD 1/2021). By Felipe M Herranz Martín. Published in the magazine Observatorio Contable No. 10 – February 2021.
- Study: Revenue recognition in the Spanish General Accounting Plan: harmonisation with IFRS 15. By Fernando Ruiz Lamas. Published in the magazine Observatorio Contable No. 10 – February 2021.