INTRODUCTION.
This analysis originates from the identification of existing regulations in Spain regarding the disclosure of provisions, contingent liabilities and risks. Since January 2005, international accounting regulations are mandatory for companies listed in Europe. Through International Accounting Standard 37 (IAS 37), the following definitions are generally established for provisions and contingent liabilities:
1. Provision is a liability with uncertainty (risk) of amount and maturity, and for the recognition of provisions, these must be present, probable obligations and that have a reliable estimate.
2. Contingent liability is:
a) A possible obligation arising from a past event and whose existence will be confirmed by the occurrence of an event beyond the control of the company (risk).
b) A present obligation arising from a past event, which has not been recognized in accounting because it lacks a reliable valuation, and it is unlikely that the company will dispose of resources.
Subsequently, international accounting regulations indicate that provisions are recognized (accounted for) when the present obligation is more likely to exist than not to exist, otherwise, the contingent liability must be disclosed (only inform in notes) "EXCEPT" in case remotely possible.
As a consequence of any possible or probable obligation, we are faced with the existence of a risk, which is what contingent liabilities and provisions seek to reveal in the financial information: The disclosure and estimation of the financial impact of risks.
For this purpose we will explain, and in due course we will clarify with the provisions of international accounting regulations, three regulations in Spain referring to the disclosure of financial information on risks, provisions and contingent liabilities.
1) Accounting and auditing regulations.
In the Spanish case, first of all we want to cite resolution 08.04 of November 26, 2003 (Spain, Accounting and Auditing Regulations) relative to the general intervention of the state administration through which certain accounting operations to be carried out are regulated at the end of the year, such as amortization of fixed assets, provisions and accrual of expenses and income. From here we find within the third section of said standard, what is related to the provision for bad debts, and we want to mention it because said insolvency situation is a risk situation, and where in said section it is mentioned that according to the valuation standards contained in the PGCP (general public accounting plan), the appropriate value corrections must be made,endowing the corresponding provisions to reflect the "possible insolvencies" that arise with respect to the collection of the rights in question, where the rights to which this rule refers are for this case, the credits and other non-budgetary rights to collect and budgetary receivables or budgetary obligations; In this paragraph, what we want to highlight is the use of the word "possible" preceding the risk "insolvency", that is, the need to make a provision in this case in the face of an uncertainty, whose origin is a risk, is shown. According to the dictionary of the Royal Academy of the Spanish Language "possibility" is the power or occasion to be or exist things and "reality" is the real and effective existence of a thing, therefore, this rule that we have cited,It speaks of something that does not exist but has the potential to be and that we derive from a risk because according to the Royal Academy, insolvency is the inability to pay a debt, then then, the risk of not collecting derived from a possibility. Subsequently, continuing with what the aforementioned standard 08.04 indicates, we find that the standard speaks of a method for determining said provision and calls it "global estimation of the risk of bad debts", with which it is even more supported that said standard makes unavoidable reference to the provision derived from a risk, which, as mentioned, is that of insolvency.Continuing with what the aforementioned rule 08.04 indicates, we find that the rule speaks of a method for determining said provision and calls it "global estimation of the risk of bad debts", with which it is further supported that said rule inescapably refers to the provision derived from a risk, which, as mentioned, is that of insolvency.Continuing with what the aforementioned rule 08.04 indicates, we find that the rule speaks of a method for determining said provision and calls it "global estimation of the risk of bad debts", with which it is further supported that said rule inescapably refers to the provision derived from a risk, which, as mentioned, is that of insolvency.
Another standard that we want to cite regarding the issue of risks is the 09.04 standard of December 26, 2003 (Spain, Accounting and Auditing Regulations) regarding the annual corporate governance report and other information instruments of listed public limited companies and other entities. In said standard, it is mentioned in its first section that the annual corporate governance report will have, among other elements, the inclusion of its risk control system, and for this purpose, the regulations request to indicate whether there are risk control systems related to the activities carried out by the company, where the description of said risk control system must contain at least an indication of the risks covered by the system and also,the justification of the adaptation of the risk control systems adopted to the risk profile of the company. Again, mention is made of the need to identify risks for which we cite what the Royal Academy of the Spanish Language defines as risk, which is understood as "contingency or proximity of damage", and said academy defines contingency such as “the possibility of happening or not happening”, that is, within the annual corporate governance report, companies must indicate those damages that are likely to happen, that is, that may or may not be realized, in a word: risks. But here the question that should be asked, what degree of possibility would be the one that should be considered?What if the possibility is remote? These are only questions that could arise at the time of expressing said risks by companies, and we assume that it will be a matter of approaches, since what for one manager is a risk, for another may not be, perhaps because he lacks information or it could even be sensitivity.
In summary, what the Spanish accounting and auditing regulations propose in this section is the following in relation to risks:
2) The general accounting plan, preparation of the annual accounts.
Within said plan, a subgroup is included, of which corresponds the record of provisions to cover certain risks and expenses. Said "provisions for risks and expenses" are intended to cover expenses originating in the same year or in a previous one, losses or debts that are clearly identified in terms of their nature but that on the balance sheet date, are probable or certain but indeterminate in regarding its amount or its expiration date, that is, there is uncertainty. The provisions that this general accounting plan contemplates are:
1. Provision for pensions and similar obligations: These are the obligations of the company with the workers mainly as a result of retirement pensions.
2. Provision for taxes: Represents the estimated amount for those tax debts whose amount or date of payment is uncertain.
3. Provision for liabilities: They are funds to deal with probable or uncertain debts but born from litigation or similar causes, that is, leaving out many risks that may originate them. In this, the Royal Academy of the Spanish Language describes as “probable” everything that you have good reasons to believe will happen and on the other hand, uncertainty is defined as something that lacks certain knowledge, in this case, and in relation to the definition of the term "probable", that it will happen. To all this, it seems that these responsibilities are expected to happen but it is not known when and perhaps never will happen.
4. Provision for large repairs: These are intended to attend large repairs of fixed assets of a multi-year nature.
5. Reversion fund: In this case, a concession company makes assets available to a public body whose value at the time of reversion must be recovering throughout the life of the concession. This recovery is achieved by creating this provision, which consequently represents the liability accumulated systematically throughout the duration of the concession by the company.
In conclusion, the general Spanish accounting plan leaves out the recognition of many risks that companies may have and focuses mainly on foreseeable uncertainties in the short and medium term. The following illustration shows what the Spanish General Accounting Plan proposes in this section that has been commented:
3) BOE number 81: resolution of March 25, 2002 of the ICAC: (Accounting and Auditing Institute): By which standards are approved for the recognition, assessment and information of environmental aspects in the annual accounts.
Its antecedent is the royal decree of December 1990 approving the Spanish General Accounting Plan and in which, in its fifth final provision, it establishes that the ICAC can dictate mandatory standards that develop the valuation standards of said accounting plan, reason For which, said body issued this standard that we will comment on in this section where it seeks to develop environmental accounting, for which we summarize the essence of this standard in the following illustration:
However, based on what is illustrated in the previous table, we will focus on the part that refers to provisions and environmental contingencies (in order to also address risks) where, for this purpose, the standard contemplates in the case of provisions, two ways to follow illustrated graphically below:
In conclusion, this resolution promotes a treatment identical to the provisions in IAS 37 in fundamentals and making a distinction in registration by virtue of the significant amount of said provision. On the other hand, said resolution contemplates its description of what a contingent obligation represents, which is similar to the one stated in IAS 37; The following table illustrates what this ICAC resolution indicates in this regard:
In conclusion, the treatment of this resolution in contingents is similar to contingent liabilities in IAS 37 but without limiting what is remote, that is, this contingent of said Spanish resolution does not exclude remoteness, but it should be remembered that it only refers to to environmental information derived from the damage caused by the company to the environment, that is, it does not refer to the risks in their entirety that could threaten the ongoing business of the company.
GENERAL CONCLUSION.
As a result of the 3 sources analyzed, we conclude that although there are regulations regarding financial disclosure regarding risks, provisions and contingent liabilities as mentioned, there are still areas of opportunity in this regard, because it is still possible to go deeper into the requirement of its disclosure. It has been observed how the General Accounting Plan, although it contemplates its provision for risks and expenses, does not contemplate all the risks that could arise in companies, since it mainly focuses on 5 classifications, but the way of identify provisions or contingencies as a result of other latent risks such as financial, natural, political, international operations risks, among other risks that may exist in companies.The accounting and auditing regulations in its resolution 09.04, takes a step forward by requesting a description of the risk control system and the risks covered by said system, thus representing a complement to the information related to risks in companies. And finally, the resolution of March 25 of the ICAC indicates to disclose the contingencies (disbursement risk) that may arise as a result of the repair of environmental damage caused by the companies.the resolution of March 25 of the ICAC indicates to disclose the contingencies (disbursement risk) that may arise as a result of the repair of environmental damage caused by the companies.the resolution of March 25 of the ICAC indicates to disclose the contingencies (disbursement risk) that may arise as a result of the repair of environmental damage caused by the companies.
That is why we consider that the 3 regulations analyzed, complement each other with regard to the disclosure of information related to risks, provisions and contingencies of the companies, however, it remains open regarding the way of disclosing risks and contingencies considered "remote", situations that in the international accounting regulations regarding provisions and contingencies, originate a qualification and their disclosure is not required.
Bibliography:
- DICTIONARY OF THE ROYAL ACADEMY OF THE SPANISH LANGUAGE, available at: INTERNATIONAL ACCOUNTING STANDARDS (2005), IAS 37 (Provisions, contingent liabilities and assets), available at: www.iasc.org.uk SPANISH ACCOUNTING AND AUDITING STANDARDS (2004) Double entry, Extraordinary number March 2005. Standards published in 2004. GENERAL ACCOUNTING PLAN SPANISH (2004), “Preparation of the Spanish annual accounts”, available at: RESOLUTION OF MARCH 25, 2002, of the Accounting and Audit Institute of accounts: "Environmental aspects in annual accounts", BOE NÚM. 81, SPAIN.
