financial statements Auditor’s report
5,164,278 5,582,874 5,650,470 Security price fluctuation
allowance-Government debt securities (Note 5) 33 10,182 3,696
Debentures and other fixed-income securities (Note 8) 198,420 298,775 313,079
Common stocks and other equity securities (Note 9) 569,715 522,640 618,406
768,168 831,597 935,181
Pension allowance (*) (Note
2-j)-At Spanish companies 7,448,941 6,626,201 5,966,704
Of which: Other assets 3,191,513 3,240,237 3,170,597
At foreign companies 3,001,768 4,033,609 3,541,307
10,450,709 10,659,810 9,508,011
General risk allowance (**) 132,223 132,223 132,223
Tangible fixed asset
allowance-Foreclosed assets (Note 13) 395,406 563,455 623,881
Other assets 104,837 131,652 99,702
500,243 695,107 723,583
Other asset allowances 207,750 243,013 219,117
Other provisions for contingencies and expenses (Note 17) 5,008,669 7,895,923 6,794,863
Total 22,232,040 26,040,547 23,963,448
(*) The consolidated balance sheets do not include the pension commitments of foreign companies which are covered by contracts taken out with insurance companies.
(**) In application of the regulations set by the Bank of Spain, the balance of this allowance is deemed to form part of the Group’s net worth reserves for the purposes of complying with capital adequacy requirements.
Argentina
Taking into account the uncertainty prevailing in Argentina as a result of the changes in its financial system (sharp devaluation of the peso, conversion to pesos of certain foreign-currency denominated assets and liabilities in the balance sheets of Argentine entities and rescheduling of customer deposits, among others), until final rules are issued to correct current asymmetries and in view of possible future events, the 2002 and 2001 consolidated financial statements were prepared as described below, in accordance with the Group’s traditional policy of prudence in valuation:
1. The assets and liabilities as of December 31, 2002, of all the Group entities located in Argentina were translated to euros at a final exchange rate of ARP 3.54/E1 (equivalent to ARP 3.375/US$ 1). The net worth effect of this translation (from commencement of the devaluation)
amounted to approximately E982 million (E505 million as of December 31, 2001, after the translation of the financial statements using a final exchange rate of ARP 1.498/E1, which is a representative market exchange rate as of the date of preparation of the 2001 financial statements) and is recorded, as stipulated in Bank of Spain Circular 4/1991, under the “Accumulated Losses at Consolidated Companies” caption (Note 21).
2. A specific allowance of E1,287 million was recorded in 2001 (E1,244 million of which were recorded with a charge to the “Extraordinary Loss” caption in the consolidated statement of income) to cover—after considering the translation differences referred to above—the net book value of the Group banks located in Argentina (E774 million) and the consolidation goodwill (including coverage of the investment relating to the
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purchase of Banco Río de la Plata, S.A. shares, as discussed in Note 3) arising from these entities (E513 million – Note 12) which had not been amortized as of December 31, 2001.
As of December 31, 2002, the total allowance recorded amounted to E1,623 million (E1,356 million of which were recorded with a charge to the “Provisions for Contingencies and Expenses – Other Provisions” caption) and covered in full the net book value of and the goodwill on the investments in companies located in that country, the risk arising from intercompany transactions, as well as the new regulatory requirements on provisions for country-risk with third parties as a result of the change in the classification of Argentina (Note 17).
3. In order that the accounting principles and presentation criteria in the financial statements of the Group subsidiaries located in Argentina are consistent with those of the Group, the results of these subsidiaries were neutralized and no other uniformity or accounting classification adjustment was made to their financial statements.
In 2002 no cash contributions were made from other Group entities to the subsidiaries located in Argentina.
(2) Accounting principles and valuation methods The accounting principles and valuation methods applied in preparing the consolidated financial statements were as follows:
a) Recognition of revenues and expenses
Revenues and expenses are generally recognized for accounting purposes on an accrual basis, the interest method being applied for transactions whose settlement periods exceed 12 months. However, in accordance with the principle of prudence and with Bank of Spain regulations, the interest earned on nonperforming, disputed or doubtful loans, including interest subject to country risk in countries classified as experiencing temporary difficulties and as doubtful or very doubtful, is not recognized as a revenue until it is collected.
b) Foreign currency transactions
Translation methods
Balances denominated in foreign currencies, including those of the financial statements of the consolidated companies and branches in non-EMU countries, were translated to euros at the year-end average official exchange rates in the Spanish spot foreign currency market, except for:
1. The balances funded in euros relating to the capital amounts assigned to branches in non-EMU countries and to the reserves and undistributed earnings of companies and branches in non-EMU countries, which were translated at historical exchange rates.
2. The revenue and expense accounts of the consolidated companies and branches in non-EMU countries, which were translated at the average exchange rates in each year.
3. The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions were translated to euros at the year-end exchange rates prevailing in the forward foreign currency market.
Accounting for exchange differences
The exchange differences arising from application of the above-mentioned translation methods are recorded as follows:
1. The net debit and credit differences arising in the consolidation process are recorded under the
«Accumulated Losses at Consolidated Companies»and
«Reserves at Consolidated Companies» captions, respectively, in the consolidated balance sheets, net of the portion of these differences relating to minority interests (Note 21).
2. The remaining exchange differences are recorded under the «Gains (Losses) on Financial Transactions»caption in the consolidated statements of income (Note 25), and those relating to nonhedging forward transactions are included under the «Other Assets»or «Other Liabilities» caption in the consolidated balance sheets.
159 Certain of the companies located in countries with specific
accounting regulations on the recording of adjustments for inflation (basically Chile, Mexico, Uruguay, Bolivia and Peru) record debits and credits in their income statements to adjust their assets and liabilities for inflation. These debits
and credits are recorded under the «Extraordinary Loss» and «Extraordinary Income»captions in the consolidated statements of income. The detail of these items is as follows:
Thousands of Euros 2002 2001 2000
Extraordinary income:
Other revenues 36,542 15,332 48,015
Extraordinary loss:
Other expenses (106,079) (57,133) (116,049)
(69,537) (41,801) (68,034)
c) Credit loss allowance
The credit loss allowances, which are recorded as a reduction of the «Due from Credit Institutions», «Loans and Credits» and «Debentures and Other Fixed-Income Securities» captions on the asset side of the consolidated balance sheets, are intended to cover possible losses in the full recovery of all types of risk transactions, except off-balance-sheet risks, arranged by the consolidated companies in the course of their business activity.
The credit loss allowances were calculated as follows:
1. Allowance for risks in Spain and abroad, excluding country risk:
a. Specific allowances: on a case-by-case basis, based on the loan recovery expectations and, as a minimum, by application of the coefficients stipulated in Bank of Spain regulations. The credit loss allowance is increased by provisions from period income and is decreased by chargeoffs of debts deemed to be uncollectible or which have been nonperforming for more than three years (six years in the case of mortgage loans with effective coverage) and by releases, where appropriate, of the provisions recorded for debts subsequently recovered (Note 7).
b. General-purpose allowance: additionally, in accordance with Bank of Spain regulations, an additional general-purpose allowance, equal to 1%
of the loans, private-sector fixed-income securities, contingent liabilities and doubtful assets for which provision is not mandatory (0.5% for certain mortgage loans) has been provided for losses not specifically identified at year-end.
2. Country-risk allowance: on the basis of the estimated classification of the degree of debt-servicing difficulty being experienced by each country (Note 7).
3. Allowance for the statistical coverage of credit losses:
additionally, from July 1, 2000, the Group is required to record an allowance for the statistical coverage of the unrealized credit losses on the various homogeneous loan portfolios, by charging each quarter to the «Writeoffs and Credit Loss Provisions» caption in the consolidated statement of income for each of the consolidated companies, the positive difference resulting from subtracting the net specific provisions for credit losses recorded in the quarter from one-fourth of the statistical estimate of the overall unrealized loan losses on the various homogeneous loan portfolios (credit risk of each portfolio multiplied by certain coefficients which range from 0% to 1.5%). If the resulting difference were negative, the amount would be credited to the consolidated statement of income with a charge to the allowance recorded in this connection (to the extent of the available balance).
The provisions recorded to cover the Group’s losses which may be incurred as a result of the off-balance-sheet risks maintained by the consolidated companies are included under the «Provisions for Contingencies and Expenses - Other Provisions» caption in the consolidated balance sheets (Note 17).
The credit loss allowances recorded by the Group comply with Bank of Spain regulations.
d) Government debt securities, debentures and fixed-income securities
The securities composing the Group’s fixed-income securities portfolio were classified as follows:
1. The securities assigned to the trading portfolio, which consists of securities held for the purpose of operating in the market, are stated at their year-end market price.
The net differences arising from price fluctuations are recorded (ex-coupon) under the «Gains (Losses) on
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Financial Transactions» caption in the consolidated statements of income.
2. The securities assigned to the held-to-maturity investment portfolio, which consists of securities which the Group has decided to hold until final maturity basically because it has the financial capacity to do so or because it has related financing available, are stated at acquisition cost, adjusted by the amount resulting from accruing by the interest method the positive or negative difference between the redemption value and the acquisition cost over the residual life of the security.
3. The securities assigned to the available-for-sale portfolio, which consists of the securities not assigned to either of the two portfolios described above, are stated at their adjusted acquisition cost, as defined in paragraph 2 above. The adjusted acquisition cost and the market value of these securities are compared. The market value of listed securities in this portfolio is deemed to be the market price on the last day of trading of each year and that of unlisted securities to be the current value at the market interest rates prevailing on that date. A security price fluctuation allowance is recorded, if required, with a charge to asset accrual accounts or to income.
In the fixed-income securities assigned to the available-for-sale portfolio, the net difference (additional to the security price fluctuation allowance recorded with a charge to income) by which the adjusted acquisition cost exceeded their market value amounted to E272 million as of December 31, 2002 (Notes 5 and 8) (E206 million and E231 million as of December 31, 2001 and 2000, respectively).
This amount is not reflected in the consolidated balance sheets since the security price fluctuation allowance recorded for this amount and the asset accrual account against which the allowance was recorded offset each other. This accrual account is taken into account in calculating the Group’s capital ratio.
In the event of disposal of these securities, the losses with respect to the adjusted acquisition cost are recorded with a charge to income. Gains (if they exceed the losses charged to income in the year) are credited to income only for the portion, if any, exceeding the security price fluctuation allowance required at year-end and charged to accrual accounts.
e) Equity securities
Equity securities held in the trading portfolio are valued at their market price at year-end. The net differences arising from price fluctuations are recorded under the «Gains (Losses) on Financial Transactions» caption in the consolidated statements of income.
The investments in nonconsolidable Group companies and in associated entities are carried by the equity method (Note 1).
Equity securities, other than those described above, are recorded in the consolidated balance sheets at the lower of cost or market. The market value of these securities is determined as follows:
1. Listed securities: lower of average market price in the last quarter of the year or market price on the last day of trading in the year.
2. Unlisted securities: underlying book value of the investment per the latest available financial statements of the investees adjusted by the unrealized gains existing at the time of acquisition and still existing at year-end. The difference between acquisition cost and the amount calculated as indicated in the preceding paragraph which may be absorbed by the annual increase in the underlying book values of the investees over a maximum period of 20 years need not be written down.
The security price fluctuation allowance recorded to recognize the unrealized losses is presented as a reduction of the balance of the related captions in the consolidated balance sheets (Note 9).
f) Intangible assets
Capital increase expenses, cash bond issuance expenses, new business launch expenses, expenditures for the acquisition and preparation of computer systems and programs which will be useful over several years, investments in the refurbishment of leased office premises and similar items are generally recorded at cost, net of accumulated amortization.
These expenses are amortized with a charge to income over a maximum period of five years.
E285,573 thousand, E336,837 thousand and E248,957 thousand of amortization of these expenses were charged to the consolidated statements of income in
161 2002, 2001 and 2000, respectively, and these amounts
are recorded under the «Depreciation and Amortization and Writedown of Property and Equipment and Intangible Assets»caption.
g) Consolidation goodwill and negative difference in consolidation
Consolidation goodwill
The positive differences between:
(i) the cost of the investments in consolidated companies (both those consolidated by the global integration method and those carried by the equity method) (ii) as required by the Bank of Spain, the market value of
the investments in other companies contributed by third parties in capital increases carried out at the Bank in accordance with the provisions of Article 159.1.c of the revised Spanish Corporations Law (Note 20) and the respective underlying book values adjusted at the date of first-time consolidation are allocated as follows:
1. If the difference is allocable to specific assets or liabilities of these companies, it is recorded by increasing the value of the assets (or reducing the value of the liabilities) whose market values were higher (lower) than the net book values per these companies’
balance sheets and whose tax treatment is similar to that of analogous assets (liabilities) of the Group (amortization, accrual, etc.).
2. The remainder is recorded as consolidation goodwill.
These differences are being amortized systematically from the acquisition date over a maximum period of 20 years (Note 12), which is the period in which it is considered that the investments will contribute to the obtainment of income for the Group.
The goodwill amortization charges are recorded under the «Amortization of Consolidation Goodwill»caption in the consolidated statements of income.
Negative difference in consolidation
The negative differences in consolidation, which are recorded in the consolidated balance sheets as deferred revenues, can be credited to consolidated income when the investments in the capital stock of the related investee companies are totally or partially disposed of.
h) Property and equipment
Operating property and equipment
Property and equipment are carried at the lower of cost revalued pursuant to the applicable enabling provisions, net of the related accumulated depreciation.
Depreciation is provided by the straight-line method at rates based on the years of estimated average useful life of the related assets. The annual depreciation expense is calculated basically at the following rates:
Rate (%)
Buildings for own use 2
Furniture 7.5 to 10
Installations 6 to 10
Office and automation equipment 10 to 25
Upkeep and maintenance expenses are expensed currently.
Property and equipment acquired through foreclosure
These property and equipment items are stated at the lower of the book value of the assets used to acquire them or the appraised value of the asset acquired.
If these assets are not disposed of or added to the Group’s operating property and equipment, a provision is recorded
on the basis of the time elapsed since their acquisition, the nature of the asset and/or the characteristics of the appraisal.
The provisions recorded with a charge to the
«Extraordinary Loss» caption in the consolidated statements of income are presented as a reduction of the balance of the «Property and Equipment - Other Property» caption (Note 13).
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i) Treasury stock
balance of the "Treasury Stock" caption relates to Bank shares acquired and held by consolidated companies.
These shares are reflected at cost, net of the required provision, if any, which is determined on the basis of the lower of the Group’s underlying book value or market price. The aforementioned provision is recorded with a charge to the “Losses on Group Transactions” caption in the consolidated statements of income.
The total Bank shares owned by consolidated companies represent 0.08% of the capital stock issued by the Bank as of December 31, 2002. At that date, the nonconsolidable subsidiaries held 0.02% of the Bank’s capital stock.
In 2002, after taking into account the acquisitions made in the year, the Group companies disposed of 763,081,401 Bank shares.
j) Pension commitments
Companies in Spain
Under the current collective labor agreements, certain Spanish consolidated entities have undertaken to supplement the social security benefits accruing to certain employees, or to their employees' beneficiary rightholders, for retirement, permanent disability, death of spouse or death of parent.
These commitments, which amounted to E9,975 million as of December 31, 2002, were covered by in-house allowances and external funds at that date. As of December 31, 2001 and 2000, they were covered by in-house allowances.
Applicable regulations
Pursuant to Royal Decree 1588/1999 enacting the Regulations on the instrumentation of the employers’
pension commitments to employees, accrued pension commitments and contingencies must be valued and covered using objective criteria, which must be at least as strict as those set forth in the aforementioned Regulations.
These criteria are mainly that the applicable assumed annual interest rate shall not exceed 4% and that the life expectancy, mortality and disability tables to be used (if other than those relating to the past experience of the group concerned, properly checked) shall be those relating to domestic or foreign past experience, properly adjusted.
The Bank of Spain extended to credit institutions the requirement to use the Swiss GRM/F-95 past experience tables because they meet the requirements relating to the principle of prudence.
The transitional system for adaptation of the new pension commitment regulations stipulates as follows:
1. The credit institutions that opt to maintain their pension allowances in-house (which is the case of the Group) shall record the difference between the recorded allowances as of December 31, 1999, and the allowances calculated by applying the new valuation methods as an in-house pension allowance, with a balancing entry in a debit-balance account (which is presented in the consolidated balance sheets offsetting the pension allowances) which shall be reduced each year with a charge to the consolidated statement of income by at least one-tenth of the beginning balance. The «Extraordinary Loss»caption in the 2002, 2001 and 2000 consolidated statements of income (Note 25) includes E125,601 thousand,
1. The credit institutions that opt to maintain their pension allowances in-house (which is the case of the Group) shall record the difference between the recorded allowances as of December 31, 1999, and the allowances calculated by applying the new valuation methods as an in-house pension allowance, with a balancing entry in a debit-balance account (which is presented in the consolidated balance sheets offsetting the pension allowances) which shall be reduced each year with a charge to the consolidated statement of income by at least one-tenth of the beginning balance. The «Extraordinary Loss»caption in the 2002, 2001 and 2000 consolidated statements of income (Note 25) includes E125,601 thousand,