Repsol

Accounting principles

Under EC Regulation number 1606/2002 of the European Parliament and Council of 19 July 2002, all companies governed by the Laws of a member state of the European Union whose stocks are traded on a regulated market of any of the states that make up the Union, shall submit their consolidated financial statements for periods commencing 1 January 2005 subject to International Financial Reporting Standards (IFRS) adopted by the European Union. In accordance with the application of this Regulation, Grupo Repsol YPF is obliged to submit their consolidated financial statements for the 2005 period in line with the IFRS validated by the European Union. In Spain, the duty to submit consolidated annual financial statements under the IFRS approved in Europe has likewise been regulated by final provision eleven of Act 62/2003 of 30 December, regulating fiscal measures.

As regards to the provisions in effect at the moment the Group formulated the annual financial statements corresponding to the 2004 period, the application of this regulation involves:

• Changes in accounting policy, assessment criteria and submission format of the financial statements that make up the Annual Financial Statements.
• Incorporation in the consolidated financial statements of two new financial statements: statement of changes in net worth and cash flow statement, and
• A significant increase in information provided in the annual financial statement report.                                 

Under the IFRS 1, First Time Adoption of International Financial Reporting Standards, approved by EC Regulation 707/2004 by the Commission dated 6 April (OJEU 17 April), although the first annual financial statements drawn up in accordance with the IFRS are, in the case of the Group, those corresponding to the period ending 31 December 2005, have incorporated, for comparison, the figures corresponding to the 2004 period, prepared on the same basis used to determine the figures from the 2005 period. This has required a Balance to be drawn up of the initial situation or situation on opening to the date of transition, 1 January 2004, prepared in accordance with IFRS norms in effect on 31 December 2005.

The criteria adopted by the Group in the transition to IFRS with regards to the alternatives permitted are as follows:

• Headings for property, plant and equipment; intangible assets; and property investments have been measured on the transition date at book value (including both the depreciated cost of the assets and, where applicable, net restatements made in the past and which had been accepted under generally accepted accounting principles in Spain), and since then at cost value.
• Exemption granted by the IFRS has been adopted for the application of the IFRS 3 Business combinations forecast from the IFRS transition date and in this way the business combinations prior to 1 January 2004, are not considered.
• IAS 32 and 39 have been applied from the transition date.
• For joint-control companies or joint ventures, the proportionate integration consolidation method is used.
• All conversion differences on the transition date have been reclassified as reserves, thereby leaving this item at zero the time.
  

Reconciliation of worth on 1 January and 31 December 2004, between GAAP in Spain and NFRS

Below, the reconciliation required by IFRS 1 between the starting and closing balances of worth for the period ending 31 December 2004, which figure in the Group's annual consolidated financial statements to date, and the correlative opening balances of the periods 2004 and 2005 determined in accordance with IFRS are detailed.

The main concepts that have required adjustments in worth to convert to IFRS are detailed below:

a. Acknowledgement of deferred tax
The Accounting treatment for tax on profit under Spanish accounting standards focuses on the calculation of tax based on the Profit and Loss method, which itself is based on the calculation of the temporary differences between fiscal profit and accounting profit. IFRS requires acknowledgement of deferred tax using the balance method that is orientated towards the calculation of temporary differences between the tax base of an asset or a liability and its accounting value in the balance sheet.

These changes have reduced the net worth of the Group by €2.577 billion and €2.203 billion on 1 January and 31 December, 2004, respectively. This decrease is primarily due to: (i) temporary differences between the tax base of the assets and liabilities of YPF, S.A. and the carry value of these assets and liabilities and (ii) the acknowledgement of deferred tax relative to the proportion of appreciation paid in business combinations assigned to the value of the assets (primarily of YPF, S.A. and BP Trinidad and Tobago).

b. Effect of exchange rate variations

The primary effects are as follows:

• Under Spanish accounting standards there is no specific regulation on functional currency for recording transactions. Thus, Grupo Repsol YPF, until December 2002, considered for some YPF, S.A. business the Argentinean Peso as functional currency (marketing, etc.) and for others the US Dollar (exploration and production, refining, etc.). For the purposes of IFRS, Grupo Repsol YPF has considered the US Dollar as the YPF functional currency for all business. This adjustment has increased the net worth attributed to the parent company by €456 million and €405 million on 1 January and 31 December 2004, respectively.
• It also includes the difference in recording the exchange rate differences under Spanish accounting standards with regards to the IFRS. Under Spanish accounting standards, negative exchange rate differences are allocated to Profit and Loss, whereas positive differences are stated in the liabilities of the balance sheet, except that, likewise, negative exchange rate differences were allocated to Profit and Loss in previous periods, in which case the positive differences are credited to the Profit and Loss of the period up to the limit of the net negatives added to Profit and Loss in previous years. Under IFRS both the negative and positive differences are allocated to Profit and Loss however much is produced. This adjustment signifies an increase in the net worth attributed to the parent company of €65 million and €60 million on 1 January and 31 December 2004, respectively.                                   

c. Deterioration in the asset value
Under the accounting standards generally accepted in Spain, there is no specific norm governing the methodology to be applied to calculate the deterioration test for asset value, so the Group applies criteria similar to that which exists in American accounting standards. This test is carried out in two phases: firstly, future cash flows forecast are compared without deducting from an asset, against its net carry amount. If that calculation yields a negative amount (that is, the net carry amount at book value is higher than the sum of the future cash flows forecast without deduction), a loss through deterioration of the value of the assets would be recorded by an amount equal to the difference between the estimated value of the future cash flows deducted from the asset and the net carry amount at book value of this asset.

Under IFRS, the calculation is made in a single step: the cash flows deducted from the asset and its net carry amount at book value are compared, and in the event that the latter is higher, an expense is recorded through deterioration in the value of the assets for the amount of the difference.

These changes have decreased the net worth attributed to shareholders by €59 million and €80 million as of 1 January and 31 December 2004, respectively. Such a decrease is primarily due to the acknowledgement of losses in the value of certain Exploration and Production assets by a sum of €6 million and €40 million on 1 January and 31 December 2004, respectively, and to Refining and Marketing assets by a sum of €53 million and €40 million, on 1 January and 31 December 2004, respectively.

d. Evaluation of financial instruments
Spanish accounting standards require financial assets to be measured at least between the cost value or market value, whilst financial liabilities are measured at redemption value. Derivative financial instruments, which are speculative, are valued by their market value insofar as this valuation signifies a loss. Those with the objective of hedging are recorded with the same criteria as the item hedged. Financial assets are closed when they expire, are transferred or are sold.

Under IFRS, financial assets and liabilities are classified into categories which determine if valuation is made at fair value or at amortised cost. Some results derived from financial instruments are directly recognised in net worth until closure, or in the case of loss, by deterioration in value.

In addition, IFRS requires very specific criteria to be fulfilled in order to apply hedge accounting. As a consequence, certain hedging agreements that may be classified as hedging under Spanish accounting standards, would not be qualified as such if we apply the IFRS hedge accounting.

The effect of these changes signifies a reduction in net worth attributed to parent company shareholders of €199 million and €99 million on 1 January and 31 December 2004, respectively, primarily due to the different hedging classification of some commercial derivatives relating to our operations and to their valuation on the market.

e. Preferred asset classification
Under IFRS, preferred assets issued by the subsidiary Repsol YPF, Repsol International Capital Limited, have been reclassified from the minority shareholder line to financial liabilities, given the duty to pay dividends if there is distributable profit on the part of the issuer.

Reconciliation of Profit and Loss corresponding to the 2004 period between GAAP in Spain and IFRS

Below, the conciliation required by IFRS 1 between the Profit and Loss for the 2004 period that figures in the consolidated annual statements of the Group to date and that which would result from applying IFRS in the transactions made in this period is detailed below.

The result attributed to the parent company shareholders under Spanish accounting standards was €1.95 billion in the 2004 period, compared to €2.414 billion with IFRS criteria. This increase is primarily due to:

a. Non-amortisation of goodwill
Under IFRS neither goodwill nor intangible assets with indefinite useful lives are amortised, although both are subject to a value loss test at least once a year. This change signifies an increase in the net result for the period ending 31 December 2004, of €200 million.

b. Acknowledgement of deferred tax
The Profit and Loss for the 2004 period drawn up according to IFRS criteria shows a positive effect in the line of tax on profits of €219 million derived primarily from the net application of deferred tax recorded on the transition date.

c. Amortisations and provisions through different deterioration calculation for the value of assets
The Profit and Loss for the 2004 period drawn up according to IFRS criteria shows, on the one hand, lower expense through amortisations after tax of €4 million due to the lower value of assets derived from the additional endowment of provisions through the deterioration of value in IFRS with regards to the existing provision with Spanish regulation on the transition date. On the other hand, it shows a negative total of €27 million after tax through the difference between the application of the deterioration test for the value assets according to IFRS, with regards to the calculation using Spanish standards, on 31 December 2004.

d. Evaluation of financial instruments
This effect corresponds primarily to the market valuation of certain derivatives linked to the commercial operations of the Group, not assigned as hedging for the purposes of IFRS.

For more information on IFRS Standards, please visit IASB

Last updated: 24 March 2011