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Note 2 - Principles Of Consolidation, Accounting Policies And Measurement Bases Applies And Recent IFRS Pronouncements | 12 Months Ended
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Dec. 31, 2017
Principles Of Consolidations Accounting Policies And Measurement Basis And Recent IFRS Pronouncements |
Significant Account Policies | Principles of consolidation, accounting policies and measurement bases applied and recent IFRS pronouncements The Glossary includes the definition of some of the financial and economic terms used in Note 2 and subsequent Notes. Principles of consolidation In terms of its consolidation, in accordance with the criteria established by IFRS, the BBVA Group is made up of four types of entities: subsidiaries, joint ventures, associates and structured entities, defined as follows: 1) Subsidiaries Subsidiaries are entities controlled by the Group (for definition of the criterion for control, see Glossary).The financial statements of the subsidiaries are fully consolidated with those of the Bank. The share of non-controll ing interests from subsidiaries in the Group’s consolidated total equity is presented under the heading “Non-controlling interests” in the consolidated balance sheet. Their share in the profit or loss for the period or year is presented under the heading “Attributable to minority interest” in the accompanying consolidated income statement (see Note 31). Note 3 includes information related to the main subsidiaries in the Group as of December 31, 2017. Appendix I includes other significant information on thes e entities. 2) Joint ventures Joint ventures are those entities over which there is a joint arrangement to joint control with third parties other than the Group (for definitions of joint arrangement, joint control and joint venture, refer to Glossary). The investments in joint ventures are accounted for using the equity method (see Note 16). Appendix II shows the main figures for joint ventures accounted for using the equity method. 3) Associates Associates are entities in which the Group is able to exe rcise significant influence (for definition of significant influence, see Glossary). Significant influence is deemed to exist when the Group owns 20% or more of the voting rights of an investee directly or indirectly, unless it can be clearly demonstrated that this is not the case. However, certain entities in which the Group owns 20% or more of the voting rights are not included as Group associates, since the Group does not have the ability to exercise significant influence over these entities. Investments in these entities, which do not represent material amounts for the Group, are classified as “Available-for-sale financial assets”. In contrast, some investments in entities in which the Group holds less than 20% of the voting rights are accounted for as Group associates, as the Group is considered to have the ability to exercise significant influence over these entities. As of December 31, 2017, 2016 and 2015, these entities are not significant in the Group. Appendix II shows the most significant informa tion related to the associates (see Note 16), which are accounted for using the equity method. 4) Structured Entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who contr ols the entity, such as when the voting rights relate to administrative matters only and the relevant activities are directed by means of contractual arrangements (see Glossary). In those cases where the Group sets up entities or has a holding in such enti ties, in order to allow its customers access to certain investments, to transfer risks or for other purposes, in accordance with internal criteria and procedures and with applicable regulations, the Group determines whether control over the entity in quest ion actually exists and therefore whether it should be subject to consolidation. Such methods and procedures determine whether there is control by the Group, considering how the decisions are made about the relevant activities, assesses whether the Group has all power over the relevant elements, exposure, or rights, to variable returns from involvement with the investee and the ability to use power over the investee to affect the amount of the investor’s returns. 5) Structured entities subject to consolida tion To determine if a structured entity is controlled by the Group, and therefore should be consolidated into the Group, the existing contractual rights (different from the voting rights) are analyzed. For this reason, an analysis of the structure and pur pose of each investee is performed and, among others, the following factors will be considered: Evidence of the current ability to manage the relevant activities of the investee according to the specific business needs (including any decisions that may ari se only in particular circumstances). Potential existence of a special relationship with the investee. Implicit or explicit Group commitments to support the investee. The ability to use the Group´s power over the investee to affect the amount of the Group’s returns. There are cases where the Group has a high exposure to variable returns and retains decision-making power over the investee, either directly or through an agent. The main structured entities of the Group are the asset securitization funds, to w hich the BBVA Group transfers loans and receivables portfolios, and other vehicles, which allow the Group’s customers to gain access to certain investments or to allow for the transfer of risks or for other purposes (for additional information, see Appendices I and V). The BBVA Group maintains the decision-making power over the relevant activities of these vehicles and financial support through securitized market standard contracts. The most common ones are: investment positions in equity note tranch es, funding through subordinated debt, credit enhancements through derivative instruments or liquidity lines, management rights of defaulted securitized assets, “clean-up” call derivatives, and asset repurchase clauses by the grantor. For these reasons, t he loans and receivable portfolios related to the vast majority of the securitizations carried out by the Bank or Group subsidiaries are not derecognized in the books of said entity and the issuances of the related debt securities are registered as liabili ties within the Group’s consolidated balance sheet. 6) Non-consolidated structured entities The Group owns other vehicles also for the purpose of allowing customers access to certain investments, to transfer risks, and for other purposes, but without the G roup having control of the vehicles, which are not consolidated in accordance with “IFRS 10 - Consolidated Financial Statements”. The balance of assets and liabilities of these vehicles is not material in relation to the Group’s Consolidated Financial Stat ements. As of December 31, 2017, there was no material financial support from the Bank or its subsidiaries to unconsolidated structured entities. The Group does not consolidate any of the mutual funds it manages since the necessary control conditions are not met (see definition of control in the Glossary). Particularly, the BBVA Group does not act as arranger but as agent since it operates the mutual funds on behalf and for the benefit of investors or parties (arranger or arrangers) and, for this reason it does not control the mutual funds when exercising its authority for decision making. The mutual funds managed by the Group are not considered structured entities (generally, retail funds without corporate identity over which investors have participations which gives them ownership of said managed equity). These funds are not dependent on a capital structure that could prevent them from carry out activities without additional financial support, being in any case insufficient as far as the activities themsel ves are concerned. Additionally, the risk of the investment is absorbed by the fund participants, and the Group is only exposed when it becomes a participant, and as such, there is no other risk for the Group. In all cases, the operating results of equity method investees acquired by the BBVA Group in a particular period only include the period from the date of acquisition to the financial statements date. Similarly, the results of entities disposed of during any only include year the period from the start of the year to the date of disposal. The consolidated financial statements of subsidiaries, associates and joint ventures used in the preparation of the Consolidated Financial Statements of the Group have the same date of presentation as the Consolidated F inancial Statements. If financial statements at those same dates are not available, the most recent will be used, as long as these are not older than three months, and adjusted to take into account the most significant transactions. As of December 31, 2017, except for the case of the consolidated financial statements of a subsidiary and five associates and joint-ventures deemed non-significant for which financial statements as of November 30, 2017 were used, the December 31, 2017 financial statements for of all Group entities were utilized. BBVA banking subsidiaries, associates and joint venture worldwide, are subject to supervision and regulation from a variety of regulatory bodies in relation to, among other aspects, the satisfaction of minimum capital req uirements. The obligation to satisfy such capital requirements may affect the ability of such entities to transfer funds in the form of cash dividends, loans or advances. In addition, under the laws of the various jurisdictions where such entities are inco rporated, dividends may only be paid out through funds legally available for such purpose. Even when the minimum capital requirements are met and funds are legally available, the relevant regulators or other public administrations could discourage or delay the transfer of funds to the Group in the form of cash, dividends, loans or advances for prudential reasons. Accounting policies and valuation criteria applied The accounting standards and policies and the valuation criteria applied in preparing these Consolidated Financial Statements may differ from those used by some of the entities within the BBVA Group. For this reason, necessary adjustments and reclassifications have been made in the consolidation process to standardize these principles and criteria and comply with the IFRS-IASB. The accounting standards and policies and valuation criteria used in preparing the accompanying Consolidated Financial Statements are as follows: Financial instruments Measurement of financial instruments and recognition of changes in subsequent fair value All financial instruments are initially a ccounted for at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability, u nless there is evidence to the contrary, the best evidence of the fair value of a financial instrument at initial recognition shall be the transaction price. Excluding all trading derivatives not considered as economic hedges, all the changes in the fair value of the financial instruments arising from the accrual of interest and similar items are recognized under the headings “Interest income” or “Interest expenses”, as appropriate, in the accompanying consolidated income statement in which period the chan ge occurred (see Note 37). The dividends received from other entities, other than associated entities and joint venture entities, are recognized under the heading “Dividend income” in the accompanying consolidated income statement in the period in which th e right to receive them arises (see Note 38). The changes in fair value after the initial recognition, for reasons other than those mentioned in the preceding paragraph, are treated as described below, according to the categories of financial assets and li abilities. “Financial assets and liabilities held for trading” and “Financial assets and liabilities designated at fair value through profit or loss” The assets and liabilities recognized under these headings of the consolidated balance sheets are measured upon acquisition at fair value and changes in the fair value (gains or losses) are recognized as their net value under the heading “Gains (losses) on financial assets and liabilities, net” in the accompanying consolidated income statements (see Note 41). Interests from derivatives designated as economic hedges on interest rate are recognized in interest income or expense (Note 37), depending on the result of the hedging instrument. However, changes in fair value resulting from variations in foreign exchang e rates are recognized under the heading “Exchange differences, net" in the accompanying consolidated income statements (Note 41). “Available-for-sale financial assets” Assets recognized under this heading in the consolidated balance sheets are measured at their fair value. Subsequent changes in fair value (gains or losses) are recognized temporarily net of tax effect, under the heading “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Available-for-sale financial a ssets” in the consolidated balance sheets (see Note 30). The amounts recognized under the headings “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Available-for-sale financial assets” and “Accumulated other compr ehensive income- Items that may be reclassified to profit or loss - Exchange differences” continue to form part of the Group's consolidated equity until the corresponding asset is derecognized from the consolidated balance sheet or until an impairment loss is recognized on the corresponding financial instrument. If these assets are sold, these amounts are derecognized and included under the headings “Gains (losses) on financial assets and liabilities, net” or “Exchange differences, net", as appropriate, in the consolidated income statement for the year in which they are derecognized (see Note 41). The net impairment losses in “Available-for-sale financial assets” over the year are recognized under the heading “Impairment losses on financial assets, net – Oth er financial instruments not at fair value through profit or loss” (see Note 47) in the consolidated income statements for that period. Changes in the value of non-monetary items resulting from changes in foreign exchange rates are recognized temporarily u nder the heading “Accumulated other comprehensive income- Items that may be reclassified to profit or loss - Exchange differences” in the accompanying consolidated balance sheets. Changes in foreign exchange rates resulting from monetary items are recogniz ed under the heading “Exchange differences, net" in the accompanying consolidated income statements (see Note 41). “Loans and receivables”, “Held-to-maturity investments” and “Financial liabilities at amortized cost” Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are subsequently measured at “amortized cost” using the “effective interest rate” method. This is because the consolidated entities generally intend to hold such financial instruments to matur ity. Net impairment losses of assets recognized under these headings arising in each period are recognized under the heading “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss – loans and receivables”, “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss - held to maturity investments” or “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss – financial assets measured at cost” (see Note 47) in the consolidated income statement for that period. “Derivatives-Hedge Accounting” and “Fair value changes of the hedged items in portfolio hedges of interest-rate risk” Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are measured at fair value. Changes occurring subsequent to the designation of the hedging relationship in the measurement of financial instruments designated as hedged items as well as f inancial instruments designated as hedge accounting instruments are recognized as follows: In fair value hedges, the changes in the fair value of the derivative and the hedged item attributable to the hedged risk are recognized under the heading “Gains or losses from hedge accounting, net” in the consolidated income statement, with a corresponding offset under the headings where hedging items ("Hedging derivatives") and the hedged items are recognized, as applicable. Almost all of the hedges used by the Gro up are for interest-rate risks. Therefore, the valuation changes are recognized under the headings “Interest income” or “Interest expenses”, as appropriate, in the accompanying consolidated income statement (see Note 37). In fair value hedges of interest r ate risk of a portfolio of financial instruments (portfolio-hedges), the gains or losses that arise in the measurement of the hedging instrument are recognized in the consolidated income statement, and the gains or losses that arise from the change in the fair value of the hedged item (attributable to the hedged risk) are also recognized in the consolidated income statement (in both cases under the heading “Gains or losses from hedge accounting, net”, using, as a balancing item, the headings "Fair value cha nges of the hedged items in portfolio hedges of interest rate risk" in the consolidated balance sheets, as applicable. In cash flow hedges, the gain or loss on the hedging instruments relating to the effective portion are recognized temporarily under the h eading ”Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Hedging derivatives. Cash flow hedges” in the consolidated balance sheets, with a balancing entry under the heading “Hedging derivatives” of the Assets or Liabilities of the consolidated balance sheets as applicable. These differences are recognized in the accompanying consolidated income statement at the time when the gain or loss in the hedged instrument affects profit or loss, when the forecast transacti on is executed or at the maturity date of the hedged item (see Note 37). Differences in the measurement of the hedging items corresponding to the ineffective portions of cash flow hedges are recognized directly in the heading “Gains or losses from hedge a ccounting, net” in the consolidated income statement (see Note 41). In the hedges of net investments in foreign operations, the differences attributable to the effective portions of hedging items are recognized temporarily under the heading "Accumulated ot her comprehensive income - Items that may be reclassified to profit or loss – Hedging of net investments in foreign transactions" in the consolidated balance sheets with a balancing entry under the heading “Hedging derivatives” of the Assets or Liabilities of the consolidated balance sheets as applicable. These differences in valuation are recognized under the heading “Exchange differences, net" in the consolidated income statement when the investment in a foreign operation is disposed of or derecognized (s ee Note 41). Other financial instruments The following exceptions are applicable with respect to the above general criteria: Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have tho se instruments as their underlying asset and are settled by delivery of those instruments are recorded in the consolidated balance sheet at acquisition cost; this may be adjusted, where appropriate, for any impairment loss (see Note 8). Accumulated other c omprehensive income arising from financial instruments classified at the consolidated balance sheet date as “Non-current assets and disposal groups classified as held for sale” are recognized with the corresponding entry under the heading “Accumulated othe r comprehensive income- Items that may be reclassified to profit or loss – Non-current assets and disposal groups classified as held for sale” in the accompanying consolidated balance sheets (see note 30). Impairment losses on financial assets Definition of impaired financial assets carried at amortized cost A financial asset is considered impaired – and therefore its carrying amount is adjusted to re flect the effect of impairment when there is objective evidence that events have occurred, which: In the ca se of debt instruments (loans and advances and debt securities), reduce the future cash flows that were estimated at the time the instruments were acquired. So they are considered impaired when there are reasonable doubts that the carrying amounts will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed. In the case of equity instruments, it means that their carrying amount may not be fully recovered. As a general rule, the carrying amount of impaired financial assets is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes known. The recoveries of previously recognized impairment losses are reflected, if appropriate, in the consolidated inco me statement for the year in which the impairment is reversed or reduced, with an exception: any recovery of previously recognized impairment losses for an investment in an equity instrument classified as financial assets available for sale is not recogniz ed in the consolidated income statement, but under the heading " Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets" in the consolidated balance sheet (see Note 30). In general, a mounts collected on impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the unpaid principal. When the recovery of any recognized amount is considered remote, such amount is written-off on the consolidated balance sheet, without prejudice to any actions that may be taken in order to collect the amount until the rights extinguish in full either because it is time-barred debt, the debt is forgiven, or other reasons. Impairment on financial assets The impairment on financial assets is determined by type of instrument and other circumstances that could affect it, taking into account the guarantees received to assure (in part or in full) the performance of the financial assets. The BBVA Group recognizes impairment charges directly against the impaired financial asset when the likelihood of recovery is deemed remote, and uses an offsetting or allowance account when it recognizes non-performing loan provisions for the estimated losses. Impairment of debt instruments measured at amortized cost With regard to impairment losses arising from insolvency risk of the obligors (credit risk), a debt instrument, mainly Loans and receivables, is impaired due to insolvency when a deterioration in the ability to pay by the obligor is evidenced, either due to past due status or for other reasons. The BBVA Group has developed policies, methods and procedures to estimate incurred losses on outstanding credit risk. These policies, methods and procedures are applied in the due diligence, approval and execution of debt instruments and Commitments and guarantees given; as well as in identifying the impairment and, where appropriate, in calculating the amounts necessary to cover estimated losses. The amount of impairment losses on debt instruments measured at amortized cost is calculated based on whether the impairment losses are determined individually or collectively. First it is determined whether there is objective evidence of impairment individually for individually significant debt instrument, and collectively for debt instrument that are not individually significant. If the Group determines that there is no objective evidence of impairment, the assets are classified in groups of debt instrument based o n similar risk characteristics and impairment is assessed collectively. In determining whether there is objective evidence of impairment the Group uses observable data in the following aspects: Significant financial difficulties of the obligors. Ongoing de lays in the payment of interest or principal. Refinancing of credit due to financial difficulties by the counterparty. Bankruptcy or reorganization / liquidation are considered likely. Disappearance of the active market for a financial asset because of fin ancial difficulties. Observable data indicating a reduction in future cash flows from the initial recognition such as adverse changes in the payment status of the counterparty (delays in payments, reaching credit cards limits, etc.). National or local econ omic conditions that are linked to "defaults" in the financial assets (unemployment rate, falling property prices, etc.). Impairment losses on financial assets individually evaluated for impairment The amount of the impairment losses incurred on financial assets represents the excess of their respective carrying amounts over the present values of their expected future cash flows. These cash flows are discounted using the original effective interest rate. If a financial asset has a variable interest rate, t he discount rate for measuring any impairment loss is the current effective rate determined under the contract. As an exception to the rule described above, the market value of listed debt instruments is deemed to be a fair estimate of the present value of their expected future cash flows. The following is to be taken into consideration when estimating the future cash flows of debt instruments: All amounts that are expected to be recovered over the remaining life of the debt instrument; including, where app ropriate, those which may result from the collateral and other credit enhancements provided for the debt instrument (after deducting the costs required for foreclosure and subsequent sale). Impairment losses include an estimate for the possibility of colle cting accrued, past-due and uncollected interest. The various types of risk to which each debt instrument is subject. The circumstances in which collections will foreseeably be made. Impairment losses on financial assets collectively evaluated for impairme nt With regard to the collective impairment analysis, financial assets are grouped by risk type considering the debtor's capacity to pay based on the contractual terms. As part of this analysis, the BBVA Group estimates the impairment loan losses that are not individually significant, distinguishing between those that show objective evidence of impairment, and those that do not show objective evidence of impairment, as well as the impairment of significant loans that the BBVA Group has deemed as not showing an objective evidence of impairment. With respect to financial assets that have no objective evidence of impairment, the Group applies statistical methods using historical experience and other specific information to estimate the losses that the Group has incurred as a result of events that have occurred as of the date of preparation of the Consolidated Financial Statements but have not been known and will be apparent, individually after the date of submission of the information. This calculation is an int ermediate step until these losses are identified on an individual level, at which time these financial instruments will be segregated from the portfolio of financial assets without objective evidence of impairment. The incurred loss is calculated taking in to account three key factors: exposure at default, probability of default and loss given default. Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty. Probability of default (PD) is the probability of the cou nterparty failing to meet its principal and/or interest payment obligations. The PD is associated with the rating/scoring of each counterparty/transaction. Loss given default (LGD) is the estimate of the loss arising in the event of default. It depends ma inly on the characteristics of the counterparty, and the valuation of the guarantees or collateral associated with the asset. In order to calculate the LGD at each balance sheet date, the Group evaluates the whole amount expected to be obtained over the re maining life of the financial asset. The recoverable amount from executable secured collateral is estimated based on the property valuation, discounting the necessary adjustments to adequately account for the potential fall in value until its execution and sale, as well as execution costs, maintenance costs and sale costs. In addition, to identify the possible incurred but not reported losses (IBNR) in the unimpaired portfolio, an additional parameter called "LIP" (loss identification period) has to be intr oduced. The LIP parameter is the period between the time at which the event that generates a given loss occurs and the time when the loss is identified at an individual level. When the property right is contractually acquired at the end of the foreclosure process or when the assets of distressed borrowers are purchased, the asset is recognized in the consolidated balance sheets (see Note 2.2.4). Impairment of other debt instruments classified as financial assets available for sale The impairment losses on other debt instruments included in the “Available-for-sale financial asset” portfolio are equal to the excess of their acquisition cost (net of any principal repayment), after deducting any impairment loss previously recognized in the consolidated income s tatement over their fair value. When there is objective evidence that the negative differences arising on measurement of these debt instruments are due to impairment, they are no longer considered as “Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” and are recognized in the consolidated income statement. If all, or part of the impairment losses are subsequently recovered, the amount is recognized in the consolidated income sta tement for the year in which the recovery occurred, up to the amount previously recognized in the income statement. Impairment of equity instruments The amount of the impairment in the equity instruments is determined by the category where they are recogni zed: Equity instruments classified as available for sale: When there is objective evidence that the negative differences arising on measurement of these equity instruments are due to impairment, they are no longer registered as “Accumulated other comprehen sive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets” and are recognized in the consolidated income statement. In general, the Group considers that there is objective evidence of impairment on equity instrume nts classified as available-for-sale when significant unrealized losses have existed over a sustained period of time due to a price reduction of at least 40% or over a period of more than 18 months, different thresholds may exist for certain equity instrum ents or specific sectors. Any recovery of previously recognized im pairment losses for an investment in an equity instrument classified as available for sale is not recognized in the consolidated income statement, but under the heading " Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Available-for-sale financial assets" in the consolidated balance sheet (see Note 30). Equity instruments measured at cost: The impairment losses on equity instruments measured at acquisition cost are equal to the excess of their carrying amount over the present value of expected future cash flows discounted at the market rate of return for similar equity instruments. In order to determine these impairment losses, unless there is better evidence, an assessment of the equity of the investee is carried out (excluding Accumulated other comprehensive income due to cash flow hedges) based on the last approved (consolidated) balance sheet, adjusted by the unrealized gains at measurement date. Impairment losses are recognized in the consolidated income statem ent in the year in which they arise as a direct reduction of the cost of the instrument. These impairment losses may only be recovered subsequently in the event of the sale of these assets. Transfers and derecognition of financial assets and liabilities The accounting treatment of transfers of financial assets is determined by the form in which risks and benefits associated with the financial assets involved are transferred to third parties. Thus the financial assets are only derecognized from the consoli dated balance sheet when the cash flows that they generate are extinguished, when their implicit risks and benefits have been substantially transferred to third parties or when the control of financial asset is transferred even in case of no physical trans fer or substantial retention of such assets. In the latter case, the financial asset transferred is derecognized from the consolidated balance sheet, and any right or obligation retained or created as a result of the transfer is simultaneously recognized. Similarly, financial liabilities are derecognized from the consolidated balance sheet only if their obligations are extinguished or acquired (with a view to subsequent cancellation or renewed placement). The Group is considered to have transferred substant ially all the risks and benefits if such risks and benefits account for the majority of the risks and benefits involved in ownership of the transferred financial assets. If substantially all the risks and benefits associated with the transferred financial asset are retained: The transferred financial asset is not derecognized from the consolidated balance sheet and continues to be measured using the same criteria as those used before the transfer. A financial liability is recognized at the amount equal to t he amount received, which is subsequently measured at amortized cost or fair value with changes in the income statement, whichever the case. Both the income generated on the transferred (but not derecognized) financial asset and the expenses of the new fin ancial liability continue to be recognized. Financial guarantees Financial guarantees are considered to be those contracts that require their issuer to make specific payments to reimburse the holder of the financial guarantee for a loss incurred when a spe cific borrower breaches its payment obligations on the terms – whether original or subsequently modified – of a debt instrument, irrespective of the legal form it may take. Financial guarantees may take the form of a deposit, bank guarantee, insurance cont ract or credit derivative, among others. In their initial recognition, financial guarantees are recognized as liabilities in the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and the Group simultaneously recognize a corresponding asset in the consolidated balance sheet for the amount of the fees and commissions received at the inception of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding. Financial guarantees, irrespective of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required for them. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments measured at amortized cost (see Note 2.2.1). The provisions recognized for financial guarantees considered impaired are recognized under the heading “Provisions - Provisions for contingent risks and commitments” on the liability side in the consolidated balance sheets (see Note 24). These provisions are recognized and reversed with a charge or credit, respectively; to “Provisions or reversal of provision” in the consolidated income statements (see Note 46). Income from financial guarantees is recorded under the heading “Fee and commission income” in t he consolidated income statement and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee (see Note 40). Non-current assets and disposal groups held for sale and liabilities included in disposal grou ps classified as held for sale The headings “Non-current assets and disposal groups held for sale” and “liabilities included in disposal groups classified as held for sale” in the consolidated balance sheets includes the carrying amount of assets that are not part of the BBVA Group’s operating activities. The recovery of this carrying amount is expected to take place through the price obtained on its disposal (see Note 21). These headings include individual items and groups of items (“disposal groups”) and disposal groups that form part of a major operating segment and are being held for sale as part of a disposal plan (“discontinued operations”). The individual items include the assets received by the subsidiaries from their debtors, in full or partial sett lement of the debtors’ payment obligations (assets foreclosed or received in payment of debt and recovery of lease finance transactions), unless the Group has decided to make continued use of these assets. The BBVA Group has units that specialize in real e state management and the sale of this type of asset. Symmetrically, the heading “Liabilities included in disposal groups classified as held for sale” in the consolidated balance sheets reflects the balances payable arising from disposal groups and disconti nued operations. Non-current assets and disposal groups classified as held for sale are generally measured, at the acquisition date and at any later date deemed necessary, at either their carrying amount or the fair value of the property (less costs to se ll), whichever is lower. In the case of real estate assets foreclosed or received in payment of debts, they are initially recognized at the lower of: the restated carrying amount of the financial asset and the fair value at the time of the foreclosure or r eceipt of the asset less estimated sales costs. The carrying amount of the financial asset is updated at the time of the foreclosure, treating the real property received as a secured collateral and taking into account the credit risk coverage that would co rrespond to it according to its classification prior to the delivery. For these purposes, the collateral will be valued at its current fair value (less sale costs) at the time of foreclosure. This carrying amount will be compared with the previous carrying amount and the difference will be recognized as a provision increase, if applicable. On the other hand, the fair value of the foreclosed asset is obtained by appraisal, evaluating the need to apply a discount on the asset derived from the specific conditi ons of the asset or the market situation for these assets, and in any case, deducting the company’s estimated sale costs. At the time of the initial recognition, these real estate assets foreclosed or received in payment of debts, classified as “Non-curren t assets and disposal groups held for sale” and “liabilities included in disposal groups classified as held for sale” are valued at the lower of: their restated fair value less estimated sale costs and their carrying amount; a deterioration or impairment r eversal can be recognized for the difference if applicable. Non-current assets and disposal groups held for sale groups classified as held for sale are not depreciated while included under the heading “Non-current assets and disposal groups held for sale”. Fair value of non-current assets held for sale from foreclosures or recoveries is based, mainly, in appraisals or valuations made by independent experts on an annual basis or more frequently, should there be indicators of impairment. Gains and losses gen erated on the disposal of assets and liabilities classified as non-current held for sale, and liabilities included in disposal groups classified as held for sale as well as impairment losses and, where pertinent, the related recoveries, are recognized in “Profit or loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement (see Note 50). The remaining income and expense items associated with these assets and li abilities are classified within the relevant consolidated income statement headings. Income and expenses for discontinued operations, whatever their nature, generated during the year, even if they have occurred before their classification as discontinued o perations, are presented net of the tax effect as a single amount under the heading “Profit from discontinued operations” in the consolidated income statement, whether the business remains on the consolidated balance sheet or is derecognized from the conso lidated balance sheet. As long as an asset remains in this category, it will not be amortized. This heading includes the earnings from their sale or other disposal. Tangible assets Property, plant and equipment for own use This heading includes the assets under ownership or acquired under lease finance, intended for future or current use by the BBVA Group and that it expects to hold for more than one year. It also includes tangible assets received by the consolidated entities in full or partial settlement o f financial assets representing receivables from third parties and those assets expected to be held for continuing use. Property, plant and equipment for own use are presented in the consolidated balance sheets at acquisition cost, less any accumulated dep reciation and, where appropriate, any estimated impairment losses resulting from comparing this net carrying amount of each item with its corresponding recoverable amount. Depreciation is calculated using the straight-line method, on the basis of the acqui sition cost of the assets less their residual value; the land is considered to have an indefinite life and is therefore not depreciated. The tangible asset depreciation charges are recognized in the accompanying consolidated income statements under the hea ding "Depreciation and Amortization" (see Note 45) and are based on the application of the following depreciation rates (determined on the basis of the average years of estimated useful life of the various assets):
Depreciation Rates for Tangible Assets
Type of Assets | Annual Percentage
Buildings for own use | 1% - 4%
Furniture | 8% - 10%
Fixtures | 6% - 12%
Office supplies and hardware | 8% - 25%
The BBVA Group’s c riteria for determining the recoverable amount of these assets, in particular buildings for own use, is based on independent appraisals that are no more than 3-5 years old at most, unless there are indications of impairment. At each reporting date, the Gro up entities analyze whether there are internal or external indicators that a tangible asset may be impaired. When there is evidence of impairment, the Group analyzes whether this impairment actually exists by comparing the asset’s net carrying amount with its recoverable amount (as the higher between its recoverable amount less disposal costs and its value in use). When the carrying amount exceeds the recoverable amount, the carrying amount is written down to the recoverable amount and depreciation charges going forward are adjusted to reflect the asset’s remaining useful life. Similarly, if there is any indication that the value of a tangible asset is now recoverable, the consolidated entities will estimate the recoverable amounts of the asset and recognize it in the consolidated income statement, recording the reversal of the impairment loss registered in previous years and thus adjusting future depreciation charges. Under no circumstances may the reversal of an impairment loss on an asset raise its carryin g amount above that which it would have if no impairment losses had been recognized in prior years. Running and maintenance expenses relating to tangible assets held for own use are recognized as an expense in the year they are incurred and recognized in t he consolidated income statements under the heading "Administration costs - Other administrative expenses - Property, fixtures and equipment" (see Note 44.2). Other assets leased out under an operating lease The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses on them, are the same as those described in relation to tangible assets for own use. Invest ment properties The heading “Tangible assets - Investment properties” in the consolidated balance sheets reflects the net values (purchase cost minus the corresponding accumulated depreciation and, if appropriate, estimated impairment losses) of the land, buildings and other structures that are held either to earn rentals or for capital appreciation through sale and that are neither expected to be sold off in the ordinary course of business nor are destined for own use (see Note 17). The criteria used to re cognize the acquisition cost of investment properties, calculate their depreciation and their respective estimated useful lives and recognize the impairment losses on them, are the same as those described in relation to tangible assets held for own use. Th e BBVA Group’s criteria for determining the recoverable amount of these assets is based on independent appraisals that are no more than one year old at most, unless there are indications of impairment. Inventories The balance under the heading “Other asset s - Inventories” in the consolidated balance sheets mainly includes the land and other properties that the BBVA Group’s real estate entities hold for development and sale as part of their real estate development activities (see Note 20). The cost of invent ories includes those costs incurred in their acquisition and development, as well as other direct and indirect costs incurred in getting them to their current condition and location. In the case of the cost of real-estate assets accounted for as inventorie s, the cost is comprised of: the acquisition cost of the land, the cost of urban planning and construction, non-recoverable taxes and costs corresponding to construction supervision, coordination and management. Financing cost incurred during the year form part of cost, provided that the inventories require more than a year to be in a condition to be sold. Properties purchased from customers in distress, which the Group manages for sale, are measured at the acquisition date and any subsequent time, at eithe r their related carrying amount or the fair value of the property (less costs to sell), whichever is lower. The carrying amount at acquisition date of these properties is defined as the balance pending collection on those assets that originated said purcha ses (net of provisions). Impairment The amount of any subsequent adjustment due to inventory valuation for reasons such as damage, obsolescence, reduction in sale price to its net realizable value, as well as losses for other reasons and, if appropriate, s ubsequent recoveries of value up to the limit of the initial cost value, are registered under the heading "Impairment or reversal of impairment on non-financial assets” in the accompanying consolidated income statements (see Note 48) for the year in which they are incurred. In the case of the above mentioned real-estate assets, if the fair value less costs to sell is lower than the carrying amount of the loan recognized in the consolidated balance sheet, a loss is recognized under the heading "Impairment or reversal of impairment on non-financial assets" in the consolidated income statement for the period. In the case of real-estate assets accounted for as inventories, the BBVA Group’s criterion for determining their net realizable value is mainly based on i ndependent appraisals no more than one year old, or less if there are indications of impairment. Inventory sales In sale transactions, the carrying amount of inventories is derecognized from the consolidated balance sheet and recognized as an expense under the income statement heading "Other operating expenses – Changes in inventories” in the year in which the income from its sale is recognized. This income is recognized under the heading “Other operating income – Financial income from non-financial service s” in the consolidated income statements (see Note 42). Business combinations A business combination is a transaction, or any other deal, by which the Group obtains control of one or more businesses. It is accounted for by applying the acquisition method. According to this method, the acquirer has to recognize the assets acquired and the liabilities and contingent liabilities assumed, including those that the acquired entity had not recognized in the accounts. The method involves the measurement of the cons ideration received for the business combination and its allocation to the assets, liabilities and contingent liabilities measured according to their fair value, at the purchase date, as well as the recognition of any non-controlling participation (minority interests) that may arise from the transaction. In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss under the heading “Gains (losses) on derecognized of non-financial assets and subsidiaries, net” of the consolidated income statements. In prior reporting periods, the acquirer may have recognized changes in the value of its equity i nterest in the acquiree in other comprehensive income. If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity intere st. In addition, the acquirer shall recognize an asset in the consolidated balance sheet under the heading “Intangible asset - Goodwill” if on the acquisition date there is a positive difference between: the sum of the consideration transferred, the amount of all the non-controlling interests and the fair value of stock previously held in the acquired business; and the net fair value of the assets acquired and liabilities assumed. If this difference is negative, it shall be recognized directly in the incom e statement under the heading “Gain on Bargain Purchase in business combinations”. Non-controlling interests in the acquired entity may be measured in two ways: either at their fair value; or at the proportional percentage of net assets identified in the acquired entity. The method of valuing non-controlling interest may be elected in each business combination. BBVA Group has always elected for the second method. Intangible assets Goodwill Goodwill represents a portion of consideration transferred in advan ce by the acquiring entity for the future economic benefits from assets that cannot be individually identified and separately recognized. Goodwill is never amortized. It is subject periodically to an impairment analysis, and is written off if there has bee n impairment. Goodwill is assigned to one or more cash-generating units that expect to be the beneficiaries of the synergies derived from the business combinations. The cash-generating units represent the Group’s smallest identifiable asset groups that gen erate cash flows for the Group and that are largely independent of the flows generated from the Group’s other assets or groups of assets. Each unit or units to which goodwill is allocated: Is the lowest level at which the entity manages goodwill internally. Is not larger than an operating segment. The cash-generating units to which goodwill has been allocated are tested for impairment (including the allocated goodwill in their carrying amount). This analysis is performed at least annually or more frequently if there is any indication of impairment. For the purpose of determining the impairment of a cash-generating unit to which a part of goodwill has been allocated, the carrying amount of that cash-generating unit, adjusted by the theoretical amount of the g oodwill attributable to the non-controlling interests, in the event they are not valued at fair value, is compared with its recoverable amount. The recoverable amount of a cash-generating unit is equal to the fair value less sale costs or its value in use, whichever is greater. Value in use is calculated as the discounted value of the cash flow projections that the unit’s management estimates and is based on the latest budgets approved for the coming years. The main assumptions used in its calculation are: a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows, which is equal to the cost of the capital assigned to each cash-generating unit, and equivalent to the sum of the risk-free rate p lus a risk premium inherent to the cash-generating unit being evaluated for impairment. If the carrying amount of the cash-generating unit exceeds the related recoverable amount, the Group recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that unit and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the remainder of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. In the event the non-controlling interests are measured at fair value, the deterioration of goodwill attributable to non-controlling interests will be recognized. In any case, an impairme nt loss recognized for goodwill shall not be reversed in a subsequent period. Goodwill impairment losses are recognized under the heading "Impairment or reversal of impairment on non-financial assets – Intangible assets” in the consolidated income statemen ts (see Note 48). Other intangible assets These assets may have an indefinite useful life if, based on an analysis of all relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net ca sh flows for the consolidated entities. In all other cases they have a finite useful life. Intangible assets with a finite useful life are amortized according to the duration of this useful life, using methods similar to those used to depreciate tangible a ssets. The defined useful life intangible asset is made up mainly of IT applications acquisition costs which have a useful life of 3 to 5 years. The depreciation charge of these assets is recognized in the accompanying consolidated income statements under the heading "Depreciation" (see Note 45). The consolidated entities recognize any impairment loss on the carrying amount of these assets with charge to the heading “Impairment or reversal of impairment on non - financial assets- Intangible assets” in the a ccompanying consolidated income statements (see Note 48). The criteria used to recognize the impairment losses on these assets and, where applicable, the recovery of impairment losses recognized in prior years, are similar to those used for tangible assets. Insurance and reinsurance contracts The assets of the BBVA Group’s insurance subsidiaries are recognized according to their nature under the corresponding headings of the consolidated balance sheets and the initial recognition and valuation is carried ou t according to the criteria set out in IFRS 4. The heading “Insurance and reinsurance assets” in the accompanying consolidated balance sheets includes the amounts that the consolidated insurance subsidiaries are entitled to receive under the reinsurance co ntracts entered into by them with third parties and, more specifically, the share of the reinsurer in the technical provisions recognized by the consolidated insurance subsidiaries. The heading “Liabilities under insurance and reinsurance contracts” in the accompanying consolidated balance sheets includes the technical provisions for direct insurance and inward reinsurance recognized by the consolidated insurance subsidiaries to cover claims arising from insurance contracts in force at period-end (see Note 23). The income or expenses reported by the BBVA Group’s consolidated insurance subsidiaries on their insurance activities is recognized, in accordance with their nature, in the corresponding items of the consolidated income statements. The consolidated insurance entities of the BBVA Group recognize the amounts of the premiums written to the income statement and a charge for the estimated cost of the claims that will be incurred at their final settlement to their consolidated income statements. At the clo se of each year the amounts collected and unpaid, as well as the costs incurred and unpaid, are accrued. The most significant provisions registered by consolidated insurance entities with respect to insurance policies issued by them are set out by their na ture in Note 23. According to the type of product, the provisions may be as follows: 1) Life insurance provisions: Represents the value of the net obligations undertaken with the life insurance policyholder. These provisions include: Provisions for unearned premiums. These are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums received until the closing date that has to be allocated to the period from the closing date to t he end of the insurance policy period. Mathematical reserves: Represents the value of the life insurance obligations of the insurance entities at year-end, net of the policyholder’s obligations, arising from life insurance contracted. 2) Non-life insurance provisions: Provisions for unearned premiums. These provisions are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums received until year-end that has to be allocated to the pe riod between the year-end and the end of the policy period. Provisions for unexpired risks: The provision for unexpired risks supplements the provision for unearned premiums by the amount by which that provision is not sufficient to reflect the assessed ri sks and expenses to be covered by the consolidated insurance subsidiaries in the policy period not elapsed at year-end. 3) Provision for claims: This reflects the total amount of the outstanding obligations arising from claims incurred prior to year-end. I nsurance subsidiaries calculate this provision as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid, and the total amounts already paid in relation to these claims. 4) Provision for bonuses and reba tes: This provision includes the amount of the bonuses accruing to policyholders, insurees or beneficiaries and the premiums to be returned to policyholders or insurees, as the case may be, based on the behavior of the risk insured, to the extent that such amounts have not been individually assigned to each of them. 5) Technical provisions for reinsurance ceded: Calculated by applying the criteria indicated above for direct insurance, taking account of the assignment conditions established in the reinsuranc e contracts in force. 6) Other technical provisions: Insurance entities have recognized provisions to cover the probable mismatches in the market reinvestment interest rates with respect to those used in the valuation of the technical provisions. The BBVA Group controls and monitors the exposure of the insurance subsidiaries to financial risk and, to this end, uses internal methods and tools that enable it to measure credit risk and market risk and to establish the limits for these risks. Tax assets and lia bilities Expenses on corporate income tax applicable to the BBVA Group’s Spanish entities and on similar income taxes applicable to consolidated foreign entities are recognized in the consolidated income statement, except when they result from transactions on which the profits or losses are recognized directly in equity, in which case the related tax effect is also recognized in equity. The total corporate income tax expense is calculated by aggregating the current tax arising from the application of the c orresponding tax rate to the tax for the year (after deducting the tax credits or discounts allowable for tax purposes) and the change in deferred tax assets and liabilities recognized in the consolidated income statement. Deferred tax assets and liabiliti es include temporary differences, defined as the amounts to be payable or recoverable in future years arising from the differences between the carrying amount of assets and liabilities and their tax bases (the “tax value”), and tax loss and tax credit or d iscount carry forwards (see Note 19). The "Tax Assets" line item in the accompanying consolidated balance sheets includes the amount of all the assets of a tax nature, and distinguishes between: "Current” (amounts recoverable by tax in the next twelve months) and "Deferred" (which includes the amount of tax to be recovered in future years, including those arising from tax losses or credits for deductions or rebates that can be compensated). The "Tax Liabilities" line item in the accompanying consolidate d balance sheets includes the amount of all the liabilities of a tax nature, except for provisions for taxes, broken down into: "Current” (income tax payable on taxable profit for the year and other taxes payable in the next twelve months) and "Deferred" (the amount of corporate tax payable in subsequent years). Deferred tax liabilities attributable to taxable temporary differences associated with investments in subsidiaries, associates or joint venture entities are recognized as such, except where the Grou p can control the timing of the reversal of the temporary difference and it is unlikely that it will reverse in the future. Deferred tax assets are recognized to the extent that it is considered probable that the consolidated entities will have sufficient taxable profits in the future against which the deferred tax assets can be utilized and are not from the initial recognition (except in the case of a business combination) of other assets or liabilities in a transaction that does not affect the fiscal outc ome or the accounting result. The deferred tax assets and liabilities recognized are reassessed by the consolidated entities at each balance sheet date in order to ascertain whether they still qualify as deferred tax assets and liabilities, and the appropr iate adjustments are made on the basis of the findings of the analyses performed. In those circumstances in which it is unclear how a specific requirement of the tax law applies to a particular transaction or circumstance, and the acceptability of the defi nitive tax treatment depends on the decisions taken by the relevant taxation authority in future, the entity recognizes current and deferred tax liabilities and assets considering whether it is probable or not that a taxation authority will accept an uncer tain tax treatment. Thus, if the entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, the entity uses the amount expected to be paid to (recovered from) the taxation authorities. The income and expens es directly recognized in consolidated equity that do not increase or decrease taxable income are accounted for as temporary differences. Provisions, contingent assets and contingent liabilities The heading “Provisions” in the consolidated balance sheets i ncludes amounts recognized to cover the BBVA Group’s current obligations arising as a result of past events. These are certain in terms of nature but uncertain in terms of amount and/or settlement date. The settlement of these obligations is deemed likely to entail an outflow of resources embodying economic benefits (see Note 24). The obligations may arise in connection with legal or contractual provisions, valid expectations formed by Group entities relative to third parties in relation to the assumption o f certain responsibilities or through virtually certain developments of particular aspects of the regulations applicable to the operation of the entities; and, specifically, future legislation to which the Group will certainly be subject. The provisions ar e recognized in the consolidated balance sheets when each and every one of the following requirements is met: They represent a current obligation that has arisen from a past event. At the date of the Consolidated Financial Statements, there is more probabi lity that the obligation will have to be met than that it will not. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The amount of the obligation can be reasonably estimated. Among other ite ms, these provisions include the commitments made to employees by some of the Group entities (mentioned in Note 2.2.12), as well as provisions for tax and legal litigation. Contingent assets are possible assets that arise from past events and whose existen ce is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement; however, they w ill be disclosed, should they exist, in the Notes to the Consolidated Financial Statements, provided that it is probable will give rise to an increase in resources embodying economic benefits. Contingent liabilities are possible obligations of the Group th at arise from past events and whose existence is conditional on the occurrence or non-occurrence of one or more future events beyond the control of the Group. They also include the existing obligations of the Group when it is not probable that an outflow o f resources embodying economic benefits will be required to settle them; or when, in extremely rare cases, their amount cannot be measured with sufficient reliability. Contingent liabilities are not recognized in the consolidated balance sheet or the inco me statement (excluding contingent liabilities from business combination) but are disclosed in the Consolidated Financial Statements, unless the possibility of an outflow of resources embodying economic benefits is remote. Pensions and other post-employmen t commitments Below we provide a description of the most significant accounting policies relating to post-employment and other employee benefit commitments assumed by BBVA Group entities (see Note 25). Short-term employee benefits Benefits for current active employees which are accrued and settled during the year and for which a provision is not required in the entity´s accounts. These include wages and salaries, social security charges and other personnel expenses. Costs are charged and recognized unde r the heading “Administration costs – Personnel expenses – Other personnel expenses” of the consolidated income statement (see Note 44.1). Post-employment benefits – Defined-contribution plans The Group sponsors defined-contribution plans for the majority of its active employees. The amount of these benefits is established as a percentage of remuneration and/or as a fixed amount. The contributions made to these plans in each period by BBVA Group entities are charged and recognized under the heading “Adminis tration costs – Personnel expenses – Defined-contribution plan expense” of the consolidated income statement (see Note 44.1). Post-employment benefits – Defined-benefit plans Some Group entities maintain pension commitments with employees who have already retired or taken early retirement, certain closed groups of active employees still accruing defined benefit pensions, and in-service death and disability benefits provided to most active employees. These commitments are covered by insurance contracts, pen sion funds and internal provisions. In addition, some of the Spanish entities have offered certain employees the option to retire before their normal retirement age, recognizing the necessary provisions to cover the costs of the associated benefit commitme nts, which include both the liability for the benefit payments due as well as the contributions payable to external pension funds during the early retirement period. Furthermore, certain Group entities provide welfare and medical benefits which extend beyo nd the date of retirement of the employees entitled to the benefits. All of these commitments are quantified based on actuarial valuations, with the amounts recorded under the heading “Provisions – Provisions for pensions and similar obligations” in the consolidated balance sheet and determined as the difference between the value of the defined-benefit commitments and the fair value of plan assets at the date of the Consolidated Financial Statements (see Note 25). Current service cost are charged and reco gnized under the heading “Administration costs – Personnel expenses – Defined-benefit plan expense” of the consolidated income statement (see Note 44.1). Interest credits/charges relating to these commitments are charged and recognized under the headings “Interest income” and “Interest expense” of the consolidated income statement (see Note 37). Past service costs arising from benefit plan changes as well as early retirements granted during the period are recognized under the heading “Provisions or reversal s of provisions” of the consolidated income statement (see Note 46). Other long-term employee benefits In addition to the above commitments, certain Group entities provide long-term service awards to their employees, consisting of monetary amounts or perio ds of vacation granted upon completion of a number of years of qualifying service. These commitments are quantified based on actuarial valuations and the amounts recorded under the heading “Provisions – Other long-term employee benefits” of the consolidate d balance sheet (see Note 24). Valuation of commitments: actuarial assumptions and recognition of gains/losses The present value of these commitments is determined based on individual member data. Active employee costs are determined using the “projected u nit credit” method, which treats each period of service as giving rise to an additional unit of benefit and values each unit separately. In establishing the actuarial assumptions we take into account that: They should be unbiased, i.e. neither unduly optim istic nor excessively conservative. Each assumption does not contradict the others and adequately reflect the existing relationship between economic variables such as price inflation, expected wage increases, discount rates and the expected return on plan assets, etc. Future wage and benefit levels should be based on market expectations, at the balance sheet date, for the period over which the obligations are to be settled. The interest rate used to discount benefit commitments is determined by reference to market yields, at the balance sheet date, on high quality bonds. The BBVA Group recognizes actuarial gains/losses relating to early retirement benefits, long service awards and other similar items under the heading “Provisions or reversal of provisions” o f the consolidated income statement for the period in which they arise (see Note 46). Actuarial gains/losses relating to pension and medical benefits are directly charged and recognized under the heading "Accumulated other comprehensive income – Items that will not be reclassified to profit or loss – Actuarial gains or losses on defined benefit pension plans" of equity in the consolidated balance sheet (see Note 30). Equity-settled share-based payment transactions Provided they constitute the delivery of su ch equity instruments following the completion of a specific period of services, equity-settled share-based payment transactions are recognized as an expense for services being provided by employees, by way of a balancing entry under the heading “Sharehold ers’ funds – Other equity instruments” in the consolidated balance sheet (Note 44.1.1). These services are measured at fair value for the employees services received, unless such fair value cannot be calculated reliably. In such case, they are measured by reference to the fair value of the equity instruments granted, taking into account the date on which the commitments were granted and the terms and other conditions included in the commitments. When the initial compensation agreement includes what may be c onsidered market conditions among its terms, any changes in these conditions will not be reflected in the consolidated income statement, as these have already been accounted for in calculating the initial fair value of the equity instruments. Non-market ve sting conditions are not taken into account when estimating the initial fair value of equity instruments, but they are taken into account when determining the number of equity instruments to be issued. This will be recognized on the consolidated income sta tement with the corresponding increase in total consolidated equity. Termination benefits Termination benefits are recognized in the financial statements when the BBVA Group agrees to terminate employment contracts with its employees and has established a detailed plan. Treasury shares The value of common stock issued by the BBVA Group’s entities and held by them - basically, shares and derivatives on the Bank’s shares held by some consolidated entities that comply with the requirements to be recognized as equity instruments - are recognized as a decrease to net equity, under the heading "Shareholders’ funds - Treasury stock" in the consolidated balance sheets (see Note 29). These financial assets are recognized at acquisition cost, and the gains or losses arising on their disposal are credited or debited, as appropriate, to the heading “Shareholders’ funds - Retained earnings” in the consolidated balance sheets (see Note 28). Foreign-currency transactions and exchange differences The BBVA Group’s functional currency, and thus the currency in which the Consolidated Financial Statements are presented, is the euro. As such, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in “foreign currency”. C onversion to euros of the balances held in foreign currency is performed in two consecutive stages: Conversion of the foreign currency to the entity’s functional currency (currency of the main economic environment in which the entity operates); and Convers ion to euros of the balances held in the functional currencies of the entities whose functional currency is not the euro. Conversion of the foreign currency to the entity’s functional currency Transactions denominated in foreign currencies carried out by t he consolidated entities (or accounted for using the equity method) are initially accounted for in their respective currencies. Subsequently, the monetary balances in foreign currencies are converted to their respective functional currencies using the exch ange rate at the close of the financial year. In addition, Non-monetary items valued at their historical cost are converted to the functional currency at the exchange rate applicable on the purchase date. Non-monetary items valued at their fair value are c onverted at the exchange rate in force on the date on which such fair value was determined. Income and expenses are converted at the period’s average exchange rates for all the operations carried out during the period. When applying this criterion the BBVA Group considers whether significant variations have taken place in exchange rates during the year which, owing to their impact on the statements as a whole, may require the application of exchange rates as of the date of the transaction instead of such av erage exchange rates. The exchange differences produced when converting the balances in foreign currency to the functional currency of the consolidated entities are generally recognized under the heading "Exchange differences, net" in the consolidated inco me statements (see Note 41). However, the exchange differences in non-monetary items, measured at fair value, are recognized temporarily in consolidated equity under the heading “Accumulated other comprehensive income - Items that may be reclassified to pr ofit or loss - Exchange differences” in the consolidated balance sheets (see Note 30). Conversion of functional currencies to euros The balances in the financial statements of consolidated entities whose functional currency is not the euro are converted to euros as follows: Assets and liabilities: at the closing spot exchange rates as of the date of each of the consolidated balance sheets. Income and expenses and cash flows are converted by applying the exchange rate applicable on the date of the transactio n, and the average exchange rate for the financial year may be used, unless it has undergone significant variations. Equity items: at the historical exchange rates. The exchange differences arising from the conversion to euros of balances in the functiona l currencies of the consolidated entities whose functional currency is not the euro are recognized under the heading “Accumulated other comprehensive income – Items that may be reclassified to profit or loss - Exchange differences” in the consolidated bala nce sheets (Notes 30 and 31 respectively). Meanwhile, the differences arising from the conversion to euros of the financial statements of entities accounted for by the equity method are recognized under the heading " Accumulated other comprehensive income - Items that may be reclassified to profit or loss - Entities accounted for using the equity method" (Note 30) until the item to which they relate is derecognized, at which time they are recognized in the income statement. The breakdown of the main consoli dated balances in foreign currencies, with reference to the most significant foreign currencies, is set forth in Appendix VII. Venezuela Local financial statements of the Group subsidiaries in Venezuela are expressed in Venezuelan Bolivar, and converted in to euros for the consolidated financial statements, as indicated below, since Venezuela is a country with strong exchange restrictions and has different rates officially published: Since December 31, 2015, the Board of Directors considers that the use of the Venezuelan official exchanges rates for converting bolivars into euros in preparing the Consolidated Financial Statements does not reflect the true picture of the financial statements of the Group and the financial position of the Group subsidiaries in Venezuela. Consequently, as of December 31, 2017, 2016 and 2015, the Group has used foreign exchange rates of 18,181, 1,893 and 469 Venezuelan bolivars per euro, respectively in the conversion of the financial statements. These exchanges rates have been c alculated taking into account the estimated evolution of inflation in Venezuela, in the absence of published official data (800%, 300%, and 170%, as of December 31, 2017, 2016 and 2015, respectively) (see Note 2.2.20). These inflation rates have been calc ulated based on the best estimate of the Group, taking into consideration the available information that includes sectorial aspects that affect the Group's subsidiaries in Venezuela. The summarized balance sheet and income statements of the Group subsidia ries in Venezuela as of December 31, 2017, whose local financial statements are expressed in Venezuelan bolivars comparing their conversion to euros with the estimated exchange rate with the balances that would have result by applying the last published ex change rate, are as follows:
Balance sheet. December 31, 2017 (Millions of euros)
| Estimated exchange rate | Official Exchange rate | Variation
Cash and balances with central banks | 597 | 2,287 | 1,690
Securities portfolio | 42 | 148 | 107
Loans and receivables | 364 | 1,650 | 1,285
Tangible assets | 60 | 272 | 212
Other | 28 | 131 | 103
TOTAL ASSETS | 1,091 | 4,487 | 3,397
Deposits from central bank and credit institutions | - | 1 | 1
Customer deposits | 839 | 3,772 | 2,933
Provisions | 5 | 24 | 18
Other | 127 | 465 | 338
TOTAL LIABILITIES | 971 | 4,262 | 3,291
Income statements December 31, 2017 (Millions of euros)
| Estimated exchange rate | Official Exchange rate | Variation
NET INTEREST ICOME | 90 | 410 | 319
GROSS INCOME | 70 | 319 | 249
Administration costs | 55 | 249 | 194
NET OPERATING INCOME | 15 | 70 | 54
OPERATING PROFIT BEFORE TAX | 12 | 53 | 41
Tax expense or (-) income related to profit or loss from continuing operation | 20 | 90 | 70
PROFIT | (8) | (38) | (29)
Attributable to minority interest [non-controlling interests] | (4) | (16) | (13)
Attributable to owners of the parent | (5) | (21) | (17)
Recognition of income and expenses The most significant policies a used by the BBVA Group to recognize its income and expenses are as follows. 1) Interest income and expenses and similar items: As a general rule, interest income and expenses and similar items are recognized on the basis of their period of accrual using the effective interest rate method. The financial fees and commissions that arise on the arrangement of loans and advances (basically origination and analysis fees) are deferred and recognized in the income statement over the expected life of the loan. From that amount, the transaction costs identified as directly attributable to the arrangement of the lo ans and advances will be deducted. These fees are part of the effective interest rate for the loans and advances. Also dividends received from other entities are recognized as income when the consolidated entities’ right to receive them arises. Once a debt instrument has been impaired, interest income is recognized applying the effective interest rate used to discount the estimated recoverable cash flows on the carrying amount of the asset. 2) Commissions, fees and similar items: Income and expenses relating to commissions and similar fees are recognized in the consolidated income statement using criteria that vary according to the nature of such items. The most significant items in this connection are: Those relating to financial assets and liabiliti es measured at fair value through profit or loss, which are recognized when collected/paid. Those arising from transactions or services that are provided over a period of time, which are recognized over the life of these transactions or services. Those rel ating to a singular transaction, which are recognized when this singular transaction is carried out. 3) Non-financial income and expenses: These are recognized for accounting purposes on an accrual basis. 4) Deferred collections and payments: These are rec ognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates. Sales of assets and income from the provision of non-financial services The heading “Other operating income” in the consolidated income statements includes the proceeds of the sales of assets and income from the services provided by the Group entities that are not financial institutions. In the case of the Group, these entities are mainly real estate and service entities (see Note 42). Lea ses Lease contracts are classified as finance leases from the inception of the transaction if they substantially transfer all the risks and rewards incidental to ownership of the asset forming the subject-matter of the contract. Leases other than finance l eases are classified as operating leases. When the consolidated entities act as the lessor of an asset under finance leases, the aggregate present values of the lease payments receivable from the lessee plus the guaranteed residual value (normally the exer cise price of the lessee’s purchase option on expiration of the lease agreement) are recognized as financing provided to third parties and, therefore, are included under the heading “Loans and receivables” in the accompanying consolidated balance sheets (s ee Note 13). When the consolidated entities act as lessors of an asset in operating leases, the acquisition cost of the leased assets is recognized under "Tangible assets – Property, plant and equipment – Other assets leased out under an operating lease" in the consolidated balance sheets (see Note 17). These assets are depreciated in line with the criteria adopted for items of tangible assets for own use, while the income arising from the lease arrangements is recognized in the consolidated income stateme nts on a straight-line basis within "Other operating expenses" (see Note 42). If a fair value sale and leaseback results in an operating lease, the profit or loss generated from the sale is recognized in the consolidated income statement at the time of sal e. If such a transaction gives rise to a finance lease, the corresponding gains or losses are accrued over the lease period. The assets leased out under operating lease contracts to other entities in the Group are treated in the Consolidated Financial Sta tements as for own use, and thus rental expense and income is eliminated in consolidation and the corresponding depreciation is recognized. Entities and branches located in countries with hyperinflationary economies In order to assess whether an economy is under hyperinflation, the country’s economic environment is evaluated, analyzing whether certain circumstances exist, such as: The country’s population prefers to keep its wealth or savings in non-monetary assets or in a relatively stable foreign currency; Prices may be quoted in a relatively stable foreign currency; Interest rates, wages and prices a re linked to a price index; The cumulative inflation rate over three years is approaching, or exceeds, 100%. The fact that any of these circumstances is present will not be a decisive factor in considering an economy hyperinflationary, but it does provide some reasons to consider it as such. Since 2009, the economy of Venezuela can be considered hyperinflationary under the above criteria. As a result, the financial statements of the BBVA Group’s entities located in Venezuela have therefore been adjusted to correct for the effects of inflation in accordance with IAS 29 “ Financial Reporting in Hyperinflationary Economies“. The breakdown of the General Price Index (“GPI”) and the inflation index used as of December 31, 2017, 2016 and 2015 for the inflation re statement of the financial statements of the Group companies located in Venezuela is as follows:
General Price Index
| 2017 | 2016 | 2015
GPI | 84,886.50 | 9,431.60 | 2,357.90
Average GPI | 27,714.47 | 5,847.74 | 1,460.50
Inflation of the period (*) | 800.0% | 300.0% | 170.0%
(*) At the date of preparation of consolidated financial statements of each year, the Venezuelan government had not released the offici al inflation figures at the end of the year. Therefore, the Group estimates the inflation rate applicable to the preparation of the Consolidated Financial Statements for each year, based on the best estimate of BBVA Research of the Group, considering other estimates made by various international organizations. The impact on the consolidated financial statements that would result from applying the latest official inflation data published against the Group's estimate of the inflation index would not be signi ficant due to its correlation with the estimated exchange rate (see Note 2.2.16). The losses recognized under the heading “Profit attributable to the parent company” in the accompanying consolidated income statement as a result of the adjustment for inflat ion on net monetary position of the Group entities in Venezuela amounted to €13 and €28 million in 2017 and 2016 respectively. Recent IFRS pronouncements Changes introduced in 2017 The following amendments to the IFRS standards or their interpretations (hereinafter “IFRIC”) became effective after January 1, 2017. They have not had a significant impact on the BBVA Group’s Consolidated Financial Statements corresponding to the year ended December 31, 2017. IAS 12 – “Income Taxes. Recognition of Deferred Tax Assets for Unrealized Losses” The amendments made to IAS 12 clarify the requirem ents on recognition of deferred tax assets for unrealized losses. The following aspects are clarified: An unrealized loss on a debt instrument measured at fair value gives rise to a deductible temporary difference regardless of whether the holder expects t o recover its carrying amount by holding the debt instrument until maturity or by selling the debt instrument. An entity assesses the utilization of deductible temporary differences in combination with other deductible temporary differences. In circumstanc es in which tax laws restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the appropriate type. An entity’s estimate of future taxable profit can include the recovery of its a ssets for amounts more than their carrying amounts if there is sufficient evidence to conclude that it is probable that the entity will achieve this. An entity’s estimate of future taxable profit excludes tax deductions resulting from the reversal of dedu ctible temporary difference. IAS 7 – “Statement of Cash Flows. Disclosure Initiative” The amendments to IAS 7 introduce the following new disclosure requirements related to changes in liabilities arising from financing activities, to enable users of financ ial statements to evaluate changes in those liabilities: changes from financing cash flows; changes arising from obtaining or losing control of subsidiaries or other businesses; the effect of changes in foreign exchange rates; changes in fair values; and o ther changes. Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows arising from financing activities. Additionally, the disclosure re quirements also apply to changes in financial assets if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities. Annual improvements cycle to IFRSs 2014-2016 – Minor amendments to IFRS 12 The annual improvements cycle to IFRSs 2014-2016 includes minor changes and clarifications to IFRS 12 – Disclosure of Interests in Other Entities. Standards and interpretations issued but not yet effective as of December 31, 2017 New International Financial Reporting Standards together with their interpretations had been published at the date of preparation of the accompanying Consolidated Financial Statements, but are not obligatory as of June 30, 2017. Although in some cases the IASB permits early adoption before they come into force, the BBVA Group has not done such application in advance. The most relevant are the following: IFRS 9 - “Financial instruments” As of July, 24, 2014, IASB issued IFRS 9 which replaces IAS 39 on financial statements fro m January 2018 onwards and includes new classification and measurement requirements of financial assets and liabilities, impairment requirements of financial assets and hedge accounting policy (See Note 56). Since the initial drafts of the standards were p ublished, the Group has been analyzing their implications once in effect in 2018, both in terms of classification of the portfolios and the valuation models for financial instruments and, in particular, the models for calculating impairment of financial as sets using expected loss models. In the fiscal years 2016 and 2017, the Group implemented a project for applying IFRS 9 with the participation of all the areas affected: finance, risks, technology, business areas, etc., with the involvement of the Group's senior management. The Project sets the definition of accounting policies and processes on the implementation of the Standard, which has implications both on the financial statements and on the Group´s daily operations (initial and subsequent risk assessme nt, changes in systems, management metrics, etc.), and also on the models used for the presentation of financial statements. The main requirements of IFRS 9 are: Classification and measurement of financial instruments Financial assets IFRS 9 has a new appr oach to classification and measurement of financial assets which is a mirror of the business model used for asset management purposes and its cash flow characteristics. IFRS 9 contains three main categories for financial assets classification: valued at a mortized cost, valued at fair value with changes in other accumulated comprehensive income, and valued at fair value through profit or loss. The standard eliminates the existing IAS 39 categories of held-to-maturity investments, loans and receivables, and available-for-sale financial assets. The classification of financial instruments as measured at amortized cost or fair value must be carried out on the basis of: the entity's business model and the assessment of the contractual cash flow, commonly known as the "solely payments of principle and interest" criterion (hereinafter, the SPPI). The purpose of the SPPI test is to determine whether in accordance with the contractual characteristics of the instrument its cash flows only represent the return of the pr incipal and interest, basically understood as consideration for the time value of money and the debtor's credit risk. A financial instrument will be classified in the amortized cost portfolio when it is managed with a business model whose purpose is to mai ntain the financial assets to receive contractual cash flows, and passes the SPPI test. They will be classified in the portfolio of financial assets at fair value with changes in other comprehensive income if they are managed with a business model whose pu rpose combines collection of the contractual cash flows and sale of the assets, and meets the SPPI test. They will be classified at fair value with changes in profit and loss provided that the entity's business model for their management or the contractual characteristics of its cash flows do not require classification into one of the portfolios described above. During 2017, the Group reviewed the existing business models in the geographic areas where it operates to establish their classification in accorda nce with IFRS 9, taking into account the special characteristics of the local structures and organizations, as well as the type of products. The Group has defined criteria to determine the acceptable frequency and reasons for sales so that the instrument c an remain in the category of held to collect contractual cash flows. Regardless of the frequency and importance of the sales, some types of sales are not incompatible with the category of held to collect contractual flows: sales due to reduction in credit quality; sales close to the maturity of transactions so that variations in market prices will not have a significant effect on the cash flows of the financial asset; sales in response to a change in regulations or in taxation; sales in response to an inter nal restructuring or significant business combination; sales derived from the execution of a liquidity crisis plan when the crisis event is not reasonably foreseeable. The Group has segmented the portfolio of instruments for carrying out the SPPI test by d ifferentiating products with standard contracts (all the instruments have identical contractual characteristics and are broadly used), for which the Group has carried out the SPPI test by reviewing the standard framework contract. Those products with simil ar characteristics, but not identical, compliance has been assessed through a sampling exercise of contracts. Finally, all the financial instruments with specific contractual characteristics have been analyzed individually. As a result of the analyses ca rried out on both the business model and the contractual characteristics, certain accounting reclassifications are expected affecting both financial assets and, as the case may be, financial liabilities related to those assets. In general, there will be a greater volume of assets valued at fair value with changes in the income statement and the valuation method of some instruments will also be changed according to the one that best reflects the business model to which they belong. Changes in the valuation m odel in order not to exceed the criterion of payment of principal and interest are not significant As of December 31, 2017, the Group had certain investments in asset instruments classified as available-for-sale which, in accordance with IFRS 9, starting i n 2018 the Group will designate these investments as financial assets at fair value through changes in accumulated other comprehensive income. As a result, all the gains and losses at fair value of these instruments will be reported in other cumulative com prehensive income. Impairment losses will not be recognized to profit and loss, and gains or losses will not be reclassified to the income statement in the case of divestment. The remaining investments held by the Group as of December 31, 2017 in equity in struments classified as available-for-sale will be accounted at fair value through changes in profit or loss. Financial liabilities IFRS 9 largely maintains the requirements under IAS 39 for classifying financial liabilities. Thus, save for the above menti oned changes derived from the business model allocation of assets associated to them, the classification of financial liabilities in accordance with IAS 39 will not be changed. However, a new aspect introduced by IFRS 9 is the recognition of changes in the fair value of the financial liabilities to which the fair value option is applied. In this case, the changes in the fair value attributable the credit risk itself should be recognized as other comprehensive income, while the rest of the variation will be recognized in the income statement. In any case, the variation of credit risk itself may be recognized in the income statement if the treatment described above generates some accounting asymmetry. Financial assets impairments IFRS 9 replaces the "incurred loss" model in IAS 39 with one of "expected credit loss". The new impairment model will be applied to financial assets valued at amortized cost; to financial assets valued at fair value with changes in accumulated other comprehensive income, except for inv estments in equity instruments; and contracts for financial guarantees and loan commitments. The new standard classifies financial instruments into three categories, which depend on the evolution of their credit risk from the moment of initial recognition. The first category includes the operations when they are initially recognized; the second comprises the operations for which a significant increase in credit risk has been identified since its initial recognition and the third one, the impaired operations. The calculation of the hedges for credit risk in each of these three categories must be done differently. In this way, the expected loss to 12 months for the operations classified in the first of the aforementioned categories must be recorded, while the losses estimated for the remaining expected life of the operations classified in the other two categories must be recorded. Thus, IFRS 9 differentiates between the following concepts of expected loss: Expected loss at 12 months: expected credit loss that arises from possible default events within the 12 months following the presentation date of the financial statements; and Expected loss during the life of the transaction: this is the expected credit loss that arises from all the possible default events ov er the expected life of the financial instrument. All this will require considerable judgment, both in the modeling for the estimation of the expected losses and in the forecasts, on how the economic factors affect such losses, which must be carried out on a weighted probability basis. For the purposes of the implementation of IFRS 9 project, the BBVA Group has applied the following definitions: 1) Default BBVA has applied a definition of default for financial instruments that is consistent with that used in internal credit risk management, as well as the indicators under applicable regulation at the date of entry into force of IFRS 9. Both qualitative and quantitative indicators have been considered. The Group has considered there is a default when one of the following situations occurs: payment past-due for more than 90 days; or there are reasonable doubts regarding the full reimbursement of the instrument. The 90-day past-due stipulation may be waived in cases where the entity considers it appropriate, b ased on reasonable and documented information that it is appropriate to use a longer term. 2) Credit impaired asset An asset is credit-impaired according to IFRS 9 if one or more events have occurred and they have a detrimental impact on the estimated futu re cash flows of the asset. Evidence that a financial asset is credit-impaired includes observable data about the following events: Significant financial difficulty of the issuer or the borrower. A breach of contract (e.g. a default or past due event). A l ender having granted a concession to the borrower – for economic or contractual reasons relating to the borrower’s financial difficulty – that the lender would not otherwise consider. It becoming probable that the borrower will enter bankruptcy or other fi nancial reorganization. The disappearance of an active market for that financial asset because of financial difficulties. The purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible t o identify a single discrete event. Instead, the combined effect of several events may cause financial assets to become credit-impaired. The definition of impaired financial assets in the Group is aligned with the definition of default explained in the abo ve paragraphs. 3) Significant increase in credit risk The objective of the impairment requirements is to recognize lifetime expected credit losses for financial instruments for which there has been significant increases in credit risk since initial recogn ition considering all reasonable and supportable information, including that which is forward-looking. The model developed by the Group for assessing the significant increase in credit risk has a twin approach that is applied globally, although the specif ic characteristics of each geographic area are respected: Quantitative criterion: the Group uses a quantitative analysis based on comparing the current expected probability of default over the life of the transaction with the original adjusted expected pro bability of default, so that both values are comparable in terms of expected default probability for their residual life. The thresholds used for considering a significant increase in risk take into account special cases according to geographic areas and p ortfolios. Depending on how old current operations are, at the time of entry into force of the standard, some simplification will be made to compare the probabilities of default between the current and the original moment, based on the best information ava ilable at that moment. Qualitative criterion: most indicators for detecting significant risk increase are included in the Group's systems through rating/scoring systems or macroeconomic scenarios, so quantitative analysis covers the majority of circumstanc es. The Group plans to use additional qualitative criteria when it considers it necessary to include circumstances that are not reflected in the rating/score systems or macroeconomic scenarios used. Additionally, the instruments in which one of the follow ing circumstances occurs are considered Stage 2: More than 30 days past due. Default of more than 30 days is a presumption that can be refuted in those cases in which the entity considers, based on reasonable and documented information, that such non-payme nt does not represent a significant increase in risk They are subject to special watch by the Risks units because they show negative signs in their credit quality, even though there may be no objective evidence of impairment Refinance or restructuring that does not show evidence of impairment Although the standard introduces a series of operational simplifications or practical solutions for analyzing the increase in significant risk, the Group does not expect to use them as a general rule. However, for high-quality assets, mainly related to certain government institutions and bodies, the standard allows for considering directly that their credit risk has not increased significantly because they have a low credit risk at the presentation date. Thus the classi fication of financial instruments subject to impairment under the new IFRS 9 will be as follows: Stage 1– without significant increase in credit risk Financial assets which are not considered to have significantly increased in credit risk have loss allowan ces measured at an amount equal to 12 months expected credit losses. Stage 2– significantly increased in credit risk When the credit risk of a financial asset has increased significantly since the initial recognition, the value correction for losses of th at financial instrument will be calculated as the expected credit loss during the entire life of the asset. Stage 3 - Impaired When there is objective evidence that the loan is credit impaired, the financial asset is transferred to this category in which value correction for losses of that financial instrument will be calculated as the expected credit loss during the entire life of the asset. Based on the impairment methodology described below, the Group has estimated that the application of the i mpairment requirements under IFRS 9 as of January 1, 2018 will give rise to additional impairment losses. Method for calculating expected loss In accordance with IFRS 9, the measurement of expected losses must reflect: A considered and unbiased amount, det ermined by evaluating a range of possible results. The time value of money. Reasonable and supportable information that is available without undue cost or effort and that reflects current conditions and forecasts of future economic conditions. The Group p lans to measure the expected loss both individually and collectively. The purpose of the Group's individual measurement is to estimate expected losses for significant impaired risks, or risks classified in Stage 2. In these cases, the amount of credit loss es is calculated as the difference between expected discounted cash flows at the effective interest rate of the transaction and the carrying amount of the instrument. For the collective measurement of expected losses the instruments are grouped into group s of assets based on their risk characteristics. Exposure within each group is segmented according to the common credit risk characteristics, similar characteristics of the credit risk, indicative of the payment capacity of the borrower in accordance with their contractual conditions. These risk characteristics will have to be relevant in estimating the future flows of each group. The characteristics of credit risk may consider, among others, the following factors: Type of operation. Rating or scoring tools. Credit risk score or rating. Type of collateral. Amount of time at default for stage 3. Segment. Qualitative criteria which can have a significant increase in risk. Collateral value if it has an impact on the probability of a default event. The estimated losses are derived from the following parameters: PD: estimate of the probability of default in each period EAD: estimate of the exposure in case of default at each future period, taking into account the changes in exposure after the presentation date of the financial statements. LGD: estimate of the loss in case of default, calculated as the difference between the contractual cash flows and receivables, including guarantees. In the case of debt securities, the Group supervises the changes in credit ris k through monitoring the external published credit ratings. To determine whether there is a significant increase in credit risk as of January 1, 2018 that is not reflected in the published ratings, the Group has also revised the changes in bond yields, and when they are available, the prices of CDS, together with the news and regulatory information available on the issuers. Use of present, past and future information IFRS 9 requires incorporation of present, past and future information to detect any signifi cant increase in risk and measure expected loss. The standard does not require identification of all possible scenarios for measuring expected loss. However, the probability of a loss event occurring and the probability it will not occur will also have to be considered, even though the possibility of a loss may be very small. Also, when there is no linear relation between the different future economic scenarios and their associated expected losses, more than one future economic scenario must be used for the measurement. The approach used by the Group consists of using first the most probable scenario (baseline scenario) consistent with that used in the Group's internal management processes, and then applying an additional adjustment, calculated by consideri ng the weighted average of expected losses in other economic scenarios (one more positive and the other more negative). Hedge accounting IFRS 9 will also affect hedge accounting, because the focus of the Standard is different from that of the current IAS 39, as it tries to align the accounting requirements with economic risk management. IFRS 9 will also permit to apply hedge accounting to a wider range of risks and hedging instruments. The Standard does not address the accounting for macro hedging strategi es. To avoid any conflict between the current macro hedge accounting and the new general hedge accounting requirements, IFRS 9 includes an accounting policy choice to continue applying hedge accounting according to IAS 39. Macro-hedges accounting is being developed as a separate project. The companies have the option to continue applying the hedge accounting as established by IAS39 until the project is completed. According to the analysis carried out, the Group will continue applying IAS 39 to its hedge acc ounting to the implementation date of IFRS 9. Estimated impact of adopting IFRS 9 The Group has assessed the estimated impact on its consolidated financial statements of the initial application of IFRS 9. The estimated impact of adopting this standard on t he Group's capital as of January 1, 2018 is based on the assessments made to date. It is summed up below. The final impacts of adopting the standards as of January 1, 2018 may change because: the Group has not concluded the tests or the evaluation of the controls of its new IT systems; and the new accounting policies,methodologies and parameters may be subject to changes until the Group presents its financial statements that include the final impact as of the date of initial application. As of the date of preparing these Annual Accounts, the estimated impact on the CET1 fully-loaded ratio would be a reduction of approximately 31 basis points and the average estimated impact on the volume of provisions would be an increase of approximately 10% on the curren t level of provisions. This increase in provisions is mainly due to non-impaired risks that would be classified within Stage 2, which are the risks most affected by the change in the calculation methodology of provisions. By geographies, the increase in pr ovisions is centered in Spain and Mexico. Finally, based on the analysis carried out to date, the impact on consolidated equity as a result of changes in classification and valuation of financial instruments is not expected to be significant. However, the European Parliament and Commission have established a mechanism for applying IFRS 9 on capital ratios, transitional and of voluntary application by the entities. It is the intention of the Group to adhere to that provision. Amended IFRS 7 - “Financial ins truments: Disclosures” The IASB modified IFRS 7 in December 2011 to include new disclosures on financial instruments that entities will have to provide as soon as they apply IFRS 9 for the first time. IFRS 15 - “Revenue from contracts with customers” IFRS 15 contains the principles that an entity shall apply to account for revenue and cash flows arising from a contract with a customer. The core principle of IFRS 15 is that a company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services, in accordance with contractual agreements. It is considered that the good or service is transferred w hen the customer obtains control over it. The new Standard replaces IAS 18 - Revenue IAS 11 - Construction Contracts, IFRIC 13 - Customer Loyalty Programmes, IFRIC 15 - Agreements for the Construction of Real Estate, IFRIC 18 - Transfers of Assets from Cus tomers and SIC 31 – Revenue-Transactions Involving Advertising Services. This Standard will be applied to the accounting years starting on or after January 1, 2018, although early adoption is permitted. It does not have a significant impact on the Consolid ated Financial Statements. IFRS 15 – “Clarifications to IFRS 15 Revenue from Contracts with Customers” The amendments to the Revenue Standard clarify how some of the underlying principles of the new Standard should be applied. Specifically, they clarify ho w to: Identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract. Determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided) and Determine whether the revenue from granting a license should be recognized at a point in time or over time. In addition to the clarifications, the amendments include two additional reliefs to reduce cost and complexity for a company wh en it first applies the new Standard. The amendments will be applied at the same time as the IFRS 15, i.e. to the accounting periods beginning on or after January 1, 2018, although early application is permitted. It does not have a significant impact on th e Consolidated Financial Statements. Amended IFRS 10 – “Consolidated Financial Statements” and Amended IAS 28 - “Investments in Associates and Joint Ventures” The amendments to IFRS 10 and IAS 28 establish that when an entity sells or transfers assets are considered a business (including its consolidated subsidiaries) to an associate or joint venture of the entity, the latter will have to recognize any gains or losses derived from such transaction in its entirety. Notwithstanding, if the assets sold or tran sferred are not considered a business, the entity will have to recognize the gains or losses derived only to the extent of the interests in the associate or joint venture with unrelated investors. These changes will be applicable to accounting periods begi nning on the effective date, still to be determined, although early adoption is allowed. IFRS 16 – “Leases” On January 13, 2016 the IASB issued the IFRS 16 which will replace IAS 17. The new standard introduces a single lessee accounting model and will req uire a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of–use asset representing its right to use the underlying lease d asset and a lease liability representing its obligation to make lease payments. With regard to lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor will continue to classify its leas es as operating leases or finance leases, and account for those two types of leases differently. The standard will be applied to the accounting years starting on or after January 1, 2019, although early application is permitted if IFRS 15 is also applied. IFRS 2 – “Classification and Measurement of Share-based Payment Transactions” The amendments made to IFRS 2 provide requirements on three different aspects: When measuring the fair value of a cash-settled share-based payment vesting conditions, other than market conditions, the conditions for the irrevocability shall be taken into account by adjusting the number of awards included in the measurement of the liability arising from the transaction. A transaction in which an entity settles a share-base payment arrangement net by withholding a specified portion of the equity instruments to meet a statutory tax withholding obligation will be classified as equity settled in its entirety if, without the net settlement feature, the entire share-based payment would ot herwise be classified as equity-settled. In case of modification of a share-based payment from cash-settled to equity-settled, the modification will be accounted for derecognizing the original liability and recognizing in equity the fair value of the equit y instruments granted to the extent that services have been rendered up to the modification date; any difference will be recognized immediately in profit or loss. These amendments will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted. It does not have a significant impact on the Consolidated Financial Statements. Amended IFRS 4 “Insurance Contracts” The amendments made to IFRS 4 address the temporary accounting consequences of the different effective dates of IFRS 9 and the forthcoming insurance contracts Standard, by introducing two optional solutions: The deferral approach or temporary exemption, that gives entities whose predominant activities are connected with insurance the option to defer the application of IFRS 9 and continue applying IAS 39 until 2021. The overlay approach, that gives all issuers of insurance contracts the option to recognize in other comprehensive income, rather than profit or loss, the additional accounting volati lity that may arise from applying IFRS 9 compared to applying IAS 39 before applying the forthcoming insurance contracts Standard. These modifications will be applied to the accounting periods beginning on or after January 1, 2018, although early applicati on is permitted. It does not have a significant impact on the Consolidated Financial Statements. Annual improvements cycle to IFRSs 2014-2016 – Minor amendments to IFRS 1 and IAS 28 The annual improvements cycle to IFRSs 2014-2016 includes minor changes an d clarifications to IFRS 1- Frist-time Adoption of International Financial Reporting Standards and IAS 28 – Investments in Associates and Joint Ventures, which will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted to amendments to IAS 28. It does not have a significant impact on the Consolidated Financial Statements. IFRIC 22- Foreign Currency Transactions and Advance Consideration The Interpretation addresses how to determine the date of th e transaction, and thus, the exchange rate to use to translate the related asset, expense or income on initial recognition, in circumstances in which a non-monetary prepayment asset or a non-monetary deferred income liability arising from the payment or re ceipt of advance consideration is recognized in advance of the related asset, income or expense. It requires that the date of the transaction will be the date on which an entity initially recognizes the non-monetary asset or non-monetary liability. If th ere are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration. The interpretation will be applied to the accounting periods beginning on or after January 1, 2018, although early application is permitted. It does not have a significant impact on the Consolidated Financial Statements. Amended IAS 40 – Investment Property The amendment states that an entity shall transfer a property to, or from, investment property w hen, and only when, there is evidence of a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property. The amendments will be applied to the accounting periods beginning on or after January 1, 2018, although early adoption is allowed. It does not have a significant impact on the Consolidated Financial Statements. IFRS 17 – Insurance Contracts IFRS 17 establ ishes the principles for the accounting for insurance contracts and supersedes IFRS 4. The new standard introduces a single accounting model for all insurance contracts and requires the entities to use updated assumptions. An entity shall divide the contr acts into groups and recognize and measure groups of insurance contracts at the total of: the fulfilment cash flows, that comprises the estimate of future cash flows, an adjustment to reflect the time value of money and the financial risk associated with t he future cash flows and a risk adjustment for non-financial risk; and the contractual service margin that represents the unearned profit. The amounts recognized in the consolidate income statement shall be disaggregated into insurance revenue, insurance service expenses and insurance finance income or expenses. Insurance revenue and insurance service expenses shall exclude any investment components. Insurance revenue shall be recognized over the period the entity provides insurance coverage and in proport ion to the value of the provision of coverage that the insurer provides in the period. The new Standard will be applied to the accounting periods beginning on or after January 1, 2021, although early adoption is allowed. IFRIC 23– Uncertainty over Income Tax Treatments IFRIC 23 provides guidance on how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. If the entity considers that it is probable that the taxation a uthority will accept an uncertain tax treatment, the Interpretation requires the entity to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings. If the entity considers that it is not probable that the taxation authority will accept an uncertain tax treatment, the Interpretation requires the entity to use the most likely amount or the expected value (sum of the probability. weighted amounts in a range of possible outcomes) in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The method used should be the method that the entity expects to provide the better prediction of the resolution of the uncertainty. The interpretation will be applied to the accounting periods beginning on or after January 1, 2019, although early application is permitted. Amended IFRS 9 – Prepayment Features with Negative Compensation The amendments to I FRS 9 allow companies to measure particular prepayable financial assets with negative compensation at amortized cost or at fair value through other comprehensive income if a specified condition is met, instead of at fair value through profit or loss. The c ondition is that the financial asset would otherwise meet the criteria of having contractual cash flows that are solely payments of principal and interest but do not meet that condition only as a result of that prepayment feature. The amendments will be ap plied to the accounting periods beginning on or after January 1, 2019, although early application is permitted. Amended IAS 28 – Long-term Interests in Associates and Joint Ventures The amendments to IAS 28 clarify that an entity is required to apply IFRS 9 to long term interests in an associate or joint venture that, in substance, form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendments will be applied to the accounting periods beginnin g on or after January 1, 2019, although early application is permitted. Annual improvements cycle to IFRSs 2015-2017 The annual improvements cycle to IFRSs 2015-2017 includes minor changes and clarifications to IFRS 3- Business Combinations, IFRS 11 – Joi nt Arrangements, IAS 12 – Income Taxes and IAS 23 – Borrowing Costs, which will be applied to the accounting periods beginning on or after January 1, 2019, although early application is permitted.

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- Definition The entire disclosure for significant accounting policies applied by the entity. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Name IAS -Number 1 -IssueDate 2016-01-13 -Paragraph 117 -URI http://eifrs.ifrs.org/eifrs/XBRL?type=IAS&num=1&date=2016-03-30&anchor=para_117&doctype=Standard -URIDate 2016-03-31 + Details
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