Essential Insights: Accounting, Finance, and EU Sustainability Reporting

Spanish Accounting Regulations: ICAC

You can look up the accounting regulations in force for Spanish companies through the ICAC: Institute of Accounting and Auditing.

Balance Sheet Measurement: Historical Cost Principle

Elements in the balance sheet are usually measured based on the historical cost principle. This method records assets and liabilities at their original acquisition cost rather than their current market value. It provides a reliable and verifiable value, minimizing subjective estimates and fluctuations that could distort financial statements.

Importance of Accruing Expenses Correctly

Accruing expenses correctly each period is crucial because it ensures that financial statements accurately reflect a company’s financial position and performance. This accurate representation helps stakeholders make informed decisions and ensures compliance with accounting standards.

Shareholder vs. Creditor: Understanding Investment Risk

Being a shareholder is generally riskier than being a creditor. Shareholders only receive returns after all debts have been settled, especially in liquidation scenarios. In contrast, creditors have a legal right to repayment and often enjoy priority over shareholders in the distribution of assets.

Risks of Distributing All Profits as Dividends

If a company distributes all its profits as dividends, it could face several problems, including:

• Liquidity issues
• Lack of reinvestment funds
• Potential insolvency during adverse times

Additionally, without retained earnings, the company would be unable to finance growth or meet unexpected financial obligations.

Consequences of Not Distributing Dividends

Not distributing dividends might discourage investment as shareholders expect periodic returns. This could lead to potential dissatisfaction among investors, especially if they perceive the company lacks a clear growth strategy.

Accounting Manipulation: Definition and Impact

Accounting make-up refers to manipulating financial statements to present a more favorable picture of a company's financial position. Items most likely to be affected include:

• Revenue recognition
• Inventory valuation
• Provision accounts

This happens because these areas involve estimates and judgments, which can be adjusted to influence reported profits.

Notable Financial Scandals: The Enron Case

One infamous case of accounting fraud is the Enron scandal (2001), where the company used special purpose entities (SPEs) to hide debt and inflate profits. This led to one of the largest bankruptcies in history and the dissolution of Arthur Andersen, one of the Big Five accounting firms.

Sustainable Development Goals (SDGs) & Corporate Reporting

SDGs, or Sustainable Development Goals, are 17 global objectives set by the United Nations to address social, economic, and environmental challenges. Companies typically report their alignment with SDGs in their Sustainability Reports or Non-Financial Information Statements.

• Example: The Spanish company Iberdrola aligns with SDG 7 (Affordable and Clean Energy) and reports progress in its Annual Sustainability Report.

Management Report in Spain: Requirements & Content

In Spain, all publicly traded companies and large entities must prepare a Management Report. It provides qualitative information, explaining the company's financial situation, performance, risks, and future outlook.

Corporate Governance Report: Spanish Requirements

Companies listed on Spanish stock exchanges are required to prepare a Corporate Governance Report. It discloses the structure and practices of the company's governance, including board composition and risk management.

Understanding Greenwashing: Deceptive Environmental Claims

Greenwashing is a deceptive practice where companies falsely advertise or exaggerate their environmental efforts to appeal to environmentally conscious consumers without making significant sustainability improvements.

European Taxonomy: Sustainable Activity Classification

The European Taxonomy is a classification system that defines which economic activities are environmentally sustainable.

• An activity is considered taxonomy-aligned if it meets the screening criteria and makes a substantial contribution to at least one of the EU’s environmental objectives while not significantly harming any others.
• An activity is taxonomy-eligible if it falls within the sector covered by the Taxonomy Regulation.

CSRD: EU Non-Financial Reporting & Key Changes

The Corporate Sustainability Reporting Directive (CSRD) is the latest EU directive for non-financial reporting.

• Key differences from the previous NFRD:
  1. Broader scope, covering more companies.
  2. Mandatory external assurance for reports.
  3. Detailed disclosure requirements.
  4. Adoption of European Sustainability Reporting Standards (ESRS).
  5. Digital tagging of information.
• ESRS: These standards provide detailed guidance for sustainability reporting, aligned with the CSRD.
• Timetable: Large public-interest entities must comply from 2024, while SMEs must comply from 2026.

Spanish Companies: CSRD & ESRS Compliance by 2024

Spanish listed companies must prepare Annual Sustainability Reports aligned with the CSRD and ESRS standards, ensuring the inclusion of environmental, social, and governance (ESG) data with external assurance to meet regulatory expectations.