Commentary on law 16/2007 of commercial reform and adapting of accounting practices for the international harmonisation based on the rules of the European union.

On 5th July 2007 the Law 16/2007 of reform and adapting in accounting practices (from hereon in the "Law") was published in the BOE.

The philosophy that preceded the development of the Law, which came into force on 1 January 2008, has been to amend the criteria included in the common rules and in the International Rules of Financial Information.

The Law authorised for the Government to approve, by means of a Real Decree, a new Plan of General Accounting, which came into force on 1 January 2008, as well as its complementary rules such as the rule for the formation of the consolidated annual accounts. Likewise, it authorises for the Ministry of Economy and Treasury to approve the adjustments of the General Plan of Accountancy.

On the other hand, the Law modifies certain mercantile texts such as the Commercial Code, the Joint Stock Companies Act, the Limited Liability Companies Act, the Amended Text of the Law of Company Tax, the Law of Partnerships, the Law of Auditing of Accounts, and the Amended Text of the Law regulating the Local Treasuries and the Real Decree Law 7/1996 on the urgent means of financial character and of promotion and freedom of economic activity.

As well as the new provisions introduced by this law, it also emphasises the continuation to define that:

1. The annual accounts include two new financial statements: a) The statement of change in the net assets, and b) The statement of cash flow, passing the accounts to be configured by the following elements:

(i) Balance sheet

(ii) Profit and loss account

(iii) Net assets statement

(iv) Cash flow statement

(v) Annual report

2. In relation to the Joint Stock Companies Act, the second, third, fourth and fifth sections of Chapter VII were omitted, which applied to the Annual Accounts, specifically in developing and structuring the Annual Accounts, in addition to the determined rules of valuation, which were omitted in order to be developed by the new General Accounting Plan.

3. The Law establishes, amongst other things, new limitations superior to those that previously existed previously, for the formulation of the balance sheet, net assets statement and consolidated Annual Report, likewise for the formulation of the consolidated profit and loss account. In this respect when there exists the possibility of calculating the balance sheet, statement of net assets, and consolidated annual report, it will not be obligatory to show the cash flow statement.

4. The Law fulfils a unification in virtue of which all the articles of the Joint Stock Companies Act in which there exists any reference to "assets", "net assets", "shares", there have been amendments to include in the place of the previous denominations the sole term of "net assets".

5. In line with this, which results also in the amendment of article 213 of the Joint Stock Companies Act in which it introduces the following new requirements:

(i) To prohibit the distribution of profit unless the amount of the disposable reserves are, as a minimum, equal to the sum of the amount of the expenses of investigation and development that figure in the balance sheet.

(ii) To establish the obligation to provide a permanent reserve equivalent to the commercial goodwill of the company that appears in the balance sheet, setting aside a profit account that represents, at minimum, 5% of the sum of the commercial goodwill referred to. If profits do not exist, or they are of an insufficient amount, freely disposable reserves can be used.

6. At the time of valuing the elements that compose the annual accounts, however general their character, the criteria of valuation based on the historic cost is maintained, but in a specific form, there shall appear a new criteria of valuation based on reasonable value.

7. Finally, with respect to the Commercial Code, articles 34 to 49 are amended in relation to annual accounts. Between the new provisions introduced, we can emphasise the amendment to the criteria of valuing the elements of the balance sheet, applying from now on the designated criteria of reasonable value, likewise the prohibition of repaying the designated value of the commercial goodwill. Together with the previous, it can be emphasised that the amendment undertaken by article 42 to remove the reference to a "unity of decision", like when determining the obligation of consolidating, being substituted by the situations in which a company has or can have, in a direct or indirect form, the control over the remaining.