COVID-19: ICAC clarifies the preparation, verification and approval process for financial statements

In ICAC’s opinion, the following scenarios could arise:

• Entities for which, as of March 14, 2020 (date of entry into force of the state of emergency royal decree), the time period for preparation of their annual financial statements had ended.

Articles 40.3 and 40.5 of the RDL (on preparation and approval) will not be applicable to these entities, whereas the provisions in article 40.4 on the audit of financial statements (extending by two months the time period for issuing the report) will.

In these cases, it must be kept in mind that if the two month extension for performance of the audit and the issuing of the report by the auditor is used, the time period for approval of the annual financial statements could be affected, because, without the auditor’s report, the annual financial statements cannot be approved by the shareholders’ meeting, and the statutory time period for their approval would become impossible to meet. In these scenarios, therefore, the time period for approval of the annual financial statements by the shareholders’ meeting (six months after the previous fiscal year-end) may be altered as a result of applying the extension for audit work under article 40.4 RDL.

• Entities for which, as of March 14, 2020, the time periods for preparation of their financial statements had not ended, although the managing body had nevertheless already prepared them before that date.

In these cases, the time period for preparing their financial statements ends in the three months following the date on which the state of emergency ends (article 40.3 of RDL), and therefore the date of approval of the annual financial statements by the shareholders’ meeting may be up to three months after that date, according to article 40.5 RDL. The provisions in article 40.4 RDL (extension of the time period for the audit) will also apply to these entities.

• Entities whose directors, although they could elect the extension of the time period for preparing their financial statements, under article 40.3 del RDL, prepare the financial statements during the state of emergency period.

For these entities, the provisions in 40.4 RDL on extension of the time period for issuing the auditor’ report will apply, along with article 40.5, concerning the extension of the time period for approval of the financial statements.

• Entities that prepare their financial statements within the three-month extension period running from the end of the state of emergency; for example: the emergency period ends on April 15, 2020 and the financial statements are prepared on June 30.

In these cases, it must be kept in mind –continuing with the example- that the maximum period for preparation would end on July 15 and the time period for approval by the shareholders’ meeting, on October 15. Articles 40.3 and 40.5 of the RDL apply in these cases, though not article 40.4 (extension of the time period for the audit).

• Entities not subject to the obligation to audit their financial statements, but which voluntarily choose to have them audited.

Article 40 of the RDL applies to these entities, as described in relation to the preceding scenarios.

• Audits of financial statements other than the annual financial statements.

The RDL, in articles 40.3 through 40.5, only mentions the preparation, verification and approval process for the annual financial statements of legal entities, and lays down an alteration to the general regime under the corporate legislation on this regime.

Therefore, the amendment set out in the RDL does not affect the audit work on the accounts of financial statements that are not annual financial statements (interim financial statements, balance sheet, etc.).

To reach the foregoing conclusions, based on the rules laid down in article 40.3 through article 40.5 of the RDL, ICAC infers that the general regime on the preparation, verification, approval and filing of annual financial statements under the Revised Capital Companies law (TRLSC) has been altered as follows:

1. Article 40.3 of the RDL suspends the statutory time period for preparation of financial statements set out in article 253 TRLSC (three months after the fiscal year-end), and it will resume when the state of emergency ends. It is extended for a three month period starting on this date, only for entities which when the declaration of the state of emergency took place had not prepared their annual financial statements, and the time period for preparation of their financial statement by reference to their fiscal year-end had not expired. From a literal interpretation of article 40.3 of the RDL, ICAC infers that these provisions would not affect entities whose periods for preparation of their financial statements had not ended before March 14.
2. Article 40.3 of the RDL does not prohibit preparation and verification of the annual financial statements during the state of emergency. This option is expressly specified in the wording given to that article 40.3 by RDL 11/2020, together with for any act that may be performed by the governing and managing bodies of the various entities, within their duties.
3. Article 40.5 of the RDL amends the process for approval of annual financial statements by the shareholders’ meeting under article 164 and article 272 TRLSC (according to which they must be approved in the first six months of the following fiscal year); the shareholders’ meeting must be held for this purpose necessarily within three months after the end date of the time period for preparation of the financial statements determined in article 40.3 of the RDL. In other words, because the time period for preparation of the financial statements is extended to within three months after the end of the state of emergency, the time period for approval of those financial statements by the shareholders’ meeting is extended for a further three months following the end of the time period for their preparation. This new time period would also be applicable to any entities whose time periods for preparation had not ended on the declaration date of the state of emergency, but which nevertheless had already prepared their financial statements on that date.
4. Article 40.4 of the RDL sets out a special regime relating to the time period for performance of the audit in cases where, before the declaration date of the state of emergency (March 14) or while it is in place, the financial statements had been prepared. Namely it is determined that “the time period for verification for accounting purposes of those financial statements, both voluntary and compulsory audits, shall be considered extended for two months running from when the state of emergency ends”, without making a distinction based on whether the period for preparation for that entity had ended on that date.

Although the legislation on this subject does not provide a specific or maximum time period for the performance of an audit and issuing the related report, it may be considered that a requirement exists for the auditor’s report to be filed and delivered subject to specific timing conditions: it must be delivered on the date determined by contract and must allow the statutory and bylaw requirements laid down for the audited entity in this respect to be met. Nevertheless, in relation to this last element it must be kept in mind that the statutory requirements regarding the fulfillment of corporate obligations for approval of financial statements by the shareholders’ meeting and their filing at the commercial registry have been altered by the RDL, which could affect the delivery date of the auditor’s report.