The restatement of the annual accounts is a procedure provided for in Spanish Law that allows certain accounting errors to be corrected or new relevant information to be included in the annual accounts that have already been prepared. However, Spanish regulations and case law establish limits to this recourse, as to when and how it can be carried out.
Regulatory and Accounting Framework for the restatement of accounts: Spanish Commercial Code and Spanish National Accounting Plan.
The restatement of accounts is an exception provided for in article 38.1 c) of the Spanish Commercial Code, which establishes both a material and time limit.
Firstly, it provides that it is possible to restate the accounts provided that the accounting error or risk is detected within the period between the drawing-up and approval of the annual accounts. Therefore, once the accounts have been approved, there is no possibility to restate them.
Secondly, not every accounting correction or error can be corrected by restatement. The error must present a material risk to, or effect on, the true and fair view of the financial position of the company and be the result of a failure to use, or an incorrect use of, reliable information that was available at the time the accounts were prepared.
In such circumstances, the company has a duty to restate its accounts. However, occasionally the error is detected late, when the accounts have already been approved. In this case, it is possible to rectify these errors in the accounts, but not through this restatement procedure.
In line with the above, accounting rules provide that, in the event that an accounting error relating to a previous financial year is detected, this error must be rectified in the accounts of the financial year in which it becomes known. Specifically, the correction must be made by adjusting the corresponding assets or liabilities and debiting or crediting reserves. In other words, the correction is not allocated retroactively to the financial statements of the year in which the error originated, but affects the accounts of the year in which the error becomes known, without the possibility of restating years already closed (valuation num. 22 of the Spanish National Accounting Plan (Plan General de Contabilidad – PGC).
Case law of the Supreme Court and recent ruling of the Barcelona Provincial Court of 26 July 2024.
Recently, the Barcelona Provincial Court in its ruling 845/2024 of 26 July 2024, states that, in the event of detecting accounting errors in the annual accounts of previous years, it is not appropriate to render these accounts null and void and to present new corrected accounts, but rather to reflect this correction in the annual accounts of the financial year in which the accounting error or inaccuracy is known, and, provided that it is relevant, in accordance with that set forth in article 38.1 c) of the Spanish Commercial Code. It also cites the aforementioned valuation num. 22 of the PGC.
The same criterion has been applied by the Supreme Court, i.e., in ruling 1095/2022 of 26 July 2022, the Supreme Court ends the debate on the possibility of restating annual accounts which have already been approved and deposited with the Spanish Commercial Registry. In this case, the plaintiff company requested the restatement in order to correct an accounting error relating to an extraordinary income incorrectly accounted for in 2011, with the aim of requesting a rectification of the self-assessment of the corporate income tax for that year. Both the Spanish Tax Agency (AEAT) and the High Court of Justice of Catalonia (TSJ) denied this possibility, arguing that errors must be corrected in the financial year in which they are detected and not through the restatement of previous financial years already closed and approved.
The Supreme Court based its decision on three key principles:
- Time limit on restatement: the possibility of restatement of approved accounts is only allowed in exceptional circumstances and within the short period between drawing-up and approval, as set out in article 38.1.c) of the aforementioned Spanish Commercial Code. Once approved and filed, the accounts cannot be amended retroactively to rectify past errors, as this would undermine the security and reliability that the filed financial statements must guarantee to third parties.
- Principle of a true and fair view of the company’s financial position: this principle has not only an accounting dimension, but also a legal one, since access to the Spanish Commercial Register provides third parties with a guarantee of true and fair information on the financial position of companies. Modifying these accounts once they have been approved and filed could mislead third-party users.
- Fraud prevention: the Court warns of the risk of fraud that could arise if it were permitted to restate accounts already approved in order to modify the accounting result, for the sole purpose of obtaining tax advantages by rectifying corporate tax self-assessments. The possibility to restate accounts repeatedly would open a potential door to abuse of this practice to adjust tax results for tax years that have already expired.
Tax implications of the correction of accounting errors
From a tax point of view, article 11.3 of the Spanish Corporate Income Tax Law (LIS) establishes that income and expenses must be allocated in the tax period in which they are booked, unless such temporary allocation results in a lower tax liability than would have been the case if the ordinary rules for temporary allocation had been followed. This means that, in the case of an accounting error, the resulting adjustment should impact the year in which the correction is made and not the year to which the error relates, which could alter the tax base in that fiscal year.
Conclusion
Recent case law and regulations are clear: the restatement of annual accounts is only possible in exceptional circumstances and within the period between their drawing up and approval. Accounting errors detected in previous years must be corrected in the year in which they are detected, with the corresponding adjustment to equity and without affecting years already approved.
This regulatory and jurisprudential framework seeks to preserve legal certainty and transparency of financial information in the Spanish Commercial Register, while preventing the misuse of restatement to obtain undue tax benefits.
Directors should be aware of these limits and of the importance of faithfully reflecting any adjustments in the year in which they occur, thus avoiding potential legal and tax liabilities, especially in times when taxation and accounting information are in the spotlight of the regulator and the courts.
Julio González
Vilá Abogados
For more information, please contact:
15th of November 2024
