The Institute of Accounting and Auditing (ICAC) has responded regarding the effect of the health crisis and Royal Decree-Law 8/2020 on urgent extraordinary measures to address the economic and social impact of COVID-19 on the process of preparing, verifying, and approving annual accounts.
As we have already informed you, Royal Decree 463/2020 declared a state of emergency on March 14, 2020, to address the health emergency caused by the COVID-19 coronavirus. To respond to the exceptional economic circumstances caused by the pandemic, Royal Decree-Law 8/2020, of March 17, on urgent extraordinary measures to address the economic and social impact of COVID-19, was published in the Official State Gazette (BOE) on March 18, 2020.
Regarding the preparation, verification, and approval of the annual accounts of various companies and entities, Article 40 of the aforementioned Royal Decree-Law established an extraordinary regime. This extraordinary regime was subsequently modified by the amendment introduced to Article 40 by the first final provision of Royal Decree-Law 11/2020, which was published in the Official State Gazette (BOE) on April 1.
In summary, this extraordinary regulation establishes the following:
• Deadline for preparing annual accounts (Art. 40.3): The obligation to prepare annual accounts, whether ordinary or abbreviated, individual or consolidated, within three months from the close of the financial year, which falls to the governing or administrative body of a legal entity, and, where legally required, the management report and other documents required under company law, is suspended until the state of emergency ends, resuming for another three months from that date. Notwithstanding the foregoing, the preparation of accounts by the governing or administrative body of a legal entity during the state of emergency will be valid, and they may also carry out their audit within the legally established deadline or by taking advantage of the extension provided for in the following section.
•Deadline for the audit of the annual accounts (art. 40.4): In the event that, on the date of declaration of the state of alarm or during its validity, the governing or administrative body of a legal entity obliged has prepared the accounts of the previous year, the deadline for the accounting verification of those accounts, whether the audit is mandatory or voluntary, will be extended by two months from the end of the state of alarm.
• Deadline for the approval of the annual accounts (Art. 40.5): The ordinary general meeting to approve the accounts for the previous financial year must be held within three months of the end of the period for preparing the annual accounts. If the notice of the general meeting was published before the declaration of the state of emergency but the date of the meeting is after that declaration, the board of directors may change the place and time scheduled for the meeting or revoke the notice of the meeting by publishing an announcement at least forty-eight hours in advance on the company's website or, if the company does not have a website, in the Official State Gazette. In the event of revocation of the notice of the meeting, the board of directors must issue a new notice within one month of the date on which the state of emergency ends.
• Notice of General Meeting (Art. 40.6): If the notice of the general meeting was published before the declaration of the state of emergency but the meeting date was after that declaration, the board of directors may change the place and time scheduled for the meeting or revoke the notice by publishing an announcement at least forty-eight hours in advance on the company's website or, if the company does not have a website, in the Official State Gazette. If the notice is revoked, the board of directors must issue a new notice within one month of the date on which the state of emergency ends.
•Proposal for application of the result (40.6 bis): In relation to the proposal for application of the result, commercial companies that, having prepared their annual accounts, convene the ordinary general meeting after the entry into force of this provision, may replace the proposal for application of the result contained in the report with another proposal.
The governing body must justify, based on the situation created by COVID-19, the substitution of the proposed application of the result, which must also be accompanied by a letter from the auditor stating that he would not have changed his audit opinion if he had known the new proposal at the time of signing.
In the case of companies whose ordinary general meeting has already been convened, the board of directors may remove the proposed allocation of profits from the agenda in order to submit a new proposal for approval at a general meeting, which must also be held within the legally prescribed period for holding the ordinary general meeting. The board's decision must be published before the already convened general meeting. The new proposal must comply with the justification requirements, including the auditor's report mentioned in the preceding paragraph. The board's certification for the purpose of filing the accounts will be limited, where applicable, to the approval of the annual accounts, with a supplementary certification regarding the approval of the proposed allocation of profits being subsequently filed with the Commercial Registry.
•Listed entities (art.41.3): When listed companies apply any of the measures included in article 40.6 bis of this Royal Decree-Law, the new proposal, its justification by the administrative body and the auditor's report must be made public, as soon as they are approved, as supplementary information to the annual accounts on the entity's website and on the CNMV's website as other relevant information or, if required depending on the specific case, as privileged information
ICAC's interpretation of the extraordinary regime of article 40 of Royal Decree-Law 8/2020
Well, the Institute of Accounting and Auditing of Accounts (ICAC) has responded, dated April 2, to the audit query on the effect of the health crisis and Royal Decree-Law 8/2020, of March 17, on urgent extraordinary measures to address the economic and social impact of COVID-19 on the process of formulation, verification and approval of the annual accounts (RDL), and its modification by the final provision 1, section thirteen, of Royal Decree-Law 11/2020, of March 31 (RDL 11/2020).
See: Audit Consultation - Effect of Royal Decree Law 8/2020, of March 17, in its article 40, on the process of formulation, verification and approval of the annual accounts of the different entities
In the opinion of the ICAC, the following situations may occur:
Entities for which, as of March 14, 2020 (date of entry into force of the Royal Decree of state of alarm), the deadline for preparing their annual accounts had already ended.
These entities will not be subject to sections 3 and 5 of article 40 of the Royal Decree-Law (regarding formulation and approval), and the provisions of section 4 for the audit of accounts will apply (two-month extension of the deadline for issuing the report).
In these cases, it should be borne in mind that if the two-month extension for the completion of the audit and the issuance of the auditor's report is used, the deadline for approving the annual accounts could be affected. Without the audit report, the annual accounts could not be approved by the general meeting, making it impossible to meet the legally established approval deadline. Therefore, in these cases, the deadline for approving the annual accounts by the general meeting (six months from the close of the previous financial year) may be altered as a result of applying the extension for the audit work regulated in Article 40.4 of the Royal Decree-Law.
Entities for which, as of March 14, 2020, the deadline for preparing their annual accounts had not yet expired, but which, nevertheless, had already been prepared by the administrative body prior to that date.
In these cases, the deadline for preparing the financial statements ends within three months of the end of the state of emergency (Article 40.3 of the Royal Decree-Law), so the date for approval of the annual accounts by the general meeting may be up to three months after that date, in accordance with the provisions of Article 40.5 of the Royal Decree-Law. Likewise, the provisions of Article 40.4 of the Royal Decree-Law (extension of the audit deadline) will apply to these entities.
Entities whose administrators, despite being able to take advantage of the extension of the deadline for preparing their annual accounts, in accordance with article 40.3 of the RDL, prepare the annual accounts during the state of alarm period.
In these entities, the provisions of Article 40.4 of the Royal Decree-Law on the extension of the deadline for issuing the audit report will apply, as well as the provisions of Article 40.5, regarding the extension of the deadline for the approval of the annual accounts.
Entities that prepare their annual accounts within the three-month extension period after the end of the state of alarm; for example: the state of alarm period ends on April 15, 2020 and the accounts are prepared on June 30.
In these cases, it should be noted—following the example—that the maximum period for drafting the financial statements would end on July 15, and the period for approval by the general meeting on October 15. In these cases, the provisions of paragraphs 3 and 5 of Article 40 of the Royal Decree-Law apply, but not paragraph 4 (extension of the audit deadline).
Entitiesnot subject to the obligation to audit their annual accounts, but which voluntarily submit them to audit.
These entities are subject to the provisions of Article 40 of the Royal Decree-Law, as indicated in the previous cases.
Audits of financial statements other than annual accounts.
The Royal Decree-Law, in its Article 40, paragraphs 3 to 5, only refers to the process of preparing, verifying, and approving the annual accounts of legal entities, establishing an alteration to the general regime regulated in commercial law regarding this regime.
Therefore, the modification established by the Royal Decree-Law does not affect audits of financial statements other than annual accounts (interim financial statements, balance sheets, etc.).
To reach the above conclusions, considering the provisions of paragraphs 3 to 5 of Article 40 of the Royal Decree-Law, the ICAC (Spanish Institute of Certified Public Accountants) deduces that the general regime for preparing, verifying, approving, and filing annual accounts regulated in the Consolidated Text of the Capital Companies Act (TRLSC) has been altered as follows:
1. Article 40.3 of the Royal Decree-Law suspends the deadline for preparing annual accounts legally established by Article 253 of the Consolidated Text of the Companies Act (three months from the end of the financial year), resuming once the state of emergency ends. This three-month extension applies only to entities that, at the time the state of emergency was declared, had not yet prepared their annual accounts and whose annual accounts preparation deadline had not yet expired, based on their financial year-end. From the wording of Article 40.3 of the Royal Decree-Law, the ICAC (Spanish Accounting and Auditing Institute) infers that this regulation would not affect entities whose annual accounts preparation deadline had expired before March 14.
2. Article 40.3 of the Royal Decree-Law does not prohibit the preparation and auditing of annual accounts during the state of emergency. This circumstance is expressly provided for in the wording given to said section by Royal Decree-Law 11/2020, as is any other action that may be carried out by the governing and administrative bodies of the various entities corresponding to their functions.
3. Article 40.5 of the Royal Decree-Law modifies the process for approving annual accounts by the general meeting, as regulated in Articles 164 and 272 of the Consolidated Text of the Companies Act (according to which these must be approved within the first six months of the following financial year): the general meeting must be held for this purpose within three months following the end of the period for preparing the accounts established in Article 40.3 of the Royal Decree-Law. In other words, given that the period for preparing the annual accounts is extended to three months from the end of the state of emergency, the period for approving these accounts by the general meeting is extended by another three months from the end of the preparation period. This new period would also apply to those entities whose preparation period had not yet ended on the date the state of emergency was declared, but which, nevertheless, had already prepared their annual accounts by that date.
4. Article 40.4 of the Royal Decree-Law establishes a special regime regarding the deadline for carrying out the audit in cases where annual accounts were prepared before the declaration of the state of emergency (March 14) or during its validity. It stipulates that "the deadline for the accounting verification of these accounts, whether the audit is mandatory or voluntary, will be extended by two months from the end of the state of emergency," without distinguishing whether the deadline for preparing the accounts for that entity had expired by that date.
Although the regulations governing this matter do not establish a specific or maximum deadline for conducting an audit and issuing the corresponding report, it can be understood that there is a requirement for the audit report to be submitted and delivered under certain time constraints: it must be delivered by the contractually agreed date and must allow the audited entity to comply with the legal and statutory requirements in this regard. However, with respect to this last point, it should be noted that the legal requirements regarding compliance with corporate obligations such as the approval of financial statements by the general meeting and their filing with the
Mercantile Registry have been altered by the Royal Decree-Law, which could affect the delivery date of the audit report.
You can contact this professional office for any questions or clarifications you may have.
Warm regards,
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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