The la Caixa Group: Statutory Documentation for 2006

Transcription

1 The la Caixa Group: Statutory Documentation for 2006 Auditors Report Consolidated Financial Statements Consolidated balance sheets Consolidated income statements Consolidated statements of changes in equity Consolidated cash flow statements Notes to the consolidated financial statements Directors Report

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3 la Caixa 2006 Annual Report 3

4 Consolidated Financial Statements of the la Caixa Group Consolidated balance sheets at 31 December 2006 and 2005, before allocation of profit (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP Assets (*) Cash and balances with central banks (Note 8) 3,925,412 1,773,805 Financial assets held for trading (Note 9) 1,599,634 1,318,374 Debt instruments 1,360,969 1,018,756 Other equity instruments 12,047 57,422 Trading derivatives 226, ,196 Memorandum item: Loaned or advanced as collateral 691, ,024 Other financial assets at fair value through profit or loss (Note 21) 199,400 0 Debt instruments 57,592 0 Other equity instruments 141,808 0 Available-for-sale financial assets (Note 10) 21,707,859 23,544,467 Debt instruments 12,365,666 13,242,288 Other equity instruments 9,342,193 10,302,179 Memorandum item: Loaned or advanced as collateral 523, ,081 Loans and receivables (Note 11) 162,863, ,241,956 Loans and advances to credit institutions (Note 11.1) 20,670,058 13,278,926 Money market operations through counterparties 0 50,140 Loans and advances to customers (Note 11.2) 137,231, ,064,698 Debt instruments (Note 11.3) 3,159,914 3,624,049 Other financial assets (Note 11.4) 1,802,529 2,224,143 Memorandum item: Loaned or advanced as collateral 35,880,869 21,297,724 Held-to-maturity investments (Note 12) 0 188,567 Changes in the fair value of the hedged items in portfolio hedges of interest rate risk 16,915 48,664 Hedging derivatives (Note 13) 5,891,388 7,160,244 Non-current assets held for sale (Note 14) 53, ,270 Tangible assets 53, ,270 Investments (Note 15) 4,594,113 3,505,598 Associates 4,594,113 3,505,598 Insurance contracts linked to pensions (Note 22) 724, ,072 Reinsurance assets (Note 16) 14,479 19,165 Tangible assets (Note 17) 4,079,969 7,704,783 Property, plant and equipment for own use 3,142,515 3,145,510 Investment property 205,615 3,943,229 Other assets leased out under an operating lease 437, ,890 Assigned to Welfare Projects (Note 27) 294, ,154 Intangible assets (Note 18) 96, ,942 Goodwill 0 68,044 Other intangible assets 96, ,898 Tax assets 2,156,713 2,450,013 Current 607, ,601 Deferred (Note 28) 1,549,668 2,042,412 Prepayments and accrued income (Note 19) 435, ,432 Other assets (Note 19) 762,357 1,018,604 Inventories 68, ,764 Other 693, ,840 Total Assets 209,123, ,351,956 Memorandum items Contingent exposures (Note 29) 13,606,805 11,803,864 Financial guarantees 13,559,932 11,764,417 Assets earmarked for third-party obligations 46,873 39,447 Contingent commitments (Note 29) 49,389,356 43,385,747 Drawable by third parties 46,524,908 40,191,319 Other commitments 2,864,448 3,194,428 (*) Presented for comparison purposes only. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 4

5 Consolidated balance sheets at 31 December 2006 and 2005, before allocation of profit (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP Liabilities and Equity (*) Liabilities Financial liabilities held for trading (Note 9) 1,136, ,092 Trading derivatives 245, ,850 Short positions 890, ,242 Other financial liabilities at fair value through profit or loss (Note 21) 206,700 0 Customer deposits 206,700 0 Financial liabilities at amortised cost (Note 20) 166,466, ,791,363 Deposits from central banks 0 63,406 Deposits from credit institutions (Note 20.1) 12,420,704 13,346,731 Customer deposits (Note 20.2) 113,171,945 99,278,477 Marketable debt securities (Note 20.3) 36,061,514 19,243,782 Subordinated liabilities (Note 20.4) 3,398,287 3,433,341 Other financial liabilities (Note 20.5) 1,413,837 2,425,626 Changes in the fair value of the hedged items in portfolio hedges of interest rate risk (599,434) 1,032,899 Hedging derivatives (Note 13) 5,545,094 5,543,511 Liabilities under insurance contracts (Note 21) 12,643,209 14,116,424 Provisions (Note 22) 2,880,427 2,400,342 Provisions for pensions and similar obligations 2,372,052 1,984,966 Provisions for taxes 152, ,867 Provisions for contingent liabilities and commitments 108,779 97,502 Other provisions 246, ,007 Tax liabilities 1,793, ,381 Current 171,330 20,838 Deferred (Note 28) 1,622, ,543 Accrued expenses and deferred income (Note 19) 545, ,628 Other liabilities (Note 19) 1,076, ,400 Welfare Fund (Note 27) 542, ,874 Other 534, ,526 Equity having the substance of a financial liability (Note 23) 3,000,000 3,100,000 Total Liabilities 194,694, ,055,040 Equity Minority interests (Note 24) 214,685 1,506,457 Valuation adjustments (Note 25) 3,444,969 3,739,812 Available-for-sale financial assets 3,430,572 3,706,867 Cash flow hedges (2,982) (31,966) Exchange differences 17,379 64,911 Own funds (Note 4) 10,769,433 8,050,647 Capital or endowment fund (Note 26) 3,006 3,006 Issued 3,006 3,006 Reserves 7,741,109 6,552,593 Accumulated reserves (losses) 6,366,649 5,360,556 Reserves (losses) of entities accounted for using the equity method (Note 26) 1,374,460 1,192,037 Associates 1,374,460 1,192,037 Profit attributed to the Group 3,025,318 1,495,048 Total Equity 14,429,087 13,296,916 Total Liabilities and Equity 209,123, ,351,956 (*) Presented for comparison purposes only. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 5

6 Consolidated income statements for the years ended 31 December 2006 and 2005 (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP (*) Interest and similar income (Note 31) 5,923,735 4,300,710 Interest expense and similar charges (Note 32) (3,402,703) (2,107,517) Return on equity having the substance of a financial liability (123,830) (110,791) Other (3,278,873) (1,996,726) Income from equity instruments (Note 33) 300, ,727 Net interest income 2,821,805 2,482,920 Share of results of entities accounted for using the equity method 494, ,032 Associates 494, ,032 Fee and commission income (Note 34) 1,469,968 1,431,049 Fee and commission expense (Note 34) (170,993) (195,767) Insurance activity income (Note 35) (204,104) (237,982) Insurance and reinsurance premium income 1,200,646 1,981,930 Reinsurance premiums paid (15,638) (11,113) Claims paid and other insurance-related expenses (1,601,208) (1,715,919) Reinsurance income 4,289 2,595 Net provisions for insurance contract liabilities (387,333) (1,147,587) Finance income 605, ,214 Finance expense (10,350) (10,102) Gains/losses on financial assets and liabilities (net) (Note 36) 1,076, ,739 Held for trading (15,205) (20,061) Available-for-sale financial assets 1,069, ,069 Loans and receivables 5 0 Other 22,272 16,731 Exchange differences (net) 137,980 74,557 Gross income 5,626,264 4,531,548 Sales and income for the provision of non-financial services (Note 37) 500, ,005 Cost of sales (Note 37) (133,281) (222,829) Other operating income (Note 38) 226, ,411 Personnel expenses (Note 39) (1,783,174) (1,737,793) Other general administrative expenses (Note 40) (832,023) (853,406) Depreciation and amortisation (410,072) (398,995) Tangible assets (Note 17) (356,610) (338,175) Intangible assets (Note 18) (53,462) (60,820) Other operating expenses (Note 41) (76,903) (44,872) Net operating income 3,116,988 2,242,069 Impairment losses (net) (Note 42) (478,479) (390,185) Available-for-sale financial assets (1,069) (34,482) Loans and receivables (473,754) (325,118) Non-current assets held for sale Investments 301 (8,901) Tangible assets (4,587) (15,819) Goodwill 0 (274) Other assets 0 (5,733) Provisions (net) (Note 22) (460,636) (272,568) Finance income from non-financial activities (Note 43) 9,212 15,752 Finance expenses from non-financial activities (Note 43) (61,111) (131,016) Other gains (Note 44) 1,949, ,476 Gains on disposal of tangible assets 54, ,147 Gains on disposal of investments 1,859, ,730 Other 35,657 29,599 Other losses (Note 44) (62,685) (89,244) Losses on disposal of tangible assets (555) (2,931) Losses on disposal of investments (473) 0 Other (61,657) (86,313) Profit before tax 4,013,050 1,791,284 Income tax (Note 28) (870,424) (52,675) Mandatory transfer to welfare projects and funds 0 0 Profit from ordinary activities 3,142,626 1,738,609 Profit from discontinued operations (net) 0 0 Consolidated profit for the year 3,142,626 1,738,609 Profit attributed to minority interests (Note 24) (117,308) (243,561) Profit attributed to the Group 3,025,318 1,495,048 (*) Presented for comparison purposes only. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 6

7 Consolidated statements of changes in equity (Statements of recognised income and expenses) for the years ended 31 December 2006 and 2005 (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP (*) Net income recognised directly in equity (Note 25) (267,010) 938,292 Available-for-sale financial assets (271,581) 878,393 Revaluation gains/losses 1,640,265 1,459,080 Amounts transferred to income statement (807,942) (324,065) Income tax (1,103,904) (256,622) Reclassifications 0 0 Other financial liabilities at fair value 0 0 Cash flow hedges 52,212 (6,285) Revaluation gains/losses 52,279 (37,003) Amounts transferred to income statement 11,979 20,021 Amounts transferred at the initial carrying amount of hedged items 0 0 Income tax (12,046) 10,697 Reclassifications 0 0 Hedges of net investments in foreign operations 0 0 Exchange differences (47,641) 66,184 Translation gains/losses (47,641) 66,184 Amounts transferred to income statement 0 0 Income tax 0 0 Reclassifications 0 0 Non-current assets held for sale 0 0 Consolidated profit for the year 3,142,626 1,738,609 Published consolidated profit for the year 3,142,626 1,738,609 Adjustments due to changes in accounting policy 0 0 Adjustments made to correct errors 0 0 Total income and expenses for the year 2,875,616 2,676,901 Parent 2,730,475 2,433,340 Minority interests 145, ,561 (*) Presented for comparison purposes only. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 7

8 Consolidated cash flow statements (1/2) for the years ended 31 December 2006 and 2005 (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP (*) 1. Cash flows from operating activities Consolidated profit for the year 3,142,626 1,738,609 Adjustments to profit: 428,412 1,644,040 Depreciation of tangible assets (+) 356, ,175 Amortisation of intangible assets (+) 53,462 60,820 Impairment losses (net) (+/ ) 478, ,185 Net provisions for insurance contract liabilities (+/ ) 387,333 1,144,992 Provisions (net) ( /+) 460, ,568 Gains/Losses on disposal of tangible assets ( /+) (53,967) (242,216) Gains/Losses on disposal of investments ( /+) (1,859,109) (141,730) Shares of results of entities accounted for using the equity method (net of dividends) (+/ ) 265, ,429 Taxes (+/ ) 870,424 52,675 Adjusted profit 3,571,038 3,382,649 Net increase/decrease in operating assets 32,719,099 21,978,755 Financial assets held for trading 281,260 (388,582) Debt instruments 342,213 (333,165) Other equity instruments (45,375) 21,921 Trading derivatives (15,578) (77,338) Other financial assets at fair value through profit or loss 199,400 0 Available-for-sale financial assets (1,945,264) (1,164,493) Debt instruments (873,873) 811,026 Other equity instruments (1,071,391) (1,975,519) Loans and receivables 33,049,552 23,332,521 Loans and advances to credit institutions 7,391,132 1,153,613 Money market operations through counterparties (50,140) (280,156) Loans and advances to customers 26,594,398 21,985,580 Debt instruments (464,224) (706,288) Other financial assets (421,614) 1,179,772 Other operating assets 1,134, ,309 Net increase/decrease in operating liabilities 13,814,138 14,536,617 Financial liabilities held for trading 182, ,232 Trading derivatives 20,799 (107,287) Short positions 161, ,519 Other financial liabilities at fair value through profit or loss 206,700 0 Financial liabilities at amortised cost 14,784,899 14,093,916 Deposits from central banks (63,406) (3,892) Deposits from credit institutions (926,027) (850,459) Customer deposits 13,893,468 13,943,029 Marketable debt securities 2,892, ,745 Other financial liabilities (1,011,789) 767,493 Other operating liabilities (1,359,613) (4,531) Total net cash flows from operating activities (1) (15,333,923) (4,059,489) (*) Presented for comparison purposes only. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 8

9 Consolidated cash flow statements (2/2) for the years ended 31 December 2006 and 2005 (Notes 1 to 47), in thousands of euros CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP (*) 2. Cash flows from investing activities Investments ( ): (1,156,797) (2,067,586) Subsidiaries, jointly controlled entities and associates 342, ,115 Tangible assets 754,057 1,812,857 Intangible assets 60,721 60,308 Held-to-maturity investments 0 52,306 Divestments (+): 6,290,150 1,162,165 Subsidiaries, jointly controlled entities and associates 1,918, ,767 Tangible assets 4,163, ,398 Intangible assests 19,431 0 Held-to-maturity investments 188,567 0 Total net cash flows from investing activities (2) 5,133,353 (905,421) 3. Cash flows from financing activities Issuance/Redemption of equity having the substance of a financial liability (+/ ) (100,000) 100,000 Issuance/Redemption of subordinated liabilities (+/ ) (35,054) (907) Issuance/Redemption of other long-term liabilities (+/ ) 13,925,079 4,569,000 Increase/Decrease in minority interests (+/ ) (1,436,913) 172,062 Total net cash flows from financing activities (3) 12,353,112 4,840, Effect of exchange rate changes on cash and cash equivalents (4) (935) 1, Net increase/decrease in cash and cash equivalents ( ) 2,151,607 (123,545) Cash or cash equivalents at beginning of year 1,773,805 1,897,350 Cash or cash equivalents at end of year 3,925,412 1,773,805 (*) Presented for comparison purposes only. The changes in scope of consolidation are included in the appropriate line based on the nature of each asset or liability addition or disposal. Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 9

10 Notes to the consolidated financial statements for 2006 la Caixa Group 1. Description of the Institution and other information 12 Description of the Institution 12 Basis of presentation 12 Responsibility for the information and for the estimates made 13 Comparative information and changes in scope of consolidation 13 Ownership interests in credit institutions 14 Minimum capital requirements 14 Deposit Guarantee Fund 15 Events after the balance sheet date Accounting policies and measurement bases Business combinations and basis of consolidation Financial instruments Derivatives and hedges Foreign currency transactions Recognition of income and expenses Transfers of financial assets Impairment of financial assets Offsetting Financial guarantees Leases Mutual funds, pension funds and other assets under management Personnel expenses and post-employment benefit obligations Income tax Tangible assets Intangible assets Inventories Non-current assets held for sale Insurance transactions Provisions and contingent liabilities Consolidated statements of changes in equity Consolidated cash flow statements Welfare Projects Risk management Credit risk exposure Market risk exposure Liquidity risk exposure Exposure to other risks Own funds and allocation of profit Purchase and sale of ownership interests in the capital of subsidiaries, jointly controlled entities and associates Business segment reporting Remuneration of key directors and executives Cash and balances with central banks Financial assets and liabilities held for trading Available-for-sale financial assets Loans and receivables Loans and advances to credit institutions Loans and advances to customers Debt instruments Other financial assets Impairment allowances Held-to-maturity investments Hedging derivatives (assets and liabilities) Non-current assets held for sale Investments 79 la Caixa 2006 Annual Report 10

11 16. Reinsurance assets Tangible assets Intangible assets Prepayments and accrued income, accrued expenses and deferred income and other Financial liabilities at amortised cost Deposits from credit institutions Customer deposits Marketable debt securities Subordinated liabilities Other financial liabilities Liabilities under insurance contracts Provisions Equity having the substance of a financial liability Minority interests Valuation adjustments Endowment fund and reserves Welfare Projects Tax matters Contingent liabilities and commitments Other significant disclosures Third-party funds managed by the Group Asset securitisations Securities deposits and investment services Financial assets derecognised due to impairment Geographical distribution of volume of business Interest and similar income Interest expense and similar charges Income from equity instruments Fee and commission income and expense Insurance activity Gains/losses on financial assets and liabilities Sales and income from the provision of non-financial services and cost of sales Other operating income Personnel expenses Other general administrative expenses Other operating expenses Impairment losses Finance income and expenses from non-financial activities Other gains and other losses Transactions with related parties Other disclosure requirements Customer ombudsman and customer care service Environmental information Explanation added for translation to English 131 Appendix 1. Public Financial Statements of la Caixa 132 Appendix 2. la Caixa Group Subsidiaries 138 Appendix 3. Joint ventures of the la Caixa Group (jointly controlled companies) 142 Appendix 4. Associates of the la Caixa Group 143 Appendix 5. Income tax credits for reinvestment of profits 144 Appendix 6. Companies filing joint tax returns 145 la Caixa 2006 Annual Report 11

12 Notes to the consolidated financial statements for the year ended 31 December 2006 CAJA DE AHORROS Y PENSIONES DE BARCELONA AND COMPANIES COMPOSING THE la Caixa GROUP As required by current legislation governing the content of consolidated financial statements, these notes to the consolidated financial statements complete, extend and discuss the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement, and form a unit together with them, in order to present fairly the consolidated equity and consolidated financial position of the la Caixa consolidated Group at 31 December 2006, and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows for the year then ended. 1. Description of the Institution and other information Description of the Institution As a savings bank and in accordance with its bylaws, Caja de Ahorros y Pensiones de Barcelona ( la Caixa ) is a private-law, non-profit financial institution providing beneficent welfare services, and is separate from any other company or entity. Its corporate purpose is to encourage all authorised forms of savings, to carry out beneficent Welfare Projects and to invest the related funds in safe and profitable assets of general interest. As a credit institution, subject to the rules and regulations issued by the Spanish and EU economic and monetary authorities, la Caixa conducts universal banking activities, and provides substantial retail banking services. la Caixa is the Parent of a group of subsidiaries that offer other products and services and which, together with it, compose a single decision-making unit. Therefore, la Caixa is obliged to prepare, in addition to its own individual financial statements, the consolidated financial statements of the Caja de Ahorros y Pensiones de Barcelona Group ( the Group ), which also include the interests in joint ventures and investments in associates. Caixa Holding, SAU, which is wholly owned by la Caixa, is the subsidiary that manages and controls practically all of the Group s equity securities portfolio. Basis of presentation The Group s consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union through EU Regulations, in accordance with Regulation no. 1606/2002 of the European Parliament and of the Council, of 19 July In addition, the Bank of Spain issued Circular 4/2004, of 22 December, on Public and Confidential Financial Reporting Rules and Formats for Credit Institutions, which constitutes the adaptation of the IFRSs adopted by the European Union to the Spanish credit institution sector. The financial statements were prepared on the basis of the accounting records kept by la Caixa and by the other Group entities and include certain adjustments and reclassifications required to unify the policies and bases used by the Group companies with those of la Caixa. Appendix 1 includes the balance sheet, income statement, statement of changes in equity and cash flow statement of la Caixa for 2006 and Translation of consolidated financial statements originally issued in Catalan and prepared in accordance with IFRSs as adopted by the European Union (see Notes 1 and 47). In the event of a discrepancy, the Catalan-language version prevails. la Caixa 2006 Annual Report 12

13 Responsibility for the information and for the estimates made The financial statements of la Caixa and the consolidated financial statements of the la Caixa Group for 2006 were prepared by the Board of Directors at a meeting held on 25 January These financial statements and the financial statements of the consolidated Group companies have not yet been approved by the General Assembly of the Parent and by the Annual General Meetings of the consolidated companies, respectively. However, the Board of Directors of la Caixa considers that they will be approved without any changes. The financial statements of la Caixa and the consolidated financial statements of the la Caixa Group for 2005 were approved by the General Assembly at a meeting held on 27 April The financial statements were prepared on the basis of judgments and estimates made by the senior executives of la Caixa and of the consolidated entities, which relate, inter alia, to the fair value of certain assets and liabilities, impairment losses, the useful life of tangible and intangible assets, actuarial assumptions for the calculation of post-employment benefit obligations, pre-retirement scheme liabilities, and the equity and profit or loss of the companies accounted for using the equity method. These estimates relate to both the amounts recognised in the consolidated balance sheet and in the consolidated income statement for the period. Although these estimates were made on the basis of the best available information, future events might make it necessary to change these estimates in coming years. Changes in accounting estimates would be applied prospectively, recognising the effects of the change in estimates in the related consolidated balance sheet and income statement. The accounting standards established by the IFRSs are generally compatible with those established by Bank of Spain Circular 4/2004 and are described in Note 2. No accounting policies differing from such standards which may have a material effect have been applied. Comparative information and changes in scope of consolidation Under International Financial Reporting Standards, the information presented in the consolidated financial statements must be consistent. Accordingly, as a result of the varying interpretations of the applicable legislation, in 2006 the unit-linked products sold by the la Caixa Group s insurance companies were classified under Other Financial Liabilities at Fair Value Through Profit or Loss in the consolidated balance sheet, and the financial assets related to these operations were classified under Other Financial Assets at Fair Value Through Profit or Loss. In 2005 these products were classified under Liabilities under Insurance Contracts and Available-for-Sale Financial Assets and totalled EUR 508 million and EUR 493 million, respectively. In 2006 the amortisation relating to operating leases was recognised under Depreciation and Amortisation Tangible Assets in the consolidated income statement, whereas in 2005 it was recognised under Other Operating Income, as an offsetting entry against lease income, amounting to EUR 58.4 million. The consolidated balance sheet heading Valuation Adjustments Available-for-Sale Financial Assets must include the gain or loss on these assets net of the related tax effect. In 2005 this tax effect included the potential reinvestment tax credit that would be applicable in the event of sale of the assets. The recent amendment to the Spanish Corporation Tax brought about changes to the conditions for taking reinvestment tax credits, with the result that it was no longer considered reasonable to recognise them. Consequently, for a proper comparison of the information relating to 2006 and 2005, the consolidated balance sheet heading Valuation Adjustments Available-for-Sale Financial Assets should be reduced, and Tax Liabilities Deferred increased, by EUR 870 million at 31 December The most significant changes in the scope of consolidation in 2006 included the disposal of the CaixaBank- France Group, effective from 1 January, of the Inmobiliaria Colonial Group, from 1 July, and of the Crèdit Andorrà Group, from 1 October. For a proper comparison of the consolidated financial statements for 2006 and 2005, it should be taken into account that at 31 December 2005 the consolidated balance sheets of the la Caixa Group included, for all those companies taken as a whole, EUR 11,416 million in Total Assets, and la Caixa 2006 Annual Report 13

14 EUR 5,610 million in Loans and Receivables, EUR 3,846 million in Tangible Assets and EUR 7,175 million in Financial Liabilities at Amortised Cost. Ownership interests in credit institutions Pursuant to the provisions of Royal Decree 1245/1995, on public disclosure of investments of 5% or more in the capital or voting rights of credit institutions, in 2006 and 2005 the la Caixa Group held the following investments other than those held in Group subsidiaries, which are listed in Appendix 2: Banco BPI, SA, a Portuguese credit institution, 25% owned at 31 December 2006 (31 December 2005: 15.99%), and Banco de Sabadell, SA, 13.83% owned at 31 December 2005 and sold entirely at 31 December At 31 December 2006 and 2005, no Spanish or foreign credit institution, or group comprising a credit institution, held an interest of 5% or more in the capital or voting rights of any of the credit institutions that are subsidiaries of the la Caixa Group. Minimum capital requirements Bank of Spain Circular 5/1993, of 26 March, sets forth the rules for determining the capital requirements to be met by consolidated groups of credit institutions, defines the consolidated balance sheet items composing eligible capital, and specifies the deductions to be made from eligible capital. Under the aforementioned Circular, eligible capital is classified as follows: Tier I capital, which includes capital the endowment fund, for savings banks, reserves, profit for the year to be used to increase reserves, minority interests and preference shares. Goodwill arising from business combinations (see Note 2.1) is deducted from Tier I capital. Tier I capital excluding preference shares is internationally known as core capital, which is a key measure of an institution s capital adequacy. Tier II capital, which most notably includes asset revaluation reserves, 45% of the gross amounts of gains on equity instruments accounted for as available-for-sale financial assets, general loan-loss reserves and subordinated debt. Tier II capital may not exceed 100% of Tier I capital. Also, general reserves and subordinated debt are eligible for inclusion in Tier II capital subject to certain quantitative and qualitative requirements. The minimum capital requirements and eligible capital must be determined by reference to the confidential financial statements of consolidated groups of credit institutions, in which the full and proportionate consolidation methods are used solely for financial institutions that may be consolidated on the basis of their activity. Circular 5/1993 sets forth the procedures to calculate the capital requirements to be met in order to provide for the following risks inherent to banking activities: Credit risk associated with on-balance-sheet assets, commitments and contingent liabilities and financial derivative transactions. Currency risk associated with the overall net position in foreign currency. Commodity risk and market risk associated with financial assets and liabilities held for trading. la Caixa 2006 Annual Report 14

15 Credit institutions calculate the measure known as weighted risk assets in accordance with the procedures established by Circular 5/1993 for the measurement of the risks listed above. The minimum eligible capital requirement to be met by credit institutions at all times is set at 8% of weighted risk assets. Similarly, the capital ratio is defined as the relationship of eligible capital to weighted risk assets and, therefore, credit institutions must always maintain a capital ratio of at least 8%. Circular 5/1993 implements, for credit institutions, the legislation on capital and supervision of consolidated financial institutions contained in Law 13/1992, of 1 June, in Royal Decree 1343/1992, of 6 November, and in the Ministerial Order of 30 December The most recent amendments to Circular 5/1993 were introduced by Circular 2/2006, of 30 June. Specifically, Circular 2/2006, of 30 June, established that 45% of the gross amounts of gains on equity instruments accounted for as available-for-sale financial assets and of general loanloss reserves is eligible for inclusion in the capital base. Circular 2/2006 also introduced the requirement for credit institutions to deduct from eligible capital their investments in insurance entities in which they hold an ownership interest in excess of 20%. Circular 5/1993 also implements, for credit institutions, the legislation on the supervision of financial conglomerates contained in Law 5/2005, of 22 April, and in Royal Decree 1332/2005, of 11 November. In this regard, the Bank of Spain reported that the la Caixa Group is considered to be a financial conglomerate on the grounds that it meets the conditions stipulated in Articles 2 and 3 of the abovementioned Law 5/2005, of 22 April. The formal requirements for financial conglomerates to report their activities to the supervisory body vary in terms of degree of detail according to the materiality of the insurance business in relation to the conglomerate s total business. In this respect, the Bank of Spain determined that the la Caixa financial conglomerate should be subject to the basic formal reporting requirements. The detail of the la Caixa Group s capital adequacy status, calculated in accordance with the procedures set out in the previous paragraphs, is provided below. In order to ensure year-on-year comparison, the data relating to 2005 were calculated in accordance with the provisions of Circular 2/2006, of 30 June. (Millions of Euros) AMOUNT AS A % AMOUNT AS A % Core capital 8, % 7, % Tier 1 11, % 10, % Tier total 16, % 13, % Capital requirements (*) 11, % 9, % Capital in excess of the minimum 5, % 3, % (*) The above figures for 2006 are the best available estimate at the time of preparing the consolidated financial statements and no significant variations are expected. Deposit Guarantee Fund la Caixa makes annual contributions to the Savings Banks Deposit Guarantee Fund, the institution responsible for guaranteeing the deposits in cash and securities placed with savings banks. In 2006 and 2005, the contributions were 0.4 per thousand of the calculation basis (guaranteed deposits plus 5% of the market value of the guaranteed securities). The amounts accrued are included under Other Operating Expenses in the consolidated income statement (see Note 41). la Caixa 2006 Annual Report 15

16 Events after the balance sheet date From 1 January 2007 to the date on which these consolidated financial statements were authorised for issue there were no events significantly affecting them. 2. Accounting policies and measurement bases The accounting policies and measurement bases applied in preparing the Group s consolidated financial statements for 2006 were as follows: 2.1. Business combinations and basis of consolidation In accordance with IFRSs, business combinations are defined as the bringing together of two or more entities into one single entity or group of entities. Acquirer is defined as an entity which, at the date of acquisition, obtains control of another entity. At the acquisition date, the acquirer recognises in its financial statements, or consolidated financial statements, as appropriate, the assets, liabilities and contingent liabilities of the acquiree measured at fair value. The acquirer must also compare the cost of the business combination with the proportion acquired of the fair value of the assets, liabilities and contingent liabilities of the acquiree. If the difference is positive, the acquirer must recognise goodwill in assets; if negative, the acquirer must recognise income. The consolidated financial statements were prepared using the full consolidation method for subsidiaries, the proportionate consolidation method for jointly controlled entities and the equity method for associates. Subsidiaries Subsidiaries are defined as entities with which la Caixa makes up a decision-making unit due to the fact that it directly or indirectly owns 50% or more of the voting rights or, if it owns a lower percentage, it has agreements with other shareholders of these companies granting it a majority of the voting rights. Special purpose entities are also considered to be subsidiaries. Appendix 2 to these notes to the consolidated financial statements contains significant information on these companies. The la Caixa Group considers Caixa Inversiones 1, SICAV, SA, in which it owns a 13.62% interest to be a subsidiary, because it holds a majority of the seats on the Board of Directors, as well as the securitisation funds created from 1 January 2004 onwards in which la Caixa retains the risks inherent to their assets. However, the la Caixa Group does not consider companies in which it holds an interest of 50% or more to be subsidiaries, since they are considered to be jointly controlled entities. CaiFor, SA, a holding company owned in equal parts by la Caixa and the Fortis group, is a jointly controlled company through which they carry on the insurance business marketed by the la Caixa Group s branch network. CaiFor, SA has an 80% interest in the share capital of VidaCaixa, SA de Seguros y Reaseguros, and the remaining 20% is directly owned by the la Caixa Group. Although the la Caixa Group s investment in VidaCaixa, SA de Seguros y Reaseguros stands at 60%, the majority in the Board of Directors of this company is held by CaiFor, SA. Consequently, VidaCaixa, SA de Seguros y Reaseguros is considered to be a jointly controlled entity. The financial statements of the subsidiaries are consolidated with those of la Caixa, without exceptions on the grounds of activity, using the full consolidation method, which consists of the aggregation of similar assets, liabilities and equity, income and expenses shown in their individual financial statements. The carrying amount of the direct and indirect investments in the share capital of the subsidiaries is eliminated to the extent of the equity interest in the subsidiaries held through these investments. All other balances and transactions between the consolidated companies are eliminated on consolidation. la Caixa 2006 Annual Report 16

17 The share of third parties in the la Caixa Group s equity and profit for the year is shown under Minority Interests in the consolidated balance sheet and Profit Attributed to Minority Interests in the consolidated income statement, respectively (see Note 24). The results of subsidiaries acquired during the year are consolidated from the date of acquisition. The results of companies that cease to be subsidiaries are consolidated until the date they are no longer Group subsidiaries. Note 5 contains information on the most significant acquisitions and disposals of subsidiaries in Jointly controlled entities The la Caixa Group defines jointly controlled entities as entities which are not subsidiaries and which it controls jointly with other shareholders under a contractual agreement. Appendix 3 contains relevant information on these companies. The financial statements of all jointly controlled entities are consolidated with those of la Caixa, without exceptions on the grounds of activity, using the proportionate consolidation method. As a result, the balance sheet and income statement balances of jointly controlled entities, and the related eliminations, are aggregated to the consolidated financial statements only at the proportion of the la Caixa Group s share of their capital. Associates Associates are entities over which la Caixa directly or indirectly exercises significant influence but are not subsidiaries or jointly controlled entities. Significant influence is, in most cases, presumed to exist where the la Caixa Group owns 20% or more of the voting power of the investee. An except to this rule are investees in which more than 20% of the voting rights are held, but which form part of the la Caixa Group s venture capital activity, and are not considered to be associates. Similarly, entities in which less than 20% of the voting rights are held are not considered to be associates of the la Caixa Group. In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group s share of the investee s net assets, after taking into account the dividends received from the investee and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group s interest in the associate. Relevant information on these entities is disclosed in Appendix 4. Note 5 contains information on the most significant acquisitions in 2006 of associates and of new investments in entities that were already considered to be associates at the beginning of the year, and on the disposals of equity investments Financial instruments Initial recognition Financial instruments are initially recognised in the consolidated balance sheet when the Group becomes a party to the contract giving rise to them, under the terms and conditions thereof. Loans and deposits, i.e. the most common financial assets and liabilities, are recognised on the date from which the legal right to receive, or the legal obligation to pay cash, respectively, arises. Financial derivatives are generally recognised from the trade date. la Caixa 2006 Annual Report 17

18 Financial asset purchases and sales arranged through conventional contracts, which may not be settled net, are recognised on the date from which the risks and rewards, rights and duties incident to ownership are for the purchaser. Based on the type of financial asset purchased or sold, that date may be the trade date or the settlement or delivery date. In particular, transactions performed in the spot currency market are recognised on the settlement date; transactions performed on equity instruments traded in Spanish secondary securities markets are recognised on the trade date and transactions performed on debt instruments traded in Spanish secondary securities markets are recognised on the settlement date. Derecognition of financial instruments A financial asset is fully or partially derecognised when the contractual rights to the cash flows from the financial asset expire or when the financial asset is transferred. The transfer of the asset must result in a transfer of substantially all of the risks and rewards of the asset or a transfer of control thereof, if such risks and rewards have been retained (see Note 2.6). A financial liability is fully or partially derecognised when the related obligations are extinguished or when it is acquired by the Group. Fair value and amortised cost Upon initial recognition, all financial instruments are recognised at fair value which, unless there is evidence to the contrary, is the transaction price. Thereafter, at a specified date, the fair value of a financial instrument is the amount for which it could be delivered, if an asset, or settled, if a liability, in a transaction carried out between knowledgeable, willing parties on an arm s-length basis. The most objective and common reference to the fair value of a financial instrument is the price that would be paid for it on an organised, transparent and deep market ( quoted price or market price ). If a market price does not exist for a given financial instrument, its fair value is estimated by reference to the price established in recent transactions involving similar instruments and, in the absence thereof, by reference to measurement models which have been sufficiently used by the international financial community, taking into account the specific features of the instrument to be measured and, most particularly, the various types of risk associated with the instrument. Most financial instruments, excluding OTC derivatives, are measured by reference to quoted prices in active markets. The fair value of financial derivatives traded in organised, transparent and deep markets and included in financial assets and liabilities held for trading is equated with their daily quoted price and if, due to exceptional reasons, their quoted price cannot be determined at a given date, they are measured using methods similar to those used to measure derivatives not traded in organised markets. The fair value of derivatives not traded in organised markets or derivatives traded in organised markets lacking depth or transparency is determined using methods recognised by the financial markets, namely net present value (NPV) or option pricing models. Nevertheless, certain financial assets and liabilities are recognised at amortised cost. This method is used for financial assets included under the headings Loans and Receivables and Held-to-Maturity Investments and for financial liabilities classified under Financial Liabilities at Amortised Cost. Amortised cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the portion systematically recognised in the consolidated income statement, using the effective interest method, of the difference between the initial cost and the maturity amount of such financial instruments. In the case of financial assets, amortised cost furthermore includes any reductions for impairment. la Caixa 2006 Annual Report 18

19 The effective interest rate is the discount rate that exactly matches the net carrying amount of a financial instrument to all its estimated cash flows of all kinds through its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date, adjusted, where applicable, for the premiums and initial discounts and the fees that, because of their nature, can be equated with a rate of interest, and transaction costs. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date. As indicated above, certain assets and liabilities are recognised at fair value, such as those included in the held for trading or available for sale portfolios. Other assets and liabilities, such as those included under Loans and Receivables or Financial Liabilities at Amortised Cost, are recognised at amortised cost as defined in this note. A portion of the assets and liabilities contained in these headings are included in some of the fair value macro-hedges or micro-hedges managed by the la Caixa Group and, therefore, they are recognised in the consolidated balance sheet at the fair value of the hedged risk. Most of the remaining assets and some liabilities are floating rate instruments subject to the applicable annual interest rate review; therefore, the fair value of these assets resulting solely from fluctuations in market interest rates will not differ significantly from the value recognised in the consolidated balance sheet. All other assets and liabilities are fixed rate instruments; a substantial portion of these has a term to maturity of less than one year and, therefore, as in the preceding case, the fair value of these assets and liabilities resulting solely from market interest rate fluctuations does not differ significantly from the value recognised in the consolidated balance sheet. The amounts of assets and liabilities that are not included in one of the preceding paragraphs, i.e. unhedged fixed rate instruments with a term to maturity at over one year, are scantly material in relation to the total balance of each heading and, therefore, the Group considers that their fair value, resulting solely from market interest rate fluctuations, will not differ significantly from the value recognised in the consolidated balance sheet. The fair value and the fair value measurement method used for the assets classified under the headings Heldto-Maturity Investments and Tangible Assets are described in Notes 12 and 17, respectively. Classification and measurement of financial assets and liabilities The financial instruments not included in the categories indicated below are recognised under the following headings in the accompanying consolidated balance sheet: Cash and Balances with Central Banks, Hedging Derivatives, Investments and Equity Having the Substance of a Financial Liability. The remaining financial instruments are classified in the consolidated balance sheet as follows: Financial assets/liabilities held for trading: this item comprises financial assets and liabilities classified as held for trading which are recognised at fair value through profit or loss: Financial assets/liabilities held for trading are financial assets or liabilities acquired/issued for the purpose of realising them in the short term or those which are part of a portfolio of identified financial instruments that are managed together, and for which there is evidence of a recent actual pattern of short-term profit taking. Financial assets/liabilities held for trading also include short positions arising from sales of assets purchased under non-optional reverse repurchase agreements or of borrowed securities. Lastly, these headings also include financial derivatives not designated as hedging instruments. la Caixa 2006 Annual Report 19

20 Financial instruments classified as held for trading are initially measured at fair value and subsequent changes in the fair value are recognised under Gains/Losses on Financial Assets and Liabilities (Net) Held for Trading in the consolidated income statement, except for the changes in the fair value due to accrued returns on financial instruments other than trading derivatives, which are recognised under Interest and Similar Income, Interest Expense and Similar Charges or Income from Equity Instruments, depending on their nature. Other financial assets and liabilities at fair value through profit or loss: this category includes financial instruments which, although not included in financial assets and liabilities held for trading, are in substance hybrid financial assets or liabilities and must be measured entirely at fair value when it is not possible to segregate the embedded derivative from the host contract, and also financial assets managed jointly with insurance contract liabilities measured at fair value, or with derivative financial instruments whose purpose is to mitigate the exposure to changes in fair value, or managed jointly with financial liabilities and derivatives whose purpose is to mitigate the overall exposure to interest rate risk. Financial instruments falling into this category must be subject at all times to an integrated and consistent system for the measurement, management and control of risks and returns permitting verification that risk has been effectively mitigated. Financial liabilities at fair value through profit or loss include life insurance policies linked to mutual funds that do not expose the contract issuer to a significant insurance risk, when the related financial assets are also measured at fair value through profit or loss. These financial assets and liabilities at fair value through profit or loss are measured initially and subsequently and taken to income under the same methods as those used for financial assets and liabilities held for trading. Held-to-maturity investments: this category includes debt instruments with fixed maturity and with fixed or determinable cash flows that the Group has the intention and ability to hold to maturity. These instruments are initially measured at fair value adjusted by the transaction costs directly attributable to the acquisition of the financial asset, which are recognised in the consolidated income statement by the effective interest method. They are subsequently measured at amortised cost, calculated using the method described above in this note. The interest accrued on these securities is recognised under Interest and Similar Income in the consolidated income statement and calculated using the effective interest method. Exchange differences on securities denominated in currencies other than the euro are recognised as explained in Note 2.4. Any impairment losses on these securities are recognised as indicated in Note 2.7. Loans and receivables: this item includes financing granted to third parties through ordinary lending activities carried out by the consolidated entities, and receivables from purchasers of goods and users of services, and for unquoted debt instruments or those quoted in markets that are not sufficiently active. These assets are initially measured at fair value adjusted by the amount of the fees and commissions and transaction costs directly attributable to the acquisition of the financial asset, which are recognised in the consolidated income statement by the effective interest method through maturity. They are subsequently measured at amortised cost, calculated using the method described above in this note. Assets acquired at a discount are measured at the cash amount paid. The difference between their repayment value and the amount paid is recognised as finance income in the consolidated income statement during the remaining term to maturity. la Caixa 2006 Annual Report 20