Special Audit Reports

SPECIAL REPORTS

APPROVED SPECIAL REPORTS
These special reports are mandatory under current legislation. The most noteworthy are:
  • Capital increase against Reserves
  • Capital increase for Credit Compensation
  • Audit of a single Financial Statement (Example: Capital Reduction).
  • Operation Accordion (reduction and subsequent capital increase), with the new capital figure falling below the initial one.
CAPITAL INCREASE AGAINST RESERVES
A capital increase against reserves requires a mandatory audit report for both Limited Companies (S.L.) and Anonymous Companies (S.A.). The audit report shall be signed by an auditor of accounts registered in the ROAC and shall be available to shareholders prior to the transaction. The capital increase agreement will not be completed without the auditor's report and without the administrator's report which will form part of the notary deed containing the aforementioned capital increase from reserves.

It is advisable to carry out this operation if you want to improve your solvency ratios against third parties and do not plan to distribute dividends in the short term.

Article 303 of the Consolidated Text of the Law on Capital Companies contains all the necessary and relevant information in regards to this type of commercial transactions. The article sets out the following:
  • For Limited Companies: If the increase in capital is made from voluntary reserves of the Company, only those that are available may be used, such as the reserves by issuance premium and the whole of the legal reserve.
  • For Anonymous Companies: If the increase in capital is made from voluntary reserves of the Company, only the part exceeding ten per cent of the capital already increased may be used.
In both cases, in order to be able to carry out the transaction, a balance sheet must be officially approved by the board within six months immediately preceding the capital increase agreement. This must be verified by the Company's auditor, or by an auditor appointed by the Commercial Registry at the request of the administrators if the company was not required to verify their accounts.

If you want to increase capital from reserves, there may be two cases:

  1. The Company was subject to mandatory audit in its last financial year. In this case, and if the capital increase took place within the first six months following the end of the financial year, the auditor does not need to draw up an 'additional' audit report.
  2. If the Company is not subject to audit. In cases where the Company is not subject to auditing accounts, the auditor shall carry out an audit of the balance sheet.
CAPITAL INCREASE FOR CREDIT COMPENSATION 
This can occur when a company cannot cope with its debts and the creditor becomes a shareholder in the debtor company or increases its if it already was. This increase is made by issuing new shares for creditors who the value of their claims for new shares, or, if they were already a shareholder in the face value of existing ones.

In order to carry out the Credit Compensation Capital Increase, in addition to the creditor's consent, the following must be fulfilled:
  • In Limited Liability Companies, Credits must be fully liquid and enforceable.
  • In Anonymous Companies, at least twenty-five per cent of the credits to be compensated must be liquid, expired and enforceable, and the remaining may not exceed five years.
Since an Audit report is mandatory for this type of transaction, if the Company did not have an auditor, the report would be issued by an auditor appointed by the Commercial Register at the request of the administrators. The report of the administrators and, in the case of the Anonymous Companies, the Auditor's Certification shall be incorporated into the public deed of execution of such capital increase.
 
AUDIT OF A SINGLE FINANCIAL STATEMENT 
The current audit regulations in Spain specifically provide for the audit of a single financial statement, for instance the balance sheet or the profit and loss account. Rules in this matter require that the auditor must comply with the applicable requirements in relation to the other audit assignments, unless in the circumstances of the audit is not applicable because it includes a condition which does not occur.

Scenarios where a balance sheet audit is applicable:
  1. To comply with a legal requirement: Transfer of company reserves to capital or capital reduction to compensate for losses.
  2. In cases where the company is not subject to mandatory auditing and does not use the annual accounts for this purpose. Also useful for auditing of interim periods during the financial year, where complete information on all financial statements is not required and an opinion on this interim financial statement is considered sufficient.
These audits may occur at the request of administrators, shareholders, financial institutions, other creditors, etc.
OPERATION "ACCORDION", WHEN AFTER A CAPITAL REDUCTION AND SUBSEQUENT INCREASE, THE NEW CAPITAL FALLS BELOW THE NUMBER OF INITIAL CAPITAL.  
A reduction in capital (whether mandatory or voluntary) cannot normally result in a capital figure below the legal minimum. However, the possibility of a capital reduction below the legal minimum (even zero capital) is accepted if followed by a capital increase that reaches or exceeds the legal minimum. This transaction is called ‘accordion operation’.
The agreement to reduce the share capital to zero or below the statutory minimum amount may be adopted only where the transformation of the company or the increase of its capital to an amount equal to or greater than that minimum amount is agreed at the same time. The effectiveness of the reduction agreement will therefore be conditional, where appropriate, on the implementation of the capital increase agreement.
Article 345 LSC warns that the entry of the reduction agreement in the Commercial Register may not be completed unless the processing or capital increase agreement (and in the latter case, its implementation) are submitted simultaneously. As this is a reduction followed by capital increase, all the requirements of an increase in capital and a reduction in capital will be required.

It is interesting in the case of the reduction which, according to the DGRN Resolution of 2 March 2011, the auditor's report is not required in an accordion operation when the share capital, after the increase, is equal to or greater than the initial capital; otherwise, a report from the auditor is required.  
If your company requires audit reports of the so-called approved, from AUDITTA GLOBAL WORLDWIDE , and as ROAC auditors, we will be at your disposal to do so.

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