Financial statements

NOTE 4



RECOGNITION AND MEASUREMENT STANDARDS

The main recognition and measurement standards used by the Company in the preparation of its financial statements are the following:

4.1 - Intangible assets

Generally, intangible assets are recognised initially at their purchase price or production cost. They are subsequently carried at cost less accumulated amortisation and any impairment losses. These assets are amortised over their useful lives.

The intangible assets correspond to:

  • Research and development costs
  • Costs of registering trademarks and trade names with the Trademarks Office
  • Cost of acquisition and/or development of computer software
  • Cost of acquisition of intellectual property rights

The cost of maintaining these assets is treated as an expense in the financial year in which it is incurred.

The amortisation of research and development expenses does not commence until the product is used or goes on sale.

The assets are amortised on a straight-line basis over the following useful lives:

Research and development expenses
3 years
Registered trademarks
10 years
Computer software
3 to 5 years
Industrial and intellectual property
5 years

Industrial and intellectual property:

The Company recognises as industrial property the amounts paid to acquire ownership or usage rights in whatever form. Industrial property is amortised on a straight-line basis over five years.

The Company recognises as intellectual property the amounts paid to acquire any rights from authors and other owners over their creative output and services. Intellectual property is amortised on a straight-line basis over five years or over the period for which those rights have been acquired.

Other rights:

The Company recognises as other rights the amounts paid to acquire usage rights to the property of third parties. These rights are amortised on a straight-line basis over the period for which those rights have been acquired.

IT applications:

The Company records the cost of acquiring and developing IT programs under this heading, including the cost of developing web pages. Computer software is amortised on a straight-line basis over three to five years.

4.2 - Property, plant and equipment

The land and buildings recorded in the balance sheet which are subject to the provisions of article 6 of Law 33/2014 were valued by an independent expert on 8 June 2015.

The carrying amount of the property located at Avda. Meritxell 112 increased in 2016, 2017 and 2018 as a result of the transfer of the net book value of the demolished buildings and the capitalisation of the demolition costs. In 2018 the Company had the land revalued by an independent expert. The current net carrying amount therefore reflects its market value (see note 6). At 31 December 2019 there is no impairment evidence that could damage the asset value.

Other property, plant and equipment, and land and buildings acquired after the above date, are stated initially at cost and subsequently at cost less accumulated depreciation and any impairment losses.

The costs of conservation and maintenance of property, plant and equipment are expensed as incurred. Conversely, amounts invested in improvements that increase the capacity or efficiency or prolong the useful life of these assets are added to the carrying value of the assets.

For items of property, plant and equipment that take more than one year to get ready for use, the capitalised costs include any borrowing costs incurred before the asset is ready for use that have been billed by the supplier or that relate to loans or other generic or specific third-party financing directly attributable to the acquisition or manufacturing of the asset.

The items grouped under plant and equipment include IT equipment and other fixed assets adjacent to that equipment, as they form an inseparable part of the project and so have the same useful lives as the main items of plant and equipment.

The Company depreciates property, plant and equipment on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings
30 years
Networks
5 to 15 years
Cabins
5 years
Electrical lines
15 years
Installed equipment
5 years
Central installations
5 to 10 years
Relay installations
10 years
Measuring equipment
5 years
Safety equipment
5 years
Materials and tools
2 to 5 years
Transport
5 years
Administrative materials
3 to 5 years
Furniture
10 years (*)

(*) Includes works of art which are not depreciated.

4.3 - Impairment of intangible assets and property, plant and equipment

Whenever there is evidence of impairment, intangible assets and property, plant and equipment are tested to determine whether there are any losses that reduce the assets’ recoverable value to below their carrying amount.

The recoverable amount is the greater of fair value fewer selling costs and the asset's value in use. If an impairment loss must be recognised, the carrying amount of the asset is reduced to the greater of fair value less costs to sell, value in use and zero.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. Any reversal of an impairment loss is recognised as income.

4.4 - Leases

Those leases where it can be deduced from the terms of the lease that substantially all the risks and rewards of ownership of the leased asset are transferred to the lessee are classified as finance leases. All other leases are classified as operating leases.

Operating lease expenses are charged against income in the year in which they accrue.

Any amount received or paid when entering into an operating lease agreement is treated as deferred income or expense and is released to the income statement over the lease term as the benefits of the leased asset are transferred or received.

At the end of the reporting period the Company had no finance leases.

4.5 - Financial instruments

4.5.1. Financial assets

The Company’s main financial assets are the following:

  • Non-current and current deposits
  • Short and long-term Andorran bonds and treasury notes
  • Non-current investment funds
  • Other shareholdings which are not traded on secondary markets


Initial measurement:

Financial assets are measured initially at fair value plus directly attributable transaction costs, except for financial assets held for trading, for which transaction costs are not added.

a) Financial investments held to maturity (financial assets at amortised cost)

Financial assets designated as Financial investments held to maturity are non-derivative financial assets yielding income of a determinable amount and maturing on a fixed date, where the Company states its intent and ability to maintain these assets under its control until their maturity. Trade receivables are also measured at amortised cost.

The financial assets in this category are initially measured at cost, which is equal to the fair value of the consideration paid less directly attributable transaction costs.

However, trade receivables falling due within 12 months and with no contractual interest rate can be measured at their nominal value provided that the effect of discounting cash flows is not material.

The Company calculates the effective interest rate for each investment held to maturity and the assets are stated at amortised cost. Accrued interest shall be recognised on the income statement using the effective interest rate method.

Receivables falling due within a year initially measured at their nominal value shall continue to be measured at that amount, unless they are impaired.

Gains and losses arising from changes in fair value are recognised and any difference between the carrying amount of a financial asset and the present value of estimated future cash flows, discounted at the effective interest rate prevailing at the time of initial recognition, is recognised as an impairment loss.

The Company treats its portfolio of short and long-term treasury bonds and bills issued by the Government of the Principality of Andorra as financial assets held for trading. At 31 December 2019 the amount of such bonds and bills held by the Company was 43.6 million euros (46.1 million euros at 31 December 2018), with no impairment losses (see notes 7 and 10).

b) Investments in group companies, joint ventures, associates and others (financial assets at cost)

Investments in subsidiaries, associates and joint ventures are recorded initially at the fair value of the consideration received plus directly attributable transaction costs.

Subsequently they are measured at cost less any accumulated impairment losses. The impairment losses are calculated as the difference between the carrying value of the investments and the recoverable amount, the latter understood as the higher of fair value less costs to sell and the present value of the future cash flows arising from the investment. Absent better evidence, the recoverable amount is taken to be the net assets of the investee adjusted for any unrealised capital gains at the valuation date.

The Company has a 50% interest in the share capital of the company ANSEAC, SA, which provides customer care services in the domestic and international market and has its registered office at La Massana, Avinguda Sant Antoni number 32, Edifici Els Arcs.

At year-end the investment is 30 thousand euros.

In 2017 the Company acquired 37.3% of the shares in the company AVATEL & WIKIKER TELECOM S.L., a telecoms provider that operates in Spanish coastal areas.This transaction, amounted to 16 million euros . Avatel has its own fibre optic network and offers internet, telephony and television services around Cadiz, Alicante and Malaga.

On 12 December , 2019 the company sold the shares in the operator for an amount of 32 million euros, an operation that has resulted in a net capital gain of 12.5 million euros.

The Company records its holdings of unlisted shares of SEMTEE, SA, amounting to 0.3 million euros at the end of the reporting period (0.3 million euros at 31 December 2018), and its 5% holding in the share capital of Tecnologia Capital SL, amounting to 150 euros, acquired on the 16th April, 2018.

c) Held-for-trading financial assets

Held-for-trading financial assets are non-derivative financial assets that are not classified either as “financial assets at cost” or as “held-to-maturity investments”.

Gains and losses arising from changes in the fair value of available-for-sale financial assets are expensed in the financial year.

The Company also tests for objective evidence of impairment to the financial asset and takes to income any difference between the acquisition cost and the fair value of the asset less any impairment losses previously recognised in the financial year.

The Company derecognises financial assets when they mature or when it cedes the rights to the related cash flows and substantially all the risks and rewards of ownership of the asset are transferred, as when assets are unconditionally sold.

4.5.2 Risks of financial instruments

Management of the Company’s financial risks is centralised in the Business Directorate, which has established mechanisms to monitor interest rate and exchange rate exposure, as well as credit and liquidity risk.

a) Credit risk:

Generally, the Company holds its cash and cash equivalents at financial institutions with strong credit ratings. Receivables are diversified across many customers.

b) Liquidity risk:

In order to guarantee liquidity and meet the payment obligations arising from its operations, the Company maintains the cash and cash equivalents shown in its balance sheet.

c) Market risk (including interest rate, exchange rate and other price risks):

The Company’s cash balances are exposed to interest rate risk, which could have an adverse effect on its financial income and cash flows. The Company has no interest-bearing liabilities and there is therefore no risk related to its liabilities.

The Company may enter into occasional material transactions in foreign currencies. In this event, the risks associated with the specific currency involved are assessed on an individual basis and hedging operations are put in place if necessary.

4.6 - Inventories

Finished goods and other supplies are measured at acquisition cost, including expenses incurred until the goods reach the warehouse, using the weighted average cost method. Trade discounts, reductions and similar items are deducted from the acquisition price.

The Company performs impairment tests at the end of each reporting period and recognises an impairment loss when the net realisable value of inventories is less than the acquisition or production cost.

4.7 - Cash and cash equivalents

The amounts recognised under this heading correspond to cash and freely drawable balances held by the Company at banks.

4.8 - Classification of items as current and non-current

Assets and liabilities are classified as current when they are expected to mature within twelve months and as non-current when they mature after this period.

4.9 – Corporate income tax

The Company is obliged to pay the corporate income tax approved by Law 95/2010 on corporate income tax and regulated by the Decree approved on 13 June 2012.

The corporate income taxes to which this standard refers are those direct taxes paid on business profits calculated in accordance with applicable tax regulations.

4.9.1 Current tax assets and liabilities

The current tax expense refers to the amount paid as a result of tax assessments on the profits for the year.

Tax relief and other tax benefits, excluding withholdings and payments on account, and tax loss carry forwards applied in the year, reduce the current tax expense.

The current tax expense for the financial year and prior years must be recognised as a liability if payment is outstanding. However, if the amount paid for the financial year and prior years is in excess of the current tax expense for these years, the excess must be recognised as an asset.

4.9.2 Deferred tax assets and liabilities

Timing differences

Timing differences result from differences in the carrying amount and tax value of assets and liabilities insofar as they affect the future tax expense. The tax value of an asset or liability is the amount attributed to this item in accordance with current tax legislation.

Timing differences are classified as follows:

  1. Taxable timing differences, which give rise to larger amounts payable or smaller refunds receivable in respect of the tax in future years, generally when the assets or liabilities giving rise to them are settled.
  2. Tax-deductible timing differences, which give rise to smaller amounts payable or larger refunds receivable in respect of the tax in future years, generally when the assets or liabilities giving rise to them are settled.

Deferred tax liabilities

In general, all taxable timing differences are recognised as deferred tax liabilities.

Deferred tax assets

In accordance with the principle of prudence, deferred tax assets are only recognised when it is considered likely that the company will have future taxable profits against which to offset these assets.

Provided this condition is met, a deferred tax asset may be recognised in the following situations:

  1. For tax-deductible timing differences
  2. For the carry forward of unused tax losses
  3. To recognise unused tax relief and other credits pending offset

4.9.3 Measurement of current and deferred tax assets and liabilities

Current tax assets and liabilities are measured at the amount the Company expects to pay or recover in accordance with current legislation. Deferred tax assets and liabilities are measured at the tax rate expected to be applicable at the reversal date, in accordance with the legislation in force at that moment.

4.9.4 Corporate income tax expense (income)

The corporate income tax expense or income comprises both current and deferred taxes.

The current tax expense or income corresponds to the cancellation of payments on account, and to the recognition of current tax liabilities and assets.

The deferred tax expense or income arises from recognition and cancellation of deferred tax assets and liabilities.

In the event of issues not covered by this accounting standard, the criteria established in the standard on corporate income tax included in international standards on accounting and/or financial reporting apply.

4.10 – Indirect tax on services rendered

The Company is subject to the General Indirect Tax that came into force on 1 January 2013. The taxpayer must transfer or pass on in full the tax on to the users for which the taxable operation is effected and the latter are obliged to pay said tax provided the transfer meets the requirements established in the Law.

At 31 December 2019, the Company recorded the amount payable in respect of indirect taxes under “Current payables”.

4.11 – Non-resident income tax

Law 94/2010 of 29 December, amended by Law 18/2011 of 1 December, governs taxation on the income obtained in Andorra by non-residents. Non-resident income tax (IRNR) is payable by individuals and legal entities which do not reside in Andorra and have obtained income considered to have been generated in the principality.

The payers of income earned by taxpayers operating without a permanent establishment are responsible for collecting IRNR and are jointly and severally liable for the tax debt.

The tax rate is 10% of the invoiced amount. Income from fees is taxed at 5% of the invoiced amount and income from reinsurance at 1.5%. A deduction of 20% is applied to income received from the rental of investment properties.

With the entry into force of the double taxation conventions with France on 1 July 2015, Spain on 26 February 2016, Luxembourg on 7 March of 2016, Liechtenstein on 21 November 2016, Portugal on 23 April 2017, United Arab Emirates on 1 August 2017, Malta on 27 September 2017 and Cyprus on 11 January 2019, IRNR is no longer withheld on invoices from suppliers in these five countries, except in the case of fees, which are still subject to a 5% withholding.

At 31 December 2019, the Company recorded the amount payable in respect of IRNR under “Current payables”.

4.12 - Foreign currency transactions

The Company’s functional currency is the euro. Transactions in currencies other than the euro are therefore considered foreign currency transactions and are translated into euros using the exchange rates prevailing at the dates of the transactions.

At year-end, any monetary assets and liabilities denominated in foreign currency are translated at the exchange rate at the end of the reporting period. Exchange gains and losses are recognised directly in the income statement in the financial year in which they arise.

4.13 – Revenues and expenses

Revenues and expenses are recorded on an accruals basis, i.e., when the actual flow of related goods and services occurs, irrespective of the timing of the resulting monetary or financial flows. Revenues are measured at the fair value of the consideration received, less discounts and taxes.

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have passed to the buyer and the Company has relinquished management responsibility for and effective control of the goods.

In accordance with the prudence criterion, the Company only recognises gains when they have been realised at the end of the reporting period. Expenses, however, are recognised both when they have been effectively realised and when the Company becomes aware of any foreseeable contingencies and possible losses.

The sales of cards for use in telephone boxes and of prepaid GSM cards are recorded as revenues in the year. In accordance with the accruals principle, a provision is recorded for “services to be provided” calculated as the cost of telephone communications sold and pending consumption at 31 December, this provision is updated annually.

4.14 – Provisions and contingent liabilities

The Company distinguishes between:

  1. Provisions: Credit balances covering present obligations arising from past events, where it is probable that an outflow of resources will be required to settle the obligations, but the amount or timing of the outflows is uncertain.
  2. Contingent liabilities: possible obligations, arising from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Company.

Provisions have been recognised in the financial statements wherever it is more likely than not that an outflow of resources will be required to settle the obligation. Contingent liabilities are not recognised in the financial statements but are disclosed in the notes thereto, provided the possibility of an outflow of resources is considered remote.

Provisions for contingent liabilities are measured at the present value of the best estimate of the expenditure required to settle or transfer the obligation, considering the information available on the event and its consequences. Any adjustments resulting from the remeasurement of these provisions are recorded as a financial expense as incurred.

Provisions for pensions and similar obligations

The Company has constituted a provision in respect of present and future commitments to retired employees and early retirees covered by the defined benefits model subject to pension regulations established by the General Council on 29 July 1981 and the Government Decree on early retirement of 5 June 1996, the Regulation approved by the Board of Directors on 12 March 2009 and the PERM/F2000 P mortality and disability tables. The financial/actuarial valuation is performed using the Projected Unit Credit method based on generally accepted actuarial principles. These commitments were revalued on 22 February 2019 and the corresponding allocations made in order to update the current and non-current provisions at 31 December 2019.

It should be noted that current staff are covered by the new “Regulations on the staff pension plan” approved on 20 November 2014 and the pension plan was externalised on 7 February 2017 to two Andorran insurance providers.



Other provisions for liabilities and charges
The Company records a provision for cards not yet consumed at 31 December of each year under this heading in the financial statements. The value of the cards is measured in accordance with the operating margin reported in the previous financial year. This provision is revised at the end of every reporting period.

4.15 – Prepayments and accrued income

The prepayment and accrued income accounts include items recorded as "advance payments" and "unearned receipts". Advance payments are those made in the financial year for expenses corresponding to the following financial year. Unearned receipts are those collected in the financial year in respect of goods or services supplied in the following year.

4.16 – Termination benefits

Under current employment legislation, the Company is obliged to pay termination benefits to employees whose contract is terminated under certain conditions. Where the amount of the benefits can be reasonably estimated, such benefits are recognised as an expense in the year in which the dismissal decision is made. No provision of this type was recognised in the year.

4.17 – Transactions and balances with related parties

The Company records as balances and transactions with related parties the balances at the end of the reporting period and operations in the financial year with companies in which it holds shares and with its sole shareholder, but not balances and transactions with companies in which its sole shareholder has holdings.