As required by IAS 1, the information on 2017 contained in this consolidated annual report is presented for solely comparative purposes with the information on 2018 and consequently does not in itself constitute the Group’s consolidated financial statements for 2017.
During 2018, the economic crisis in Argentina worsened considerably, and this situation has led to a substantial increase in the rate of inflation, which in the last three years has surpassed 100%. These events led Argentina to be considered a hyperinflationary economy from 2018 onwards, in accordance with accounting standards. As a result, the Group applied IAS 29 “Financial Information in Hyperinflationary Economies” to the Group’s business in Argentina, making the necessary accounting corrections as of 1 January 2018, in accordance with accounting standards.
In accordance with IAS 29, the financial statements of an entity whose functional currency is that of a hyperinflationary economy must be expressed in the unit of measurement current at the end of the reporting period, based on the purchasing power of the closing month.
Given Argentina’s consideration as a hyperinflationary country, the financial statements are adjusted for inflation (see Note 4.23), the most significant impact being the restatement of non-current assets and liabilities from the date of acquisition, last revaluation or first application of IFRS by the inflation index. The difference between the pre-tax result and the net result corresponds to the recognition of deferred tax (see Note 18) for the adjustments for inflation of net assets that, according to current tax legislation in Argentina, are not tax deductible.
The effect of the application of IAS 29 at 1 January 2018 led to an increase of 46 million euros in consolidated reserves and an increase in the value of minority interests of 7 million euros, recorded mainly under “Property, Plant and Equipment” (an increase of 71 million euros in net book value upon first application, see Note 8) and under deferred tax liabilities (an increase of 18 million euros in the value of liabilities at the time of first application, see Note 18).
After this first application, the impact of the application of IAS 29 during 2018 has had a negative net effect on the reserves of consolidated companies amounting to 43 million euros. This is composed of the effect of the devaluation of the currency that compensates for the increase in equity because of the restatement of non-monetary items due to hyperinflation. On the other hand, “Property, plant and equipment” increased by 1.8 million euros (see Note 8), and the deferred tax liability increased by 1.2 million euros (see Note 18) with respect to the first application at 1 January 2018. Also, the net effect in the profit and loss account of the application of IAS 29 is recorded as income of 25,674 thousand euros, under the heading “Results from exposure to hyperinflation” (IAS 29) in the 2018 consolidated comprehensive profit and loss statement.
Additionally, the Group has decided to classify the historical translation differences associated with the devaluation of the currency in Argentina to consolidated reserves. This has had a negative effect on the consolidated reserves of 96,862 thousand euros and, therefore, the total effect of hyperinflation at the time of first-time application amounted to lower reserves in fully consolidated companies amounting to 50,724 thousand euros.
In addition, IFRS 9 on financial instruments entered into force on 1 January 2018. The Group has decided to apply the standard without restating the comparatives, i.e., the difference between the previous book values and the new values at the date of initial application of the standard (1 January 2018), were recognised as an adjustment in reserves (equity).
During 2016, the Group renegotiated its financial liabilities (bonds and obligations) which, according to the provisions of IAS 39, were considered non-material and consequently did not require derecognition of financial liabilities. The treatment provided for by IFRS 9 requires recalculating the amortised cost book value of such financial liabilities on the renegotiation date and recognising a gain or loss for the change in the results of the period or at the time of applying the new standard. The impact calculated at 1 January 2018 was a decrease of 8.6 million euros in the book value of financial liabilities, which increased the amount of opening reserves at that date. In relation to the other requirements for the application of IFRS 9, the Parent’s directors considered that there were no significant impacts to be recorded by the Group as a result of their application.