Repsol YPF

Accounting principles

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must present their consolidated financial statements for the years beginning on or after 1 January 2005, in conformity with the International Financial Reporting Standards (IFRSs) ratified by the European Union. In conformity with this Regulation, the Repsol YPF Group has to present its consolidated financial statements for 2005 in accordance with the IFRSs ratified by the European Union. In Spain, the obligation to prepare consolidated financial statements in accordance with the IFRSs approved in Europe is also regulated in Final Provision Eleven of Law 62/2003, of 30 December, on tax, administrative, labour and social security measures (Official State Gazette of 31 December).

With respect to the standards in force when the Groups consolidated financial statements for 2004 were prepared, these Standards entail:

• Changes in accounting policies, measurement bases and presentation of the financial statements making up the annual financial statements;
• The inclusion in the consolidated financial statements of two new financial statements, namely the consolidated statement of changes in equity and the consolidated cash flow statement; and
• A significant increase in the volume of disclosures in the notes to the consolidated financial statements.
  

In accordance with IFRS 1 (First-time Adoption of International Financial Reporting Standards), approved by Regulation (CE) 707/2004 of the Commission of 6 April (OJEC of 17 April), although the first financial statements prepared in accordance with IFRSs are, in the case of the Group, those for the year ended 31 December 2005, for comparison purposes, the figures for 2004 were included, prepared in accordance with the same bases as those used to determine the figures for 2005. This made it necessary to prepare an initial or opening balance sheet at the date of transition, 1 January 2004, in accordance with the IFRSs in force at 31 December 2005.

The criteria adopted by the Group in the transition to IFRSs in connection with the permitted alternatives are as follows:

• Property, plant and equipment, intangible assets and investment property were initially recognised, at the date of transition, at their carrying amount (which included both the depreciated/amortised cost of the assets and, where appropriate, the net revaluations made in the past and accepted in accordance with Spanish GAAP) and were subsequently measured at cost.
• The exemption provided by IFRS 1 for the prospective application of IFRS 3 (Business Combinations) from the date of transition to IFRSs was applied to business combinations occurring before 1 January 2004.
• IASs 32 and 39 were applied from the transition date.
• Jointly controlled entities and joint ventures are proportionately consolidated.
• The translation differences at the transition date were reclassified in full to reserves and, therefore, the related balance was reduced to zero at that date.
  

Reconciliation of equity at 1 January and 31 December 2004, between Spanish GAAP and IFRSs

The reconciliation required by IFRS 1 of the equity balances at the beginning and end of the year ended 31 December 2004, and which, therefore, are reflected in the Groups consolidated financial statements for that year, to the corresponding opening balances for 2004 and 2005 determined in accordance with the new Standards is as follows:

The main adjustments made to equity on conversion to IFRSs were as follows:

a. Recognition of deferred taxes
The accounting treatment of income tax under Spanish GAAP focuses on the calculation of the tax using the income statement liability method, which is based on calculating the timing differences between taxable profit and accounting profit. Under IFRSs, deferred taxes must be recognised using the balance sheet liability method, which focuses on the calculation of the temporary differences between the tax base of an asset or liability and its carrying amount in the balance sheet.

These changes reduced the Groups equity by EUR 2,577 million and EUR 2,203 million at 1 January and 31 December 2004, respectively. This reduction was due mainly to: (i) the temporary differences between the tax base of the assets and liabilities of YPF, S.A. and their carrying amount; and (ii) the recognition of deferred taxes relating to the portion of the premium paid in business combinations allocated to the carrying amount of the assets (mainly of YPF, S.A. and BP Trinidad y Tobago).

b. Effect of changes in exchange rates

This relates mainly to the following:

• Spanish GAAP did not specifically regulate the functional currency for the recognition of transactions. In this regard, through December 2002 the Repsol YPF Group considered the functional currency for certain businesses (marketing, etc.) of YPF, S.A. to be the Argentine peso and for others (exploration and production, refining, etc.) it considered it to be the US dollar. For IFRS purposes, the Repsol YPF considered the US dollar to be the functional currency for all the businesses of YPF. This adjustment increased the equity attributable to shareholders of the Parent by EUR 456 million and EUR 405 million at 1 January and 31 December 2004, respectively.
• It also includes the difference in the recognition of exchange differences under Spanish GAAP with respect to IFRSs. Under Spanish GAAP; exchange losses are charged to income, whereas exchange gains are classified on the liability side of the balance sheet, unless exchange losses in a given group of currencies have been charged to income in prior years, in which case the net positive differences are credited to period income up to the limit of the negative net differences charged to income in prior years. Under IFRSs, both exchange losses and exchange gains are allocated to profit or loss when they arise. This adjustment increased the equity attributable to shareholders of the Parent by EUR 65 million and EUR 60 million at 1 January and 31 December 2004, respectively.       

c. Asset impairment losses

Spanish GAAP does not specifically regulate the methodology to be used to test for asset impairment and, therefore, the Group had been applying in this connection a method similar to that provided for in US accounting legislation. The test was performed in two stages: first, the expected undiscounted future cash flows from an asset were compared with the carrying amount of the asset; if the result was a negative amount (i.e. the carrying amount was higher than the sum of the expected undiscounted future cash flows), an impairment loss was recognised for an amount equal to the difference between the estimated value of the discounted future cash flows from the asset and the carrying amount of the asset.

Under IFRSs, the calculation is made in a single stage: the discounted cash flows from the asset are compared with the carrying amount of the asset and, if the latter is higher, an impairment loss is recognised as an expense for the difference.

These changes reduced the equity attributable to shareholders of the Parent by EUR 59 million and EUR 80 million at 1 January and 31 December 2004, respectively. This reduction was due mainly to the recognition of losses in certain exploration and production assets amounting to EUR 6 million and EUR 40 million at 1 January and 31 December 2004, respectively, and to refining and marketing assets amounting to totalling EUR 53 million and EUR 40 million at 1 January and 31 December 2004, respectively.

d. Measurement of financial instruments

Under Spanish GAAP, financial assets are measured at the lower of cost or market, whereas financial liabilities are measured at repayment value. Speculative derivative financial instruments are measured at their market value to the extent that the resulting value is a loss. Hedging instruments are recognised using the same criteria as those applied to the hedged items. Financial assets are derecognised on maturity or when they are transferred or sold.

Under IFRSs, financial assets and liabilities are classified in categories, on the basis of which they are measured at either fair value or amortised cost. Certain gains and losses on financial instruments are recognised directly in equity until the instrument is disposed of or it is determined that it has become impaired.

Also, IFRSs require that certain very specific conditions be met in order to be able to apply hedge accounting. As a result, certain hedging transactions that can be classified as such under Spanish GAAP do not qualify for hedge accounting under IFRSs.

These changes reduced the equity attributable to shareholders of the Parent by EUR 199 million and EUR 99 million at 1 January and 31 December 2004, respectively, due mainly to the different classification as hedges or otherwise of certain trading derivatives relating to the Groups operations and to their measurement at their market value.

e. Classification of preference shares

In accordance with IFRSs, the preference shares issued by the Repsol YPF subsidiary, Repsol International Capital Limited, were reclassified from minority interests to financial liabilities, in view of the obligation to pay dividends if the issuer reports a distributable profit.

Reconciliation of the profit for 2004 between Spanish GAAP and IFRSs

The reconciliation required by IFRS 1 of the consolidated income statement for 2004 in the Groups consolidated financial statements for that year to the consolidated income statement that would result from applying IFRSs to the transactions performed in that year is as follows:

The profit attributable to shareholders of the Parent under Spanish GAAP amounted to EUR 1,950 million in 2004, as compared with EUR 2,414 million under IFRSs. This increase was due mainly to the following:

a. Non-amortisation of goodwill
Under IFRSs, goodwill and intangible assets with indefinite useful lives are not amortised, but are rather tested for impairment at least once a year. This change increased the net profit for the year ended 31 December 2004, by EUR 200 million.
b. Recognition of deferred taxes
The consolidated income statement for 2004 prepared in accordance with IFRSs includes a positive effect under the heading Income Tax of EUR 219 million derived mainly from the net allocation of deferred taxes recognised at the date of transition.
c. Depreciation and amortisation charge and provisions due to differences in the calculation of asset impairment
The consolidated income statement for 2004 prepared in accordance with IFRSs includes, on the one hand, a lower after-tax depreciation and amortisation charge of EUR 4 million due to the decrease in the value of the assets as a result of the additional impairment losses recognised in accordance with IFRSs with respect to the allowance recorded under Spanish GAAP at the date of transition. It also includes a reduction of EUR 27 million after tax relating to the difference between the result of applying the impairment test in accordance with IFRSs with respect to the impairment calculated in accordance with Spanish GAAP at 31 December 2004.
d. Measurement of financial instruments
This effect relates mainly to the measurement at their market value of certain derivatives relating to the Groups commercial operations that are not designated as hedges for the purposes of IFRSs.

For further information, see the Annual Report on Form 20-F 2007 (note 42.- F-116 to F-142).
For additional information on International Accounting Standards, check IASB.