are jointly controlled with third parties. Associates are
companies in which there is significant influence, but not
control or joint control with third parties. Telefónica
assesses the existence of significant influence not only in
terms of percentage ownership but also in qualitative
terms such as presence on the board of directors,
involvement in decision-making, the exchange of
management personnel, and access to technical
information.
Financial investments which the Company intends to
hold for an unspecified period of time and could be sold
at any time to meet specific liquidity requirements or in
response to interest rate movements and which have not
been included in the other categories of financial assets
defined in the RD 1/2021, which amends PGC 2007 (see
Note 2), are classified as financial assets at fair value
through equity. These investments are recorded under
“Non-current assets,” unless it is probable and feasible
that they will be sold within 12 months.
Derivative financial instruments and hedge
accounting
When Telefónica chooses not to apply hedge accounting
criteria but economic hedging, gains or losses resulting
from changes in the fair value of derivatives are taken
directly to the income statement.
e) Revenue and expenses
Revenue and expenses are recognized on the income
statement based on an accrual basis; i.e. when the goods
or services represented by them take place, regardless of
when actual payment or collection occurs.
A distribution of unrestricted reserves is considered as
dividend distribution, and therefore, is registered as
dividend revenue in the accounting of the receiving
Company whenever the distributing company and/or any
of its group's subsidiaries have gathered profits above the
amount of equity distributed.
When the Company receives free-allotment rights,
known as scrip dividends, that can be used to acquire
new shares at no cost or be sold in the market or to the
distributing company, it accounts for the concept as
dividend revenue with a counterpart of account
receivable on the distribution date.
The income obtained by the Company in dividends
received from Group companies and associates, and from
the interest accrued on loans and credits given to them,
are included in revenue in compliance with the provisions
of consultation No. 2 of BOICAC 79, published on
September 30, 2009.
f) Related party transactions
In business merger or spin-off transactions involving the
parent company and its direct or indirect subsidiary, as
well as in the case of non-monetary contributions of
businesses between Group companies and in the case of
dividend distributions, when an exemption from preparing
consolidated financial statements in accordance with the
Standards on Preparing Consolidated Financial
Statements (Spanish “NOFCAC”) applies, the assets and
liabilities may be measured at their pre-transaction
carrying amount in the individual financial statements,
although there is also the option of using consolidated
values in under IFRS as adopted by the European Union,
provided that this consolidated information does not
differ significantly from that obtained by applying
NOFCAC. In addition, the Company may also opt to use
the values resulting from a reconciliation to NOFCAC.
In the particular case of a contribution to a group
company of the shares of another group company, the
pre-transaction carrying amount in the standalone
financial statements of the contributing company may be
used, unless the net equity amount is higher, in which
case this amount is used.
The change in value arising in the contributing company
as a result of the above accounting treatment is
recognized in reserves.
g) Financial guarantees
The Company has provided guarantees to a number of
subsidiaries to secure their transactions with third parties
(see Note 20.a). Where financial guarantees provided
have a counter-guarantee on the Company’s balance
sheet, the value of the counter-guarantee is estimated to
be equal to the guarantee given, with no additional
liability recognized as a result.
Guarantees provided for which there is no item on the
Company’s balance sheet acting as a counter-guarantee
are initially measured at fair value which, unless there is
evidence to the contrary, is the same as the premium
received plus the present value of any premiums
receivable. After initial recognition, these are
subsequently measured at the higher of:
i)The amount resulting from the application of the rules
for measuring provisions and contingencies.
ii)The amount initially recognized less, when applicable,
any amounts take to the income statement
corresponding to accrued income.