- 1.Banco Santander, S.A.and Companiescomposing
SantanderGroupConsolidated Financial Statements andDirectors Report
for the year ended 31December 2011, together with
AuditorsReportTranslation of a report originally issued in
Spanishbased on our work performed in accordance with theaudit
regulations in force in Spain and ofconsolidated financial
statements originally issued inSpanish and prepared in accordance
with theregulatory financial reporting framework applicable tothe
Group (see Notes 1 and 55). In the event of adiscrepancy, the
Spanish-language version prevails.
2. Banco Santander, S.A.and Companiescomposing
SantanderGroupConsolidated Financial Statements andDirectors Report
for the year ended 31December 2011 3. Translation of consolidated
financial statements originally issued in Spanish and prepared in
accordance with the regulatory financial reporting framework
applicable to the Group (see Notes 1 and 55). In the event of a
discrepancy, the Spanish-language version prevails.SANTANDER GROUP
CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2011, 2010 AND 2009
(Millions of Euros) ASSETS Note2011 2010 (*)2009 (*) LIABILITIES
AND EQUITYNote 2011 2010 (*)2009 (*)CASH AND BALANCES WITH CENTRAL
BANKS 96,52477,78634,889 FINANCIAL LIABILITIES HELD FOR
TRADING:146,948 136,772 115,516 Deposits from central banks 20
7,74012,605 2,985 Deposits from credit institutions 20 9,28728,371
43,131FINANCIAL ASSETS HELD FOR TRADING:172,638 156,762 135,054
Customer deposits2116,574 7,849 4,658 Loans and advances to credit
institutions6 4,63616,2165,953 Marketable debt securities22 77 366
586 Loans and advances to customers 10 8,056755 10,076 Trading
derivatives 9103,083 75,279 58,713 Debt instruments
752,70457,87249,921 Short positions 910,18712,302 5,140 Equity
instruments 8 4,744 8,8509,248 Other financial liabilities 24- -
303 Trading derivatives9 102,49873,06959,856OTHER FINANCIAL
LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:44,909
51,02042,371OTHER FINANCIAL ASSETS AT FAIR VALUE Deposits from
central banks 201,510 337 10,103 THROUGH PROFIT OR
LOSS:19,56339,480 37,814 Deposits from credit institutions208,232
19,26312,745 Loans and advances to credit institutions64,70118,831
16,243 Customer deposits21 26,982 27,14214,636 Loans and advances
to customers 10 11,748 7,777 8,329 Marketable debt
securities228,1854,278 4,887 Debt instruments 72,649 4,605 7,365
Subordinated liabilities -- - Equity instruments 8 4658,267 5,877
Other financial liabilities-- - FINANCIAL LIABILITIES AT AMORTISED
COST: 935,669898,969 823,403Deposits from central
banks2034,9968,64422,345AVAILABLE-FOR-SALE FINANCIAL
ASSETS:86,61386,23586,620 Deposits from credit institutions
2081,373 70,89250,782 Debt instruments 7 81,58979,68979,289
Customer deposits 21 588,977581,385 487,681 Equity instruments
85,024 6,546 7,331 Marketable debt securities22 189,110188,229
206,490Subordinated liabilities 2322,992 30,47536,805Other
financial liabilities2418,221 19,34419,300LOANS AND
RECEIVABLES:779,525 768,858736,746 Loans and advances to credit
institutions642,38944,808 57,641 CHANGES IN THE FAIR VALUE OF
HEDGED ITEMS Loans and advances to customers 10 730,296
715,621664,146 IN PORTFOLIO HEDGES OF INTEREST RATE RISK 36876810
806 Debt instruments 7 6,840 8,429 14,959 HEDGING DERIVATIVES
116,4446,634 5,191HELD-TO-MATURITY INVESTMENTS- --LIABILITIES
ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE 42 54 293CHANGES
IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF
LIABILITIES UNDER INSURANCE CONTRACTS15517 10,44916,916 INTEREST
RATE RISK362,024 1,4641,420PROVISIONS: 15,572 15,66017,533HEDGING
DERIVATIVES119,898 8,227 7,834 Provision for pensions and similar
obligations259,0459,51910,629 Provisions for taxes and other legal
contingencies253,6633,670 3,283NON-CURRENT ASSETS HELD FOR SALE
125,338 6,285 5,789 Provisions for contingent liabilities and
commitments 25 659 1,030642 Other provisions252,2051,441
2,979INVESTMENTS: 134,155 273164 Associates2,082 273164 TAX
LIABILITIES: 8,1748,618 7,005 Jointly controlled entities 2,073--
Current 5,1014,306 3,338 Deferred273,0734,312 3,667INSURANCE
CONTRACTS LINKED TO OTHER LIABILITIES26 9,5167,600 7,625
PENSIONS142,146 2,2202,356 TOTAL LIABILITIES 1,168,6671,136,586
1,036,659REINSURANCE ASSETS 15254 546 417 EQUITYSHAREHOLDERS
EQUITY:30 80,896 77,33371,832TANGIBLE ASSETS:13,84611,1428,996
Share capital314,4554,164 4,114Property, plant and equipment- 9,995
9,8327,905 Registered 4,4554,164 4,114 For own use 167,797
7,5086,202 Less: Uncalled capital-- - Leased out under an operating
lease 162,198 2,3241,703 Share premium32 31,223
29,45729,305Investment property163,851 1,3101,091 Reserves 33
32,980 28,30724,608Accumulated reserves (losses)33 32,921
28,25524,540Reserves (losses) of entities accounted for using
theINTANGIBLE ASSETS:28,08328,064 25,643equity method 3359 5268
Goodwill17 25,08924,622 22,865 Other equity instruments
348,7088,686 7,189 Other intangible assets 182,994 3,4422,778
Equity component of compound financial instruments
341,6681,668-Other347,0407,018 7,189 Less: Treasury shares 34
(251)(192) (30)TAX ASSETS: 22,90122,572 20,655 Profit for the year
attributable to the Parent 5,3518,181 8,942 Current 5,140
5,4834,828 Less: Dividends and remuneration4(1,570)(1,270) (2,296)
Deferred27 17,76117,089 15,827VALUATION ADJUSTMENTS(4,482)(2,315)
(3,165)OTHER ASSETS 198,018 7,5876,132 Available-for-sale financial
assets29 (977) (1,249)645 Inventories319 455519 Cash flow hedges11
(202)(172) (255) Other 7,699 7,1325,613 Hedges of net investments
in foreign operations29(1,850)(1,955)297 Exchange
differences29(1,358)1,061 (3,852) Non-current assets held for sale
-- - Entities accounted for using the equity method29 (95) - -
Other valuation adjustments-- - NON-CONTROLLING INTERESTS 28
6,4455,897 5,203Valuation adjustments43583845Other 6,0105,059 5,158
TOTAL EQUITY82,859 80,91573,870TOTAL ASSETS1,251,526
1,217,5011,110,529 TOTAL LIABILITIES AND EQUITY 1,251,5261,217,501
1,110,529 MEMORANDUM ITEMS: CONTINGENT LIABILITIES3548,042
59,79559,256 CONTINGENT COMMITMENTS35 195,382203,709 163,531 (*)
Presented for comparison purposes only.The accompanying Notes 1 to
55 and Appendices are an integral part of the consolidated balance
sheet at 31 December 2011. 4. Translation of consolidated financial
statements originally issued in Spanish and prepared in accordance
with the regulatory financial reporting framework applicable to the
Group(see Notes 1 and 55). In the event of a discrepancy, the
Spanish-language version prevails.SANTANDER GROUPCONSOLIDATED
INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND
2009(Millions of Euros)(Debit) Credit Notes20112010 (*) 2009
(*)Interest and similar income38 60,85652,90753,173Interest expense
and similar charges 39(30,035)(23,683) (26,874)NET INTEREST
INCOME30,821 29,22426,299Income from equity instruments 40 394
362436Share of results of entities accounted for using the equity
method 415717(1)Fee and commission income42 12,74911,68110,726Fee
and commission expense 43(2,277) (1,946)(1,646)Gains/losses on
financial assets and liabilities (net) 442,838 2,1643,802 Held for
trading2,113 1,3122,098 Other financial instruments at fair value
through profit or loss2170198 Financial instruments not measured at
fair value through profit or loss803 791 1,631 Other(99)(9)
(125)Exchange differences (net) 45(522)441444Other operating income
8,050 8,1957,929 Income from insurance and reinsurance contracts
issued466,748 7,1627,113 Sales and income from the provision of
non-financial services 46 400 340378 Other operating income46 902
693438Other operating expenses (8,032) (8,089)(7,785) Expenses of
insurance and reinsurance contracts 46(6,356) (6,784)(6,774)
Changes in inventories46(249) (205)(238) Other operating
expenses46(1,427) (1,100)(773)GROSS INCOME 44,078
42,04940,204Administrative expenses(17,781)(16,255) (14,825) Staff
costs 47(10,326)(9,329)(8,451) Other general administrative
expenses 48(7,455) (6,926)(6,374)Depreciation and amortisation
charge 16 & 18 (2,109) (1,940)(1,596)Provisions (net) 25(2,601)
(1,133)(1,792)Impairment losses on financial assets
(net)(11,868)(10,443) (11,578) Loans and receivables10
(11,040)(10,267) (11,088) Other financial instruments not measured
at fair value through profit or loss7 & 29 (828)
(176)(490)PROFIT FROM OPERATIONS 9,71912,27810,413Impairment losses
on other assets (net)(1,517) (286)(165) Goodwill and other
intangible assets17 & 18 (1,161)(69) (31) Other assets(356)
(217)(134)Gains/(losses) on disposal of assets not classified as
non-current assets held for sale491,846350 1,565Gains on bargain
purchases arising on business combinations- --Gains/(losses) on
non-current assets held for sale not classified as discontinued
operations 50(2,109) (290)(1,225)PROFIT BEFORE
TAX7,93912,05210,588Income tax 27(1,776) (2,923)(1,207)PROFIT FOR
THE YEAR FROM CONTINUING OPERATIONS 6,163 9,1299,381PROFIT (LOSS)
FROM DISCONTINUED OPERATIONS (Net) 37 (24)(27)31CONSOLIDATED PROFIT
FOR THE YEAR 6,139 9,1029,412Profit attributable to the Parent5,351
8,1818,942Profit attributable to non-controlling interests 28 788
921470EARNINGS PER SHAREFrom continuing and discontinued
operationsBasic earnings per share (euros) 4 0.60 0.941.04Diluted
earnings per share (euros) 4 0.60 0.941.04From continuing
operationsBasic earnings per share (euros) 4 0.60 0.941.04Diluted
earnings per share (euros) 4 0.60 0.941.04 (*) Presented for
comparison purposes only.The accompanying Notes 1 to 55 and
Appendices are an integral part of the consolidated income
statement for the year ended 31 December 2011. 5. Translation of
consolidated financial statements originally issued in Spanish and
prepared in accordance with the regulatory financial reporting
framework applicable to the Group (see Notes 1 and 55). In the
event of a discrepancy, the Spanish-language version prevails.
SANTANDER GROUPCONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND
EXPENSEFOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009
(Millions of Euros)20112010 (*) 2009 (*)CONSOLIDATED PROFIT FOR THE
YEAR6,1399,102 9,412OTHER RECOGNISED INCOME AND
EXPENSE(2,570)1,6435,551Available-for-sale financial assets:
344(2,719)1,254 Revaluation gains/(losses)231(1,863)2,133 Amounts
transferred to income statement 156 (856) (777) Other
reclassifications (43) -(102)Cash flow hedges:(17)117 73
Revaluation gains/(losses) (109)(89) 160 Amounts transferred to
income statement92 206(41) Amounts transferred to initial carrying
amount of hedged items-- - Other reclassifications --(46)Hedges of
net investments in foreign operations: 106(2,253) (1,171)
Revaluation gains/(losses) 13(2,444) (1,222) Amounts transferred to
income statement9 191 51 Other reclassifications84- -Exchange
differences:(2,824) 5,704 5,915 Revaluation gains/(losses)(2,906)
5,986 5,944 Amounts transferred to income statement85(282) (29)
Other reclassifications (3)- -Non-current assets held for sale:--
(37) Revaluation gains/(losses)-- (37) Amounts transferred to
income statement -- - Other reclassifications -- -Actuarial
gains/(losses) on pension plans-- -Entities accounted for using the
equity method:(95) - 148 Revaluation gains/(losses)(37) - - Amounts
transferred to income statement -- - Other reclassifications (58) -
148Other recognised income and expense-- -Income tax (84)794
(631)TOTAL RECOGNISED INCOME AND EXPENSE 3,569
10,74514,963Attributable to the Parent3,1849,03114,077Attributable
to non-controlling interests 3851,714886 (*) Presented for
comparison purposes only.The accompanying Notes 1 to 55 and
Appendices are an integral part of the consolidated statement of
recognised income and expensefor the year ended 31 December 2011.
6. Translation of consolidated financial statements originally
issued in Spanish and prepared in accordance with the regulatory
financial reporting framework applicable to the Group (see Notes 1
and 55). In the event of a discrepancy, the Spanish-language
version prevails. SANTANDER GROUPCONSOLIDATED STATEMENTS OF CHANGES
IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND
2009(Millions of Euros)Equity Attributable to the Parent
Shareholders EquityReserves Reserves(losses) of entities Profit for
AccumulatedaccountedOther Less:the yearLess: Total Non-Share
Sharereservesfor using the equityTreasury attributableDividends
andshareholdersValuationcontrolling
Totalcapitalpremium(losses)equity method instruments shares to the
Parentremunerationequity adjustmentsTotal interestsequityEnding
balance at 31/12/10 (*) 4,164 29,45728,255528,686 (192) 8,181
(1,270)77,333(2,315)75,0185,897 80,915Adjustments due to changes
inaccounting policies--- - - - - --- - - -Adjustments due to
errors--- - - - - --- - - -Adjusted beginning balance 4,164
29,45728,255528,686 (192) 8,181 (1,270)77,333(2,315)75,0185,897
80,915Total recognised income andexpense--- - - -5,351- 5,351
(2,167)3,1843853,569Other changes in equity2911,766 4,6667 22
(59)(8,181)(300) (1,789) -(1,789)164(1,625)Capital
increases12017(123)-(17) - - - (3) -(3)- (3)Capital reductions ---
- - - - --- -(51) (51)Conversion of financial liabilitiesinto
equity1711,773- - - - - - 1,944 -1,944-1,944Increases in other
equityinstruments--- - 185 - - - 185 - 185 -185Reclassification of
financialliabilities to other equityinstruments--- - - - - --- - -
-Reclassification of other equityinstruments to financial
liabilities --- - - - - --- - - -Distribution of dividends--(2,060)
- - - - (1,570) (3,630) -(3,630)(431)(4,061)Transactions involving
own equityinstruments (net)--(31)- -(59) - - (90)-
(90)-(90)Transfers between equity items - (24) 6,9707(41) -(8,181)
1,270 -- - - -Increases (decreases) due tobusiness combinations---
- - - - --- -162162Equity-instrument-based payments --- - (105) - -
-(105)-(105)-(105)Other increases/(decreases) inequity --(90)--- -
- (90)- (90) 484 394Ending balance at 31/12/11 4,455
31,22332,921598,708 (251) 5,351 (1,570)80,896(4,482)76,4146,445
82,859 (*) Presented for comparison purposes only.The accompanying
Notes 1 to 55 and Appendices are an integral part of the
consolidated statement of changes in total equity for the year
ended 31 December 2011. 7. Translation of consolidated financial
statements originally issued in Spanish and prepared in accordance
with the regulatory financial reporting framework applicable to the
Group (see Notes 1 and 55). In the event of a discrepancy, the
Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED
STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31
DECEMBER 2011, 2010 AND 2009(Millions of Euros) Equity Attributable
to the Parent (*)Shareholders EquityReserves Reserves(losses) of
entitiesProfitNon- Accumulatedaccounted OtherLess: for the
yearLess:TotalcontrollingTotal ShareSharereservesfor using
theequity TreasuryattributableDividends
andshareholdersValuationinterests equity capital
premium(losses)equity methodinstrumentssharesto the
Parentremunerationequity adjustments Total(*)(*)Ending balance at
31/12/094,11429,30524,54068 7,189(30) 8,942 (2,296)71,832 (3,165)
68,6675,203 73,870Adjustments due to changes inaccounting policies
- --- - - - -- -- - -Adjustments due to errors - --- - - - -- -- -
-Adjusted beginning balance4,11429,30524,54068 7,189(30) 8,942
(2,296)71,832 (3,165) 68,6675,203 73,870Total recognised income
andexpense - --- - -8,181- 8,181 8509,031 1,71410,745Other changes
in equity50 152 3,715 (16)1,497 (162)(8,942) 1,026(2,680)- (2,680)
(1,020) (3,700)Capital increases50 162(44) - (168) - - -- -- -
-Capital reductions- --- - - - -- -- - -Conversion of
financialliabilities into equity - --- - - - -- -- - -Increases in
other equityinstruments - --- 1,821 - - - 1,821-
1,821-1,821Reclassification of financialliabilities to other
equityinstruments - --- - - - -- -- - -Reclassification of
otherequity instruments tofinancial liabilities - --- - - - -- -- -
-Distribution of dividends - -(1,825)- - - - (1,270) (3,095)-
(3,095)(400)(3,495)Transactions involving ownequity instruments
(net)- -(18) - - (162) - -(180) - (180)-(180)Transfers between
equityitems - (10)6,712 (16) (40) -(8,942) 2,296 - -- - -Increases
(decreases) due tobusiness combinations - --- - - - -- --101
101Equity-instrument-basedpayments- --- (116) - - -(116) -
(116)-(116)Other increases/(decreases) inequity- -(1,110)- - - - -
(1,110)-(1,110) (721) (1,831)Ending balance at
31/12/104,16429,45728,25552 8,686 (192) 8,181 (1,270)77,333 (2,315)
75,0185,897 80,915 (*) Presented for comparison purposes only.The
accompanying Notes 1 to 55 and Appendices are an integral part of
the consolidated statement of changes in total equity for the year
ended 31 December 2011.2 8. Translation of consolidated financial
statements originally issued in Spanish and prepared in accordance
with the regulatory financial reporting framework applicable to the
Group (see Notes 1 and 55). In the event of a discrepancy, the
Spanish-language version prevails. SANTANDER GROUPCONSOLIDATED
STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31
DECEMBER 2011, 2010 AND 2009(Millions of Euros) Equity Attributable
to the Parent (*) Shareholders EquityReservesReserves (losses)of
entities Profit Non-Accumulatedaccounted OtherLess:for the
yearLess: TotalcontrollingTotal Share Sharereservesfor using
theequity treasury attributableDividends and
shareholdersValuationinterests equity capitalpremium(losses)equity
methodinstrumentsshares to the Parentremuneration equity
adjustmentsTotal (*)(*)Ending balance at 31/12/083,997 28,10421,158
(290) 7,155 (421)8,876(2,693) 65,886 (8,300)57,5862,415
60,001Adjustments due to changes inaccounting policies ---- - --- -
- - - -Adjustments due to errors ---- - --- - - - - -Adjusted
beginning balance3,997 28,10421,158 (290) 7,155 (421)8,876(2,693)
65,886 (8,300)57,5862,415 60,001Total recognised income andexpense
---- - - 8,942 - 8,942 5,135 14,077886 14,963Other changes in
equity117 1,201 3,382 35834391(8,876)397(2,996) - (2,996)
1,902(1,094)Capital increases117 1,224(88) -(2)--- 1,251 - 1,251
2,1873,438Capital reductions---- - --- - --- -Conversion of
financialliabilities into equity ---- - --- - --- -Increases in
other equityinstruments ----148--- 148 - 148 -148Reclassification
of financialliabilities to other equityinstruments ---- - --- - ---
-Reclassification of otherequity instruments tofinancial
liabilities ---- - --- - --- -Distribution of dividends --(2,119)-
- --(2,296) (4,415) - (4,415) (233)(4,648)Transactions involving
ownequity instruments (net)--321- -391 -- 712 - 712 -712Transfers
between equityitems - (23) 5,891 358 (43)- (8,876)2,693- ---
-Increases (decreases) due tobusiness combinations ---- - --- - --
(10)(10)Equity-instrument-basedpayments---- (76)--- (76)-
(76)-(76)Other increases/(decreases) inequity-- (623) - 7
---(616)-(616) (42)(658)Ending balance at 31/12/094,114
29,30524,54068 7,189(30)8,942(2,296) 71,832 (3,165)68,6675,203
73,870 (*) Presented for comparison purposes only.The accompanying
Notes 1 to 55 and Appendices are an integral part of the
consolidated statement of changes in total equity for the year
ended 31 December 2011. 3 9. Translation of consolidated financial
statements originally issued in Spanish and prepared in accordance
with the regulatory financial reporting framework applicable to the
Group (see Notes 1 and 55). In the event of a discrepancy, the
Spanish-language version prevails. SANTANDER GROUP CONSOLIDATED
STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED 31 DECEMBER 2011, 2010
AND 2009 (Millions of Euros)20112010 (*) 2009 (*)A. CASH FLOWS FROM
OPERATING ACTIVITIES:35,995 51,874 (18,036)Consolidated profit for
the year 6,1399,1029,412Adjustments made to obtain the cash flows
from operating activities-21,877 17,849 15,558 Depreciation and
amortisation charge2,1091,9401,596 Other adjustments19,768 15,909
13,962Net increase/decrease in operating assets- (337) 28,487
23,749 Financial assets held for trading (7,561)6,310 (10,146)
Other financial assets at fair value through profit or loss
(12,221) 413 11,553 Available-for-sale financial assets 383(3,145)
30,417 Loans and receivables20,569 18,481 (11,196) Other operating
assets(1,507)6,4283,121Net increase/decrease in operating
liabilities-9,566 55,488 (17,730) Financial liabilities held for
trading(15,348) 7,583 (14,437) Other financial liabilities at fair
value through profit or loss(6,351)2856,730 Financial liabilities
at amortised cost32,901 47,274 (10,206) Other operating liabilities
(1,636)346183Income tax recovered/paid(1,924)(2,078)(1,527)B. CASH
FLOWS FROM INVESTING ACTIVITIES: (7,099)(2,635)2,884Payments-
10,5755,3105,341 Tangible assets 1,8583,6351,880 Intangible assets
1,5401,5053,223 Investments 1 10 13 Subsidiaries and other business
units 7,176160225 Non-current assets held for sale and associated
liabilities --- Held-to-maturity investments--- Other payments
related to investing activities---Proceeds-3,4762,6758,225 Tangible
assets 5206961,176 Intangible assets -91,321 Investments10104 14
Subsidiaries and other business units 1,044 33756 Non-current
assets held for sale and associated liabilities 1,9021,8334,958
Held-to-maturity investments--- Other proceeds related to investing
activities---C. CASH FLOWS FROM FINANCING ACTIVITIES: (8,111)
(11,301)433Payments- 16,259 21,470 18,281 Dividends 3,4894,1074,387
Subordinated liabilities5,3297,7274,245 Redemption of own equity
instruments--- Acquisition of own equity instruments
6,9377,3729,263 Other payments related to financing
activities5042,264386Proceeds-8,148 10,169 18,714 Subordinated
liabilities1712873,654 Issuance of own equity instruments---
Disposal of own equity instruments6,8487,1919,975 Other proceeds
related to financing activities1,1292,6915,085D. EFFECT OF FOREIGN
EXCHANGE RATE CHANGES (2,046)4,9573,826E. NET INCREASE/(DECREASE)
IN CASH AND CASH EQUIVALENTS 18,738 42,897 (10,892)F. CASH AND CASH
EQUIVALENTS AT BEGINNING OF YEAR 77,786 34,889 45,781G. CASH AND
CASH EQUIVALENTS AT END OF YEAR 96,524 77,786 34,889COMPONENTS OF
CASH AND CASH EQUIVALENTS AT END OF YEAR: Cash5,4835,515 5,172 Cash
equivalents at central banks91,041 72,27129,717 Other financial
assets-- - Less: Bank overdrafts refundable on demand-- -TOTAL CASH
AND CASH EQUIVALENTS AT END OF YEAR 96,52477,786 34,889 (*)
Presented for comparison purposes only. See Note 37.The
accompanying Notes 1 to 55 and Appendices are an integral part of
the consolidated statement of cash flowsfor the year ended 31
December 2011. 10. Translation of consolidated financial statements
originally issued in Spanish and prepared in accordance with the
regulatory financial reporting framework applicable to the Group
(see Notes 1 and 55). In the event of a discrepancy, the Spanish-
language version prevails. Banco Santander, S.A. and Companies
composing the Santander Group Notes to the consolidated financial
statements for the year ended 31 December 20111. Introduction,
basis of presentation of the consolidated financial statements and
other information a) IntroductionBanco Santander, S.A. (the Bank or
Banco Santander) is a private-law entity subject to the rules
andregulations applicable to banks operating in Spain. The Bylaws
and other public information on the Bank canbe consulted on the
website of the Bank (www.santander.com) and at its registered
office at Paseo dePereda 9-12, Santander.In addition to the
operations carried on directly by it, the Bank is the head of a
group of subsidiaries thatengage in various business activities and
which compose, together with it, Santander Group (the Group
orSantander Group). Therefore, the Bank is obliged to prepare, in
addition to its own separate financialstatements, the Groups
consolidated financial statements, which also include the interests
in joint venturesand investments in associates.The Groups
consolidated financial statements for 2009 were approved by the
shareholders at the Banksannual general meeting on 11 June 2010.
The Groups consolidated financial statements for 2010 wereapproved
by the shareholders at the Banks annual general meeting on 17 June
2011. The 2011 consolidatedfinancial statements of the Group and
the 2011 financial statements of the Bank and of substantially all
theGroup companies have not yet been approved by their shareholders
at the respective annual generalmeetings. However, the Banks board
of directors considers that the aforementioned financial statements
willbe approved without any changes. b) Basis of presentation of
the consolidated financial statementsUnder Regulation (EC) no.
1606/2002 of the European Parliament and of the Council of 19 July
2002, allcompanies governed by the Law of an EU Member State and
whose securities are admitted to trading on aregulated market of
any Member State must prepare their consolidated financial
statements for the yearsbeginning on or after 1 January 2005 in
conformity with the International Financial Reporting
Standards(IFRSs) previously adopted by the European Union
(EU-IFRSs).In order to adapt the accounting system of Spanish
credit institutions to the new standards, the Bank of Spainissued
Circular 4/2004, of 22 December, on Public and Confidential
Financial Reporting Rules and Formats.The Groups consolidated
financial statements for 2011 were formally prepared by the Banks
directors (at theboard meeting on 23 January 2012) in accordance
with International Financial Reporting Standards asadopted by the
European Union and with Bank of Spain Circular 4/2004 and Spanish
corporate andcommercial law applicable to the Group, using the
basis of consolidation, accounting policies andmeasurement bases
set forth in Note 2 to these consolidated financial statements and,
accordingly, they 11. present fairly the Groups equity and
financial position at 31 December 2011 and the consolidated results
ofits operations, the changes in the consolidated equity and the
consolidated cash flows in 2011. Theseconsolidated financial
statements were prepared from the separate accounting records of
the Bank and ofeach of the companies composing the Group, and
include the adjustments and reclassifications required tounify the
accounting policies and measurement bases applied by the Group.The
notes to the consolidated financial statements contain
supplementary information to that presented in theconsolidated
balance sheet, consolidated income statement, consolidated
statement of recognised incomeand expense, consolidated statement
of changes in total equity and consolidated statement of cash
flows.The notes provide, in a clear, relevant, reliable and
comparable manner, narrative descriptions andbreakdowns of these
financial statements.Adoption of new standards and interpretations
issuedThe following standards and interpretations came into force
and were adopted by the European Union in2011: - Amendment to IAS
32, Classification of Rights Issues - this amendment relates to the
classification of foreign currency denominated rights issues
(rights, options or warrants). Pursuant to this amendment, when
these rights are to acquire a fixed number of shares in exchange
for a fixed amount, they are classified as equity instruments,
irrespective of the currency in which that fixed amount is
denominated and provided that the other requirements of the
standard are fulfilled. - Revision of IAS 24, Related Party
Disclosures - the revised IAS 24 addresses related party
disclosures in financial statements. There are two new basic
features. Firstly, it provides a partial exemption from certain
disclosure requirements when the transactions are between
state-controlled entities or government-related entities (or
equivalent government institution) and, secondly, it simplifies the
definition of a related party, clarifying its intended meaning and
eliminating inconsistencies from the definition. - Amendments to
IFRIC 14, Prepayments of a Minimum Funding Requirement - these
amendments remedy the fact that in some circumstances entities
could not recognise certain voluntary prepayments as assets. -
IFRIC 19, Extinguishing Financial Liabilities with Equity
Instruments - this interpretation addresses the accounting by a
debtor when all or part of a financial liability is extinguished
through the issue of equity instruments. The interpretation does
not apply to transactions in situations where the counterparties in
question are shareholders or related parties, acting in their
capacity as such, or where extinguishing the financial liability by
issuing equity instruments is in accordance with the original terms
of the financial liability. In this case, the equity instruments
issued are measured at fair value at the date the liability is
extinguished and any difference between this value and the carrying
amount of the liability is recognised in profit or loss.The
application of the aforementioned accounting standards and
interpretations did not have any materialeffects on the Groups
consolidated financial statements. 2 12. At the date of preparation
of these consolidated financial statements, the European Union had
approved andadopted the amendments to IFRS 7, Financial
Instruments, which are mandatorily applicable for reportingperiods
beginning on or after 1 July 2011. These amendments reinforce the
disclosure requirementsapplicable to transfers of financial assets,
including both those in which the assets are not derecognised
and,principally, those in which the assets qualify for
derecognition but the entity has a continuing involvement
inthem.Lastly, at the date of preparation of these consolidated
financial statements, the following Standards andInterpretations
which effectively come into force after 31 December 2011 had not
yet been adopted by theEuropean Union:- IFRS 9, Financial
Instruments: Classification and Measurement (obligatory as from 1
January 2015),which will in the future replace the part of the
current IAS 39 relating to the classification andmeasurement of
financial assets. IFRS 9 presents significant differences regarding
financial assets withrespect to the current standard, including the
approval of a new classification model based on only twocategories,
namely instruments measured at amortised cost and those measured at
fair value, thedisappearance of the current Held-to-maturity
investments and Available-for-sale financial assetscategories,
impairment analyses only for assets measured at amortised cost and
the non-separation ofembedded derivatives in financial contracts.
The main change introduced with regard to financial
liabilitiesapplies only to liabilities that an entity elects to
measure at fair value. The portion of the change in the fairvalue
of these liabilities attributable to changes in the entitys own
credit risk must be presented inValuation adjustments instead of in
profit or loss.- Amendments to IAS 12, Income Taxes (obligatory for
annual reporting periods beginning on or after 1January 2012) -
these amendments incorporate the requirement to measure deferred
tax assets andliabilities relating to investment property depending
on whether the entity expects to recover the carryingamount of the
asset through use or sale.- IFRS 10, Consolidated Financial
Statements (obligatory for reporting periods beginning on or after
1January 2013) - this standard will replace the current IAS 27 and
SIC 12, introducing a single basis forconsolidation (control),
irrespective of the nature of the investee. IFRS 10 modifies the
current definition ofcontrol. The new definition of control sets
out the following three elements of control: power over
theinvestee; exposure, or rights, to variable returns from
involvement with the investee; and the ability to usepower over the
investee to affect the amount of the investors returns.- IFRS 11,
Joint Arrangements (obligatory for reporting periods beginning on
or after 1 January 2013) - thisstandard will replace the IAS 31
currently in force. The fundamental change introduced by IFRS 11
withrespect to the current standard is the elimination of the
option of proportionate consolidation for jointlycontrolled
entities, which will begin to be accounted for using the equity
method.- IFRS 12, Disclosure of Interests in Other Entities
(obligatory for reporting periods beginning on or after 1January
2013) - this standard represents a single standard presenting the
disclosure requirements forinterests in other entities (whether
these be subsidiaries, associates, joint arrangements or other
interests)and includes new disclosure requirements. The objective
of this standard is to require an entity to discloseinformation
that enables users of its financial statements to evaluate the
nature of its interests in otherentities (control), the possible
restrictions on its ability to access or use assets and settle
liabilities, therisks associated with its interests in
unconsolidated structured entities, etc. 3 13. - IFRS 13, Fair
Value Measurement (obligatory for reporting periods beginning on or
after 1 January 2013) - this standard replaces the current rules
concerning fair value contained in various standards and sets out
in a single IFRS a framework for measuring fair value. It does not
modify the criteria set out in other standards for measuring assets
and liabilities at fair value. IFRS 13 is applicable to the
measurement of both financial and non-financial items and it
introduces new disclosure requirements. - Amendments to IAS 27 and
IAS 28 (revised) (obligatory for reporting periods beginning on or
after 1 January 2013) - these amendments reflect the changes
arising from the new IFRS 10 and IFRS 11 described above. -
Amendments to IAS 1, Presentation of Items of Other Comprehensive
Income (obligatory for reporting periods beginning on or after 1
July 2012) - these amendments consist basically of the requirement
to present items that will be reclassified (recycled) to profit or
loss in subsequent periods separately from those that will not be
reclassified. - Amendments to IAS 19, Employee Benefits (obligatory
for reporting periods beginning on or after 1 January 2013) - these
amendments eliminate the "corridor" under which entities are
currently able to opt for deferred recognition of a given portion
of actuarial gains and losses, establishing that when the
amendments come into effect, all actuarial gains and losses must be
recognised immediately (see Note 25). The amendments include
significant changes in the presentation of cost components, as a
result of which service cost (past service cost and plan
curtailments and settlements) and net interest will be recognised
in profit or loss and the remeasurement component (comprising
basically gains and losses) will be recognised in Equity -
Valuation adjustments and may not be reclassified to profit or
loss. - Amendments to IAS 32, Financial Instruments: Presentation -
Offsetting Financial Assets and Financial Liabilities (obligatory
for reporting periods beginning on or after 1 January 2014) - these
amendments introduce a series of additional clarifications on the
requirements established by the standard for an entity to be able
to offset a financial asset and a financial liability, indicating
that they can only be offset when an entity currently has a legally
enforceable right to set off the recognised amounts and this does
not depend on the occurrence of future events. - Amendments to IFRS
7, Offsetting Financial Assets and Financial Liabilities
(obligatory for reporting periods beginning on or after 1 January
2013) - these amendments introduce new disclosures for financial
assets and financial liabilities that are presented net in the
balance sheet and for other instruments subject to an enforceable
netting arrangement. - IFRIC 20, Stripping Costs in the Production
Phase of a Surface Mine - in view of its nature, this
interpretation does not affect the Groups operations. The Group is
currently analysing the possible effects of these new standards and
interpretations. All accounting policies and measurement bases with
a material effect on the 2011 consolidated financial statements
were applied in their preparation.c) Use of estimates The
consolidated results and the determination of consolidated equity
are sensitive to the accounting policies, measurement bases and
estimates used by the directors of the Bank in preparing the
consolidated financial statements. The main accounting policies and
measurement bases are set forth in Note 2.4 14. In the consolidated
financial statements estimates were occasionally made by the senior
management of the Bank and of the consolidated entities in order to
quantify certain of the assets, liabilities, income, expenses and
commitments reported herein. These estimates, which were made on
the basis of the best information available, relate basically to
the following: - The impairment losses on certain assets (see Notes
6, 7, 8, 10, 12, 13, 16, 17 and 18); - The assumptions used in the
actuarial calculation of the post-employment benefit liabilities
and commitments and other obligations (see Note 25); - The useful
life of the tangible and intangible assets (see Notes 16 and 18); -
The measurement of goodwill arising on consolidation (see Note 17);
and - The fair value of certain unquoted assets and liabilities
(see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22).d) Other matters i.
Disputed corporate resolutions The directors of the Bank and its
legal advisers consider that the objection to certain resolutions
adopted by the Banks shareholders at the general meetings on 18
January 2000, 4 March 2000, 10 March 2001, 9 February 2002, 24 June
2002, 21 June 2003, 19 June 2004, 18 June 2005 and 11 June 2010
will have no effect on the financial statements of the Bank and the
Group. The status of these matters at the date of preparation of
the consolidated financial statements is detailed below: On 25
April 2002, the Santander Court of First Instance number 1
dismissed in full the claim contesting the resolutions adopted by
the shareholders at the general meeting on 18 January 2000. The
plaintiff filed an appeal against the judgment. On 2 December 2002,
the Cantabria Provincial Appellate Court dismissed the appeal. The
Bank appeared as a party to the cassation appeal and filed
pleadings with respect to the inadmissibility of the appeal. In the
Order dated 4 November 2008 the Supreme Court considered the appeal
to have been withdrawn in view of the decease of the appellant and
the failure to appear of his heirs. On 29 November 2002, the
Santander Court of First Instance number 2 dismissed in full the
claims contesting the resolutions adopted by the shareholders at
the general meeting on 4 March 2000. The plaintiffs filed an appeal
against the judgment. On 5 July 2004, the Cantabria Provincial
Appellate Court dismissed the appeal. One of the appellants
prepared and filed an extraordinary appeal on grounds of procedural
infringements and a cassation appeal against the judgment, which
were not given leave to proceed by order of the Supreme Court of 31
July 2007. On 12 March 2002, the Santander Court of First Instance
number 4 dismissed in full the claims contesting the resolutions
adopted by the shareholders at the general meeting on 10 March
2001. The plaintiffs filed an appeal against the judgment. On 13
April 2004, the Cantabria Provincial Appellate Court dismissed the
appeals. One of the appellants prepared and filed an extraordinary
appeal on grounds of procedural infringements and a cassation
appeal against the judgment, which were not given leave to proceed
by order of the Supreme Court of 6 November 2007.5 15. On 9
September 2002, the Santander Court of First Instance number 5
dismissed in full the claim contesting the resolutions adopted by
the shareholders at the general meeting on 9 February 2002. The
plaintiff filed an appeal against the judgment. On 14 January 2004,
the Cantabria Provincial Appellate Court dismissed the appeal. The
appellant prepared and filed an extraordinary appeal on grounds of
procedural infringements and a cassation appeal against the
judgment, which were not given leave to proceed by order of the
Supreme Court of 8 May 2007. On 29 May 2003, the Santander Court of
First Instance number 6 dismissed in full the claim contesting the
resolutions adopted by the shareholders at the general meeting on
24 June 2002. The plaintiffs filed an appeal against the judgment.
On 15 November 2005, the Cantabria Provincial Appellate Court
dismissed the appeal in full. The appellants filed an extraordinary
appeal on grounds of procedural infringements and a cassation
appeal against the judgment. The Bank appeared as a party to the
two appeals and filed pleadings with respect to the inadmissibility
thereof. In the order dated 23 September 2008 the Supreme Court
refused leave to proceed with the aforementioned appeals. On 23
November 2007, the Santander Court of First Instance number 7
dismissed in full the claims contesting the resolutions adopted by
the shareholders at the annual general meeting on 21 June 2003. The
plaintiffs filed an appeal against the judgment. The court was
notified of the decease of one of the appellants and the court
considered his appeal to have been withdrawn on the grounds of his
decease and the failure to appear of his heirs. The other three
appeals filed were dismissed in full by the Cantabria Provincial
Appellate Court on 30 June 2009. The appellants filed an
extraordinary appeal on grounds of procedural infringements and a
cassation appeal against this judgment, and the appeal filed by one
of the three appellants was refused leave to proceed by the
Provincial Appellate Court. The cassation appeals filed against the
judgments that dismissed the claims contesting the resolutions
adopted at the annual general meeting on 21 June 2003 were not
given leave to proceed by order of the Supreme Court of 25 January
2011. On 28 October 2005, the Santander Court of First Instance
number 8 dismissed in full the claims contesting the resolutions
adopted by the shareholders at the general meeting on 19 June 2004.
The plaintiffs filed an appeal against the judgment. In a Judgment
dated 28 June 2007 the Cantabria Provincial Appellate Court
dismissed the appeals in full. Against this judgment the plaintiffs
prepared and filed cassation appeals and extraordinary appeals on
the grounds of procedural infringements. The cassation appeal and
extraordinary appeal for procedural infringement filed by one of
the appellants were refused leave to proceed due to the decease of
the appellant and the failure to appear of his heirs. The other two
appeals were refused leave to proceed by order of the Supreme Court
of 27 October 2009. On 13 July 2007, the Santander Court of First
Instance number 10 dismissed in full the claims contesting the
resolutions adopted by the shareholders at the general meeting on
18 June 2005. The plaintiffs filed an appeal against the judgment.
In a judgment dated 14 May 2009 the Cantabria Provincial Appellate
Court dismissed the appeals in full. Against this judgment the
plaintiffs prepared and filed a cassation appeal and an
extraordinary appeal on the grounds of procedural infringements,
and these appeals are still being processed at the Supreme Court. A
claim contesting certain of the resolutions adopted by the
shareholders at the general meeting held on 11 June 2010 is
currently in process at the Santander Commercial Court number 1.ii.
Credit assignment transactionsFollowing the prolonged
investigations carried out since 1992 by the Madrid Central
Examining Court number3, and the repeated applications by the
Public Prosecutors Office and the Government Lawyer, as
therepresentative of the Public Treasury, to have the case against
the Bank and its executives dismissed andstruck off, the trial
commenced at Panel One of the Criminal Chamber of the National
Appellate Court and6 16. after the debate on preliminary issues was
held at the end of November 2006, without the appearance of the
Government Lawyer, in which the Public Prosecutors Office
reiterated its appeal to set aside the trial and interrupt the
proceedings, on 20 December 2006, the Criminal Chamber of the
National Appellate Court ordered the dismissal of the proceedings,
as requested by the Public Prosecutors Office and the private
prosecution. A cassation appeal was filed against the
aforementioned order by the Association for the Defence of
Investors and Customers and Iniciativa per Catalunya Verds and,
following the opposition by the Public Prosecutors Office, the
Government Lawyer and the remaining appearing parties, it was
dismissed by a Supreme Court decision handed down on 17 December
2007. In an interlocutory order of 15 April 2008, the Supreme Court
dismissed the request filed by the Association for the Defence of
Investors and Customers for the decision handed down in the
judgment of 17 December 2007 to be set aside. The appeal filed by
the Association for the Defence of Investors and Customers against
the aforementioned Supreme Court decision was given leave to
proceed by the Spanish Constitutional Court, and the appearing
parties have submitted their pleadings.e) Information relating to
2010 and 2009 The information relating to 2010 and 2009 contained
in these notes to the consolidated financial statements is
presented with the information relating to 2011 for comparison
purposes only and, accordingly, it does not constitute the Groups
statutory consolidated financial statements for 2010 and 2009.f)
Capital management The Groups capital management is performed at
regulatory and economic levels. Regulatory capital management is
based on the analysis of the capital base and the capital ratios
using the criteria of the related Bank of Spain Circular. The aim
is to achieve a capital structure that is as efficient as possible
in terms of both cost and compliance with the requirements of
regulators, ratings agencies and investors. Active capital
management includes securitisations, sales of assets, issues of
equity instruments (preference shares and subordinated debt) and
hybrid instruments. From an economic standpoint, capital management
seeks to optimise value creation at the Group and at its
constituent business units. To this end, the economic capital,
RORAC and value creation data for each business unit are generated,
analysed and reported to the management committee on a quarterly
basis. Within the framework of the internal capital adequacy
assessment process (Pillar II of the Basel Capital Accord), the
Group uses an economic capital measurement model with the objective
of ensuring that there is sufficient capital available to support
all the risks of its activity in various economic scenarios, with
the solvency levels agreed upon by the Group. In order to
adequately manage the Groups capital, it is essential to estimate
and analyse future needs, in anticipation of the various phases of
the business cycle. Projections of regulatory and economic capital
are made based on the budgetary information (balance sheet, income
statement, etc.) and on macroeconomic scenarios defined by the
Groups economic research service. These estimates are used by the
Group as a reference to plan the management actions (issues,
securitisations, etc.) required to achieve its capital targets.7
17. In addition, certain stress scenarios are simulated in order to
assess the availability of capital in adversesituations. These
scenarios are based on sharp fluctuations in macroeconomic
variables, GDP, interest rates,values of equity instruments, etc.
that mirror historical crises that could happen again.Bank of Spain
Circular 3/2008 on the calculation and control of minimum capital
requirements, which hasbeen in force since June 2008, was partially
amended in certain aspects by Circular 9/2010 and Circular4/2011.
Pending implementation of the new capital regulations known as
Basel III, which will be carried outprogressively from 2013 to 2019
through the corresponding European Capital Requirements Directive
(CRDIV), the current Bank of Spain Circular addresses new
developments relating to capital requirements (Pillar I)and to the
possibility of using internal ratings-based (IRB) classifications
and methods for calculating risk-weighted exposures, and the
inclusion therein of operational risk. The aim is to render
regulatoryrequirements more sensitive to the risks actually borne
by entities in carrying on their business activities. Italso
establishes a supervisory review system to improve internal risk
management and internal capitaladequacy assessment based on the
risk profile (Pillar II), and incorporates elements relating to
disclosuresand market discipline (Pillar III).The Group intends to
adopt, over the next few years, the Basel II advanced internal
ratings-based (AIRB)approach for substantially all its banks, until
the percentage of net exposure of the loan portfolio covered bythis
approach exceeds 90%.Accordingly, the Group continued in 2011 with
the progressive implementation of the technology platformsand
methodological improvements required for the roll-out of the AIRB
approaches. In this connection, in thecourse of the year the Group
obtained regulatory authorisation for various units, including most
notablySantander Consumer Espaa, Banco Santander (Mxico), S.A.,
Institucin de Banca Mltiple, GrupoFinanciero Santander and the
global corporate customer portfolios in Brazil and Chile. In
addition, in 2008 theGroup obtained authorisation from the
supervisory authorities to use advanced approaches for the
calculationof regulatory capital requirements for credit risk for
the Parent and the main subsidiaries in Spain, the UnitedKingdom
and Portugal. The Groups Basel implementation strategy is focused
on obtaining authorisation forthe use of AIRB approaches at the
main entities in the Americas and at consumer banking entities in
Europe.As regards the other risks explicitly addressed in Pillar I
of the Basel Capital Accord, Santander Group wasauthorised to use
its internal model for market risk with respect to the treasury
areas trading activities inMadrid and the Chile and Portugal units,
thus continuing implementation of the roll-out plan it submitted to
theBank of Spain for the other units.With regard to operational
risk, the Group considers that the internal model should be
developed primarily onthe basis of the experience accumulated in
managing the entity through the corporate guidelines and
criteriaestablished after assuming control, which are a distinctive
feature of Santander Group. The Group hasperformed numerous
acquisitions in recent years and, as a result, a longer maturity
period will be required inorder to develop the internal model based
on its own management experience of the various acquiredentities.
However, although the Group has decided to use the standardised
approach for regulatory capitalcalculation purposes, it is
considering the possibility of adopting AMA approaches once it has
collatedsufficient data using its own management model in order to
make full use of the positive qualities that arecharacteristic of
the Group.Also, Royal Decree-Law 2/2011, approved on 18 February
2011, established the implementing regulations ofthe Plan for
Strengthening the Financial Sector published in January 2011 by the
Spanish Ministry ofEconomy and Finance, which aimed, inter alia, to
establish certain minimum requirements for core capital, inadvance
of those established by Basel III, to be met before autumn 2011. At
the reporting date, the Grouphad complied with these minimum core
capital requirements.8 18. Furthermore, in December 2011 the
European Banking Authority (EBA) published the new
capitalrequirements for the main European credit institutions.
These requirements are part of a package ofmeasures adopted by the
European Council in the second half of 2011 with the aim of
restoring stability andconfidence in the European markets.At 30
June 2012, the institutions selected for the EBA sample must have a
Tier 1 core capital ratio,determined on the basis of EBA rules of
at least 9%. These capital requirements are expected to be of
anexceptional and temporary nature.The EBA published the capital
requirements of each credit institution and required them to
submit, on 20January 2012, their capital plans to reach the
required ratio by 30 June 2012.The EBA estimated a EUR 15,302
million capital shortfall for Santander Group. In January 2012 the
Groupreported the measures it had taken -detailed in its capital
plan submitted to the Bank of Spain- and which hadenabled it to
attain the required 9% ratio. These measures are summarised as
follows: i) EUR 6,829 millionrelating to "Valores Santander"
-securities that are mandatorily convertible before the end of
October 2012; ii)the exchange of EUR 1,943 million of preference
shares for new shares in December 2011; iii) EUR 1,660million
resulting from application of the "Santander Dividendo Eleccin"
programme at the date of the finaldividend for 2011; and iv) EUR
4,890 million obtained through the organic generation of capital,
write-downsand the transfer of various ownership interests, most
notably those held in Chile and Brazil (see Note 1.h). g)
Environmental impactIn view of the business activities carried on
by the Group entities, the Group does not have any
environmentalliability, expenses, assets, provisions or
contingencies that might be material with respect to its
consolidatedequity, financial position or results. Therefore, no
specific disclosures relating to environmental issues areincluded
in these notes to the consolidated financial statements. h) Events
after the reporting periodIt should be noted that from 1 January
2012 to the date on which these financial statements were
authorisedfor issue, the following significant events occurred:In
the first week of January 2012, the Group transferred shares
representing a 4.41% ownership interest inBanco Santander (Brasil),
S.A. to a leading international financial institution. This
institution has undertaken todeliver these shares to the holders of
the bonds which, issued by Banco Santander in October 2010,
areexchangeable for Banco Santander (Brasil), S.A. shares upon
maturity, in accordance with the termsgoverning them.2. Accounting
policies and measurement bases The accounting policies and
measurement bases applied in preparing the consolidated financial
statements were as follows: a) Foreign currency transactionsi.
Functional currencyThe Groups functional currency is the euro.
Therefore, all balances and transactions denominated incurrencies
other than the euro are deemed to be denominated in foreign
currency. 9 19. ii. Translation of foreign currency balancesForeign
currency balances are translated to euros in two consecutive
stages:- Translation of foreign currency to the functional currency
(currency of the main economic environment inwhich the entity
operates), and- Translation to euros of the balances held in the
functional currencies of entities whose functional currencyis not
the euro.Translation of foreign currency to the functional
currencyForeign currency transactions performed by consolidated
entities (or entities accounted for using the equitymethod) not
located in EMU countries are initially recognised in their
respective currencies. Monetary items inforeign currency are
subsequently translated to their functional currencies using the
closing rate.Furthermore:- Non-monetary items measured at
historical cost are translated to the functional currency at the
exchangerate at the date of acquisition.- Non-monetary items
measured at fair value are translated at the exchange rate at the
date when the fairvalue was determined.- Income and expenses are
translated at the average exchange rates for the year for all the
transactionsperformed during the year. When applying this
criterion, the Group considers whether there have beensignificant
changes in the exchange rates in the year which, in view of their
materiality with respect to theconsolidated financial statements
taken as a whole, would make it necessary to use the exchange rates
atthe transaction date rather than the aforementioned average
exchange rates.- The balances arising from non-hedging forward
foreign currency/foreign currency and foreigncurrency/euro purchase
and sale transactions are translated at the closing rates
prevailing in the forwardforeign currency market for the related
maturity.Translation of functional currencies to eurosIf the
functional currency is not the euro, the balances in the financial
statements of the consolidated entities(or entities accounted for
using the equity method) are translated to euros as follows:-
Assets and liabilities, at the closing rates.- Income and expenses,
at the average exchange rates for the year.- Equity items, at the
historical exchange rates.iii. Recognition of exchange
differencesThe exchange differences arising on the translation of
foreign currency balances to the functional currencyare generally
recognised at their net amount under Exchange differences in the
consolidated incomestatement, except for exchange differences
arising on financial instruments at fair value through profit or
loss,which are recognised in the consolidated income statement
without distinguishing them from other changes in10 20. fair value,
and for exchange differences arising on non-monetary items measured
at fair value through equity,which are recognised under Valuation
adjustments - Exchange differences.The exchange differences arising
on the translation to euros of the financial statements denominated
infunctional currencies other than the euro are recognised under
Valuation adjustments - Exchange differencesin the consolidated
balance sheet, whereas those arising on the translation to euros of
the financialstatements of entities accounted for using the equity
method are recognised under Valuation adjustments -Entities
accounted for using the equity method, until the related item is
derecognised, at which time they arerecognised in the consolidated
income statement.iv. Entities located in hyperinflationary
economiesAs indicated in Note 3, in 2009 the Group sold
substantially all its businesses in Venezuela and at 31December
2011 its net assets in that country amounted to only EUR 10 million
(31 December 2010: EUR 18million).In view of the foregoing, at 31
December 2011, 2010 and 2009 none of the functional currencies of
theconsolidated entities and associates located abroad related to
hyperinflationary economies as defined byInternational Financial
Reporting Standards as adopted by the European Union. Accordingly,
at 2011, 2010and 2009 year-end it was not necessary to adjust the
financial statements of any of the consolidated entitiesor
associates to correct for the effect of inflation.v. Exposure to
foreign currency riskAt 31 December 2011, the Groups largest
exposures on temporary positions (with a potential impact on
theincome statement) were concentrated, in descending order, on the
pound sterling, the Mexican peso, theChilean peso, the Polish zloty
and the US dollar. At that date, its largest exposure on permanent
positions(with a potential impact on equity) were concentrated, in
descending order, on the Brazilian real, the poundsterling, the US
dollar, the Mexican peso and the Polish zloty.At 31 December 2010,
the Groups largest exposures on temporary positions (with a
potential impact on theincome statement) were concentrated, in
descending order, on the pound sterling, the Mexican peso and
theChilean peso. At that date, its largest exposures on permanent
positions (with a potential impact on equity)were concentrated, in
descending order, on the Brazilian real, the pound sterling, the
Mexican peso, the USdollar and the Chilean peso.At 31 December
2009, the Groups largest exposures on temporary positions (with a
potential impact on theincome statement) were concentrated, in
descending order, on the pound sterling and the Chilean peso.
Atthat date, its largest exposures on permanent positions (with a
potential impact on equity) were concentrated,in descending order,
on the Brazilian real, the pound sterling, the Mexican peso and the
Chilean peso.The Group hedges a portion of these permanent
positions using foreign exchange derivative financialinstruments
(see Note 36).The following tables show the sensitivity of
consolidated profit and consolidated equity to changes in theGroups
foreign currency positions due to 1% variations in the various
foreign currencies in which the Grouphas material balances.The
estimated effect on the Groups consolidated equity and consolidated
profit of a 1% appreciation of theeuro against the related currency
is as follows: 11 21. Millions of eurosEffect on consolidated
equityEffect on consolidated profitCurrency20112010 2009 2011
20102009US dollar (41.7) (39.1) - 2.8 - 2.8Chilean peso (7.3)
(11.7) (12.7)6.17.67.0Pound sterling(72.8) (62.0) (21.5) 10.5 20.3
16.2Mexican peso(22.2) (42.9) (20.5)9.59.14.7Brazilian real (151.7)
(89.2)(111.4) ---Polish zloty(19.4)(2.6) (2.3) 3.7 --Similarly, the
estimated effect on the Groups consolidated equity and consolidated
profit of a 1% depreciationof the euro against the related currency
is as follows: Millions of eurosEffect on consolidated equityEffect
on consolidated profitCurrency20112010 2009 2011 20102009US dollar
42.5 39.9 -(2.9) - (2.8)Chilean peso 7.5 11.9 12.9
(6.2)(7.8)(7.2)Pound sterling74.2 63.2 21.9 (10.7) (20.7)
(16.5)Mexican peso22.6 42.0 16.5 (9.7)(9.3)(4.8)Brazilian real60.1
81.0 81.9 ---Polish zloty19.82.72.4 (3.8)--The foregoing data were
obtained by calculating the possible effect of a variation in
exchange rates on thevarious asset and liability items, excluding
the foreign exchange positions arising from goodwill, and on
otherforeign currency-denominated items, such as the Groups
derivative instruments, considering the offsettingeffect of the
various hedging transactions on these items. This effect was
estimated using the exchangedifference recognition methods set
forth in Note 2.a) iii above.Also, the estimated effect on the
Groups consolidated equity of a 1% appreciation or depreciation of
the euroagainst the foreign currencies in which goodwill is
denominated at 31 December 2011 would be a decrease orincrease,
respectively, in equity due to valuation adjustments of EUR 88.1
million and EUR 89.9 million in thecase of the pound sterling
(2010: EUR 85.5 million and EUR 87.2 million; 2009: EUR 82.8
million and EUR84.5 million), EUR 80.5 million and EUR 82.1 million
in the case of the Brazilian real (2010: EUR 86.7 millionand EUR
88.4 million; 2009: EUR 76.3 million and EUR 77.8 million), EUR
22.5 million and EUR 23 million inthe case of the US dollar (2010:
EUR 21.8 million and EUR 22.3 million; 2009: EUR 20.3 million and
EUR20.7 million), and EUR 39.2 million and EUR 40 million for the
other currencies (2010: EUR 15.1 million andEUR 15.4 million; 2009:
EUR 11.0 million and EUR 11.3 million). These changes are offset by
a decrease orincrease, respectively, in the balance of goodwill at
that date and, therefore, they have no impact on thecalculation of
the Groups equity.The estimates used to obtain the foregoing data
were performed considering the effects of the exchange
ratefluctuations in isolation from the effect of the performance of
other variables, the changes in which wouldaffect equity and
profit, such as variations in the interest rates of the reference
currencies or other market12 22. factors. Accordingly, all
variables other than the exchange rate fluctuations were kept
constant with respect to their positions at 31 December 2011, 2010
and 2009.b) Basis of consolidation i. Subsidiaries Subsidiaries are
defined as entities over which the Bank has the capacity to
exercise control; control is, in general but not exclusively,
presumed to exist when the Parent owns directly or indirectly half
or more of the voting power of the investee or, even if this
percentage is lower or zero, when, as in the case of agreements
with shareholders of the investee, the Bank is granted control.
Control is the power to govern the financial and operating policies
of an entity, as stipulated by the law, the Bylaws or agreement, so
as to obtain benefits from its activities. The financial statements
of the subsidiaries are fully consolidated with those of the Bank.
Accordingly, all balances and effects of the transactions between
consolidated entities are eliminated on consolidation. On
acquisition of control of a subsidiary, its assets, liabilities and
contingent liabilities are recognised at fair value at the date of
acquisition. Any positive differences between the acquisition cost
and the fair values of the identifiable net assets acquired are
recognised as goodwill (see Note 17). Negative differences are
recognised in profit or loss on the date of acquisition.
Additionally, the share of third parties of the Groups equity is
presented under Non-controlling interests in the consolidated
balance sheet (see Note 28). Their share of the profit for the year
is presented under Profit attributable to non-controlling interests
in the consolidated income statement. The results of subsidiaries
acquired during the year are included in the consolidated income
statement from the date of acquisition to year-end. Similarly, the
results of subsidiaries disposed of during the year are included in
the consolidated income statement from the beginning of the year to
the date of disposal. The Appendices contain significant
information on these entities. ii. Interests in joint ventures
(jointly controlled entities) Joint ventures are deemed to be
ventures that are not subsidiaries but which are jointly controlled
by two or more unrelated entities. This is evidenced by contractual
arrangements whereby two or more entities (venturers) acquire
interests in entities (jointly controlled entities) or undertake
operations or hold assets so that strategic financial and operating
decisions affecting the joint venture require the unanimous consent
of the venturers. In the consolidated financial statements,
investments in jointly controlled entities are accounted for using
the equity method, i.e. at the Groups share of net assets of the
investee, after taking into account the dividends received
therefrom and other equity eliminations. The profits and losses
resulting from transactions with a jointly controlled entity are
eliminated to the extent of the Groups ownership interest in the
entity. The Appendices contain significant information on these
entities.13 23. iii. AssociatesAssociates are entities over which
the Bank is in a position to exercise significant influence, but
not controlor joint control. Significant influence generally exists
when the Bank holds 20% or more of the voting power ofthe
investee.In the consolidated financial statements, investments in
associates are accounted for using the equitymethod, i.e. at the
Groups share of net assets of the investee, after taking into
account the dividendsreceived therefrom and other equity
eliminations. The profits and losses resulting from transactions
with anassociate are eliminated to the extent of the Groups
interest in the associate.The Appendices contain significant
information on these entities.iv. Special purpose entitiesWhen the
Group incorporates special purpose entities, or holds ownership
interests therein, to enable itscustomers to access certain
investments, or for the transfer of risks or other purposes, it
determines, usinginternal criteria and procedures, and taking into
consideration the applicable legislation, whether control
(asdefined above) exists and, therefore, whether these entities
should be consolidated. These criteria andprocedures take into
account, inter alia, the risks and rewards retained by the Group
and, accordingly, allrelevant matters are taken into consideration,
including any guarantees granted or any losses associated withthe
collection of the related assets retained by the Group. These
entities include the securitisation specialpurpose vehicles, which
are fully consolidated in the case of the SPVs over which, based on
theaforementioned analysis, it is considered that the Group
continues to exercise control.v. Other mattersAt 31 December 2011,
the Group controlled the following companies in which it held an
ownership interest ofless than 50% of the share capital: (i) Luri
1, S.A., (ii) Luri 2, S.A. and (iii) Luri Land, S.A. The
percentageownership interest in the aforementioned companies was
5.59%, 4.82% and 5.16%, respectively (seeAppendix I). Although the
Group holds less than half the voting power, it manages and, as a
result, exercisescontrol over these entities.In addition, at 31
December 2011 the Group exercised joint control of Luri 3, S.A.,
despite holding 9.63% ofits share capital (see Appendix II). This
decision is based on the Groups presence on the companys board
ofdirectors, in which the agreement of all members is required for
decision-making.The impact of the consolidation of these companies
on the Groups consolidated financial statements isimmaterial.The
company object of these entities is the acquisition of real estate
and other general operations relatingthereto, including the rental,
purchase and sale of properties (see Appendices I and II). 31% of
their assetsare located in Spain.vi. Business combinationsA
business combination is the bringing together of two or more
separate entities or economic units into onesingle entity or group
of entities.Business combinations whereby the Group obtains control
over an entity are recognised for accountingpurposes as follows:14
24. - The Group measures the cost of the business combination,
which is normally the considerationtransferred, defined as the
acquisition-date fair values of the assets transferred, the
liabilities incurred tothe former owners of the acquiree and the
equity instruments issued, if any, by the acquirer. Since 1January
2010, in cases where the amount of the consideration to be
transferred has not been definitivelyestablished at the acquisition
date, but rather depends on future events, any contingent
considerationmust be recognised as part of the consideration
transferred and measured at its acquisition-date fairvalue; also
since that date, acquisition-related costs, such as fees paid to
auditors, legal advisers,investment banks and other consultants,
may not for these purposes form part of the cost of the
businesscombination.- The fair values of the assets, liabilities
and contingent liabilities of the acquired entity or
business,including any intangible assets which might not have been
recognised by the acquiree, are estimated andrecognised in the
consolidated balance sheet; the Group also estimates the amount of
any non-controllinginterests and the fair value of the previously
held equity interest in the acquiree.- Any positive difference
between the aforementioned items is recognised as discussed in Note
2.m. Anynegative difference is recognised under Gains on bargain
purchases arising on business combinations inthe consolidated
income statement.Since 1 January 2010, goodwill is only measured
and recognised once, when control is obtained of abusiness.vii.
Changes in the levels of ownership interests in subsidiariesAs
required under IFRSs, since 1 January 2010, acquisitions and
disposals not giving rise to a change incontrol are recognised as
equity transactions, and no gain or loss is recognised in the
income statement andthe initially recognised goodwill is not
remeasured. The difference between the consideration transferred
orreceived and the decrease or increase in non-controlling
interests, respectively, is recognised in reserves.Similarly, since
that date, IAS 27 has established that when control over a
subsidiary is lost, the assets,liabilities and non-controlling
interests and any other items recognised in valuation adjustments
of thatcompany are derecognised from the consolidated balance
sheet, and the fair value of the considerationreceived and of any
remaining equity interest is recognised. The difference between
these amounts isrecognised in profit or loss.With respect to
non-monetary contributions to jointly controlled entities, the IASB
has acknowledged theexistence of a conflict between IAS 27, which
establishes that if control is lost the remaining equity interest
ismeasured at fair value, recognising the full amount of the gain
or loss in profit or loss, and IAS 31.48, togetherwith SIC 13,
which for transactions under its scope- would only permit
recognition of the portion of the gainor loss attributable to the
capital owned by the other venturers in the jointly controlled
entity. The Group hasopted to apply the provisions of IAS 27
consistently to all transactions falling under the scope of
theaforementioned standards.viii. Acquisitions and disposalsNote 3
provides information on the most significant acquisitions and
disposals in 2011, 2010 and 2009.15 25. c) Definitions and
classification of financial instruments i. Definitions A financial
instrument is any contract that gives rise to a financial asset of
one entity and, simultaneously, to a financial liability or equity
instrument of another entity. An equity instrument is any agreement
that evidences a residual interest in the assets of the issuing
entity after deducting all of its liabilities. A financial
derivative is a financial instrument whose value changes in
response to the change in an observable market variable (such as an
interest rate, foreign exchange rate, financial instrument price,
market index or credit rating), whose initial investment is very
small compared with other financial instruments with a similar
response to changes in market factors, and which is generally
settled at a future date. Hybrid financial instruments are
contracts that simultaneously include a non-derivative host
contract together with a derivative, known as an embedded
derivative, that is not separately transferable and has the effect
that some of the cash flows of the hybrid contract vary in a way
similar to a stand-alone derivative. Compound financial instruments
are contracts that simultaneously create for their issuer a
financial liability and an own equity instrument (such as
convertible bonds, which entitle their holders to convert them into
equity instruments of the issuer). The following transactions are
not treated for accounting purposes as financial instruments:
-Investments in associates and jointly controlled entities (see
Note 13). -Rights and obligations under employee benefit plans (see
Note 25). -Rights and obligations under insurance contracts (see
Note 15). -Contracts and obligations relating to employee
remuneration based on own equity instruments (see Note34). ii.
Classification of financial assets for measurement purposes
Financial assets are initially classified into the various
categories used for management and measurement purposes, unless
they have to be presented as Non-current assets held for sale or
they relate to Cash and balances with central banks, Changes in the
fair value of hedged items in portfolio hedges of interest rate
risk (asset side), Hedging derivatives and Investments, which are
reported separately. Financial assets are included for measurement
purposes in one of the following categories: -Financial assets held
for trading (at fair value through profit or loss): this category
includes the financialassets acquired for the purpose of generating
a profit in the near term from fluctuations in their prices
andfinancial derivatives that are not designated as hedging
instruments. -Other financial assets at fair value through profit
or loss: this category includes hybrid financial assets notheld for
trading that are measured entirely at fair value and financial
assets not held for trading that areincluded in this category in
order to obtain more relevant information, either because this
eliminates orsignificantly reduces recognition or measurement
inconsistencies (accounting mismatches) that would16 26. otherwise
arise from measuring assets or liabilities or recognising the gains
or losses on them on differentbases, or because a group of
financial assets or financial assets and liabilities is managed and
itsperformance is evaluated on a fair value basis, in accordance
with a documented risk management orinvestment strategy, and
information about the group is provided on that basis to the Groups
keymanagement personnel. Financial assets may only be included in
this category on the date they areacquired or originated.-
Available-for-sale financial assets: this category includes debt
instruments not classified as Held-to-maturity investments, Loans
and receivables or Financial assets at fair value through profit or
loss, andequity instruments issued by entities other than
subsidiaries, associates and jointly controlled entities,provided
that such instruments have not been classified as Financial assets
held for trading or as Otherfinancial assets at fair value through
profit or loss.- Loans and receivables: this category includes the
investment arising from ordinary lending activities, suchas the
cash amounts of loans drawn down and not yet repaid by customers or
the deposits placed withother institutions, whatever the legal
instrument, unquoted debt securities and receivables from
thepurchasers of goods, or the users of services, constituting part
of the Groups business.The consolidated entities generally intend
to hold the loans and credits granted by them until their
finalmaturity and, therefore, they are presented in the
consolidated balance sheet at their amortised cost(which includes
any reductions required to reflect the estimated losses on their
recovery).- Held-to-maturity investments: this category includes
debt instruments traded in an active market, withfixed maturity and
with fixed or determinable payments, for which the Group has both
the intention andproven ability to hold to maturity.iii.
Classification of financial assets for presentation
purposesFinancial assets are classified by nature into the
following items in the consolidated balance sheet:- Cash and
balances with central banks: cash balances and balances receivable
on demand relating todeposits with the Bank of Spain and other
central banks.- Loans and advances: includes the debit balances of
all credit and loans granted by the Group, other thanthose
represented by securities, as well as finance lease receivables and
other debit balances of afinancial nature in favour of the Group,
such as cheques drawn on credit institutions, balances
receivablefrom clearing houses and settlement agencies for
transactions on the stock exchange and organisedmarkets, bonds
given in cash, capital calls, fees and commissions receivable for
financial guarantees anddebit balances arising from transactions
not originating in banking transactions and services, such as
thecollection of rentals and similar items. They are classified,
depending on the institutional sector to whichthe debtor belongs,
under:- Loans and advances to credit institutions: credit of any
nature, including deposits and money marketoperations, in the name
of credit institutions.- Loans and advances to customers: includes
the remaining credit, including money market operationsthrough
central counterparties.- Debt instruments: bonds and other
securities that represent a debt for their issuer, that generate
aninterest return, and that are in the form of certificates or book
entries. 17 27. - Equity instruments: financial instruments issued
by other entities, such as shares, which have the natureof equity
instruments for the issuer, unless they are investments in
subsidiaries, jointly controlled entitiesor associates. Investment
fund units are included in this item.- Trading derivatives:
includes the fair value in favour of the Group of derivatives which
do not form part ofhedge accounting, including embedded derivatives
separated from hybrid financial instruments.- Changes in the fair
value of hedged items in portfolio hedges of interest rate risk:
this item is the balancingentry for the amounts credited to the
consolidated income statement in respect of the measurement of
theportfolios of financial instruments which are effectively hedged
against interest rate risk through fair valuehedging derivatives.-
Hedging derivatives: includes the fair value in favour of the Group
of derivatives, including embeddedderivatives separated from hybrid
financial instruments, designated as hedging instruments in
hedgeaccounting.iv. Classification of financial liabilities for
measurement purposesFinancial liabilities are initially classified
into the various categories used for management and
measurementpurposes, unless they have to be presented as
Liabilities associated with non-current assets held for sale orthey
relate to Hedging derivatives or Changes in the fair value of
hedged items in portfolio hedges of interestrate risk (liability
side), which are reported separately.Financial liabilities are
classified for measurement purposes into one of the following
categories:- Financial liabilities held for trading (at fair value
through profit or loss): this category includes the
financialliabilities issued for the purpose of generating a profit
in the near term from fluctuations in their prices,financial
derivatives not considered to qualify for hedge accounting and
financial liabilities arising from theoutright sale of financial
assets acquired under reverse repurchase agreements ("reverse
repos") orborrowed (short positions).- Other financial liabilities
at fair value through profit or loss: financial liabilities are
included in this categorywhen more relevant information is
obtained, either because this eliminates or significantly
reducesrecognition or measurement inconsistencies (accounting
mismatches) that would otherwise arise frommeasuring assets or
liabilities or recognising the gains or losses on them on different
bases, or because agroup of financial liabilities or financial
assets and liabilities is managed and its performance is
evaluatedon a fair value basis, in accordance with a documented
risk management or investment strategy, andinformation about the
group is provided on that basis to the Groups key management
personnel.Liabilities may only be included in this category on the
date when they are issued or originated.- Financial liabilities at
amortised cost: financial liabilities, irrespective of their
instrumentation and maturity,not included in any of the
above-mentioned categories which arise from the ordinary borrowing
activitiescarried on by financial institutions.v. Classification of
financial liabilities for presentation purposesFinancial
liabilities are classified by nature into the following items in
the consolidated balance sheet:- Deposits: includes all repayable
balances received in cash by the Group, other than those
instrumentedas marketable securities and those having the substance
of subordinated liabilities. This item alsoincludes cash bonds and
cash consignments received the amount of which may be invested
withoutrestriction. Deposits are classified on the basis of the
creditors institutional sector into:18 28. - Deposits from central
banks: deposits of any nature, including credit received and money
marketoperations received from the Bank of Spain or other central
banks.- Deposits from credit institutions: deposits of any nature,
including credit received and money marketoperations in the name of
credit institutions.- Customer deposits: includes the remaining
deposits, including money market operations throughcentral
counterparties. -Marketable debt securities: includes the amount of
bonds and other debt represented by marketablesecurities, other
than those having the substance of subordinated liabilities. This
item includes thecomponent considered to be a financial liability
of issued securities that are compound financialinstruments.
-Trading derivatives: includes the fair value, with a negative
balance for the Group, of derivatives, includingembedded
derivatives separated from the host contract, which do not form
part of hedge accounting. -Short positions: includes the amount of
financial liabilities arising from the outright sale of financial
assetsacquired under reverse repurchase agreements or borrowed.
-Subordinated liabilities: amount of financing received which, for
the purposes of payment priority, ranksbehind ordinary debt. This
category also includes the financial instruments issued by the
Group which,although capital for legal purposes, do not meet the
requirements for classification as equity, such ascertain
preference shares issued. -Other financial liabilities: includes
the amount of payment obligations having the nature of
financialliabilities not included in other items, and liabilities
under financial guarantee contracts, unless they havebeen
classified as doubtful. -Changes in the fair value of hedged items
in portfolio hedges of interest rate risk: this item is the
balancingentry for the amounts charged to the consolidated income
statement in respect of the measurement of theportfolios of
financial instruments which are effectively hedged against interest
rate risk through fair valuehedging derivatives. -Hedging
derivatives: includes the fair value of the Groups liability in
respect of derivatives, includingembedded derivatives separated
from hybrid financial instruments, designated as hedging
instruments inhedge accounting.d) Measurement of financial assets
and liabilities and recognition of fair value changes In general,
financial assets and liabilities are initially recognised at fair
value which, in the absence of evidence to the contrary, is deemed
to be the transaction price. Financial instruments not measured at
fair value through profit or loss are adjusted by the transaction
costs. Financial assets and liabilities are subsequently measured
at each period-end as follows: i. Measurement of financial assets
Financial assets are measured at fair value, without deducting any
transaction costs that may be incurred on their disposal, except
for loans and receivables, held-to-maturity investments, equity
instruments whose fair 19 29. value cannot be determined in a
sufficiently objective manner and financial derivatives that have
those equityinstruments as their underlying and are settled by
delivery of those instruments.The fair value of a financial
instrument on a given date is taken to be the amount for which it
could be boughtor sold on that date by two knowledgeable, willing
parties in an arms length transaction acting prudently. Themost
objective and common reference for the fair value of a financial
instrument is the price that would bepaid for it on an active,
transparent and deep market (quoted price or market price). At 31
December 2011,there were no significant investments in quoted
financial instruments which have ceased to be recognised attheir
quoted price because their market cannot be deemed to be active.If
there is no market price for a given financial instrument, its fair
value is estimated on the basis of the priceestablished in recent
transactions involving similar instruments and, in the absence
thereof, of valuationtechniques commonly used by the international
financial community, taking into account the specific featuresof
the instrument to be measured and, particularly, the various types
of risk associated with it.All derivatives are recognised in the
balance sheet at fair value from the trade date. If the fair value
is positive,they are recognised as an asset and if the fair value
is negative, they are recognised as a liability. The fairvalue on
the trade date is deemed, in the absence of evidence to the
contrary, to be the transaction price.The changes in the fair value
of derivatives from the trade date are recognised in Gains/losses
on financialassets and liabilities in the consolidated income
statement. Specifically, the fair value of financial
derivativestraded in organised markets included in the portfolios
of financial assets or liabilities held for trading isdeemed to be
their daily quoted price and if, for exceptional reasons, the
quoted price cannot be determinedon a given date, these financial
derivatives are measured using methods similar to those used to
measureOTC derivatives.The fair value of OTC derivatives is taken
to be the sum of the future cash flows arising from the
instrument,discounted to present value at the date of measurement
(present value or theoretical close) using valuationtechniques
commonly used by the financial markets: net present value (NPV),
option pricing models andother methods.Loans and receivables and
Held-to-maturity investments are measured at amortised cost using
the effectiveinterest method. Amortised cost is understood to be
the acquisition cost of a financial asset or liability plus
orminus, as appropriate, the principal repayments and the
cumulative amortisation (taken to the incomestatement) of the
difference between the initial cost and the maturity amount. In the
case of financial assets,amortised cost furthermore includes any
reductions for impairment or uncollectibility. In the case of loans
andreceivables hedged in fair value hedges, the changes in the fair
value of these assets related to the risk orrisks being hedged are
recognised.The effective interest rate is the discount rate that
exactly matches the carrying amount of a financialinstrument to all
its estimated cash flows of all kinds over its remaining life. For
fixed rate financialinstruments, the effective interest rate
coincides with the contractual interest rate established on
theacquisition date plus, where applicable, the fees and
transaction costs that, because of their nature, form partof their
financial return. In the case of floating rate financial
instruments, the effective interest rate coincideswith the rate of
return prevailing in all connections until the next benchmark
interest reset date.Equity instruments whose fai