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regulations, the consolidated annual accounts may be modified if they are not approved by that governance body. 2. BASIS OF PRESENTATION OF THE CONSOLIDATED ANNUAL ACCOUNTS

2.1. Basis of presentation

The group’s consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, with all companies having carried out the requisite standardization adjustments.

The consolidated financial statements were prepared on the cost-model basis, except for available-for-sale financial assets, financial assets for trading and derivative financial instruments, which were recorded at fair value.

There was no early application of the rules and

interpretations which, having been approved by the European Commission, had not entered into force on the closing date of the 2014 financial year. However, their early adoption would have had no effect on the group’s financial situation and results.

2.2. Financial information by segment

Section E) of the consolidated annual accounts includes financial information by segment.

The Board of Directors of the controlling company has identified the following main segments by business activity: • Life Direct Insurance

• Automobile Direct Insurance • Other Non-Life Direct Insurance

• Life and Non-Life Accepted Reinsurance • Other Activities

The revenues and expenses of the first four segments correspond to the Life, Non-Life and Reinsurance activities, while those included under “Other Activities” correspond to the management of securities and property assets, medical services, assistance, funeral services, technology services, etc.

In order to identify the operating segments, the main activities and insurance lines under the group’s management have been taken into account, as well as the quantitative thresholds laid down in the regulations. Transactions between segments are performed at fair value and eliminated in the consolidation process.

The Consolidated Management Report provides additional information on the development and characteristics of the business.

2.3 Financial information by geographical area

Section F) of the consolidated annual accounts includes financial information by geographical area.

The geographical areas established are: Spain, United States of America, Brazil, Venezuela, Mexico, Colombia, Argentina, Turkey, Chile and Other Countries.

2.4. Changes in accounting policies, changes in estimates and errors

In the financial years 2014 and 2013 there were no changes in accounting policies, estimates or significant errors that could have had an effect on the group’s financial position or results.

2.5. Comparison of information

There are no reasons preventing the comparison of the consolidated annual accounts of the current financial year with those of the preceding one.

The adoption of the new Rules and Interpretations applicable to financial years beginning after January 1, 2013 (modifications of IFRS 7, IAS 19 and IAS 12) and after January 1, 2014 (revised IAS 28 and modification of IAS 32) have had no effect on the group’s financial position and results. Furthermore, IFRS 12 “Disclosure of Interests in Other Entities” and IFRS 13 “Fair Value Measurement”, which came into force on January 1, 2014 and 2013 respectively, have not had an impact on the group’s financial position and results. However, they have led to additional breakdowns which are provided in accordance with the provisions in the relevant notes of the consolidated annual report. IFRS 10 “Consolidated Financial Statements” and IFRS 11 “Joint Arrangements”, which came into force on January 1, 2014 and introduce changes regarding, among other aspects, the definition of control and consolidation methods to be used, respectively, have resulted in four fully consolidated companies in financial year 2013, investees of FUNESPAÑA, S.A., being included by the equity method in the present financial year. This has led to a reduction of assets, liabilities and minority interests to the tune of 43.94, 12.34 and 31.6 million euros, respectively, but has had no effect on the results attributable to the controlling company. Due to the insignificance of these effects, the comparative information for 2013 has not been restated in these annual accounts. The group will adopt any applicable rules, amendments and interpretations when they come into force. It is estimated that their initial application will not have a significant impact on the group’s financial position and results.

2.6. Changes in the scope of consolidation

Appendix 1 identifies the companies that were incorporated into the consolidation scope in 2014 and 2013, together with details of their equity and results. This appendix also describes the other changes that occurred in the consolidation scope.

The effects on the equity attributable to the controlling company as a result of changes in the last two financial years regarding the ownership of controlled companies that do not imply a loss of control have not been significant (these changes are described in Appendix 1).

The result of the loss of control in controlled companies has had only a slight impact on the financial year (these losses of control are described in Appendix 1).

The overall effect on the group’s consolidated equity, financial position and results in 2014 and 2013 derived from other changes in the consolidation scope with respect to the preceding year is described in the relevant notes of the consolidated annual report.

2.7. Accounting judgments and estimates

In the preparation of the consolidated annual accounts under IFRS, the controlling company’s Board of Directors has made judgments and estimates based on assumptions about the future and uncertainties that basically refer to:

• Losses from impairment of certain assets.

• The calculation of provisions for risks and charges.

• The actuarial calculation of liabilities and post-employment remuneration-related commitments.

• The useful life of intangible assets and of tangible fixed asset items.

• The fair value of certain non-listed assets.

The estimates and assumptions used are regularly reviewed and are based on historical experience and other factors that may have been considered as more reasonable from time to time. If a change in the estimates were to take place in a given period as a result of these reviews, its effect would apply to that period and, if applicable, to subsequent periods.

3. CONSOLIDATION

3.1. Controlled companies, associated undertakings and joint arrangements

The controlled companies, associated undertakings and joint arrangements included in the consolidation are identified and described in the capitalization table, which forms an integral part of the consolidated report as Appendix 1.

This appendix indicates the joint arrangements that have been included in the consolidation and the integration method used.

Companies are configured as controlled companies when the controlling company holds power over the investee entity, has exposure or rights to variable returns, and has the capacity to influence those returns through the power exercised in the entities. Controlled companies are consolidated from the date when the group acquires control, and are excluded from the consolidation on the date when it ceases to have such control. Consequently, the results relating to the part of the financial year during which the entities belonged to the group are included in the accounts.

Associated undertakings are entities in which the controlling company exercises a significant influence but which are neither controlled companies nor joint arrangements. Significant influence refers to the power of intervening in the investee company’s decisions on financial and operating policies, but without having control or joint control over these policies. It is presumed that significant influence is exercised when the controlling company owns, either directly or indirectly through its controlled companies, at least 20 percent of the voting rights of the investee company. Shareholdings in associated undertakings are consolidated by the equity method, including within the value of the shareholding the net goodwill identified on the acquisition date.

When the group’s participation in the losses of an associated undertaking is equal to or higher than the book value of its stake, including any unsecured receivable, the group does not record additional losses, unless obligations have been incurred or payments have been made on behalf of the associated undertaking.

In determining whether an investee is a controlled or associated undertaking, account has been taken of the investee’s purpose and design in order to determine its main activities, the way in which decisions about those activities are made, who currently has the capacity to manage those activities, and who receives returns on them. The following aspects have also been taken into account: the potential voting rights held and liable of exercise, call options on shares, debt instruments convertible into shares, and other instruments that provide the controlling company with the possibility of increasing or reducing its voting rights.

A joint arrangement is considered to exist when two or more entities undertake an economic activity subject to shared control regulated by means of contractual agreement. A joint arrangement is classified as a joint venture when the parties have rights to the net assets of the arrangement, in which case their interests are recorded in the consolidated annual accounts using the equity method.

A joint arrangement is classified as a joint operation when the parties have rights to the net assets and obligations for the liabilities, in which case their interests are recorded in the consolidated annual accounts using the proportionate consolidation method.

In controlled companies in which the controlling company has 50 percent or less of the dividend rights, their consideration as controlled entities is based on the provisions in the shareholder agreements, which may be as follows: • The administration of the companies is carried out by a Board of Directors, which is responsible for their operating and financial strategies as well as their administration and management, and for overseeing their financial and operating policies. In these cases, the Board of Directors comprises an even number of members, the chairman of which is always

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