1. Introduction, basis for the presentation of the consolidated financial statements and internal control of financial information

1.1 Introduction

Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter “the Bank” or “BBVA") is a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad.

The Bylaws and other public information are available for inspection at the Bank’s registered address (Plaza San Nicolás, 4 Bilbao) as on its web site (www.bbva.com).

In addition to the transactions it carries out directly, the Bank heads a group of subsidiaries, joint venture and associated entities which perform a wide range of activities and which together with the Bank constitute the Banco Bilbao Vizcaya Argentaria Group (hereinafter, “the Group” or “the BBVA Group”). In addition to its own separate financial statements, the Bank is therefore required to prepare the Group’s consolidated financial statements.

As of December 31, 2013, the BBVA Group was made up of 301 consolidated entities and 127 entities accounted for using the equity method (see Notes 3 and 17 Appendices I to IV).

The consolidated financial statements of the BBVA Group and the separate financial statements of the Bank for the year ended December 31, 2012 and 2011 were approved by the shareholders at the Annual General Meetings (“AGM”) on March 15, 2013 and March 16, 2012, respectively.

The BBVA Group’s consolidated financial statements and the Bank’s separate financial statements and those of the majority of the Group subsidiaries for the year ended December 31, 2013, are pending approval from the respective AGMs. Notwithstanding, the Board of Directors expects that these financial statements will be approved without material changes.

1.2 Basis for the presentation of the consolidated financial statements

The BBVA Group’s consolidated financial statements are presented in accordance with the International Financial Reporting Standards endorsed by the European Union (hereinafter, “EU-IFRS”) applicable as of December 31 2013 (see Note 1.3), considering the Bank of Spain Circular 4/2004, of 22 December (and as amended thereafter), and with any other legislation governing financial reporting applicable to the Group.

The BBVA Group’s accompanying consolidated financial statements for the year ended December 31, 2013 were prepared by the Group’s Directors (through the Board of Directors held January 30, 2014) by applying the principles of consolidation, accounting policies and valuation criteria described in Note 2, so that they present fairly the Group’s consolidated equity and financial position as of December 31, 2013, together with the consolidated results of its operations and cash flows generated during the year 2013.

These consolidated financial statements were prepared on the basis of the accounting records kept by the Bank and each of the other entities in the Group. Moreover, they include the adjustments and reclassifications required to harmonize the accounting policies and valuation criteria used by the Group (see Note 2.2).

All effective accounting standards and valuation criteria with a significant effect in the consolidated financial statements were applied in their preparation.

The amounts reflected in the accompanying consolidated financial statements are presented in millions of euros, unless it is more appropriate to use smaller units. Some items that appear without a total in these consolidated financial statements do so because of the size of the units used. Also, in presenting amounts in millions of euros, the accounting balances have been rounded up or down. It is therefore possible that the totals appearing in some tables are not the exact arithmetical sum of their component figures.

The percentage changes in amounts have been calculated using figures expressed in thousands of euros.

1.3 Comparación de la información

The information included in the accompanying consolidated financial statements and the explanatory notes referring to December 31, 2012 y 2011 are presented exclusively for the purpose of comparison with the information for December 31, 2013, and therefore do not represent the consolidated financial statements of the BBVA Group for the years ended December 31, 2011 and 2012.

For the information provided as of December 31, 2012 and 2011, the following should be noted:

• The application of new standards, IFRS 10 and 11 have, as a material impact, the change in the consolidation method of the investment in the joint venture of Garanti. As of January 1, 2013, such investment is consolidated under the equity method, while in the fiscal years 2012 and 2011, said investment was consolidated under the proportionate consolidation method. For comparative purposes the information as of December 31, 2012 and 2011 will be provided under the current consolidation method. The balance sheet and income statement for 2012 and 2011 before and after application of IFRS 10 and 11 are presented in Annex VIII. (See Appendix VIII).
• As mentioned in Note 6, in the year 2013, minor changes were made to the operating segments in the BBVA Group with respect to the structure in place in 2012 and 2011. The figures for 2012 and 2011 are provided according to the criteria used in 2013, as established by IFRS 8, “Operating segments”.

1.4 Seasonal nature of income and expenses

The nature of the most significant operations carried out by the BBVA Group’s entities is mainly related to traditional activities carried out by financial institutions, which are not significantly affected by seasonal factors.

1.5 Responsibility for the information and for the estimates made

The information contained in the BBVA Group’s consolidated financial statements is the responsibility of the Group’s Directors.

Estimates have to be made at times when preparing these consolidated financial statements in order to calculate the recorded amount of some assets, liabilities, income, expenses and commitments. These estimates relate mainly to the following:

• Impairment on certain financial assets (see Notes 7, 8, 12, 13, 14 and 17).
• The assumptions used to quantify certain provisions (see Notes 18, 24 and 25) and for the actuarial calculation of post-employment benefit liabilities and commitments (see Note 26).
• The useful life and impairment losses of tangible and intangible assets (see Notes 16, 19, 20 and 22).
• The valuation of goodwill (see Note 20).
• The fair value of certain unlisted financial assets and liabilities (see Notes 7, 8, 10, 11, 12 and 15).

Although these estimates were made on the basis of the best information available as of December 31, 2013 on the events analyzed, future events may make it necessary to modify them (either up or down) over the coming years. This would be done prospectively in accordance with applicable standards, recognizing the effects of changes in the estimates in the corresponding consolidated income statement.

1.6 Control of the BBVA Group’s financial reporting

The financial information prepared by the BBVA Group is subject to a system of internal control (hereinafter the "Internal Financial Control" or "ICFR"). Its aim is to provide reasonable assurance with respect to its reliability and integrity, and to ensure that the transactions carried out and processed use the criteria established by the BBVA Group’s management and comply with applicable laws and regulations.

The ICFR was developed by the BBVA Group’s management in accordance with international standards established by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter, "COSO"). This stipulates five components that must form the basis of the effectiveness and efficiency of systems of internal control:

• Establishment of an appropriate control framework to monitor these activities.
• Assessment of all of the risks that could arise during the preparation of financial information.
• Design the necessary controls to mitigate the most critical risks.
• Establishment of an appropriate system of information flows to detect and report system weaknesses or flaws.
• Monitoring of the controls to ensure they perform correctly and are effective over time.

In May 2013, COSO has released an updated version of its Integrated Internal Control Framework version. This update provides a broader framework than the previous guidance and clarifies the requirements for determining what constitutes effective internal control. Although BBVA Group is in the process of analyzing the current version, no significant changes are expected in the current internal model control.

The ICFR is a dynamic model that evolves continuously over time to reflect the reality of the BBVA Group’s business at any time, together with the risks affecting it and the controls designed to mitigate these risks. It is subject to continuous evaluation by the internal control units located in the BBVA Group’s different entities.

The internal control units comply with a common and standard methodology issued by the corporate internal control units, which also perform a supervisory role over them, as set out in the following diagram:

As well as the evaluation by the Internal Control Units, ICFR Model is subject to evaluations by the Group’s Internal Audit Department and external auditors. It is also supervised by the Audit and Compliance Committee of the Bank’s Board of Directors. At the date of preparation of these consolidated financial statements, the BBVA Group has not identified internal control weaknesses of the financial information that could materially impact the consolidated financial statements of the Group for 2013.

The description of the Internal Control system for financial information is detailed in the Corporate Governance Annual Report, which is included within the Management Report attached to these consolidated financial statements for the year ended December 31, 2013.

1.7 Mortgage market policies and procedures

The information on “Mortgage market policies and procedures” (for the granting of mortgage loans and for debt issues secured by such mortgage loans) required by Bank of Spain Circular 5/2011, applying Royal Decree 716/2009, dated April 24 (which developed certain aspects of Act 2/1981, dated 25 March, on the regulation of the mortgage market and other mortgage and financial market regulations), can be found in Appendix XI.