Effects of new and amended IFRSs

Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year 2018.

Amendments to IAS 40 (Investment Property) have been applicable since January 1, 2018; they clarify when a property is transferred to or from investment property and thus the scope of IAS 40.

In addition, amendments to IFRS 1 and IAS 28 are applicable, which the International Accounting Standards Board issued as part of the improvements to International Financial Reporting Standards (Annual Improvement Project 2016). In IFRS 1 (First-time Adoption of IFRSs), short-term exemptions for first-time adopters of the IFRSs have been deleted. In IAS 28 (Investments in Associates and Joint Ventures), guidance on investment entities has been clarified.

In addition, IFRS 2 (Share-based Payment) was amended. These amendments relate to the clarification of how transactions with share-based payment are classified and measured.

Moreover, amendments to IFRS 4 (Insurance Contracts) have come into effect, which reduce the impact of the different initial application dates of IFRS 9 and IFRS 17.

IFRIC 22 (Foreign Currency Transactions and Advance Consideration) also applies; this interpretation clarifies the exchange rates to be used in foreign currency transactions with advance consideration.

The amendments referred to above do not materially affect the Volkswagen Group’s net assets, financial position and results of operations.

IFRS 9 – FINANCIAL INSTRUMENTS

IFRS 9 changes the accounting requirements for classifying and measuring financial assets, for impairment of financial assets, and for hedge accounting.

Financial assets are classified and measured on the basis of the entity’s business model and the characteristics of the financial asset’s cash flows. A financial asset is initially measured either “at amortized cost”, “at fair value through other comprehensive income”, or “at fair value through profit or loss”. The classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the accounting requirements of IAS 39.

The basis for measuring impairment losses and recognizing loss allowances switched from an incurred credit loss model to an expected credit loss model. The change in measurement method leads to an increase in the loss allowance. The increase in the loss allowance results firstly from the requirement to recognize a loss allowance even for financial assets not classified as non-performing and whose credit risk has not increased significantly since initial recognition. Secondly, the increase results from the requirement to recognize loss allowances on the basis of the entire expected remaining life of the contractual asset for financial assets for which there has been a significant increase in credit risk since initial recognition.

In the case of hedge accounting, IFRS 9 contains both extended designation options and the need to implement more complex recognition and measurement methods. In addition, IFRS 9 also eliminates the quantitative limits for effectiveness measurement.

Furthermore, IFRS 9 has an impact on the entity’s reclassification practice. Depending on market trends, there is an expectation that operating profit or loss will be affected by hedging transactions to a greater extent. Due to the retrospective application of the guidance on designating options, the prior-year figures were adjusted. This resulted in an effect of €−0.2 billion on earnings after tax in fiscal year 2017.

This also results in far more extensive disclosures in the notes.

The tables below show the main effects of the new accounting rules under IFRS 9 on the classification and measurement of financial assets, the impairment of financial assets and hedge accounting.

For the class of derivatives in hedge accounting, IFRS 9 did not result in any reclassifications from or to other classes.

In addition to the changes described above, the new rules on the recognition of loss allowances had an impact on the measurement of lease assets. This resulted in an adjustment of €43 million (of which €35 million recognized in lease assets and €7 million in inventories). This transition effect, net of deferred taxes, was recognized directly in equity.

The categories of financial instruments have been added as part of the implementation of IFRS 9 (see the section on “Accounting policies”). The principal movement in this context was the reclassification of lease receivables and liabilities in the “measured at amortized cost” category to “not allocated to any measurement category”. Prior-year values under financial services receivables and financial liabilities have been restated. The carrying amount of lease receivables was €49,166 million (previous year €46,156 million) and their fair value (fair value hierarchy level 3) was €49,791 million (previous year €46,959 million). The carrying amount of lease liabilities was €449 million (previous year €479 million) and their fair value (fair value hierarchy level 2) was €466 million (previous year €510 million).

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 specifies new accounting rules for revenue recognition. The Volkswagen Group applies the modified retrospective transition method. This did not result in material transition effects for the Volkswagen Group as of January 1, 2018, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance.

In the MAN subgroup, sales revenue for certain types of contracts are recognized at a later point in time than under the previous accounting treatment. Other provisions and other liabilities were adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash increased total assets by €0.2 billion in the balance sheet as of January 1, 2018 compared with the previous year.

Starting in fiscal year 2018, certain items previously recognized in distribution expenses (in particular financing cost subsidies granted to third parties) are allocated to sales allowances.

In addition, from 2018 onward, the reversal of provisions for sales allowances is no longer presented under other operating income, but under sales revenue. As a result, an amount of €0.6 billion has been moved between other operating income and sales revenue.

To make the presentation more consistent and easier to compare, the way other income from the reversal of provisions and accrued liabilities is reported was also adjusted in this context; these items were allocated to those functional areas in which they were originally recognized. As a result, cost of sales declined in the reporting period because of income from the reversal of provisions and accrued liabilities of €2.5 billion (previous year: €2.1 billion). In addition, distribution expenses were down by €0.5 billion (previous year: €0.7 billion) and administrative expenses by €0.2 billion (previous year: €0.1 billion). There was a corresponding €3.3 billion (previous year: €3.0 billion) decrease in other operating income.

In addition, it was established in connection with the introduction of IFRS 15 that certain sales programs in certain countries should be allocated to sales allowances rather than distribution expenses. The prior-period distribution expenses were therefore adjusted by €1.1 billion. There was a corresponding decrease in sales revenue.

New and amended IFRSs not applied

In its 2018 consolidated financial statements, Volkswagen AG did not apply the following accounting pronouncements that have already been adopted by the IASB, but were not yet required to be applied for the fiscal year.

IFRS 16 – LEASES

IFRS 16 amends the rules for lease accounting and replaces the previous IAS 17 standard and related interpretations.

The main objective of IFRS 16 is to recognize all leases. It establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. They will instead be required to recognize a right-of-use asset and a lease liability for all leases in the balance sheet. The lease liability is measured on the basis of the outstanding lease payments, discounted using the incremental borrowing rate, while the right-of-use asset is always measured at the amount of the lease liability plus any initial direct costs. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using the effective interest method and taking the lease payments into account. Exceptions will be made for short-term leases and leases of low-value assets. For these cases, the Volkswagen Group will make use of the practical expedient provided for in IFRS 16, and opt not to recognize a right-of-use asset or a lease liability arising from such lease agreements; instead it will continue to recognize the lease payments as expenses in profit or loss.

Lessor accounting essentially follows the current guidance of IAS 17. In the future, lessors will continue to classify their leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset.

As of January 1, 2019, the Volkswagen Group will for the first time account for leases in accordance with IFRS 16, using the modified retrospective transition method. This requires the recognition of the lease liability at the present value of the remaining lease payments, discounted using an incremental borrowing rate at the transition date. To simplify, the right-of-use assets are recognized in the amount of the corresponding lease liability, adjusted for any prepaid or accrued lease payments. As a result of the first-time recognition of right-of-use assets and lease liabilities in almost the same amounts, current estimates indicate that the balance sheet total will increase by around 1%. The rise in financial liabilities will have a negative effect on the Volkswagen Group’s net liquidity. No significant effect on equity is expected.

Unlike the previous procedure, under which all operating lease expenses were reported under operating profit, the only items allocated to operating profit under IFRS 16 are depreciation charges on right-of-use assets. Interest expense from adding interest on lease liabilities is reported in the financial result. Based on leases in place as of January 1, 2019, current estimates indicate that there will be an improvement in operating profit by an amount in the low three-digit million range.

The change in the way operating lease expenses are presented in the cash flow statement will result in a slight improvement in cash flows from operating activities and a corresponding reduction in cash flows from financing activities.

This standard also results in far more extensive disclosures in the notes.