General Accounting Principles of the Combined Financial Statements

7. ACCOUNTING POLICIES

The significant provisions presented below on recognition and measurement have been applied uniformly for all accounting periods presented in these financial statements.

Intangible Assets

With the exception of goodwill, intangible assets are recognised at cost when acquired. If their useful life can be determined, they are generally amortised on a straight-line basis over their contractual term or their shorter economic useful life. Favourable contracts are amortised over the individual contractual term.

Economic Useful Lives Underlying Amortisation
in yearsUseful life
Software3 – 5
Trademarks5 – 30
Customer relationships4 – 21
Licenses1 – 45
Leasehold interests1 – 25
Permanent rights of use2 – 30

Internally generated intangible assets must be capitalised only if certain precisely defined prerequisites are met. In the Combined Financial Statements, this applies to internally developed software. Cost comprises all directly allocable costs necessary to prepare and produce the software products. In addition to external costs, this also encompasses internal personnel costs. Capitalised development expenses are amortised over the expected useful life of the newly developed software. Research costs are expensed in the period in which they arise.

Goodwill represents the excess of the cost of an acquisition over the acquirer's share of the net fair value of the net assets on the acquisition date. Such goodwill is allocated to intangible assets and is not amortised. Goodwill is measured at its original cost less cumulative impairments and assessed at least annually as part of an impairment test. Goodwill attributable to foreign entities is recognised in local currency and subject to currency translation. No reversals of impairment are carried out on goodwill.

Goodwill from the acquisition of an associate or a joint venture is included in the carrying amount of the investment in associates or joint ventures.

Property, Plant and Equipment

Property, plant and equipment is measured at cost less accumulated depreciation and cumulative impairment losses. The cost includes the expenses directly attributable to the acquisition. Borrowing costs are capitalised solely when material assets are produced which require more than twelve months of preparation for their intended use or sale. In the groups, this concerns warehouses and administrative buildings in particular. All other borrowing costs are expensed in the period in which they are incurred. Public investment subsidies received and free investment grants are considered by reducing the cost of the corresponding asset by the amount of the subsidy.

Depreciation is generally taken on a straight-line basis over the respective economic useful life. Residual carrying amounts and economic useful lives are reviewed at each balance sheet date and adjusted if necessary. As part of the review of the economic useful lives of real estate, the maximum useful life was reduced from 50 to 40 years for the majority of the store properties.

Economic Useful Lives Underlying Depreciation
in yearsUseful life
Buildings25 – 50
Investment properties25 – 50
Leasehold improvements7 – 15
Technical equipment and machinery8 – 20
Motor vehicles5 – 8
Other equipment, operating and office equipment3 – 23

Restoration obligations are included in the cost in the amount of the discounted settlement. These capitalised restoration costs are depreciated pro rata over the useful life of the asset. Maintenance expenses are recognised only if the recognition criteria for property, plant and equipment are satisfied. Gains and losses from disposals of assets are determined as the difference between the disposal proceeds and the carrying amounts and are recognised in profit or loss.

Impairment of Assets

Intangible assets with an indefinite useful life are not amortised, but instead tested at least annually for impairment. Intangible and tangible assets with a finite useful life are tested for impairment if pertinent events or changes in circumstances indicate that the carrying amount may no longer be recoverable. An impairment loss is recognised in the amount by which the carrying amount exceeds the recoverable amount. The recoverable amount is determined as the higher of the asset's fair value less costs to sell and its value in use. For impairment testing, assets are aggregated at the lowest level for which separate cash flows can be identified. As a rule, the individual store is the cash-generating unit (CGU) for impairment testing of the assets identified here, unless a smaller CGU could be determined or the asset was not allocable to a store.

Impairments of tangible and intangible assets, with the exception of goodwill, are reversed if the reasons for an impairment recognised in previous years no longer apply. For assets subject to depreciation/amortisation, impairments are reversed up to the carrying amount – less depreciation/amortisation – that would have been determined if no impairment loss had been recognised in previous years. For assets with indefinite useful lives, impairments are reversed up to a maximum of the carrying amount that would have been determined if no impairment loss had been recognised in previous years.

The carrying amount of an interest in an entity recognised using the equity method is always tested for impairment if there are objective indications that the interest could be impaired.

The impairment described in this section does not apply to recognised inventories, assets from employee benefits, financial assets under the scope of IFRS 9 or deferred taxes.

Impairment of Goodwill

Goodwill is tested for impairment annually and additionally if there are indications of impairment. The goodwill allocated to a CGU is impaired if the recoverable amount is less than the carrying amount. An impairment may not be reversed if the reason for an impairment recognised in previous years no longer exists.

Goodwill is allocated by considering the units that should benefit from the synergies resulting from the business combination.

CGUs are formed at the lowest level at which goodwill is monitored for internal management purposes.

Investment Properties

Investment properties comprise real estate (land, buildings or parts of buildings)

  • held for generating rental income or to realise capital appreciation,
  • which is not used for production or administrative purposes, and
  • is also not to be sold in connection with ordinary business activities.

Investment properties are measured in accordance with the cost model at cost less accumulated depreciation and impairments. They are depreciated on a straight-line basis over their expected useful life and subjected to impairment testing if there are indications of impairment. Please see the notes on property, plant and equipment with respect to useful lives.

A mixed-use property is classified based on the portion of owner occupation. If this is more than five per cent, it is not classified as an investment property.

Other Financial Assets

a)    Classification

Other financial assets within the scope of IFRS 9 are classified to one of the following measurement categories:

  • amortised cost,
  • fair value through profit or loss, or
  • fair value through other comprehensive income.

Other financial assets are initially classified as equity or debt instruments in accordance with IAS 32. In the case of a debt instrument, it is subsequently classified depending on:

  • the business model for managing the financial asset, and
  • the contractual cash flow characteristics.

Financial assets (debt instruments) held within a business model whose objective is to collect contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are measured at amortised cost.

Debt instruments that meet the cash flow characteristics but are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets are measured at fair value through other comprehensive income. The groups do not hold any financial assets that are assigned to this category.

In accordance with the classification requirements of IFRS 9, financial assets are measured at fair value through profit or loss under the following conditions:

  • The cash flow characteristics have not been met.
  • The financial asset is held for trading ("sell" business model).
  • The election is made to recognise changes in fair value through profit or loss (FVPL option), taking into account the requirements under IFRS 9.
  • The financial asset meets the definition of a derivative.

The groups do not exercise the FVPL option for financial assets.

Debt instruments are reclassified only in the event there is a change in the business model for managing the financial asset.

In accordance with IFRS 9, an entity may make an irrevocable election at initial recognition for investments in equity instruments not held for trading to present changes in fair value in other comprehensive income (FVOCI option). The measurement effects recognised in other comprehensive income are not reclassified to the income statement upon subsequent disposal of the equity instrument.

b)    Recognition and derecognition

Regular way purchases or sales of financial assets are measured at fair value as at the trade or settlement date. A financial asset is derecognised if the contractual rights to cash inflows from the asset expire or if the financial asset is transferred. The latter is the case if all substantial risks and rewards of ownership of the asset are transferred or if control over the asset is lost.

Financial assets are counted as current assets if their maturity is within twelve months of the balance sheet date. Otherwise, they are presented as non-current assets.

c)    Measurement

At initial recognition, financial assets are measured at fair value plus or minus the transaction costs directly attributable to the acquisition of the financial asset. In the case of primary financial instruments, the fair value is generally the transaction price. The transaction costs of financial assets measured at fair value through profit or loss are recognised directly through profit or loss. If the transaction price differs from the fair value, the difference is recognised through profit or loss.

The subsequent measurement of the financial assets depends on the measurement category:

Debt instruments
  • Amortised cost:
    Subsequent measurement is made at amortised cost using the effective interest method. Gains or losses on impairment must be recognised in profit or loss. Gains and losses from the derecognition of these assets, including interest income, are recognised in profit or loss in the period in which they arise.
  • Fair value through profit or loss:
    Gains and losses from the change in fair value of these assets, including interest income, are recognised in profit or loss in the period in which they arise.
  • Fair value through other comprehensive income:
    The groups do not hold any financial assets assigned to this measurement category.
Equity instruments

In general, investments in equity instruments are measured at fair value through profit or loss. Changes in the fair value of the instruments, including their dividend income, are recognised in profit or loss in the period in which they arise.

If the irrevocable election is made to recognise financial assets that represent equity instruments, the changes in the fair value are presented in other comprehensive income. The measurement effects recognised in other comprehensive income are not reclassified to the income statement upon subsequent disposal of the equity instrument. By contrast, dividends musts be recognised in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment.

d)    Impairments

The credit risk of debt instruments reported at amortised cost is measured using a three-stage impairment model. The model includes forward-looking inputs and reflects significant increases in credit risk.

Upon initial recognition of the financial assets, a loss allowance must be determined and recognised through profit or loss on the basis of the expected credit losses that would result from a loss event occurring within twelve months of the balance sheet date (stage 1). If the credit risk of the financial assets has increased significantly between the date of initial recognition and the balance sheet date, the loss allowance must be recognised at an amount equal to the lifetime expected credit losses of the financial instrument (stage 2). Indications of a significant increase in the credit risk include considerable financial difficulties on the part of a borrower and an increased probability that a borrower will enter bankruptcy or other financial reorganisation. If, in addition to a significant increase in the credit risk as at the balance sheet date, there are objective indications of impairment, such as a breach of contract in connection with a default or delinquency in interest and principal payments, the creditworthiness of the financial asset is deemed impaired and the specific valuation allowance is also measured on the basis of the present value of the lifetime expected credit losses, taking into account the available evidence (stage 3).

The calculation of the expected future impairment losses is generally based on historical probabilities of default, which are supplemented by future parameters relevant to the credit risk.

Financial assets are derecognised if there is no reasonable expectation of repayment. In the event a financial asset is derecognised, the groups continue to undertake enforcement measures in an effort to collect the receivable due.

There were no significant changes in the impairment methods and assumptions applied during the financial year.

For reasons of materiality, no loss allowances were recognised for other financial assets.

Accounting policies applied up to 31 December 2017

The Group applied IFRS 9 retrospectively, but has decided to not restate the comparative figures retrospectively. Consequently, the comparative figures continue to be presented in accordance with the accounting policies applied by the groups as at 31 December 2017.

Other financial assets within the scope of IAS 39 were assigned to one of the following categories depending on their intended use:

  • "financial assets at fair value through profit or loss",
  • "loans and receivables", or
  • "available-for-sale financial assets".

The "financial investments held to maturity" category was not used.

Other financial assets were generally initially recognised at fair value. In the case of a financial asset that was not measured at fair value through profit or loss, the transaction costs that were directly attributable to the acquisition of the financial asset were included in the measurement. For financial assets in the "financial assets at fair value through profit or loss" category, associated transaction costs were recognised in profit or loss. Regular way purchases and sales of financial assets were measured at fair value as at the trade date.

The recognised value corresponded to the maximum credit risk.

Subsequent measurement depended on the classification of the financial assets:

a)    Financial Assets at Fair Value Through Profit or Loss

Financial assets were assigned to this category if they were principally acquired with a short-term intent to sell or if they were designated as such by management. Derivatives belonged to this category to the extent they did not qualify as hedges.

Financial assets in this category were recognised as current assets if they were either held for trading or would likely be realised within twelve months of the balance sheet date.

The fair value option was not exercised.

Gains and losses from financial assets in this category, including interest and dividend income, were recognised in profit or loss in the period in which they arose.

Financial assets measured at fair value through profit or loss, such as derivatives with a positive fair value, were subsequently measured at fair value.

b)    Loans and receivables

Loans and other financial receivables (e.g. trade receivables) were classified as "loans and receivables". They were primary financial assets with fixed or determinable payments that were not quoted on an active market. They were counted as current assets if their maturity was within twelve months of the balance sheet date. Otherwise, they were presented as non-current assets. Subsequent measurement was made at amortised cost using the effective interest method.

Gains and losses from financial assets recognised at amortised cost were recognised as amortisations or impairments in the net income/loss for the period.

c)    Available-for-sale Financial Assets

Available-for-sale financial assets were primary financial assets that were either allocated directly to this category or could not be allocated to any other category presented. Available-for-sale financial assets were generally subsequently measured at the fair value directly to equity. If no quoted price listed on an active market was available or the fair value could not be measured reliably, these financial assets were measured at amortised cost.

Gains and losses from a change in the fair value of available-for-sale financial assets were recognised directly to equity, taking deferred taxes into account. Gains and losses were recognised only when the financial asset was derecognised or if the asset was impaired. Interest calculated using the effective interest method was recognised in the income statement.

d)    Impairment of Financial Assets

At each balance sheet date, a test was carried out to see if there were objective indications of impairment to a financial asset or a group of financial assets. A need to recognise an impairment was considered to exist if the carrying amount of the financial asset or of a group of financial assets exceeded the future recoverable amount expected. For financial assets or a group of financial assets measured at amortised cost, the impairment was the difference between the carrying amount of the asset or group of financial assets and the present value of the expected future cash flows discounted at the original effective interest rate. An impairment resulted in a direct reduction of the carrying amount of all affected financial assets, with the exception of trade receivables, the carrying amount of which was reduced indirectly using an adjustment account. Changes in the carrying amount were recognised in profit or loss in the "other operating expenses" item. If a trade account receivable was classified as uncollectible, the impairment recognised in the adjustment account was eliminated against the gross receivable.

If the fair value of an available-for-sale financial asset was significantly or permanently below the asset's cost, this was considered an indicator that the asset was impaired. In such an event, the cumulative loss was reclassified from equity to profit or loss. This cumulative loss was the difference between the cost and the current fair value less previously recognised impairment losses. If the causes for impairment on a debt instrument (e.g. government bonds) no longer existed, the impairment was reversed through profit or loss. By contrast, for equity instruments (e.g. equity investments), the impairment was not reversed through profit or loss when the reasons for an impairment no longer existed.

e)    Derecognition of Financial Assets

A financial asset was derecognised if the contractual rights to cash inflows from the asset expired or if the financial asset was transferred. The latter was the case if all substantial risks and rewards of ownership of the asset were transferred or if control over the asset was lost.

Trade receivables

Trade receivables are classified as financial assets in the "amortised cost" measurement category because they are held until maturity to collect the contractual payments of principal and interest on the principal amount outstanding.

They are initially recognised at fair value or, to the extent there are no significant financing components, at their transaction price.

Subsequent measurement is made at amortised cost using the effective interest method. Impairment losses on trade receivables are recognised using the simplified impairment approach in accordance with IFRS 9. Under this approach, the lifetime expected credit losses are recognised through profit or loss upon initial recognition. Objective indications of the existence of an impairment include a borrower with significant financial difficulties, an increased probability that a borrower will enter bankruptcy or other financial reorganisation, as well as a breach of contract, such as default or delinquency in interest or principal payments. The existence of such objective evidence leads to a specific valuation allowance on the receivables under the simplified stage-based approach.

Accounting policies applied until 31 December 2017:

Trade receivables fell into the "loans and receivables" measurement category. They were initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Trade receivables were written down to the lower present value of the expected future cash flows if there were objective indications that the outstanding amounts receivable were not fully recoverable. Indicators of the existence of an impairment included a borrower with significant financial difficulties, an increased probability that a borrower will enter bankruptcy or other financial reorganisation, as well as a breach of contract, such as default or delinquency in interest or principal payments.

Non-interest bearing or low-interest-bearing receivables with fixed terms of more than one year were discounted.

Receivables from other long-term investments, joint ventures and associates fell in the "loans and receivables" category and were measured at fair value on the acquisition date and subsequently measured at amortised cost using the effective interest method.

Other assets

All other claims are recognised under other assets. All other assets are recognised at cost and written down to the lower recoverable amount when indications of impairment exist.

Inventories

Inventories of raw materials, consumables and supplies as well as merchandise are generally measured at cost or the lower net realisable value. For the branch business, they are measured retrospectively using an appropriate discount on the selling prices.

Inventories in warehouses are measured at cost less all subsequent cost reductions. Direct administrative costs of merchandise procurement and central settlement are added to the cost. Allowances for inventory risks are determined as at the balance sheet date and accounted for on an individual basis.

The net realisable value used is calculated as the realisable sale proceeds anticipated less the completion and selling costs incurred up to sale. Merchandise is written down to the lower net realisable value item by item. If the reason for the write-down ceases to exist or the net realisable value increases, the write-down is reversed.

Work in progress and finished goods are recognised at cost or at the lower net realisable value. They include all costs directly allocable to the production process as well as appropriate portions of the production-related overheads. This includes production-related depreciation, pro-rata administrative costs and pro-rata social security costs. Borrowing costs are not normally recognised as part of cost because long-term production processes are necessary to produce inventories only in exceptional cases.

Cash and Cash Equivalents

Cash includes cash, cheques received and bank balances. Cash equivalents are short-term, highly liquid financial investments that can be converted into certain cash amounts at all times or within a maximum period of three months and that are subject to insignificant risk of changes in value.

As is the case for other financial assets, cash and cash equivalents are also subject to the general impairment requirements of IFRS 9.

Current and Deferred Taxes

Current tax expense and income are determined based on the respective domestic taxable earnings of the year (taxable income) using the domestic tax provisions applicable to the company. The liabilities or receivables of the groups' companies from current taxes are calculated based on the applicable tax rates of the countries in which the companies included in the Combined Financial Statements are domiciled. Uncertain income tax assets and liabilities are recognised as soon as their level of probability exceeds 50 per cent. Uncertain income tax positions are recognised using their most probable value.

Deferred taxes are determined using the liability method (balance sheet liabilities method). Accordingly, temporary differences in the carrying amounts of assets and liabilities recognised under IFRS in the Combined Financial Statements and the carrying amounts for tax purposes are generally recognised. In addition, deferred tax assets are recognised for tax loss carryforwards (taking into account a minimum taxation provision) and for interest carryforwards and realisation carryforwards for hidden liabilities from the transfer of obligations.

Deferred taxes are measured using the respective country-specific tax rates and tax laws that have been enacted or substantively enacted as at the balance sheet date and whose applicability is expected as at the date the deferred tax assets will be recovered or the deferred tax liabilities will be settled.

Deferred tax assets are recognised only to the extent to which it is probable that future taxable income of the same taxable entity at the level of the same taxation authority will be available, against which the temporary differences can be offset.

Expected future tax reductions from loss carryforwards, and interest carryforwards are capitalised if it is probable that sufficient taxable income will be generated in the foreseeable future or taxable temporary differences that will reverse in the future are available and against which the tax loss carryforwards can be offset in the period in question. The three-year plans for internal management purposes are used for the forecast of future tax results and taxable temporary differences. These forecasts are generally extrapolated to a five-year planning horizon.

Changes in deferred taxes in the balance sheet are recognised as deferred tax expense/income if the underlying item is not accounted for directly in equity. Deferred tax assets and tax liabilities are recognised directly in equity for the effects presented in equity.

Deferred tax assets and liabilities are not discounted.

Deferred tax assets and deferred tax liabilities are offset if these income tax assets and liabilities apply to the same taxation authority and to the same taxable entity.

Non-current Assets, Disposal Groups and Discontinued Operations Held for Sale

Non-current assets or groups of assets and liabilities are classified as held for sale if their carrying amount will largely be realised through a highly probable sale within the next twelve months or through an already completed sales transaction instead of continued business use. They are measured at the lower of the carrying amount and fair value less costs to sell. If non-current assets with a finite useful life are to be sold, they are no longer depreciated/amortised as at the date they are classified as held for sale.

These assets and liabilities are presented in the balance sheet separately in the items "non-current assets and disposal groups held for sale" or "liabilities from non-current assets and disposal groups held for sale". Related expenses and revenues are included in the result from continuing operations until disposal unless the disposal group qualifies for reporting as a discontinued operation.

The results of an entity's component are presented as a discontinued operation if this component represents a material business line or includes all activities in a geographical region. Results from discontinued operations are recognised in the period in which they arise and are presented separately in the income statement as "results from discontinued operations". The previous period's income statement is adjusted accordingly.

Employee Benefits

Consolidated companies have both defined contribution and defined benefit pension plans.

Consolidated companies contribute to defined contribution plans on the basis of a statutory or contractual obligation, or make voluntarily contributions to public or private external pension insurance plans. The consolidated companies have no additional payment obligations beyond the payment of the contributions. The contributions are recognised in personnel expenses when due. Prepayments of contributions are recognised as assets in that there is a right to repayment or reduction of future contribution payments.

A defined benefit plan is a pension scheme that stipulates the amount of pension benefits an employee will receive upon retirement. The amount is normally dependent on one or more factors such as age, length of service and salary. The provision for defined benefit plans recognised in the balance sheet (net pension obligation) corresponds to the present value of the defined benefit obligation (DBO) as at the balance sheet date less the fair value of plan assets. The DBO is calculated annually by independent actuarial experts using the projected unit credit method. The DBO is calculated by discounting the expected future cash outflows using the interest rate for the most highly rated corporate bonds denominated in the currency in which the benefits will also be paid, and whose terms correspond to those of the pension obligation.

Actuarial gains and losses based on experience adjustments and changes to actuarial assumptions are recognised in other comprehensive income and in retained earnings in the statement of comprehensive income.

Past service cost is recognised in profit or loss as soon as it is incurred.

The interest portion contained in the pension expenses consists of the interest cost on the DBO and the interest on plan assets. They are aggregated into a net interest component, which is presented in the financial result. The net interest component is determined by using the above interest rate.

The expected income from reimbursement rights against the trust associations is also reported under the financial result. It is likewise determined by using the above interest rate.

The other components of pension expenses are reported under personnel expenses.

Severance payments and similar payments in Italy ("Trattamento di Fine Rapporto" or "TFR") are non-recurring payments that must be paid due to labour law provisions in Austria and Italy upon termination of an employee as well as regularly upon retirement. As defined benefit pension plans, they are recognised in accordance with the above principles for accounting for such plans.

Retirement allowances are employee benefits that are paid under certain conditions when employees retire. Survivor benefits are payments based on length of service, which are made to the heirs of an employee upon the death of that employee. Since retirement allowances and survivor benefits are defined benefit plans, they are recognised in accordance with the above principles for accounting for defined benefit plans.

The provision for German partial and early retirement obligations is measured in accordance with the expert actuarial opinion of Hamburger Pensionsverwaltung e.G., Hamburg, based on the 2018 G actuarial tables (previous year: 2005 G actuarial tables) of Prof. Klaus Heubeck, based on a reasonable discount rate. The refund claims for additional retirement contributions against the German Federal Employment Agency (Bundesagentur für Arbeit) are recognised under other assets. The provisions for additional retirement contributions from partial retirement obligations are allocated over the vesting period.

The provision for service anniversary bonuses corresponds to the full amount of the obligation and was determined using actuarial principles reflecting a reasonable fluctuation discount and discount rate. It is measured based on the 2018 G actuarial tables (previous year: 2005 G actuarial tables) of Prof. Klaus Heubeck for the earliest possible retirement age for German statutory pension insurance.

The provision for holiday entitlements is measured at the daily rates or the average hourly rate expected for the subsequent year, including expected additional amounts (e.g., in-kind remuneration, holiday pay, Christmas bonus and employer contributions to capital-forming savings schemes) and social security contributions to be incurred.

Other Provisions

Other provisions are recognised if there is a present legal or constructive obligation vis-à-vis third parties as a result of past events, whose settlement is expected to entail an outflow of resources embodying economic benefits and whose amount can be estimated with sufficient reliability.

They are measured using the best estimated value of the settlement amount. They are not offset against reimbursement claims. If the amount of the provision could be influenced by several possible events, the amount is estimated by weighting all potential events with their respective probabilities (calculation of an expected value). Non-current provisions are recognised using the discounted settlement amount as at the balance sheet date.

For rented properties, each location is analysed based on the following principles as to whether and in what amount another provision must be recognised from the lease:

  • A provision for rental obligations is recognised for rented properties not used by the groups and for rented properties that are not subleased or are subleased below cost. For residual rental agreement terms of up to one year, the provision is measured using the nominal amount of the rent shortfall. For longer-term rental agreements, the provision is measured at the present value of the expected rent shortfall.
  • A provision for onerous contracts is recognised for rented properties used by the groups if the location shows a sustained negative contribution margin. For residual rental agreement terms of up to one year, the provision is measured using the lower amount between negative contribution margins and expected rent shortfall taking into account future subleasing of the property. For longer-term rental agreements, the provision is measured at the present value of the nominal amount.

Other Financial Liabilities

a)    Classification

On account of their characteristics, other financial liabilities within the scope of IFRS 9 are generally assigned to the "amortised cost" measurement category in the groups.

This does not include, for example, derivative financial liabilities, which are assigned to the "fair value through profit or loss" category.

Financial liabilities cannot be reclassified.

b)    Recognition and derecognition

The groups recognise a financial liability at the time they become a contracting party.

A financial liability is derecognised if its underlying obligation is satisfied or terminated, or expires. If an existing financial liability is exchanged for another financial liability of the same creditor with substantially different contractual terms, or if the terms of an existing liability are changed significantly, such an exchange or change is treated as a derecognition of the original liability and a recognition of a new liability. The difference between the respective carrying amounts is recognised in net income/loss for the period.

Financial liabilities are counted as current liabilities if their maturity is within twelve months of the balance sheet date. Otherwise, they are presented as non-current liabilities.

c)    Measurement

At initial recognition, financial liabilities are measured at fair value plus or minus the transaction costs directly attributable to the acquisition of the financial liability. The transaction costs of financial liabilities measured at fair value through profit or loss are recognised through profit or loss.

During subsequent measurement, all financial liabilities are generally measured at amortised cost using the effective interest method, with the interest expense recognised using the effective interest rate.

This excludes the following financial liabilities:

  • derivative financial instruments,
  • contingent consideration that is recognised by the acquirer and measured at fair value through profit or loss in accordance with IFRS 3,
  • financial guarantee contracts for which the higher of the two following amounts is recognised: either the amount of the impairment loss determined pursuant to the requirements of IFRS 9 or the original amount less cumulative amortisation.

The groups do not exercise the voluntary option to subsequently measure the liabilities at fair value through profit or loss (fair value option).

d)    Miscellaneous

The membership capital of RZF is presented under other financial liabilities because the members have the right to demand redemption of the shares.

Accounting policies applied up to 31 December 2017

Other financial liabilities within the scope of IAS 39 were assigned to one of the following categories in the groups, depending on their intended use:

  • "financial liabilities held for trading",
  • "financial liabilities at fair value through profit or loss" or
  • "other financial liabilities".

Other financial liabilities in the "financial liabilities held for trading" and "financial liabilities at fair value through profit or loss" categories were initially recognised at fair value. Subsequent measurement was also at fair value.

Other financial liabilities in the "other financial liabilities" category, including borrowings, were initially recognised at fair value, including such transaction costs that were directly attributable to the issuance of the financial liability. During subsequent measurement, they were measured at amortised cost using the effective interest method, with the interest expense recognised using the effective interest rate.

Liabilities to banks and liabilities to other long-term investments were assigned to the "other financial liabilities" category.

The membership capital of RZF was presented under other financial liabilities because the members have the right to demand redemption of the shares.

Financial guarantee contracts were initially measured at fair value. The higher of the two following amounts was recognised based on the subsequent measurement: either the amount determined pursuant to the provisions governing provisions or the original amount less cumulative amortisation.

A financial liability was derecognised if its underlying obligation was satisfied, terminated or expired. If an existing financial liability was exchanged for another financial liability of the same creditor with substantially different contractual terms, or if the terms of an existing liability were changed significantly, such an exchange or change was treated as a derecognition of the original liability and a recognition of a new liability. The difference between the respective carrying amounts was recognised in net income/loss for the period.

Trade payables

Trade payables are classified as financial liabilities in the "at amortised cost" measurement category.

They are initially measured at fair value. Subsequent measurement is made at amortised cost using the effective interest method.

Other Liabilities

Other liabilities are recognised at the repayment amount.

Contingent Liabilities and Assets

A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of future events not wholly within the control of the entity. Contingent liabilities also include present obligations that arise from past events for which no provision has been recognised because the outflow of resources embodying economic benefits is not probable or cannot be measured with sufficient reliability. If the chance of a possible outflow of resources embodying economic benefits is not remote, a disclosure is made in the notes to the financial statements. Contingent liabilities are recognised solely in connection with business combinations.

Contingent assets are not recognised, but instead only explained in the notes.

Leases

Lease agreements that transfer all substantial risks and rewards incidental to ownership of an asset are recognised as finance leases. Property, plant and equipment rented on the basis of finance leases is recognised at fair value or at the lower present value of the minimum lease payments as at the acquisition date. Such assets are depreciated on a straight-line basis over the expected useful life or over the shorter lease term if the transfer of ownership at the end of the lease term is not sufficiently certain. The present value of the payment obligations resulting from the future lease payments is presented under financial liabilities.

All other lease transactions in which the risks and rewards incidental to ownership of an asset are not substantially transferred are recognised as operating leases. Payments made or received in connection with an operating lease are generally recognised in the income statement on a straight-line basis over the term of the lease.

Accounting for Derivative Financial Instruments and Hedges

In addition to primary financial instruments, items including derivative financial instruments are also presented under other financial assets and other financial liabilities in the Combined Financial Statements.

Derivative financial instruments are initially recognised at fair value as at the date the contract is concluded and measured at fair value in subsequent periods.

The effect of changes in the fair value on profit or loss or equity generally depends on whether the derivative was designated as a hedging instrument in a hedging relationship using hedge accounting, and if so, on the hedged item.

The consolidated companies designate certain derivatives either as:

  • hedges of the fair value of a recognised asset, liability or a fixed company obligation (fair value hedge) or
  • hedges of the cash flows of a recognised asset, liability or a highly probable forecast transaction (cash flow hedge).

When derivatives are designated, the hedging relationship between the hedging instrument and the hedged item as well as the risk management strategy and objectives are documented.

This includes the specific assignment of the hedging instruments to the corresponding assets or liabilities or (firmly agreed/expected) future transactions and the assessment of the degree of effectiveness of the hedging instruments used. The effectiveness of existing hedging relationships is monitored on an ongoing basis. If the conditions for using hedge accounting are no longer met, the hedging relationship is terminated immediately.

a)    Fair Value Hedge

In the previous year, the groups hedged against changes in the fair value of recognised assets, recognised liabilities, off-balance-sheet firm commitments and precisely defined portions of such assets, liabilities or firm commitments, provided the change was attributable to a specific risk and impacted the profit or loss for the period. For fair value hedges, the hedged item was measured in profit or loss in accordance with the applicable accounting requirements as at the balance sheet date. The corresponding derivative hedging instrument was recognised at its fair value through profit or loss.

Changes in the fair value of the designated derivative hedging instruments were recognised in the income statement together with the those changes in the fair value of the assets or liabilities designated as hedged items that were attributable to the hedged risk.

A fair value hedge ceased to be recognised if the hedging instrument expired, was sold, became due or was exercised, or if the hedging transaction no longer satisfied the requirements for hedge accounting. Any adjustment to the carrying amount of a hedged item was amortised to profit or loss using the effective interest method as at the date the hedging relationship was terminated.

Replacing or continuing a hedging instrument through another hedging instrument did not constitute the expiration or termination of the hedging relationship, provided the documented hedging strategy called for such a replacement or continuation. The novation of a hedging instrument to a central counterparty also did not constitute an end to the hedging relationship if the hedging instrument was novated due to statutory requirements or on account of the novation the central counterparty became the contracting partner of all parties of the respective derivative agreement. Furthermore, there can be no changes (except for those necessitated by the novation) to the terms of the agreement underlying the original derivative.

There are no fair value hedges in the current financial year.

b)    Cash Flow Hedge

The groups use cash flow hedges to hedge against the risk of cash flow fluctuations on profit or loss related to recognised assets, recognised liabilities or highly probable forecast transactions.

The effective portion of changes in the fair value of derivatives that are designated to hedge the cash flow and represent qualified hedging instruments is recognised in equity.

A distinction is drawn between changes in the value components of hedging instruments included in the designation and those excluded from the hedging relationship. For currency derivatives that were concluded prior to 1 January 2018, only the foreign currency basis spreads were excluded from the designation. For currency derivatives that were concluded after 1 January 2018, neither the foreign currency basis spreads nor the forward components of the hedges were designated.

The effective changes in the value of the excluded fair value components are recognised in equity in the costs of hedging reserve. The effective changes in the value of the designated components are recognised in the reserve for designated risk components.

By contrast, any resulting ineffective portion of the designated and excluded components is recognised directly in profit or loss for the period.

If the hedged item leads to the recognition of a non-financial asset or non-financial liability, the effective changes in value of the hedging instrument previously recognised in other comprehensive income are directly included in the original cost or carrying amount of the asset or liability. If a non-financial asset or non-financial liability is not recognised, the amounts recognised in equity are reclassified to the income statement and recognised as an income or expense in the period in which the hedged item affects profit or loss.

If a hedging instrument expires or is sold or if the hedging relationship no longer meets the accounting requirements under IFRS 9 relating to cash flow hedges, the cumulative gain or loss remains in equity. The gain or loss recognised in equity is not recognised in the income statement until the underlying expected forecast transaction occurs. If the forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity must be recognised immediately in profit or loss.

Taking into account the terms for fair value hedges mentioned in paragraph a) above, the replacement or continuation of a hedging instrument through another hedging instrument and the novation of a hedging instrument to a central counterparty as a result of existing or newly enacted statutory or regulatory provisions also do not constitute the expiration or termination of the hedging relationship in the case of cash flow hedges.

c)    Derivatives that are not designated as hedging instruments

Certain derivative financial instruments, such as written options, do not meet the requirements for hedge accounting in accordance with IFRS 9. Furthermore, there are derivative financial instruments, such as forward exchange contracts and currency swaps, that are not or only partially designated as hedges using hedge accounting. Any changes in the fair value of non-designated derivatives or portions thereof are recognised directly in the income statement. The presentation of the measurement gains and losses is based on the presentation of the gains or losses of the economically underlying hedged transactions.

If currency derivatives are used to economically hedge foreign currency loans, the gains or losses from the change in fair value of the stand-alone derivatives are reported in the financial result. Measurement gains and losses from stand-alone derivatives concluded to economically hedge purchases of goods in foreign currencies or to hedge foreign currency liabilities from hotel purchases are reported under other operating expenses and income.

Determination of Fair Value

The fair value of a specific asset or liability is the sale price of a hypothetical transaction (sale/transfer) conducted at arm's length between market participants on the primary or most advantageous market as at the measurement date.

Fair value is calculated using market, cost and revenue-based measurement models. The three-level measurement hierarchy is used for the underlying input factors: Level 1 inputs are unadjusted quoted prices and market prices in the primary or most advantageous active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are market data that can be observed, either directly or indirectly, over the full term of the asset or liability. Level 3 inputs are unobservable parameters (not market-based) and shall only be used if observable parameters are not available.

The fair value of interest rate swaps is calculated based on the present value of the estimated future cash flows. The fair value of currency forwards is determined using the forward exchange rates as at the balance sheet date and discounted.

For derivative financial instruments without an option component, including forward contracts and interest rate swaps, future cash flows are determined using yield curves. The fair value of these instruments is the sum of the discounted cash flows. The options on currency pairs are measured on the basis of standard market option price models.

For trade receivables and payables, it is assumed that the nominal amount less allowances and any necessary discounting corresponds to the fair value.

The influence of credit risk is always taken into account when determining fair value.

Recognised capital market valuation techniques are used to determine the fair value of investment properties.

Revenue and Expense Recognition

Beginning on 1 January 2018, revenue is recognised in accordance with the five-step model specified by IFRS 15:

  • Identify the contract,
  • Identify the individual performance obligations,
  • Determine the transaction price,
  • Allocate the transaction price,
  • Recognise revenue when (or as) the performance obligation is satisfied.

Revenue is generally not recognised until the control of the performance obligation has transferred to the customer.

Revenue from the sale of goods to wholesalers, retailers and individual customers is recognised once products have been delivered to a customer, the customer has accepted the goods, and the collectability of the resulting receivable is deemed sufficiently certain. Bonuses, discounts and rebates are deducted from the transaction price and therefore the net amount of the corresponding revenue is reported. The variable components of the price, such as bonuses, are estimated using historical and forecast revenue thresholds. Income from performance obligations satisfied over time, such as the rendering of services, is recognised in accordance with the stage of completion in the ratio of the service provided to the service to be provided in the financial year the service is provided. The total amount of the transaction price allocated to the unsatisfied or partially satisfied performance obligations at the end of the reporting period was not disclosed since the performance obligations are primarily part of contracts with an expected original term of at most one year.

The Travel and Tourism business segment offers both package travel and component travel arrangements. Significant integration services are provided for both types of products in order to sell the customer a trip. Due in particular to these integration services, the trip constitutes only a single performance obligation. Revenue for travel extending beyond the balance sheet date is recognised pro rata and accounted for accordingly in the pro rata expenses. The sales commissions of travel agencies are recognised on a net basis.

In accordance with IFRS 15, customer loyalty programmes are considered to be the material right to receive a premium right or a discount on a future purchase. To the extent customer loyalty programmes are in place, revenue is reduced proportionately on the basis of relative individual sales prices. The right is deemed an individual performance obligation and this thus recognised as a contract liability. This deferred revenue is recognised when premiums are provided.

If goods are sold with a return obligation, revenue is recognised as a refund liability at each reporting date in accordance with IFRS 15 with the potential probability of return. In turn, a right to return these goods is recorded. Both previously deferred items are realised once the right to return expires. As a matter of principle, the groups do not grant any significant financing for the purchase of goods or services. The average payment terms vary between the business segments. While average payment terms of up to eight days are granted in the Retail business segment, advance payments are required in the Travel and Tourism business segment for orders and one to four weeks prior to departure, which are due immediately.

Dividend income is recognised when the legal claim arises.

Interest income and expenses are recognised periodically using the effective interest method.

In the case of transport services, it is reviewed whether this is a service provided as principal (gross disclosure of revenue) or agent (net disclosure of revenue).