General Accounting Principles of the Combined Financial Statements
The following accounting standards were adopted for the first time in the 2018 financial year:
|Name of standard, amendment or interpretation|
|IFRS 9||Financial Instruments, including amendments to this standard|
|IFRS 15||Revenue from Contracts with Customers, including amendments to this standard|
|IAS 401||Amendments: Transfers of Investment Property|
|IFRIC 221||Foreign Currency Transactions and Advance Consideration|
|Various1||Amendments: Annual Improvements: 2014-2016 cycle|
- 1 No material impacts resulted from the standard, amendment or interpretation.
IFRS 9: Financial Instruments, Including Amendments to this Standard
a) Classification and Measurement
This standard replaces the previous provisions on accounting for financial instruments set forth in IAS 39.
The groups opted for the simplified initial application for classification and measurement purposes. The cumulative effect from the transition is recognised directly in equity. Comparative figures from prior-year periods are not restated.
The measurement categories under IAS 39 are replaced by the "amortised cost", "fair value through profit or loss" and "fair value through other comprehensive income" measurement categories. The classification of a financial asset into these categories depends not only on its classification as an equity or debt instrument in accordance with IAS 32 but also on its contractual characteristics (contractual interest and principal payments or cash flow characteristics) and the underlying business model ("hold-to-collect", "hold-to-collect and sell" or "sell") of the company. When classifying a financial asset that is a debt instrument in accordance with IAS 32 in the "fair value through profit or loss" category, it must be remeasured through profit or loss similar to the previous presentation in accordance with IAS 39. If a financial asset (debt instrument) is assigned to the "fair value through other comprehensive income" category, the asset is remeasured at fair value and any changes in value are recognised in other comprehensive income. When classifying a financial asset in the "amortised cost" category, it is subsequently measured at amortised cost using the effective interest method.
Equity investments (equity instruments) that were measured at cost in accordance with the exceptions under IAS 39 will be measured at fair value through profit or loss going forward. In accordance with IFRS 9, the groups make the irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument (FVOCI option). Due to the exercise of the FVOCI option for equity instruments, an initial application effect in the lower double-digit million range was recognised in other comprehensive income.
Subsidiaries and associates that, due to their immateriality, were not fully consolidated or accounted for using the equity method and were previously recognised as "available-for-sale financial assets", will be reported under other assets from the 2018 financial year onwards (75.4 million euros).
Debt instruments in the form of loans to associates whose contractual cash flows do not meet the cash flows characteristics test will be measured at fair value through profit or loss from 1 January 2018 onwards ("fair value through profit or loss"). The negative transition effect due to application of the new valuation technique is recognised in other comprehensive income and is in the lower double-digit million range.
The requirements for classifying and measuring financial liabilities in accordance with IFRS 9 are largely unchanged compared with the accounting requirements of IAS 39. Only when the irrevocable election to recognise financial liabilities at fair value (fair value option) is made does IFRS 9 allow changes in value resulting from own credit risk to be recognised directly in equity.
As was previously the case, the groups do not exercise the fair value option for financial assets or financial liabilities.
b) Impairment Model
In addition to the new classification requirements, the new standard also includes new guidance on calculating impairment losses on financial assets. The previous model for accounting for credit losses was replaced by a multiple-stage model for accounting for expected credit losses.
The groups opted for the simplified initial application with regard to the impairment model. The cumulative effect (0.3 million euros) from the transition was primarily attributable to trade receivables and was recognised directly in equity. Comparative figures from the prior-year period were not restated. The increase in the loss allowance was due primarily to the requirement that loss allowances also be recognised for credit-impaired assets.
The carrying amounts of the financial assets and financial liabilities pursuant to the measurement categories in accordance with IAS 39 and IFRS 9 are as follows:
|in million €||31 Dec. 2017|
Category in accordance with IAS 39
|1 Jan. 2018|
Category in accordance with IFRS 9
|Other financial assets||964.6||901.3||-63.3|
|Other receivables from suppliers||Loans and receivables||543.7||Amortised cost||543.7||0.0|
|Loans||Loans and receivables||238.0||Amortised cost||238.0||0.0|
|Shareholder loans to partner companies||Loans and receivables||41.5||Fair value through profit or loss||40.4||-1.1|
|Receivables from derivative financial instruments||25.2||25.2||0.0|
|Derivatives not included in hedge accounting||Financial assets held for trading||15.3||Fair value through profit or loss||15.3||0.0|
|Derivatives included in hedge accounting||N/A||9.9||N/A||9.9||0.0|
|Shares in corporations and other securities||Financial assets available for sale||61.0||Fair value through profit or loss 1)||6.7||-54.3|
|Fair value through other comprehensive income||35.8||35.8|
|Interest in partnerships||Financial assets available for sale||46.1||Fair value through profit or loss 1)||2.4||-43.7|
|Other financial assets||Loans and receivables||9.1||Amortised cost||9.1||0.0|
|Trade receivables||Loans and receivables 1,262.4||Amortised cost 1,262.1||-0.3|
|Cash and cash equivalents||Loans and receivables 653.4||Amortised cost 653.4||0.0|
|Other financial liabilities||2,397.6||2,397.6||0.0|
|Liabilities to banks||Financial liabilities at amortised cost||1,120.8||Amortised cost||1,120.8||0.0|
|Liabilities from finance leases 2)||N/A||899.7||N/A||899.7||0.0|
|Liabilities from derivative financial instruments||36.5||36.5||0.0|
|Derivatives not included in hedge accounting||Financial liabilities held for trading||15.0||Fair value through profit or loss||15.0||0.0|
|Derivatives included in hedge accounting||N/A||21.5||N/A||21.5||0.0|
|Other financial liabilities||Financial liabilities at amortised cost||340.6||Amortised cost||340.6||0.0|
|Trade payables||Financial liabilities at amortised cost||6,160.1||Amortised cost6,160.1||0.0|
- 1) Change includes reclassification of immaterial affiliated companies and associates
- 2) Carrying amount in accordance with IAS 17
C) Hedge Accounting
The initial application of IFRS 9 also amends the rules for hedge accounting. When entities apply the standard for the first time, they have the option to continue hedge accounting in accordance with IAS 39. The groups did not exercise this option. Hedges are therefore accounted for in accordance with IFRS 9. The requirements of the new standard are that operating risk management and hedge accounting be aligned to a greater degree in order to better present a true and fair view of the economic relationships between the hedged item and the hedging instrument. In the context of applying the standard, the groups have aligned their risk management strategies with one set of uniform hedging procedures.
In addition, hedge accounting in accordance with IFRS 9 results in expanded designation options as well as the need to implement more complex accounting and measurement methodologies. The groups recognise designated changes in fair value in the reserve for cash flow hedges, while gains or losses from non-designated changes in fair value are reported in the costs of hedging reserve. Non-designated changes in the time value of foreign currency options or forward components and the foreign currency basis spread of forward transactions are recognised as costs of hedging.
In accordance with IAS 39, the time value of foreign currency options was presented in the financial result as the ineffective portion of existing cash flow hedges. Since no foreign currency options were designated as hedging instruments using hedge accounting in the previous year, the retrospective application of the requirements governing the designation of option transactions did not result in any effects from the initial application or the need to restate the prior-year figures.
Upon initial application, the groups also applied the option to retrospectively implement the new accounting requirements governing the exclusion of the foreign currency basis spreads of forward exchange contracts designated as hedging instruments. The restatement of the prior-year comparative figures was restricted to reclassifying the measurement gains and losses on foreign currency basis spreads between the reserve for designated risk components and the costs of hedging reserve.
Effects of Excluding Foreign Currency Basis Spreads from the Designation
|in million €||Reserve for cash flow hedges||Costs of hedging reserve|
|Adjustment as at 1 Jan. 2017||+3.1||-3.1|
|Adjustment as at 30 June 2017||-0.3||+0.3|
|Adjustment as at 31 Dec. 2017||-1.2||+1.2|
By contrast, the forward elements of the forward exchange contracts designated as hedging instruments will continue to be treated as the effective portion of the derivative and recognised in the reserve for designated risk components.
The forward elements and the foreign currency basis spreads were excluded from the designation for forward exchange contracts that had been concluded as at 1 January 2018, and were designated as hedging instruments using hedge accounting.
If the amendments to IFRS 9 to exclude certain value components of hedging instruments had not been applied as at the balance sheet date, the reserve for designated risk components would have amounted to 10.0 million euros instead of 2.2 million euros.
IFRS 15: Revenue from Contracts with Customers
The new standard provides uniform, principle-based guidance on the revenue recognition for all industries and all categories of transactions and replaces a number of individual provisions. The date and amount of revenue is based on a five-step model. Under this model, an entity must recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Control can still be passed either at a point in time or over time. Furthermore, the standard clarifies a number of technicalities such as how changes to contracts should be handled and how variable consideration such as rebates, rights of return and performance-based compensation should be measured. Moreover, the standard includes new guidance on principal versus agent considerations and costs of obtaining a contract.
The DIY Stores business segment recognised reimbursement liabilities from possible returns in the low seven-figure range. The associated right to receive the returned products from the customer in return for reimbursing the payment is recognised as an asset.
The new standard also gives rise to further effects on the balance sheet and income statement. Due to their immateriality, these effects are not presented separately.
The groups apply the modified retrospective transition method, under which a cumulative restatement effect is recognised as at the transition date. Comparative figures from prior-year periods are not restated.
New or Revised Accounting Standards Published, but not yet Applied During the 2018 Financial Year
The new standards and interpretations listed below, as well as amendments to existing standards, were issued by the IASB, but – if adopted as European law – did not yet require application in the 2018 financial year. Any option for voluntary early application was not exercised for these accounting standards.
|Mandatory application expected in financial year||Name of standard, amendment or interpretation||Standard has already been adopted as European law|
|2019||IFRS 91||Amendments: Prepayment Features with Negative Compensation||Yes|
|IAS 281||Amendments: Long-term Interests in Associates and Joint Ventures||Yes|
|IFRIC 231||Uncertainty over Income Tax Treatments||Yes|
|IAS 191||Amendments: Plan Amendment, Curtailment or Settlement||Yes|
|Various1||Amendments: Annual Improvements: 2015-2017 cycle||Yes|
|2020||IFRS 31||Amendments: Definition of a Business||Yes|
|IAS 1/IAS 81||Amendments: Definition of Material||No2|
|Various1||Amendments: Revised Conceptual Framework||No2|
|2021||IFRS 171||Insurance Contracts||No2|
- 1 No material impacts are expected to result from the standard, amendment or interpretation.
- 2 Since the standard, amendment or interpretation has not yet been adopted as European law, there is no mandatory application date within the European Union. Consequently, the date of initial application as planned by the IASB, on which the allocation to financial years is based, is subject to change.
The first-time application of the new standards or amendments is expected to have the following effects on the presentation of net assets, financial position and results of operations:
IFRS 16: Leases
The new standard, IFRS 16, will replace the currently applicable standard, IAS 17, and IFRIC 4. The scope of IFRS 16 includes in general all rental and lease arrangements, sub-letting arrangements and sale-and-leaseback transactions.
The purpose of the new standard is to account for all obligations arising from rental and lease arrangements. The principal innovation of IFRS 16 as compared to IAS 17 relates to lessee accounting. Going forward, lessees will no longer be required to classify leases as either operating or finance leases. Instead, the lessee must recognise a liability as at the date on which the lessor transfers the asset to the lessee for use as well as a corresponding right-of-use asset, which is generally equal to the present value of the future lease payments plus directly attributable costs. During the term of the lease, the lease liability is adjusted using a model based on financial mathematics, while the usage right is amortised. The REWE Group has elected to not recognise right-of-use assets and lease liabilities for short-term leases and for leases for which the underlying asset is of low value.
At the lessor, however, the provisions of the new standard do not differ from the previous standards of IAS 17. The criteria of IAS 17 are taken over for the classification pursuant to IFRS 16.
From the lessor's point of view, subleases in particular will need to be analysed. According to the information currently available, the effect on the balance sheet and income statement is expected to be minor, since, based on current analyses, a significant number of subleases will continue to be recognised as operating leases.
The new standard will materially affect EBITDA, EBITA, EBIT, EBT and EAT: the future lease payments attributable to leases to be recognised will no longer be reported as a lease expense. These leases will be recognised through profit or loss by amortising the recognised right-of-use asset and discounting the lease liability.
The new standard will also affect the cash flow statement: Whereas the lease expenses from operating leases are currently reported under cash flows from operating activities, the effects from these leases to be recognised going forward will be reported in different sections of the cash flow statement: interest paid must be recognised under cash flows from operating activities and payment of the lease liability under cash flows from financing activities. Thus, IFRS 16 will lead to an increase in cash flows from operating activities and a decrease in cash flows from financing activities.
The groups will apply the standard from the mandatory effective date on 1 January 2019. The modified retrospective approach is currently used to determine the effect of the changes as at the date of initial application. Consequently, the comparative figures for the year prior to initial application will not be restated retrospectively. The lease liability must be measured as at the date of first-time application using the present value of the lease payments still outstanding as at the transition date, applying the incremental borrowing rate. The right-of-use asset is recognised at the same amount less amounts recognised as provisions if the lease is an onerous contract as defined in IAS 37 (option). The cumulative effect is recognised in retained earnings.
The REWE Group reviewed the groups' significant leases (real estate and vehicle fleet) with respect to the new accounting requirements for leases under IFRS 16. The standard will have fundamental effects on the accounting treatment of operating leases. As at the balance sheet date, the REWE Group reported obligations from non-cancellable operating leases of 12,847.3 million euros (undiscounted; see note 24 "Leases"). In the case of agreements previously classified as finance leases, the carrying amount of the right of use asset and the lease liability in accordance with IFRS 16 as at 1 January 2019 corresponds to the values recognized in accordance with IAS 17 as at 31 December 2018 (IFRS 16.C11).
In the Combined Financial Statements, a lease expense of 1,892 million euros is reported as at 31 December 2018 (for current rental and lease expenses, see note 14 "Other Operating Expenses"). The accounting of operating leases in accordance with IFRS 16 is expected to result in a lease liability of approximately 9 billion euros. The recognition of right-of-use assets is expected to decline by approximately 0.5 billion euros. Depending on the lease term, country, location (real estate) and other conditions specific to the leased asset, interest rates of between 0.75 per cent and 13.75 per cent were used to calculate the present value. Options to renew are only taken into account if, on the basis of the plans approved by management, it is sufficiently certain that the corresponding leased asset will continued to be operated over this period; otherwise, the shortest possible lease term is assumed. The lease expenses reported as at 31 December 2018 include immaterial expenses for short-term leases and for leases for which the underlying asset is of low value.