General Accounting Principles of the Combined Financial Statements

3. CONSOLIDATION

Consolidation Principles

The Combined Financial Statements are prepared in accordance with the consolidation methods presented below.

a) Subsidiaries

Generally, subsidiaries are all companies at which RZF or RZAG, or both together, that on account of substantial direct or indirect rights have the ability to control key business activities of these companies so as to generate variable returns (controlled companies). The existence and effect of potential voting rights which are currently exercisable or convertible are taken into account when evaluating whether control exists.

Subsidiaries are generally included in the Combined Financial Statements (full consolidation) from the date on which control has been transferred, directly or indirectly, to RZF or RZAG or both together. They are deconsolidated when control is lost. Subsidiaries classified as held for sale are recognised pursuant to the provisions for non-current assets, disposal groups and discontinued operations held for sale.

Acquired subsidiaries are recognised using the acquisition method. The acquisition cost corresponds to the fair value of the assets acquired, the equity instruments issued and the liabilities incurred or assumed as at the transaction date. Costs related to the business combination are always treated as expenses, regardless of whether they are directly allocable to the acquisition. Upon initial consolidation, the assets, liabilities and contingent liabilities identifiable in connection with a business combination are measured at their fair value as at the acquisition date, irrespective of the extent of any non-controlling interest.

The excess of the acquisition cost over the interest in the net fair value of the assets acquired is recognised as goodwill. If the acquisition cost is less than the net fair value of the assets of the acquired subsidiary after reassessing the measurement, the difference is recognised in the income statement under "other operating income".

Intercompany transactions and any resulting gains that are included in the Combined Financial Statements are eliminated. Losses are also eliminated unless the transaction indicates an impairment of the transferred asset.

The separate financial statements of the domestic and foreign subsidiaries consolidated are prepared according to uniform accounting policies.

b) Joint Ventures and Joint Operations

Joint arrangements, over which RZF or RZAG, or both together, directly or indirectly, exercise joint control with one or more partners by virtue of a contractual agreement, are included in the Combined Financial Statements as joint ventures or joint operations. Currently, no joint operations are included in the Combined Financial Statements. Joint ventures are included in the Combined Financial Statements using the equity method. Please see the explanatory notes with regard to associates for the general accounting treatment using the equity method. They are recognised from the date on which joint control can be exercised until the date on which joint control is lost. Joint ventures classified as held for sale are recognised pursuant to the provisions for non-current assets, disposal groups and discontinued operations held for sale. Entities over which joint control cannot be exercised despite a corresponding share of voting rights are classified as associates or as other equity investments.

c) Associates

An entity at which the groups have the ability to significantly influence financial and operating decisions, and in which the groups regularly hold 20 to 50 per cent share of voting rights, directly or indirectly, is classified as an associate and recognised in the Combined Financial Statements using the equity method. The equity method is not used if an associate has been classified as held for sale. An entity in which the share of voting rights is 20 per cent or more, but whose financial and operating policy cannot be significantly influenced, is classified as other equity investments. These shares are reported under non-current financial assets and generally measured at fair value. If the fair value cannot be reliably measured, the amortised cost is the best estimate.

An entity is generally included in the group of associates accounted for using the equity method from the date on which significant influence over the entity can first be exercised. An entity is no longer included in the Combined Financial Statements using the equity method as at the date on which significant influence can no longer be exercised. An associate classified as held for sale is recognised in accordance with the provisions for non-current assets, disposal groups and discontinued operations held for sale.

Investments in associates are initially recognised at cost. In addition to the interest in net assets, cost reflects the disclosed hidden reserves and liabilities and a premium paid in the form of goodwill. A gain on a bargain purchase is recognised immediately in profit or loss. If there are indications of an impairment of the entity accounted for using the equity method, the entire carrying amount of the investment is subjected to an impairment test. A subsequent reversal of impairment also applies to the entire carrying amount.

The groups' interest in an associate includes the goodwill identified upon acquisition, subsequent effects from the adjustment of hidden reserves and liabilities and pro-rata profits and losses of the associated company as at the acquisition date, less the cumulative impairment losses from impairment testing of the carrying amount of the equity-accounted investment.

During subsequent consolidation, the carrying amount recognised in the balance sheet increases or decreases in accordance with the groups' share of the associate's net income/loss for the period. Changes recognised directly in the associate's equity are also recognised directly in equity in the Combined Financial Statements in the amount of the groups' interest. If the carrying amount of the investment and other unsecured receivables of the groups are written down in full due to pro-rata losses of the associate, the groups do not recognise any additional losses unless they have entered into a legal or constructive obligation or have made payments for the associate.

Significant "upstream" and "downstream" transactions and resulting profits between the companies of the groups as well as those between an associate or joint venture are eliminated. Significant losses are also eliminated unless the transaction indicates an impairment of the transferred asset.

The accounting policies of associates are adjusted as required to ensure uniform accounting treatment.

Consolidation Principles in Connection with Step-ups and Step-downs

a) Control Obtained in Stages

For a business combination achieved in stages, there is an upward consolidation as at the acquisition date when control is obtained for the first time. First, the previously held interest is measured at fair value through profit or loss. Then, a first-time consolidation is recognised based on the fair values of all acquired shares. Together with the consideration transferred for the recently acquired shares, the amount of non-controlling interests and the net fair value of the subsidiary's assets, the remeasured interest forms the basis for calculating goodwill or a bargain purchase.

If the shares previously held were classified as equity instruments for which the fair value option was exercised, the changes in fair value recognised in equity must be reclassified to retained earnings.

Upon a transition from the equity method to full consolidation, the interest previously recognised using the equity method is also remeasured to fair value through profit or loss. Reserves recognised directly in equity are reversed as if the previously held interest had been sold. Upon disposal, these reserves are reversed in accordance with the individual standards under which they were recognised.

b) Loss of Control with Retention of an Interest

Upon loss of control, the interest disposed of is deconsolidated through profit or loss. At the same time, amounts related to this interest recognised directly in equity are either recognised through profit or loss or reclassified to other retained earnings depending on the provisions of the individual standards under which these reserves were recognised. Any remaining interest in the entity is measured at fair value through profit or loss in the Combined Financial Statements as at the date of the step-down. The accounting treatment of this remaining interest in subsequent periods is made in accordance with the provisions for financial instruments, for associates or for joint ventures.

c) Step-ups or Step-downs in Interests Without Loss of Control

i) Step-ups in Interests in Controlled Companies

Acquisitions of interests in a subsidiary, whose direct or indirect control by the groups was possible prior to the acquisition, are accounted for as equity transactions between owners. A difference between the purchase price and the interest of the non-controlling interests in the net assets resulting from such an acquisition is recognised directly in equity in the Combined Financial Statements.

ii) Step-downs of Interests in Controlled Companies

The disposal of interests in a subsidiary without loss of control is treated analogously to an increase in controlling interests – as a pure equity transaction. As a result, for sales to non-controlling interests, differences between the disposal proceeds and the corresponding interest in the net carrying amount of the subsidiary's assets are also recognised directly to equity in the Combined Financial Statements.

Scope of Consolidation

During the financial year, the Combined Financial Statements included 412 (previous year: 396) subsidiaries, of which 260 (previous year: 249) were German and 152 (previous year: 147) were foreign.

Changes to the Scope of Consolidation in Financial Year 2018
Fully-consolidated subsidiariesGermanyInternationalTotal
As at 1 Jan. 2018249147 396
Additions159 24
of which: new formations or initial consolidations of companies already under control14620
of which: acquisitions134
Disposals 44 8
of which: mergers, accretions or liquidations347
of which: disposals101
As at 31 Dec. 2018 260 152 412

Disclosures on Changes in the Scope of Consolidation

Companies Included in the Scope of Consolidation for the First Time During the Financial Year
No.Company Name, Registered Office
 Germany
1.Glockenbrot Immobilien 1 GmbH & Co. KG, Cologne
2.REISEBÜRO RADE GMBH, Offenburg*
3.REWE Immobilien 2 GmbH & Co. KG, Cologne
4.REWE Immobilien 3 GmbH & Co. KG, Cologne
5.REWE Immobilien Beteiligungs GmbH, Cologne
6.REWE LOG 30 GmbH, Cologne
7.REWE LOG 31 GmbH, Cologne
8.REWE LOG 32 GmbH, Cologne
9.REWE Märkte 46 GmbH, Cologne
10.REWE Märkte 47 GmbH, Cologne
11.REWE Märkte 54 GmbH, Cologne
12.REWE Märkte 55 GmbH, Cologne
13.REWE Märkte 56 GmbH, Cologne
14.Wilhelm Brandenburg Immobilien 2 GmbH & Co. KG, Cologne
15.Wilhelm Brandenburg Immobilien 3 GmbH & Co. KG, Cologne
  • * Acquisitions
No.Company Name, Registered Office
 International
1.commercetools B.V., Amsterdam
2.DER Touristik Tunisie S.A.R.L., Tunis
3.Destination Touristik Services d.o.o., Pula
4.Journey Latin America Limited, London*
5.REWE Systems Austria GmbH, Premstätten
6.REWE Systems Spain S.L., Málaga
7.Travel LAB SAS, St. Ouen*
8.UAB Palink, Vilnius*
9.Xtravel AB, Stockholm*
  • * Acquisitions
Companies that were Deconsolidated in the Financial Year due to Mergers, Accretions, Liquidations or Disposals
No.Company Name, Registered Office
 Germany
1.DIY Union GmbH, Cologne*
2.Gartenliebe GmbH, Cologne
3.REWE Unterhaltungselektronik GmbH, Cologne
4.SELGROS Verwaltung GmbH & Co. Vermietungs-KG, Pullach i. Isartal
  • * Partial disposal
No.Company Name, Registered Office
 International
1.Falk Lauristen Rejser A/S, Herning
2.MAXXI S.R.L., Milan
3.REWE ITALIA SRL, Carmignano di Brenta
4.Serenissima Travel Limited, London

Eight joint ventures (previous year: seven) and 12 associates (previous year: 14) were included using the equity method in the financial year.

In addition, the groups have interests in a total of 1,214 REWE partner companies (previous year: 1,151) which are also included as associates using the equity method.