General Accounting Principles of the Combined Financial Statements
The preparation of the Combined Financial Statements in compliance with IFRS as adopted into European law requires that judgements be made and estimates and assessments be used, which impact on the amount and presentation of recognised assets, liabilities, income, expenses and contingent liabilities.
Judgements when Applying Accounting Policies
Preparing the financial statements in conformity with IFRS requires judgements. All judgements are continually reassessed and are based on historical experience and expectations with regard to future events that appear reasonable under the given circumstances.
This applies in particular to the following circumstances:
- When determining the scope of consolidation, it was decided that 1,214 REWE partnerships (previous year: 1,151) would be included as associates using the equity method due to lack of control. Control was negated despite certain opportunities to exert influence because the groups cannot determine these companies' relevant activities.
- When determining the scope of consolidation, it was decided that certain companies would be included in the Combined Financial Statements as subsidiaries, even absent the existence of an equity investment, because the groups exercise control over these companies on account of special contractual relationships.
- The groups hold equity investments in various real estate funds, which are in the German legal form of a limited partnership (Kommanditgesellschaft), as limited partners. Due to lack of control, it was decided that the interests in these funds would be reported as shares in associates or as equity investments, depending on the extent to which influence could be exerted.
Estimates and Assessments
Preparing the financial statements in conformity with IFRS requires estimates. All estimates and assessments are updated continually and are based on historical experiences and additional factors, including expectations in terms of future events that appear reasonable under the given circumstances. Naturally, estimates derived in this way will very rarely correspond to the actual circumstances to come. Changes are recognised in profit or loss when better knowledge is available.
Areas where assumptions and estimates are of decisive significance for the Combined Financial Statements are listed below:
- Estimates of the economic useful lives of assets must be made when determining depreciation/amortisation.
- Assets and liabilities must be identified in connection with purchase price allocations for business combinations and measured at fair value, which requires that assumptions be made.
- Goodwill acquired in connection with business combinations is allocated to cash-generating units. An estimate of whether the goodwill is recoverable must be made at least annually. The recoverable amount is calculated to determine this, which requires assumptions to be made.
- The carrying amount of a deferred tax asset is checked at each balance sheet date to determine whether it is still recoverable, i.e. whether future tax relief can be realised. This requires making assumptions. The amount of provisions for risks from expected tax audits and for litigation risks is also based on estimates by management.
- When measuring provisions for expected losses from onerous contracts, the underlying negative contribution margins are determined using planning data. In that respect, forward-looking assumptions and estimates are inputs into the calculation. The subletting ratio is calculated using weighted actual subleases.
- The annual financial statements of the associated REWE partner companies were not yet available in final form when the Combined Financial Statements were prepared. An estimate of the annual results of the REWE partner companies was made based on the preliminary annual financial statements, whereby any necessary additional adjustments pursuant to IFRS provisions will be made.
- The measurement of the fair values of investment properties requires estimates with respect to the allocation between portions for buildings and land. The land value is separated from the building portion for accounting treatment. The allocation ratio for the land and the building portion therefore affects the present value of future earnings from the building.
- In the case of award credits under customer loyalty programmes, the probability of redemption is estimated on the basis of historical experience.
- Revenue is recognised on the basis of its operating purpose. When estimating variable consideration, the influencing factors are recorded as precisely as possible so that any future correction of recognised revenue figures can be avoided to the greatest extent. Non-monetary consideration is measured at fair value if it can be reasonably estimated. If this is not the case, the individual sales price of the good or service is used that was promised in exchange for the non-monetary consideration. If percentage rebates are granted depending on the volume purchased during the year, these are taken into account when recognising revenue during the year, provided that they can be reliably determined.
- Estimates and external ratings are used to calculate the expected credit losses of financial instruments.