Accounting standards

Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year 2017.

From January 1, 2017, IAS 7 (Statement of Cash Flows) requires entities to make additional disclosures on changes arising from cash flows and noncash changes in financial liabilities arising from financing activities as reported in the statement of cash flows.

Since January 1, 2017, the amendments to IAS 12 (Income Taxes) have clarified the recognition of deferred tax assets for unrealized losses in the case of assets carried at fair value.

The IASB amended IFRS 12 (Disclosures of Interests in Other Entities) as part of its 2016 annual improvements project, with effect from January 1, 2017. This clarifies that, as a matter of principle, disclosures in accordance with IFRS 12 must also be made for the entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities even if these are classified as held for sale, held for distribution to owners or as discontinued operations.

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

New and amended IFRSs not applied

In its 2017 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 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 change in method for classifying and measuring financial assets is expected to have a transition effect of €0.3 billion. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. The classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the current accounting requirements of IAS 39.

The basis for measuring impairment losses and recognizing loss allowances will switch from an incurred credit loss model to an expected credit loss model. The change in measurement method will lead to a €0.3 billion to €0.5 billion increase in the loss allowance on initial application. These amounts, net of deferred taxes, reduce the retained earnings directly in equity. 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 testing.

IFRS 9 will have a particularly significant 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 option transactions, a transition effect of €0.1 billion is expected. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. Since the new guidance for hedging with currency forwards will be applied prospectively, these hedges will not result in any initial application effect.

This will also result in far more extensive disclosures in the notes.

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 specifies new accounting rules for revenue recognition. In the MAN subgroup, sales revenue is expected to be recognized at a later point in time than under the current accounting treatment for certain types of contract. Other provisions and other liabilities will be adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash will additionally inflate the balance sheet by an amount in the three-digit million range.

In addition, from next year onward, the Volkswagen Group will no longer present the reversal of sales allowances under other operating income, but under sales revenue.

The Volkswagen Group will apply the modified retrospective transition method. This is not expected to result in material transition effects for the Volkswagen Group, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance.

This will also result in far more extensive disclosures in the notes.

IFRS 16 – LEASES

IFRS 16 changes the accounting treatment for leases. 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. In the future, they will instead be required to recognize a right-of-use asset and a lease liability for all leases in the statement of financial position. Exceptions will only be made for short-term leases and leases of low-value assets. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using an effective interest method and taking the lease payments into account. The new lessee accounting model will therefore tend to increase noncurrent assets and noncurrent liabilities. In the income statement this change is expected to improve the operating result and reduce the financial result. 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.

This will also result in far more extensive disclosures in the notes.