41 Additional Financial Instrument Disclosures

The section below provides information on the financial assets and financial liabilities not covered by IFRS 9:

• Employee benefits in accordance with IAS 19: Gross presentation of right to reimbursement arising from transferred pension obligations in the amount of € 4.7 million (December 31, 2017: € 5.3 million).
• Amount by which the fair value of plan assets exceeds the corresponding obligation: € 1.1 million (December 31, 2017: € 1.1 million).
• Provisions for pensions and similar obligations: € 520.6 million (December 31, 2017: € 513.7 million).

IFRS 13 defines fair value as a price that would be received by selling an asset or paid to transfer a liability in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market. The fair value is to be determined using valuation parameters that are as market-based as possible as inputs. The valuation hierarchy (fair value hierarchy) categorizes the inputs for the measurement technique in three levels, giving the highest priority level to the most market-based inputs:

Level 1 inputs: quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 inputs: valuation parameters other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs: unobservable valuation parameters for the asset or liability.

When inputs used to measure the fair value are categorized within different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is material to the entire measurement.

Should the level of the input parameters used for a financial instrument change in a period subsequent to initial recognition, the financial instrument is reclassified to the new hierarchy level as of the end of that reporting period. No financial instruments were reclassified to different hierarchy levels during the reporting period.

The following table shows the assets and liabilities that are recognized in the balance sheet at fair value and their classification according to the fair value hierarchy:

In general, Vonovia measures its investment properties on the basis of the discounted cash flow (DCF) methodology (Level 3). The material valuation parameters and valuation results can be found in note [23] “Investment Properties.”

The investment properties classified as assets held for sale are recognized at the time of their transfer to assets held for sale at their new fair value, the agreed purchase price (Level 2).

No financial instruments were reclassified to different hierarchy levels as against the comparative period.

Non-current securities are measured using the quoted prices in active markets (Level 1).

For the measurement of financial instruments, cash flows are initially calculated and then discounted. In addition to the tenor-specific EURIBOR/STIBOR rates (3M; 6M), the respective credit risk is taken as a basis for discounting. Depending on the expected cash flows, either Vonovia’s own credit risk or the counterparty risk is taken into account in the calculation.

For the consolidated financial statements, Vonovia’s own credit risk, in principle, was relevant for interest rate swaps. This credit risk is derived for material risks from rates observable on the capital markets and ranges of between 40 and 180 basis points, depending on the residual maturities of financial instruments. Regarding the positive market values of the cross currency swaps, a counterparty risk of 90 basis points was taken into account.

The calculated cash flows of the cross currency swap result from the forward curve for USD/EUR. The cash flows are discounted on the basis of the reference interest rate of each currency (LIBOR and EURIBOR) and translated into euros at the current exchange rate (Level 2).

The fair values of the cash and cash equivalents, trade receivables as well as other financial receivables approximate their carrying amounts at the reporting date owing to their mainly short maturities. The amount of the estimated impairment loss on cash and cash equivalents was calculated based on the losses expected over a period of twelve months. It was determined that the cash and cash equivalents have a low risk of default due to the external ratings and short residual maturities and that there is no need for any material impairment of cash and cash equivalents.

The fair value of the purchase price liabilities from put options/rights to reimbursement granted to minority shareholders is generally based on the going concern value of the respective company; if a contractually agreed minimum purchase price is higher than this amount, this purchase price is recognized (Level 3). The unobservable valuation parameters may fluctuate depending on the going concern values of these companies. However, a major change in value is not likely, as the business model is very predictable.

The following table shows the development of the put options recognized at fair value:

The change in the scope of consolidation relates to put options for shares held by minority shareholders as part of the first-time consolidation of BUWOG.

For further information, we refer to note [4] “Scope of Consolidation and Business Combinations.”

The sensitivity analysis has shown that if the value of the company deviates by 10% in each case, the purchase price liability from put options granted as of the reporting date would differ by € +3.7 million or € -3.6 million (Dec. 31, 2017: € +0.4 million or € -0.4 million). The changes would be recognized in full in net interest.