8 Changes in Accounting Policies, Estimates, Assumptions, Options and Judgments

Changes in Accounting Policies Due to New Standards and Interpretations

The following new or amended standards and interpretations became mandatory for the first time in the 2019 fiscal year. Other than IFRS 16, none of the other new or amended standards had a material impact.

• Improvements and supplements to a selection of IFRS 2015–2017
• IAS 19 “Employee Benefits”
• IAS 28 “Investments in Associates and Joint Ventures”
• IFRS 9 “Financial Instruments”
• IFRS 16 “Leases”
• IFRIC 23 “Uncertainty over Income Tax Treatments”

IFRS 16

Vonovia applied the new leasing standard IFRS 16 for the first time as of January 1, 2019, based on the modified retrospective method provided for in the transitional provisions. Based on these provisions, the cumulative effect resulting from the initial application of IFRS 16 was recognized as an adjustment to the value of retained earnings/non-controlling interests in the opening balance sheet. Comparative information has not been adjusted.

As of January 1, 2019, total lease liabilities of € 335.1 million and total right-of-use assets in the amount of € 1,032.1 million were recognized. The weighted average incremental borrowing rate for all lease liabilities to be recognized amounts to 2.3% as of January 1, 2019.

The difference between lease liabilities and right-of-use assets was largely due to the fair value measurement of the right-of-use assets from leasehold contracts under IAS 40. Inheritable building rights previously included in investment properties were reclassified to right-of-use assets within investment properties in the amount of € 732.0 million.

The remaining cumulative effect resulting from the initial application of IFRS 16 has been recognized as an adjustment of the value of retained earnings/non-controlling interests in the opening balance sheet in the amount of € -35.0 million (€ -24.1 million including deferred taxes). The effect results from the differences in the discounting of right-of-use assets and lease liabilities in connection with leasehold contracts. Due to the IAS 40 measurement of the right-of-use assets under leasehold contracts, the fair value of the right-of-use assets is calculated using property-specific discount rates. The lease liabilities from leasehold contracts, on the other hand, are calculated with the help of term-specific incremental borrowing rates.

The newly added lease liabilities in the amount of € 335.1 million are reported under liabilities from leasing and were largely attributable to leasehold contracts in the amount of € 251.6 million. The majority of the newly added right-of-use assets are reported under investment properties and result not only from interim lease agreements (€ 1.4 million) but primarily from leasehold contracts (€ 948.5 million). The other right-of-use assets totaling € 82.2 million are reported under property, plant and equipment and largely include right-of-use assets resulting from the rental of land for the construction of a commercial property to be used by the company itself (€ 26.5 million), from rental agreements that have been concluded (€ 22.8 million), from heating supply contracts (€ 16.5 million) and from vehicle lease contracts (€ 11.8 million).

Fixed-term heating supply contracts and the Spree-Bellevue property, which had been recognized as finance leases in accordance with the provisions set out in IAS 17 up until December 31, 2018, have been recognized in accordance with the provisions set out in IFRS 16 since January 1, 2019. At the time of the transition, the right-of-use assets and lease liabilities resulting from the aforementioned agreements were stated at their present values as of December 31, 2018 (right-of-use assets: € 75.7 million; lease liabilities: € 99.4 million).

The present value of the lease obligations, pursuant to IAS 17, reported in the Notes to the consolidated financial statements as of December 31, 2018 deviates from the present value of the lease liabilities to be recognized as of January 1, 2019 pursuant to IFRS 16. This deviation in value is due to leases that expired in 2019 (short-term) and particularly due to those lease agreements that are not classified as leases under the right-of-use model pursuant to IFRS 16.

IFRIC 23

IFRIC 23 clarifies how the recognition and measurement requirements of IAS 12 are applied when there is uncertainty over income tax treatments. Recognition and measurement require estimates and assumptions, e. g., whether an assessment is performed separately or together with other uncertainties, whether a probable amount or expected value is used for the uncertainty and whether there have been changes compared with the previous period. The risk of detection is irrelevant with regard to the recognition of uncertain balance sheet items. Recognition assumes that the taxation authorities will examine the matter in question and will have full knowledge of all relevant information. In this regard, it is important to note that it is difficult to predict how tax authorities in Germany and abroad will evaluate these scenarios. The initial application of IFRIC 23 has not resulted in any changes in the consolidated financial statements compared with the previous period.

New Standards and Interpretations Not Yet Applied

Application of the following standards, interpretations and amendments to existing standards was not yet mandatory for the 2019 fiscal year. Vonovia also did not choose to apply them in advance. Their application will be mandatory for the fiscal years following the dates stated in the following table:

Estimates and Assumptions

To a certain extent, the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the reporting date as well as reported amounts of income and expenses during the reporting year. The actual amounts may differ from the estimates as the business environment may develop differently than assumed. In this case, the assumptions and, where necessary, the carrying amounts of the assets or liabilities affected are prospectively adjusted accordingly. Specific estimates and assumptions relating to individual elements of financial statements are also explained in the corresponding notes to the consolidated financial statements.

Assumptions and estimates are reviewed on an ongoing basis and are based on experience and other factors, including expectations regarding future events that appear reasonable under the given circumstances.

The estimates and assumptions that may have a material risk of causing an adjustment to the carrying amounts of assets and liabilities mainly relate to the determination of the fair value of investment properties.

The best evidence of fair value of investment properties is current prices in an active market for comparable residential properties. As such information is not completely available, however, Vonovia uses standard valuation techniques.

A detailed description of the discounted cash flow (DCF) method used can be found in chapter [D28] Investment Properties.

In accordance with IAS 40 in conjunction with IFRS 13, the respective market values of the investment properties owned by Vonovia are determined for accounting purposes. Changes in certain market conditions such as prevailing rent levels and vacancy rates may affect the valuation of investment properties. Any changes in the fair value of the investment portfolio are recognized as part of the profit for the period in the Group’s income statement and can thus substantially affect Vonovia’s results of operations.

The statement of financial liabilities at amortized cost using the effective interest method takes the expected contractual cash flows into account. In some cases, the agreements do not have any fixed maturity terms. As a result, the cash flows included in the valuation are subject to management assumptions in terms of amount and term.

As explained in chapter [D26] Intangible Assets, Vonovia checks for goodwill impairments on an annual basis, or if there is any reason to suspect such impairments. The next step involves estimating the recoverable amount of the group of cash-generating units (CGU). This corresponds to either the fair value less costs of sale or the value in use, whichever is higher. Determining the value in use includes adjustments and estimates regarding the forecast and discounting of the future cash flow. Although the management believes that the assumptions used to determine the recoverable amount are appropriate, any unforeseeable changes in these assumptions could result in impairment losses, with a detrimental impact on the net assets, financial position and results of operations.

When determining the volume of current and deferred taxes, the Group takes into account the effects of uncertain tax items and whether additional taxes and interest may be due. This assessment is made on the basis of estimates and assumptions and may contain a number of judgments about future events. New information may become available that causes the Group to change its judgments regarding the appropriateness of existing tax liabilities; such changes to tax liabilities will affect the tax expense in the period in which such a change is made.

Deferred tax assets are recognized to the extent that it can be demonstrated that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that there will be sufficient future taxable profits to realize the tax benefit in the future.

As part of the application of IFRS 15, the determination of the time at which a performance obligation is satisfied and the determination of the progress made in cases involving revenue recognition over time may involve discretionary judgment.

Additional estimates and assumptions mainly relate to the uniform definition of useful lives, the assumptions made on the value of land and buildings, the recognition and measurement of provisions as well as the realization of future tax benefits.

Options and Judgments

Options exercised and judgments made by Vonovia’s management in the process of applying the entity’s accounting policies that may have a significant effect on the amounts recognized in the consolidated financial statements include the following:

• Determining whether the acquisition of investment properties as part of a business combination constitutes the acquisition of a “business” or the acquisition of an individual asset or group of assets can involve discretionary judgments.
• Vonovia measures investment properties at fair value. If management had opted to use the cost model as permitted under IAS 40, the carrying amounts of the investment properties as well as the corresponding income and expense items in the income statement would differ significantly.
• The criteria for assessing in which category a financial asset is to be classified may involve discretionary judgments.
• Within the scope of revenue recognition in accordance with IFRS 15, discretionary decisions relating to the expected revenue, the total costs of a project and the degree of completion may be necessary. These have an impact on the amount and timing of revenue.
• When accounting for leases in accordance with IFRS 16, the assessment of the exercise or non-exercise of unilaterally granted termination or extension options may involve discretionary judgment, particularly if there is no economic incentive for the exercise or non-exercise of options.
• The need to include information concerning the future in the valuation of expected defaults results in discretionary decisions regarding the impact that changes in economic factors will have on the expected defaults.
• The decision on how to define a group of cash-generating units to which goodwill is allocated may involve discretionary judgments.
• Allocating the goodwill to the group of individual cash-generating units may also involve discretionary judgments. The parameters used in the impairment test, such as the determination of undiscounted cash flows, the weighted average cost of capital and the growth rate, may also involve discretionary judgments. Due to a lack of any detailed definition of the term “operation” (IAS 36.86), the disposal of goodwill within the context of real estate sales may involve discretionary decisions.
• Due to a lack of any detailed definition of the term “a separate major line of business or geographical area of operations” (IFRS 5), a disposal group within the context of real estate sales may involve discretionary decisions.
• At the moment, there are no definitive provisions on how to reflect a mandatory acquisition of non-controlling interests following the acquisition of control as part of a voluntary public takeover offer. In general, the acquisition of shares as part of a public offer during the second offer period is based on exactly the same conditions as those that applied in the first offer period, and the two acquisitions are closely related in terms of content and timing. This means that, even if it is executed in two offer periods, the acquisition constitutes one and the same transaction (linked transaction). Following the completion of the later acquisition, the original purchase price allocation is to be adjusted with retroactive effect from the acquisition date, resulting in a change in the consideration transferred, the fair value of net assets transferred and, consequently, the resulting goodwill.