4 Accounting Policies

Recognition and measurement, as well as the explanatory information and notes, are generally based on the same recognition and measurement methods that were used to prepare the consolidated financial statements for the 2018 fiscal year. There were no seasonal or economic influences that had an impact on Vonovia’s business activities in the reporting period.

With the exception of the new lease accounting standard set out in IFRS 16, the new standards and interpretations to be applied as of January 1, 2019 do not have any material effects on Vonovia’s consolidated financial statements.

Leases

The new leasing standard, IFRS 16 “Leases,” is to be applied as a mandatory requirement for fiscal years beginning on or after January 1, 2019 and specifies how companies applying the IFRS recognize, measure, present and disclose leases in their financial statements.

In particular, IFRS 16 replaces the previous leasing standard, IAS 17 “Leases,” and introduces only one accounting model (right-of-use model) for lessees, based on which all leases are to be recognized in the balance sheet as a matter of principle. There is an accounting option available for short-term leases and leases of low-value assets. Vonovia makes use of this option, meaning that such leases are not recognized. The previous distinction between operating and finance leases only remains in place for accounting at the level of the lessor.

As of January 1, 2019, all contracts that give the Vonovia Group the right to control the use of an identified asset over a certain period of time in return for consideration are considered leases within the meaning of IFRS 16. All lease contracts within the Vonovia Group were assessed as of January 1, 2019 to determine whether they are or contain a lease within the meaning of IFRS 16. In this respect, the practical expedient provided for in IFRS 16.C3 was not applied.

In respect of those leases previously classified as operating leases, Vonovia recognizes lease liabilities as of January 1, 2019, equal to the present value of the future lease payments, discounted to reflect the term-specific incremental borrowing rate at the time of initial application. Right-of-use assets are recognized accordingly. The initial measurement of the right-of-use assets as of January 1, 2019, is based on the amount of the lease liabilities plus any advance payments that have already been made. Initial, directly assignable costs are not recognized as of January 1, 2019.

The right-of-use assets are generally recognized at amortized cost, taking depreciation and impairments into account. Right-of-use assets that meet the definition of investment properties pursuant to IAS 40 are recognized at fair value as of the time of initial application in line with the recognition and measurement rules set out in IAS 40.

The lease liabilities are adjusted in line with financial principles. They are increased by the periodic interest expenses and reduced by the lease payments made.

In the consolidated income statement, leasing expenses from operating leases that were recognized on a straight-line basis in previous years are replaced by depreciation or net income from fair value adjustments (for right-of-use assets within the meaning of IAS 40) and interest expenses.

Leases ending/expiring within the 2019 fiscal year are treated as short-term leases, meaning that they are not recognized. As far as rented IT equipment is concerned, portfolios have been set up for leases with similar terms and a single discount rate has been applied to these portfolios. As part of the transition to IFRS 16, Vonovia also takes scenarios pursuant to IAS 37 into account and adjusts the valuation of the right-of-use assets to reflect provisions for onerous contracts recognized on the reporting date. Periods resulting from extension or termination options granted to Vonovia on an unilateral basis are assessed on a lease-by-lease basis and are only taken into account if their use is sufficiently probable – for example, due to financial incentives.

In addition to conventional vehicle leasing, the Vonovia Group also leases IT equipment (IT leasing), residential and commercial property for subletting (interim leasing), heat generation plants to supply the Group’s own properties with heat (contracting) as well as office buildings, office spaces and storage spaces (rental). Under license agreements with public-sector institutions Vonovia is granted the right to use public properties as storage locations or parking spaces, to lay heating pipes or cables, or to construct playgrounds. Long-term leasehold contracts, however, have the biggest impact on the company’s net assets, financial position and results of operations. These involve Vonovia leasing land for the rental of constructed residential and commercial properties.

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. As a result, the cumulative effect resulting from the initial application of IFRS 16 has been recognized as an adjustment to the value of retained earnings/non-controlling interests in the opening balance sheet in the amount of € -35.0 million (€ -24.1 million after consideration of 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. Comparative information has not been adjusted.

Effects Resulting from the Initial Application of IFRS 16

As of January 1, 2019, total lease liabilities of € 357.5 million and total right-of-use assets in the amount of € 1,085.0 million were recognized.

The difference between lease liabilities and right-of-use assets is largely due to the fair value measurement of the right-of-use assets from leasehold contracts under IAS 40. Hereditary building rights previously already included in investment properties were reclassified to right-of-use assets within investment properties in the amount of € 762.5 million.

The bigger part of the newly added right-of-use assets in the amount of € 1,085.0 million is reported under investment properties and results from both leasehold contracts (€ 1,001.4 million) and from interim rental agreements (€ 1.4 million). The other right-of-use assets in the amount of € 82.2 million are reported under property, plant and equipment and mainly include right-of-use assets resulting from the leasing of land for the construction of commercial property to be used by the company itself (€ 26.5 million), from concluded lease agreements (€ 22.8 million), heating supply contracts (€ 16.5 million) and vehicle lease contracts (€ 11.8 million).

Right-of-use assets totalling € 1,089.9 million and lease liabilities totaling € 346.2 million were recognized as of June 30, 2019. The weighted average incremental borrowing rate for all lease liabilities to be recognized amounts to 2.3% as of January 1, 2019.

The present value of the future 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 is due to leases expiring in 2019 (short-term) and particularly due to those lease agreements that are not classified as leases under the right-of-use model within the meaning of IFRS 16.

The changes resulting from IFRS 16 presented above will also be reflected in the consolidated financial statements for 2019 as a whole.

Impact on Existing Finance Leases

Up until December 31, 2018, Vonovia had recognized fixed-term heating supply contracts as well as the Spree-Bellevue property, which has a term running up until 2044, as finance leases in accordance with the provisions set out in IAS 17. 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) and recognized in accordance with the provisions set out in IFRS 16 as of this point in time.

As of June 30, 2019, the right-of-use assets resulting from those finance leases that were previously recognized pursuant to IAS 17 amounted to € 81.1 million. Of this amount, € 76.6 million were recognized under investment properties (Spree-Bellevue) and € 4.5 million under property, plant and equipment (heat generation plants). The associated lease liabilities amount to € 99.3 million.