Application of new accounting methods

Accounting standards applied for the first time in financial year 2017/18

The following standards revised or amended by the International Accounting Standards Board (IASB) that were binding for METRO AG in financial year 2017/18 were applied for the first time in these consolidated financial statements, unless the company had opted for voluntary early adoption:

IAS 7 (Statement of cash flows)

As per the amendments to IAS 7 in the context of the Disclosure Initiative, the notes to the consolidated financial statements provide disclosures on changes in liabilities arising from financing activities. In particular, the following changes are listed: financing cash flows, corresponding effects resulting from the acquisition or loss of control of subsidiaries or other business units, impact of currency exchange rates and fair value measurements. Financial liabilities include events that are classified as cash flows before financing activities in the cash flow statement.

Additional IFRS amendments

Other accounting rules to be applied for the first time in financial year 2017/18 without material effects on METRO are:

• IAS 12 – Income Taxes (recognition of deferred tax assets for unrealised losses with regard to certain debt instruments)
• Annual improvements to IFRS 2014–2016
• (Clarification of the application area of IFRS 12 – Disclosure of Interests in Other Entities)

Accounting standards that were published but not yet applied in financial year 2017/18

A number of other standards and interpretations revised or newly adopted by the IASB were not yet applied by METRO AG in financial year 2017/18 because they were either not yet mandatory or have not yet been endorsed by the European Commission.

IFRS 9 (Financial instruments)

The new IFRS 9 adopted in its final version on 24 July 2014 (Financial Instruments) will replace IAS 39 (Financial Instruments: Recognition and Measurement), covering the classification and measurement of financial instruments. As part of a project dealing with the introduction of IFRS 9 at METRO, the following qualitative and quantitative effects of the new standard were analysed and evaluated.

The majority of debt instruments held by METRO, lendings, loans, trade receivables and other financial assets (with the exception of equity instruments) will satisfy the criteria for their recognition at amortised costs pursuant to IFRS 9. Selected financial assets, such as certain loans and derivative financial instruments not designated as part of a hedging transaction, must under the new standard be measured at fair value through profit or loss. Due to the resulting changes to the current accounting in accordance with IAS 39, an increase in equity in a low single-digit million amount is expected to occur outside of profit or loss at the conversion date.

METRO will in the future recognise credit losses expected for trade receivables over the entire term of these financial instruments. METRO will elect to apply the simplified procedure available under the standard and ascertain the expected losses on the basis of impairment tables. The outstanding receivables are continuously monitored by the individual METRO companies.

In accordance with the new accounting and measurement methods, METRO will apply the general impairment requirements stipulated in IFRS 9 to all other financial assets. The credit risk is in these cases evaluated on the basis of the customer’s credit quality – which METRO assesses using external ratings, previous experience with the respective customer and credit risk rating grades. METRO minimises the risk by exclusively investing in first-class debt capital instruments from issuers with a good to very good rating (investment grade). For these kinds of assets, the creditworthiness of the issuers is also monitored continuously. This allows METRO to identify any probable significant increase in the credit risk and to swiftly respond to any potential changes. METRO uses borrower-specific information to monitor loans advanced and other financial assets. In light of the conversion from a model based on actually incurred losses to a model focusing on expected losses, METRO expects a reduction of equity in a mid-single-digit million amount to occur outside of profit or loss at the conversion date. The introduction of the impairment models could in subsequent years lead to a higher fluctuation in the income statement, since the level of risk provisions also depends on economic conditions.

According to the new accounting and measurement methods pursuant to IFRS 9, METRO will classify the majority of equity instruments held by it as measured at fair value through other comprehensive income with effect on 1 October 2018. This will result in comparatively lower earnings volatility, because METRO had previously classified most of these equity instruments as available for sale and thus recognised the unrealised gains and losses in the other comprehensive income until they had to be recognised through profit or loss for the purposes of the reclassification. Commencing on 1 October 2018, METRO will decide for each new equity instrument whether the instrument is measured at fair value through other comprehensive income or at fair value through profit or loss.

METRO does not expect any significant effects from the application of IFRS 9 in the area of financial liabilities.

METRO exercises the option to continue the accounting of hedging transactions in accordance with IAS 39.

The introduction of IFRS 9 entails extensive new disclosure requirements pursuant to IFRS 7 (Financial Instruments: Disclosures). The analysis carried out in this respect was also concerned with identifying the data to be disclosed in the notes that are currently not reported or generated by the current reporting processes. METRO is currently setting up the necessary systems and control mechanisms for making the material disclosures required under IFRS 7 available.

METRO will apply the new standard for the first time on 1 October 2018. METRO will make use of the option pertaining to an exemption from a full retrospective application and recognise the effect of the first-time application of the standard as an adjustment to the opening balance of the reserves retained from earnings with effect on 1 October 2018.

IFRS 15 (Revenue from contracts with customers)

The new IFRS 15 will replace IAS 18 (Revenue) and IAS 11 (Construction Contracts) and related interpretations and stipulates a uniform and comprehensive model for recognising revenue from customers.

The new standard uses a 5-step model to determine the amount of revenue and the date of realisation. Revenues are recognised at the point in time the performance obligation is satisfied. The performance obligation is satisfied when the control of the good or service is transferred to the customer. The performance obligation can be satisfied at a single point in time or over a period of time. If the performance obligation is satisfied over a period of time, the revenue is recognised over the period in such a way that, on the basis of the selected method, the performance obligation is satisfied in a manner that best reflects the continuous transfer of control over time.

IFRS 15 is to be applied for the first time to financial years beginning on or after 1 January 2018. METRO will commence application of the standard for financial year 2018/19 commencing on 1 October 2018 (IFRS 15 conversion year) and elect to apply the modified retrospective transitional approach, in which no adjustment of the previous year’s figures takes place and any resulting adjustment amount is recognised in equity. METRO elects to make use of the simplified process and only applies IFRS 15 retrospectively to contracts that have not been fully performed at the date of the first-time application (1 October 2018). During the course of the almost completed group-wide project concerned with the introduction of IFRS 15, the following significant conversion issues were identified within the METRO group and will be affected by an adjustment to the reserves retained from earnings in a low single-digit million amount in the opening balance sheet as of 1 October 2018.

Essential rights from customer loyalty programmes

As part of discount campaigns or customer loyalty programmes, the customer is regularly granted the option of acquiring additional goods or services at a discounted price in the future. The part of the transaction price corresponding to the relative stand-alone selling price must be allocated to the resulting essential right. In the future, sales will be accrued under contract liability. Revenue recognition for the essential right occurs at the time the right is redeemed or expired, potentially leading to a later recognition of revenue.

Multi-component contracts in relation to franchise agreements

Some of METRO’s franchise models make use of multi-component contracts that provide for customers purchasing a package of franchise products and services from METRO at the time of entering into the contract, with selected contractual components being subsidised by METRO. In such cases, the total consideration of the contract shall be divided into the identifiable performance obligations in accordance with the relative individual selling prices and, in comparison to the previous accounting, a potentially larger part of the total compensation is attributable to the previously subsidised component, so that in the future revenues for those products must be reported earlier. Therefore, the balance sheet total at the time of initial application may increase as a result of the capitalisation of contract assets. Legally, these represent not yet incurred receivables from the customer contract.

The following conversion issues will in each instance result in the revised disclosure of a low single- to low double-digit million amount within the sales item and without adjustments affecting equity:

Principal/agent relationship

The acknowledgement of whether METRO AG acts as principal or agent must be reassessed based on the indicator changes in IFRS 15. This results in a reduction of sales in a low double-digit million amount in the financial year as a result of the switch from being treated as a principal (recognition of gross sales and separate recognition of cost of sales) to being treated as an agent (recognition of net sales and cost of sales).

Transport services in store-based retail

Product sales are allocated to service revenues (transport revenues) due to discounted or free delivery. This results in a changed disclosure within the item sales.

Licences in relation to franchise agreements

Product sales are allocated to service revenues due to the issuance of franchise licences at discounted prices under multi-component contracts for franchising agreements. This results in a changed disclosure within sales.

Right of return

Sales in some METRO Wholesale business models regularly result in redemption or conversion rights. These may be legally binding or arise from active business practice. Refunds represent a form of variable consideration in the determination of the transaction price. The disclosure of the return obligations will in the future be made in the liabilities section under the item return liability. In addition, an asset is recognised for the company’s right to recover products upon settlement of the return obligation (return asset).

The application of IFRS 15 will otherwise affect the notes to the consolidated financial statements.

New transactions are continuously examined in terms of their potential IFRS 15-relevant implications.

IFRS 16 (Leases)

The new leasing standard IFRS 16 will replace the currently applicable standard IAS 17 (Leases) and IFRIC 4 (determining whether an arrangement contains a lease). IFRS 16 generally applies to contracts that convey the right to use an asset, rental contracts and leases, subleases and sale-and-lease-back transactions. A lessee can elect to apply IFRS 16 to leases of certain intangible assets, whereas agreements on service concessions or leasing of natural resources are outside the scope of IFRS 16.

The key change in IFRS 16 compared to IAS 17 concerns the lessee accounting model. Lessees no longer have to classify leases as operating or finance. Instead, the lessee recognises a right-of-use asset and a lease liability upon commencement of the lease when the lessor makes an underlying asset available for use by the lessee.

The lessee measures the lease liability at the present value of the lease payments payable over the lease term. The lease payments include all fixed payments less any lease incentives for the conclusion of the contract. This includes all index-based variable lease payments. In addition, the lease payments must include any variable lease payments that classify as in-substance fixed payments as well as amounts expected to be payable by the lessee under residual value guarantees. The exercise price of a purchase or lease extension option must be included if it is reasonably certain that the lessee will exercise that option. In addition, the lease payments must include payments of penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.

Over the term of the lease, the lease liability is accounted for under the effective interest method in consideration of lease payments made.

The simultaneously recognised right-of-use asset is capitalised at the amount of the liability. Lease payments already made and directly attributable costs must also be included. Any payments received from the lessor that are related to the lease are deducted. Measurement also considers any reinstatement obligations from leases. The right-of-use asset is subjected to scheduled depreciation.

Exercising of options

Lessees can elect to make use of several policy options. METRO has policy options in accounting and measurement relating to the creation of portfolios of contracts with identical or similar characteristics, which METRO does not exercise. METRO will exercise the option of not applying the right-of-use approach to low-value assets (mainly business and office equipment) and short-term leases (maximum term of 12 months). Rental expenses for these assets must therefore be recognised directly in the income statement.

The option to separate lease and non-lease components (service) is not exercised and the non-lease component is included in the right-of-use assets to be recognised.

In the future, comprehensive qualitative and quantitative information must be provided in the notes to the consolidated financial statements.

The revised definition of leases also applies to the lessor and can lead to assessments deviating from IAS 17. However, the lessor continues to classify a lease as either an operating lease or a finance lease.

IFRS 16 is applicable for reporting periods beginning on or after 1 January 2019.

METRO will apply these regulations for the first time on 1 October 2019, and thus refrains from early application of the standard together with IFRS 15 on 1 October 2018.

Transitional arrangements

METRO will apply IFRS 16 for the first time with full retrospective effect. The figures from the previous year will be adapted in consideration of the applicable transitional rules.

Project status

METRO AG has further analysed the effects of IFRS 16 during the past financial year 2017/18 (post-impact analysis) as part of a group-wide implementation project. The modified standard method was used to ascertain the effects on the key financial figures as part of the post-impact analysis.

The new leasing standard IFRS 16 has a significant impact on the true and fair view of the asset, financial and earnings position of METRO.

While future payment obligations for operating leases had previously only been disclosed in the notes, the resulting rights and payment obligations are to be accounted for in future as rights of use and lease liabilities. This mainly affects the leasing of real estate.

METRO expects a significant increase in total assets at the time of initial application in the amount of €3 billion to €4 billion (of which approx. €1 billion is attributable to the discontinued operations) due to the increase in fixed assets based on the addition of the right of use to be capitalised. Additional impairment losses and interest expenses will be recognised in the income statement in the future instead of leasing expenses. This leads to an improvement in EBITDA in an amount in the mid 3-digit million euro range (which includes a low 3-digit million amount attributable to the discontinued operations) and an EBIT improvement at the expense of the financial result in the low 3-digit million euro range (of which a high 2-digit million amount is attributable to the discontinued operations).

METRO has decided to implement centralised software that will be used to document and evaluate all leases throughout the entire group.

Additional IFRS amendments

At this point, the first-time application of the other standards and interpretations listed in the above table as well as changes to other IFRS are not expected to have a material impact on the group’s asset, financial and earnings position.

Segment reporting

METRO has changed its segment reporting with the beginning of financial year 2017/18 (please refer to the comments on segment reporting). METRO’s operational business is handled by the following 7 segments:

• METRO Wholesale Germany
• METRO Wholesale Western Europe (excl. Germany)
• METRO Wholesale Russia
• METRO Wholesale Eastern Europe (excl. Russia)
• METRO Wholesale Asia
• Real
• Others