Application of new accounting methods

Accounting standards applied for the first time in financial year 2018/19

The following IFRS, issued or revised by the International Accounting Standards Board (IASB), that were binding for METRO AG in financial year 2018/19 were applied for the first time in these consolidated financial statements:

IFRS 9 (Financial Instruments)

As of financial year 2018/19, the new IFRS 9 (Financial Instruments) will replace IAS 39 (Financial Instruments: Recognition and Measurement) covering the classification and measurement of financial instruments. In particular, IFRS 9 introduces new regulations as follows:

• The classification and measurement of financial assets
• The determination and reporting of impairments of specific financial assets,
• The balance sheet reporting of hedging relationships.

Changeover effects

METRO has made use of the option pertaining to a modified retrospective application and recognised the effect of the first-time application of IFRS 9 as an adjustment to the opening balance of the reserves retained from earnings with effect on 1 October 2018. The first-time application of the new subsequent measurement regulations and the amended impairment rules for financial assets leads to an equity-reducing adjustment, which was reported to the sum of €4 million. The 2 adjustments were made taking into account offsetting deferred income tax effects in the amount of €1 million, resulting in an overall reduction of reserves retained from earnings in the amount of €3 million. As METRO exercises the option to continue the hedge accounting in accordance with IAS 39, the first-time application of IFRS 9 does not require any adjustments in this respect.

METRO has implemented the consequential amendment applied to IAS 1 (Presentation of Financial Statements) due to the passing of IFRS 9, which stipulates that impairments of financial assets must be reported as a separate item in the income statement. For reporting periods after the start of financial year 2018/19, the separate item earnings from impairment of financial assets will be included in the EBIT (Earnings Before Interest and Taxes).

Classification and measurement of financial assets

Under IFRS 9, the classification and (subsequent) measurement of financial assets depends on the business model within which a financial asset is held and the characteristic of the individual cash flows of a financial asset.

On this basis, the individual financial asset is assigned to one of the following classes at initial recognition:

• Measured at amortised cost (AC),
• Measured at fair value through other comprehensive income (FVOCI)
• Measured at fair value through profit or loss (FVPL)

As these classifications differ from the previously applicable rules of IAS 39, there are corresponding differences in the classification and measurement of financial assets. The majority of debt instruments, loans, trade receivables and other financial assets (with the exception of equity instruments) held by METRO meet the criteria for reporting at amortised cost (AC) as per IFRS 9. Under the new standard, selected financial assets must be measured at fair value through profit or loss (FVPL). This applies in particular to certain loans as well as derivative financial instruments that are not designated as part of a hedging transaction. METRO has classified its financial assets as laid out in the preceding table, based on the underlying business models and the contractually determined cash flow characteristics. In total, this has not resulted in any changes to carrying amounts due to reclassification.

The implementation of IFRS 9 does not cause any major changes to the classification and subsequent measurement regulations for financial liabilities.

According to the new accounting and measurement methods pursuant to IFRS 9, METRO classifies the majority of equity instruments held by it as measured at fair value through profit or loss since 1 October 2018. Since 1 October 2018, METRO has been deciding for each new equity instrument whether the instrument is measured at fair value through profit or loss (FVPL) or at fair value through other comprehensive income without subsequent reclassification to profit or loss (FVOCInR).

Impairments of financial assets

In accordance with the new accounting and measurement methods, METRO will apply the general impairment requirements stipulated in IFRS 9 to financial assets in the AC (with the exception of trade receivables) and FVOIC categories. The credit risk is in these cases evaluated on the basis of the counterparty’s credit quality – which METRO assesses using external ratings, previous experience with the respective customer and credit risk rating grades. METRO minimises credit risk by predominantly investing in first-class debt capital instruments from issuers with a good to very good rating (investment grade). For these kinds of assets, the credit worthiness of the issuers is also monitored continuously. This enables METRO to identify any probable significant increase in the credit risk early on, allowing it to swiftly respond to any potential changes. METRO uses borrower-specific information to monitor loans and other financial assets. The introduction of the impairment models could in subsequent years lead to a higher fluctuation in the consolidated result, since the level of risk provisions also depends on economic conditions.

As of the start of financial year 2018/19, METRO recognises expected credit losses for trade receivables over the entire term of these financial instruments. METRO elected to apply the simplified procedure available under IFRS 9 and ascertain the expected losses on the basis of provision matrices. The outstanding receivables are continuously monitored by the individual METRO companies.

IFRS 15 (Revenue from Contracts with Customers)

The new IFRS 15 has replaced IAS 18 (Revenue) and IAS 11 (Construction Contracts) and related interpretations. It 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 recognition. Revenues are recognised when a performance obligation is satisfied. The performance obligation is satisfied when customer obtains the control of the good or the service. The performance obligation can be satisfied at a point in time or over a period of time. If the performance obligation is satisfied over a period of time, the net sales are 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.

As of 1 October 2018 (beginning of financial year 2018/19), METRO applied IFRS 15 by employing the modified retrospective transition method, under which no adjustments were made to previous year’s figures. With respect to the transition, METRO elected to make use of the practical expedient according to which IFRS 15 is only applied retrospectively to contracts that have not been fully performed at the date of the first-time application. As per the modified retrospective transition method, the effects of the first-time application were cumulatively reported in equity outside of profit or loss as at the day of the first-time application on 1 October 2018.

The first-time application of IFRS 15 has led to changes in the following significant topics in the METRO group, which have recorded an increase of contract assets (€1 million) and contract liabilities (€6 million) in the opening statement dated 1 October 2018. This caused a reduction of reserves retained from earnings to the sum of €5 million before deferred taxes (€4 million after deferred taxes).

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 of the right must be allocated to the resulting essential right. Revenue recognition for the essential right occurs at the time the right is redeemed or expired, 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 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 must be divided into the identifiable performance obligations in accordance with the relative individual selling prices. Thus in comparison to the previous accounting under IAS 18, a potentially larger part of the total compensation is attributable to the previously subsidised component, so that in the future net sales for those products will be reported earlier.

Compared to the previous regulation, net sales from these topics have not changed significantly in financial year 2018/19.

The following transitional topics led to a revised disclosure in the reporting period:

Constellation as principal or agent

The acknowledgement of whether METRO acts as principal or agent had to be reassessed based on the indicator changes in IFRS 15. With regard to certain transactions, METRO acts as an agent (net sales and cost of sales) instead of a principal (gross sales and additional cost of sales), taking into account the changed indicators. In financial year 2018/19, this led to a reduction in sales of €33 million and cost of sales of €33 million.

Contract liabilities

Contract liabilities relate to deferred revenue from sales to customers; they mainly comprise advance payments on orders and deferred revenue from the company’s own customer loyalty programmes. Instead of primarily being reported under deferred income, the above items are now reported as contract liabilities of €35 million as of 30 September 2019 (1/10/2018: €31 million).

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. Instead of being presented as a provision, the return or exchange rights granted to customers are recognised as a refund liability under other non-financial liabilities as of 30 September 2019 in the amount of €1 million. For the right to recover products from a customer on settling reimbursement refund-liability, assets in the amount of €1 million are reported in other non-financial assets as of 30 September 2019.

Additional IFRS amendments

Other accounting rules to be applied for the first time in financial year 2018/19 without material effects on METRO are:

• IAS 40 – Investment Property (clarification: transfers of Investment Property.)
• IFRS 2 – Share-based Payment (Classification and Measurement of Share-based Payment Transactions)
• IFRIC 22 – Foreign Currency Transactions and Advance Consideration
• Amendments to IFRS 1 (First-time Adoption of International Financial Reporting Standards) and IAS 28 (Investments in Associates and Joint Ventures) in accordance with the Annual Improvements to IFRS Standards −2014-2016 Cycle

Accounting standards that were published but not yet applied in financial year 2018/19

A number of other standards and interpretations revised or newly adopted by the IASB were not yet applied by METRO in financial year 2018/19 because they were either not yet mandatory or have not yet been endorsed by the European Commission.

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-leaseback transactions. With respect to the lease of certain intangible assets, 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 of IFRS 16 compared to IAS 17 concerns the lessee accounting model. IFRS 16 introduces a uniform accounting model for lessees after the recognition of a right-of-use asset for each asset transferred for use. It also references a corresponding liability in the amount of the present value of the future lease payments. 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 option and additional liabilities stemming from lease extension options must be included in the lease liability if the lessee is reasonably certain to exercise such options. In addition, the lease liability must include any penalties to be paid 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 of the right-of-use asset also considers any reinstatement obligations from leases. The right-of-use asset is subject to scheduled amortisation.

Exercising of options

Lessees can elect to make use of several policy options. For accounting and measurement, they have the option to build a portfolio of leases with similar characteristics of which METRO is not availing itself. 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 terms 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 components are 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.

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.

The implementation project of the new standard for leases is in the final phase and the initial effects on the consolidated financial result and the financial position of the company are being examined internally.

The process for data collection of the lease agreements by the group companies has been completed. A leasing accounting tool was implemented to determine the carrying amounts to be recognised at the beginning of financial year 2019/20 as of 1 October 2018 and 1 October 2019 respectively as well as the expenses and income to be recognised for financial year 2018/19. The tool is also used for ongoing accounting and reporting of leases.

For continuing operations, the estimated effects of IFRS 16 on the opening balance sheet as of 1 October 2018 (beginning of financial year 2018/19) will lead to an increase in non-current assets of approximately €2.3 billion and an increase in total liabilities of approximately €2.6 billion.

At the end of financial year 2018/19, total liabilities remain the same at approximately €2.6 billion due to offsetting effects resulting from additions of usage rights and redemption payments.

Additional impairment losses in the amount of approximately €0.3 billion and interest expenses (2018/19 as well as 2019/20) will be recognised in the income statement in the future instead of leasing expenses. This leads to an improvement in EBITDA of approximately €0.4 billion and an improvement in EBIT at the expense of the financial result amounting to approximately €0.1 billion.

METRO plans to publish an IFRS 16 Transition Booklet in January 2020, which will contain the effects of the changeover per quarter and per segment for financial year 2018/19.

Additional IFRS amendments

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

Segment reporting

The segment reporting of METRO was adjusted due to the activities not continued. The 5 Wholesale regions continue to be reportable segments as defined by IFRS 8 (Operating Segments). All other units are combined in the Others segment. In the combined management report, the separate disclosure of individual companies under ‘METRO Wholesale Others’ and total for ‘METRO Wholesale segments’ will no longer be provided.

Adjustment of the previous year’s financial statements

The Turkish government issued a decree in September 2018 under which business contracts may only be concluded in Turkish lira and no longer in other currencies such as euros or US dollars. At METRO, it is real estate lease contracts that will be affected predominantly. The lease contracts of METRO Properties Gayrimenkul Yatirim A.Ş that were previously based on euros have been converted accordingly to Turkish lira. As a result, as of 1 October 2018, the functional currency of the company will also change from euro to Turkish lira.

Deferred tax differences arising from the translation of tax carrying amounts at current rates compared with their translation at historical rates were adjusted retrospectively.

As of 1 October 2017, deferred tax assets were reduced by €30 million, deferred tax liabilities had been increased by €16 million and the net effect on equity amounted to €−46 million. The effect on income taxes in financial year 2017/18 amounted to €11 million expenses from deferred taxes. For financial year 2018/19 and onwards, no further currency-related effects on income taxes are expected, as the functional currency of METRO Properties Gayrimenkul Yatirim A.Ş. will not differ from the local currency anymore.