Application of new accounting methods

No first-time application of accounting standards in financial year 2013/14

In 2013, METRO AG changed its financial year to end on 30 September. These consolidated financial statements represent the financial year 2013/14, which comprises the period from 1 October 2013 to 30 September 2014. All new financial reporting standards applicable to financial years beginning on or after 1 January 2014 will be taken into consideration with the start of the next financial year, beginning on 1 October 2014. As a result, the consolidated financial statements as of 30 September 2014 did not apply any new financial reporting standards.

Accounting standards that were published but not yet applied in financial year 2013/14

A number of other accounting standards and interpretations newly adopted or revised by the IASB were not yet applied by METRO AG during the financial year 2013/14 because they were either not yet mandatory or have not yet been endorsed by the European Commission.

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Standard/Interpre­tation

Titel

Effective date according to IFRS1

Application at METRO AG from2

Endorsed by EU3

1

Without earlier application

2

Precondition: EU endorsement has been effected

3

As of 30 September 2014

4

Application as of 1 October due to deviation of financial year from calendar year

5

Applicable for EU companies from 1 January 2014; application at METRO AG from 1 October due to deviation of financial year from calendar year

6

Official German title not yet known – therefore own translation

IFRS 9

Financial Instruments

1/1/2018

1/10/20184

No

IFRS 10

Consolidated Financial Statements

1/1/2013

1/10/20145

Yes

IFRS 10

Consolidated Financial Statements (Amendment: Transition Guidance)

1/1/2013

1/10/20145

Yes

IFRS 10

Consolidated Financial Statements (Amendment: Investment Entities)

1/1/2014

1/10/20144

Yes

IFRS 10

Consolidated Financial Statements (Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture)6

1/1/2016

1/10/20164

No

IFRS 11

Joint Arrangements

1/1/2013

1/10/20145

Yes

IFRS 11

Joint Arrangements (Amendment: Transition Guidance)

1/1/2013

1/10/20145

Yes

IFRS 11

Joint Arrangements (Amendment: Accounting for Acquisitions of Interests in Joint Operations)6

1/1/2016

1/10/20164

No

IFRS 12

Disclosure of Interests in Other Entities

1/1/2013

1/10/20145

Yes

IFRS 12

Disclosure of Interests in Other Entities (Amendment: Transition Guidance)

1/1/2013

1/10/20145

Yes

IFRS 12

Disclosure of Interests in Other Entities (Amendment: Investment Entities)

1/1/2014

1/10/20144

Yes

IFRS 14

Regulatory Deferral Accounts6

1/1/2016

1/10/20164

No

IFRS 15

Revenue from Contracts with Customers6

1/1/2017

1/10/20174

No

IAS 16

Property, Plant and Equipment (Amendment: Bearer Plants)6

1/1/2016

1/10/20164

No

IAS 16

Property, Plant and Equipment (Amendment: Clarification of Acceptable Methods of Depreciation and Amortisation)6

1/1/2016

1/10/20164

No

IAS 19

Employee Benefits (Amendment: Defined Benefit Plans: Employee Contributions)6

1/7/2014

1/10/20144

No

IAS 27

Separate Financial Statements (Revision and renaming as part of the introduction of IFRS 10)

1/1/2013

1/10/20145

Yes

IAS 27

Separate Financial Statements (Amendment: Investment Entities)

1/1/2014

1/10/20144

Yes

IAS 27

Separate Financial Statements (Amendment: Equity Method in Separate Financial Statements)6

1/1/2016

1/10/20164

No

IAS 28

Investments in Associates and Joint Ventures (Revision and renaming as part of the introduction of IFRS 11)

1/1/2013

1/10/20145

Yes

IAS 28

Investments in Associates and Joint Ventures (Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture)6

1/1/2016

1/10/20164

No

IAS 32

Financial Instruments: Presentation (Amendment: Offsetting Financial Assets and Financial Liabilities)

1/1/2014

1/10/20144

Yes

IAS 36

Impairment of Assets (Amendment: Recoverable Amount Disclosures for Non-Financial Assets)

1/1/2014

1/10/20144

Yes

IAS 38

Intangible Assets (Clarification of Acceptable Methods of Depreciation and Amortisation)6

1/1/2016

1/10/20164

No

IAS 39

Financial Instruments: Recognition and Measurement (Amendment: Novation of Derivatives and Continuation of Hedge Accounting)

1/1/2014

1/10/20144

Yes

IAS 41

Agriculture (Amendment: Bearer Plants)6

1/1/2016

1/10/20164

No

IFRIC 21

Levies

1/1/2014

1/10/20144

Yes

Various

Improvements to IFRS (2010−2012 and 2011−2013)

1/7/2014

1/10/20144

No

Various

Improvements to IFRS (2012−2014)

1/1/2016

1/10/20164

No

IFRS 9 (Financial Instruments)

The new IFRS 9 standard (Financial Instruments) will replace IAS 39 (Financial Instruments: Recognition and Measurement) covering the classification and measurement of financial instruments.

Financial instruments are recognised when the company preparing the financial statements becomes a contractual partner and thus has retained the rights of the financial instrument or assumed comparable obligations. As a rule, the initial measurement of financial assets and liabilities is at fair value adjusted for transaction costs, if applicable. Only trade receivables without a significant financing component are recognised at the transaction price.

At the time of recognition, standards for classification are to be taken into account. According to IAS 39, the subsequent measurement of a financial asset and a financial liability is linked to its classification. Financial assets are classified on the basis of the characteristics of contractual cash flow of the financial asset and the business model which the entity uses to manage the financial asset. The original four measurement categories for financial assets were reduced to two categories: Financial assets recognised at amortised cost (category 1) and financial assets measured at fair value (category 2), wherein the latter category has two subcategories (for more information on financial instruments, see next section).

If the financial asset is held within a business model whose objective is collecting payments such as principal and interest, and if the contract terms stipulate certain payments are exclusively for principal and interest, this financial instrument shall be recognised at amortised cost (category 1). If the objective of the business model is collecting payments and selling financial assets, and if the payment dates are fixed, the changes in its fair value are recognised in other comprehensive income outside of profit or loss (subcategory 2 a). If these criteria are not cumulatively met, the financial asset is measured at fair value through profit or loss (subcategory 2 b). Amortised cost is determined using the effective interest, while IFRS 13 (Fair Value Measurement) is applied to determine fair value measurement.

As a rule, equity instruments are classified as subcategory 2 b based on the classification criteria stated above. However, for equity instruments not meeting the cash flow criteria, an irrevocable election can be made upon initial recognition to classify these as subcategory 2 a. Additionally, financial instruments can be classified as subcategory 2 b contrary to the definition of the fair value option according to IAS 39, but exclusively to eliminate accounting mismatches in doing so.

In general, financial liabilities are measured at amortised cost (category 1). In some cases, however, such as with financial liabilities held for trading, fair value measurement through profit or loss is required (subcategory 2 b). In addition, the fair value option of measurement at fair value through profit or loss also applies here in the case of inconsistencies. In contrast to financial assets, financial liabilities can include embedded derivatives that are required to be separated. If separation is required, the host contract is usually measured according to the rules of category 1 and the derivative according to the rules of subcategory 2 b.

Unlike IAS 39 (Incurred Loss Model), IFRS 9 focuses on expected losses. This expected loss model uses a three-stage approach for recognising impairment. At the first stage, impairment losses are recognised in the amount of the losses resulting from default on the financial instrument expected in the next twelve months after the closing date. At the second stage, the total losses due to default expected over the contractual term of a portfolio of similar instruments are taken into account, provided that these are trade receivables or certain leasing receivables or if the credit risk has significantly increased since initial recognition and exceeds a certain credit risk. At the third and final stage, impairment losses are recognised for additional objective indications with respect to the individual financial instrument.

In order to reduce the complexity and make hedge accounting more comprehensible on the balance sheet, the following key changes were made. The scope of possible hedged items was expanded. For example, several risk positions can now be more easily combined into a single hedged item and hedged. The net position can be designated as the hedged item if the risks partially offset each other in the combined risk position. In addition, non-derivative financial instruments classified as subcategory 2 b can be designated as hedging instruments. Furthermore, thresholds are no longer stipulated for measuring effectiveness. Effectiveness is assessed in reference to the economic relationship between the hedged item and hedging transaction taking into account the hedging ratio and default risk.

IFRS 9 in its current version is scheduled to apply in the EU as of 1 January 2018. Thus, IFRS 9 will be applied at METRO AG for the first time in financial year 2018/19 starting on 1 October 2018. As a result, the potential impact of this new standard cannot be determined at this point.

IFRS 10 (Consolidated Financial Statements), IFRS 11 (Joint Arrangements) and IFRS 12 (Disclosure of Interests in Other Entities)

The new standards IFRS 10, 11 and 12 contain changes in accounting and disclosure requirements for consolidated financial statements. IFRS 10 (Consolidated Financial Statements) includes a new definition of control that determines which entities are consolidated. It replaces previous regulations governing consolidated financial statements included in IAS 27 (Consolidated and Separate Financial Statements – in the future, only Separate Financial Statements) and SIC-12 (Consolidation – Special Purpose Entities). The key change resulting from IFRS 10 concerns the introduction of a uniform definition of control. In the future, three criteria must be met for the existence of control. For one, the investor has power over the investee. This means that the investor has existing rights that give it the ability to direct the relevant activities; that is, the activities that significantly affect the investee’s results. In addition, the investor is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee.

IFRS 11 (Joint Arrangements) describes the accounting for arrangements in which several parties have joint control over a joint venture or a joint operation. It replaces IAS 31 (Interests in Joint Ventures) and SIC-13 (Jointly Controlled Entities – Non-Monetary Contributions by Venturers) and amends IAS 28 (Investments in Associates – in the future: Investments in Associates and Joint Ventures). IFRS eliminates the option currently granted under IAS 31 to apply proportionate consolidation to joint ventures. In the future, joint ventures must be recognised using the equity method in accordance with the stipulations of IAS 28. As METRO AG has not made use of the option to apply proportionate consolidation, this amendment has no effect on the consolidated financial statements of METRO AG. According to IFRS 11, the individual partners in joint arrangements recognise their portion of jointly held assets and jointly incurred liabilities in their own balance sheet. Analogously, they also include their respective portion of sales, income and expenses deriving from the joint arrangement in their income statement.

The new IFRS 12 (Disclosure of Interests in Other Entities) markedly expands the disclosure requirements for investments in other entities. In the future, detailed information must be provided on subsidiaries, associates, joint arrangements, joint ventures, consolidated special purpose entities (so-called structured entities) and all special purpose entities that are not consolidated but with which an entity maintains a relationship.

The new standards IFRS 10, 11 and 12 as well as the amendments to IAS 27 and 28 apply from 1 January 2013. However, in its endorsement of the new standards, the EU postponed the date of application for listed companies within the EU to 1 January 2014. As a result of the company’s change of financial year, METRO AG will therefore apply the new standards for the first time as of financial year 2014/15 starting on 1 Octo-ber 2014. The first-time application of these standards is not expected to have a material effect on the consolidated financial statements of METRO AG.

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 five-step model to determine the amount of revenue and the date of realisation. In the first step, contracts with the customers are identified. According to IFRS 15, a contract is entered into by the contractual partners, the company can identify the rights of the customer to goods and services and the payment terms, and the agreement has economic substance. In addition, it is probable that the company will collect on the contract. If a company has more than one contract with a single customer at (virtually) the same time, and if certain criteria are met, the contracts can be combined and treated as a single contract.

As a rule, a contract as defined in IFRS 15 can include several performance obligations. In the second step, possible separate performance obligations are therefore identified within a single contract. In this step, contract terms and customary business practices are evaluated in order to identify which goods and services should be accounted for as separate performance obligations. A separate performance obligation is identified when a good or service is distinct. This is the case when the customer can use a good or service on its own or together with other readily available resources and it is separately identifiable from other commitments in the contract. Under certain circumstances, homogeneous goods or services can be treated as a single performance obligation.

In the third step, the transaction price corresponding to the expected consideration is determined. The consideration may include fixed and variable components. For variable compensation, the expected amount is estimated based on either the expected value or the most probable amount, depending on which amount best reflects the amount of consideration. In addition, the consideration includes the interest rate effect if the contract includes a financing component significant to the contract, the fair value of non-cash considerations and the effects of payments made to the customer such as rebates and coupons.

The allocation of the transaction price to separate performance obligations is carried out in the fourth step. In principle, the transaction price is to be allocated to the separately identified performance obligations in relation to the relative stand-alone selling price. Observable data must be used to determine the stand-alone selling price. If this is not possible, estimates are to be made. For this purpose, IFRS 15 suggests various methods for estimating according to which the estimates are based on market prices for similar services or expected costs plus a surcharge. In exceptional cases, the estimate can also be based on the residual value method.

In the fifth and final step, revenue is recognised at the point in time when 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 point in time or over a period of time. If the performance obligation is satisfied over time, the revenue is recognised over the period the performance obligation is satisfied in a manner that best reflects the continuous transfer of control over time.

In addition to the five-step model, IFRS 15 addresses various special topics such as the treatment of costs for obtaining and fulfilling a contract, presentation of contract assets and liabilities, rights of return, commission business, customer retention and customer loyalty programmes.

In addition, the disclosures in the notes are significantly expanded. Accordingly, this includes qualitative and quantitative disclosures to be made in the future on contracts with customers, on significant estimates and judgements and to changes over time.

IFRS 15 is scheduled to apply in the EU as of 1 January 2017. Thus, IFRS 9 will be applied at METRO AG for the first time in financial year 2017/18 starting on 1 October 2017. As a result, the potential impact of this new standard cannot be determined at this point.

IAS 32 (Financial Instruments: Presentation)

Pursuant to IAS 32 (Financial Instruments: Presentation), financial assets and financial liabilities should be offset if the following two preconditions are met: first, the entity must have a legally enforceable right to set off the amounts as of the closing date; second, it must intend to either settle on a net basis or to realise the asset and settle the liability simultaneously. The amendment to IAS 32 “Offsetting of Financial Assets and Financial Liabilities” specifies when these conditions are considered met. In particular, it determines criteria for the existence of a legally enforceable right.

The amendment to IAS 32 will apply to financial years from 1 January 2014. Given the change of financial year, METRO AG will therefore implement this amendment for the first time in financial year 2014/15, which starts on 1 October 2014. At present, this amendment is not expected to have any material effect on the asset, financial and earnings position of METRO AG.

Additional IFRS amendments

Within the scope of the annual improvements to IFRS 2010–2012, slight revisions were made to IFRS 3 (Business Combinations) and IFRS 8 (Operating Segments), among others. In IFRS 3, clarification was provided that a contingent consideration is only classified as equity or a financial liability when there is a financial instrument. Additionally, the option to recognise effects from the subsequent measurement of contingent considerations outside of profit or loss in other comprehensive income was eliminated. In the future, their recognition through profit or loss is mandatory. Future transactions with contingent considerations will result in individual impacts on earnings for METRO AG.

Furthermore, aggregation of several operating segments to a single reportable segment in accordance with IFRS 8 requires a description of the aggregated operating segments. Additionally, the metrics used as a criterion for evaluating the existence of similar economic characteristics must be disclosed in the future. In the future, a reconciliation of segment assets to group assets is necessary only if the segment assets are part of reporting to the responsible corporate decision-maker. However, for the time being, METRO AG will continue to report the reconciliations from segment assets to group assets and from segment liabilities to group liabilities. Until adopted by the EU, these amendments are to be applied by METRO AG in financial year 2014/15 beginning on 1 October 2014.

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