Application of new accounting methods

Accounting standards applied for the first time in financial year 2014/15

The following accounting standards and interpretations, revised, amended and newly adopted by the IASB, that were binding for METRO AG in financial year 2014/15 were applied for the first time in these consolidated financial statements unless the company opted for voluntary early adoption:

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, owing to existing rights, the investor has 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 his or her power over the investee.

IFRS 11 (Joint Arrangements) modifies 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 applied 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. Therefore, as a result of the company’s change of financial year, METRO AG applied the new standards for the first time as of financial year 2014/15 starting on 1 October 2014. The first-time application of these standards had no material effect on the consolidated financial statements of METRO AG.

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 retrospective application of this specification led to the following changes: as of the end of financial year 2013/14 on the reporting date 30 September 2014, the balance sheet was extended by €152 million, with receivables due from suppliers, assets held for sale, trade liabilities and liabilities related to assets held for sale accounting for €145 million, €7 million, €145 million and €7 million, respectively.

Additional IFRS amendments

Within the scope of the annual improvements to IFRS 2010–2012, slight revisions were made to IFRS 3 (Business Combinations), 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. As a result, transactions with contingent considerations may now result in individual impacts on earnings for METRO AG.

Accounting standards that were published but not yet applied in financial year 2014/15

A number of other accounting standards and interpretations newly adopted or revised by the IASB were not yet applied by METRO AG in financial year 2014/15 because they were either not yet mandatory or have not yet been endorsed by the European Commission.

Standard/interpre­tation

Title

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 2015

4

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

5

Official German title not yet known – therefore own translation

6

Indefinite deferral of effective date by IASB

7

Applicable for EU companies from 1 February 2015; application at METRO AG from 1 October 2015 due to deviation of financial year from calendar year

8

Applicable for EU companies from 1 January 2015; application at METRO AG from 1 October 2015 due to deviation of financial year from calendar year

IFRS 9

Financial Instruments

1/1/2018

1/10/20184

No

IFRS 10

Consolidated Financial Statements (Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture)5

Unknown6

Unknown6

No

IFRS 10

Consolidated Financial Statements (Amendment: Investment Entities: Applying the Consolidation Exception)5

1/1/2016

1/10/20164

No

IFRS 11

Joint Arrangements (Amendment: Accounting for Acquisitions of Interests in Joint Operations)5

1/1/2016

1/10/20164

No

IFRS 12

Disclosure of Interests in Other Entities (Amendment: Investment Entities: Applying the Consolidation Exception)5

1/1/2016

1/10/20164

No

IFRS 14

Regulatory Deferral Accounts5

1/1/2016

1/10/20164

No

IFRS 15

Revenue from Contracts with Customers5

1/1/2018

1/10/20184

No

IAS 1

Presentation of Financial Statements (Amendment: Disclosure Initiative)8

1/1/2016

1/10/20164

No

IAS 16

Property, Plant and Equipment (Amendment: Bearer Plants)5

1/1/2016

1/10/20164

No

IAS 16

Property, Plant and Equipment (Amendment: Clarification of Acceptable Methods of Depreciation and Amortisation)5

1/1/2016

1/10/20164

No

IAS 19

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

1/7/2014

1/10/20157

Yes

IAS 27

Separate Financial Statements (Amendment: Equity Method in Separate Financial Statements)5

1/1/2016

1/10/20164

No

IAS 28

Investments in Associates and Joint Ventures (Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture)5

Unknown6

Unknown6

No

IAS 28

Investments in Associates and Joint Ventures (Amendment: Investment Entities: Applying the Consolidation Exception)5

1/1/2016

1/10/20164

No

IAS 38

Intangible Assets (Clarification of Acceptable Methods of Depreciation and Amortisation)5

1/1/2016

1/10/20164

No

IAS 41

Agriculture (Amendment: Bearer Plants)5

1/1/2016

1/10/20164

No

Various

Improvements to IFRS (2010–2012)

1/7/2014

1/10/20157

Yes

Various

Improvements to IFRS (2011–2013)

1/7/2014

1/10/20158

Yes

Various

Improvements to IFRS (2012–2014)

1/1/2016

1/10/20164

No

IFRS 9 (Financial Instruments)

The new IFRS 9 (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 the 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 that do not meet 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 (which uses “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) and IAS 28 (Investments in Associates and Joint Ventures)

A conflict exists between the current requirements of IFRS 10 (Consolidated Financial Statements) and IAS 28 (Investments in Associates and Joint Ventures) regarding the sale or contribution of assets between an investor and its associate or joint venture. IAS 28 requires a partial gain or loss recognition, limited to the unrelated investors’ interests in the investee, for all transactions between an investor and its associate or joint venture. IFRS 10, in contrast, requires that the gain or loss that arises on the loss of control of a subsidiary is recognised in full.

The amendment clarifies how to account for the gain or loss from transactions with associates or joint ventures, with the partial or full recognition requirement depending on whether or not the assets being sold or contributed are a business as defined in IFRS 3 (Business Combinations). IFRS 3 defines a business as an integrated set of activities that is required to have inputs and processes which together are used to create outputs.

If the sold or contributed asset classifies as a business, the gain or loss from the transaction must be recognised in full. In contrast, a gain or loss from the sale or contribution to an associate or joint venture of assets that do not constitute a business must be recognised only to the extent of unrelated investors’ interests in the associate or joint venture.

If a group of assets is to be sold or contributed, the investor must assess whether this group of assets constitutes a single business and should be accounted for as a single transaction.

At the present time, IASB has indefinitely deferred the original effective date of this amendment for financial years starting on or after 1 January 2016. As a result, the date of first-time application of this amendment at METRO AG is unknown. As METRO AG currently follows the rules of IFRS 10, future transactions will be impacted accordingly.

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 if 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 must be 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. Therefore, possible separate performance obligations are identified within a single contract in the second step. 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 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.

IAS 1 (Presentation of Financial Statements)

In the context of the so-called Disclosure Initiative, the following amendments to IAS 1 (Presentation of Financial Statements) were made with respect to the materiality principle, the presentation of the asset position, the income statement or other comprehensive income as well as disclosures in the notes to the financial statements.

In accordance with the materiality principle, information should not be obscured by aggregating information; materiality considerations apply to all parts of a financial statement, and the materiality principle must be considered even when a standard requires a specific disclosure.

The amendment clarifies that the list of line items to be presented in the financial statements can be disaggregated and aggregated as relevant and include additional guidance on subtotals in these statements. In addition, an entity’s share of other comprehensive income of associates or joint ventures accounted for using the equity method should be presented in the group’s other comprehensive income based on whether or not it will subsequently be reclassified to profit or loss.

With respect to the notes to the financial statements, the amendment clarifies that understandability and comparability should be considered when determining the order of the notes.

These amendments to IAS 1 apply to financial years beginning on or after 1 January 2016. Subject to the respective EU endorsement, METRO AG will apply these regulations for the first time on 1 October 2016. The impact of these amendments on the disclosures in the consolidated financial statements of METRO AG will be minor.

Additional IFRS amendments

Within the scope of the annual improvements to IFRS 2010–2012, slight revisions were made to IFRS 8 (Operating Segments), among others. Aggregation of several operating segments to a single reportable segment 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. A reconciliation of segment assets to group assets is now necessary only if the segment assets are part of reporting to the responsible corporate body. 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. As these amendments will be applicable for EU companies from 1 February 2015, they will be applicable for METRO AG in financial year 2015/16 beginning on 1 October 2015.

Among other things, the annual improvements 2012–2014 comprise a clarification in IAS 34 (Interim Financial Reporting) regarding the disclosure of information “elsewhere in the interim financial report”. Following this change in wording, several disclosures may now be replaced by references to the management report.

This amendment is applicable for reporting periods beginning on or after 1 July 2016. Subject to EU endorsement, METRO AG will apply the amended IAS 34 for the first time on 1 October 2016. The option to incorporate cross references will simplify the preparation of the notes to the financial statements at METRO AG.

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