Accounting standards

Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year 2016.

A number of amendments to International Financial Reporting Standards resulting from the Annual Improvements Project 2012 and the Annual Improvements Project 2014 became effective on January 1, 2016. Among others, these amendments included changes to IFRS 3, IFRS 7, IFRS 8, IFRS 13 and IAS 24. The changes to IFRS 8 Operating Segments added a requirement to describe the criteria used to aggregate the operating segments. The segment disclosure requirements have therefore been clarified. Additional disclosure requirements have been included in IFRS 7 in relation to the derecognition of financial instruments. These changes mainly entail clarifications in relation to ABS transactions.

Changes to IAS 19 also had to be applied from January 1, 2016 onward. These changes relate to the accounting treatment of employee pension contributions. In the Volkswagen Group, employee contributions in which the amount is independent of the number of years of service (fixed percentage of salary) will be deducted from the service cost in the year the contributions are made.

The amendments to IAS 16 and IAS 38 clarified that, with effect from January 1, 2016, revenue-based methods for measuring depreciation and amortization are not generally permitted.

Furthermore, IAS 1 made clarifications and amendments for IFRS reporting with effect from January 1, 2016. The amendments also specified that disclosures are only required in the consolidated financial statements if the content is material.

The amendments do not materially affect the Volkswagen Group’s net assets, financial position and results of operations.

New and amended IFRSs not applied

In its 2016 consolidated financial statements, Volkswagen AG did not apply the following accounting pronouncements that have already been adopted by the IASB, but were not yet required to be applied for the fiscal year.

IFRS 9 – FINANCIAL INSTRUMENTS

IFRS 9 “Financial Instruments” changes the accounting requirements for classifying and measuring financial assets, for impairment of financial assets, and for hedge accounting.

Financial assets are classified and measured on the basis of the entity’s business model and the characteristics of the financial asset’s cash flows. A financial asset is initially measured either “at amortized cost”, “at fair value through other comprehensive income”, or “at fair value through profit or loss”. The Volkswagen Group does not expect IFRS 9 to result in material changes in the updated classification of its financial assets. The classification of financial liabilities under IFRS 9 is largely unchanged compared with the current accounting requirements of IAS 39.

The basis for measuring impairment losses and recognizing loss allowances will switch from an incurred loss model to an expected credit loss model. We expect that this change in the requirements will tend to increase the amount of recognized loss allowances. This expectation is based, first, on the requirement to recognize a loss allowance on the basis of expected credit losses in the first 12 months in the case of financial assets not classified as non-performing and whose credit risk has not increased significantly since initial recognition. It is based, second, on the assessment that for financial assets for which there has been a signifycant increase in credit risk since initial recognition, loss allowances must be recognized on the basis of the entire remaining life of the contractual asset.

In the case of hedge accounting, IFRS 9 contains both extended designation options and the need to implement more complex measurement methods. In addition, IFRS 9 also eliminates the quantitative limits for effectiveness testing.

IFRS 9 will have a particularly significant impact on the entity’s reclassification practice. Depending on market trends, there is an expectation that operating profit or loss will be affected by hedging transactions to a greater extent.

This will also result in far more extensive disclosures.

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 revises the accounting requirements governing revenue recognition. The Volkswagen Group expects that the changes resulting from IFRS 15 will lead to minor shifts in the recognition of revenue from warranty and licensing agreements for construction contracts. No significant changes over and above this are expected, in particular in the case of multiple-element arrangements. The Volkswagen Group plans to apply the modified retrospective transitional method under which the cumulative effect of initially applying IFRS 15 will be recognized as an adjustment to the opening balance of equity in 2018.

This will also result in far more extensive disclosures.

IFRS 16 – LEASES

IFRS 16 changes the accounting for leases. The main objective of IFRS 16 is to recognize all leases. It establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. In the future, they will instead be required to recognize a right-of-use asset and a lease liability for all leases in the statement of financial position. Exceptions will only be made for short-term leases and leases of low-value assets. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using an effective interest method and taking the lease payments into account. The new lessee accounting model will therefore tend to increase noncurrent assets and noncurrent liabilities. In the income statement this change is expected to improve the operating result and reduce the financial result. It will also lead to far more extensive disclosures. Lessor accounting essentially follows the current guidance of IAS 17. In the future, lessors will continue to classify their leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset.