8 Changes in Accounting Policies, Estimates, Assumptions, Options and Judgments
Changes to Key Accounting Methods
The Group did not have to apply any Interest Rate Benchmark Reform as of January 1, 2021.
Measures to Address the Interest Rate Benchmark Reform and the Associated Risks
The key interest rate benchmarks are being fundamentally reformed across the globe, including the replacement of some interbank offered rates (IBORs) with alternative, virtually risk-free rates (referred to as the IBOR Reform).
Financial instruments held by the Group are subject to IBORs that have not been replaced or reformed as part of these market-wide initiatives. The biggest risk for the Group in connection with the IBOR as of December 31, 2021 was the connection to EURIBOR and STIBOR. As these are likely to remain in place until 2025, no changes had to be made to the financial instruments as of December 31, 2021 meaning that no new interest rate benchmarks have to be taken into account in this respect.
Although USD-LIBOR was to have been discontinued by the end of 2021, the ICE Benchmark Administration (IBA), the LIBOR administrator regulated and licensed by the UK Financial Conduct Authority (FCA), announced in November 2020 that it had started discussing ending the publication of certain USD-LIBORs after June 2023. As of December 31, 2021 it remains unclear when the date on which publication of USD-LIBOR will cease will be announced. The Group does not hold any financial instruments subject to USD-LIBOR.
The IBOR risks to which the Group is exposed as of December 31 relate to EURIBOR-linked corporate bonds. As explained above, the Group did not have to make any amendments to the contractual terms to reflect any risks resulting from the connection with EURIBOR.
The EURIBOR calculation method changed in the course of 2019.
In July 2019, the Belgian Financial Services and Markets Authority approved EURIBOR pursuant to the European Union Benchmarks Regulation. This allows market participants to continue to use EURIBOR for both existing and new contracts, and the Group expects EURIBOR to remain the interest rate benchmark for the foreseeable future.
The Group holds interest rate swaps designated in hedging relationships for the hedging of cash flows for risk management purposes. The variable amounts under the interest rate swaps are linked to EURIBOR.
The Group’s hedged items and hedging instruments are linked to EURIBOR as of the reporting date. These benchmarks are fixed daily and the IBOR cash flows are exchanged with the contractual counterparties as usual.
Changes in Accounting Policies Due to New Standards and Interpretations
The following new or amended standards and interpretations became mandatory for the first time in the 2021 fiscal year. They did not have any material effects on Vonovia’s consolidated financial statements.
- IAS 39 “Financial Instruments: Recognition and Measurement”
- IFRS 4 “Insurance Contracts”
- IFRS 7 “Financial Instruments: Disclosures”
- IFRS 9 “Financial Instruments”
- IFRS 16 “Leases”
Due to the rent concessions (deferrals, waivers) granted in a large number of countries as a result of the COVID-19 pandemic, IFRS 16 was amended to provide companies with an exemption from assessing whether a COVID-19-related rent concession is a lease modification within the meaning of IFRS 16. Instead, they can opt to account for COVID-19-related rent concessions as if they were not lease modifications. This would spare them the work involved in evaluating the lease contracts to check for possible contractually defined rent concessions as well as the work involved in reassessing these contracts applying a new discount rate (which is always required for lease modifications). This relief was initially limited until June 30, 2021 but was extended until June 30, 2022 in April 2021.
No rent concessions were granted by the lessor within the Vonovia Group. This is due primarily to the Group’s encouraging and robust financial position, even in times dominated by the COVID-19 pandemic. As a result, the Group is not exercising this option as it is not relevant. The amendments to IFRS 16 do not have any material effects on the consolidated financial statements.
New Standards and Interpretations Not Yet Applied
Application of the following standards, interpretations and amendments to existing standards was not yet mandatory for the 2021 fiscal year. Vonovia also did not choose to apply them in advance. It is expected that the application of the new or amended standards and interpretations will have no material effects on Vonovia’s consolidated financial statements. Their application will be mandatory for the fiscal years following the dates stated in the following table:
Overview New Standards and Amendments to Existing Standards
Relevant New Standards, Interpretations and Amendments to Existing Standards and Interpretations
Effective date for Vonovia
Annual Improvements 2018–2020
Jan. 1, 2022
Amendments to Standards
“Presentation of Financial Statements”
Jan. 1, 2023*
“Accounting policies, Changes in Accounting Estimates and Errors”
Jan. 1, 2023*
Jan. 1, 2023*
IAS 16, IAS 37 and IFRS 3
“Property, Plant and Equipment”, “Provisions, Contingent Liabilities and Contingent Assets” and “Business Combinations”
Jan. 1, 2022
Jan. 1, 2023
- *Not yet endorsed.
Estimates and Assumptions
To a certain extent, the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the reporting date as well as reported amounts of income and expenses during the reporting year. The actual amounts may differ from the estimates as the business environment may develop differently than assumed. In this case, the assumptions and, where necessary, the carrying amounts of the assets or liabilities affected are prospectively adjusted accordingly. Specific estimates and assumptions relating to individual elements of financial statements are also explained in the corresponding notes to the consolidated financial statements.
Assumptions and estimates are reviewed on an ongoing basis and are based on experience and other factors, including expectations regarding future events that appear reasonable under the given circumstances.
The estimates and assumptions that may have a material risk of causing an adjustment to the carrying amounts of assets and liabilities mainly relate to the determination of the fair value of investment properties.
The best evidence of fair value of investment properties is current prices in an active market for comparable residential properties. As such information is not completely available, however, Vonovia uses standard valuation techniques.
A detailed description of the discounted cash flow (DCF) method used can be found in chapter [D28] Investment Properties.
In accordance with IAS 40 in conjunction with IFRS 13, the respective market values of the investment properties owned by Vonovia are determined. Changes in certain market conditions such as prevailing rent levels and vacancy rates may affect the valuation of investment properties. Any changes in the fair value of the investment portfolio are recognized as part of the profit for the period in the income statement and can thus substantially affect Vonovia’s results of operations.
The statement of financial liabilities at amortized cost using the effective interest method takes the expected contractual cash flows into account. In some cases, the agreements do not have any fixed maturity terms. As a result, the cash flows included in the valuation are subject to management assumptions in terms of amount and term.
As explained in chapter [D26] Intangible Assets, Vonovia checks for goodwill impairments on an annual basis, or if there is any reason to suspect such impairments. The next step involves calculating the recoverable amount of the group of cash-generating units (CGU). This corresponds to either the fair value less costs of sale or the value in use, whichever is higher. Determining the value in use includes adjustments and estimates regarding the forecast and discounting of the future cash flow. Although the management believes that the assumptions used to determine the recoverable amount are appropriate, any unforeseeable changes in these assumptions could result in impairment losses, with a detrimental impact on the net assets, financial position and results of operations.
When determining the volume of current and deferred taxes, the Group takes into account the effects of uncertain tax items and whether additional taxes and interest may be due. This assessment is made on the basis of estimates and assumptions about future events. New information may become available that causes the Group to change its discretionary decisions regarding the appropriateness of existing tax liabilities; such changes to tax liabilities will affect the tax expense in the period in which such a change is made.
Deferred tax assets are recognized to the extent that it can be demonstrated that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that there will be sufficient future taxable profits to realize the tax benefit in the future.
In connection with the application of IFRS 15, it is assumed with respect to determining progress in relation to revenue recognition over time that the costs incurred appropriately reflect the progress as a share of total costs.
Additional estimates and assumptions mainly relate to the uniform definition of useful lives, the assumptions made on the value of land and buildings, the recognition and measurement of provisions as well as the realization of future tax benefits.
Options and Judgments
Options exercised and judgments made by Vonovia’s management in the process of applying the entity’s accounting policies that may have a significant effect on the amounts recognized in the consolidated financial statements include the following:
- The group of investments accounted for using the equity method is determined by assessing significant influence.
- Determining whether the acquisition of investment properties as part of a business combination constitutes the acquisition of a “business” or the acquisition of an individual asset or group of assets can involve discretionary judgments.
- Vonovia measures investment properties at fair value. If management had opted to use the acquisition costs model as permitted under IAS 40, the carrying amounts of the investment properties as well as the corresponding income and expense items in the income statement would differ significantly.
- The criteria for assessing in which category a financial asset is to be classified may involve discretionary judgments.
- Within the scope of revenue recognition in accordance with IFRS 15, discretionary decisions relating to the expected revenue, the total costs of a project and the degree of completion may be necessary. These have an impact on the amount and timing of revenue.
- When accounting for leases in accordance with IFRS 16, the assessment of the exercise or non-exercise of unilaterally granted termination or renewal options may involve discretionary judgment, particularly if there is no economic incentive for the exercise or non-exercise of options.
- The need to include information concerning the future in the valuation of expected defaults results in discretionary decisions regarding the impact that changes in economic factors will have on the expected defaults.
- The decision on how to define a group of cash-generating units to which goodwill is allocated may involve discretionary judgments.
- Allocating the goodwill to the group of individual cash-generating units may also involve discretionary judgments. The parameters used in the impairment test, such as the determination of undiscounted cash flows, the weighted average cost of capital and the growth rate, may also involve discretionary judgments. Due to a lack of any detailed definition of the term “operation” (IAS 36.86), the disposal of goodwill within the context of real estate sales may involve discretionary decisions.
- Due to a lack of any detailed definition of the term “a separate major line of business or geographical area of operations” (IFRS 5), a disposal group within the context of real estate sales may involve discretionary decisions.
- At the moment, there are no definitive provisions on how to reflect a mandatory acquisition of non-controlling interests following the acquisition of control as part of a voluntary public takeover offer. In general, the acquisition of shares as part of a public offer during the second offer period is based on exactly the same conditions as those that applied in the first offer period, and the two acquisitions are closely related in terms of content and timing. This means that, even if it is executed in two offer periods, the acquisition constitutes one and the same transaction (linked transaction). Following the completion of the later acquisition, the original purchase price allocation is to be adjusted with retroactive effect from the acquisition date, resulting in a change in the consideration transferred, the fair value of net assets transferred and, consequently, the resulting goodwill.