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26 Intangible Assets

Intangible Assets

in € million

Concessions, industrial property rights, license and similar rights

Self-developed software

Customer relationships and non- competition clause

Trademark rights

Goodwill

Total

Cost

As of Jan. 1, 2021

107.7

7.1

13.8

66.6

4,616.8

4,812.0

Additions due to business combinations

26.2

0.4

45.6

86.0

4,666.3

4,824.5

Additions

11.9

1.1

13.0

Disposals

-3.2

-0.4

-1.9

-5.5

Changes in value from currency translation

-19.0

-19.0

Transfers

1.0

-0.1

0.9

As of Dec. 31, 2021

143.6

8.1

57.5

152.6

9,264.1

9,625.9

Accumulated amortization

As of Jan. 1, 2021

66.3

4.7

7.2

3,122.1

3,200.3

Additions due to business combinations

19.6

8.5

28.1

Amortization in reporting year

15.4

1.3

4.2

20.9

Impairment

3,384.1

3,384.1

Disposals

-2.9

-1.9

-4.8

Changes in value from currency translation

-8.6

-8.6

Transfers

0.6

0.6

As of Dec. 31, 2021

99.0

6.0

18.0

6,497.6

6,620.6

Carrying amounts

As of Dec. 31, 2021

44.6

2.1

39.5

152.6

2,766.5

3,005.3

Cost

As of Jan. 1, 2020

85.7

5.1

10.4

66.6

4,514.9

4,682.7

Additions due to business combinations

3.5

0.2

3.4

66.5

73.6

Additions

24.5

1.8

26.3

Disposals

-4.8

-4.8

Changes in value from currency translation

35.4

35.4

Transfers

-1.2

-1.2

As of Dec. 31, 2020

107.7

7.1

13.8

66.6

4,616.8

4,812.0

Accumulated amortization

As of Jan. 1, 2020

49.7

3.1

3.7

3,122.0

3,178.5

Additions

21.4

1.6

3.5

26.5

Disposals

-4.8

-4.8

Changes in value from currency translation

0.1

0.1

As of Dec. 31, 2020

66.3

4.7

7.2

3,122.1

3,200.3

Carrying amounts

As of Dec. 31, 2020

41.4

2.4

6.6

66.6

1,494.7

1,611.7

Accounting Policies

Acquired other intangible assets are stated at amortized cost. Internally generated other intangible assets are stated at amortized cost provided that the requirements of IAS 38 for the capitalization of internally generated intangible assets are met. Acquired trademark rights that are identified have an indefinite useful life and are subject to regular impairment testing. All of Vonovia’s miscellaneous other intangible assets have definite useful lives and are amortized on a straight-line basis over their estimated useful lives. Software and licenses are amortized on the basis of a useful life of three years.

In accordance with IAS 36 “Impairment of Assets,” other intangible assets are tested for impairment whenever there is an indication of an impairment. Impairment testing is performed at least once a year. An impairment loss is recognized when an asset’s recoverable amount is less than its carrying amount. If the recoverable amount cannot be determined for the individual asset, the impairment test is conducted on the cash-generating unit (CGU) to which the asset belongs. Impairment losses are recognized as expenses in the income statement affecting net income.

An impairment loss recognized for prior periods is reversed if there has been a change in the estimates used to determine the asset’s (or the CGU’s) recoverable amount since the last impairment loss was recognized. The carrying amount of the asset (or the CGU) is increased to the newly estimated recoverable amount. The carrying amount is limited to the amount that would have been determined if no impairment loss had been recognized in prior years for the asset (or the CGU).

Customer Relationships and Similar Values

The brand names “Pflegen & Wohnen Hamburg” and “Katharinenhof” were identified as material assets with indefinite useful lives in the context of the purchase price allocation for the Deutsche Wohnen Group and were recognized at a total value of € 86.0 million. In addition, customer relationships for these activities were identified and recognized as assets with definite useful lives of between five and six years in the amount of € 37.1 million. The “BUWOG” brand name, which was acquired in the previous year, is still recognized with a value of € 66.6 million for the development business. There were no signs of impairment losses for any of the brand names or customer relationships.

Goodwill

Accounting Policies

Goodwill results from a business combination and is defined as the amount by which the total consideration for shares in a company or group of companies exceed the pro rata net assets acquired. The net assets are the total of the identifiable assets acquired that are valued at fair value in accordance with IFRS 3 as well as the assumed liabilities and contingent liabilities.

Goodwill is not subject to amortization, but rather is subjected to impairment testing on an annual basis. It is also tested for impairment whenever events or circumstances indicating an impairment arise.

The impairment testing of goodwill is performed at the level of cash generating units (CGUs) or a group of CGUs. A CGU is the smallest group of assets which generates cash inflows that are largely independent of the cash inflows generated by other assets or other groups of assets. Goodwill purchased as part of a business combination is allocated to the CGUs or groups of CGUs that are expected to produce benefits resulting from the synergy effects of the combination.

At Vonovia, each property meets the requirements for classification as a CGU as a general rule. As part of operational management, these properties are grouped first of all to form geographically structured business units and then to form regional business areas. Since the regional business areas are the lowest level within the company at which goodwill is monitored for internal management purposes, the impairment test is performed at business area level and, as a result, in accordance with IAS 36.80 for a group of CGUs. The acquired assets are allocated to the business areas based on the geographical location of the properties. A further group of CGUs for which goodwill is monitored for internal management purposes relates to the Value-add Business segment. The third group of CGUs, to which goodwill is allocated and for which goodwill is monitored for management purposes, relates to the Development segment. The acquisition of Deutsche Wohnen SE has resulted in the addition of a new CGU in the nursing and assisted living sector. Part of the goodwill resulting from the acquisition of Deutsche Wohnen SE has been provisionally allocated to this segment for the purposes of impairment testing.

The group of CGUs to which goodwill has been allocated are tested for impairment on a regular basis. This involves comparing the recoverable amount with the carrying amount of the group of CGUs. The recoverable amount of the group of CGUs is either its value in use or fair value less costs of sale, whichever is higher. When calculating the value in use, the estimated future cash flows are discounted to their cash value. Discount rates before tax are used that reflect the current market assessment of the interest rate effect and the specific risks associated with the business areas, the Value-add and Development segments, and the nursing and assisted living sector.

If goodwill has been allocated to a group of CGUs and its carrying amount exceeds the recoverable amount, the goodwill is to be written down in the amount of the difference in the first instance. Any need for impairment in excess of this amount is distributed among the other assets in the group of CGUs in proportion to their carrying amount. The individual fair value less costs to sell, value in use or zero must not be undercut in this regard.

Impairment losses that have been realized as part of the valuation of goodwill are not reversed in the following years.

Groups of Cash-Generating Units

Groups of Cash-Generating Units

Rental segment

in € million

North area

East area

West area

South area

Central area

Sweden Business Area

Value- add seg­ment

Deve­lopment seg­ment

Nur­sing and assis­ted living sector

not allo­cated

Group

Goodwill as of Dec. 31, 2021

73.7

0.0

84.0

0.0

0.0

885.9

278.5

138.2

0.0

34.4

1,494.7

Additions due to business combinations*

588.3

1,462.0

754.9

571.1

22.7

1,232.1

35.2

4,666.3

Allocation

34.4

-34.4

0.0

Impairment

-391.5

-1,462.0

-84.0

-571.1

-875.5

-3,384.1

Currency translation differences

-10.4

-10.4

Goodwill as of Dec. 31, 2021

304.9

0.0

754.9

0.0

22.7

0.0

1,510.6

138.2

35.2

0.0

2,766.5

WACC before tax Dec. 31, 2021 in %

4.0

4.1

4.0

4.0

3.9

3.9

4.1

6.3

4.3

WACC before tax Dec. 31, 2020 in %

3.8

3.8

3.6

3.9

6.0

Sustainable rate of increase 2021 in %

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

Sustainable rate of increase 2020 in %

1.0

0.9

1.0

1.0

1.0

  1. * Goodwill still not allocated, preliminary allocation for goodwill impairment test purposes

Goodwill came to € 2,766.5 million as of December 31, 2021. This means that goodwill has risen by € 1,271.8 million compared with December 31, 2020. The change is due to additions of € 4,666.3 million resulting from the acquisition of Deutsche Wohnen SE, impairment losses of € 3,384.1 million and negative exchange rate effects of € 10.4 million.

Part of the impairment loss is the result of the ad hoc impairment test performed as of June 30, 2021. Within the meaning of IAS 36, the triggering event was the increase in the value of the real estate portfolio in the first half of the 2021 fiscal year amounting to € 3,698.6 million (thereof € 3,039.5 million in Germany and € 596.8 million in Sweden) in combination with the increased cost of capital of the Rental segment’s business areas in Germany and the Sweden business area. Other than for these aforementioned business areas, no triggering events were identified for any other groups of cash-generating units in the second quarter.

The goodwill of the North (€ 108.1 million) and West (€ 84.0 million) business areas of € 192.1 million was impaired as a result of the impairment test as of June 30, 2021. There was no impairment of the Sweden business area.

In general, an increase in the value of the real estate portfolio increases the carrying amount of the CGU affected by the measurement, which can, in turn, lead to impairment losses being recognized on the goodwill allocated to the business areas.

The regular annual impairment test was performed in the fourth quarter. Other material increases in the value of the real estate portfolio in the second half of 2021 also triggered an ad hoc impairment test. For the purposes of this process, the new goodwill of € 4,666.3 million resulting from the acquisition of Deutsche Wohnen was provisionally allocated to Vonovia’s corresponding CGUs.

The allocation of goodwill to the business areas of the Rental segment, the Value-add segment and the the nursing and assisted living sector were performed based on the two indicators that reflect the synergy effects expected to be generated as a result of the business combination: “direct planned synergies” and “fair values.”

All in all, the impairment tests in the fouth quarter resulted in a further goodwill impairment of € 3,192.0 million.

As part of the impairment test in accordance with IAS 36.19, first the value in use was calculated based on the Management Board-approved detailed plan with a planning period of five years. This was derived from the five-year plan at Group level approved by the Management Board and the Supervisory Board. The main parameters for calculating the value in use are the sustainable rate of increase, the average total cost of capital (WACC) and the expected cash flows. In the Development segment, another normalized planning year was added to the five-year plan to reflect a “steady state.”

The growth rate for the CGUs of the Rental segment was limited to 1% for the CGU Germany. With regard to the regional business areas of the Rental segment, the main drivers behind the results of the five-year plan are the increase in gross rental income by an average of 2.5% every year as well as the planned vacancy rate of 2.5% at the end of the detailed planning period. The growth rate for the CGU Sweden was also set at 1%. The average gross rent increase within the five-year plan comes to 3.1%, based on an assumed vacancy rate of 2% at the end of the detailed planning period.

Developments in the Value-add segment are characterized primarily by the extension of existing business areas (craftsmen’s organization, multimedia, management of residential property, smart metering, etc.). On the other hand, there is an increase in operating expenses, taking into account the rate of inflation. The development in these values is in line with past experiences of business model development.

The Development segment is characterized by the construction of new buildings for Vonovia’s own portfolio and by the sale of properties to third parties. The main drivers of the results in the Development segment are the investment costs, the number of units sold and completed and the sales margin that can be generated.

The nursing and assisted living sector comprises the rental of senior citizens’ and care facilities, as well as services for elderly people as part of the assisted living concept.

The cash flows from the last detailed planning year were derived to calculate the perpetual annuity.

A constant growth rate of 1.0% was assumed for the Value-add, Development and nursing and assisted living CGUs.

The weighted average cost of capital before tax is based on the risk-free interest rate calculated as a three-month average using the Svensson method, a market risk premium and a levered beta. The levered beta and the equity ratios used are determined on the basis of a peer comparison. In addition, a country-specific cost surcharge was also calculated for the Development segment. The main parameters are shown in the following table:

Parameters for WACC Calculation

Parameters for WACC Calculation

Rental segment

Germany

Sweden

Value-add segment

Development segment

Nursing and assisted living sector

Dec. 31, 2021

Risk-free interest rate in %

0.08

0.08

0.08

0.08

0.08

Market risk premium in %

7.75

7.75

7.75

7.75

7.75

Levered beta

0.67

0.70

0.68

0.91

0.79

Country-specific premium in %

0.08

Dec. 31, 2020

Risk-free interest rate in %

-0.20

-0.20

-0.20

-0.20

Market risk premium in %

7.75

7.75

7.75

7.75

Levered beta

0.65

0.65

0.65

0.84

Country-specific premium in %

0.12

The identified impairment as of December 31, 2021 relates to the North, East, South and Sweden business areas, with the goodwill allocated in each case being completely written off, except for the North business area.

The impairment loss was recognized in the consolidated income statement under depreciation and amortization. The value in use for the East area amounted to € 22.3 billion, with a value of € 9.2 billion for the North business area, € 11.3 billion for the South business area and € 6.4 billion for the Sweden business area.

An increase in the cost of capital would result in the following need for impairment:

Results of increase in the cost of capital

Rental segment

North area

West area

Central area

Value- add segment

Develop- ment segment

Nursing and assisted living sector

2021 goodwill in € million

304.9

754.9

22.7

1,510.6

138.2

35.2

Impairment starts with an increase of the WACC in percentage points

0.01

0.09

0.51

2.98

1.96

0.68

Full write-off in the event of an increase in the WACC in %

0.09

0.27

0.75

16.70

2.61

1.01

2020 goodwill in € million

73.7

84.0

278.5

138.2

Impairment starts with an increase of the WACC in percentage points

0.05

0.17

9.70

3.40

Full write-off in the event of an increase in the WACC in %

0.06

0.18

19.50

4.40

If the planned sustainable rate of increase were to decline by 0.25 percentage points, this would result in a full impairment loss of € 304.9 million being recognized against the goodwill remaining in the North business area. In the West area, an impairment loss of € 670.4 million would be recognized if the sustainable rate of increase were to decline by 0.25 percentage points. A 0.28 percentage point drop in the sustainable rate of increase in West would result in a complete impairment. The estimated recoverable amount for the West business area exceeds its carrying amount by € 0.5 billion.

In the Central business area as well as in the Value-add and Development segments and the nursing and assisted living sector, a 0.25 percentage point drop in the sustainable rate of increase would not result in any goodwill impairment.

In the previous year, if the planned sustainable rate of increase had declined by 0.25 percentage points, this would have resulted in a full impairment loss of € 73.7 million being recognized against the goodwill in the North business area. In the West area, a full impairment loss of € 84.0 million would have been recognized if the sustainable rate of increase had declined by 0.25 percentage points. The estimated recoverable amount for the North business area exceeded its carrying amount by € 184.8 million and that of the West business area by € 810.3 million.

In the Value-add and Development segments, a 0.25 percentage point drop in the sustainable rate of increase in the previous year would not have resulted in any goodwill impairment.