8 Changes in Accounting Policies, Estimates, Assumptions, Options and Judgments
Changes to Key Accounting Methods
As of January 1, 2022, the Group did not have to apply any interest rate benchmark reform.
Approach to the Interest Rate Benchmark Reform and Associated Risks
A fundamental reform of the main interest rate benchmarks is under way across the globe, including the replacement of some “Interbank Offered Rates” (IBORs) with alternative, almost risk-free interest rates (referred to as the “IBOR reform”).
Group financial instruments are exposed to IBORs that are not being 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, 2022 was the link to the EURIBOR and STIBOR. As these are expected to remain valid until 2025, no changes had to be made to the financial instruments in the period leading up to December 31, 2022, meaning that no new interest rate benchmarks have to be reflected here.
The LIBOR administrator regulated and licensed by the UK Financial Conduct Authority (FCA), the ICE Benchmark Administration (IBA), announced in November 2020 that it had launched talks on ceasing the publication of certain USD LIBORs after June 2023. As of December 31, 2022, it remains unclear when the date on which publication of the USD LIBOR will cease will be announced. The Group does not hold any financial instruments that are subject to the USD LIBOR.
The IBOR risks to which the Group was exposed as of December 31, 2022 relate to corporate bonds linked to the EURIBOR. As explained above, the Group has not had to make any changes to the contractual terms for any risks resulting from a link to the EURIBOR.
The EURIBOR calculation method changed in the course of 2019.
In July 2019, the Belgian Financial Services and Markets Authority approved the EURIBOR in accordance with the European Union Benchmarks Regulation. This allows market participants to keep using the EURIBOR for both existing and new contracts, and the Group expects the EURIBOR to remain in force as the interest rate benchmark for the foreseeable future.
The Group holds interest rate swaps designated in hedging relationships to hedge cash flows for risk management purposes. The variable amounts of the interest rate swaps are linked to the EURIBOR.
The Group’s hedged items and hedging instruments are linked to the EURIBOR as of the reporting date. These reference rates are quoted daily and the IBOR cash flows are exchanged with the 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 2022 fiscal year. They did not have any material effects on Vonovia’s consolidated financial statements.
- IFRS 1 “First-time Adoption of International Financial Reporting Standards”
- IFRS 3 “Business Combinations”
- IFRS 9 “Financial Instruments”
- IFRS 16 “Leases”
- IAS 16 “Property, Plant and Equipment”
- IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”
- IAS 41 “Agriculture”
Due to the rent concessions (deferrals, waivers) granted in a large number of countries as a result of the coronavirus 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. These 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 2022 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
Amendments to Standards
Jan. 1, 2023
Jan. 1, 2024*
“Presentation of Financial Statements”
Jan. 1, 2023
“Presentation of Financial Statements”
Jan. 1, 2024*
“Accounting Policies, Changes in Accounting Estimates and Errors”
Jan. 1, 2023
Jan. 1, 2023
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 determining 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.
Climate risks have an impact on Vonovia’s business model and strategy. They are addressed in particular by the climate path that the company has mapped out, but also by appropriate estimates and assumptions in key items of the company’s net assets, financial position and results of operations. Climate risks can have a potentially negative impact and result in increased estimation uncertainties.
Physical climate risks refer to longer-term shifts in general climatic conditions. Climate events such as floods, earthquakes, extreme weather events, etc. could have an impact on our real estate portfolio and require specific crisis management measures. Climate transition risks describe the effects that can arise for companies due to the process of transformation towards a more sustainable economic system.
As part of its sustainability strategy, Vonovia has made a clear and explicit commitment to climate protection targets and a virtually carbon-neutral housing stock by 2045. Based on our current knowledge and expectations regarding future developments, this will not have any impact on Vonovia’s balance sheet. This relates, among other things, to the fair values of investment properties, specific useful lives and the value of assets, as well as provisions for environmental risks, for which no significant need for adjustment emerges.
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.