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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, 2022*

143.5

8.1

57.5

152.6

9,372.1

9,733.8

Additions

12.9

2.9

15.8

Disposals

-20.0

-3.1

-23.1

Changes in value from currency translation

-0.1

-67.8

-67.9

Transfers

1.7

1.7

As of Dec. 31, 2022

138.1

10.9

54.4

152.6

9,304.3

9,660.3

Accumulated amortization

As of Jan. 1, 2022*

99.0

6.0

18.0

6,887.9

7,010.9

Amortization in reporting year

20.7

1.7

7.8

86.0

116.2

Impairment

954.3

954.3

Disposals

-13.0

-0.7

-13.7

Changes in value from currency translation

-67.8

-67.8

Transfers

0.9

0.9

As of Dec. 31, 2022

107.6

7.7

25.1

86.0

7,774.4

8,000.8

Carrying amounts

As of Dec. 31, 2022

30.5

3.2

29.3

66.6

1,529.9

1,659.5

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

4,774.3

4,932.5

Additions

11.8

1.1

12.9

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*

143.5

8.1

57.5

152.6

9,372.1

9,733.8

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*

3,774.4

3,774.4

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

6,887.9

7,010.9

Carrying amounts

As of Dec. 31, 2021*

44.5

2.1

39.5

152.6

2,484.2

2,722.9

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. As part of the (ad hoc) impairment tests conducted in the second quarter of 2022, trademark rights in the Care segment in the amount of € 86.0 million were written off in full. Information on the approach to impairment testing can be found in the subchapter below entitled Goodwill (see below).

The “BUWOG” brand name, which had already been acquired in previous years, is still recognized with a value of € 66.6 million for the development business. There were no signs of impairment losses for this brand name 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 exceeds 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 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. As a result of the acquisition of Deutsche Wohnen SE, the Care segment was added as a further CGU, which is also monitored for internal management purposes.

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 regional business areas and the Value-add, Development and Care segments.

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

Central area

Deutsche Wohnen

Value-add segment

Development segment

Care segment

Group

Goodwill as of Dec. 31, 2021*

21.4

896.9

1,391.7

138.2

36.0

2,484.2

Impairment

-21.4

-896.9

-36.0

-954.3

Goodwill as of Dec. 31, 2022

0.0

0.0

1,391.7

138.2

0.0

1,529.9

Trademark rights as of Dec. 31, 2021

66.6

86.0

152.6

Impairment

-86.0

-86.0

Trademark rights as of Dec. 31, 2022

66.6

0.0

66.6

The carrying amount of goodwill came to € 1,529.9 million as of December 31, 2022. This means that goodwill has dropped by € 954.3 million compared with December 31, 2021. The change is due, first of all, to the impairment of € 918.3 million identified in the first quarter of 2022 as part of the (ad hoc) impairment test performed. Within the meaning of IAS 36, the triggering event related to further increases in the values of the real estate portfolio in the first quarter of the 2022 fiscal year in combination with the increased cost of capital of the Rental business areas in Germany.

Second, the change is due to the impairment identified in the second quarter of 2022 as part of the (ad hoc) impairment test performed. The increased cost of capital in the Care segment was classified as a triggering event within the meaning of IAS 36. The impairment test conducted as of June 30, 2022, resulted in the goodwill for the Care segment of € 36.0 million being written off in full. In addition, trademark rights in the Care segment classified as having an indefinite useful life in the amount of € 86.0 million were also written off in full. This led to an impairment of € 1,040.3 million in 2022 for goodwill and trademark rights.

The conclusion of the purchase price allocation in connection with the acquisition of the Deutsche Wohnen Group (see [A2] Adjustment to Prior-year Figures) meant that goodwill had increased by € 108.0 million as against the provisional purchase price allocation. At the same time, the goodwill was finally allocated to the date of the first-time consolidation as of September 30, 2022.

As part of the provisional allocation of goodwill from the acquisition of Deutsche Wohnen, the acquired residential real estate was allocated to the existing business areas in the Rental segment. Goodwill was provisionally allocated to these CGUs.

As part of the final allocation, the CGUs were restructured, as part of the final breakdown of the expected synergies, to produce an independent CGU with Deutsche Wohnen’s real estate portfolio. The final allocation of goodwill is accordingly made to the business areas in the Rental segment (North, East, South, West and Central) and to the new CGU with Deutsche Wohnen’s real estate in the amount of € 1,342.8 million. In addition, the final allocation of goodwill was made to the Value-add and nursing and assisted living CGUs.

Overall, both the preliminary and the final allocation of goodwill to the business areas of the Rental, Value-add and Care segments 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.”

As a result of the final purchase price allocation, the impairment tests for the reporting dates December 31, 2021, March 31, 2022, and June 30, 2022, were then performed again. This resulted in an impairment loss that was € 390.4 million higher as of December 31, 2021, an impairment loss that was € 164.3 million lower as of March 31, 2022, and an impairment loss that was € 0.8 million higher as of June 30, 2022.

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. With the exception of the WACC, the assumptions used to calculate the value in use during the year match the assumptions used for the purposes of the impairment test at the end of 2021. 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 and the planned vacancy rate.

The growth rate for the cash-generating units of the Rental segment and the Deutsche Wohnen Rental business area was calculated regionally on the basis of in-place rents and limited to 1%. The growth rate for the Care segment was also restricted to 1%. The main parameters for calculating the value in use are the sustainable rate of increase, the weighted average cost of capital (WACC) and the expected cash flows. In the Development segment, a further 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 in Germany was limited to 1%. 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 average gross rental increase within the five-year plan is 3.1% with an assumed vacancy rate of 2% at the end of the detailed planning period.

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

Parameters for WACC Calculation – Rental Segement

Parameters for WACC Calculation for the Rental Segment

Dec. 31, 2021

Mar. 31, 2022

Risk-free interest rate in %

0.08

0.40

Market risk premium in %

7.75

7.75

Levered beta

0.67

0.77

WACC (before tax) in %

4.00

4.30

Parameters for WACC Calculation – Nursing and Assisted Living Segment

Parameters for WACC Calculation for the Care Segment

Dec. 31, 2021

June 30, 2022

Risk-free interest rate in %

0.08

1.24

Market risk premium in %

7.75

8.00

Levered beta

0.79

0.83

WACC (before tax) in %

4.30

6.00

For the purposes of the regular annual impairment test on goodwill as of December 31, 2022, the five-year plan for the Value-add and Development segments for the fiscal years from 2023 to 2027 was taken as a basis. This also forms part of the five-year plan for the Group as a whole as approved by the Management Board and acknowledged by the Supervisory Board. The plan is based on assessments regarding the development of the operating business areas in terms of future revenue, expenses and margins, and taking current market developments into account.

The regular annual impairment test was performed for the CGUs attributable to the Value-add and Development segments as of December 31, 2022. The value of the goodwill for the Value-add and Development CGUs and the trademark rights for the Development CGU was ultimately confirmed. 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, energy service, 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 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 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 and Development 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 – Development Segment

Parameters for WACC Calculation

Value-add segment

Development segment

Dec. 31, 2022

Risk-free interest rate in %

2.00

2.00

Market risk premium in %

7.00

7.00

Levered beta

0.76

0.92

Country-specific premium in %

0.12

WACC (before tax) in %

6.10

8.13

Dec. 31, 2021

Risk-free interest rate in %

0.08

0.08

Market risk premium in %

7.75

7.75

Levered beta

0.68

0.91

Country-specific premium in %

0.08

WACC (before tax) in %

4.1

6.33

Impairment losses are recognized in the consolidated income statement under depreciation, amortization and impairment losses. The value in use for the Deutsche Wohnen Rental business area amounts to € 17.0 billion, with a value of € 0.3 billion for the central business area and € 1.3 billion for the Care segment.

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

Results of increase in the cost of capital

Value-add segment

Development segment

Goodwill and trading rights as of Dec. 31, 2022
in € million

1,391.7

204.8

Headroom in € million

830.6

62.0

Impairment starts with an increase of
the WACC in percentage points

1.19

0.14

Full impairment in the event of an increase in
the WACC in percentage points

10.18

0.67

Goodwill and trading rights as of Dec. 31, 2021
in € million
*

1,391.7

204.8

Headroom in € million

3,082.9

1,045.0

Impairment starts with an increase of
the WACC in percentage points

3.19

1.96

Full impairment in the event of an increase in
the WACC in percentage points

21.65

2.61

  1. * Adjusted (see chapter [A2] Adjustment to Prior-year Figures).

In the event of a drop in the planned sustainable rate of increase by 0.25 percentage points, there would only be impairment losses in the Development segment. Goodwill and trademark rights would only be written off in full if no growth were achieved.

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