IFRS 16 adopted, modified retrospective, policies including sale and leaseback, lessee and lessor disclosures


Daimler AG – Annual report – 31 December 2019

Industry: automotive

1. Significant accounting policies (extract 1)
IFRS issued, EU endorsed and initially adopted in the reporting period (extract)
In January 2016, the IASB published IFRS 16 Leases, replacing IAS 17 Leases and IFRIC 4 Determining Whether an Arrangement Contains a Lease and other interpretations. IFRS 16 abolishes for lessees the previous classification of leasing agreements as either operating or finance leases. Instead, IFRS 16 introduces a single lessee accounting model, requiring lessees to recognize assets for the right to use as well as leasing liabilities for the outstanding lease payments. This means that as of January 1, 2019 all leases have to be reported in the Consolidated Statement of Financial Position – very similar to the former accounting of finance leases.

According to IFRS 16, a lessee may elect, for leases with a lease term of 12 months or less (short-term leases) and for leases for which the underlying asset is of low value, not to recognize a right-of-use asset and a lease liability. Daimler applies both recognition exemptions. The lease payments associated with those leases are generally recognized as an expense on a straight-line basis over the lease term or
another systematic basis if appropriate.

Right-of-use assets, which are included under property, plant and equipment, are measured at cost less any accumulated depreciation and, if necessary, any accumulated impairment. The cost of a right-of-use asset comprises the present value of the outstanding lease payments plus any lease payments made at or before the commencement date less any lease incentives received, any initial direct costs and an estimate of costs to be incurred in dismantling or removing the underlying asset. In this context, Daimler also applies the practical expedient that the payments for non-lease components are generally recognized as lease payments. If the lease transfers ownership of the underlying asset to the lessee at the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the right-of-use asset is depreciated to the end of the useful life of the underlying asset. Otherwise, the right-of-use asset is depreciated to the end of the lease term.

Lease liabilities, which are assigned to financing liabilities, are measured initially at the present value of the lease payments. Subsequent measurement of a lease liability includes the increase of the carrying amount to reflect interest on the lease liability and reducing (while affecting other comprehensive income) the carrying amount to reflect the lease payments made. According to IFRS 16, the depreciation of right-of-use assets is recognized within functional costs. The interest due on the lease liability is a component of interest expense. The lease expenses of leases classified according to IAS 17 as operating leases have been fully recognized within functional costs. With the introduction of lessee accounting, payments of lease liabilities excluding interest of €701 million are presented in the Consolidated Statement of Cash Flows under cash flows from financing activities, while the interest portion is presented under cash flows from operating activities – as total lease expenses previously were.

Lease accounting for lessors has been taken over almost identically from IAS 17 into IFRS 16.

Daimler applies IFRS 16 for the first time at January 1, 2019. In compliance with the transition regulations, Daimler does not adjust the prior-year figures and presents the not significant accumulated transitional effects in retained earnings.

Daimler as lessee uses the following practical expedients of IFRS 16 at the date of initial application:

– With leases previously classified as operating leases according to IAS 17, the lease liability is measured at the present value of the outstanding lease payments, discounted by the incremental borrowing rate at January 1, 2019. The weighted average incremental borrowing rate was 2.27%. The respective right-of-use asset is generally recognized at an amount equal to the lease liability.
– An impairment review is not performed. Instead, a right-of use asset is adjusted by the amount of any provision for onerous leases recognized in the Statement of Financial Position at December 31, 2018.
– Regardless of their original lease term, leases for which the lease term ends at the latest on December 31, 2019 are recognized as short-term leases.
– At the date of initial application, the measurement of a right-of-use asset excludes the initial direct costs.
– Current knowledge is given due consideration when determining the lease term if the contract contains options to extend or terminate the lease.

In the context of the transition to IFRS 16, right-of-use assets of €3,777 million (including finance leases of €335 million) and lease liabilities of €3,790 million were recognized at January 1, 2019. The following reconciliation (see F.06) to the opening balance for lease liabilities as at January 1, 2019 is based on the other financial obligations from rental agreements and operating leases at December 31, 2018.

 

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Right-of-use assets and lease liabilities include assets and liabilities, which were recognized until December 31, 2018 as finance leases in accordance with IAS 17.

1. Significant accounting policies (extract 2)
Leasing
Leases include all contracts that transfer the right to use a specified asset for a stated period of time in exchange for consideration, even if the right to use such asset is not explicitly described in the contract. The Group is a lessee mainly of real estate properties and a lessor of its products.

Daimler as lessee
Until December 31, 2018 it was evaluated on the basis of the risks and rewards of a leased asset according to IAS 17 whether the ownership of the leased asset is attributed to the lessee (so-called finance lease) or to the lessor (so-called operating lease).

In the case of an operating lease, the lease payments or rental payments were expensed on a straight-line basis in the Consolidated Statement of Income.

Assets carried as finance leases were measured at the beginning of the (lease) contract at the lower of the present value of the minimum lease payments and the fair value of the leased object, and in the following periods less accumulated depreciation and other accumulated impairment losses. Depreciation was on a straight-line basis; residual values of the assets were given due consideration. Payment obligations resulting from future lease payments were discounted and disclosed under financing liabilities.

Since January 1, 2019 the Group as a lessee has recognized right-of-use assets and the lease liabilities for the payment obligations entered into for generally all leases in the statement of financial position at present value. The lease liabilities include the following lease payments:

– fixed payments including defacto fixed payments, less lease incentives receivables from the lessor;
– variable lease payments linked to an index or interest rate;
– amounts expected to be payable under residual value guarantees;
– the exercise price of purchase options, when exercise is estimated to be reasonably certain and
– contractual penalties for the termination of a lease if the lease term reflects the exercise of a termination option.

Lease payments are discounted at the rate implicit in the lease if that rate can readily be determined. Otherwise, discounting is at the incremental borrowing rate. The incremental borrowing rate, which is mainly applied at Daimler, is based on risk-adjusted interest rates and determined for the respective lease terms and currencies. As the cash flow pattern of the reference interest rates (bullet bonds) does not correspond to the cash flow pattern of a lease contract (annuity), we use a duration adjustment in order to account for that difference.

Daimler generally also applies the option for contracts comprising lease components as well as non-lease components not to split these components.

Extension and termination options are part of a number of leases particularly of real estate. Such contract terms offer Daimler the greatest possible flexibility. In determining the lease term, all facts and circumstances offering economic incentives for exercising extension options or not exercising termination options are taken into account. In determining the lease term, those options are only considered if they are reasonably certain.

Sale and leaseback
In a sale and leaseback transaction, the requirements of IFRS 15 are applied, to ascertain whether the transfer of an asset has to be accounted for as a sale.

If the transfer of an asset does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset, the transferred asset is still recognized and a financial liability is recognized equal to the transfer proceeds in accordance with IFRS 9.

If the transfer of an asset is accounted for as a sale, the lessee accounting principles described above apply to those sold assets if Daimler leases them back from the buyer.

Daimler as lessor
Based on the risk and rewards associated with a leased asset, it is assessed whether economic ownership of the leased asset is transferred to the lessee (so-called finance leases) or remains with the lessor (so-called operating leases).

Operating leases, i.e. by which the economic ownership of the vehicle remains at Daimler, relate to vehicles that the Group produces itself and leases to third parties. Additionally an operating lease may have to be reported with sales of vehicles for which the Group enters into a repurchase obligation:

– Sales of vehicles in the form of a forward (an entity’s obligation to repurchase the asset) and a call option (an entity’s right to repurchase the asset) are reported as operating leases.
– Sales of vehicles including a put option (an entity’s obligation to repurchase the asset at the customer’s request) are reported as operating leases if the customer has a significant economic incentive to exercise that right. Otherwise a sale with a right of return is reported. Daimler considers several factors when assessing whether a customer has a significant economic incentive to exercise his right at contract inception. Amongst others these are the relation between repurchase price and the expected future market value (at the time of repurchase) of the asset or historical return rates.

As part of the established residual-value management process, especially for operating lease contracts, certain assumptions are regularly made at local and corporate levels regarding the expected level of prices, based upon which the cars to be returned in the leasing business are evaluated. If changing market developments lead to a negative deviation from assumptions, there is a risk of lower residual values of used cars. Depending on the region and the current market situation, the measures taken generally include continuous market monitoring as well as, if required, price-setting strategies or
sales-promotion measures designed to regulate vehicle inventories. The quality of market forecasts is verified by regular comparisons of internal and external sources, and, if required, the determination of residual values is adjusted and further developed with regard to methods, processes and systems.

In the case of accounting as an operating lease, these vehicles are capitalized at (depreciated) cost of production under leased equipment and are depreciated over the contract term on a straight-line basis with consideration of the expected residual values. Changes in the expected residual values lead either to prospective adjustments of the scheduled depreciation or to an impairment loss if necessary. The vehicles are allocated to the segment which bears substantially all of the residual value risk.

Operating leases also relate to vehicles, primarily Group products that Daimler Mobility acquires from non-Group dealers or other third parties and leases to end customers. These vehicles are presented at (amortized) cost of acquisition under leased equipment in the Daimler Mobility segment. If these vehicles are Group products and are subsidized, the subsidies are deducted from the cost of acquisition. After revenue is received from the sale to independent dealers, these Group products generate revenue from lease payments and subsequent resale on the basis of the separate leasing contracts. The revenue received from the sale of Group products to the dealers is estimated by the Group as being of the magnitude of the respective addition to leased equipment at Daimler Mobility. In 2019, additions to leased equipment from these vehicles at Daimler Mobility amounted to approximately €14 billion (2018: approximately €13 billion).

In the case of finance leases, the Group presents the receivables under receivables from financial services in an amount corresponding to the net investment of the lease agreements. The net investment of a lease agreement is the gross investment (future lease payments and non-guaranteed residual value) discounted at the rate upon which the lease agreement is based.

2. Accounting estimates and management judgments (extract)
Recoverable amount of equipment on operating leases
Daimler regularly reviews the factors determining the values of its leased vehicles. In particular, it is necessary to estimate the residual values of vehicles at the end of their leases, which constitute a substantial part of the expected future cash flows from leased assets. In this context, assumptions are made regarding major influencing factors, such as the expected number of returned vehicles, the latest remarketing results and future vehicle model changes. Those assumptions are determined either by qualified estimates or by publications provided by expert third parties; qualified estimates are based, as
far as publicly available, on external data with consideration of internally available additional information such as historical experience of price developments and recent sale prices. The residual values thus determined serve as a basis for depreciation; changes in residual values lead either to prospective adjustments of the depreciation or, in the case of a significant decline in expected residual values, to an impairment. If depreciation is prospectively adjusted, changes in estimates of residual values do not have a direct effect but are equally distributed over the remaining periods of the lease contracts.
11. Property, plant and equipment (extract)
Property, plant and equipment as shown on the Consolidated Statement of Financial Position with a carrying amount of €37,143 million also includes right-of-use assets from lessee accounting.

Property, plant and equipment, excluding right-of-use assets, developed as shown in table F.27.

In 2019, government grants of €52 million (2018: €51 million) were deducted from property, plant and equipment.

At December 31, 2018 property, plant and equipment also included leased buildings, technical equipment and other equipment with a total carrying amount of €335 million, which were assigned to the Group as economic owner due to the design of the underlying leasing contracts (so called finance leases). Additions to and depreciation of the leased equipment in the year 2018 amounted to €17 million and €33 million respectively.

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Table F.28 shows the composition of the right-of-use assets which are accounted for at January 1, 2019. The right-of-use assets include finance leases, which were shown in property, plant and equipment at December 31, 2018.

The tables F.29, F.30 and F.31 show additional disclosures related to lessee accounting.

Further information on lessee accounting is provided in Notes 1, 24 and 33.

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12. Equipment on operating leases
The development of equipment on operating leases is shown in table F.32.

At December 31, 2019, equipment on operating leases with a carrying amount of €10,874 million were pledged as security for liabilities from ABS transactions related to a securitization transaction of future lease payments on leased vehicles (December 31, 2018: €9,804 million) (see also Note 24).

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Leasing payments
Non-cancelable future lease payments to Daimler for equipment on operating leases are due as presented in table F.33 at December 31, 2019, under IFRS 16. Comparison amounts at December 31, 2018, under IAS 17 are shown in table F.34.

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14. Receivables from financial services
Table F.41 shows the components of receivables from financial services.

Types of receivables
Receivables from sales financing with customers include receivables from credit financing for customers who purchased their vehicle either from a dealer or directly from Daimler.

Receivables from sales financing with dealers represent loans for floor financing programs for vehicles sold by the Group’s automotive businesses to dealers or loans for assets purchased by dealers from third parties, primarily, used vehicles traded in by dealers’ customers or real estate such as dealers’ showrooms.

Receivables from finance lease contracts consist of receivables from leasing contracts for which all substantial risks and rewards incidental to the leasing objects are transferred to the lessee.

All cash flow effects attributable to receivables from financial services are presented within cash provided by/used for operating activities in the Consolidated Statement of Cash Flows.

Table F.42 shows the maturities of the future contractual lease payments and the development of lease payments to the carrying amounts of receivables from finance lease contracts at December 31, 2019, according to IFRS 16. Comparison amounts at December 31, 2018, under IAS 17 are shown in table F.43.

In 2019, Daimler recognized a gain of €478 million as the difference between the additions to receivables from finance lease contracts and the carrying amounts of the underlying assets (especially in connection with the delivery of vehicles to consolidated companies).

Loss allowances
The development of loss allowances for receivables from financial services due to expected credit losses is shown in table F.44.

The carrying amounts of receivables from financial services based on modified contracts that are shown in stage 2 and 3, amounted to €387 million at December 31, 2019 (December 31, 2018: €184 million). In addition, carrying amounts of €314 million (December 31, 2018: €127 million) in connection with contractual modifications were reclassified from stage 2 and 3 into stage 1.

Credit risks
Information on credit risks included in receivables from financial services is shown in table F.45.

Longer overdue periods regularly lead to higher allowances. At the beginning of the contracts, collaterals of usually at least 100% of the carrying amounts were agreed, which are backed by the vehicles based on the underlying contracts. Over the contract terms, the amounts of the collaterals are included in the calculation of the risk provisioning, so the carrying amounts of the credit impaired contracts are primarily backed by the underlying vehicles.

Further information on financial risks and nature of risks is provided in Note 33.

At December 31, 2019, receivables from financial services with a carrying amount of €8,941 million (December 31, 2018: €8,106 million) were pledged as collateral for liabilities from ABS transactions (see also Note 24).

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24. Financing liabilities (extract)
The composition of financing liabilities is shown in table F.63.

Lease liabilities include assets and liabilities which were recognized until December 31, 2018 as finance leases in accordance with IAS 17. Future minimum lease payments under finance leases amounted to €477 million at December 31, 2018. The reconciliation of future minimum lease payments from finance lease arrangements to the corresponding liabilities at December 31, 2018 is shown in table F.64.

At December 31, 2019, lease liabilities include effects from first-time adoption of IFRS 16. Information on the adjustments is disclosed in Note 1 of the Notes to the Consolidated Financial Statements. Information on the maturities of lease liabilities is provided in Note 33.

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31. Contingent liabilities and other financial obligations (extract)
Other financial obligations
At December 31, 2018, the Group reported other financial obligations from non-cancelable rental agreements and operating leases of €3,800 million according to IAS 17. At January 1, 2019, Daimler applies IFRS 16 for the first time, replacing IAS 17. The reconciliation to the opening balance for lease liabilities as at January 1, 2019, is based on other financial obligations from non-cancelable rental agreements and operating leases at December 31, 2018, as shown in table F.06. Further information on financial liabilities is provided in Notes 1 and 24.

33. Management of financial risks (extract)
Liquidity risk (extract)
Table F.89 provides an overview of how the future liquidity situation of the Group can be affected by the cash flows from liabilities, financial guarantees and irrevocable loan commitments as of December 31, 2019.

Information on the Group’s financing liabilities is also provided in Note 24.

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