IFRS 16, policies including sale and leaseback, sales with repurchase commitments, lessee and lessor disclosures


Mercedes-Benz Group AG – Annual report – 31 December 2021
Industry: automotive

1. Significant accounting policies (extract)

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.

The Mercedes-Benz Group as lessee

The Mercedes-Benz Group as a lessee recognises for generally all lease contracts right-of-use assets as well as leasing liabilities for the outstanding lease payments. According to IFRS 16, a lessee may elect, for leases with a lease term of twelve months or less (short-term leases) and for leases for which the underlying asset is of low value, not to recognise a right-of-use asset and a lease liability. The Mercedes-Benz Group applies both recognition exemptions. The lease payments associated with those leases are generally recognised 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 initially measured at cost. The cost of a right-of-use asset comprises the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date less any lease incentives received from the lessor, any initial direct costs and an estimate of costs to be incurred in dismantling or removing the underlying asset. All leasing incentives already received from the lessor are deducted.

Lease liabilities, which are assigned to financing liabilities, are measured initially at the present value of the lease payments still to be made. The lease liabilities include the following lease payments:

  • fixed payments including de facto 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.

The Mercedes-Benz Group generally also applies the option for contracts comprising lease components as well as non-lease components not to split these components.

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 the Mercedes-Benz Group, 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.

A right-of-use asset is subsequently measured at cost less any accumulated depreciation and, if necessary, any accumulated impairment. 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.

In the subsequent measurement of a lease liability, the carrying amount is increased to reflect interest on the lease liability and reduced to reflect the lease payments made.

According to IFRS 16, the depreciation of right-of-use assets is recognised within functional costs. The interest due on the lease liability is a component of interest expense.

Extension and termination options are part of a number of leases particularly of real estate. Such contract terms offer the Mercedes-Benz Group 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 their exercise is 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 recognised and a financial liability is recognised 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 the Mercedes-Benz Group leases them back from the buyer. Accordingly, only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor is recognised.

The Mercedes-Benz Group 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 economic ownership of the vehicle remains at the Mercedes-Benz Group, 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 by which the Mercedes-Benz Group is obliged to repurchase the vehicles in the future are accounted for as operating leases. This also applies to a call option that only grants the Mercedes-Benz Group the right to repurchase.
  • 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. The Mercedes-Benz Group considers several factors when assessing whether a customer has a significant economic incentive to exercise his or her right at contract inception. Among 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 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 risk-mitigation 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 capitalised 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, if necessary, to an impairment loss. 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 Mercedes-Benz Mobility acquires from non-Group dealers or other third parties and leases to end customers. These vehicles are presented at (amortised) cost of acquisition under leased equipment in the Mercedes-Benz Mobility segment. If these vehicles are Group products and are subsidised, 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 dealers is estimated by the Group as being of the magnitude of the respective addition to leased equipment at Mercedes-Benz Mobility. In 2021, additions to leased equipment from these vehicles at Mercedes-Benz Mobility amounted to approximately €10 billion (2020: approximately €11 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.

The leased equipment of the Mercedes-Benz Mobility segment includes commercial vehicles and buses (produced by Daimler Truck) which have been acquired from external dealers or other third parties not related to the Mercedes-Benz Group. Mercedes-Benz Mobility usually receives a residual-value guarantee from Daimler Truck for this leased equipment in connection with the obligation to return the respective commercial vehicles and buses to Daimler Truck. Such leased equipment is depreciated over the contractual term on a straight-line basis to the guaranteed residual value. The residual-value guarantee does not affect classification as an operating lease as Daimler Truck is a related party to Mercedes-Benz Mobility after the spin-off.

Additionally, the Mercedes-Benz Group will continue the leasing and sales-financing business for Daimler Truck’s commercial vehicles and buses in some markets. These vehicles are directly acquired from Daimler Truck and leased to the end customer. Insofar as a mandatory vehicle return has been agreed, there is a rental contract (head lease) between Mercedes-Benz Mobility and Daimler Truck. The contract between Mercedes-Benz Mobility and the end customer constitutes a sublease in this respect.

Accounting for and classification of a sublease depend on whether the contracts were concluded before or after the legal spin-off and hive-down of Daimler’s commercial vehicle business. The leases that were concluded before the legal spin-off and hive-down are continued as operating leases. The head lease is presented under leased equipment as a right of use, which was recognised at fair value at the spin-off date and subsequently depreciated on a straight-line basis. In addition, a residual-value receivable from the companies of the Daimler Truck Group is recognised. However, the leasing contracts concluded after the legal spin-off and hive-down are classified and accounted for as finance leases. The net investment in the lease corresponds to the right-of-use asset from the head lease. In addition to the finance lease, Mercedes-Benz Mobility recognises a residual-value receivable from the Daimler Truck Group in the amount of the guaranteed residual value. The head lease is not recorded separately.

2. Accounting estimates and management judgements (extract)

Recoverable amount of equipment on operating leases

The Mercedes-Benz Group 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.

12. Property, plant and equipment (extract)

Property, plant and equipment as shown in the Consolidated Statement of Financial Position with a carrying amount of €27,859 million (31 December 2020: €35,246 million) also includes right-of-use assets, that the group has received as lessee.

Property, plant and equipment, excluding right-of-use assets, developed as shown in table D.31.

In 2021, government grants of € 69 million (2020: € 17 million) were deducted from the carrying amount of property, plant and equipment.

Table D.32 shows the composition of the right-of-use assets.

The tables D.33, D.34 and D.35 show additional disclosures related to lessee accounting.

Further information on lessee accounting is provided in Notes 1, 25 and 34.

13. Equipment on operating leases

The development of equipment on operating leases is shown in table D.36.

At 31 December 2021, equipment on operating leases with a carrying amount of €12,915 million was pledged as security for liabilities from ABS transactions related to a securitisation transaction of future lease payments on leased vehicles (31 December 2020: €10,737 million) (see also Note 25).

Leasing payments

Non-cancellable future lease payments to the Mercedes-Benz Group for equipment on operating leases are due as presented in table D.37.

15. Receivables from financial services

Table D.45 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 the Mercedes-Benz Group.

Receivables from sales financing with dealers represent loans for floor financing programmes 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 dealers’ real estate financing.

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 for operating activities in the Consolidated Statement of Cash Flows.

Table D.46 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.

In 2021, the Mercedes-Benz Group recognised a gain of €203 million (2020: €336 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, which result in a finance-lease).

Loss allowances

The development of loss allowances for receivables from financial services due to expected credit losses is shown in table D.47.

At 31 December 2020, €0.4 billion of the loss allowances related to the increase in the allowance for credit losses recognised at the Mercedes-Benz Mobility segment through profit and loss as a result of the economic development in connection with the covid-19 pandemic. In addition, the decrease of the loss allowances compared to 2020 is attributable to the spin-off and hive-down of Daimler’s commercial vehicle business.

The carrying amounts of receivables from financial services based on modified contracts that are shown in stages 2 and 3, amounted to €392 million at 31 December 2021 (31 December 2020: €2,440 million). In addition, carrying amounts of €210 million (31 December 2020: €473 million) in connection with contractual modifications were reclassified from stages 2 and 3 into stage 1.

Credit risks

Information on credit risks included in receivables from financial services is shown in table D.48.

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 the nature of risks is provided in Note 34.

At 31 December 2021, receivables from financial services with a carrying amount of €10,378 million (31 December 2020: €11,463 million) were pledged mostly as collateral for liabilities from ABS transactions (see also Note 25).

25. Financing liabilities (extract)

The composition of financing liabilities is shown in table D.65.

Information on the maturities of lease liabilities as of 31 December 2021 is provided in Note 34.

34. Management of financial risks (extract)

Table D.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 31 December 2021.

Information on the Group’s financing liabilities is also provided in Note 25.