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


Daimler AG – Annual report – 31 December 2020

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.

Daimler as lessee

Daimler as a lessee recognizes 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 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 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.

Lease liabilities, which are assigned to financing liabilities, are measured initially at the present value of the lease payments. 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.

Daimler 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 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.

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 (through other comprehensive income) 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.

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. Accordingly, only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor is recognized.

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 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 by which Daimler 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 Daimler 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. 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 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, 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 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 2020, additions to leased equipment from these vehicles at Daimler Mobility amounted to approximately €11 billion (2019: approximately €14 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 in the Consolidated Statement of Financial Position with a carrying amount of €35,246 million (December 31, 2019: €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 D.27.

In 2020, government grants of €17 million (2019: €52 million) were deducted from property, plant and equipment.

Table D.28 shows the composition of the right-of-use assets.

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

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

12. Equipment on operating leases

The development of equipment on operating leases is shown in table D.32.

At December 31, 2020, equipment on operating leases with a carrying amount of €10,737 million was pledged as security for liabilities from ABS transactions related to a securitization transaction of future lease payments on leased vehicles (December 31, 2019: €10,874 million) (see also Note 24).

Leasing payments

Non-cancelable future lease payments to Daimler for equipment on operating leases are due as presented in table D.33.

14. Receivables from financial services

Table D.40 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 D.41 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 2020, Daimler recognized a gain of €357 million (2019: €343 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 D.42.

At December 31, 2020, €0.4 billion of the loss allowances relates to the increase in the allowance for credit losses recognized at the Daimler Mobility segment through profit and loss as a result of the economic development in connection with the covid-19 pandemic. In addition, the calculation of the allowance for credit losses considers, among other things, that customers’ current financial solvency is positively affected by offered national programs and programs of Daimler Mobility.

The carrying amounts of receivables from financial services based on modified contracts that are shown in stages 2 and 3, amounted to €2,440 million at December 31, 2020 (December 31, 2019: €387 million). In addition, carrying amounts of €473 million (December 31, 2019: €314 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.43.

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 33.

At December 31, 2020, receivables from financial services with a carrying amount of €11,463 million (December 31, 2019: €8,941 million) were pledged mostly as collateral for liabilities from ABS transactions (see also Note 24).

24. Financing liabilities (extract)

The composition of financing liabilities is shown in table D.61.

Information on the maturities of lease liabilities as of December 31, 2020 is provided in Note 33.

33. Management of financial risks (extract)

Table D.85 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, 2020.

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