Application of new accounting methods

Accounting standards applied for the first time in financial year 2019/20

The following IFRS, issued or revised by the International Accounting Standards Board (IASB), that were binding for METRO AG in financial year 2019/20 were applied for the first time in these consolidated financial statements:

IFRS 16 (Leases)

The key change of IFRS 16 compared to IAS 17 concerns the lessee accounting model. IFRS 16 introduces a uniform accounting model for lessees after the recognition of a right-of-use asset for each asset transferred for use. It also references a corresponding liability in the amount of the present value of the future lease payments.

Exercising of options

Lessees can choose from several policy options. For accounting and measurement, they have the option to build a portfolio of leases with similar characteristics of which METRO did not make use of. METRO is exercising the option of not applying the right-of-use approach to leases involving assets of minor value (mainly business and office equipment) and short-term leases (maximum terms of 12 months). Rental expenses for these assets were therefore recognised in the income statement.

The option to separate lease and non-lease components (service) is not exercised and the non-lease components are included in the right-of-use assets to be recognised.

Furthermore, the option to capitalise leased intangible assets was not exercised. They still fall within the scope of IAS 38.

METRO as lessee

The company recognises an asset with a right of use and a lease liability at the inception of the lease. The right of use is initially measured at cost, which is the initial amount of the lease liability, adjusted for any lease payments made on or before the commencement date, plus any initially incurred direct costs, minus any incentives received. The right of use is subsequently amortised on a straight-line basis over the shorter lease term or the useful life of the underlying asset. Moreover, the right of use is reduced by any impairment loss and adjusted for certain remeasurements of the lease liabilities. The lease liability is initially measured at the present value of the lease payments, which are discounted at the interest rate inherent in the lease agreement or, if this interest rate cannot be readily determined, at the company’s incremental borrowing rate.

The lease payments included in the measurement of the lease liability consist of the following items:

• Fixed payments, including substantially fixed payments
• Variable lease payments that depend on an index or instalment, which are initially valued using the index or instalment on the starting date
• Amounts expected to be paid under a residual value guarantee
• Exercise price of a call option which the company assumes with sufficient certainty will be exercised
• Lease payments in an optional extension period, if the company exercises an extension option with sufficient certainty
• Penalties for early termination of a lease, unless the company is reasonably certain that it will not terminate the lease prematurely.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured if the future lease payments change as a result of a change in the index or interest rate, if the company’s estimate of the amount expected to be payable under a residual value guarantee changes, or if the company changes its assessment of whether it will exercise a purchase, renewal or termination option. If the lease liability is remeasured in this way, a corresponding adjustment to the carrying amount of the right of use is made or recognised in the income statement if the carrying amount of the right of use is reduced to 0. Rights of use are disclosed in the balance sheet under property, plant and equipment. Rights of use that meet the definition of investment property are included under ‘Investment properties’ and are recognised separately in the financial statements. Lease liabilities are included in ‘Other current financial liabilities’ and ‘Other non-current financial liabilities’.

In the cash flow statement, the company has classified the repayment of lease payments and the interest portion within financing activities. Lease payments are divided into a redemption and an interest portion and are included in the cash flow statement in the line ‘Redemption of lease liabilities’. Lease payments for short-term leases, lease payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are classified as cash flows from operating activities.

METRO as lessor

The accounting policies that applied to METRO as a lessor under IAS 17 do not differ materially from the new rules under IFRS 16. However, there are differences with regard to subleases, which are classified under IFRS 16 with reference to the right of use and not, as previously under IAS 17, by reference to the underlying asset. As a result, the number of subleases classified as finance leases has risen, and the amount of receivables to be reported in the balance sheet has increased accordingly.

Even if the company is the lessor in a sublease, it determines at the inception of the lease whether each lease is a finance lease or an operating lease. To classify each lease, the company makes an overall assessment of whether the lease generally transfers all the risks and benefits associated with ownership of the underlying asset. If this is the case, the lease is a finance lease; otherwise, it is an operating lease. As part of this assessment, the company considers certain indicators, for example, whether the lease covers most of the lease term of the main lease of the asset.

If the lease is a finance lease, a net investment (receivable) equal to the discounted future lease payments to be received is recognised in the balance sheet. The interest rate underlying the lease is used to determine the discount. Interest income from leases is disclosed in cash flow from operating activities.

If the company is an intermediate lessor, it accounts for its interest in the main lease agreement and the sub-lease agreement separately. If a main lease is a short-term lease to which the company applies the exception described above, the company classifies the sub-lease as an operating lease. The company recognises lease payments it receives under operating leases as rental income.

Sale-and-leaseback transactions

If a sale and leaseback transaction involves the sale of the asset as defined by IFRS 15 (Revenue from Customer Agreements), the lessee (seller) must derecognise the asset and recognise any gain or loss relating to the rights transferred to the lessor (buyer). Retrospective application of the new accounting treatment of sale and leaseback transactions is not required and was thus not applied to METRO.

METRO is applying the standard fully retrospectively, which requires restatement of previous year’s comparative figures.

Additional IFRS amendments

Other accounting rules to be applied for the first time in financial year 2019/20 without material effects on METRO are:

• IAS 12 – Income Taxes (clarification as part of the annual improvements cycle 2015–2017: Income Tax Consequences of Payments on Instruments Classified as Equity)
• IAS 19 – Employee Benefits (clarification: Plan Amendment, Curtailment or Settlement)
• IAS 23 – Borrowing Costs (clarification as part of the annual improvements cycle 2015–2017: Borrowing Costs Eligible for Capitalisation)
• IAS 28 – Investments in Associates and Joint Ventures (clarification: Long-term Interests in Associates and Joint Ventures)
• IFRS 3 – Business Combinations/IFRS 11 – Joint Arrangements (clarification as part of the annual improvements cycle 2015–2017: Previously Held Interest in a Joint Operation)
• IFRS 9 – Financial Instruments (clarification: Prepayment Features with Negative Compensation)
• IFRIC 23 – Uncertainty over Income Tax Treatments (IFRIC interpretation to be applied for the first time)

In addition, METRO is voluntarily applying the amendments to IFRS 16 (Leases) adopted by the IASB in May 2020 early, which made it possible to simplify the accounting treatment of concessions granted by lessors to lessees due to the Covid-19 pandemic.

Accounting standards that were published but are not yet applied in financial year 2019/20

A number of other standards and interpretations amended or newly issued by the IASB were not yet applied by METRO in financial year 2019/20 because they were either not yet mandatory or have not yet been endorsed by the European Commission.

Effect of the additional IFRS amendments

The first-time application of the other standards and interpretations listed in the above table as well as amendments to IFRS is not expected to have a material impact on the group’s asset, financial and earnings position.