7 Changes in Accounting Policies, Estimates, Assumptions, Options and Judgments

Changes to Key Accounting Methods

As of January 1, 2024, the Group did not have to apply any interest rate benchmark reform. Based on the existing transactions, we do not expect to see any material impact in the future either.

Changes in Accounting Policies Due to New Standards and Interpretations

The following new or amended standards and interpretations became mandatory for the first time in the 2024 fiscal year. They did not have any material effects on Vonovia’s consolidated financial statements.

• IFRS 7 “Financial Instruments: Disclosures”
• IFRS 16 “Leases”
• IAS 1 “Presentation of Financial Statements”
• IAS 7 “Statement of Cash Flows”

IFRS IC Agenda Decision on IFRS 8

At its meeting held in June 2024, the IFRS IC finalized its agenda decision on the disclosure of income and expenses for reportable segments pursuant to IFRS 8. Based on this decision, items of income and expense are to be disclosed separately in the segment reporting if they are material as defined by IAS 1. Within this context, Vonovia reviewed its internal reporting to the management and the segment reporting disclosures to determine the extent to which other positions are to be classed as material. As Vonovia already presents individual items of income and expense as separate reconciliation figures, it does not currently see any reason to adjust its segment reporting as a result of IFRS IC Agenda Decision “Disclosure of Revenues and Expenses for Reportable Segments (IFRS 8)”.

IAS 12/International Tax Reform Pillar 2

The Organization for Economic Cooperation and Development (OECD) has launched a project, BEPS (Base Erosion and Profit Shifting), to combat unfair tax competition at international level and tax loopholes, particularly in light of our digitalized economy. A two-pillar solution was developed as part of this international tax reform, with the second pillar (Pillar 2) addressing global effective minimum taxation, in particular.

The implementation status of the Pillar 2 tax regulations in terms of their transposition into national law varies considerably from country to country. The IASB published amendments to IAS 12 in May 2023 in order to avoid inconsistent accounting during this transition phase, as well as to provide users of financial statements with information that would be as useful as possible for their decisions regarding the expected impact of the tax reform. These were adopted by the EU in November 2023 and already applied for the 2023 reporting year.

In addition to a mandatory exception from the recognition of deferred taxes in connection with the Pillar 2 rules, the amendments include, in particular, extended disclosures in the notes. While the exception is designed explicitly as a temporary one, the IASB has not yet set any expiration date.

Vonovia is applying the extended regulations set out in IAS 12 as planned as of the 2023 fiscal year. The impact on the Group and the required disclosures in the notes are set out in note [B21] Income Taxes.

New Standards and Interpretations Not Yet Applied

Application of the following standards, interpretations and amendments to existing standards was not yet mandatory for the 2024 fiscal year. Vonovia also did not choose to apply them in advance. The implementation of IFRS 18 is likely to lead to considerable changes in Vonovia’s future consolidated financial statements. No detailed analysis of the expected changes is available as yet. It is expected that the application of the other new or amended standards will have no material effects on Vonovia’s consolidated financial statements. Their application will be mandatory for the fiscal years following the dates stated in the following table:

Estimates and Assumptions

To a certain extent, the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the reporting date as well as reported amounts of income and expenses during the reporting year. The actual amounts may differ from the estimates as the business environment may develop differently than assumed. In this case, the assumptions and, where necessary, the carrying amounts of the assets or liabilities affected are prospectively adjusted accordingly. Specific estimates and assumptions relating to individual elements of financial statements are also explained in the corresponding notes to the consolidated financial statements.

Assumptions and estimates are reviewed on an ongoing basis and are based on experience and other factors, including expectations regarding future events that appear reasonable under the given circumstances.

The estimates and assumptions that may have a material risk of causing an adjustment to the carrying amounts of assets and liabilities mainly relate to the determination of the fair value of investment properties.

The best evidence of fair value of investment properties is current prices in an active market for comparable residential properties. As such information is not completely available, however, Vonovia uses standard valuation techniques.

A detailed description of the discounted cash flow (DCF) method used can be found in chapter [D27] Investment Properties.

In accordance with IAS 40 in conjunction with IFRS 13, the respective market values of the investment properties owned by Vonovia are determined. Changes in certain market conditions such as prevailing rent levels and vacancy rates may affect the valuation of investment properties. Any changes in the fair value of the investment portfolio are recognized as part of the profit for the period in the income statement and can thus substantially affect Vonovia’s results of operations.

The statement of financial liabilities at amortized cost using the effective interest method takes the expected contractual cash flows into account. In some cases, the agreements do not have any fixed maturity terms. As a result, the cash flows included in the valuation are subject to management assumptions in terms of amount and term.

As explained in chapter [D25] Intangible Assets, Vonovia checks for goodwill impairments on an annual basis, or if there is any reason to suspect such impairments. The next step involves determining the recoverable amount of the group of cash-generating units (CGU). This corresponds to either the fair value less costs of sale or the value in use, whichever is higher. Determining the value in use includes adjustments and estimates regarding the forecast and discounting of the future cash flow. Although the management believes that the assumptions used to determine the recoverable amount are appropriate, any unforeseeable changes in these assumptions could result in impairment losses, with a detrimental impact on the net assets, financial position and results of operations.

When determining the volume of current and deferred taxes, the Group takes into account the effects of uncertain tax items and whether additional taxes and interest may be due. This assessment is made on the basis of estimates and assumptions about future events. New information may become available that causes the Group to change its discretionary decisions regarding the appropriateness of existing tax liabilities; such changes to tax liabilities will affect the tax expense in the period in which such a change is made.

Deferred tax assets are recognized to the extent that it can be demonstrated that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that there will be sufficient future taxable profits to realize the tax benefit in the future.

In connection with the application of IFRS 15, it is assumed with respect to determining progress in relation to revenue recognition over time that the costs incurred appropriately reflect the progress as a share of total costs.

Properties under development are measured by comparing the net sales proceeds against the recoverable amount. The measurement of properties under development in the Development to sell and Development to hold areas is shaped by a large number of relevant parameters (e.g., future sale prices, total investment costs, etc.). These parameters are associated with estimation uncertainties regarding their specific actual amount as of the relevant measurement date.

Additional estimates and assumptions mainly relate to the uniform definition of useful lives, the assumptions made on the value of land and buildings, the recognition and measurement of provisions as well as the realization of future tax benefits.

Climate risks and opportunities have an impact on Vonovia’s business model and strategy, e.g., in connection with energy efficiency modernization measures. They are addressed in particular by the climate path that the company has mapped out, but also by appropriate estimates and assumptions in key items of the company’s net assets, financial position and results of operations. Climate risks can have a potentially negative impact and result in increased estimation uncertainties.

Physical climate risks refer to longer-term shifts in general climatic conditions. Climate events such as floods, earthquakes, extreme weather events, etc. could have an impact on our real estate portfolio and require specific crisis management measures. Climate transition risks describe the effects that can arise for companies due to the process of transformation towards a more sustainable economic system. We did not identify any material physical climate risks or climate transition risks as part of our double materiality assessment in accordance with the ESRS.

Based on our current knowledge and expectations regarding future developments, this will not have any impact on Vonovia’s balance sheet. This relates, among other things, to the fair values of investment properties, specific useful lives and the value of assets, as well as provisions for environmental risks, for which no significant need for adjustment emerges.

Options and Judgments

Options exercised and judgments made by Vonovia’s management in the process of applying the entity’s accounting policies that may have a significant effect on the amounts recognized in the consolidated financial statements include the following:

• The group of investments accounted for using the equity method is determined by assessing significant influence or whether there is joint control.
• Determining whether the acquisition of investment properties as part of a business combination constitutes the acquisition of a “business” or the acquisition of an individual asset or group of assets can involve discretionary judgments.
• Vonovia measures investment properties at fair value. If management had opted to use the acquisition costs model as permitted under IAS 40, the carrying amounts of the investment properties as well as the corresponding income and expense items in the income statement would differ significantly.
• The criteria for assessing in which category a financial asset is to be classified may involve discretionary judgments.
• Within the scope of revenue recognition in accordance with IFRS 15, discretionary decisions relating to the expected revenue, the total costs of a project and the degree of completion may be necessary. These have an impact on the amount and timing of revenue.
• When accounting for leases in accordance with IFRS 16, the assessment of the exercise or non-exercise of unilaterally granted termination or renewal options may involve discretionary judgment, particularly if there is no economic incentive for the exercise or non-exercise of options.
• The need to include information concerning the future in the valuation of expected defaults results in discretionary decisions regarding the impact that changes in economic factors will have on the expected defaults.
• The decision on how to define a group of cash-generating units to which goodwill is allocated may involve discretionary judgments.
• Allocating the goodwill to the group of individual cash-generating units may also involve discretionary judgments. The parameters used in the impairment test, such as the determination of undiscounted cash flows, the weighted average cost of capital and the growth rate, may also involve discretionary judgments. Due to a lack of any detailed definition of the term “operation” (IAS 36.86), the disposal of goodwill within the context of real estate sales may involve discretionary decisions.
• Defining a disposal group when selling properties can involve a discretionary decision. Due to a lack of any detailed definition of the term “a separate major line of business or geographical area of operations” (IFRS 5), classification as a discontinued operation may involve discretionary decisions. Assessing whether a sale is deemed to be highly probable within the space of a year can also involve a discretionary decision.
• At the moment, there are no definitive provisions on how to reflect a mandatory acquisition of non-controlling interests following the acquisition of control as part of a voluntary public takeover offer. In general, the acquisition of shares as part of a public offer during the second offer period is based on exactly the same conditions as those that applied in the first offer period, and the two acquisitions are closely related in terms of content and timing. This means that, even if it is executed in two offer periods, the acquisition constitutes one and the same transaction (linked transaction). Following the completion of the later acquisition, the original purchase price allocation is to be adjusted with retroactive effect from the acquisition date, resulting in a change in the consideration transferred, the fair value of net assets transferred and, consequently, the resulting goodwill.