Additional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments)

The tables below show the carrying amounts of financial instruments by measurement category:

CLASSES OF FINANCIAL INSTRUMENTS

Financial instruments are divided into the following classes at the Volkswagen Group:

• financial instruments measured at fair value;
• financial instruments measured at amortized cost;
• derivative financial instruments within hedge accounting;
• not allocated to any measurement category; and
• credit commitments and financial guarantees (off-balance sheet).

RECONCILIATION OF BALANCE SHEET ITEMS TO CLASSES OF FINANCIAL INSTRUMENTS

The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments.

The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount.

As a result of the initial application of IFRS 9 and IFRS 15, the carrying amounts of contract assets, lease receivables and liabilities and equity-accounted associates and joint ventures have been classified as “not allocated to any measurement category” since fiscal year 2018. Apart from those, other amounts (excluding financial instruments) may also be included here for reconciliation to the carrying amounts.

The risk variables governing the fair value of the receivables are risk-adjusted interest rates.

Financial instruments measured at fair value also include shares in partnerships and corporations.

The classes of financial instruments have been added as part of the implementation of IFRS 9 (see the section on “Accounting policies”). The principal movement in this context was the reclassification of lease receivables and liabilities in the “measured at amortized cost” category to “not allocated to any measurement category”. Prior-year values under financial services receivables and financial liabilities have been restated. The carrying amount of lease receivables was €49,166 million (previous year: €46,156 million) and their fair value (fair value hierarchy level 3) was €49,791 million (previous year: €46,959 million). The carrying amount of lease liabilities was €449 million (previous year: €479 million) and their fair value (fair value hierarchy level 2) was €466 million (previous year: €510 million).

Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The measurement techniques used are explained in the section on “Accounting policies”. The fair value of Level 3 receivables was measured by reference to individual expectations of losses; these are based to a significant extent on the Company’s assumptions about counterparty credit quality. The inputs used are not observable in an active market.

Other financial assets include receivables from tax allocations of €29 million, and other financial liabilities include liabilities from tax allocations of €33 million.

The following tables contain an overview of the financial assets and liabilities measured at fair value by level:

Other financial assets include receivables from tax allocations of €29 million, and other financial liabilities include liabilities from tax allocations of €33 million.

The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value that are listed and traded on a public market. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables, receivables from vehicle financing programs and other equity investments are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price.

The table below provides a summary of changes in level 3 balance sheet items measured at fair value:

The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no extrapolation is required. There were no transfers between other levels of the fair value hierarchy.

Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity.

If commodity prices for commodity futures classified as Level 3 had been 10 % higher (lower) as of December 31, 2018, earnings after tax would have been €59 million (previous year: €10 million) higher (lower). The equity is not affected.

The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax.

If the assumed enterprise values at December 31, 2018 had been 10 % higher, earnings after tax would have been €3 million (previous year: €3 million) higher. If the assumed enterprise values at December 31, 2018 had been 10 % lower, earnings after tax would have been €3 million (previous year: €3 million) lower.

Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buyback obligations under leases are borne in part by the Volkswagen Group.

The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax.

If the prices of the used cars covered by the residual value protection model had been 10 % higher as of December 31, 2018, earnings after tax would have been €325 million (previous year: €319 million) higher. If the prices of the used cars covered by the residual value protection model had been 10 % lower as of December 31, 2018, earnings after tax would have been €352 million (previous year: €333 million) lower.

If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of December 31, 2018, earnings after tax would have been €1 million lower. If the risk-adjusted interest rates as of December 31, 2018 had been 100 basis points lower, earnings after tax would have been €4 million higher.

If the corresponding vehicle price used in the vehicle financing programs had been 10 % higher as of December 31, 2018, earnings after tax would have been €8 million higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10 % lower as of December 31, 2018, earnings after tax would have been €8 million lower.

If the result of operations of equity investments measured at fair value had been 10% better as of December 31, 2018, the equity would have been €3 million higher. If the result of operations had been 10% worse, the equity would have been €3 million lower.

OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

The following tables contain information about the effects of offsetting in the balance sheet and the potential financial effects of offsetting in the case of instruments that are subject to a legally enforceable master netting arrangement or a similar agreement.

Other financial assets include receivables from tax allocations of €29 million.

The Financial instruments column shows the amounts that are subject to a master netting arrangement but were not set off because they do not meet the criteria for offsetting in the balance sheet. The Collateral received and Collateral pledged columns show the amounts of cash collateral and collateral in the form of financial instruments received and pledged for the total assets and liabilities that do not meet the criteria for offsetting in the balance sheet.

Other financial liabilites include receivables from tax allocations of €33 million.

ASSET-BACKED SECURITIES TRANSACTIONS

Asset-backed securities transactions with financial assets amounting to €27,906 million (previous year: €24,561 million) entered into to refinance the financial services business are included in bonds, commercial paper and notes, and liabilities from loans. The corresponding carrying amount of the receivables from the customer and dealer financing and the finance lease business amounted to €32,669 million (previous year: €26,689 million). Collateral of €47,884 million (previous year: €41,799 million) in total was furnished as part of asset-backed securities transactions. The expected payments were assigned to structured entities and the equitable liens in the financed vehicles were transferred. These asset-backed securities transactions did not result in the receivables from financial services business being derecognized, as the Group retains nonpayment and late payment risks. The difference between the assigned receivables and the related liabilities is the result of different terms and conditions and the share of the securitized paper and notes held by the Volkswagen Group itself, as well as the proportion of vehicles financed within the Group.

Most of the public and private asset-backed securities transactions of the Volkswagen Group can be repaid in advance (clean-up call) if less than 9 % or 10 %, as appropriate, of the original transaction volume is outstanding. The assigned receivables cannot be assigned again or pledged elsewhere as collateral. The claims of the holders of commercial paper and notes are limited to the assigned receivables and the receipts from those receivables are earmarked for the repayment of the corresponding liability.

As of December 31, 2018, the fair value of the assigned receivables still recognized in the balance sheet was €32,944 million (previous year: €27,089 million). The fair value of the related liabilities was €30,122 million (previous year: €24,511 million) at that reporting date.

Companies of the Volkswagen Financial Services subgroup are contractually obliged, under certain conditions, to transfer funds to the structured entities that are included in its financial statements. Since the receivables are transferred to the special purpose entity by way of undisclosed assignment, the situation may occur in which the receivable has already been reduced in a legally binding manner at the originator, for example if the obligor effectively offsets it against receivables owed to it by a company belonging to the Volkswagen Group. In this case, collateral must be furnished for the resulting compensation claims against the special purpose entity, for example if the rating of the Group company concerned declines to a contractually agreed reference value.