The first-time application of new financial reporting standards and interpretations had no material impact on the Bertelsmann Group..

The Bertelsmann Group has not opted for early adoption of any additional standards, interpretations or amendments that have been issued by the IASB or the IFRS IC but are not yet mandatory. Financial reporting standards having a material impact on Bertelsmann that are not yet effective are IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.

IFRS 9 Financial Instruments contains revised regulations for the classification and measurement of financial assets, new requirements for Impairment  of financial instruments and new requirements for hedge accounting. For the Bertelsmann Group, IFRS 9 will be applied for the first time in the financial year 2018. Analyses to assess the effects of IFRS 9 on the Consolidated Financial Statements started in 2016 were completed in 2017. The analysis of debt instruments indicated that, in the majority of cases, these were held in order to collect the contractual cash flows representing exclusively principal and interest payments so that the majority of debt instruments will continue to be measured at amortized cost. The Bertelsmann Group also holds so-called fund-in-fund investments purchased by the Bertelsmann Investments division. Under IFRS 9, these primarily represent debt instruments. The returns from these fund-in-fund investments do not solely represent payments of principal and interest and thus do not meet the conditions applicable to contractual cash flows. As a result, these debt instruments will be recognized at fair value through profit or loss under IFRS 9. Because, as a rule, these fund-in-fund investments are already measured at fair value, there will be no financial impact from the measurement of these financial instruments as of January 1, 2018. During the financial year, the gains and losses resulting from changes in the fair value were recognized in other comprehensive income with deferred taxes taken into consideration, while these will be recognized in the consolidated income statement in the future. As of December 31, 2017, financial assets amounting to €509 million are classified as available for sale and measured at fair value through other comprehensive income. These financial assets will continue to be measured at fair value; however, as a rule, for the majority changes in the fair value will be recognized in the consolidated income statement. The amounts related to these financial assets recognized in other comprehensive income totaling €69 million will be reclassified to other retained earnings as of January 1, 2018, and will subsequently no longer be recycled in the consolidated income statement. Equity instruments recognized at fair value through other comprehensive income are immaterial for the Bertelsmann Group, both individually and in total, and relate mainly to subsidiaries not included in the scope of consolidation for reasons of materiality. To the extent that changes in carrying amounts are recognized in other comprehensive income, they are no longer to be recycled to profit or loss when these instruments are sold. The analyses of effects on the measurement of financial instruments, in particular in regard to the impairment of financial instruments, have also been completed. Going forward, impairment matrices will be used for this analysis to determine the loss allowance of trade receivables on the basis of historic bad debt losses, maturity bands and expected credit losses. The impairment matrices are created for division-specific or business-unit-specific groups of receivables, each with similar default patterns. In addition, separate risk assessments are performed. Changes to the calculations for impairment result in an immaterial increase of impairment, which will be recognized directly in other retained earnings as of January 1, 2018. Furthermore, there is no material impact with regard to the measurement of financial instruments. As of December 31, 2017, no material impacts are anticipated for the Consolidated Financial Statements from the new regulations for hedge accounting. Application of IFRS 9 must be generally retrospective, but various exceptions are granted, particularly in the area of hedge accounting. Prior-year figures will not be adjusted on the grounds of the existing practical expedients in accordance with IFRS 9.

IFRS 15 Revenue from Contracts with Customers includes new comprehensive regulations for the recognition of revenue that are independent of a specific industry or transaction. The new standard replaces the current risk and reward approach with a contract-based five-step model. In addition to substantially more extensive application guidance for the accounting treatment of revenue from contracts with customers, there are more detailed disclosure requirements in the notes. Application of the standard is mandatory for financial years beginning on or after January 1, 2018. Bertelsmann has decided to apply the modified retrospective method for initial application, according to which IFRS 15 will be applied prospectively on a Group-wide basis from January 1, 2018, recognizing the cumulative effect of first-time application in retained earnings. For its first-time application, Bertelsmann will apply the expedients provided in the standard for the modified retrospective method.
As part of the implementation, Bertelsmann initiated and successfully conducted a Group-wide project tailored to the individual needs of the respective divisions. On the basis of defined and analyzed core business models in the divisions, these analyses were rolled out to existing customer contracts, and a decentralized review of sales processes was conducted to identify the need for adaptations. This will serve as the basis for ensuring the process-related requirements of IFRS 15 are fulfilled. As part of the project, adjustments have been made to the reporting systems, chart of accounts and the disclosure templates. At the end of 2017, Bertelsmann assessed the anticipated impact of implementing IFRS 15 on the balance sheet, income statement and notes for each business unit based on the revenues generated in 2017 and on balance sheet figures as of December 31, 2017.

The following effects have been identified for the divisions:

• RTL Group: In the future, the timing of revenue recognition for business models generating revenue from licenses will depend on whether the license represents a right to access the intellectual property through the entire licensing period or a right to use the intellectual property at the time licensing is granted. At RTL Group, the majority of licenses provided represent a right to use the intellectual property at the date licensing is granted, and as a result, revenue recognition is at the point in time the license is granted to the licensee. Compared to current accounting, revenue recognition will in some cases be at an earlier date. The effect on the opening balance as of initial application is immaterial.
• Penguin Random House: With regard to certain contracts underlying e-book sales, presentation of revenue and expenses will change as a result of the new standard. Based on a more specific concept of the term “customer” – or, more specifically, as a result of a more specific definition of the term “customer,” the control concept underlying IFRS 15 and the application of the enhanced principal/agent approach – revenue will be recognized in the amount of the retail price to the end consumer in the future. Related commissions for the online retailer are recognized as an expense. In respect to physical books, expected returns of books sold are no longer offset against the receivables but are presented as a return liability. Return assets are presented as non-financial assets rather than in inventory.
• Gruner + Jahr: In subscription sales, giveaways to customers meet the criteria of a separate performance obligation. Any giveaways to third parties during the acquisition of new subscriptions are considered costs to obtain a contract and are amortized over the expected term of the subscription. Additionally, marketing incentives paid to customers are no longer presented as an expense but they reduce revenue. Both individually and cumulatively, the effects on the balance sheet and income statement of the Bertelsmann Group based on the issues described are immaterial. In terms of the sale of magazines, expected returns are no longer offset against the receivables but are presented as a return liability.
• BMG: No material impact on the balance sheet and income statement is expected at BMG.
• Arvato: Based on the service character of the business activities at Arvato, no material impact regarding timing and measurement of revenue recognition is expected. As a result of the more specific definition of the customer and revenue under IFRS 15, other operating income will now be presented as revenue in selected situations. Additionally, the core principal-agent analyses at Arvato have been completed with the conclusion that, based on the business models analyzed, no material impact in the assessment between gross and net presentation is expected.
• Bertelsmann Printing Group: Due to the increasing service character of the business activities, no material impact regarding timing and measurement of revenue recognition is expected.
• Bertelsmann Education Group: In the education business, no material impact on the balance sheet and income statement is expected.

Based on the changes mentioned above, a cumulative effect from first-time application in the low single-digit million euro range is expected in retained earnings as of the implementation date on January 1, 2018. Additionally, as of January 1, 2018, a balance sheet extension of about €370 million is expected due to the changes in presentation in the balance sheet. This corresponds to a percentage of the Group’s total assets of 1.5 percent. In terms of the income statement, the changes described above result in a decrease in the EBITDA margin of about 0.25 percent points.
The Group opted to apply the following practical expedients from January 1, 2018:

• Costs associated with obtaining contracts are not capitalized if the underlying asset is amortized in no more than 12 months.
• The value of consideration is not adjusted for the effects of a material financing component if the financing component pertains to a period of no more than 12 months.

IFRS 16, issued in January 2016, sets out principles for recognition, measurement, presentation and disclosure requirements for leases. IFRS 16 replaces the current standards and interpretations IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The changes mainly affect lessee accounting and generally require lessees to recognize contractual rights and obligations on the lessee’s balance sheet. The standard replaces the straight-line recognition of operating lease expense for those leases applying IAS 17 with the recognition of depreciation expenses for the right-of-use asset and interest expenses on the lease liability (included within the financial result). In addition, IFRS 16 includes more extensive disclosures in the notes for lessees. Compared to the current accounting rules under IAS 17, the IFRS 16 regulations for lessors are mostly unchanged. Application of the standard is mandatory for financial years beginning on or after January 1, 2019. For the initial application of IFRS 16, there is an option to choose a full retrospective approach or a modified retrospective approach. IFRS 16 will be introduced in the Bertelsmann Group as part of a Group-wide transition project. Under this project, initially, Bertelsmann Group’s material lease agreements were analyzed to determine the approach for the initial application of IFRS 16, among other things. The analysis of material leases has not been completed. The effects on the Consolidated Financial Statements will be quantified as part of the further analysis of all lease agreements. As of December 31, 2017, present value of rental and lease commitments from noncancelable leases qualified as operating leases in accordance with IAS 17 amounts to €1,261 million and will probably lead to the recognition of right-of-use assets in accordance with IFRS 16. Barring application of an exemption for short-term leases or lease agreements for low-value assets in individual cases, the Bertelsmann Group will have to recognize a right-ofuse asset and a lease liability. No decision has been made within the Bertelsmann Group concerning the election to apply the accounting options for short-term leases with a lease term of up to one year and for leases for low-value assets, as well as for the approach for initial application of IFRS 16. It is to be assumed that, due to the recognition of the right to use the underlying leased objects and the recognition of the lease liability, the first-time application of IFRS 16 will have a material impact on the consolidated balance sheet of the Bertelsmann Group. In the consolidated income statement, the amortization of the right-of-use assets and the interest expense for the lease liabilities will be recognized in place of the other operating expenses for operating leases. Accordingly, the introduction of IFRS 16 will result in an improvement of EBITDA. In the consolidated statement of cash flows, the application of IFRS 16 will result in an improvement of cash flows from operating activities, while the repayment component of lease payments will reduce the cash flows from financing activities. A reliable estimate of the financial impact can only be made following completion of the Group-wide review of lease agreements.

The Bertelsmann Group has not opted for early application of IFRS 9, IFRS 15 and IFRS 16.