Additional Disclosures on Financial Instruments
Maturity Analysis of Selected Financial Assets
Maturity Analysis of Selected Financial Assets
| Not individually impaired as of the reporting date and past due by: | |||||||
|---|---|---|---|---|---|---|---|
| in € millions | Neither impaired nor past due on the reporting date | < 1 month | 1 to 3 months | 3 to 6 months | 6 to 12 months | > 12 months | Gross value of accounts receivable individually impaired |
| Loans | 62 | – | – | – | – | – | 47 |
| Securities and financial assets | 23 | – | – | – | – | – | – |
| Trade receivables | 2,549 | 472 | 150 | 61 | 29 | 33 | 173 |
| Receivables from participations | 24 | – | – | 1 | – | – | – |
| Other selected receivables | 653 | 27 | 15 | 13 | 16 | 44 | 20 |
| Balance as of 12/31/2017 | 3,311 | 499 | 165 | 75 | 45 | 77 | 240 |
| Loans | 71 | – | – | – | – | – | 48 |
| Securities and financial assets | 17 | – | – | – | – | – | 4 |
| Trade receivables | 2,508 | 412 | 142 | 52 | 27 | 22 | 184 |
| Receivables from participations | 24 | 1 | – | – | – | 1 | 4 |
| Other selected receivables | 722 | 16 | 13 | 1 | 2 | 3 | 37 |
| Balance as of 12/31/2016 | 3,342 | 429 | 155 | 53 | 29 | 26 | 277 |
No Impairment losses were recognized for unsettled receivables not yet due as of the end of the reporting period, as there was no indication of default.
Reconciliation of Changes in Impairment in accordance with IFRS 7
Reconciliation of Changes in Impairment in Accordance with IFRS 7
| in € millions | Balance as of 1/1 | Additions | Usage | Reversal | Change of consolidation scope | Exchange rate effect | Balance as of 12/31 |
|---|---|---|---|---|---|---|---|
| Loans | (48) | (15) | 5 | 11 | – | 1 | (46) |
| Trade receivables | (197) | (46) | 23 | 66 | (5) | 9 | (150) |
| Receivables from participations | (3) | – | 3 | – | – | – | – |
| Sundry financial receivables | (42) | (12) | 14 | 6 | – | 1 | (33) |
| Total 2017 | (290) | (73) | 45 | 83 | (5) | 11 | (229) |
| Loans | (46) | (6) | – | 2 | 2 | – | (48) |
| Trade receivables | (242) | (62) | 12 | 88 | 4 | 3 | (197) |
| Receivables from participations | (3) | – | – | – | – | – | (3) |
| Sundry financial receivables | (28) | (17) | 1 | 2 | – | – | (42) |
| Total 2016 | (319) | (85) | 13 | 92 | 6 | 3 | (290) |
The carrying amount of all receivables, loans and securities constitutes the Bertelsmann Group’s maximum default risk.
The following table presents the contractually fixed undiscounted cash flows of the financial liabilities for settlement. The figures are based on undiscounted cash flows at the earliest date at which the Bertelsmann Group can be held liable for payment.
Contractual Maturity Analysis of Financial Liabilities
Contractual Maturity Analysis of Financial Liabilities
| Undiscounted cash flows | |||||
|---|---|---|---|---|---|
| in € millions | Carrying amount | Up to 1 year | 1 to 5 years | Over 5 years | Total |
| Profit participation capital | 413 | – | 413 | – | 413 |
| Fixed interest bonds and promissory notes | 4,284 | 200 | 1,560 | 2,550 | 4,310 |
| Floating rate bonds and promissory notes | 100 | – | 100 | – | 100 |
| Liabilities to banks | 324 | 314 | 10 | – | 324 |
| Lease liabilities | 47 | 10 | 41 | – | 51 |
| Other financial debt | 164 | 144 | 16 | 4 | 164 |
| Trade payables | 3,596 | 3,453 | 127 | 16 | 3,596 |
| Liabilities to participations | 28 | 28 | – | – | 28 |
| Derivative financial instruments | 47 | 36 | 13 | 1 | 50 |
| Sundry financial payables | 1,008 | 799 | 161 | 48 | 1,008 |
| Balance as of 12/31/2017 | 10,011 | 4,984 | 2,441 | 2,619 | 10,044 |
| Profit participation capital | 413 | – | – | 413 | 413 |
| Fixed interest bonds and promissory notes | 3,584 | – | 360 | 3,250 | 3,610 |
| Floating rate bonds and promissory notes | 100 | – | 100 | – | 100 |
| Liabilities to banks | 103 | 91 | 12 | – | 103 |
| Lease liabilities | 51 | 9 | 48 | – | 57 |
| Other financial debt | 160 | 136 | 19 | 5 | 160 |
| Trade payables | 3,764 | 3,557 | 184 | 23 | 3,764 |
| Liabilities to participations | 14 | 14 | – | – | 14 |
| Derivative financial instruments | 66 | 56 | 10 | – | 66 |
| Sundry financial payables | 855 | 680 | 122 | 53 | 855 |
| Balance as of 12/31/2016 | 9,110 | 4,543 | 855 | 3,744 | 9,142 |
Current cash outflows from financial obligations are offset by planned cash inflows from receivables and other financial assets. To cover current cash flows, Bertelsmann SE & Co. KGaA also has adequate financial reserves in the amount of the cash and cash equivalents and unutilized credit facilities in place at the end of the reporting period.
The following table presents the remaining terms of the contractual amounts to be exchanged in a derivative financial instrument for which gross cash flows are exchanged:
Liabilities from Derivatives with Gross Settlement
The following table presents the remaining terms of the contractual amounts to be exchanged in a derivative financial instrument for which gross cash flows are exchanged:
Liabilities from Derivatives with Gross Settlement
| Remaining term of liabilities | |||
|---|---|---|---|
| in € millions | Up to 1 year | 1 to 5 years | Over 5 years |
| Cash outflow | (1,810) | (406) | (32) |
| Cash inflow | 1,776 | 393 | 31 |
| Balance as of 12/31/2017 | (34) | (13) | (1) |
| Cash outflow | (2,256) | (127) | – |
| Cash inflow | 2,195 | 118 | – |
| Balance as of 12/31/2016 | (61) | (9) | – |
Future Interest Payments
Based on the remaining contractual terms of its financial liabilities at the end of the reporting period, the Bertelsmann Group will have to make the following future interest payments:
Future Interest Payments
| Undiscounted interest payments | ||||
|---|---|---|---|---|
| in € millions | Up to 1 year | 1 to 5 years | Over 5 years | Total |
| Profit participation capital | 45 | 181 | – | 226 |
| Bonds and promissory notes | 86 | 333 | 210 | 629 |
| Liabilities to banks | 8 | 1 | – | 9 |
| Lease liabilities | 2 | 3 | – | 5 |
| Other financial debt | 3 | 1 | 1 | 5 |
| Balance as of 12/31/2017 | 144 | 519 | 211 | 874 |
| Profit participation capital | 45 | 181 | 45 | 271 |
| Bonds and promissory notes | 85 | 332 | 290 | 707 |
| Liabilities to banks | 3 | 1 | – | 4 |
| Lease liabilities | 2 | 5 | – | 7 |
| Other financial debt | 3 | 3 | 1 | 7 |
| Balance as of 12/31/2016 | 138 | 522 | 336 | 996 |
Carrying Amounts and Measurement Methods by Measurement Category
Assets
| in € millions | Category in accordance with IAS 39 | Balance as of 12/31/2017 | Category in accordance with IAS 39 | Balance as of 12/31/2016 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans and Receivables | Available-for-Sale | Financial assets initially recognized at fair value through profit or loss | Financial assets held for trading | Derivatives with hedge relation | Loans and Receivables | Available-for-Sale | Financial assets initially recognized at fair value through profit or loss | Financial assets held for trading | Derivatives with hedge relation | |||||
| Measurement | At amortized cost | At cost | Fair value recognized in equity | Fair value recognized in profit or loss | Fair value recognized in profit or loss | At amortized cost | At cost | Fair value recognized in equity | Fair value recognized in profit or loss | Fair value recognized in profit or loss | ||||
| Loans | 63 | – | – | – | – | – | 63 | 71 | – | – | – | – | – | 71 |
| Investments in affiliates | – | 3 | 15 | – | – | – | 18 | – | 3 | 12 | – | – | – | 15 |
| Other investments | – | 25 | 491 | – | – | – | 516 | – | 54 | 366 | – | – | – | 420 |
| Securities and financial assets | – | 1 | 3 | 19 | – | – | 23 | – | 1 | 3 | 13 | – | – | 17 |
| Derivative financial instruments | – | – | – | – | 87 | 4 | 91 | – | – | – | – | 68 | 63 | 131 |
| Trade receivables | 3,317 | – | – | – | – | – | 3,317 | 3,150 | – | – | – | – | – | 3,150 |
| Receivables from participations | 25 | – | – | – | – | – | 25 | 27 | – | – | – | – | – | 27 |
| Sundry financial receivables | 755 | – | – | – | – | – | 755 | 752 | – | – | – | – | – | 752 |
| Cash | 1,384 | – | – | – | – | – | 1,384 | 1,192 | – | – | – | – | – | 1,192 |
| Other securities < 3 months | 56 | – | – | – | – | – | 56 | 181 | – | – | – | – | 181 | |
| 5,600 | 29 | 509 | 19 | 87 | 4 | 6,248 | 5,373 | 58 | 381 | 13 | 68 | 63 | 5,956 | |
Other investments include mainly the minority stakes in other entities and so-called fund-in-fund investments purchased by the Bertelsmann Investments division. As a rule, these financial instruments are measured at fair value, and the gains and losses from fluctuations in fair value are recognized in other comprehensive income with deferred taxes taken into consideration. The fair value measurement of fund-infund investments is based on the valuations of the external management as presented in regular reporting and taking into account a fungibility discount. When possible, measuring the fair value of minority stakes in other entities is based on observable prices obtained as part of the most recently implemented qualified financing rounds, which meet the minimum requirements for volume and participants, taking into account life and development cycles of the entity.
Certain investments in affiliates and other investments that are classified as available-for-sale within financial assets are measured at cost as they do not have a quoted price on an active market and a reliable estimate of the fair value is not possible. No plan has been made to sell significant holdings of the other available-for-sale investments in the near future. For all other financial assets and financial liabilities, their carrying amount represents a reasonable approximation of fair value.
Equity and Liabilities
| in € millions | Category in accordance with IAS 39 | Balance as of 12/31/2017 | Category in accordance with IAS 39 | Balance as of 12/31/2016 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Financial Liabilities | Financial liabilities initially recognized at fair value through profit or loss | Financial liabilities held for trading | Derivatives with hedge relation | Payables out of scope of IAS 39 | Financial liabilities | Financial liabilities initially recognized at fair value through profit or loss | Financial liabilities held for trading | Derivatives with hedge relation | Payables out of scope of IAS 39 | |||
| Measurement | At amortized cost | Fair value recognized in profit or loss | Fair value recognized in profit or loss | At amortized cost | Fair value recognized in profit or loss | Fair value recognized in profit or loss | ||||||
| Profit participation capital | 413 | – | – | – | – | 413 | 413 | – | – | – | – | 413 |
| Bonds and promissory notes | 4,384 | – | – | – | – | 4,384 | 3,684 | – | – | – | – | 3,684 |
| Liabilities to banks | 324 | – | – | – | – | 324 | 103 | – | – | – | – | 103 |
| Lease liabilities | – | – | – | – | 47 | 47 | – | – | – | – | 51 | 51 |
| Other financial debt | 164 | – | – | – | – | 164 | 160 | – | – | – | – | 160 |
| Trade payables | 3,596 | – | – | – | – | 3,596 | 3,764 | – | – | – | – | 3,764 |
| Liabilities to participations | 28 | – | – | – | – | 28 | 14 | – | – | – | – | 14 |
| Derivative financial instruments | – | – | 24 | 23 | – | 47 | – | – | 63 | 3 | – | 66 |
| Sundry financial payables | 964 | 44 | – | – | – | 1,008 | 807 | 48 | – | – | – | 855 |
| 9,873 | 44 | 24 | 23 | 47 | 10,011 | 8,945 | 48 | 63 | 3 | 51 | 9,110 | |
Financial Assets Measured at Fair Value Categorized Using the Fair Value Measurement Hierarchy
Financial Assets Measured at Fair Value Categorized Using the Fair Value Measurement Hierarchy
| in € millions | Level 1: Quoted prices in active markets | Level 2: Observable market data | Level 3: Unobservable market data | Balance as of 12/31/2017 | ||
|---|---|---|---|---|---|---|
| Financial assets initially recognized at fair value through profit or loss | 4 | 15 | – | 19 | ||
| Available-for-sale financial assets | 134 | 1 | 374 | 509 | ||
| Primary and derivative financial assets held for trading | – | 87 | – | 87 | ||
| Derivatives with hedge relation | – | 4 | – | 4 | ||
| 138 | 107 | 374 | 619 | |||
| in € millions | Level 1: Quoted prices in active markets | Level 2: Observable market data | Level 3: Unobservable market data | Balance as of 12/31/2016 | |
|---|---|---|---|---|---|
| Financial assets initially recognized at fair value through profit or loss | – | 13 | – | 13 | |
| Available-for-sale financial assets | 9 | 1 | 371 | 381 | |
| Primary and derivative financial assets held for trading | – | 65 | 3 | 68 | |
| Derivatives with hedge relation | – | 63 | – | 63 | |
| 9 | 142 | 374 | 525 | ||
It is possible to allocate the financial instruments measured at fair value in the balance sheet to the three levels of the fair value hierarchy by category based on the table “Carrying Amounts and Measurement Methods by Measurement Category.” The increase of level 1 financial instruments results from IPOs of BAI investments that belong to Bertelsmann Investments within the reporting period.
Financial Assets Measured at Fair Value Based on Level 3
| in € millions | Available-for-sale financial assets | Primary and derivative financial assets held for trading | Total | |
|---|---|---|---|---|
| Balance as of 1/1/2017 | 371 | 3 | 374 | |
| Total gain (+) or loss (-) | (30) | – | (30) | |
| – in profit or loss | (9) | – | (9) | |
| – in other comprehensive income | (21) | – | (21) | |
| Purchases | 94 | – | 94 | |
| Sales/settlements | (76) | (3) | (79) | |
| Transfers out of/into level 3 (including first-time classification on level 3) | 15 | – | 15 | |
| Balance as of 12/31/2017 | 374 | – | 374 | |
| Gain (+) or loss (-) for assets still held at the end of the reporting period | (9) | – | (9) | |
| in € millions | Available-for-sale financial assets | Primary and derivative financial assets held for trading | Total | |
|---|---|---|---|---|
| Balance as of 1/1/2016 | 30 | 6 | 36 | |
| Total gain (+) or loss (-) | – | (3) | (3) | |
| – in profit or loss | – | (3) | (3) | |
| – in other comprehensive income | – | – | – | |
| Purchases | 2 | – | 2 | |
| Transfers out of/into level 3 (including first-time classification on level 3) | 339 | – | 339 | |
| Balance as of 12/31/2016 | 371 | 3 | 374 | |
| Gain (+) or loss (-) for assets still held at the end of the reporting period | – | (3) | (3) | |
The available-for-sale financial assets of level 3 mainly pertain to investments held by the Bertelsmann Investments division, which were recognized at fair value.
Financial Liabilities Measured at Fair Value Categorized Using the Fair Value Measurement Hierarchy
| in € millions | Level 1: Quoted prices in active markets | Level 2: Observable market data | Level 3: Unobservable market data | Balance as of 12/31/2017 |
|---|---|---|---|---|
| Financial liabilities initially recognized at fair value through profit or loss | – | – | 44 | 44 |
| Primary and derivative financial liabilities held for trading | – | 24 | – | 24 |
| Derivatives with hedge relation | – | 23 | – | 23 |
| – | 47 | 44 | 91 |
| in € millions | Level 1: Quoted prices in active markets | Level 2: Observable market data | Level 3: Unobservable market data | Balance as of 12/31/2016 |
|---|---|---|---|---|
| Financial liabilities initially recognized at fair value through profit or loss | – | – | 48 | 48 |
| Primary and derivative financial liabilities held for trading | – | 63 | – | 63 |
| Derivatives with hedge relation | – | 3 | – | 3 |
| – | 66 | 48 | 114 |
Financial Liabilities Measured at Fair Value Based on Level 3
| in € millions | Financial liabilities initially recognized at fair value through profit or loss | Total |
|---|---|---|
| Balance as of 1/1/2017 | 48 | 48 |
| Total gain (-) or loss (+) | 3 | 3 |
| – in profit or loss | 5 | 5 |
| – in other comprehensive income | (2) | (2) |
| Purchases | 23 | 23 |
| Settlements | (30) | 30 |
| Transfers out of/into level 3 | – | – |
| Balance as of 12/31/2017 | 44 | 44 |
| Gain (-) or loss (+) for liabilities still held at the end of the reporting period | – | – |
| in € millions | Financial liabilities initially recognized at fair value through profit or loss | Total |
|---|---|---|
| Balance as of 1/1/2016 | 45 | 45 |
| Total gain (-) or loss (+) | (12) | (12) |
| – in profit or loss | (12) | (12) |
| – in other comprehensive income | – | – |
| Purchases | 22 | 22 |
| Settlements | (7) | (7) |
| Transfers out of/into level 3 | – | – |
| Balance as of 12/31/2016 | 48 | 48 |
| Gain (-) or loss (+) for liabilities still held at the end of the reporting period | (5) | (5) |
Level 1:
The fair value of the listed financial instruments – including
those in the Bertelsmann Investments division – is
determined on the basis of stock exchange listings at the
end of the reporting period. That applies regardless of
whether any contractual lockups are in place at the end
of the reporting period for financial instruments held by
Bertelsmann.
Level 2:
For measuring the fair value of unlisted derivatives,
Bertelsmann uses various financial methods reflecting the
prevailing market conditions and risks at the respective
balance sheet dates. Irrespective of the type of financial
instrument, future cash flows are discounted at the end of
the reporting period based on the respective market interest
rates and yield curves at the end of the reporting period. The
fair value of forward exchange transactions is calculated
using the average spot prices at the end of the reporting
period and taking into account forward markdowns and
markups for the remaining term of the transactions. The
fair value of interest rate derivatives is calculated on the
basis of the respective market rates and yield curves at
the end of the reporting period. The fair value of forward
commodity transactions is derived from the stock exchange
listings published at the end of the reporting period. Any
mismatches to the standardized stock exchange contracts
are reflected through interpolation or additions.
Level 3: If no observable market data is available, measuring fair values is based primarily on cash flow-based valuation techniques. As a rule, so-called qualified financing rounds are used for minority stakes in the Bertelsmann Investments division.
The valuation of financial assets and financial liabilities according to level 2 and level 3 requires management to make certain assumptions about the model inputs, including cash flows, discount rate and credit risk, as well as the life and development cycle of start-up investments.
Net Result from Financial Instruments
Net Result from Financial Instruments
| in € millions | Loans and receivables | Available for-sale financial assets | Financial assets initially recognized at fair value through profit or loss | Financial liabilities at amortized cost | Financial liabilities initially recognized at fair value through profit or loss | Derivatives with hedge relation | Financial instruments held for trading | Other currency translation differences |
|---|---|---|---|---|---|---|---|---|
| From dividends | – | 10 | – | – | – | – | – | – |
| From interest | 7 | – | – | (110) | – | (1) | (23) | – |
| From impairment | 12 | (23) | – | – | – | – | – | – |
| From fair value measurement | – | – | – | – | (5) | – | 6 | – |
| From currency translation differences | – | – | – | – | – | – | 135 | (141) |
| From disposal/derecognition | (25) | 178 | – | 12 | – | – | – | – |
| Net income 2017 | (6) | 165 | – | (98) | (5) | (1) | 118 | (141) |
| From dividends | – | 14 | – | – | – | – | – | – |
| From interest | 9 | – | – | (117) | – | – | (3) | – |
| From impairment | 5 | (18) | – | – | – | – | – | – |
| From fair value measurement | – | – | – | – | 12 | 4 | (3) | – |
| From currency translation differences | – | – | – | – | – | – | 39 | (29) |
| From disposal/derecognition | (29) | 72 | – | 23 | – | – | – | – |
| Net income 2016 | (15) | 68 | – | (94) | 12 | 4 | 33 | (29) |
Other currency translation differences consist of the exchange rate effects of the “Loans and receivables” and “Financial liabilities at amortized cost” categories.
Financial assets and liabilities are offset on the balance sheet if master netting agreements or similar agreements allow the Bertelsmann Group and the counterparty to reach settlement on a net basis. Settlement on a net basis is thus legally valid both as part of ordinary business activities and in the event of payment default by one of the parties. In addition, Bertelsmann purchases financial derivatives that do not meet the criteria for offsetting on the balance sheet as future events determine the right to offset. As in the previous year, in general, the requirements for offsetting the financial instruments reported on the balance sheet are not met so that no material offsetting was carried out as of December 31, 2017.
Financial Derivatives
Bertelsmann uses standard market financial derivatives, primarily unlisted (OTC) instruments. These include, in particular, forward agreements, currency swaps, currency options, interest rate swaps and individual commodities forwards. Transactions are entered into solely with banks with a high credit Rating . As a rule, the Central Financial Department’s transactions are only performed with a group of banks approved by the Executive Board. The nominal volume is the total of all underlying buying and selling amounts of the respective transactions. The majority of the financial derivatives at the end of the reporting period (nominal volume of €4,540 million) are used to hedge against exchange rate risks from intercompany financing activities. These financial derivatives account for a total of €2,613 million (58 percent) as of the end of the reporting period. A total of €1,677 million (37 percent) is due to financial derivatives used to hedge currency risks from operating business as of the end of the reporting period. Financial derivatives are also used to hedge against interest rate risks from interest-bearing receivables and liabilities. No financial derivatives were purchased for speculative purposes. All relationships between hedging instruments and hedged items are documented, in addition to risk management objectives and strategies in connection with the various hedges. This method includes linking all derivatives used for hedging purposes to the underlying assets, liabilities, firm commitments and forecasted transactions. Furthermore, the Bertelsmann Group assesses and documents the degree to which changes in the fair values or cash flows of hedged items are effectively offset by changes in the corresponding derivatives used as hedging instruments, both when the hedges are initiated and on an ongoing basis.
Nominal Volume and Fair Values of Financial Derivatives
| 12/31/2017 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Nominal volume | ||||||||
| in € millions | < 1 year | 1 to 5 years | > 5 years | Total | Fair values | |||
| Currency derivatives | ||||||||
| Forward contracts and currency swaps | 2,652 | 1,435 | 203 | 4,290 | 44 | |||
| Interest rate derivatives | ||||||||
| Interest rate swaps | – | 250 | – | 250 | – | |||
| Other derivative financial instruments | – | – | – | – | – | |||
| 2,652 | 1,685 | 203 | 4,540 | 44 | ||||
| 12/31/2016 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Nominal volume | ||||||||
| in € millions | < 1 year | 1 to 5 years | > 5 years | Total | Fair values | |||
| Currency derivatives | ||||||||
| Forward contracts and currency swaps | 2,942 | 699 | 41 | 3,682 | 62 | |||
| Interest rate derivatives | ||||||||
| Interest rate swaps | – | – | – | – | – | |||
| Other derivative financial instruments | – | – | – | – | 3 | |||
| 2,942 | 699 | 41 | 3,682 | 65 | ||||
The option offered in IFRS 13.48 (net risk position) is used for measuring the fair value of financial derivatives. To identify the credit exposure from financial derivatives, the respective net position of the fair values with the contractual partners is used as a basis, as these values are managed based on a net position in view of their market or credit default risks. Currency forwards are used to hedge the exchange rate risk relating to the purchase and sale of program rights and output deals for the TV business. Bertelsmann hedges between 80 percent and 100 percent of the short-term (within one year) future cash flows, and between 10 percent and 80 percent of the longer-term (two to five years) future cash flows. The derivatives used for this purpose are recognized as hedging instruments in connection with cash flow hedges. The effective portion of changes in the fair value of cash flow hedges is recognized in other comprehensive income until the effects of the hedged underlying transaction affect profit or loss or until a basis adjustment occurs. The amount of €-39 million relating to cash flow hedge effects was reclassified from other comprehensive income (previous year: €-33 million) to the income statement. These are amounts before tax. The portion remaining in other comprehensive income at December 31, 2017, will thus mainly impact the income statement in the next years. In the financial year 2017, no ineffective portion of the cash flow hedges existed. In the previous year, the ineffective portion of the cash flow hedges in the amount of €5 million was recognized under the items “Other financial expenses” and “Other financial income.” The effects of non-designated components of a cash flow hedge in the amount of €13 million (e.g., forward component of a foreign currency derivative with a designation on a spot basis) are recognized immediately in profit or loss.
The following table provides an overview of the carrying amounts of the derivative financial instruments, which correspond to their fair values. A distinction is made between derivatives that are included in an effective hedging relationship in accordance with IAS 39 and those that are not.
Derivative Financial Instruments
| in € millions | Carrying amount as of 12/31/2017 | Carrying amount as of 12/31/2016 |
|---|---|---|
| Assets | ||
| Forward contracts and currency swaps | ||
| – without hedge relation | 87 | 65 |
| – in connection with cash flow hedges | 4 | 63 |
| Interest rate swaps | ||
| – without hedge relation | – | – |
| – in connection with cash flow hedges | – | – |
| Other derivative financial instruments without hedge relation | – | 3 |
| Equity and liabilities | ||
| Forward contracts and currency swaps | ||
| – without hedge relation | 24 | 63 |
| – in connection with cash flow hedges | 23 | 3 |
| Interest rate swaps | ||
| – without hedge relation | – | – |
| – in connection with cash flow hedges | – | – |
| Other derivative financial instruments without hedge relation | – | – |
Financial Instruments
Financial Risk Management
The Bertelsmann Group is exposed to various forms of
financial risk through its international business operations.
Above all, this includes the effects of exchange and interest
rate movements. Bertelsmann’s risk management activities
are designed to effectively mitigate these risks.
The Executive Board establishes basic risk management policy,
outlining general procedures for hedging currency and interest
rate risk and the utilization of derivative financial instruments.
The Central Financial Department advises subsidiaries on
operating risk and hedges risks using derivative financial
instruments as necessary. However, subsidiaries are not
obliged to use the services provided by this department for
their operating risks. Some subsidiaries, such as RTL Group
in particular, have their own finance departments. They report
their hedge transactions to the Central Financial Department
each quarter. Further information on financial market risks
and financial risk management is presented in the Combined
Management Report.
Exchange Rate Risk
Bertelsmann is exposed to exchange rate risk in various currencies. Its subsidiaries are advised, but not obliged, to hedge themselves against exchange rate risks in the local reporting currency by signing forward agreements with banks that have a high credit rating. Loans within the Bertelsmann Group that are subject to exchange rate risk are hedged using derivatives.
A number of subsidiaries are based outside the eurozone. The resulting translation risk is managed through the relationship of economic financial debt to Operating EBITDA of key currency areas. Over the long term, the Group aims to achieve a reasonable relationship between financial debt and results of operations. Bertelsmann’s focus is on the maximum leverage factor permitted for the Group.
Interest Rate Risk
There are interest rate risks for interest-bearing assets and financial debt. Interest rate risk in the Bertelsmann Group is analyzed centrally and managed on the basis of the Group’s planned net financial debt. A key factor in this management is the Group’s interest result over time and its sensitivity to interest rate changes. The Group aims for a balanced relationship between floating rates and long-term fixed interest rates depending on the absolute amount, forecast performance of the interest-bearing liability and interest level. This is implemented using underlying and derivative financial instruments for control.
Liquidity Risk
Liquidity risks may arise through a lack of rollover financing
(liquidity risk in a narrow sense), delayed receipt of payment
and unforeseen expenditure (budgeting risk). Budgeting risk is
determined by comparing deviations in actual spending with
budget and reserve amounts. In a narrow sense, liquidity risk
depends on the volume of debt due within a given period.
Liquidity risk is monitored on an ongoing basis with
reference to the budget for current and future years.
New and unplanned transactions (e.g., acquisitions) are continuously tracked. The maturity profile of financial assets and liabilities is also reconciled on a regular basis. Budget risks are managed through effective cash management and constant monitoring of projected versus actual cash flows. Debt maturities are also diversified to ensure that rising financing costs do not have a short-term impact. Credit facilities with banks are also maintained for unplanned expenditures.
Counterparty Risk
The Bertelsmann Group is exposed to default risks in the amount of the invested cash and cash equivalents and the positive fair value of the derivatives in its portfolio. Transactions involving money market securities and other financial instruments are exclusively conducted with a defined group of banks with a high credit rating (“core banks”). The credit ratings of core banks are constantly monitored and classified on the basis of quantitative and qualitative criteria (rating, CDS spreads, stock price, etc.). Counterparty limits determined on the basis of credit ratings refer to cash holdings and positive fair values; the use of limits is monitored regularly. Funds are invested in very short-term portfolios in some cases to preserve flexibility in the event of credit rating changes. In addition, some tri-party transactions with banks have been concluded to reduce default risks. These tri-party transactions are collateralized investments, and the banks provide predefined securities as collateral. As in the previous year, at the end of the reporting period, no tri-party transactions were outstanding and no collateral had been provided. Processing these transactions and managing and valuing the collateral are performed by a clearing agent. Default risks arising from trade receivables are partially mitigated through credit insurance coverage. The Bertelsmann Group has obtained credit collateralization in the amount of €665 million for these receivables (previous year: €610 million).
Capital Management
The financing guidelines adopted by the Bertelsmann Group are designed to ensure a balance between financing security, return on equity and growth. The Group’s indebtedness is based specifically on the requirements for a credit rating of “Baa1/BBB+.” Financial management at Bertelsmann is conducted using quantified financing objectives that are a central factor in ensuring the Group’s independence and capacity to act. These objectives, as elements of the planning process and regular monitoring, are broadly defined performance indicators. The key performance indicator for limiting economic debt within the Bertelsmann Group is a maximum leverage factor of 2.5. On December 31, 2017, the leverage factor was 2.5 (previous year: 2.5). In addition, the coverage ratio is to remain above four. The coverage ratio amounted to 11.2 on December 31, 2017 (previous year: 9.7). The equity ratio is not to fall below 25 percent of total assets. Management of the equity ratio is based on the definition of equity in IFRS. Although minority interests in partnerships represent equity in financial terms, they are classified as debt for accounting purposes. In the financial year 2017, the equity ratio was 38.5 percent (previous year: 41.6 percent), meeting the internal financial target set by the Group.
Interest Rate and Exchange Rate Sensitivity
For the analysis of interest rate risk, a distinction is made between cash flow and present value risks. Financial debt, cash and cash equivalents, and interest rate derivatives with variable interest terms are subject to a greater degree of cash flow risk, as changes in market interest rates impact the Group’s interest result almost immediately. In contrast, medium- and long-term interest rate agreements are subject to a greater degree of present value risk. The accounting treatment of present value risks depends on the respective financial instrument or a hedging relationship documented in conjunction with a derivative (micro-hedge). Upon initial recognition, originated financial debt is measured at fair value less transaction costs. Subsequent measurement is based on amortized cost. Changes in fair value are limited to opportunity effects, as changes in interest rates have no effect on the balance sheet or the income statement. The recognition of originated financial debt at fair value is only permitted for transactions for which a micro-hedge is documented in accordance with IAS 39 in conjunction with the conclusion of an interest rate or exchange rate hedge transaction involving derivatives. In this case, changes in the fair value of the respective items are recognized in the income statement in order to substantially balance out the offsetting effects of the fair value measurement of the related derivatives. For derivative financial instruments, the effects of changes in interest rates are recognized in the income statement. In the case of documented hedging relationships (cash flow hedges), however, these effects are taken directly to equity.
The cash flow or present value risks existing at the end of the reporting periods are analyzed using a sensitivity calculation as an after-tax observation. A parallel shift in the interest rate curve of plus or minus 1 percent is assumed for all major currencies. The analysis is performed on the basis of financial debt, cash and cash equivalents, and derivatives at the end of the reporting period. The results are shown in the following table:
Sensitivity Analysis of Cash Flow and Present Value Risks
| 12/31/2017 | 12/31/2016 | |||
|---|---|---|---|---|
| in € millions | Shift +1 % | Shift -1 % | Shift +1 % | Shift -1 % |
| Cash flow risks (income statement) | 10 | -10 | 8 | -8 |
| Present value risks (income statement) | 16 | -16 | 4 | -4 |
| Present value risks (equity) | – | – | – | – |
The analysis of exchange rate sensitivity includes the Group’s financial debt and operating transactions at the end of the reporting period and the hedging relationships entered into (forward agreements and options). The calculation is performed for the unsecured net exposure on the basis of an assumed 10 percent appreciation of the euro versus all foreign currencies and is presented after tax. A uniform devaluation of foreign currencies would have resulted in a change in the carrying amount recognized in profit or loss of €-9 million (previous year: €-11 million). Thereof, €-5 million (previous year: €-6 million) relates to fluctuations in the US dollar exchange rate with a net exposure of US$86 million (previous year: US$95 million). Shareholders’ equity would have changed by €46 million (previous year: €50 million) as a result of fluctuations in the fair values of documented cash flow hedges. Thereof, €46 million (previous year: €50 million) relates to fluctuations in the US dollar exchange rate on the basis of a documented cash flow hedge volume of US$805 million (previous year: US$766 million). If there had been a uniform increase in the value of foreign currencies, this would have led to opposite changes in these amounts for the Bertelsmann Group.
Servicing Accounts Receivables Sold
In certain individual cases, Bertelsmann sells receivables purchased from third parties to financial intermediaries. The receivables sold relate primarily to short-term receivables, some covered by credit insurance, that Arvato Financial Solutions acquires from third parties in the course of its services in receivables management and some of which it resells to financial intermediaries on an ongoing basis. This business can be changed at any time during the year. As part of the contractual agreements on the sale of receivables, substantially neither all the rewards nor all risks that are associated with the receivables were transferred or retained. This relates in particular to possible defaults and late payments of receivables sold, so that a receivable was accounted for in the amount of the continuing involvement of €49 million (previous year: €45 million). The carrying amount of the associated liability is €56 million (previous year: €52 million). The underlying volume of receivables sold amounts to €346 million as of the end of the reporting period (previous year: €321 million).
