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Operating Assets, Liabilities, and Contingent Liabilities

(21) Leasing

Accounting and measurement policies
Leasing

Scope of IFRS 16

The Group exercises the option provided by IFRS 16 to not recognize leases of intangible and low-value assets as leases. Right-of-use assets under leases are reported in the balance sheet item “Property, plant, and equipment” (see Note (20) “Property, plant, and equipment”).

Where the provision of company cars to employees qualifies as an employee benefit within the meaning of IAS 19, IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.

Separation of lease and non-lease components

Leases for land, land rights, and buildings are separated into lease and non-lease components. The Group otherwise elects to exercise the option not to separate non-lease components from lease components.

Depreciation of the right-of-use assets arising from leases

Basically, right-of-use assets are depreciated over the lease term. If it is considered sufficiently probable that an existing purchase option will be exercised or ownership will be automatically transferred at the end of the lease term, however, depreciation takes place over the period that applies for corresponding assets under property, plant, and equipment (see Note (20) “Property, plant, and equipment”).

Determining the incremental borrowing rate

If the interest rate for the lease cannot be reliably determined, the incremental borrowing rate is applied in measuring the lease liability. In the Group, the incremental borrowing rate is determined on the basis of the risk-free interest rate of the respective Group company over a similar term and in the same currency. This interest rate is adjusted using a risk surcharge specific to the Group. The Group applies the repayment model to determine the current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12 months.

Determining the lease term

Where renewal or termination options are available, their exercise is assessed on a case-by-case basis, considering factors such as location strategies, leasehold improvements, and the degree of specificity.

Significant discretionary decisions and sources of estimation uncertainty
Leasing

Identification of a lease

Discretionary decisions can arise during the identification of leases in answering the question of whether a lessor’s right of substitution is substantive. The Group classifies rights of substitution as not substantive if the facts and circumstances of the case do not support a different assessment.

Measurement of lease and non-lease components

In the case of leases for land, land rights, and buildings, separating the lease into lease and non-lease components is subject to discretion and estimation uncertainty if observable prices are not available from the contract partner or other potential lessors.

Determining the lease term

When determining the lease term, existing renewal and termination options must be evaluated to determine the probability that such options will be exercised. The assessment of the probability of exercise may be discretionary even though it relies on existing and material information on the general economic context, such as location strategies, leasehold improvements, or the degree of specificity. If the available information does not allow a reliable assessment, the Group uses historical experience for comparable situations.

The largest 30 leases accounted for around 50% of total lease liabilities in fiscal 2023 and 2022. They are essentially for right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these leases were exercised in future, which is not yet considered likely, this would result in additional potential undiscounted cash outflows of up to € 235 million (2022: € 219 million).

Where individual contracts include termination options, it was considered unlikely that these would be exercised so that additional lease payments were already considered in the corresponding lease liability.

Determining the incremental borrowing rate

Determining the risk-free interest rate and determining the risk surcharge are both discretionary.

Initial measurement of the lease liability and the right-of-use asset

In measuring the lease liability, there is discretionary scope and significant estimation uncertainty regarding

  • measuring any payments in the course of promised residual value guarantees, and
  • assessing the probability that existing purchase, termination, and renewal options will be exercised.

In measuring right-of-use assets under leases, the Group is subject to estimation uncertainty regarding any demolition obligations and their resulting payments.

The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:

 

 

Right-of-use assets

€ million

 

Land, land rights, and buildings

 

Plant and machinery

 

Other facilities, operating and office equipment

 

Total

Net carrying amounts as of Jan. 1, 2022

 

382

 

9

 

56

 

447

Changes in the scope of consolidation

 

7

 

 

 

7

Additions

 

160

 

 

43

 

203

Disposals

 

-16

 

-1

 

-3

 

-19

Depreciation

 

-112

 

-3

 

-37

 

-152

Impairment losses

 

 

 

 

Reversal of impairment losses

 

 

 

 

Other

 

-6

 

2

 

-1

 

-5

Dec. 31, 2022

 

415

 

8

 

58

 

481

 

 

Right-of-use assets

€ million

 

Land, land rights, and buildings

 

Plant and machinery

 

Other facilities, operating and office equipment

 

Total

Net carrying amounts as of Jan. 1, 2023

 

415

 

8

 

58

 

481

Changes in the scope of consolidation

 

 

 

 

Additions

 

157

 

4

 

45

 

206

Disposals

 

-23

 

 

-1

 

-25

Depreciation

 

-108

 

-2

 

-37

 

-147

Impairment losses

 

 

 

 

Reversal of impairment losses

 

 

 

 

Other

 

-13

 

1

 

-1

 

-14

Dec. 31, 2023

 

427

 

10

 

64

 

500

The net carrying amounts of other facilities, operating and office equipment mainly included the right-of-use assets for vehicles.

The additions to land, land rights, and buildings primarily related to newly agreed right-of-use assets for laboratories, office buildings, and warehouses as well as agreed lease renewals.

The expenses and income and the payments under the leases in accordance with IFRS 16 were reported in the consolidated income statement and the consolidated statement of cash flows as follows:

€ million

 

2023

 

2022

Right-of-use assets

 

 

 

 

Depreciation

 

-147

 

-152

Impairment losses

 

 

Reversals of impairment losses

 

 

Expenses for leasing low-value assets

 

-11

 

-14

Expenses for leases with variable lease payments

 

 

 

 

 

 

 

Income from subleasing right-of-use assets

 

 

Income from sale-and-lease-back transactions

 

 

 

 

 

 

 

Interest expenses for lease liabilities

 

-14

 

-13

Total

 

-173

 

-179

€ million

 

2023

 

2022

Operating cash flow

 

-25

 

-26

Financing cash flow

 

-149

 

-150

Total

 

-174

 

-176

At the reporting date, the future lease payments were distributed over the following periods:

December 31, 2023

€ million

 

Within 1 year

 

1-5 years

 

After more
than 5 years

 

Total

Future lease payments

 

130

 

278

 

152

 

560

Interest portion of future payments

 

-11

 

-22

 

-15

 

-47

Present value of future lease payments

 

120

 

256

 

137

 

513

December 31, 2022

€ million

 

Within 1 year

 

1-5 years

 

After more
than 5 years

 

Total

Future lease payments

 

132

 

281

 

111

 

524

Interest portion of future payments

 

-9

 

-17

 

-9

 

-35

Present value of future lease payments

 

123

 

264

 

101

 

488

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