Chapters
Annual Report 2018

2. Basis of Preparation

2.1 Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRS IC) as adopted within the European Union.

The accounting policies based on IFRS have been applied consistently for the years presented by all entities. There were no changes in the accounting policies applied compared to the previous year, except as described in note 2.7.1.

2.2 Basis of Measurement

The IFRS financial statements have been prepared under the historical cost convention except for derivatives, share-based payment plans, contingent considerations, certain non-current assets and post-employment benefits.

Preparing the financial statements in accordance with IFRS means that management is required to make assessments, estimates and assumptions that influence the application of regulations and the amounts reported for assets, equity, liabilities, commitments, income and expenses.

The areas involving higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.8.

2.3 Significant Accounting Policies

The Group’s significant accounting policies are included in the relevant individual notes to the consolidated financial statements as well as the significant accounting estimates and judgments made, where applicable, as described in note 2.8.

2.4 Subsidiaries

Subsidiaries are those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intercompany transactions, balances and unrealized gains or losses on transactions between Group companies are eliminated.

2.5 Foreign Currency

2.5.1 Functional and Presentation Currency

Items in the financial statements of the various Group companies are measured in the currency of the primary economic environment in which each entity operates (the functional currency). The consolidated financial statements are presented in euros (€), this being GrandVision’s presentation currency. Amounts are shown in thousands of euros unless otherwise stated.

2.5.2 Transactions, Balances and Translation

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, excluding foreign operations in hyperinflationary economies, are recognized in the consolidated Income Statement, except when deferred in Other Comprehensive Income as qualifying cash flow hedges.

Foreign currency exchange gains and losses are presented in the consolidated Income Statement either in the operating result if foreign currency transactions relate to operational activities, assets and liabilities, or within the financial result for non-operating financial assets and liabilities.

2.5.3 Foreign Subsidiaries

The assets and liabilities of foreign subsidiaries, including goodwill and fair value adjustments arising on consolidation, are translated into the presentation currency at the exchange rate applicable at the balance sheet date. The income and expenses of foreign subsidiaries are translated into the presentation currency at rates approximate to the exchange rates applicable at the date of the transaction. Resulting exchange differences are recognized in Other Comprehensive Income.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate.

2.5.4 Hyperinflation Accounting

The Group applies hyperinflation accounting for its operations in Argentina. The effects of this hyperinflation accounting on the consolidated financial figures of the Group are limited, since the operations in Argentina represent a limited part of the total assets and the operating result of GrandVision.

The index used to apply hyperinflation accounting is the Retail Price Index published by the Government Board of the Argentine Federation of Professional Councils of Economic Sciences (FACPCE).

2.6 Principles for the Statement of Cash Flows

The statement of cash flows is compiled using the indirect method. The statement of cash flows distinguishes between cash flows from operating, investing and financing activities. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, cash pool balances and bank overdrafts, as they are considered an integral part of the Group’s cash management. In the consolidated Balance Sheet, bank overdrafts and cash pool liabilities are included in borrowings in current liabilities. Cash flows in foreign currencies are translated at the rate of the transaction date. Interest paid and received is included under cash flow from financing activities and investing activities respectively. Cash flows arising from the acquisition or disposal of financial interests (subsidiaries and participating interests) are recognized as cash flows from investing activities, taking into account any cash and cash equivalents in these interests. Dividends paid out are recognized as cash flows from financing activities; dividends received are recognized as cash flows from investing activities.

2.7 Changes in Accounting Policy and Disclosures

2.7.1 New and Amended Standards and Interpretations Adopted by the Group

A number of new or amended standards and interpretations became applicable for the current reporting period and the Group had to change its accounting policies as a result of adopting the following standards:

  • IFRS 15 Revenue from Contracts with Customers
  • IFRS 9 Financial Instruments
  • IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

The nature and effect of these changes are disclosed below.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers. Under the five-step model, revenue is recognized at an amount that reflects the allocated transaction price to which an entity expects to be entitled in exchange for transferring control of a good or service identified as a performance obligation in a contract with a customer.

The standard became effective for accounting periods beginning on or after 1 January 2018. The Group adopted IFRS 15 using the fully retrospective method of adoption.

The Group used the practical expedient upon transition for completed contracts. Furthermore, the Group has applied the practical expedients of IFRS 15 related to certain disclosures of the allocation of the transaction price to remaining performance obligations.

Impact of adoption

The application of IFRS 15 resulted in the separate presentation in the consolidated Balance Sheet of the Group's obligation to deliver future goods and services, i.e. contract liability and expanded disclosures regarding the disaggregation of revenue and information about contract liability and refund liability balances. Contract liabilities mainly include prepayments made by customers, vouchers for rebates on future purchases given as part of an initial sales transaction and unfulfilled extended (service-type) warranties. At 31 December 2017, this resulted in the separate presentation of non-current and current Contract liabilities, of €5.1 million and €75.9 million, and a resulting decrease in Other non-current liabilities and Trade and other payables, respectively.

Based on the Group's processes for identifying customer contracts and performance obligations, as well as allocating transaction prices to performance obligations and related revenue recognition patterns, the impact of IFRS 15 on revenue recognition is not significant to the consolidated Income Statement.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018. IFRS 9 addresses the classification and measurement of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets based on expected credit losses.

In accordance with the transitional provisions in IFRS 9 on classification, measurement and impairment, comparative figures have not been restated.

The changes to the Group's accounting policies resulting from the adoption of IFRS 9, are described below.

Impact of adoption

Classification and measurement

Under IFRS 9, financial assets should be classified as either measured at amortized cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). IFRS 9 introduced new criteria for determining a financial asset's classification, which is now based on the Group’s business model for managing the asset and the contractual cash flow characteristics of the asset.

Based on the characteristics and purpose of the Group's financial assets, the measurement categories did not change. The accounting for the Group’s financial liabilities remains the same as it was under IAS 39.

Impairment of financial assets

The adoption of IFRS 9 has changed the Group’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward-looking expected credit loss (ECL) approach.

From 1 January 2018, the Group assesses on a forward-looking basis the expected credit losses on financial assets measured at amortized cost. The Group applies the full lifetime expected credit loss method to trade and other receivables that have a maturity of one year or less. The Group uses a provision matrix in determining expected credit losses on trade receivables.

The application of the expected credit risk model under IFRS 9 did not result in an equity impact at 1 January 2018.

Hedge accounting

The Group has applied the hedge accounting requirements of IFRS 9 since it is better aligned with the Group’s risk management objectives. All of the Group’s existing hedging relationships at 1 January 2018 have been continued under IFRS 9.

When forward contracts are used to hedge forecast transactions, the Group designates only the change in fair value of the forward contract related to the spot component as the hedging instrument. The Group has selected to recognize the costs of hedging for forward contracts within the consolidated Income Statement.

The adoption of the hedge accounting requirements of IFRS 9 had no significant impact on the Group.

Presentation

The application of IFRS 9 resulted in changes in presentation of the following items in the consolidated financial statements:

  • Financial assets at amortized cost and financial assets at fair value through profit or loss are presented in the consolidated Balance Sheet as Non-current receivables and Trade and other receivables. Other assets outside of the scope of IFRS 9 (e.g. prepayments) are separately presented in the consolidated Balance Sheet as Other non-current assets and Other current assets
  • As from 2018, hedge results transferred from the cash flow hedge reserve to the carrying value of non-financial items are presented separately from other comprehensive income in the consolidated Statement of Changes in Equity

IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

IFRIC 22 was issued in 2016 and is effective for accounting periods beginning on or after 1 January 2018. The interpretation clarifies the date on which a foreign currency transaction paid or received in advance should be translated in the entity's functional currency. IFRIC 22 did not have a significant impact on the consolidated financial statements of the Group as only a limited number of entities within the Group pay or receive consideration in advance for foreign currency transactions.

2.7.2 New Standards, Amendments and Interpretations Issued But Not Effective for the Reported Period and Not Adopted Early

The following new standards and amendments to standards and interpretations are applicable to the Group and are effective for annual periods beginning after 1 January 2018. These have not been applied in preparing these consolidated financial statements, and will be adopted by the Group at the moment they become effective.

IFRS 16 Leases

IFRS 16 Leases, the new leasing standard, is effective for accounting periods beginning on or after 1 January 2019.

It will result in the majority of the leases being recognized on the consolidated Balance Sheet, as the distinction between operating and finance leases is removed for leases where the entity is a lessee. Further, IFRS 16 introduces stricter criteria for classification of subleases where the entity is a lessor. The standard will affect the accounting for the Group’s operating leases and subleases. The majority of the Group's lease portfolio relates to property leases for its stores.

Transition to IFRS 16 Leases

GrandVision has substantially completed its implementation process, amongst others the implementation of the lease accounting tool, data collection, provided internal training and determined the accounting policies under the new standard as well as the discount rates at 1 January 2019. GrandVision is in process of finalizing its review of the data collected and as such also the below estimates of the effect of IFRS 16 on the consolidated Balance Sheet of GrandVision are subject to change until the Group presents its first financial statements in 2019 under the new standard.

GrandVision will adopt the new standard on the required effective date using the modified retrospective transition approach, with the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of equity on 1 January 2019. GrandVision will therefore not restate comparative amounts for the year prior to first adoption.

GrandVision will measure the right-of-use assets as follows on 1 January 2019:

  • For its property leases, which make up the majority of the Group's leases, at its carrying amount as if IFRS 16 had been applied since the commencement date
  • For other leases, at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the Balance Sheet immediately before the date of initial application

Expected impact from adopting IFRS 16 Leases

Based on the Group's current lease portfolio and assessments undertaken to date, the adoption of IFRS 16 is expected to have the following effect on the consolidated Balance Sheet at 1 January 2019:

in millions of EUR

Adoption of IFRS 16

Right-of-use asset (initial recognition)

1,410

Finance lease receivable (initial recognition)

70

Lease liability (increase)

- 1,370

Key money intangible assets (reclassification)

- 210

Deferred tax (increase)

30

Equity (decrease)

70

For GrandVision, IFRS 16 will result in the recognition of right-of-use assets and lease liabilities in the consolidated Balance Sheet. GrandVision will recognize finance lease receivables for most of its subleases. In addition, key money previously presented as Intangible assets qualify as initial direct costs under IFRS 16 and will therefore be reclassified and historically depreciated, following the measurement approach of right-of-use assets for property leases. This historical depreciation is included in the expected Equity effect above.

One of GrandVision’s strategic strengths is the flexibility of its lease portfolio. This flexibility means that GrandVision has up to 10,000 leases in its current lease portfolio that require processing on an annual basis, approximately two thirds of which are modified due to changes in indexation, closure, opening or renewal. GrandVision estimates that the occupancy costs in the consolidated Income Statement will decrease in a range between 50-80% and accordingly (adjusted) EBITDA will increase, offset by an increase in depreciation and an increase in finance charges. The large majority of this EBITDA increase will be reported as depreciation of the right-of-use assets in the consolidated Income Statement. This depreciation charge is constant over the lease period, but finance charges decrease as the remaining lease liability decreases, resulting in a reduction in result for the year during the early part of a lease arrangement but a positive profit impact towards the end of the contract. As such, result before tax will be impacted by the progression of the Group's leases in comparison to the lease term.

Rental costs related to payments based on variables (e.g. revenue) are excluded under IFRS 16 from the measurement of lease liabilities and right-of-use assets, and will therefore remain in EBITDA. Rental costs related to arrangements where the landlord controls the asset will not qualify as leases under IFRS 16 and will therefore also remain in EBITDA.

Net cash from operating activities is expected to increase due to certain lease expenses no longer being presented as operating cash outflows, as the majority of the cash movement related to the Group's leases will be presented in net cash used in financing activities, representing repayment of lease liabilities. Net cash flow will remain unchanged.

Net debt is expected to increase due to the recognition of lease liabilities which are considered financial liabilities.

The Group's revolving credit facility requires GrandVision to comply with the following financial covenants: maintenance of a maximum total leverage ratio (net debt/adjusted EBITDA) of less than or equal to 3.25 and a minimum interest coverage ratio (adjusted EBITDA/net interest expense) of 5 (see note 3.1.3 for more details). In terms of the facility agreement, the calculation of these ratios are based on constant accounting standards and as such will not be impacted by the implementation of IFRS 16.

Key judgements and estimates

Key judgements and estimates to apply IFRS 16 mainly include determining the lease term, i.e. when renewal and termination options are reasonably certain to be exercised, and the determination of the discount rate in order to calculate the present value of the lease liabilities and finance lease receivables.

Accounting policy choices and practical expedients

The Group has elected to use the exemptions in IFRS 16 on lease contracts with a duration of less than 12 months and lease contracts for which the underlying asset, when new, has a value of below €5,000. This relates mainly to short-term vehicle rentals and low-value office equipment.

As permitted by IFRS 16, the Group has elected to use certain practical expedients and as such will apply a single discount rate to a portfolio of leases with similar characteristics, account for lease and non-lease components (e.g. fixed service costs) as a single component and as part of the transition, adjust the right of use assets recognized as of 1 January 2019 with the amount of any provision for onerous lease contracts recognized in the consolidated Balance Sheet as of 31 December 2018.

Reconciliation to operating lease commitments as per 31 December 2018

The following reconciliation to the expected opening balance of lease liabilities at 1 January 2019 is based on the operating lease commitments as per 31 December 2018 (see note 31.2):

in millions of EUR

At 1 January 2019

Reported operating lease commitments at 31 December 2018 (undiscounted)

1,420

Less: Short-term leases and low-value leased assets

- 1

Less: Future, committed operating lease commitments

- 5

Operating lease commitments at 31 December 2018 under IFRS 16 (undiscounted)

1,414

Less: Effect of discounting

- 85

Add: Non-lease components (fixed service costs) (discounted)

40

Lease liabilities due to initial application of IFRS 16 at 1 January 2019

1,369

Add: Lease liabilities from finance leases at 1 January 2019

1

Total lease liabilities at 1 January 2019

1,370

IFRIC Interpretation 23 Uncertainty over Income Tax Treatments

IFRIC 23 was issued in 2017 and is effective for accounting periods beginning on or after 1 January 2019. The interpretation sets out how to determine the accounting tax positions when there is uncertainty over income tax treatments under IAS 12 Income Taxes. Based on the Group's current methodology for the accounting of uncertain tax positions, GrandVision does not expect a significant quantitative impact as result of IFRIC 23.

Amendments to IAS 19 Employee Benefits: Plan Amendment, Curtailment or Settlement

The amendments to IAS 19 on plan amendment, curtailment or settlement were issued in 2018 and are effective for accounting periods beginning on or after 1 January 2019. If a defined benefit plan amendment, curtailment or settlement occurred during the reporting period, the amendments require an entity to use the updated actuarial assumptions to determine current service cost and net interest for the remainder of the annual reporting period. Furthermore, the amendments clarify the resulting effect on the asset ceiling. As from 2019, the Group will apply these amendments if and when such events occur.

Annual Improvements to IFRS Standards 2015-2017 cycle

These annual improvements were issued in 2017, are effective for annual periods beginning on or after 1 January 2019 and relate to clarifications of certain requirements of IFRS standards. These annual improvements will have a limited impact on the Group's financial statements.

Amendments to IFRS 3 Business Combinations

The amendments to IFRS 3 on the definition of a business were issued in 2018 and are effective for accounting periods beginning on or after 1 January 2020. The amendments clarify whether an acquired set of activities and assets is a business or not, which is a key consideration in determining whether a transaction is accounted for as a business combination or an asset acquisition. As from 2020, the Group will apply these amendments.

Amendments to IAS 1 and IAS 8: Definition of "Material"

The amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors on the definition of "Material" were issued in 2018 and are effective for accounting periods beginning on or after 1 January 2020. The amendments were issued to align the definition of ‘material’ across the IFRS standards and to clarify certain aspects of the definition. As from 2020, the Group will apply these amendments.

2.8 Significant Accounting Estimates and Judgments

Preparing the financial statements in accordance with IFRS means that management is required to make assessments, estimates and assumptions that influence the application of regulations and the amounts reported for assets, equity, liabilities, commitments, income and expenses. The estimates and assumptions serve as the basis for assessing the value of recognized assets and liabilities whose amounts cannot currently be determined from other sources. The Group makes estimations and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results.

The estimates made and the related assumptions are based on historical experience and various other factors, including expectations of future events that are believed to be reasonable under the given circumstances. Estimates and underlying assumptions are subject to constant assessment. Changes in estimates and assumptions are recognized in the period in which the estimates are revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are described together with the applicable note, as follows:

Acquisition accounting

Note 4

Uncertain tax positions

Note 10

Impairment test of Goodwill

Note 12

Impairment test of Key Money

Note 13

Consolidation of the Synoptik Group

Note 22

Post-Employment Benefits

Note 25

Provisions and contingencies

Note 27