Basis of presentation

General information on the Company

By resolution of the Annual General Meeting dated 9 May 2018, KION GROUP AG’s registered office was moved to Thea-Rasche-Strasse 8, 60549 Frankfurt am Main, Germany. The relocation became legally effective when it was entered in the commercial register at the Frankfurt am Main local court under reference HRB 112163 on 20 June 2018.

The condensed consolidated interim financial statements and the interim group management report were prepared by the Executive Board of KION GROUP AG on 25 July 2018.

Basis of preparation

The condensed consolidated interim financial statements of the KION Group for the six months ended 30 June 2018 have been prepared in line with International Accounting Standard (IAS) 34 ‘Interim Financial Reporting’ and other International Financial Reporting Standards (IFRSs) as adopted by the European Union in accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council concerning the application of international accounting standards for interim financial statements. A condensed scope of interim reporting has been prepared in accordance with IAS 34.

All of the IFRSs and the related interpretations (IFRICs / SICs) of the IFRS Interpretations Committee (IFRS IC) that had been issued by the reporting date and that were required to be applied for financial years commencing on or after 1 January 2018 have been applied in preparing these condensed consolidated interim financial statements. Furthermore, IFRS 16 ‘Leases’, which is only required to be applied for financial years commencing on or after 1 January 2019, has been voluntarily adopted early with effect from 1 January 2018 because of its interactions with IFRS 15 ‘Revenue from Contracts with Customers’. These condensed consolidated interim financial statements do not contain all the information and disclosures required of a set of consolidated annual financial statements and should therefore be read in conjunction with the consolidated financial statements prepared for the year ended 31 December 2017.

The reporting currency is the euro. All amounts are disclosed in millions of euros (€ million) unless stated otherwise. Due to rounding effects, addition of the individual amounts shown may result in minor rounding differences to the totals. The percentages shown are calculated on the basis of the respective amounts, rounded to the nearest thousand euros.

Basis of consolidation

A total of 24 German (31 December 2017: 24) and 115 foreign (31 December 2017: 114) subsidiaries were fully consolidated in addition to KION GROUP AG as at 30 June 2018.

In addition, two joint ventures and seven associates were consolidated and accounted for using the equity method as at 30 June 2018, which was the same number as at 31 December 2017.

55 (31 December 2017: 56) subsidiaries with minimal business volumes or no business operations and other equity investments were not included in the consolidation.

Accounting policies

Initial application of IFRS 9, IFRS 15 and IFRS 16

The KION Group adopted IFRS 9 ‘Financial Instruments’, IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’ in full and retrospectively for the first time with effect from 1 January 2018. Only the amended rules on hedge accounting in accordance with IFRS 9 are being applied prospectively. The prior-year figures have not been restated for IFRS 9, whereas for IFRS 15 and IFRS 16 the prior-year figures have been restated in accordance with the transitional provisions applicable in each case.

The disclosures relating to the financial performance and financial position of the KION Group, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the segment report take into account the following effects and changes in presentation resulting from the initial application of new financial reporting standards. With the exception of the aforementioned standards applied for the first time, the accounting policies applied in these condensed consolidated interim financial statements are fundamentally the same as those used for the year ended 31 December 2017. These condensed consolidated interim financial statements are based on the interim financial statements of the parent company and its consolidated subsidiaries prepared in accordance with the standard accounting policies applicable throughout the KION Group.

IFRS 9 ‘Financial Instruments’

In accordance with the new classification rules in IFRS 9, the KION Group assigns financial assets to three measurement categories: financial assets measured at fair value through profit or loss (FVPL), debt instruments measured at amortised cost (AC) and equity instruments measured at fair value through other comprehensive income, although cumulative gains and losses in other comprehensive income are not permitted to be reclassified to profit or loss upon disposal of these financial assets (FVOCI). Assignment to a particular measurement category depends on the type of financial instrument and the resulting cash flows and is based on the business model used to manage the financial instruments.

For the majority of the KION Group’s financial instruments, the classification rules in IFRS 9 did not require any change to the respective measurement. The KION Group assigns financial investments previously designated as available for sale (AfS) under IAS 39 to either the FVPL category or the FVOCI category, as the case may be. Financial investments held as at 1 January 2018 will be recognised at fair value through other comprehensive income without being reclassified to profit or loss upon disposal (FVOCI category). By contrast, equity investments in non-consolidated subsidiaries or companies not accounted for under the equity method are now reported under other non-current assets. As the cash flows for financial instruments in the other financial investments category that were previously classified in accordance with IAS 39 as available for sale (AfS) or as loans and receivables (LaR) do not solely consist of interest and principal payments, these debt instruments are recognised at fair value through profit or loss (FVPL) on the basis of the cash flow characteristics test in IFRS 9. As at 1 January 2018, trade receivables of €18.6 million were recognised at fair value through profit or loss (FVPL) on the basis of the business model test.

> TABLE 25 contains a reconciliation of the financial assets from the categories in IAS 39 to the categories in IFRS 9 as at 1 January 2018.

Initial application of IFRS 9 also results in changes to the subsequent measurement of financial assets. The KION Group applies the simplified impairment approach of IFRS 9 to all trade receivables, lease receivables and contract assets and thus recognises losses expected over the entire term. As a consequence of applying the simplified impairment approach of IFRS 9, valuation allowances for trade receivables fell by €14.8 million. > TABLE 26

Overall, the initial application of IFRS 9 resulted in an increase in equity, after taking deferred taxes into account, of €14.6 million as at 1 January 2018. This transition effect was primarily due to the new impairment approach based on expected losses.

Initial application of IFRS 9 has no impact on the categorisation and measurement of the KION Group’s financial liabilities.

All of the KION Group’s hedges in existence as at 1 January 2018 satisfy the hedge accounting requirements in IFRS 9 and continue to be highly effective.

IFRS 15 ‘Revenue from Contracts with Customers’

Following the adoption of IFRS 15, the contract assets previously recognised in trade receivables are for the first time reported as a separate line item in the consolidated statement of financial position and amounted to €100.3 million as at 31 December 2017 (1 January 2017: €117.4 million). Contract liabilities, which were previously reported under other liabilities, also formed a new line item; they amounted to €324.4 million as at 31 December 2017 (1 January 2017: €376.4 million). There were no further changes to the presentation of the KION Group’s primary financial statements.

For the vast majority of new business contracts, service business contracts and construction contracts, there has been no change in the point in time at which or the period of time over which the revenue is recognised. A shift in the timing of revenue recognition was identified only for minor number of cases and led to an overall increase in equity, after taking deferred taxes into account, of €7.9 million as at 1 January 2017.

The KION Group has used the exemption under which contracts fulfilled before 1 January 2017 do not have to be reassessed in accordance with IFRS 15.

IFRS 16 ‘Leases’

Indirect end customer financing transactions, which were previously recognised as sales transactions, are now recognised as leases in accordance with IFRS 15 and IFRS 16. As a result, leased assets as at 31 December 2017 increased by €724.0 million (1 January 2017: €714.2 million). On the other side of the statement of financial position, there was a €541.5 million rise in deferred revenue (1 January 2017: €532.7 million), of which €349.7 million was classified as other non-current liabilities (1 January 2017: €341.7 million) and €191.8 million as other current liabilities (1 January 2017: €191.1 million). Furthermore, the change in the reporting of indirect end customer financing resulted in additional residual value obligations of €340.7 million as at 31 December 2017 being recognised under liabilities from financial services (1 January 2017: €335.9 million). As a result, non-current liabilities from financial services went up by €262.4 million (1 January 2017: €258.8 million) and current liabilities from financial services by €78.3 million (1 January 2017: €77.2 million). Liabilities from financial services were reported as a separate line item for the first time and include liabilities from financial services used to fund the long-term leasing business, which had previously been reported under other current financial liabilities (reclassification of €8.3 million as at 1 January 2017).

In accordance with IFRS 16, procurement leases that were previously recognised as operating leases but not shown in the statement of financial position are recognised as right-of-use assets under other property, plant and equipment; liabilities from procurement leases are reported under other financial liabilities. The KION Group exercises the option not to recognise right-of-use assets and liabilities from procurement leases for low-value procurement leases and for procurement leases that have a lease term of less than twelve months. Other property, plant and equipment rose by €318.0 million as at 31 December 2017 (1 January 2017: €240.8 million). Accordingly, other non-current financial liabilities increased by €267.8 million (1 January 2017: €207.0 million) and other current financial liabilities by €72.0 million (1 January 2017: €55.6 million). Overall, the first-time adoption of IFRS 16 in regard to the KION Group’s leasing arrangements led to a reduction in equity, after taking deferred taxes into account, of €160.8 million as at 1 January 2017.

Because the retrospective adoption of IFRS 15 and IFRS 16 affects various line items in the consolidated statement of financial position, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows, the prior-year figures presented throughout the financial report have been adjusted. The quantitative effects are summarised in > TABLES 27 – 30.

As a result of initial application of the new standards, EBIT and adjusted EBIT (EBIT adjusted for non-recurring items and purchase price allocation effects) for 2017 both rose by €11.7 million to reach €561.0 million and €777.3 million respectively. Of the net income of €422.5 million, a share of €420.9 million was attributable to the shareholders of KION GROUP AG. As a result of applying the new standards for the first time, basic earnings per share went down by €0.04 to €3.68 and diluted earnings per share by €0.03 to €3.68. Furthermore, the retrospective adjustment of cash flow from operating activities shown in > TABLE 30 caused free cash flow to increase by €96.0 million to €474.3 million in the consolidated statement of cash flows for 2017.

Revenue recognition

The new IFRS 15 ‘Revenue from Contracts with Customers’ sets out the standardised basic principles for recognising revenue from customer contracts. The core principle is that revenue is recognised when control over the goods or services passes to the customer.

Leases / short-term rentals

KION Group entities in the Industrial Trucks & Services segment lease industrial trucks and related items of equipment to their customers in order to promote sales. The leases may be of a short-term nature (short-term rental) or long-term nature (leasing).

Entities in the KION Group enter into leases as lessors and as lessees. In line with IFRS 16, these contracts are classified as finance leases if substantially all of the risks and rewards incidental to ownership of the leased / rental asset are transferred to the lessee. All other rentals and leases are classified as operating leases, again in accordance with IFRS 16.

If an entity in the Industrial Trucks & Services segment enters into a finance lease as the lessor, the future lease payments to be made by the customer are recognised as lease receivables at an amount equal to the net investment in the lease. Lease receivables are measured using the simplified impairment approach in accordance with IFRS 9. Interest income is spread over the term of the lease in order to ensure a constant return on the outstanding net investment in the lease.

Leased assets

If the beneficial ownership of leased assets remains with a KION Group entity as the lessor under an operating lease, the assets are reported as leased assets in a separate item in the statement of financial position. The leased assets are carried at cost and depreciated on a straight-line basis over the term of the underlying leases. To fund leases, industrial trucks are generally sold to leasing companies and then leased back (head lease) before being sub-leased to external end customers (described below as ‘sale and leaseback sub-leases’).

It was not necessary to reassess the portfolio in existence as at 31 December 2017 with regard to the transfer of control to the funding partner in the head lease. If, in the case of sale and leaseback sub-leases, the risks and rewards incidental to the head lease are substantially borne by entities in the KION Group, the corresponding assets are reported as leased assets within non-current assets at the lower of the present value of the lease payments and fair value. However, if substantially the risks and rewards incidental to the head lease are transferred to the end customer, a corresponding lease receivable is recognised. In both cases, the funding items for these long-term customer leases, which are funded for terms that match those of the leases, are recognised as lease liabilities.

The recognition of contracts concluded after 31 December 2017 is determined by whether the funding partner gains control over the industrial truck. As the funding partner does not obtain control over the industrial truck in general, it is recognised as a leased asset in the statement of financial position or, if the risks and rewards have been transferred to the end customer, as a lease receivable. The leased asset is carried at cost. The consideration received is recognised under liabilities from financial services for leases.

In an indirect end customer finance arrangement, industrial trucks are sold to funding partners who enter into long-term leases with end customers. As the funding partner does not obtain control over the industrial truck in general, it is recognised as a leased asset in the statement of financial position and carried at cost. If the KION Group provides a residual value guarantee, an amount equivalent to the residual value obligation is recognised under liabilities from financial services. Accordingly, entities in the KION Group immediately recognise the portion of the consideration received that exceeds the residual value obligation as revenue or they initially treat that portion of the consideration received as deferred income and subsequently recognise the revenue in instalments over the term of the lease.

Rental assets

Under short-term rental agreements, entities in the KION Group rent industrial trucks directly to end customers. Short-term rental agreements usually have a term of one day to one year.

The industrial trucks are carried at cost and depreciated on a straight-line basis over the normal useful life of between five and seven years, depending on the product group. If a sale and leaseback arrangement is in place for funding purposes, the assets are reported in the statement of financial position either at the lower of the present value of the rental payments and fair value or at cost, depending on the portfolio to which they belong.

It was not necessary to reassess the portfolio in existence as at 31 December 2017 with regard to the transfer of control to the funding partner in the head lease. If, in the case of sale and leaseback sub-leases, the risks and rewards incidental to the head lease are substantially borne by entities in the KION Group, the corresponding assets are reported as rental assets within non-current assets. The funding is recognised as a liability from short-term rental fleet financing under other financial liabilities.

The recognition of contracts concluded after 31 December 2017 is determined by whether the funding partner gains control over the industrial truck. As the funding partner does not obtain control over the industrial truck in general, it is recognised as a rental asset in the statement of financial position. It is carried at cost. The consideration received is recognised under liabilities from financial services (rental).

Trade receivables and contract assets

For the subsequent measurement of financial assets, the KION Group applies the simplified impairment approach of IFRS 9 to all trade receivables and contract assets and thus recognises losses expected over the entire term. To determine the losses expected over the entire term, the loss allowance for trade receivables and contract assets is set using an average default rate based on the period by which the receivable is past due. The default rates are calculated on the basis of observable historical default data, taking into account current conditions and the economic outlook.

Assumptions and estimates

The preparation of these condensed IFRS consolidated interim financial statements requires the use of assumptions and estimates for certain line items that affect recognition and measurement in the statement of financial position and the income statement. The actual amounts realised may differ from estimates. Assumptions and estimates are applied in particular:

• In assessing the need for and the amount of impairment losses on intangible assets, property, plant and equipment, and inventories;
• In determining the useful life of non-current assets;
• In classifying and measuring leases;
• In recognising and measuring defined benefit pension obligations and other provisions;
• In recognising and measuring current and deferred taxes;
• In recognising and measuring assets acquired and liabilities assumed in connection with business combinations; and
• In evaluating the stage of completion of contracts where the revenue is recognised over a period of time.

The estimates may be affected, for example, by deteriorating global economic conditions, by changes to exchange rates or interest rates and by commodity prices. Production errors, the loss of key customers and changes in financing can also impact on the Company’s performance going forward. Changes are recognised in profit or loss when they become known and assumptions are adjusted accordingly.