[6] Accounting policies

Judgments and estimates

The preparation of the IFRS consolidated financial statements requires the use of judgments and estimates for certain line items that affect recognition and measurement in the consolidated statement of financial position and consolidated income statement. The actual amounts realized may differ from estimates. Judgments and estimates that are material to the financial statements are explained in the description of the specific accounting policies and principles of consolidation.

Material judgments are required when:

• determining the terms of leases in either the role of lessee or the role of lessor;
• classifying leases in the role of lessor;
• determining whether the transfer of an asset to a financing partner as part of a sale and leaseback transaction or in the indirect lease business constitutes a sale;
• assessing whether brand names have an indefinite useful life.

Material estimates are required when:

• measuring lease receivables on the basis of the determined lease term and the estimate of unguaranteed residual values at the end of the lease term;
• measuring the leased asset on the basis of the estimate of the residual value in order to calculate depreciation;
• determining the total estimated contract costs in order to evaluate the stage of completion of contracts and determining the estimated revenue from variable elements in the project business where the revenue is recognized over a period of time;
• determining the recoverable amount of goodwill and other intangible assets as part of an impairment test and determining the related assumptions;
• measuring defined benefit obligations with regard to material actuarial assumptions, such as discount rates and increases in pensions and salaries.

The impact of a change to judgments or estimates is recognized prospectively when it becomes known and assumptions are adjusted accordingly.

Revenue recognition

Revenue is the consideration that is expected to be received from the customer for the transfer of goods or services (transaction price). In addition to the contractually agreed consideration, the transaction price may also include variable elements. Variable elements are included in the transaction price only if it is highly unlikely that the revenue that has already been recognized will subsequently be reversed. Revenue is recognized when control over the promised goods or services passes to the customer. This is the case when the customer can direct how the goods or services are used and substantially obtain the remaining benefits from the goods or services.

Where a contract includes multiple distinct goods or services, the transaction price is allocated to the performance obligations on the basis of the relative selling prices. If stand-alone selling prices are not directly observable, they are estimated.

Other criteria may arise, depending on each individual transaction, as described below:

Sale of goods

Revenue from the sale of goods is primarily attributable to the sale of industrial trucks and the supply of spare parts. It is reduced by any deductions such as rebates, volume discounts, trade discounts, and bonuses and is recognized at the point in time when the contractual performance obligation is satisfied. This is generally the case when the KION Group delivers goods to a customer, the risks and rewards incidental to the ownership of the goods sold are substantially transferred to the customer, and there is a right to receive the contractually agreed consideration. If a customer is expected to accept goods but has yet to do so, the corresponding revenue is recognized only when the goods are accepted. The point in time when the risks and rewards incidental to ownership of the goods sold are substantially transferred to the customer is determined by the underlying contract and the delivery terms specified therein or by international trade rules. Shipping services are not usually treated as separate performance obligations. Payment terms vary in accordance with the customary conditions in the respective countries and are generally between 30 and 90 days.

Rendering of services

Services rendered mainly consist of individual orders for repairs and maintenance work, plus multiple-year service contracts. Revenue from individual contracts is recognized at a point in time, upon performance of the service. Revenue from multiple-year service contracts is recognized on a straight-line basis over the period of performance or in accordance with the proportion of the overall service rendered by the reporting date. Payment terms vary in accordance with the customary conditions in the respective countries and are generally between 30 and 90 days.

Lease and short-term rental business

The Industrial Trucks & Services segment leases and rents industrial trucks and related items of equipment to its customers in its lease and short-term rental business. In the direct lease business, subsidiaries of the KION Group enter into leases with end customers, whereas in the indirect lease business, industrial trucks are sold to financing partners that enter into long-term leases with end customers.

The KION Group recognizes revenue from leases and the cost of sales relating to leases in accordance with the rules for lessors that are manufacturers or dealers. In the direct lease business, this means that if a lease is classified as a finance lease, revenue is recognized as at the commencement date at the fair value of the industrial truck. If the present value of the lease payments, discounted using a market interest rate, is lower than the fair value of the industrial truck, revenue is recognized in the amount of the present value of the lease payments. If a lease is classified as an operating lease, the revenue is recognized on a straight-line basis over the term of the lease, generally in the amount of the agreed lease installments.

In the indirect lease business, subsidiaries in the KION Group initially treat as deferred income the portion of the consideration received that exceeds the amount they expect to have to pay when the industrial truck is returned and subsequently recognize the revenue in installments over the term of the lease. If substantially all of the risks and rewards incidental to ownership of the industrial truck are transferred to the financing partner, the portion of the consideration received that exceeds the amount expected to be paid when the industrial truck is returned is recognized as revenue immediately.

Short-term rental business is generally classified as an operating lease.

Further information on leases where the KION Group is the lessor can be found in the section on the lease and short-term rental business in this note.

Project business contracts

The deliverables in the project business include integrated technology and software solutions. Manual and automated material handling solutions are provided for customers’ operational material flows, ranging from goods inward and Multishuttle warehouse systems through to order picking. The provision of this kind of integrated supply chain solution generally constitutes only one single performance obligation as defined by IFRS 15. The project business also involves the production of customer-specific assets for which the KION Group has no alternative use. As the KION Group has a legal right to payment for performance completed to date, plus a margin, control over the promised goods and services gradually passes to the customer over the course of the project. Revenue is therefore recognized over a period of time, i.e. the duration of the project, in line with the percentage of completion. The percentage of completion is the proportion of contract costs incurred up to the reporting date compared to the total estimated contract costs as at the reporting date (cost-to-cost method) and reflects the continuous transfer of control over the project to the customer.

In addition to the contractually agreed consideration, the transaction price may also include variable elements in the project business, primarily bonuses, penalties, and changes to the contractually agreed consideration as a result of price adjustment clauses. Variable elements are included in the transaction price only if it is highly unlikely that the revenue that has already been recognized will subsequently be reversed. This necessitates, in particular, an assessment regarding adherence to the contractually agreed completion dates for projects and regarding fulfillment of technical specifications. The assessment takes place continuously throughout the project. If an assessment changes, the impact on the transaction price is taken into account. Adjustments are also made to the revenue to be recognized based on the percentage of completion as at the reporting date and to the project’s profit or loss.

Contract costs are recognized as an expense in the period in which they are incurred. The total estimated contract costs are reviewed on an ongoing basis throughout the project and, in the event of changes to the estimates, are adjusted accordingly. This means that the percentage of completion calculated as at the reporting date, the revenue to be recognized, and the project’s profit or loss may change. An expected loss from a contract is immediately recognized as an expense in the period in which the loss becomes apparent.

Contract modifications and claims against customers are factored into the project costing provided that the parties to the contract have agreed to them and they do not give rise to any distinct performance obligation. If these lead to changes to the transaction price or to the percentage of completion calculated as at the reporting date, the difference between the resulting revenue and the revenue already recognized up to that point is recognized in profit or loss.

The duration of a project depends on the size and complexity of the supply chain solution and generally ranges from a few months to three years. During the project, invoices are issued to the customer when contractually agreed milestones are reached. The payment conditions typically specify payment terms of between 30 and 90 days after the invoice has been issued. If the revenue recognized exceeds the invoiced performance, the excess is recognized as a contract asset. If the payments received from the customer exceed the revenue recognized, the excess is recognized as a contract liability.

Cost of sales

The cost of sales comprises the cost of goods sold and services rendered, costs arising from project business contracts, and revenue-related costs from the lease and short-term rental business. As well as direct costs, these also include relevant overheads.

The main components of the cost of sales are cost of materials, personnel expenses, depreciation expenses on property, plant and equipment and amortization expenses on intangible assets in connection with purchase price allocations, and amortization expenses on capitalized development costs. This item also includes warranty costs.

Financial income and expenses

The interest income and expense included in net financial income/expenses are recognized in profit and loss in accordance with the effective interest method.

Goodwill

Goodwill has an indefinite useful life and is therefore not amortized. Instead, it is tested for impairment in accordance with IAS 36 at least once a year and whenever there is an indication that the asset might be impaired.

Goodwill is tested for impairment annually at the level of the cash-generating units (CGUs) to which goodwill is allocated.

The CGUs or groups of CGUs (simply referred to as CGUs below) identified for the purposes of testing goodwill and brand names for impairment equate to the KION ITS EMEA, KION ITS APAC, and KION ITS Americas Operating Units in the Industrial Trucks & Services (ITS) segment and to the KION SCS Operating Unit in the Supply Chain Solutions (SCS) segment.

The recoverable amount of a CGU is determined by calculating its value in use on the basis of the discounted cash flow method. The measurement draws on cash flows forecast for the next five years on the basis of the financial planning signed off by management that applies at the time the impairment test is carried out. This planning is based on assumptions derived from external economic research studies and sectoral studies relating to future conditions in the global economy and to future sector-specific conditions in the global material handling market. Supplemented by the internal departments’ assessments, this planning is then used to produce specific market planning models for industrial trucks and supply chain solutions. These models provide the basis for revenue planning in the CGUs. Assumptions made about a likely increase in adjusted EBIT take account of anticipated future revenue growth and, in particular, management’s expectations about economies of scale targeted in industrial truck production and increases in profitability in the long-term project business. In all CGUs, the planning for sale prices and cost structures incorporates the latest assumptions about macroeconomic trends (movements in exchange rates, interest rates, procurement prices, and labor costs).

Material measurement parameters for determining the recoverable amount are the long-term growth rate for the extrapolation of cash flows beyond the five-year planning period and the weighted average cost of capital (WACC) used to discount the cash flows, which reflects current market assessments of the specific risks to individual CGUs. These are shown in the following table for 2022 and 2023:

Another material measurement parameter relates to the long-term outlook for adjusted EBIT and thus the CGUs’ expected profitability. In the planning period, a continual rise in adjusted EBIT is anticipated in the KION ITS EMEA and KION SCS CGUs, whose combined goodwill makes up more than 95 percent of the total goodwill recognized by the Group. In the final year of the planning prior to the transition to perpetuity, the adjusted EBIT margin expected for each of these two CGUs corresponds to the profitability target defined in the KION 2027 strategy; that target is to raise the adjusted EBIT margin above 10 percent on a permanent basis. For KION SCS, a sharp increase compared with the adjusted EBIT margin achieved in 2023 is therefore expected.

The impairment test carried out in the fourth quarter of 2023 did not reveal any need to recognize impairment losses for the goodwill allocated to the KION ITS EMEA, KION ITS APAC, KION ITS Americas, and KION SCS CGUs. For the KION SCS CGU, whose recoverable amount exceeds its carrying amount by approximately €681 million, a lowering of the adjusted EBIT margin expected in the final year of the planning (as the basis for perpetuity) by more than around 2 percentage points could potentially reduce the recoverable amount to less than the carrying amount.

Further information on goodwill can be found in note [16].

Other intangible assets

Other purchased intangible assets with a finite useful life are carried at historical cost less all accumulated amortization and accumulated impairment losses. If events or market developments suggest impairment has occurred, impairment tests are carried out on the carrying amount of items classified as other intangible assets with a finite useful life. The carrying amount of an asset is compared with its recoverable amount. If the reasons for recognizing impairment losses in prior periods no longer apply, the relevant impairment losses are reversed, but subject to a limit such that the carrying amount of the asset is no higher than its amortized cost.

Development costs are capitalized if the capitalization criteria in IAS 38 are met. Capitalized development costs include all costs and overheads directly attributable to the development process. Once they have been initially capitalized, these costs and other internally generated intangible assets – particularly internally generated software – are carried at cost less accumulated amortization and accumulated impairment losses. All non-qualifying development costs are expensed as incurred and immediately reported in the consolidated income statement under research and development costs together with research costs.

Amortization of intangible assets with a finite useful life is recognized on a straight-line basis and predominantly reported under cost of sales. The impairment losses on intangible assets are reported under other expenses.

The following useful life ranges are applied in determining the carrying amounts of other intangible assets:

Other intangible assets with an indefinite useful life are carried at cost and currently comprise only brand names. Brand names, which have been established in the market for a number of years, have an indefinite useful life because they are used and maintained on a long-term basis. As there is no foreseeable end to their useful life, the brand names are not amortized. In accordance with IAS 36, they are instead tested for impairment at least once a year and whenever there is an indication that they might be impaired. The impairment test applies an income-oriented method in which fundamentally the same assumptions are used as in the impairment test for goodwill, and it did not reveal any need to recognize impairment losses. Assessments of indefinite useful life are carried out at every reporting date.

Lease and short-term rental business

The Industrial Trucks & Services segment leases and rents industrial trucks and related items of equipment to its customers in its lease and short-term rental business.

The classification and accounting treatment of these leases depends on which party has beneficial ownership of the industrial trucks. In line with IFRS 16, contracts are therefore classified as finance leases if substantially all of the risks and rewards incidental to ownership of the industrial truck are transferred to the customer. All other leases and short-term rentals are classified as operating leases, again in accordance with IFRS 16.

The classification of leases requires assessments to be made regarding the transferred and retained risks and rewards in connection with ownership of the industrial truck. Judgments are required, in particular, when determining the term of a lease. When making its assessment, the KION Group takes into consideration all facts and circumstances that offer an economic incentive to exercise extension options or to not exercise termination options.

Further information on the lease and short-term rental business can be found in notes [17] Leased assets, [18] Rental assets, and [21] Lease receivables. Information on procurement leases in which the KION Group is the lessee can be found in the disclosures on other property, plant and equipment.

Lease business

If the beneficial ownership of the industrial trucks remains with a KION Group subsidiary as the lessor under an operating lease, the industrial trucks are reported as leased assets under non-current assets in the consolidated statement of financial position. The industrial trucks are carried at cost and depreciated on a straight-line basis over the term of the underlying leases until the expected residual value is reached. Changes to the expected residual values are recognized by prospectively adjusting the depreciation over the remaining term of the lease. If the recoverable amount is lower than the amortized cost, an impairment loss is recognized. When the lease ends, the industrial trucks are transferred to inventories and recognized at the remaining carrying amount of the leased assets. The KION Group makes estimates regarding future residual values. These estimates are primarily based on empirical values and prices in used truck markets.

If a KION Group subsidiary enters into a finance lease as the lessor, a lease receivable is recognized at an amount equal to the net investment. The net investment comprises the present value of the customer’s lease payments and any unguaranteed residual value. To calculate the lease payments, the KION Group determines the term of the lease, which thus affects the net investment amount. In subsequent measurement, the lease installments paid are divided into payments of principal and payments of interest. The interest income is recognized under financial income and is spread over the term of the lease in order to ensure a constant return on the outstanding net investment in the lease. The simplified impairment model in accordance with IFRS 9 is applied to the lease receivables. Furthermore, the unguaranteed residual values of the industrial trucks are regularly reviewed and, in the event of a reduction, adjusted. The KION Group makes estimates regarding future unguaranteed residual values. These estimates are primarily based on empirical values and prices in used truck markets.

To finance the direct lease business, the KION Group uses sale and leaseback transactions, securitizations through a special-purpose entity, and lease facilities. In sale and leaseback transactions, industrial trucks are sold to financing partners in accordance with civil law, immediately leased back, and then provided for use to end customers. The KION Group assesses whether the sale to the financing partner in accordance with civil law also results in the transfer of control over the industrial truck and thus to a sale in accordance with the criteria of IFRS 15. Where financing agreements contain a call option for the KION Group or provide for the automatic transfer of ownership of the industrial truck to the KION Group at the end of the term of the financing, a sale pursuant to IFRS 15 is not deemed to take place as a rule. Where agreements contain a put option for the financing partner, the KION Group generally assumes – based on past experience – that exercising the put option is advantageous for the financing partner. This also applies where there is no contractually agreed provision to take back the industrial trucks, but the KION Group has raised a valid expectation that it will repurchase them. As these scenarios generally do not involve a sale as defined by IFRS 15 either, the industrial trucks continue to be recognized as leased assets in the case of operating leases; in the case of finance leases, a lease receivable is recognized. The liabilities resulting from sale and leaseback transactions, securitizations, and lease facilities are recognized under liabilities from lease business.

In the indirect lease business, industrial trucks are sold to financing partners that enter into long-term leases with end customers. As the KION Group usually repurchases the industrial truck, the financing partner does not obtain control over the industrial truck and a sale pursuant to IFRS 15 is not deemed to take place (see the information on the financing of the direct lease business). The industrial truck is therefore recognized as a leased asset in the KION Group’s consolidated statement of financial position and carried at cost. In the period before the industrial truck is returned, it is depreciated on a straight-line basis until the amount expected to be paid upon return is reached. The KION Group recognizes an obligation equivalent to the amount that it expects to have to pay when the industrial truck is returned (repurchase obligation) under liabilities from lease business. In addition, the consideration received that exceeds the amount that is expected to be paid when the industrial truck is returned is initially treated as deferred income and the revenue is subsequently recognized in installments over the term of the lease.

Short-term rental business

Subsidiaries in the KION Group rent industrial trucks directly to end customers under short-term rental agreements. Short-term rental agreements usually have a term ranging from a few hours to a year. Beneficial ownership of the assets in the short-term rental business remains with a KION Group subsidiary under an operating lease and the industrial trucks are reported as rental assets under non-current assets in the consolidated statement of financial position. They are carried at cost and usually depreciated on a straight-line basis over the normal useful life of between five and eight years, depending on the product group.

To finance its short-term rental business, the KION Group uses sale and leaseback transactions and rental facilities. In sale and leaseback transactions, industrial trucks are sold to financing partners, immediately leased back, and then provided for use to end customers. In this case too, the financing partner usually does not obtain control over the industrial truck (see the information on the financing of the direct lease business), so the industrial truck continues to be recognized as a rental asset in the consolidated statement of financial position. The liabilities resulting from finance transactions are recognized under liabilities from short-term rental business.

Other property, plant and equipment

Property, plant and equipment is carried at cost less depreciation and impairment losses. The cost of internally generated machinery and equipment includes all costs directly attributable to the production process and an appropriate portion of production overheads.

Depreciation of property, plant and equipment is recognized on a straight-line basis and reported under functional costs. The useful lives and depreciation methods are reviewed annually and adjusted to reflect changes in conditions.

The following useful life ranges are applied in determining the carrying amounts of items of other property, plant and equipment:

KION Group companies also lease property, plant and equipment for their own use through procurement leases, which are recognized as right-of-use assets under other property, plant and equipment. As a rule, the leases are entered into for defined periods, although they may contain extension and/or termination options. For this reason, when defining the lease term, the KION Group takes into consideration all facts and circumstances that offer an economic incentive to exercise extension options or to not exercise termination options. Examples include the importance of the leased asset to the KION Group’s operations – and the availability of suitable alternatives – and costs relating to the termination of the lease. Particularly in the case of leases for land and buildings, the assessment of whether extension and termination options will be exercised or not affects the measurement of the liabilities from procurement leases (further information can be found in note [36]) and the measurement of the right-of-use assets related to procurement leases (further information can be found in note [19]).

The right-of-use assets are depreciated over the shorter of their useful life or the term of the lease, unless title to the leased assets passes to the lessee when the lease expires, in which case the right-of-use asset is depreciated over the useful life of the leased asset.

When liabilities from procurement leases are initially measured, the lease payments not yet made are discounted at an interest rate implicit in the lease. If this cannot be readily defined, a term-specific and currency-specific incremental borrowing rate of interest is essentially determined and used for the calculation. The interest expense resulting from unwinding the discount on liabilities upon subsequent measurement is recognized in financial expenses. The interest portion and the principal portion of lease payments are recognized in cash flow from financing activities in the consolidated statement of cash flows.

Lease installments for procurement leases with a term of no more than twelve months and for procurement leases relating to low-value assets are immediately recognized as an expense under functional costs.

If there are certain indications of impairment of the property, plant and equipment, the assets are tested for impairment by comparing the residual carrying amount of the assets with their recoverable amount. If the residual carrying amount is greater than the recoverable amount, an impairment loss is recognized for an asset. The impairment losses on property, plant and equipment are reported under other expenses.

If an impairment test for an item of property, plant and equipment is performed at the level of a cash-generating unit to which goodwill is allocated and results in the recognition of an impairment loss, first the goodwill and, subsequently, the assets must be written down in proportion to their relative carrying amounts. If the reason for an impairment loss recognized in prior years no longer applies, the relevant pro rata impairment losses are reversed, but subject to a limit such that the carrying amount of the asset is no higher than its amortized cost. This does not apply to goodwill.

Equity-accounted investments

In accordance with the equity method, associates and joint ventures are measured as the proportion of the interest in the equity of the investee. They are initially carried at cost. Subsequently, the carrying amount of the equity investment is adjusted in line with any changes to the KION Group’s interest in the net assets of the investee. The KION Group’s interest in the profit or loss generated after acquisition is recognized in income. Other changes in the equity of associates and joint ventures are recognized in other comprehensive income in the consolidated financial statements in proportion to the Group’s interest in the associate or joint venture.

If the Group’s interest in the losses incurred by an associate or joint venture exceeds the carrying amount of the proportionate equity attributable to the Group, no additional losses are recognized. Any goodwill arising from the acquisition of an associate or joint venture is included in the carrying amount of the investment in the associate or joint venture.

If there is evidence that an associate or joint venture may be impaired, the carrying amount of the equity investment in question is tested for impairment. The carrying amount of the asset is compared with its recoverable amount. If the carrying amount is greater than the recoverable amount, an impairment loss is recognized for the equity investment. If the reasons for the recognition of the impairment loss on the equity investment no longer apply, the impairment loss is reversed.

Financial instruments

Financial assets

In accordance with IFRS 9, the KION Group categorizes financial assets as debt instruments measured at amortized cost (AC category), debt instruments recognized at fair value through profit or loss (FVPL category), or equity instruments recognized at fair value through other comprehensive income (FVOCI category). Financial assets are subject to settlement date accounting, i.e. they are recognized on the day they are received and derecognized on the day of delivery. Details of how they are assigned to the respective categories can be found in note [40].

Debt instruments are measured at amortized cost if they are held as part of a business model whose objective is to collect the contractual cash flows, and these cash flows consist solely of payments of principal and interest on the principal amount outstanding.

Upon initial recognition, financial assets in the AC category are carried at fair value including directly attributable transaction costs. In subsequent periods, they are measured at amortized cost using the effective interest method. Low-interest or non-interest-bearing receivables due in more than one year are carried at their present value. Upon initial recognition, trade receivables that do not contain a significant financing component are measured at their transaction price.

In line with the general impairment approach for debt instruments in the AC category, the KION Group recognizes the expected credit loss in profit or loss by recognizing valuation allowances, both upon initial recognition and subsequently. These valuation allowances amount to the twelve-month expected losses, provided no significant increase in credit risk (for example as a result of material changes to external or internal credit ratings) is observable at the reporting date. Otherwise, the lifetime expected loss is recognized. The expected loss is calculated using the probability of default, the amount at risk, and, taking into account any collateral, the estimated loss given default. The calculation draws on observable historical loss data, information on current conditions, and the economic outlook. A default is defined as the occurrence of a loss event, such as a borrower being in considerable financial difficulties or a contract being breached. A financial asset is considered to be credit-impaired if there are no reasonable prospects of recovering the underlying cash flows in full or partly. The recoverability is assessed on the basis of different indicators – for example, failure to adhere to payment terms or the opening of insolvency proceedings over the borrower’s assets – that take the relevant country-specific factors into account. The reversal of an impairment loss must not result in a carrying amount greater than the amortized cost that would have arisen if the impairment loss had not been recognized. The general impairment approach is currently not material in the KION Group.

Upon measurement of trade receivables, lease receivables, and contract assets subsequent to initial recognition, the KION Group applies the simplified impairment approach of IFRS 9. For purposes of the valuation allowance, average loss rates on a collective basis are used to determine the expected lifetime losses. In the case of trade receivables, this depends on the past due status of the receivable. The loss rates are calculated on the basis of observable historical loss data, taking into account current conditions and economic assessments, for example on the basis of expected probability of default for significant countries. The amount of the valuation allowances already recognized is adjusted through profit or loss if there is a change in the assessment of the underlying inputs.

Financial assets assigned to the FVPL category are initially recognized at fair value; directly attributable transaction costs have to be taken directly to profit or loss. In subsequent periods, financial assets in the FVPL category are recognized at fair value through profit or loss.

The KION Group uses factoring programs as a way of managing working capital. In these programs, the underlying receivables are sold to the factor in return for payment. If, under a factoring program, the default risk and the other material risks and opportunities remain with the KION Group, the receivables continue to be recognized in full in the statement of financial position. If some of the material risks and opportunities are passed to the factor, the receivables are accounted for as a continuing involvement. The KION Group has assigned the portfolio of receivables under the factoring programs that are still recognized in its statement of financial position to the ‘sell’ business model in accordance with IFRS 9, which means that the receivables continue to be recognized at fair value through profit or loss until they are derecognized.

Equity instruments in the FVOCI category are recognized at fair value through other comprehensive income. Upon initial recognition at fair value, directly attributable transaction costs are included. Gains and losses recognized in accumulated other comprehensive income are not reclassified to profit or loss upon derecognition of these financial assets but instead remain in equity.

Financial liabilities

In accordance with IFRS 9, the KION Group differentiates between financial liabilities that are not held for trading and are thus recognized at amortized cost using the effective interest method (AC category) and financial liabilities that are held for trading and recognized at fair value through profit or loss (FVPL category). Financial liabilities are subject to settlement date accounting, i.e. they are recognized on the day they are received and derecognized on the day of delivery. Details of how they are assigned to the respective categories can be found in note [40].

Upon initial recognition, financial liabilities in the AC category are carried at fair value, including any directly attributable transaction costs. Low-interest or non-interest-bearing liabilities due in more than one year are carried at their present value. Subsequently, financial liabilities are recognized at amortized cost using the effective interest method. The corresponding interest expenses and interest payments are recognized in the consolidated income statement under financial expenses and in the consolidated statement of cash flows in the cash flow from financing activities.

Financial liabilities assigned to the FVPL category are initially recognized at fair value; directly attributable transaction costs have to be taken directly to profit or loss. In subsequent periods, financial liabilities in the FVPL category are recognized at fair value through profit or loss.

Hedge accounting

Derivative financial instruments that are part of a formally documented hedge with a hedged item are not assigned to any of the IFRS 9 measurement categories and are therefore recognized in accordance with the hedge accounting rules described below.

In the case of cash flow hedges for hedging currency risk, derivatives are used to hedge future cash flow risks from highly probable future transactions and firm commitments not reported in the statement of financial position. The effective portion of changes in the fair value of derivatives is initially recognized in equity in the hedge reserve (accumulated other comprehensive income). The amounts previously recognized in the hedge reserve are subsequently reclassified to the income statement – or recognized under inventories – when the gain or loss on the corresponding hedged item is recognized. The ineffective portion of the changes in fair value is recognized immediately in the income statement.

In addition, the KION Group uses an interest-rate swap to hedge the fair value of a fixed-rate financial liability.

The critical-terms-match method is used to measure the prospective effectiveness of the hedges. Ineffective portions can arise if the critical terms of the hedged item and hedge no longer match; this is determined using the dollar-offset method.

In addition, the KION Group uses amortizing interest-rate swaps to hedge the fair value of certain lease receivables at portfolio level in accordance with IAS 39. The effective portion of changes in the fair value of the interest-rate swaps is recognized in net financial income/expenses. These are offset by gains and losses on the change in the fair value of the hedged lease receivables, which result in an adjustment in profit or loss of the carrying amount of the hedged item in net financial income/expenses. The ineffective portion of the hedge is also recognized in net financial income/expenses.

The prospective and retrospective effectiveness of hedges is measured using a regression analysis with historical data. Ineffectiveness may arise in the hedged item in the event of default.

Income taxes

In the consolidated financial statements, current and deferred taxes are recognized on the basis of the tax legislation of the jurisdictions involved. Deferred taxes are recognized in other comprehensive income if they relate to transactions also recognized in other comprehensive income.

Deferred tax assets and liabilities are recognized in accordance with the liability method for all temporary differences between the IFRS carrying amounts and the tax base, as well as for temporary consolidation measures.

Deferred tax assets also include tax refund claims that arise in subsequent years from the expected utilization of existing tax loss carryforwards and interest carryforwards and from tax credits and whose utilization is reasonably certain according to current forecasts.

Deferred taxes are determined on the basis of the tax rates that will apply at the recovery date, or have been announced, in accordance with the current legal situation in each country concerned. Deferred tax assets are offset against deferred tax liabilities to the extent that they relate to the same taxation authority and there is an intention to settle them on a net basis.

Significant estimates are involved in calculating income taxes. These estimates may change on the basis of new information and experience (see also note [14]). Deferred tax assets on tax loss carryforwards and interest carryforwards are recognized on the basis of an assessment of the future recoverability of the tax benefit, i.e. an assumption as to whether sufficient taxable income or tax relief will be available against which the carryforwards can be utilized. The actual amount of taxable income in future periods – and hence the actual utilization of tax loss carryforwards and interest carryforwards – may be different from the assessments made when the corresponding deferred tax assets were recognized.

The companies in the KION Group operate in many different countries and are therefore subject to different tax rules. The tax expense can increase due to changes to tax laws – or due to changes in how they are applied or interpreted – and as a result of current or future tax audits. Changes to tax laws, tax rules, and tax agreements – or changes in the relevant tax authorities’ legal opinions with regard to how tax laws are applied, managed, and interpreted – may potentially lead to higher tax expenses and higher tax payments that would have an impact on both past and future years. Such changes can also have an effect on the tax assets and tax liabilities that have been or will be recognized in the statement of financial position and on any deferred tax assets and deferred tax liabilities to be recognized. Furthermore, the uncertain legal situation in some regions may make it difficult or impossible to enforce legal rights. Consequently, the companies in the KION Group continually review the presence of tax risks and the amounts at which they have been measured. Where appropriate under IFRIC 23, provisions are recognized in the statement of financial position in respect of possible risks resulting from uncertain tax items. The most likely amount or the expected value is used for measurement purposes, depending on which reflects expectations most closely.

Inventories

Inventories are carried at the lower of cost and net realizable value. The acquisition costs of raw materials and merchandise are calculated using the weighted average cost method. The cost of finished goods and work in progress includes direct costs and an appropriate portion of the material and production overheads and production-related depreciation directly attributable to the production process. Administrative costs and social insurance/employee benefits are included to the extent that they are attributable to the production process. The amount recognized is an average value or a value determined in accordance with the FIFO method (FIFO = first in, first out).

Net realizable value is the selling price that can be realized less the estimated costs of completion and the estimated necessary selling costs.

Impairment losses are recognized for inventory risks resulting from duration of storage, impaired recoverability, or other reasons. If the reasons for the recognition of the impairment losses on the inventories no longer apply, they are reversed, but subject to a limit such that the carrying amount of the asset is no higher than its cost.

Contract balances

Contract assets mainly relate to goods and services provided in the project business that have not yet been billed. Subsequent to initial recognition, contract assets are measured using the simplified impairment approach in accordance with IFRS 9. The average loss rates calculated for trade receivables are used as an approximation of the expected losses from contract assets.

A contract liability is a company’s obligation to transfer goods or services to a customer for which the company has received consideration. Project business contracts with a net debit balance due to customers are reported under contract liabilities, as are advances received from customers. Contract liabilities are recognized as revenue as soon as the contractual goods and services have been provided. Further information on contract balances can be found in note [34].

Assets classified as held for sale

Non-current assets or disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For such classification, the assets or disposal groups must be available for immediate sale in their present condition and their sale must be highly probable.

Such assets or disposal groups are measured at the lower of their net carrying amount and fair value less costs of disposal. Amortization on intangible assets and depreciation on property, plant and equipment cease to be recognized as soon as the assets are classified as held for sale.

Retirement benefit obligation and similar obligations

The retirement benefit obligation and similar obligations are calculated in accordance with the projected unit credit method, taking account of future increases in remuneration and pensions. Pension provisions are reduced by the fair value of the plan assets used to cover the Group’s benefit obligations, taking account – if applicable – of the rules on limiting the surplus of plan assets over the obligation (asset ceiling).

Remeasurements and changes in the effect of the asset ceiling are recognized in other comprehensive income, factoring in deferred taxes. The service cost and the net interest cost on the net liability under defined benefit plans are recognized in profit or loss.

Defined benefit pension entitlements are calculated on the basis of actuarial parameters, although the fair value for certain plan assets is derived from inputs that are not observable in the market. Further information on sensitivity analysis in relation to the impact of the discount rate and details of measurement can be found in the information on the retirement benefit obligation and similar obligations in note [29].

Liabilities from lease business

In accordance with IFRS 9, liabilities from the lease business are recognized at amortized cost using the effective interest method (AC category). Upon initial recognition, they are carried at fair value, including any relevant directly attributable transaction costs.

Liabilities from the lease business comprise all liabilities from financing the direct lease business and the repurchase obligations resulting from the indirect lease business.

Liabilities from short-term rental business

In accordance with IFRS 9, liabilities from the short-term rental business are recognized at amortized cost using the effective interest method (AC category). Upon initial recognition, they are carried at fair value, including any relevant directly attributable transaction costs.

Other provisions

In accordance with IAS 37, other provisions are recognized when the Group has a legal or constructive obligation to a third party as the result of a past event that is likely to lead to a future outflow of resources and that can be reliably estimated. Where there is a range of possible outcomes and each individual point within the range has an equal probability of occurring, the provision is recognized in the amount of the mean of the individual points. Measurement is at full cost. Provisions for identifiable risks and uncertain liabilities are recognized in the amount that represents the best estimate of the cost required to settle the obligations. The settlement amount also includes cost increases identifiable as at the reporting date. Provisions with a maturity of more than twelve months are discounted using the standard market interest rate. The discount rate is a before-tax interest rate that reflects current market expectations for the time value of money and the specific risks inherent in the liability.

Provisions for statutory and contractual warranties and for goodwill cases are recognized on the basis of past or estimated future claim statistics and for known individual claims. In the case of product sales, the corresponding expense is recognized in cost of sales at the date on which the revenue is recognized. In the project business, the corresponding expense is recognized in cost of sales upon acceptance by the customer.

Provisions for onerous contracts and other business obligations are measured on the basis of the contractual obligations that are currently still to be fulfilled. In the case of contracts in the project business, a provision for onerous contracts is recognized if the total contract costs exceed the contract revenue. The expected loss is immediately recognized as an expense in the period in which the loss becomes apparent.

A restructuring provision is recognized when a KION Group subsidiary has prepared a detailed, formal restructuring plan and this plan has raised the valid expectation in those affected that the subsidiary will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. The measurement of a restructuring provision only includes the direct expenditures arising from the restructuring and not associated with the ongoing activities of the entity concerned.

The recognition and measurement of other provisions are based on an assessment of the probability of the future outflow of resources, supplemented by past experience and the circumstances known to the Group at the reporting date. Accordingly, the actual outflow of resources for a given event may be different from the amount of the provision recognized. Further details can be found in note [33].

Share-based payments

IFRS 2 distinguishes between equity-settled and cash-settled share-based payment transactions.

Equity-settled share-based payment transactions are recognized at their fair value at the date of grant. The fair value of the obligation is recognized as an expense under functional costs over the vesting period and added to capital reserves.

The portion of the fair value of cash-settled share-based payments that is attributable to service provided up to the valuation date is recognized as an expense under functional costs and is also reported as a liability. The fair value is recalculated on each reporting date until the end of the performance period. Any change in the fair value of the obligation must be recognized (pro rata) under expenses.