Accounting Principles

The Interim Financial Report for Bertelsmann SE & Co. KGaA has been prepared according to Section 115 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and has been subject to a limited review by the Group’s auditor. It complies with International Financial Reporting Standards (IFRS) and the related interpretations (IFRIC) of the IFRS Interpretations Committee (IFRS IC) applicable in the European Union (EU-IFRS) and contains Condensed Interim Consolidated Financial Statements prepared in accordance with IAS 34 Interim Financial Reporting, including selected explanatory notes. This report was prepared – with the exception of the financial reporting standards applied for the first time in the current financial year – using fundamentally the same accounting and measurement policies as in the Consolidated Financial Statements of December 31, 2017. A detailed description of these policies is presented in the notes to the Consolidated Financial Statements in the 2017 Annual Report.

Impact of New Financial Reporting Standards

In terms of the merits and the amount, the effects from the first-time application of the new financial reporting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers essentially meet the expectations presented in the 2017 Consolidated Financial Statements.

The following sections provide explanations of the new accounting and measurement policies applied since January 1, 2018, with regard to the financial instruments and revenues from contracts with customers where they differ from those applied as of December 31, 2017.

IFRS 9 Financial Instruments
IFRS 9 replaces the provisions of IAS 39 – the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets, and hedge accounting. IFRS 9 introduces new rules for classifying and measuring financial assets and includes new rules for impairment of financial instruments. A detailed description of the new impairment model can be found in the 2017 Annual Report in the section “Impact of Issued Financial Reporting Standards That Are Not Yet Effective” on page 53. Bertelsmann makes use of the exception and does not adjust comparative information from the prior period. As a result, only the opening balance as of January 1, 2018, has been adjusted.

The following table presents the classification and measurement categories for financial assets in accordance with IAS 39, the reconciliation to the new classification and measurement categories in accordance with IFRS 9 and the respective carrying amounts as of January 1, 2018.

Reconciliation of the Classes and Measurement Categories of Financial Assets from IAS 39 to IFRS 9 as of January 1, 2018

in € millionsCategory in accordance with IAS 39Balance as of
12/31/2017
Reclassifica-
tions
Change in
measurement
IFRS 9
Change in
presentation
IFRS 15
Balance as of
1/1/2018
Category in accordance with IFRS 9 Derivatives with
hedge relation
MeasurementLoans and
Receivables
Available-for-SaleFinancial Assets
Initially Reco-
gnized at Fair
Value through
Profit or Loss
Financial Assets
Held for Trading
Derivatives with
hedge relation
    At amortized
cost
Fair value
through other
comprehensive
income
Fair value
through profit
or loss
At amortized
cost
At costFair value
recognized
in equity
Fair value
recognized in
profit or loss
Fair value
recognized in
profit or loss
Loans6363635013
Investments in affiliates31518(18)n/an/an/an/an/a
Other investments25491516(516)n/an/an/an/an/a
Securities and financial assets131923(23)n/an/an/an/an/a
Equity instruments and debt instruments (IFRS 9)n/an/an/an/an/an/an/a55755753504
Derivative financial instruments8749191874
Trade receivables3,3173,317(11)3713,6773,677
Receivables from participations25252525
Sundry financial receivables755755175674016
Cash1,3841,3841,3841,384
Other securities < 3 months56565656
5,60029509198746,248(10)3716,6095,932536204

In accordance with the IFRS 9 classification and measurement approach for financial assets, there are three classification categories for financial assets in the Bertelsmann Group:

  • at amortized cost,
  • at fair value with changes in fair value through profit or loss (FVTPL) and
  • at fair value with changes in fair value through other comprehensive income (FVOCI).

In accordance with IFRS 9, equity instruments where the Bertelsmann Group has neither control nor significant influence are classified as a rule at fair value through profit or loss. Bertelsmann exercises the option granted by IFRS 9 to measure at fair value through other comprehensive income mainly for individual immaterial investments. These equity instruments were already measured at fair value in accordance with IAS 39, so that as of January 1, 2018, there was no financial impact from the measurement of these financial instruments. As of January 1, 2018, and at the end of the reporting period of these Condensed Interim Consolidated Financial Statements, the Bertelsmann Group held no debt instruments measured at fair value through other comprehensive income. Certain investments in debt instruments, primarily so-called fund-of-fund investments purchased by the Bertelsmann Investments division, were reclassified into the category of fair value through profit or loss because their contractual cash flows did not represent solely principal and interest payments. The revised method for determining impairment results in an increase of impairment by €9 million.

The first-time application of IFRS 9 had no impact on the classification and measurement of financial liabilities. Within the class of derivative financial instruments in hedge relationships, there were no reclassifications from or to other classes due to IFRS 9.

IFRS 15 Revenue from Contracts with Customers
The modified retrospective method was used for the transition to IFRS 15. The immaterial cumulative effect of the first-time application as of January 1, 2018, was recognized in retained earnings. Prior-year comparative figures were not adjusted. The accounting treatment of expected returns that are no longer offset with the receivables resulted in an increase of total assets as of January 1, 2018, of €371 million. The corresponding effects on the balance sheet position “Trade receivables” as of January 1, 2018, are shown in the table “Reconciliation of the Classes and Measurement Categories of Financial Assets from IAS 39 to IFRS 9 as of January 1, 2018” presented in the section “IFRS 9 Financial Instruments.”

Under IFRS 15, the former risk and reward approach has been replaced by a contract-based five-step model, which serves as the basis for initially identifying and distinguishing the relevant contracts with customers in the Bertelsmann Group. In a next step, the separate performance obligations explicitly or implicitly stipulated in the contract are identified, and the contract is examined for fixed and variable consideration in order to use this as a basis for determining the respective transaction price. In doing so, constraining estimates of variable consideration are adequately taken into account. If more than one separate performance obligation is identified in a contract, the transaction price is then allocated to the identified performance obligations using the method of relative stand-alone selling prices, which are generally determined as prices on the markets relevant for the respective customers. Revenue recognition occurs upon satisfaction of the performance obligation either at a point in time or over time, depending on the underlying business model. If necessary, principal-agent considerations are also taken into account in analyzing the contracts.

The prioritization of the five steps depends on the design of the underlying business model. Based on the underlying revenue sources in the Bertelsmann Group, the following key aspects are taken into consideration for accounting and measurement:

  • Own products and merchandise: As a rule, the revenues resulting from these contracts are recognized at a point in time when control is transferred. Expected returns from sales of products, mainly from physical books and magazines, are shown as liabilities in the balance sheet position “Trade and other payables.”
  • Services: Services are generally rendered over a period of time, and the revenue is recognized based on an appropriate output- or input-based method for measuring progress. If permissible, revenues are recognized in the amount of the invoice if this amount corresponds to the value of the performance provided.
  • Advertising: Advertising services are generally rendered over a period of time, and revenue is recognized on the basis of an appropriate output-based measure of progress.
  • Rights and licenses: The timing of revenue recognition for business models generating revenue from licenses depend on whether the license represents a right to access the intellectual property through the entire licensing period or a right to use when the license is granted. In particular, the underlying contracts are analyzed to determine whether the licensee is exposed to significant changes to the intellectual property or whether the intellectual property remains in the condition defined upon entering into the contract throughout the term of the contract with regard to its content and scope. While revenues from licenses granted for a right to use are realized at the date of the transfer of control, revenues from licenses for rights to access are realized over a period of time throughout the term of the contract. The majority of licenses granted in the TV business represents a right to use of intellectual property at the date the license is granted, and as a result, revenue is recognized at the point in time the license is granted to the licensee. Rights to access are extensively used in the music business, and the revenues for these are recognized throughout the term of the contract.

IFRS 15 stipulates some practical expedients of which the following are applied in the Bertelsmann Group:

  • The costs associated with obtaining contracts are not capitalized if the underlying asset is amortized in no more than 12 months.
  • The value of consideration is not adjusted for the effects of a material financing component if the financing component pertains to a period of no more than 12 months.

Impact of Issued Financial Reporting Standards that Are Not Yet Effective

The Bertelsmann Group has not opted for early adoption of any standards, interpretations or amendments that have been issued but are not yet effective.

IFRS 16 Leases, issued in January 2016, sets out principles for recognition, measurement, presentation and disclosure requirements for leases. Application of the standard is mandatory for financial years beginning on or after January 1, 2019. Due to the recognition of the right-of-use of the underlying leased objects and due to the recognition of the lease liability, the application of IFRS 16 will have a material impact on the consolidated balance sheet of the Bertelsmann Group. Concerning the consolidated income statement, under IFRS 16, the depreciation of the right-of-use assets and the interest expense for the lease liabilities will be recognized in place of other operating expenses for operating leases. With regard to the assessment of the expected impacts of IFRS 16, which has not yet been applied, there were no material changes in the first half of 2018 compared to the expectations presented in the 2017 Consolidated Financial Statements. Further information on this topic is presented in the 2017 Annual Report.

Scope of Consolidation

The Condensed Interim Consolidated Financial Statements as of June 30, 2018, include Bertelsmann SE & Co. KGaA and all material subsidiaries over which Bertelsmann SE & Co. KGaA is able to exercise control in accordance with IFRS 10. Joint ventures and associates are accounted for using the equity method in accordance with IAS 28. As of June 30, 2018, the scope of consolidation including Bertelsmann SE & Co. KGaA consists of 1,003 companies (December 31, 2017: 970) with 53 entries and 20 exits in the first half of 2018. This includes 909 (December 31, 2017: 879) consolidated companies. In addition, investments in 27 (December 31, 2017: 28) joint ventures and 67 (December 31, 2017: 63) associates are accounted for using the equity method in the Consolidated Financial Statements. A total of 185 (December 31, 2017: 213) companies without significant business operations is excluded from the scope of consolidation due to their negligible importance for the financial position and financial performance of the Bertelsmann Group.

Acquisitions and Disposals

In the first half of 2018, the cash flow from acquisition activities totaled €-68 million, of which, after consideration of cash and cash equivalents acquired, €-31 million relates to new acquisitions during the first half of the year. The consideration transferred amounted to €68 million taking into account contingent consideration totaling €4 million.

In February 2018, Bertelsmann Education Group increased its interest in the US university services provider HotChalk by 36 percent through the conversion of a loan granted, the conversion of previously held shares into newly issued shares and the direct acquisition of additional shares. The acquisition of the majority interest in HotChalk strengthens Bertelsmann Education Group’s position in the services segment of the US education market. As a result of obtaining control, the investment previously accounted for using the equity method is fully consolidated from the date of acquisition. The consideration transferred was €28 million, of which a cash contribution to HotChalk amounted to €11 million. Obtaining control led to a derecognition of the investment previously accounted for using the equity method, whose fair value amounted to €127 million immediately before the acquisition date, and to a reclassification of the associated share of other comprehensive income of investments accounted for using the equity method amounting to €-13 million in profit or loss in the item “Results from disposals of investments.” The remeasurement of the investment already held resulted in other operating income of €2 million. Non-tax-deductible goodwill from the purchase price allocation amounted to €71 million and resulted primarily from synergies, employees taken over and new customer potential. The initial consolidation led to an immaterial increase in Group revenues and an immaterial reduction in Group profit or loss. Consolidation of HotChalk from January 1, 2018, would have also resulted in an immaterial increase in the Group revenues and an immaterial reduction in Group profit or loss. Transaction-related costs were not material in the first half of 2018 and have been recognized in profit or loss.

In addition, the Bertelsmann Group made several acquisitions in the first half of 2018, none of which was material on a standalone basis. Payments net of acquired cash and cash equivalents amounted to €-33 million; the consideration transferred in accordance with IFRS 3 for these acquisitions amounted to €40 million taking into account contingent consideration of €4 million. The other acquisitions resulted in goodwill totaling €35 million, which reflects synergy potential and is not tax deductible. Transaction-related costs were not material in the first half of 2018 and have been recognized in profit or loss.

The purchase price allocations consider all the facts and circumstances prevailing as of the respective dates of acquisition that were known prior to preparation of the Consolidated Financial Statements. In accordance with IFRS 3, should further facts and circumstances become known within the 12-month measurement period, the purchase price allocation will be adjusted accordingly.

The following table shows the fair values of the assets and liabilities of the acquisitions on their dates of initial consolidation based on the currently still preliminary purchase price allocations:

Effects of Acquisitions

in € millionsHotChalkOtherTotal
Non-current assets 
Goodwill7135106
Other intangible assets8922111
Property, plant and equipment11
Trade and other receivables33
Other non-current assets37239
Current assets
Inventories11
Trade and other receivables246
Other current assets123
Cash and cash equivalents13316
 
Liabilities
Financial debt20121
Other financial and non-financial liabilities221739
 
Fair value of pre-existing interests12712139
Non-controlling interests17219

Since initial consolidation, all new acquisitions in accordance with IFRS 3 in the first half of 2018 have contributed €25 million to revenue and €-11 million to Group profit or loss. If consolidated as of January 1, 2018, these would have contributed €41 million to revenue and €-8 million to Group profit or loss.

After considering the cash and cash equivalents disposed of, the Bertelsmann Group generated cash flows totaling €11 million from disposals in the first half of 2018. The disposals led to income from deconsolidation of €5 million, which is recognized in “Results from disposals of investments.”

Currency Translation

The following euro exchange rates were used to translate the currencies most significant to the Bertelsmann Group.

  Average ratesClosing rates
Foreign currency unit per €1 H1 2018H1 20176/30/201812/31/20176/30/2017
Australian dollarAUD1.56911.43601.57871.53461.4851
Canadian dollarCAD1.54631.44521.54421.50391.4785
Chinese renminbiCNY7.70927.44427.71707.80447.7385
British poundGBP0.87980.86060.88610.88720.8793
US dollarUSD1.21081.08321.16581.19931.1412

Additional Disclosures on Revenues

Group revenues are primarily generated from contracts with customers in accordance with IFRS 15. Other revenues not in the scope of IFRS 15 result from financial services in the Arvato division.

The following table shows the revenues from contracts with customers in accordance with IFRS 15 by division and broken down by the revenue sources and primary geographical areas:

Revenue from Contracts with Customers

in € millionsRTL GroupPenguin
Random
House
Gruner +
Jahr
BMGArvatoBertels-
mann
Printing
Group
Bertels-
mann
Education
Group
Total
divisions1)
Revenue Sources        
Own products and merchandise721,41530920106151,937
Services187401961,7526571112,943
Advertising1,760178171,955
Rights and licenses1,0212772201,275
3,0401,4826902401,8586891118,110
 
Geographical Areas
Germany1,0191044471775242512,765
France723615410195321,120
United Kingdom10615245910281504
Other European countries6691256728518921,499
United States441853998154511081,714
Other countries8224292813782508
 3,0401,4826902401,8586891118,110

The revenues reported by source of revenue and geographical areas reflect exclusively the revenues in accordance with IFRS 15 and consequently differ from the breakdown of revenues in segment reporting.

The revenues from contracts with customers comprise in the reporting period performance obligations fulfilled at a certain point in time of €3,124 million and performance obligations fulfilled over a certain period of time of €4,986 million. They are mainly attributable to the following divisions:

Timing of Revenue Recognition from Contracts with Customers

in € millionsPoint in timeOver timeTotal
divisions1)
RTL Group9102,1303,040
Penguin Random House1,432501,482
Gruner + Jahr438252690
BMG68172240
Arvato1971,6611,858
Bertelsmann Printing Group78611689
Bertelsmann Education Group1110111
3,1244,9868,110

Additional Disclosures on Financial Instruments

The principles and methods used for the fair value measurement remain unchanged compared to those used in the previous year. Only disclosures on financial instruments that are significant to an understanding of the changes in financial position and financial performance since the end of the last annual reporting period are explained below.

The following hierarchy is used to determine the fair value of financial instruments.

Level 1:
The fair value of the listed financial instruments – including those in the Bertelsmann Investments division – is determined on the basis of stock exchange listings at the end of the reporting period. That applies regardless of whether any contractual lockups are in place at the end of the reporting period for financial instruments held by Bertelsmann.

Level 2:
For measuring the fair value of unlisted derivatives, Bertelsmann uses various financial methods reflecting the prevailing market conditions and risks at the respective balance sheet dates. Irrespective of the type of financial instrument, future cash flows are discounted at the end of the reporting period based on the respective market interest rates and yield curves at the end of the reporting period.

The fair value of forward exchange transactions is calculated using the average spot prices at the end of the reporting period and taking into account forward markdowns and markups for the remaining term of the transactions. The fair value of interest rate derivatives is calculated on the basis of the respective market rates and yield curves at the end of the reporting period. The fair value of forward commodity transactions is derived from the stock exchange listings published at the end of the reporting period. Any incongruities to the standardized stock exchange contracts are reflected through interpolation or additions.

Level 3:
If no observable market data is available, fair value measurement is based primarily on cash flow-based valuation techniques. As a rule, qualified financing rounds are used for minority stakes in the Bertelsmann Investments division.

The measurement of financial assets and financial liabilities according to level 2 and level 3 requires management to make certain assumptions about the model inputs including cash flows, discount rate and credit risk, as well as the life and development cycle of start-up investments.

The option offered in IFRS 13.48 (net risk position) is used for measuring the fair value of financial derivatives. To identify the credit exposure from financial derivatives, the respective net position of the fair values with the contractual partners is used as a basis, as these are managed based on a net position in view of their market or credit default risks.

The measurement category “fair value through profit or loss” mainly includes the minority stakes in other entities and so-called fund-of-fund investments purchased by the Bertelsmann Investments division. With deferred taxes taken into consideration, the gains and losses resulting from fluctuations in the fair value are recognized in profit or loss. As a rule, the fair value measurement of fund-of-fund investments is based on the valuations of the external management as presented in regular reporting and taking into account a fungibility discount. The fair value of listed minority stakes is based on quoted (unadjusted) market prices at the end of the reporting period. When possible, measuring fair value of minority stakes in other entities is based on observable prices obtained as part of the most recently implemented qualified financing rounds, taking into account the life and development cycle of the entity.

The market value of the 2001 profit participation certificates with a closing rate of 336.00 percent on the last day of trading in the first half of 2018 on the Frankfurt Stock Exchange was €955 million (December 31, 2017: €950 million with a rate of 334.00 percent) and, correspondingly, €33 million for the 1992 profit participation certificates with a rate of 195.00 percent (December 31, 2017: €34 million with a rate of 199.00 percent). The market values are based on level 1 of the fair value hierarchy.

In June 2018, a fixed interest promissory note in the amount of €200 million was repaid on time.

On June 30, 2018, the cumulative market value of the listed bonds totaled €3,600 million (December 31, 2017: €3,695 million) with a nominal volume of €3,500 million (December 31, 2017: €3,500 million) and a carrying amount of €3,477 million (December 31, 2017: €3,476 million). The stock market prices are based on level 1 of the fair value hierarchy. On June 30, 2018, the total carrying amount of the private placements and promissory notes totaled €709 million (December 31, 2017: €908 million), and the total market value amounted to €749 million (December 31, 2017: €949 million). The fair values of private placements and promissory notes are determined using actuarial methods based on yield curves adjusted for the Group’s credit margin. This credit margin results from the market price for credit default swaps at the end of the respective reporting periods. Fair value is measured on the basis of discount rates ranging from -0.32 percent to 1.82 percent. The fair values of the private placements and promissory notes are based on level 2 of the fair value hierarchy.

The allocation to measurement levels as of June 30, 2018, take into account the reclassification of financial instruments carried out during the first-time application of IFRS 9 and described in the section “Impact of New Financial Reporting Standards.”

Financial Assets Measured at Fair Value Categorized Using the Fair Value Measurement Hierarchy

in € millionsLevel 1:
Quoted prices
in active
markets
Level 2:
Observable
market data
Level 3:
Unobservable
market data
Balance as of
6/30/2018
Financial assets recognized at fair value13110536677
Primary and derivative financial assets held for trading6666
Derivatives with hedge relation1717
13193536760

Financial Assets Measured at Fair Value Based on Level 3

in € millionsFinancial
assets recog-
nized at fair
value
Primary and
derivative
financial as-
sets held for
trading
Total
Balance as of 1/1/2018428428
Total gain (+) or loss (-)7474
– in profit or loss7070
– in other comprehensive income44
Purchases106106
Sales/settlements(80)(80)
Transfers out of/into level 388
Balance as of 6/30/2018536536
Gain (+) or loss (-) for assets still held at the end of the reporting period4949

Financial Liabilities Measured at Fair Value Categorized Using the Fair Value Measurement Hierarchy

in € millionsLevel 1:
Quoted prices
in active
markets
Level 2:
Observable
market data
Level 3:
Unobservable
market data
Balance as of
6/30/2018
Financial liabilities recognized at fair value through profit or loss3838
Primary and derivative financial liabilities held for trading1919
Derivatives with hedge relation1212
313869

Financial Liabilities Measured at Fair Value Based on Level 3

in € millionsFinancial
liabilities
recognized
at fair value
through
profit or loss
Total
Balance as of 1/1/20184444
Total gain (-) or loss (+)11
– in profit or loss11
– in other comprehensive income
Purchases44
Settlements(11)(11)
Transfers out of/into level 3
Balance as of 6/30/20183838
Gain (-) or loss (+) for liabilities still held at the end of the reporting period11

Income Taxes

The tax expense for the first half of 2018 was calculated in accordance with IAS 34 using the average annual tax rate expected for the whole of 2018, which is calculated at 33.1 percent according to Bertelsmann management’s current estimation. In addition, non-recurring tax items have been recognized in current tax and deferred tax, which resulted in a lower tax rate in the income statement.

The tax expense for the first half of 2018 was lower than in the same period of the previous year, in particular due to lower earnings before taxes and higher positive non-recurring items in the tax result.

Other Information

As a result of seasonal influences on the divisions, higher revenues and a higher operating result tend to be expected in the second half of the year compared to the first half of the year. The higher revenues in the second half of the year are primarily due to the increasing demand during the year-end holiday season, in particular in advertising-driven businesses and in the publishing business, as well as to the customary seasonality in the music business.

Within the Consolidated Cash Flow Statement, the item “Proceeds from/redemption of other financial debt” includes receipts in the amount of €440 million and payments in the amount of €-146 million. The receipts include net inflows from a bank loan in order to finance a short-term funding requirement of €400 million. Payments include the repayment of €-52 million by Penguin Random House of a loan from Pearson and the repayment of €-20 million by HotChalk of a loan from Pinnacle Bank.

Notes on Segment Reporting

Segment reporting continues to reflect eight operating reportable segments (RTL Group, Penguin Random House, Gruner + Jahr, BMG, Arvato, Bertelsmann Printing Group, Bertelsmann Education Group and Bertelsmann Investments)..

Reconciliation of Segment Information to Group Profit or Loss

in € millionsH1 2018H1 2017
Operating EBITDA from continuing operations1,0711,099
Amortization/depreciation, impairment losses and reversals on intangible assets and property, plant and equipment311311
Adjustments on amortization/depreciation, impairment losses and reversals on intangible assets and property, plant and equipment included in special items(1)(2)
Special items(8)(15)
EBIT from continuing operations769805
Financial result(106)(105)
Earnings before taxes from continuing operations663700
Income tax expense(162)(197)
Earnings after taxes from continuing operations501503
Earnings after taxes from discontinued operations
Group profit or loss501502

Events After the Reporting Period

In July 2018, Bertelsmann issued a floating rate note with a volume of €200 million and a term of up to two years as part of a private placement.

In July 2018, Groupe M6, which belongs to RTL Group, announced that it had entered into exclusive negotiations with the US-based investment fund GACP, with a view to selling its entire shareholding in the Football Club Girondins de Bordeaux (FCGB). Completion of the transaction remains subject to finalization of the negotiations, consultation with employee representative bodies and approval from the Bordeaux Métropole Council regarding the guarantees offered by GACP in relation to the lease payments owed by FCGB for use of the stadium.