Notes to the Consolidated Financial Statements

1. General

First-time adoption of IFRS 16 – Leases

In this financial year, PUMA has for the first time applied IFRS 16 leases as the new standard became mandatory for financial years commencing on or after January 1, 2019.

The effect of the new leasing standard IFRS 16 was that all leases, except short-term and low-value leases, were recognized in the form of a right-of-use asset and a corresponding leasing liability. A differentiation between operating and finance leases is no longer required. The impacts of the initial application of IFRS 16 on the consolidated financial statements will be described in the following.

PUMA mainly concludes leasing contracts as an operating lessee. With the application of IFRS 16, the reporting of leases previously recognized as operating leases and not recognized on the balance sheet has changed. In accordance with the new standard, PUMA recognizes for all leases, except short-term leases with a duration of less than 12 months and low-value lease assets:

1. in the consolidated balance sheet, a right-of-use asset and a corresponding lease liability which are initially valued at the present value of future lease payments;
2. depreciation of the right-of-use assets and interest expenses for the lease liabilities in the consolidated income statement;
3. the lease installments in the cash flow statement; here, the repayment and interest portions are separately recognized within the cash inflows/outflows from financing activities.

The first-time application of IFRS 16 by PUMA is done based on the modified retrospective method. This method did not require adjustment of the previous year’s numbers. Instead, at the time of initial application (January 1, 2019), the cumulated effects of the initial application of IFRS 16 are recognized as a correction item in the opening balance.

PUMA has made use of the exemption provision which does not require to newly evaluate whether a contract contains a lease or not during the transition to IFRS 16. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those contracts that were concluded or amended before January 1, 2019. For all contracts that were concluded or amended on or after January 1, 2019, PUMA already applies the definition of a lease based on the guidelines stipulated by IFRS 16. As part of the implementation of the new leasing standard, PUMA has not determined any material changes as a result of the new definition of leases in accordance with IFRS 16.

PUMA has elected to fully use all recognition exemptions provided for by IFRS 16 for the application of the standard. For the country portfolios of leases, PUMA has applied a term-specific discount rate. The weighted average of the incremental borrowing rate was 4.6%. The incremental borrowing rate was determined on a country- and currency-specific basis and with comparable terms based on the risk-free market rate. Furthermore, a specific risk premium was added for every subsidiary.

As part of the initial application of IFRS 16, PUMA has decided not to perform an impairment test. As of December 31, 2018, no provisions existed for onerous contracts from leases in accordance with IAS 37. Consequently, at the time of initial application on January 1, 2019, no adjustment of the right-of-use assets relating to provisions for onerous contracts from leases was necessary.
In addition, PUMA has elected to use the exemption provisions for short-term leases with a term of less than 12 months and low-value lease assets and recognized the underlying lease expense in operating expenses on a straight-line basis in accordance with IFRS 16. Similarly, initial direct costs when measuring the right-of-use assets were disregarded at the time of initial application. In addition, PUMA retrospectively determined the term of the leases, for example with regard to extension and termination options ("use of hindsight").

The measurement of the right-of-use assets occurred at the transition point in the amount of the lease liabilities that were corrected by the amount of the prepaid or deferred lease payments recognized on the balance sheet as of December 31, 2018.

In addition, lease incentives of the lessee (e.g. rent-free periods and incentive payments) were recognized during the measurement of the right-of-use asset and lease liability, whereas under IAS 17, these were recognized as deferred liabilities and reported as a reduction of rental expenses on a straight-line basis.

The right-of-use assets recognized on the balance sheet are subject to impairment of assets in accordance with IAS 36. In contrast, for operating leases under IAS 17, an assessment is made whether the contract is an onerous contract according to IAS 37 with regards to provisions.

With regards to the leases that were previously recognized as finance leases, PUMA assumed the carrying amount of the leased asset and the lease liability under IAS 17 for the valuation of the right-of-use asset and the lease liability at the time of initial adoption of IFRS 16. The carrying amount of the finance leases was € 8.3 million as of December 31, 2018 as shown in the reconciliation presented below.

The following table represents the reconciliation of the obligations arising from the operating leases as of December 31, 2018 with the lease liabilities recognized on the balance sheet as of January 1, 2019:

Amendments to IFRIC 23 Uncertainty Transactions and Advance Consideration

IFRIC 23 clarifies the accounting of current and deferred tax liabilities where uncertainties exist regarding their income tax-related treatment. Such uncertainties may arise if the application of the respectively applicable tax law is not clear with regard to a specific business case and is therefore also dependent on the interpretation of the law by the taxation authority. PUMA, however, is not aware of the respective interpretation at the time the financial statements are prepared. IFRIC 23 specifies that a company should only take these uncertainties into account with regard to recognized tax liabilities or claims if it is probable that the respective tax amounts will have to be paid or reimbursed. It is in this case to be assumed that the taxation authority will exercise its right to review declared amounts and will have full knowledge of all pertaining information.

In these cases, PUMA will always perform an individual assessment of tax-related matters and will measure these with the most probable amount.

The application of IFRIC 23 had no effect on the consolidated financial statements as it did not change the recognized tax liabilities or claims.

The explanations regarding the assumptions made and estimates used with regard to taxes are presented in chapter 2 Significant Consolidation, Accounting and Valuation Principles.

New, but not yet mandatory standards and interpretations

The following standards and interpretations have been released but will only become effective in later reporting periods and are not applied earlier by the Group.