Comparability with the first half of 2019

After due consideration is given to the following issues, the financial information presented for the first half of 2020 is comparable with the financial information for the first half of 2019:

• Details of major events and transactions
• General information regarding the impact of the Covid-19 pandemic on the consolidated financial statements

Particularly as a result of the Covid-19 pandemic, revenues in virtually all segments have suffered a significant decline in certain cases. In DB Group, revenues in the first half of 2020 declined to € 19,423 million (first half
of 2019: € 22,014 million). For further information please refer to the details regarding revenues from contracts with customers IFRS 15.

In addition, mainly due to the impact of the Covid-19 pandemic, EBIT declined to € –3,283 million in the first half of 2020 (first half of 2019: € +629 million). The cash flow from operating activities has also declined to € –235 million (first half of 2019: € 1,386 million). This has also resulted in net financial debt increasing to € 27,513 million as of June 30, 2020 (as of December 31, 2019: € 24,175 million).

Major events and transactions, and the corresponding impact on the consolidated financial statements, are described in greater detail in the following.

Impairments of assets

IAS 36 governs the impairment test for property, plant and equipment and intangible assets which is carried out using a so-called indicator-based asset impairment test. Such an asset impairment test has to be carried out when indicators (so-called triggering events) indicate a possible loss of value. For DB Group, the impact of the Covid-19 pandemic represents such a triggering event, and impairment tests were accordingly carried out as of April 30, 2020. Up to the point at which the financial statements were prepared, there have been no significant changes to the underlying assumptions.

Regarding the methodological approach, please also refer to the notes in the 2019 Integrated Report of DB Group. In this connection, the forecast of the cash flows was extended to include assumptions regarding risks relating to the Covid-19 pandemic which are subject to a high degree of uncertainty.

In connection with the performance of the impairment tests, the costs of capital have increased compared with December 31, 2019. The weighted average cost of capital (WACC) for the respective cash-generating units (CGUs) valid as of June 30, 2020, and December 31, 2019, are shown in the following table, whereby the cost of capital as of June 30, 2020 remained unchanged compared with April 30, 2020.

The changes in the WACCs compared with the previous year are attributable to current expectations of medium- to long-term developments of the capital markets.

With the exception of DB Arriva, the impairment tests carried out in the period under review identified surplus cover for all CGUs despite the effects of the Covid-19 pandemic.

The income and cash flow planning in the segment DB Arriva has been reduced considerably in connection with the Covid-19 pandemic; together with the much higher costs of capital in connection with the impairment test, this has meant that the net assets (carrying amount) shown in the balance sheet are no longer covered by future surpluses which are derived from medium-term planning (value-in-use). This has resulted in an impairment loss of € 1,410 million, which is attributable entirely to the write-down of the goodwill previously recognized by DB Arriva.

Within the framework of the impairment tests, the main assumptions which have an impact on the value of a CGU are reviewed in the form of standard sensitivity analyses. At the CGU DB Cargo, the sensitivity analysis was carried out in relation to the market values established for the main assets. Even in conjunction with a markdown of 10% in relation to the market value, this has not resulted in any impairment requirement for the CGU DB Cargo.

EBIT margin

The risk of an EBIT margin reduced by 10% has been considered for analyzing a scenario in which results fail to perform in line with budget. This model calculation has identified an impairment requirement for the CGUs DB Long-Distance and DB Netze Stations as well as an additional impairment requirement for the CGU DB Arriva. In scenarios in which the EBIT margin is reduced, the CGU DB Long-Distance is robust up to a reduction of 6.3%. The CGU Netze Stations can cover the carrying amount up to a reduction of 8.4% in the EBIT margin. All other CGUs report surplus coverage even if the EBIT margin is reduced by 10%.

Average real growth rate of cash flows

A reduction of 10% in the long-term growth rate has been simulated in order to assess the sensitivity of the impairment test result in relation to the assumed long-term growth of cash flow (+1%). As was the case in the previous year, no impairment requirement has been identified for any of the CGUs considered in this scenario.

Weighted average cost of capital

Risks relating to the assumptions of the capitalization rate, which is normally used for calculating the present value of the value in use, have been analyzed by simulating the value of each CGU in conjunction with a capital cost mark-­­up of 10%. The currently used weighted costs of capital (after tax) have been used as the basis of this simulation. In this scenario, there is an impairment requirement for the CGU DB Long-Distance. DB Long-Distance can cope with an increase of up to 9.1% in the cost of capital. There is also an additional impairment requirement for the CGU DB Arriva which has been considered.

Useful life and residual value

With regard to the assumptions relating to useful life and residual value, the effect of a 10% reduction in the residual value at the end of useful
life (terminal value) was analyzed. In this scenario, there is no impairment requirement for any observed CGU.

In DB Group, capital-value-oriented procedures are used for the impairment test of software developments with directly attributable cash flows. In view of amended assumptions, also due to the Covid-19 pandemic, there is a total impairment requirement of € 73 million, which is attributable to Mobimeo GmbH, Deutsche Bahn Connect GmbH and Arriva plc, Sunderland/­Great Britain.

Provisions relating to onerous contracts

Particularly in connection with the Covid-19 pandemic, provisions have been created for loss-making passenger service contracts as a result of lower fare revenues. At DB Regional, the additions to these provisions amounted to € 213 million as of June 30, 2020.

Procedures relating to method: see also the notes to the 2019 Integrated Report (note (32)).

Impairment of inventories

As of June 30, 2020, pandemic protection articles held in inventories were measured at the lower of cost or net realizable value. In view of the increased worldwide production and the decline in market prices, impairments of € 46 million have been recognized in relation to such protection articles.

Impairments and risk provisioning relating to receivables

A total of € 36 million was recognized as of June 30, 2020, in relation to the derecognition of receivables or individual impairments recognized in relation to receivables. As a result of the Covid-19 pandemic, the general risk provisioning for anticipated credit losses has also been increased to € 36 million.

Procedures relating to method: see also the notes to the 2019 Integrated Report (note (19)).

Measurement of other participations

As of June 30, 2020, the carrying amount of various other participations recognized at fair value was reduced by a total of € 12 million, as income and cash flow planning has to be updated due to the Covid-19 pandemic.

Adjustment for discounting decommissioning and disposal obligations

The discount rate for individual decommissioning obligations was reduced as of June 30, 2020. This has resulted in a one-off non-cash-effective interest expense of € 68 million. The discount rate of provisions for ecological burdens was also adjusted. It has resulted in non-current deferred items being reclassified to the other provisions (€ 61 million).

Arriva Rail North

On March 1, 2020, the operating assets and liabilities of the Arriva Rail North franchise were transferred to the state-owned Operator of Last Resort (OLR). The transferred operating assets mainly comprise utilization rights from leasing agreements (carrying amount as of December 31, 2019: € 499 million) and corresponding leasing liabilities (carrying amount as of Decem­ber 31, 2019: € 502 million). Please also refer to the notes to the 2019 Integrated Report (note (39)). The transfer of the business to ORL resulted in a decline in revenues of € 287 million in the segment DB Arriva in the first half of 2020.