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62 ANNUAL REPORT 2014Deutsche EuroShop MANAGEMENT REPORT Risk report Principles governing the risk management system and internal control system Deutsche EuroShop’s strategy is geared to- wards maintaining and sustainably increasing shareholders’ assets and generating sustain- ably high surplus liquidity from leasing real estate, thereby ensuring that the shareholders can share in the success of the company over the long term through the distribution of a rea- sonable dividend. The focus of the risk manage- ment system is therefore on monitoring com- pliance with this strategy and, building on this, the identification and assessment of risks and opportunities as well as the fundamental deci- sion on how to manage these risks. Risk man- agement ensures that risks are identified at an early stage and can then be evaluated, commu- nicated promptly and mitigated. Monitoring and management of the risks identified form the focal point of the internal control system, which at Group level is essentially the responsi- bility of the Executive Board. The internal con- trol system is an integral part of the risk man- agement system. Within the framework of their legal man- date for auditing the annual financial state- ments, the auditor checks whether the early warning system for risks is suitable for detect- ing at an early stage any risks or developments that might endanger the Company. Risk analysis involves the identification and analysis of factors that may jeopardise the achievement of objectives. The risk analysis process answers the question of how to deal with risks given ongoing changes in the en- vironment, the legal framework and working conditions. The resulting control activities are to be embedded into processes that are essential to the realisation of business targets. Key features Under existing service contracts, the Executive Board of Deutsche EuroShop AG is continu- ously briefed about the business performance of individual property companies. Financial statements and financial control reports are submitted on a quarterly basis for each shop- ping center, with medium-term corporate plans submitted annually. The Executive Board the internal control and risk management sys- tem enables the full recording, processing and evaluation of Company-related facts as well as their proper presentation in Group financial reporting. Decisions based on personal judgement, flawed controls, criminal acts or other circum- stances cannot be entirely ruled out, however, and may limit the effectiveness and reliability of the internal control and risk management system that is in use such that the application of the systems used cannot guarantee absolute certainty in respect of the correct, complete and timely recording of facts in Group finan- cial reporting. The statements made relate to those sub- sidiaries included in the consolidated financial statements of Deutsche EuroShop for which Deutsche EuroShop is in a position, directly or indirectly, to dictate their financial and op- erating policies. Presentation of material individual risks Cyclical and macroeconomic risks The German economy posted moderate growth of 1.6% in 2014. According to data published by the German Federal Statistical Office, private consumption, which was up for the fourth year in a row, was the primary driver behind this growth. The healthy order situation in the construction sector and strong exports also stimulated the economy last year. The federal government forecasts GDP growth of 1.5% in Germany in 2015. The positive situation on the job market also continued last year. Around 42.7 million people were employed in 2014, which repre- sents a figure of 371 thousand or 0.9% more than the previous year. The number of unem- ployed people fell by 94,000 to 2.1 million (-4.5%) in 2014, which is the lowest level since reunification. Germany thus has the lowest un- employment rate in the EU. In December 2014, the unemployment rate was 6.4%. The job mar- ket in 2015 is expected to undergo robust de- velopment which is still associated with risk. The gross domestic product in the euro- zone rose by 0.9% (2013: -0.4 %). The uncer- tain course of reforms, some of which have yet to be implemented, being pursued in some member states combined with a high backlog of public and private debts reflects the recent, rather gloomy development of the European economy. Hopes of a sustained improvement have yet to be realised. In several European member states, growth is by no means suffi- regularly reviews and analyses these reports, using the following information in particular to assess the level of risk: 1. Portfolio properties • Trends in accounts receivable • Trends in occupancy rates • Retail sales trends in the shopping cent- ers • Variance against projected income from the properties 2. Centers under construction • Pre-leasing levels • Construction status • Budget status Risks are identified by observing issues and changes that deviate from the original plans and budgets. The systematic analysis of eco- nomic data such as consumer confidence and retail sales trends is incorporated into risk man- agement, as well. The activities of competitors are also monitored continually. Annual financial state- ment preparation process Preparation of the financial statements is a fur- ther important part of the internal control sys- tem and is monitored and controlled at the level of the Group holding company. Internal regula- tions and guidelines ensure the conformity of the annual financial statements and the con- solidated financial statements. The decentralised preparation of Group- relevant reports by the service provider is fol- lowed by the aggregation and consolidation of the individual annual financial statements and the preparation of the information for report- ing in the notes and Management Report in the accounting department of the holding compa- ny with the aid of the consolidation software Conmezzo. This is accompanied by manual process controls such as the principle of dual control by the employees charged with ensur- ing the regularity of financial reporting and by the Executive Board. In addition, within the scope of his auditing activities, the auditor of the consolidated financial statements performs process-independent auditing work, also with respect to financial reporting. Advice on limitations By virtue of the organisational, control and monitoring measures laid down in the Group, cient to push debt reduction - on the contra- ry: the debt level continues to rise inexorably. Some member states continue to struggle with a lack of competitiveness and unemployment rates in excess of 20%. Despite favourable over- allfinancialconditions,theprospectstherethus remain only moderate. In 2014, the overall un- employment rate in the eurozone was 11.5%. The EU Commission expects growth of 1.3% for the 19 member states in 2015. Consumer prices once again declined in 2014. Germany’s inflation rate was 0.9% while prices rose by 0.6% in the eurozone year-on- year. The steep decline in energy prices was particularly noticeable here. The loose monetary policy of the central banks, lower energy costs and the healthy sit- uation on the job market are contributing to a positive mood among German companies and consumers. The global economic situa- tion, however, remains challenging in light of the ongoing Greek debt crisis and the geopo- litical risks in Ukraine and Syria. Until now, Germany has been left unscathed by the very sluggish economic development in the euro- zone. Greece’s exit from the eurozone cannot be ruled out. Even though the European Un- ion has approved an extension of the Greek aid package by another four months, there is still no identifiable solution to the structural problems of the Greek economy, even five years on. The foundation for a new phase of growth needs to be laid and implementation of the ap- proved reform programme will take time. The overall economic risks remain high as a result. Deutsche EuroShop AG is not as strongly affected by short-term economic develop- ments as other sectors are in terms of its busi- ness model – long-term, inflation-proofed leas- ing of retail space – and the associated risks. However, in light of the sovereign debt crisis, we cannot rule out the possibility of a change in economic conditions that would impact Deutsche EuroShop AG’s business. Past experience has demonstrated that by locating our shopping centers in prime loca- tions and by ensuring broad sector diversifica- tion within the centers, we can achieve com- mercial success even under difficult economic conditions. REVENUE € million 20162015 Target 201–204 Target 203–206 2014 Earnings 200.8 EBIT € million 20162015 Target 177–180 Target 179–182 2014 Earnings 177.5 EBT EXCLUDING VALUATION € million 20162015 Target 126–129 Target 130–133 2014 Earnings 125.0 FFO PER SHARE € 20162015 Target 2.24–2.28 Target 2.30–2.34 2014 Earnings 2.23