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SHOPPING70 ANNUAL REPORT 2014Deutsche EuroShop FINANCIAL STATEMENTS in € thousand Level 1 Level 2 Level 3 Investment properties 3,060,179 There were no reclassifications between the hierarchical levels in the current financial year. Lease agreements In line with IAS 17, the tenancy agreements in the Deutsche EuroShop Group are classified as operating leases. The operat- ing lease agreements relate to investment property owned by the Group with long-term leases. Rental income from operating leases is recognised in income on a straight-line basis over the term of the corresponding lease. The lessee has no opportunity to acquire the property at the end of the term. FINANCIAL INSTRUMENTS Financial assets and liabilities are recognised in the consolidated balance sheet when the Group becomes a party to the contrac- tual provisions governing the financial instrument. Financial instruments are generally recognised at fair value. The fair value is defined as the price that would be accepted or paid to transfer a liability in an arm’s length transaction between mar- ket participants. When measuring the fair value, it is assumed that the transaction upon which the price is based occurs on a main market to which the Group has access. The price is meas- ured based on the assumptions that market participants would use for pricing. When determining fair value, a distinction is made between three assessment categories in accordance with IFRS 13: Level 1: At the first level of the “fair value hierarchy”, fair values are determined using publicly quoted market prices, as the best-possible objective indication of the fair value of a financial asset or liability can be observed on an active market. Level 2: If there is no active market for an instrument, a com- pany determines the fair value using measurement models. These models include use of the most recent arm’s-length transactions between knowledgeable and willing parties, comparison with the current fair value of another, essentially identical financial instru- ment, use of the discounted cash flow method and option pricing models. The fair value is estimated on the basis of the results of a method of measurement that uses data from the market to the greatest possible extent and is based as little as possible on company- specific data. Level 3: The measurement models used for this level are based on parameters that are not observable on the market. In the case of financial instruments that are recognised at fair value on a regular basis, it is determined based on a reassessment at the end of the financial year whether reclassifications between the hierarchical levels occurred. For financial instruments meas- ured at amortised cost, fair value is determined based on the expected payment flows using the benchmark interest rates for matching risk and maturities at the balance sheet date. a. Derivative financial instruments Derivatives that qualify for hedge accounting in accordance with IAS 39 are used to hedge interest rate risks. These are fixed- rate swaps to limit the interest rate risk of variable interest rate loans, which have terms extending to 2026. The interest rate hedges are recognised at fair value (recurring fair value meas- urement) under “Other assets” or “Other liabilities”. Changes are recognised directly in equity, provided that the conditions of the underlying and hedge transaction are identical. Hedge ef- fectiveness tests are conducted regularly. If the effectiveness be- tween the hedged item and the hedge does not exist, the hedge is measured as a derivative at fair value in profit or loss. Present value is calculated based on discounted cash flows using cur- rent market interest rates. The final maturities of the interest rate hedges and loan agreements are identical. b. Non-current financial assets Non-current financial assets are classified as available for sale and include an investment in a Dutch corporation that is a joint venture controlled by Deutsche EuroShop jointly with partner companies. As Deutsche EuroShop, under the provisions of the shareholders’ agreement, exercises neither significant influence nor control over this company, the investment is measured at fair value (recurring fair value measurement) in line with the provisions of IAS 39. c. Receivables and other current assets Receivables and other current assets are recognised at amortised cost less write-downs. Allowances are established for trade re- ceivables if it is no longer certain that payment will be received. This is reviewed on a case-by-case basis at the balance sheet date. They are written off if the receivable becomes uncollectible. d. Right to redeem of limited partners The distinction between equity and liabilities is set out in IAS 32 Financial Instruments: Disclosure and Presentation. In accordance with this standard, the equity interests of third-party shareholders in commercial partnerships are reclassified as li- abilities due to the shareholders’ potential right of redemption. According to sections 131 et seq. HGB, shareholders in com- mercial partnerships have an ordinary legal right of termina- tion of six months with effect from the end of the financial year, which the shareholders’ agreement can define from a long-term perspective, but cannot exclude. As a result of this stipulation, a liability rather than equity is recognised in the balance sheet. This liability must be measured at fair value. e. Financial liabilities Liabilities to banks/bank loans and overdrafts are reported at amortised cost. Discounts are deducted, which under IAS 39 must be amortised over the term of the loan agreement and rec- ognised annually as an expense. The debt component of convertible bonds is measured using the market interest rate for a similar, non-convertible bond. This debt component is measured as a liability at amortised cost using the effective interest method until converted or re- payment becomes due. The remaining proceeds from the issue represent the value of the conversion rights. This is recognised in equity within the capital reserves. The financial liability in- creases over time, with an effect on net income, and comes to an amount equalling the difference between the actual interest expense and the nominal interest rate. f. Trade payables Trade payables are recognised at their repayment amount. g. Other liabilities Other liabilities are recognised at amortised cost. h. Cash and cash equivalents Cash and cash equivalents include cash and bank balances (terms of up to three months) at their principal amounts. Investments accounted for using the equity method Investments in associates and joint ventures are initially rec- ognised at cost in the balance sheet and adjusted by changes in the Group’s share of the equity of the associate/joint ventures after the date of acquisition. At every reporting date, the Group reviews whether there are indications that the shares need to be impaired in relation to the amortised carrying amounts. Deferred taxes In accordance with IAS 12, deferred taxes are recognised for all differences between the tax accounts and the IFRS balance sheet, using the currently enacted tax rate. Currently, deferred taxes are primarily formed on the differences between the IFRS carrying amounts of the properties and their carrying amounts for tax purposes. A uniform corporation tax rate of 15% plus the soli- darity surcharge of 5.5% was used for German companies, and in some cases a rate of 16.45% for trade tax. The respective local tax rates were applied for foreign companies. In accordance with IAS 12.74, deferred tax assets on existing loss carryforwards are offset against deferred tax liabilities. Other provisions Under IFRS, other provisions may only be recognised if a pre- sent obligation exists towards a third party and payment is more likely than not. Non-current provisions are discounted. Notes to the consolidated balance sheet – assets 1. Intangible assets CONCESSIONS, INDUSTRIAL AND SIMILAR RIGHTS AND LICENCES IN SUCH RIGHTS AND ASSETS in € thousand 2014 2013 Costs as at 1 January 64 64 Additions 14 4 Disposals -28 -4 as at 31 December 50 64 Depreciation as at 1 January -56 -48 Additions -5 -11 Disposals 28 3 as at 31 December -33 -56 Carrying amount at 1 January 8 16 Carrying amount at 31 December 17 8 This item consists mainly of software licences. Forum, Wetzlar in € thousand 20142013 Costs as at 1 January 6464 Additions 144 as at 31 December 5064 Disposals 283 Carrying amount at 1 January 816 Carrying amount at 31 December 178