Notes on the Consolidated Statement of Financial Position

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(15) Goodwill (16) Other intangible assets (17) Investment property (18) Property, plant and equipment (19) Companies measured at equity (20) Financial assets available for sale (21) Trade accounts receivable and other receivables (22) Derivative financial instruments (23) Current and deferred income tax claims (24) Inventories (25) Cash and cash equivalents (26) Assets held for sale (27) Subscribed capital (28) Capital reserves (29) Revenue reserves (30) Hybrid capital (31) Minority interests (32) Pension provisions and similar obligations (33) Income tax provisions and other provisions (34) Financial liabilities (35) Trade accounts payable (36) Derivative financial instruments (37) Other liabilities (38) Liabilities related to assets held for sale (39) Contingent liabilities (40) Litigation (41) Other financial commitments Financial instruments Capital risk management

(15) Goodwill

The rise in the carrying amount was largely attributable to the translation of goodwill not carried in the TUI Group’s functional currency into euros.

In accordance with IFRS 5, assets of discontinued operations and other non-current assets held for sale were combined into a disposal group in the statement of financial position. Reclassifications of goodwill classified as held for sale in the course of the short financial year under review were carried as reclassifications and exclusively related to TUI Travel.
 
In accordance with the rules of IAS 21, goodwill allocated to individual segments and sectors was recognised in the functional currency of the subsidiaries and subsequently translated in the framework of the preparation of the consolidated financial statements. In analogy to the treatment of other differences from the translation of annual financial statements of foreign subsidiaries, differences due to exchange rate fluctuations between the exchange rate at the date of acquisition of the subsidiary and the exchange rate at the balance sheet date were taken directly to equity outside profit and loss and disclosed as a separate item. In the short financial year 2009, exchange differences caused an increase of €179.7m (previous year: decrease of €461.2m) in the carrying amount of goodwill.

At €2,288.6m, the largest portion of goodwill shown related to the TUI Travel Division. Within TUI Hotels & Resorts, goodwill of €351.7m was carried for the RIU Group.

The difference between net assets acquired and acquisition costs of €52.6m ­(previous year: €32.4m) arising from the acquisition of minority interests in the financial year under review was directly eliminated against other revenue reserves.

(16) Other intangible assets

Self-generated software consisted of computer programmes for tourism applications exclusively used internally by the Group.

Other intangible assets, consisting in particular of trademarks and customer relationships, were amortised annually over the estimated economic useful life on the basis of the economic value of the corresponding asset. Trademarks were amortised over periods of 15 to 20 years, while customer relationships were amortised over periods of 2 to 15 years.

In the completed financial year no impairments were carried (previous year: €1.0m). Write-backs to other intangible assets were not effected, either (previous year: €0.3m). Reclassifications for the short financial year included amounts of €65.0m and €13.0m, respectively, for the reclassification of assets held for sale in accordance with IFRS 5.

(17) Investment property

As a matter of principle, real estate owned by the Group was occupied for use in the framework of the Group’s ordinary business activities. In addition, the Group owned commercial property and apartments which met the definition of investment property under IAS 40. The carrying amount of this investment property shown in fixed assets totalled €76.7m (previous year: €90.1m). The fair values totalling €72.0m (previous year: €91.8m) were calculated by the Group’s own real estate companies, without consulting an external expert, on the basis of comparable market rents. The fair value of property for which purchase contracts had already been concluded was the fair value of the selling price. Investment property generated total income of €23.8m (previous year: €50.6m). The generation of this income was associated with expenses of €20.6m (previous year: €44.0m) in the short financial year 2009. Impairments of €2.6m (previous year: no impairments) were charged for investment property.

(18) Property, plant and equipment

At the balance sheet date, the carrying amount of property, plant and equipment subject to restraints on ownership amounted to €49.3m (previous year: €20.3m), including an amount of €45.8m (previous year: €10.9m) pledged as security.

The Group did not effect any reversals of depreciation of property, plant and equipment (previous year: €0.1m). Impairments totalled €190.2m (previous year: €20.1m) and related to aircraft assets (€139.4m) as well as land with hotel buildings (€44.9m). This impairment related to the Discontinued Magic Life Operation and was included in the profit and loss statement under ‘Result from Discontinued Operations’. In 2008, most of the impairments had related to aircraft assets at €11.0m.

Reclassifications in the financial year under review comprised amounts of €310.8m and €217.1m for the reclassification of assets held for sale in accordance with IFRS 5 (previous year: €4,171.9m and €1,802.4m).

Property, plant and equipment also comprised leased assets in which Group subsidiaries assumed substantially all the risks and rewards of ownership of the assets.

The payment obligations resulting from future lease payments were carried as liabilities without, however, taking account of future interest expenses. Total payments due in future under finance leases amounted to €237.3m (previous year: €257.5m). Group companies accepted guarantees for the residual values of the leased assets totalling €179.2m (previous year: €135.6m). 

In the framework of ordinary business activities, Group companies generated turnover of €17.3m (previous year: €41.8m) from short leasehold properties.

(19) Companies measured at equity

For associated companies and joint ventures measured at equity, proportionate profits for the year were shown under additions and disposals, while impairments of companies measured at equity would have to be carried under impairments.

For associated companies and companies jointly managed by the Group and one or several partners (joint ventures), the stake held by the Group corresponded to the share in the individual assets and liabilities of the joint ventures.

(20) Financial assets available for sale

Where a listed market price in an active market was not available and other methods to determine an objective market value did not produce any reliable results, the shares were measured at amortised cost. In the short financial year 2009, financial assets classified as available for sale under IFRS 7 of €2.7m ­(previous year: €20.5m) were impaired. Other securities included a downpayment for 9.9% of the shares in Air Berlin.

The securities shown included an amount of €2.0m (previous year: €3.9m) of current securities.

(21) Trade accounts receivable and other receivables

In the short financial year 2009, as in 2008, no cash inflow from impaired interest-bearing trade accounts receivable and other receivables was recorded.

Payments on account made mainly related to prepayments for future tourism ­services, in particular future hotel services payable by tour operators customary in the industry.

In the short financial year 2009, financial assets of €6.0m (previous year: €6.8m) were deposited with counterparties in order to collateralise contractually agreed liabilities.

(22) Derivative financial instruments

Derivative financial instruments were carried at their fair values (market values). They mainly served as hedges for future business operations and are detailed in the explanations on financial instruments.

(23) Current and deferred income tax claims

The determination of current and deferred income taxes is outlined in detail in the section ’Accounting and measurement methods’.

Deferred income tax claims included an amount of €198.5m (previous year: €154.8m) to be realised in more than twelve months.

Income taxes with no effect on profit and loss mainly resulted from the treatment of actuarial gains and losses in connection with the recognition of pension obligations, the measurement of cash flow hedges and other derivative financial instruments. Equity rose by €118.1m overall (previous year: €-59.3m) due to offsetting income taxes with no effect on profit and loss in the short financial year 2009. This amount broke down into €58.1m related to financial instruments (previous year: €-60.5m) and €60.0m related to pension obligations (previous year: €+1.2m).

No deferred tax liabilities were carried for temporary differences of €85.6m (previous year: €67.2m) between the net assets of subsidiaries and the respective carrying amounts carried in the tax balance sheet since these temporary differences were not expected to be reversed in the near future.

Loss carryforwards for German companies comprised the cumulative amount of trade tax and corporation tax. Potential tax savings totalling €620.3m (previous year: €475.3m) were not capitalised since use of the underlying loss carryforwards was not considered probable within the planning period.

In the short financial year 2009, the use of loss carryforwards previously assessed as non-realisable and for which therefore no asset had been carried for the resulting potential tax savings in previous years led to tax savings of €0.5m (previous year: €64.5m). The use of these loss carryforwards in 2008 was mostly related to the transfer of TUI AG’s maritime assets to Hapag-Lloyd AG. In the short financial year 2009, no tax reductions were realised by means of loss carrybacks, as in 2008.

The capitalised deferred tax claim from temporary differences and recoverable loss carryforwards of €104.8m (previous year: €82.3m), allocable to the German unit of fiscal entities which arose in 2007 due to reorganisation of the German companies transferred to TUI Travel, was covered by expected future taxable income, irrespective of tax losses in the prior period of these companies.

(24) Inventories

In the short financial year 2009, inventories of €3.3m were impaired in order to carry them at the lower net realisable value. No write-backs of inventories were effected in 2009, nor in 2008.

(25) Cash and cash equivalents

At 30 September 2009, an amount of €0.1bn (previous year: €0.1bn) of cash and cash equivalents were subject to restraints on disposal.

(26) Assets held for sale

In accordance with IFRS 5, the assets of Discontinued Operations and the non-current assets subject to a specific plan to sell had to be combined into a disposal group in a single item in the statement of financial position.

The assets classified as held for sale as at 30 September 2009 and the associated liabilities comprised the Discontinued Magic Life Operation and other non-current assets. Other non-current assets mainly included aircraft assets held for sale as well as property and yachts held for sale. In segment reporting, the two administrative buildings were carried in the Holdings Division, with other assets carried in the Tourism Division.

(27) Subscribed capital

The subscribed capital of TUI AG consisted of no-par value shares, each representing an identical share in the capital stock. The proportionate share in the capital stock per no-par value share was around €2.56. In July 2005, the previous bearer shares were converted to registered shares, whose owners have been registered by name in the share register.

The subscribed capital of TUI AG, registered in the commercial registers of the district courts of Berlin-Charlottenburg and Hanover, remained unamended at €642.8m. It thus continued to comprise 251,444,305 shares at the end of the financial year.
 
The Annual General Meeting of 13 May 2009 again authorised the Executive Board of TUI AG to purchase own shares of up to 10% of the capital stock. The authorisation will expire on 12 November 2010 and replaces the authorisation granted by the Annual General Meeting of 7 May 2008 to purchase own shares. The Executive Board has also been authorised to use equity derivatives in the form of put or call options or a combination of such options in the framework of the acquisition of treasury shares. Use of equity derivatives has been limited to purchases of shares in a volume of up to 5% of the capital stock. An authorisation to exclude the shareholders’ subscription rights was not adopted. The authorisation to purchase own shares has not been used to date.

Conditional capital

The Annual General Meeting of 10 May 2006 adopted a resolution creating conditional capital of €100.0m. Accordingly, bonds with conversion options and warrants as well as profit-sharing rights and income bonds with a total nominal value of up to €1.0bn (with and without fixed terms) can be issued by 9 May 2011.

Using a part of this capital, TUI AG, on 1 June 2007 issued unsecured non-subordinate convertible bonds of €694.0m, maturing on 1 September 2012. The bonds were issued in denominations with nominal values of €50,000 each. Since an adjustment in May 2008, the conversion price has been €27.3019 per no-par value share. The convertible bonds may thus be converted into a maximum of  25,419,475 shares. The bonds, which carry an interest coupon of 2.75% p.a., were issued at par. The bonds are traded at three German stock exchanges, in Luxemburg and Zurich. By 30 September 2009, the holders of the convertible bonds did not exercise any conversion options.

In order to provide additional opportunities to issue bonds, the Annual General Meetings of 7 May 2008 and 13 May 2009 resolved to create additional conditional capital of €100.0m each, expiring on 6 May 2013 and 12 May 2014, respectively. The issue of bonds with conversion options and warrants as well as profit-sharing rights and income bonds (with and without fixed terms) under the two above-mentioned authorisations has been limited to a total nominal value of up to €1.0bn.

Authorised capital

The Annual General Meeting of 7 May 2008 adopted a resolution on the issue of new registered shares against cash contribution for up to a maximum of €64.0m. This authorisation will expire on 6 May 2013.

The Annual General Meeting of 7 May 2008 also resolved to create new authorised capital for the issue of employee shares, which in 2009 stood at €9.5m, as in 2008. No new employee shares were issued in the short financial year 2009. The Executive Board of TUI AG has been authorised to use this capital in one or several transactions for the issue of employee shares against cash contribution by 6 May 2013.

In addition, the Annual General Meeting of 10 May 2006 resolved to create authorised capital for the issue of new shares against cash or non-cash contribution totalling €246.0m. The issue of new shares against non-cash contribution was limited to € 128.0 million. The authorisation to use this authorised capital will expire on 9 May 2011.

Authorisations for as yet unused authorised capital thus totalled around €319.5m for cash contributions and €201.5m for cash and non-cash contributions.

(28) Capital reserves   

The capital reserves mainly comprised transfers of premiums from the issue of shares. In addition, amounts entitling the holders to acquire shares in TUI AG in the framework of bonds issued for conversion options and warrants had to be transferred to the capital reserves if the conversion options and warrants had to be classified as equity instruments in accordance with IAS 32. Premiums from the issue of shares due to the exercise of conversion options and warrants were also transferred to the capital reserves.

Borrowing costs for the issue of conversion options and warrants and for the ­capital increase by means of the issue of new shares against cash contribution were eliminated against the transfers to the capital reserves resulting from these trans­actions.

The net loss for the year of TUI AG totalled €98.0m. A corresponding amount of €98.0m (previous year: €1,503.9m) was withdrawn from the capital reserves in order to balance the result for the year.

(29) Revenue reserves

Other revenue reserves comprised transfers from the results of the current or previous financial years.

In 2008, adjustments with no effect on profit or loss from the first-time application of new or revised accounting standards and effects of changes in accounting and measurement methods were transferred to or eliminated against ‘Other revenue reserves’.

In accordance with IAS 27 (revised), newly arising losses applicable to minority interests were no longer eliminated against ‘Other revenue reserves’. Losses applicable to minority interests already existing at the date of first-time application of IAS 27 (revised) were eliminated against ‘Other revenue reserves’ until their value was positive. In the financial year under review, the amount to be eliminated was €-744.2m. It resulted from the first-time consolidation of the First Choice Holidays Group in financial year 2007 and the development of that group.

In accordance with section 58 (2) of the German Stock Corporation Act, dividend payments to TUI AG shareholders were based on net profit available for distribution shown in the commercial-law annual financial statements. In financial year 2009, dividends were paid to non-Group shareholders of subsidiaries, in particular TUI Travel PLC.

Differences arising from currency translation comprised differences from the currency translation of the financial statements of foreign subsidiaries as well as differences from the translation of goodwill denominated in foreign currencies. The effects of currency hedges of foreign currency exposure arising from the translation of the functional currency in Container Shipping into euros (hedge of a net investment), recognised in equity under ‘Currency translation differences’ in 2008, were recognised in profit and loss in the financial year under review upon the sale of Shipping.

The revaluation reserve formed in accordance with IAS 27 (old version) in the framework of step acquisitions of companies was retained until the date of deconsolidation of the respective company. In accordance with IAS 27 (revised), requiring prospective application, no new revaluation reserves for step acquisitions were formed since the changes in the fair values of the assets and liabilities of an acquired company arising in between the individual acquisition dates were taken to profit and loss based on the stake held, which did not yet result in consolidation of the company.

The differences between acquired equity and acquisition costs arising from the acquisition of minority interests were directly eliminated against other revenue reserves.

Changes in the value of financial assets available for sale were eliminated against revenue reserves outside profit and loss.

The revaluation reserve for cash flow hedges comprised the portion of gains and losses from hedges determined as effective hedges of future cash flows. When a hedged transaction had an effect on results or was no longer assessed as probable, this reserve was reversed through profit and loss in the same period.

The reserve according to IAS 19 comprised gains and losses from changes in actuarial parameters in connection with the measurement of pension obligations and the associated fund assets, carried outside profit and loss. In the short financial year 2009, the fall in the long-term interest rate level in Germany and the UK resulted in an increase in pension obligations and thus a decrease in the reserve in accordance with IAS 19.

Taking account of minority interests and deferred taxes, the reserves stood at €-217.2m (previous year: €-125.0m) at the end of the short financial year.

(30) Hybrid capital   

In accordance with IAS 32, the subordinated hybrid capital issued by TUI AG in December 2005 worth a nominal volume of €300.0m constitutes Group equity. The borrowing costs of €8.5m were deducted from the hybrid capital with no effect on profit and loss, taking account of deferred income taxes. Dividend entitlements of the hybrid capital investors were deferred as other financial liabilities until the payment date.

(31) Minority interests   

Minority interests mainly related to companies of the TUI Hotels & Resorts Sector, in particular the RIUSA II Group. Losses attributable to minority interests in TUI Travel PLC were offset against revenue reserves.

(32) Pension provisions and similar obligations

A number of defined contribution plans and defined benefit pension plans were operated for Group employees. Pension obligations varied, reflecting the different legal, fiscal and economic conditions in each country of operation and usually depended on employees’ length of service and pay levels. All defined contribution plans were funded by the payment of contributions to external insurance companies or funds, whilst defined benefit plans entailed the formation of provisions within the Company or investments in funds outside the Company.

German employees enjoyed benefits from a statutory defined contribution plan paying pensions as a function of employees’ income and the contributions paid in. Several additional industry pension organisations existed for companies of the TUI Group. Once the contributions to the state-run pension plans and private pension insurance organisations had been paid, the Company had no further payment obligations. Current contribution payments were recognised as an expense for the respective period. In the short financial year 2009, the pension costs for all defined contribution plans for the continuing operations totalled €32.3m (previous year: €49.1m). The pension costs for defined benefit pension commitments amounted to €60.1m (previous year: €71.7m).

The slight year-on-year rise in pension costs in the short financial year 2009 mainly resulted from lower expected returns on the funded pension plans.

Provisions for pension obligations were established for benefits payable in the form of retirement, invalidity and surviving dependants’ benefits. Provisions were exclusively formed for defined benefit schemes under which the Company guarantees employees a specific pension level. Provisions for similar obligations covered in particular early retirement and temporary assistance benefits.

The actuarial gains and losses which arose in the short financial year 2009 were eliminated against equity outside profit and loss, causing the indicated movement in pension provisions outside profit and loss.

Where the defined benefit pension obligations were not financed by provisions, they were funded externally. This type of funding of pension obligations prevailed to a considerable extent in the UK, Switzerland and the Netherlands.

While the fund assets were determined on the basis of the fair values of invested funds as at 30 September 2009, pension obligations were measured on the basis of actuarial calculations and assumptions. The obligations under defined benefit plans were calculated on the basis of the internationally accepted projected unit credit method, taking account of expected future increases in salaries and pensions.

Determination of the interest rate applicable in discounting the provision for pensions was based on an index for corporate bonds adjusted for securities already downgraded and under observation by rating agencies as well as subordinate bonds in order to meet the criterion for first-rate bonds required under IAS 19. In order to cover a correspondingly broad market, an index based on shorter-terms bonds was used. The resulting interest rate structure was extrapolated on the basis of the yield curves for almost risk-free bonds, taking account of an appropriate risk mark-up reflecting the term of the obligation.

Actuarial calculations for companies abroad were based on specific parameters for each country concerned.

Pension obligations rose by €375.5m in the financial year under review. This increase primarily resulted from actuarial losses due to a lower discount rate applicable under IFRS rules.

The fair values of fund assets rose considerably year-on-year. This was above all attributable to the actuarial gains caused by the deviation of actual from expected returns on the plan assets. With expected returns of €56.1m (previous year: €85.2m), actual profits generated by the funds totalled €149.5m (previous year: losses of €213.7m).

The assumptions used in determining the expected return on external fund assets were based on the actual fund structure and were oriented to the future long-term returns for the individual fund categories. Further factors taken into account were the current interest rate level and the inflation trend.

For the forthcoming financial year, the companies of the TUI Group are expected to contribute around €104.3m to the pension funds, with a substantial amount being earmarked to reduce the pension deficit in the UK.

Since the TUI Group used the option of immediately offsetting the actuarial gains and losses against equity in the year in which they arose, the TUI Group’s total pension obligations were fully shown in the statement of financial position, netted against existing fund assets. There was only a difference of €1.2m due to past service cost that was not yet recognised in the statement of financial position. This off-balance difference will be charged to expenses and successively amortised over the next few financial years.

Where plan assets exceeded obligations with regard to funded pension obligations, taking account of a difference due to past service cost, and where at the same time there was an entitlement to reimbursement or reduction of future contribution payments to the fund, the excess was capitalised in conformity with the limit defined by IAS 19.

At 30 September 2009, the actuarial gains and losses before deferred income taxes carried and eliminated against equity with no effect on profit and loss by that date totalled €-533.1m (previous year: €-321.8m). 

(33) Income tax provisions and other provisions

Income tax provisions

Income tax provisions comprised provisions for current and deferred income taxes, outlined in Note 23. The net change in deferred tax provisions between the balance sheet dates was fully shown under usage in the above table.

Other provisions

Other provisions comprised provisions for personnel costs, typical operating risks, maintenance risks (in particular maintenance of leased aircraft), risks from onerous contracts, guarantee and liability risks, provisions for other taxes and other provisions.

Provisions for personnel costs comprised provisions for vacation, unpaid bonus payments, severance compensation and jubilee benefits.

In addition, the provisions for personnel costs also comprised provisions for share based payment schemes with cash compensation according to IFRS 2.

In the framework of a long-term incentive programme, the Executive Board members and other senior executive staff of the Group were granted bonuses, translated into phantom stocks in TUI AG on the basis of an average share price. The phantom shares were calculated on the basis of Group earnings before taxes and amortisation of goodwill (EBTA). The translation into phantom stocks was based on the average stock price of the TUI share on the 20 trading days following the Supervisory Board meeting at which the annual financial statements were approved. The number of phantom stocks granted in a financial year is therefore only determined in the subsequent year. Following a lock-up period of two years, the individual beneficiaries are free to exercise their right to cash payment from this bonus within predetermined timeframes. This lock-up period is not applicable if a beneficiary leaves the Company. The payment level depended on the average stock price of the TUI share over a period of 20 trading days after the exercise date. There are no absolute or relative return or stock price targets. A cap has been agreed for exceptional, un­­foreseen developments. Since the strike price is €0 and the incentive programme does not entail a vesting period, the fair value corresponds to the intrinsic value and hence the market price at the balance sheet date. Accordingly, the fair value of the obligation is determined by multiplying the number of phantom shares with the stock price at the respective reporting date.

The TUI Travel Division operated three principal share based payment schemes linking employee remuneration to the future performance of the Sector: a Deferred Annual Bonus Scheme (DABS), a Performance Share Plan (PSP) and a Value Creation Synergy Plan (VCSP).

On 30 September 2009, 2,626,963 shares were held by the First Choice Employee Benefit Trust. As at the same date 8,215,945 shares were held by the TUI Travel Employee Benefit Trust.

None of the instruments or options granted were exercisable at the end of the financial year.

The fair value of services received in return for share options granted was measured by reference to the fair value of the share options granted. The estimate of the fair value of services received was usually determined using binomial or simulation models, depending on the vesting criteria, with the exception of the calculation of the fair value of plans to be exercised as a function of market conditions. The fair value of such plans was estimated using a Monte Carlo simulation.

Participants were not entitled to dividends prior to vesting. Expected volatility was based on historic volatility of First Choice Holidays Ltd. and TUI Travel PLC, adjusted for changes to future volatility indicated by publicly available information. Share options were granted under a service condition.

In financial year 2009, personnel costs of £13.0m sterling (€14.7m) related to share based payment schemes were carried through profit and loss.

In the framework of realigning the business activities in the TUI Travel Division, provisions were formed where the individual measures were sufficiently specific and a factual restructuring obligation existed. In the short financial year 2009, the restructuring measures in the TUI Travel Division resulted in total expenses of €58.3m (previous year: €284.9m), primarily incurred for personnel measures. As at the balance sheet date, provisions of around €49.2m were carried.

Provisions for necessary environmental protection measures included in typical operating risks were almost fully used in accordance with the intended use in the year under review. At the balance sheet date, provisions still accounted for €1.6m (previous year: €15.0m).

The rise in provisions for risks from onerous contracts primarily resulted from risks in connection with the tourism season which had not yet ended at the balance sheet date.

The development of other provisions was characterised, among other things, by reversals of provisions which were no longer expected to be used, including provisions for litigation risks for the CP Ships Group.

Where the difference between the present value and the settlement value of a provision was material for the measurement of a non-current provision as at the balance sheet date, the provision had to be recognised at its present value in accordance with IAS 37. The discount rate to be applied should take account of the specific risks of the provision and of future price increases. This criterion applied to some items contained in the TUI Group’s other provisions. Transfers to other provisions comprised an interest portion of €6.0m (previous year: €12.4m), recognised as interest expenses. The largest portion related to additions to provisions for maintenance.

Provisions for deferred taxes had to be carried as non-current provisions in the statement of financial position, irrespective of the expected realisation date.

(34) Financial liabilities

In accordance with the rules of IAS 32, the subordinated hybrid capital issued in December 2005 without a fixed term to maturity was not carried as a bond but was shown as a separate Group equity item.

Convertible bonds comprised the 2007/12 convertible bond worth €694m issued on 1 June 2007. The convertible bond will mature on 1 September 2012 and carries a nominal interest coupon of 2.75% per annum. In accordance with an adjustment effected in May 2008, each convertible bond with a nominal value of €50,000.00 entitled the holder to convert it into 1,831 shares any time between 12 July 2007 and the seventh business day prior to the redemption date at a conversion price of € 27.3019 per share.

At the issue date, the debt component of the convertible bond was carried at its present value based on an interest rate in line with market conditions and was increased by the interest portion of the period as at the balance sheet date in accordance with the internationally accepted effective interest method.

Two bonds totalling €1,025.0m were issued in financial year 2004. The bond worth €625.0m, issued in May 2004 and maturing in May 2011, carries a nominal fixed-interest coupon of 6.625% per annum. It was issued in denominations of €1,000.00. The floating rate notes worth €400.0m issued in June 2004 were repaid on schedule as at 17 August 2009.

Two further bonds with an aggregate volume of €1,000.0m were issued in December 2005. The fixed-interest senior floating rate notes worth €550.0m carry a floating interest rate (3-month-EURIBOR + 1.55% p.a.) and will mature in December 2010. The senior fixed rate notes worth €450.0m carry a fixed nominal interest rate of 5.125% per annum and are repayable in December 2012. These two bonds had denominations of at least €50,000.00 each, with higher integral multiples of €1,000.00.

(35) Trade accounts payable

(36) Derivative financial instruments

Derivative financial instruments were carried at their fair value (market value). They primarily served to hedge future business operations and are outlined in detail in the explanations on financial instruments.

(37) Other liabilities

(38) Liabilities related to assets held for sale

(39) Contingent liabilities

Contingent liabilities were carried at an amount representing the best estimate of the expenditure that would be required to meet the present obligation as at the balance sheet date.

Liabilities under warranties were all contractual liabilities to third parties not to be classified as guarantees and going beyond the typical scope of the business and the industry.

Contingent liabilities as at 30 September 2009 were above all attributable to the granting of guarantees for the benefit of Hapag-Lloyd AG.

(40) Litigation

Neither TUI AG nor any of its subsidiaries have been involved in pending or foreseeable court or arbitration proceedings which might have a significant impact on their economic position or had such an impact in the past two years. This also applies to actions claiming warranty, repayment or any other compensation brought forward in connection with the divestment of subsidiaries and sectors over the past few years. The action submitted by the insolvency trustee of Babcock Borsig AG (in insolvency) in 2004 was dismissed by the regional court of first instance in Frankfurt/Main at the end of 2007. The appeal proceedings has meanwhile been pending for two years without a court ruling having been handed down in the matter. The provision formed in this regard only covers an amount representing the anticipated non-refundable cost of the proceedings, as before, since the action is expected to also be dismissed by the court of second instance.

In 1999, the operator of the container terminal in Zeebrugge in Belgium brought an action for damages against CP Ships Ltd. and several of its subsidiaries due to an alleged breach of agreement in connection with the change of the Belgian port of call from Zeebrugge to Antwerp. Furthermore, seven shareholder class actions were brought against CP Ships in the US and a further three in Canada due to alleged irregularities in the reporting by the CP Ships Group in connection with the adjustments of the financial statements in 2004, which resulted in particular in the reduction in profits for the first quarter of 2004 and for the preceding years 2002 and 2003. The proceedings in the US have meanwhile been settled. In Canada, too, the parties have agreed on a settlement, still requiring formal judicial recording.

As in previous years, the respective Group companies formed adequate provisions, partly covered by expected insurance benefits, to cover all potential financial charges from court or arbitration proceedings. Overall, the future financial position is therefore unlikely to be substantially affected by such charges.

(41) Other financial commitments

The fair value of other financial commitments was determined by means of discounting future expenses using a customary market interest rate of 5.25% per annum (previous year: 6.25% p.a.). If the previous year’s interest rate of 6.25% p.a. had been applied, the fair value would have been €73.8m lower.

The decrease of €1,095.8m in nominal order commitments in respect of capital expenditure included an amount of €806.4 resulting from the sale of Container Shipping.

At the balance sheet date, order commitments in respect of capital expenditure in Tourism had a total nominal value of €2,510.7m and a fair value of €2,098.2m. As at 31 December 2008, order commitments in respect of capital expenditure in Tourism had amounted to a nominal value of €2,795.6m and a fair value of €2,192.1m. The decline was primarily attributable to the delivery of aircraft and the cancellation of orders for B737 aircraft.

The development of other financial commitments was caused by the fact that the commitments carried as at 31 December 2008 had included payment obligations and credit lines granted to the Albert Ballin consortium totalling €900.0m and payment obligations to TUI Cruises GmbH totalling €138.5m, which were fulfilled in the short financial year under review.

No order commitments in respect of capital expenditure nor any other financial obligations related to the Discontinued Magic Life Group Operation.

The fair value of financial commitments from lease, rental and charter agreements was determined by means of discounting future expenses using a customary market interest rate of 5.25% p.a. (previous year: 6.25% p.a.). If the previous year’s interest rate of 6.25% p.a. had been applied, the fair value would have been €72.2m lower.

The commitments from lease, rental and leasing agreements exclusively related to leases that did not transfer all the risks and rewards of ownership of the assets to the companies of the TUI Group in accordance with IASB rules (operating leases). The test carried out to check whether the risks and rewards of ownership had passed to the TUI Group also covered existing options to purchase the assets or extend the terms of the contracts.

As a matter of principle, operating leases for aircraft did not include a purchase option. Current lease payments also included a small portion covering maintenance costs. The basic lease term was usually six to eight years.

The decline in commitments for ships and containers included an amount with a nominal value of €2,214.5m (fair value: €1,789.7m) for the sale of Container Shipping.

Lease, rental and charter agreements with a nominal value of €125.8m and a fair value of €103.0m related to the Discontinued Magic Life Group Operation.

Financial instruments

Risks and risk management

Risk management principles   
Due to the nature of its business operations, the TUI Group is exposed to various financial risks, including market risks (consisting of currency risks, interest rate risks and market price risks), credit risks and liquidity risks.

In accordance with the Group’s corporate financial goal, financial risks have to be limited. In order to achieve that goal, policies and rules applicable throughout the Group have been defined, fixing binding decision bases, competencies and responsibilities for all financial transactions.

In the framework of the merger of TUI’s tourism activities with First Choice to form TUI Travel PLC in 2007, responsibilities were divided up differently for central cash management, which was previously managed by TUI AG alone, and central financial risk management. TUI Travel PLC performs these tasks for the Group’s Tourism Division, while TUI AG continues to be responsible for these functions for all other business operations of the Group.

The individual financing units, rules, competencies and workflows as well as limits for transactions and risk positions have been defined in policies. The trading, settle­ment and controlling functions have been segregated in functional and organisational terms. Compliance with the policies and limits is continually monitored. As a matter of principle, all hedges by the Group were based on correspondingly recognised or future underlying transactions. Recognised standard software is used for assessing, monitoring and reporting the hedges entered into. The processes, the methods applied and the organisation of risk management are reviewed for compliance with the relevant regulations at least on an annual basis by the internal audit department and external auditors.

Within the TUI Group, financial risks primarily arose from payment flows in foreign currencies, fuel requirements (aircraft fuel and bunker oil) and financing via the money and capital markets. In order to limit the risks from changes in exchange rates, market prices and interest rates for underlying transactions, TUI used derivative over-the-counter financial instruments. These were primarily fixed-price transactions (e.g. forward transactions and swaps). In addition, TUI also traded in options to a minor extent. Use of derivative financial instruments was confined to internally fixed limits and other regulations. As a matter of principle, the instruments used had to be controllable with the respective entity’s own (HR, organisational and systems) resources. The transactions were concluded on an arm’s length basis with top-rated contracting counterparties with strong credit ratings operating in the financial sector, whose counterparty risk was regularly monitored. Currency translation risks from the consolidation of Group companies not preparing their account in euros were not hedged.

The Group companies submitted monthly reports detailing their current and planned foreign currency and fuel requirements (or surpluses). Based on the risk profile, the hedging schedule and the monthly reports by the companies, each company defined its specific hedging strategy, which formed the basis of the hedge portfolio comprised of derivative financial instruments.

Market risk

Market risks result in fluctuations in earnings, equity and cash flows. In order to limit or eliminate these risks, the TUI Group has developed various hedging strategies, including the use of derivative financial instruments.

According to IFRS 7, market risks have to be presented using sensitivity analyses showing the effects of hypothetical changes in relevant risk variables on profit or loss and equity. The effects for the period were determined by relating the hypothetical changes in risk variables to the portfolio of primary and derivative financial instruments as at the balance sheet date. Care was taken to ensure that the respective portfolio as at the balance sheet date was representative for the financial year.

The analyses of the TUI Group’s risk reduction activities outlined below and the amounts determined using sensitivity analyses represent hypothetical and thus uncertain disclosures entailing risks. Due to unforeseeable developments in the global finance markets, actual results may deviate substantially from the disclosures provided. The risk analysis methods used must not be considered a projection of future events or losses, since the TUI Group is also exposed to risks of a non-financial or non-quantifiable nature. These risks primarily include country, business and legal risks not covered by the following presentation of risks.

Currency risk

The operational business of the TUI Group’s companies generated payments denominated in foreign currencies, which were not always matched by congruent payments with equivalent terms in the same currency. Using potential netting effects (netting of payments made and received in the same currency with identical or similar terms), TUI AG entered into appropriate hedges with external counterparties in order to limit the currency risk.

Currency hedges in Tourism were entered into when the calculated brochure prices had been fixed and covered 80% to 100% of the planned currency requirements for the respective tourism season, depending on the respective company’s risk profile. The hedged volumes were changed in line with changes in planned requirements on the basis of monthly reporting by the subsidiaries.

Currency hedging in the Cruises Sector was also based on the planned exposure indicated in the monthly reports submitted by the companies. The hedges covered 80% to 100% of the reported exposure.

Within the TUI Group, risks from exchange rate fluctuations of more than 20 currencies were hedged, with the largest hedging volumes relating to US dollars, euros and sterling.

The largest hedging volume in the operational business related to US dollars. In the tourism business, payments in US dollars primarily related to the procurement of services in non-European destinations, purchases of aircraft fuel and purchases or rental of aircraft.

The Eurozone limited the currency risk from transactions in the key tourist destinations to Group companies whose functional currency was not the euro. The Tourism Division and primarily the Northern Region Sector were mainly affected by changes in the value of the British pound sterling and the Swedish kronor.

Currency risks within the meaning of IFRS 7 arise from primary and derivative monetary financial instruments issued in a currency other than the functional currency of a company. Exchange rate-related differences from the translation of financial statements into the Group’s currency were not taken into account. Taking account of the different functional currencies within the TUI Group, the sensitivity analyses of the currencies identified as relevant risk variables are presented below. A 10% strengthening or weakening of the respective functional currencies, primarily euro and sterling, against the other currencies would create the following effects on the revaluation reserve and earnings after income tax:

Interest rate risk   
Market value interest rate risks, i.e. exposure to potential fluctuations in the fair value of a financial instrument resulting from changes in market interest rates, arose primarily from medium- and long-term fixed–interest receivables and liabilities. Concerning the bonds issued, the fair values deviated from recognised carrying amounts. However, these financial instruments were carried at amortised cost rather than at fair value as a matter of principle. As a result, neither equity nor profit and loss were directly affected.

However, for balance sheet items and financial derivatives based on floating interest rates, the TUI Group was exposed to earnings-related risks (cash flow interest rate risks). These risks related in particular to the Group’s floating-rate financial liabilities. In order to minimise this risk, the Group entered into interest rate hedges, where necessary.

Fuel price risk   
Due to the nature of its business operations, the TUI Group was exposed to market price risks from the procurement of fuels, both for the aircraft fleet and the cruise ships.

Hedging of market price risks from the purchase of aircraft fuel was based on the hedging model of the Tourism companies. When calculating the exposure for the respective season, at least 80% of the exposures were hedged. Possibilities of levying fuel surcharges were taken into account.

Hedging of fuel price risks in the Cruises Sector was based on financial derivatives and the use of applicable business-specific price escalator clauses. At least 80% of the relevant exposures were hedged.

Credit risk   
The credit risk in non-derivative financial instruments resulted from the risk of a counterparty’s default on its contractual payment obligations.

Maximum credit risk exposure was defined by the total of the recognised carrying amounts of the financial assets (including derivative financial instruments with positive market values) on the one hand and the granting of financial guarantees on the other. Details concerning the guarantees at the balance sheet date are presented in Note 39. Legally enforceable possibilities of netting financial assets and liabilities were taken into account, whereas existing collateral was not considered. The credit risk was minimised due to the strict requirements placed on the counter­parties’ credit rating. Credit risks were reviewed closely on conclusion of the contract and continually monitored thereafter so as to be able to swiftly respond to potential a downgrading of a counterparty’s credit rating. As a matter of principle, responsibility for handling the credit risk relating to the operative business was held by the individual Group companies of the TUI Group. Depending on the type of business activity and level of the credit limit, additional monitoring and control activities were effected at Group level.

Since the TUI Group operated in many different business areas and regions, significant credit risk concentrations of receivables from and loans to specific debtors or groups of debtors were not to be expected. A significant concentration of credit risks related to specific countries was not to be expected either. Wherever possible, collateral was negotiated with the business partners as part of credit risk management in order to reduce the credit risk. Guarantees by the respective parent company, bank guarantees and the deposit of cash and securities were accepted as collateral to reduce the credit risk.

Identifiable credit risks of individual receivables were covered by means of corresponding bad debt allowances. In addition, portfolios were impaired based on empirical values. An analysis of the aging structure of the category ‘Trade accounts receivable and other receivables’ is provided in Note 21.

At the balance sheet date, there were no financial assets that would be overdue or impaired unless the terms and conditions of the contract had been renegotiated, neither in the short financial year 2009 nor in 2008.

Credit management also covered the TUI Group’s derivative financial instruments. The maximum credit risk for derivative financial instruments entered into was limited to the total of all positive market values of these instruments since in the event of counterparty default asset losses would only be incurred up to that amount. Since derivative financial instruments were concluded with different debtors with top credit ratings, no credit risk exposure was to be expected. Nevertheless, the counterparty risk was continually monitored and controlled using internal bank limits.

Liquidity risk   
Liquidity risks consisted of potential financial bottlenecks and resulting increases in refinancing costs. For this reason, the key objectives of TUI’s internal liquidity management system were to secure the Group’s liquidity at all times, to consistently comply with contractual payment obligations and optimise the cost situation for the overall Group. The Group’s liquidity requirements were determined by means of liquidity planning and were covered by committed credit lines and liquid funds so that the Group’s liquidity was guaranteed at all times.

The tables provided below list the contractually agreed (non-discounted) cash flows of primary financial liabilities and derivative financial instruments.

The cash flow analysis covered all primary and derivative financial instruments as at the balance sheet date. Planned payments for new future liabilities were not taken into account. Where financial liabilities had a floating interest rate, the interest rates fixed as at the balance sheet date were also applied to subsequent periods in determining future interest payments. Financial liabilities cancellable at any time were allocated to the earliest maturity band.

Derivative financial instruments and hedges

Strategy and goals   
In accordance with the TUI Group’s implementing regulations, derivatives may be used if they are based on underlying recognised assets or liabilities, firm commitments or forecasted transactions. Hedge accounting was based on the rules of IAS 39, in particular in the framework of hedging against exposure to fluctuations in future cash flows. In the financial year under review, hedges primarily consisted of cash flow hedges.

Forward transactions and options were used to limit currency risks. In order to hedge against exposure to external commodity price risks, price hedging instruments in the form of swaps and options were used.

Cash flow hedges   
As at 30 September 2009, underlying transactions existed to hedge cash flows in foreign currencies with maturities of up to five years (previous year: up to six years). The planned underlying transactions of commodity price hedges had terms of up to two years (previous year: up to three years).

In accounting for derivatives of cash flow hedges, the effective portion of the cumulative changes in market values was carried in the revaluation reserve outside profit and loss until the underlying transaction occurred. It was carried in the profit and loss statement with an effect on profit and loss when the hedged item was executed. In the financial year under review, expenses of € 111.4m (previous year: income of €517.2m) for currency hedges and derivative financial instruments used as price hedges were carried in the cost of sales and administrative expenses. Income of €8.0m (previous year: expenses of €5.2m) were carried from the ineffective portion of the cash flow hedges.

Since Air Berlin took over air routes from TUIfly in the framework of the stake taken in Air Berlin, aircraft fuel requirements by TUIfly declined by 183,400 mt. In hedge accounting, TUIfly therefore withdrew existing hedges with a volume of 30,250 mt and a market value of €-12.1m from the revaluation reserve through profit and loss and reclassified them to cost of sales.

In the wake of cancelling aircraft orders, a gross amount of €-19.0m was reclassified from the revaluation reserve to cost of sales.

In connection with adjustments of Corsair’s currency requirements, existing hedges with a nominal value of €26.5m and a fair value of €6.6m were withdrawn from the revaluation reserve with an effect on profit and loss and reclassified to cost of sales as a hedge accounting transaction.

The nominal amounts corresponded to the total of all purchase or sale amounts or the respective contract values of the transactions. Interest rate/currency swaps, e.g. cross currency interest rate swaps, not unambiguously allocable to currency or interest rate hedges were shown under currency hedges.

Fair values of derivative financial instruments
As a matter of principle, the fair values of derivative financial instruments corresponded to the market values. The market price determined for all derivative financial instruments was the price at which a contracting party would take over the rights and/or obligations of the respective counterparty. The fair value of over-the-counter derivatives was determined by means of appropriate calculation methods, e.g. by discounting the expected future cash flows. The forward prices of forward transactions were based on the spot or cash prices, taking account of forward premiums and discounts. The calculation of the fair values of currency options was based on the Black & Scholes model and the Turnbull & Wakeman model for optional fuel hedges. The fair values determined on the basis of the Group’s own systems were regularly compared with fair value confirmations of external counterparties.

Financial instruments which were entered into in order to hedge a risk position according to operational criteria but did not meet the strict criteria of IAS 39 to qualify as hedges were shown as other derivative financial instruments. They included in particular foreign currency transactions entered into in order to hedge against exposure to changes in the value of balance sheet items not meeting the criteria to qualify as fair value hedges in accordance with IAS 39.

Hedge of a net investment
Forward exchange operations were used in order to hedge the net assets of the stake in Container Shipping, whose functional currency deviated from the functional currency of the Group, until the sale of Container Shipping in March 2009. 

Financial instruments – Additional disclosures

Carrying amounts and fair values
The fair value of a financial instrument is the amount for which an asset could be exchanged, sold or purchased, or a liability settled, between knowledgeable and willing parties in an arm’s length transaction. Where financial instruments are listed in an active market, e.g. above all shares held and bonds issued, the respective quotation in this market represented the fair value. For over-the-counter bonds, liabilities to banks, note loans and other non-current financial liabilities, the fair value was determined as the present value of future cash flows, taking account of yield curves and the TUI Group’s credit spread which depended on its credit rating.

Due to the short remaining terms of cash and cash equivalents, current trade accounts receivable and other receivables, current trade accounts payable and other liabilities, the carrying amounts were taken as realistic estimates of the fair value.

The fair values of non-current trade accounts receivable and other receivables corresponded to the present values of the cash flows associated with the assets, taking account of current interest parameters which reflected market- and counter­party-related changes in terms and expectations.

The financial investments classified as financial instruments available for sale included an amount of €48.5m (previous year: €68.0m) for stakes in partnerships and corporations. The fair value of these non-listed stakes was not determined since the cash flows could not be reliably determined. It was not possible, either, to determine reliable fair values on the basis of comparable transactions.

In connection with the disposal of shares shown in the category ‘Financial assets available for sale’, measured at acquisition cost, carrying amounts of €0.8m were disposed of. In the financial years under review, the disposal did not give rise to any significant income or expenses.

Effects on results   
The net results of financial instruments according to the measurement categories under IAS 39 were as follows:

Besides interest income and interest expenses, net results primarily included results from participations, gains/losses on disposal, effects of fair value measurement and impairments.

Financial instruments measured at fair value outside profit and loss did not result in any commission expenses in the short financial year 2009 (previous year: €0.5m).

Capital risk management

One of the key performance indicators in the framework of capital risk management is the IFRS-based gearing, i.e. the relationship between the Group’s net debt and Group equity. From a risk perspective, a balanced relation between net debt and equity is to be sought. The current target of the Group is for a gearing of 80% to 110%.

Average Group equity was impacted above all by foreign currency effects as at 30 September 2009.

In order to actively control the capital structure, the TUI Group’s management may change dividend payments to the shareholders, repay capital to the shareholders, issue new shares or issue hybrid capital. The management may also sell assets in order to reduce Group debt.