Notes on the Principles and Methods underlying the Consolidated Financial Statements

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General Accounting Principles Principles and methods of consolidation Accounting and measurement

General

TUI AG, based in Hanover, Karl-Wiechert-Allee 4, is the TUI Group’s parent company and a listed stock corporation under German law. The Company has been registered in the commercial registers of the district courts of Berlin-Charlottenburg (HRB 321) and Hanover (HRB 6580).

Following the sale of Container Shipping in March 2009, the TUI Group has exclusively operated in Tourism, its core business. As in financial year 2008, Tourism comprises TUI Travel PLC, TUI Hotels & Resorts and Cruises. The Cruises Sector operates in the German-speaking premium and luxury market with Hapag-Lloyd Kreuzfahrten and TUI Cruises. In addition, TUI AG holds an indirect stake of 43.3% in Container Shipping, enabling the Company to exert significant influence. Since the sale of Container Shipping, the proportionate earnings resulting from this stake have no longer had to be included in operating earnings of the Continu­ing Operations.

The members of the Executive Board and the Supervisory Board as well as other board mandates held by them are listed separately in an annex to the notes in the section ‘Other Notes’ of the annual report.

The Executive Board and the Supervisory Board have submitted the declaration of compliance with the German Corporate Governance Code required pursuant to section 161 of the German Stock Corporation Act (AktG) and made it permanently accessible to the general public on the Company’s website (www.tui-group.com).

The Annual General Meeting of TUI AG on 13 May 2009 decided to change the financial year to a financial year ending on 30 September. As a result, a short financial year has been introduced for the period from 1 January to 30 September 2009 (hereinafter: ‘SFY 2009‘). The corresponding amendments to the Articles of Association in the commercial registers of the district courts of Hanover and Berlin-Charlottenburg were registered on 3 June 2009. The financial year of the TUI Group and its main subsidiaries included in consolidation will therefore cover the period from 1 October of any one year to 30 September of the following year. Where any of TUI’s subsidiaries (in particular TUI Travel PLC and the RIU Group) use financial years with other closing dates, audited interim financial statements were prepared in order to include these subsidiaries in TUI AG’s consolidated financial statements.

Since the short financial year 2009 only comprised a 9-month period, a year-on-year comparison with the 12-month period in 2008, especially of the profit and loss statement, is of limited value.

The consolidated financial statements were prepared in euros. Unless stated ­otherwise, all amounts are indicated in million euros (€m).

Accounting principles

Pursuant to section 315a (1) of the German Commercial Code (HGB), in combination with Regulation EEC No. 1606/2002 of the European Union, TUI AG is legally obliged to prepare consolidated financial statements in accordance with the rules of the International Accounting Standards Board (IASB), the International Financial Reporting Standards (IFRS).

The IFRS are applied in the form in which they have been transposed into national legislation in the framework of the endorsement process by the European Commission. The commercial-law provisions listed in section 315a (1) of the German Commercial Code are also observed.

The following standards and interpretations revised or newly published by the IASB have been mandatory since the beginning of financial year 2009:

• Amendments to IAS 1: ‘Presentation of Financial Statements’
• Amendments to IAS 23: ‘Borrowing Costs’ concerning elimination of the option to capitalise borrowing costs 
• Amendments to IAS 32: ‘Financial Instruments: Presentation’ and follow-up amendment to IAS 1: ‘Presentation of Financial Statements’ concerning ­puttable financial instruments and obligations arising on liquidation
• Amendments to IAS 39 and IFRS 7: ‘Reclassification of financial instruments: Effective date and transitional provisions’ 
• Annual Improvements Project
• Amendments to IFRS 1: ‘First-Time Adoption of IFRS’ and IAS 27: ‘Consolidated and Separate Financial Statements’ concerning determination of the acquisition costs of an investment, a joint venture or an associated company
• Amendments to IFRS 2: ‘Share-Based Payment’ concerning vesting conditions and cancellations
• IFRS 8: ‘Operating Segments’
• IFRIC 13: ‘Customer Loyalty Programmes’
• IFRIC 14: ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ 

The amendments to IAS 1 concerning presentation of net assets, financial position and results of operations for IFRS-based annual financial statements were implemented. Accordingly, a consolidated statement of recognised income and expenses is now presented, and the statement of changes in equity is shown as a separate part of the consolidated financial statements. The consolidated statement of recognised income and expenses consists of the consolidated profit and loss and other income or expenses, corresponding to income and expenses directly taken to equity. In addition to the presentation used to date, the statement of financial position comprises a further column listing the opening values of the prior period in the event of retrospective adjustments.

The amendments to IAS 23, now prescribing capitalisation of borrowing costs, do not impact the TUI Group’s net assets, financial position and results of operations since the TUI Group already exercised the previous option to capitalise borrowing costs.

The amendments to IAS 32, transposed in EU legislation on 21 January 2009, and their follow-up amendment to IAS 1 relate to the classification of certain shareholder investments as equity or as liabilities. In the previous version, the definition of equity according to IAS 32 regularly resulted in recognition as a ­liability in German commercial partnerships. The new version of this standard defines exceptions which regularly result in classification as equity for German commercial partnerships.

The amendments to IAS 39 and IFRS 7 have to be applied retrospectively as from 1 July 2008 and merely serve to clarify the application date for the amendment to the reclassification of financial instruments, already transposed into European legislation due to the financial crisis.

The Annual Improvements Project (2008) comprises 35 minor amendments. Most of them relate to changes in the presentation, reporting and measurement of items in the financial statements. A small number relates to editorial changes hardly affecting the accounting.

Since the amendments to IFRS 1: ‘First-Time Adoption of IFRS’ and IAS 27 ­‘Consolidated and Separate Financial Statements’ exclusively relate to separate IFRS-based financial statements, they are not relevant at all for the TUI Group’s financial statements.

The amendments to IFRS 2, to be applied retrospectively, clarify the definition of vesting conditions. They also establish that all cancellations, whether by the entity or by other parties, should be treated the same way in the accounts.

IFRS 8 replaces the previous provisions of  IAS 14 on segment reporting. The main change is that the segment reporting structure follows the reporting structure internally used by decision-makers (management approach). In addition, exclusively for the year-end-reporting ­disclosures on geographical areas and major customers are required. The requirements of IFRS 8 were fully met in the presentation of segment reporting in the present financial statements. The previous year’s figures were restated accordingly.

Accounting for customer loyalty programmes (e.g. air miles) was adjusted to the requirements of IFRIC 13. Loyalty award credits are thus measured by reference to their fair value and deferred from turnover until the credits are redeemed. Application of this interpretation does not have a major impact on the TUI Group’s results of operations. The effects on the items in the consolidated statement of financial position are presented below:
 

Effects of IFRIC 13 on the consolidated statement of financial position   
 

The provisions of IFRIC 14 were already voluntarily applied in the financial statements for 2008, prior to their mandatory effective date of 1 January 2009, and did not affect net assets, financial position and results of operations in the present financial statements.

Except for the changes caused by IFRS 13, the mandatory application of these amendments to standards or interpretations did not result in any changes in the TUI Group’s net assets, financial position and results of operations.

In addition, the TUI Group already applied the provisions of the revised IFRS 3: ‘Business Combinations’, transposed into EU legislation in June 2009, and the amendments to IAS 27: ‘Consolidated and Separate Financial Statements according to IFRS’ in financial year 2009. The accounting and measurement methods were changed in accordance with the transitional provisions of the standards.

The amendments to IFRS 3 mainly comprise provisions on purchase price components and acquisition-related costs, step acquisitions, goodwill, minority interests and the revaluation of agreements taken over. IAS 27 establishes that purchases and sales of investments associated with a change of control lead to recognition at fair value of any interests already held by the Group or any retained interests through profit or loss. By contrast, transactions not involving a change of control are presented in equity outside profit or loss.
 

Effects of the application of IFRS 3 and IAS 27 on the consolidated financial statements
 

The following standards and interpretations, revised or newly adopted by the IASB, were not yet effective in financial year 2009:

Summary of new standards and interpretations not yet applied/applicable   
 

Changes in an accounting method and the structure of the profit and loss ­statement

Transitional pensions for flight captains in the German airlines are no longer recog­nised as non-current provisions for personnel costs but as pension provisions in accordance with IAS 19 since this accounting method provides a presentation of the economic substance of this agreement. This had the following impact on Group equity:

Effects on the consolidated statement of financial position
 

Effects on the profit and loss statement
 

Principles and methods of consolidation

Principles

The consolidated financial statements include all major companies in which TUI AG is able, directly or indirectly, to govern the financial and operating policies so as to obtain benefits from the activity of these companies (subsidiaries). As a rule, the control is exercised by means of a majority of voting rights. The consolidation of the RIUSA II Group is based on de facto control, with TUI AG and the co-shareholder holding equal interests and voting rights. In the light of overall conditions and circumstances, TUI AG is able in this case to govern the financial and operating policies so as to obtain benefits from the activity of this hotel group. In assessing control, the existence and effect of potential voting rights that are currently exercisable or convertible are taken into account. Consolidation of such companies starts as from the date at which the TUI Group gains control. When the TUI Group ceases to control the corresponding companies, they are removed from consolidation.

Although a majority stake (68.254%) was held, the stake in Albert Ballin Terminal Holding GmbH was not included in consolidation because the ‘control’ requirement of IAS 27 was not met, in particular because of specific majority requirements for the shareholders’ meeting.

The consolidated financial statements are prepared from the separate or consolidated financial statements of TUI AG and its subsidiaries, drawn up on the basis of uniform accounting, measurement and consolidation methods and in almost all cases audited or reviewed by auditors.

Shareholdings in companies in which the Group is able to exert significant influence over the financial and operating decisions within these companies (associated companies, shareholdings of 20% to less than 50% as a matter of principle) are carried at equity. Companies managed jointly with one or several partners (joint ventures) are also measured at equity. The dates as of which associated companies and joint ventures are included in or removed from the group of companies measured at equity are determined in analogy to the principles applying to subsidiaries. At equity measurement in each case is based on the last annual or consolidated financial statements available, or the interim financial statements as at 30 September, in  cases in which the financial year did not correspond to TUI AG’s financial year. This applied to 41 companies with a financial year ending on 31 December, seven companies with a financial year ending on 31 October and two companies with a financial year ending on 31 March.

Group of consolidated companies

In the short financial year 2009, the consolidated financial statements included a total of 45 domestic and 694 foreign subsidiaries, besides TUI AG.

42 domestic and 82 foreign subsidiaries were not included in the consolidated financial statements. Even when taken together, these companies were not significant for the presentation of a true and fair view of the net assets, financial position and results of operations of the Group.
 

Development of the group of consolidated companies¹⁾ and the group of companies measured at equity    
 

Since 1 January 2009, a total of 28 companies were newly included in consolidation, with seven companies added to consolidation due to an expansion of their business operations and 13 due to acquisitions while eight companies had been newly established. 27 additions related to the Tourism segment and one to ‘Other’.

Since 31 December 2008, a total of 50 companies were removed from consolidation. 47 of these companies were related to Container Shipping, deconsolidated due to the sale of this division in the first quarter of 2009. In the Tourism segment, two companies each were removed from consolidation due to mergers and sale and one due to liquidation.

18 associated companies and 35 joint ventures were measured at equity. The group of companies measured at equity rose by four year-on-year. While three companies were removed from the group of companies measured at equity due to the sale of interests, five companies were added due to an expansion of their business operations. Two newly formed companies were added to the group of companies measured at equity. One of them related to the significant stake of 43.33% held in Container Shipping after its disposal.

The major direct and indirect subsidiaries, associated companies and joint ventures of TUI AG are listed under ‘Major subsidiaries, associated companies and joint ventures’. A complete list of shareholdings is published in the electronic Federal Gazette and at www.tui-group.com on the internet.

The effects of the changes in the group of consolidated companies in financial year 2009 on the years 2009 and 2008 are outlined below. While balance sheet values of companies deconsolidated in financial year 2009 are shown as per the closing date for the previous period, items of the profit and loss statement are also shown for financial year 2009 due to prorated effects.
 

Effects of changes in the group of consolidated companies on the statement of financial position    
 

Effects of changes in the group of consolidated companies on the consolidated profit and loss statement   
 

Acquisitions – divestments

In the short financial year 2009, 13 Tourism companies were acquired at acquisitions costs of €23.0m in order to expand business operations.

Summary presentation of acquisitions
 

The cost of acquisition in foreign currencies was translated into euros. In accordance with the provisions of revised IFRS 3, incidental acquisition costs of €0.8m and contingent consideration of €7.9m, which are dependent on the continued employment of former owners were taken through profit and loss.

Fair values of considerations transferred
 

In some cases the cost of acquisition also comprised the fair values of conditional purchase price portions depending on future events, alongside the purchase price already paid.
 

Summary presentation of statements of financial position as at the date of first-time consolidation    
 

The difference between the cost of acquisition and the revalued net assets attributable to the acquired share totalled €19.6m (incl. currency translation) as at the date of acquisition and was provisionally carried as goodwill for the respective companies. This goodwill essentially constituted part of the expected synergy potential. As expected, €2.6m of the goodwill was tax deductible.

The 12-month timeframe offered under IFRS 3 was used, according to which the purchase price allocation to the individual assets and liabilities was effected on a provisional basis.

Since the date of first-time consolidation, the companies mentioned above have generated turnover of €45.9m and earnings after tax of €4.3m. Until the date of the transfer of the shares, the companies generated turnover of €18.5m and earnings after tax of €-2.0m.

In the present short financial year, the purchase price allocations of the following companies and groups, acquired in the first nine months of financial year 2008, were finalised within the timeframe of 12 months applicable under IFRS 3:

• Active Safary Group, Australia
• Destination Florida-New England Group, USA
• Gullivers Group, UK
• Your Sporting Challenge, UK
• Real Travel Group, UK
• World Challenge Group, UK
• Sportsworld Group, UK
• Travelmood Ltd., UK
• FanFirm Group, Australia
• Hotels London Ltd., UK
• Events International Group, UK
• Societé Polynésienne Promotion Hoteliére S.A.S., Polynesia

Comparative information for reporting periods prior to preparation of the first-time accounting of the acquisition transaction must be presented retrospectively as if the purchase price allocation had already been completed at the date of acquisition. The following table provides an overview of the final purchase price allocation.
 

Final presentation of the statements of financial position as at first time consolidation for
acquisitions expected in the first nine months   
 

The goodwill arising in the consolidated statement of financial position from the elimination of the acquisition costs against the acquiree’s revalued equity attributable to the acquired share rose by a total of €1.3m due to changes in the purchase price allocation.

Taking account of the changes in purchase price allocation and adjustments for acquisitions effected in the last three months of 2008, the following changes in the consolidated statement of financial position arose as at 31 December 2008.

Effects of changes in purchase price allocations and adjustments on the consolidated statement of financial position

The capitalised goodwill essentially represents a portion of the expected synergy potential. These purchase price allocations did not have any major effects on the consolidated profit and loss statement.

On 23 March 2009, TUI AG sold its entire Container Shipping operations. All shares in Hapag-Lloyd AG were sold to Albert Ballin Holding GmbH & Co. KG. By the end of March 2009, Container Shipping generated turnover of €1,118.9m and earnings after tax of €-197.9m. The 47 subsidiaries were sold for an enterprise value (excl. real estate) of €4.3bn. Taking account of the early application of IAS 27, profit after tax from the sale accounted for €1,134.9m after deduction of the costs to sell and the final purchase price determination.

Statement of financial position as at the date of deconsolidation of Container Shipping   
 

The assets and liabilities of Container Shipping shown as per 31 December 2008 were presented in separate items in the statement of financial position for 2008, as required by IFRS 5.

TUI AG indirectly acquired an entrepreneurial stake of 43.33% in Albert Ballin Joint Venture GmbH & Co. KG, the sole shareholder of Albert Ballin Holding GmbH & Co. KG.

Currency translation

Transactions in foreign currencies were translated into the functional currency at the foreign exchange rates ruling at the date of the transaction. Any gains and losses resulting from the execution of such transactions and the translation of monetary assets and liabilities denominated in foreign currencies at the foreign exchange rate ruling at the date of the transaction are shown in the profit and loss statement, with the exception of gains and losses to be recognised in equity as qualifying cash flow hedges.

The financial statements of companies are prepared in the respective functional currency. The respective functional currency of a company corresponds to the currency of the primary economic environment in which the company operates. With the exception of four companies in the Tourism Division, the functional currencies of all subsidiaries corresponded to the currency of the country of incorporation of the respective subsidiary.

Where subsidiaries prepare their financial statements in functional currencies other than the euro, the Group’s reporting currency, the assets, liabilities and notes on the statement of financial position are translated at the mean rate of exchange applicable at the balance sheet date (closing rate). Goodwill allocated to these companies and adjustments of the fair value arising on the acquisition of a foreign company are treated as assets and liabilities of the foreign company and also translated at the mean rate of exchange applicable at the balance sheet date. The items of the profit and loss statement and hence the profit for the year shown in the profit and loss statement are translated at the average monthly rate of the period in which the associated transaction arose.

Translation differences related to non-monetary items with changes in their fair values eliminated through profit and loss (e.g. equity instruments measured at their fair value through profit and loss) are carried as a gain or loss from measurement at fair value in the profit and loss statement. By contrast, translation differences for non-monetary items with changes in their fair values taken to equity (e.g. equity instruments classified as held for sale) are carried in revenue reserves.

The TUI Group did not hold any subsidiaries operating in hyperinflationary economies in the financial year under review, nor in 2008.

The translation of the financial statements of foreign companies measured at equity follows the same principles for adjusting equity and translating goodwill as those used for consolidated subsidiaries.

Differences arising on the translation of the annual financial statements of foreign subsidiaries are carried outside profit and loss and separately shown as differences from currency translation in the statement of changes in equity. When a foreign company or operation is sold, any currency differences previously carried in equity outside profit and loss are recognised as a gain or loss from disposal in the profit and loss statement.

Net investment in a foreign operation
Monetary items receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, essentially form part of a net investment in this foreign operation. Currency differences from the translation of these monetary items are recognised directly in equity outside profit and loss.

Gains or losses from currency hedges arising from the translation of the functional currency of Container Shipping into euros were also separately shown in equity under ‘Currency translation’ to the extent that the hedge was effective (hedge of a net investment in a foreign operation) until the date of disposal of Container Shipping. These amounts taken to equity outside profit and loss were released to the profit and loss statement upon disposal of the net investment.
 

Exchange rates of currencies of relevance to the TUI Group   
 

Consolidation methods

The recognition of the net assets of acquired subsidiaries is based on the purchase method of accounting. Accordingly, irrespective of existing minority interests, a complete fair value measurement of all identifiable assets, liabilities and contingent liabilities is initially effected as at the acquisition date. Subsequently, the acquisition costs of the shareholding are eliminated against the acquiree’s revalued equity attributable to the acquired share. Any excess of acquisition costs over net assets acquired is capitalised as goodwill for all companies purchased since 1 October 1995 and recognised as an asset for the acquired subsidiary in accordance with the provisions of IAS 21. Any negative goodwill is immediately reversed through profit and loss as at the date on which it arises, with the reversal effect carried under ‘Other income’.

Goodwill is not amortised. Goodwill is regularly tested for impairment, at least annually, following the completion of the annual planning process. Additional impairment tests are effected if there are any indications of potential impairment in goodwill.

In the framework of the generally prospective application of IFRS 3 (revised) and IAS 27 (revised), the difference between the purchase price received and the carrying amount of the stakes acquired is recognised directly in equity when additional shares are purchased after obtaining control (follow-up share purchases). The effects from sales of stakes not entailing a loss of control are also recognised directly in equity on an analogous basis.

By contrast, when control is obtained or lost, the difference is recognised through profit and loss. This gain or loss effect results from step acquisitions (transaction involving a change of control), with equity attributable to the share in the acquired company revalued at the fair value applicable at the acquisition date. For transactions involving a loss of control, the profit or loss does not only comprise the difference between the carrying amounts of the disposed stakes and the consideration received but also the effect from a revaluation of the remaining shares.

In the event of step acquisitions effected before 31 December 2008 still treated in accordance with the old IAS 27 provisions, a complete fair value measurement of assets and liabilities of the acquired company was effected as at every acquisition date. The goodwill to be recognised arose from the elimination of the acquisition cost against the acquiree’s revalued equity attributable to the acquired share at the respective acquisition date. Any changes in the fair values of assets and liabilities arising in between the acquisition dates were recognised in equity outside profit and loss in the consolidated statement of financial position in relation to the stake not yet resulting in consolidation of the company and were carried in the revaluation reserve. In the framework of the removal of a company from consolidation, this revaluation reserve was eliminated against other revenue reserves. 

The difference between the income from the disposal of the subsidiary and Group equity attributable to the stake, including any translation differences, differences from the revaluation reserve, the reserve for changes in the value of financial instruments as well as eliminated interim profits is carried in the consolidated profit and loss statement as at the disposal date. This principle does not apply to actuarial gains or losses carried in Group equity outside profit and loss in the framework of the recognition of pension obligations in accordance with IAS 19. If any subsidiaries are sold, the goodwill attributable to these subsidiaries is included in the determination of the gain or loss on disposal.

The Group’s major associated companies and joint ventures are measured at equity and shown in the statement of financial position at the cost of acquisition as at the acquisition date. The group’s stake in associated companies and joint ventures includes the goodwill arising from the respective acquisition transaction.

The Group’s share in profits and losses of associated companies and joint ventures is carried in the profit and loss statement as from the date of acquisition (Result from joint ventures and associates), while the Group’s share in changes in reserves is shown in its revenue reserves. Accumulated changes arising after the acquisition were shown in the carrying amount of the participation. Where the share in the loss of an associated company or joint venture equals or exceeds the Group’s stake in this company, including other unsecured receivables, no further losses are recognised as a matter of principle. Any losses exceeding that share are only recognised where obligations have been assumed or payments have been made for the associated company or joint venture.

Intercompany profits from transactions between subsidiaries and companies measured at equity are eliminated in relation to the Group’s stake in the company. Intercompany losses are also eliminated if the transaction does not suggest an impairment in the transferred asset. Where the accounting and measurement methods applied by associated companies and joint ventures differ from the uniform accounting rules applied in the Group and the differences are sufficiently known and accessible, amendments are made as a matter of principle.

Intercompany receivables and payables or provisions are eliminated. Where the conditions for the consolidation of third-party debt are met, this option is used. Intercompany turnover and other income as well as the corresponding expenses are eliminated. In accordance with the provisions of IFRS 5, expenses and income from transactions between continuing and discontinued operations are not eliminated where these operations are continued after the disposal of the discontinued operation. Intercompany results from intercompany deliveries and services are reversed through profit and loss, taking account of deferred income taxes. However, intercompany losses are understood as suggesting that an impairment test is required for the transferred assets. Intercompany deliveries and services are usually provided in conformity with the arm’s length principle.

Accounting and measurement

The financial statements of the consolidated subsidiaries are prepared in accordance with uniform accounting and measurement principles. The amounts stated in the consolidated financial statements are not determined by tax regulations but solely by the commercial  presentation of the net assets, financial position and results of operations as set out in the rules of the IASB.

Recognition of income

Turnover comprises the fair value of the consideration received or to be received for the sale of products and services in the framework of ordinary business activities. Turnover is carried excluding value-added tax, returns, discounts and price rebates and after elimination of intra-Group sales.

As a matter of principle, turnover and other income is carried upon rendering of the service or delivery of the assets and hence upon transfer of the risk.

The commission fees received by travel agencies for package tours are recognised upon payment by the customers or, at the latest, at the date of departure. The services of tour operators mainly consist in organising and coordinating package tours. Turnover from the organisation of tours is therefore fully recognised when the customer departs. Turnover from individual travel modules booked directly from airlines, hotel companies or incoming agencies by customers is recognised when the customers use the respective services. Income from non-completed shipping tours is recognised according to the proportion of contract performance at the balance sheet date. For cruises, the percentage of completion is determined as the ratio between travel days completed by the balance sheet date and overall travel days.

Interest income and interest expenses not to be capitalised under IAS 23 are reported on an accrual basis according to the effective interest method. Dividends are reported when the legal claim has arisen.

Goodwill and Other intangible assets

Acquired intangible assets are carried at cost. Self-generated intangible assets, primarily software for use by the Group itself, are capitalised at cost where an inflow of future economic benefits for the Group is probable and can be reliably measured. The cost of production comprises direct costs and directly allocable overheads. Intangible assets with a limited service life are amortised over the expected useful life.

Intangible assets acquired in the framework of business combinations, such as order book, customer base or trademark rights, are carried at the fair value as at the date of acquisition and amortised.
 

Useful lives of intangible assets
 

Intangible assets with indefinite useful lives are not amortised but have to be tested for impairment at least annually. In addition, impairment tests have to be conducted if there are any indications of potential impairment. The TUI Group’s intangible assets with an indefinite useful life consisted exclusively of goodwill.

Impairment tests for goodwill are conducted on the basis of cash generating units. According to the IASB rules, cash generating units are the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. In the Tourism segment, the TUI Travel Division as a whole was defined as a cash generating unit. Allocation in the TUI Hotels & Resorts Sector is based on the individual hotel groups.

Impairments are effected where the carrying amounts of the tested units plus the allocable goodwill exceeds the recoverable amount. The recoverable amount corresponds to the higher of fair value less costs to sell and the present value of future payment flows of the tested entity based on continued use within the company (value in use). The fair value less cost to sell corresponds to the amount that could be generated between knowledgeable, willing, independent business partners in an arm’s length transaction after deduction of the cost to sell. Due to the restrictions applicable to the determination of the cash flows to derive the value in use, e.g. the requirement not to account for earnings effects from investments in expansions or from restructuring activities for which no provision was formed according to IAS 37, the fair value less cost to sell usually exceeds the value in use and therefore represents the recoverable amount.

Since a fair value was not available in an active market for the entities to be tested, with the exception of TUI Travel PLC, it was determined by means of discounting the expected cash surpluses. This was based on the medium-term plan for the entity under review, prepared at the balance sheet date, following deduction of income tax payments. The assumptions underlying the planning are outlined in the section ‘Report on Expected Developments’ in the management report. For the detailed planning period from 2009/10 to 2011/12, the weighted average cost of capital after income taxes which formed the discounting basis was 8.0% per annum for the TUI Travel PLC sector and 8.1% per annum for TUI Hotels & Resorts; taking account of a growth markdown of 1.0% per annum, the corresponding figures were 7.0% p.a. and 7.1% p.a., respectively, for the longer-term period. The fair values determined were tested against multiples customary in the market. The costs to sell to be taken into account were determined on the basis of empirical values related to past transactions.

Where the original causes for impairments effected in previous years no longer applied, the impairment was written back to ‘Other income’. In accordance with IAS 36, write-backs of goodwill are not admissible.

Property, plant and equipment

Property, plant and equipment are measured at amortised cost. The cost of purchase comprises all costs incurred to purchase an asset and bring it to working condition. The cost of production is determined on the basis of direct costs and appropriate allocations of overheads and depreciation.

Borrowing costs directly associated with the acquisition, construction or production of qualified assets are included in the cost of acquisition or production of these assets until the assets are ready for their intended use. The capitalisation rate applied in the event of intercompany financing is 6.0% per annum for the short financial year 2009 and 6.25% p.a. for 2008. Other borrowing costs are ­recognised as current expenses.

To the extent that funds are borrowed specifically for the purpose of obtaining a qualified asset, the underlying capitalisation rate is determined on the basis of the specific borrowing cost; in all other cases the weighted average of the ­borrowing costs applicable to the borrowings outstanding is applied.

Use-related depreciation and amortisation is based on the following useful lives:
 

Useful lives 
 

Moreover, the level of depreciation is determined by the residual amounts recoverable at the end of the useful life of an asset. The residual value assumed for cruise ships and their hotel complexes amounts to 30% of the acquisition costs. The determination of the depreciation of aircraft fuselages, aircraft engines and spare parts in first-time recognition is based on a residual value of 20% of the cost of acquisition.

Both the useful lives and assumed residual values are reviewed on an annual basis in the framework of the preparation of the annual financial statements. The review of the residual values is based on comparable assets at the end of their useful lives as at the current point in time. Any adjustments required are effected as a correction of depreciation over the remaining useful life of the asset. The restatement of depreciation is effected retrospectively for the entire financial year in which the review has taken place. Where the review results in an increase in the residual value so that it exceeds the remaining net carrying amount of the asset, depreciation is suspended. In this case, the amounts are not written back.

Any losses in value expected to be permanent and going beyond wear-and-tear depreciation are taken into account by means of the recognition of impairment losses. If there are any events or indications of impairment, the carrying value of an asset is compared with the recoverable amount in the framework of the impairment test required in that case. The recoverable amount is the higher of an asset’s fair value less costs to sell and the value of future payment flows attributable to the asset (value in use).

Investment grants received are shown as reductions in cost where these grants are directly attributable to individual property, plant or equipment items. Where a direct allocation of grants is not possible, the grants and subsidies received are carried as deferred income under ‘Other liabilities’ and reversed in accordance with the useful life of the investment project.

Leases

Finance leases   
In accordance with IAS 17, leased property, plant and equipment in which the TUI Group carries all essential risks and rewards incident to ownership of the assets are capitalised. Capitalisation is based on the fair value of the asset or the present value of the minimum lease payments, if lower. Depreciation is charged over the useful life or the lease term, if shorter, on the basis of the depreciation method applicable to comparable purchased or manufactured assets. Payment obligations arising from future lease payments are carried as liabilities, with no consideration of future interest expenses. Every lease payment is broken down into an interest portion and a redemption portion so as to produce a constant periodic rate of interest on the remaining balance of the liability. The interest portion is carried in the profit and loss statement with an effect on results.

Where companies of the TUI Group are lessors in finance leases, receivables equivalent to the net investment value are carried for the lease. The periodic distribution of the income from finance leases results in constant interest payments on the outstanding net investment volume of the leases over the course of time.

Operating leases   
Both expenses made and income received under operating leases are recognised in the profit and loss statement on a straight-line basis over the term of the corresponding leases.

Sale-and-lease-back-transactions
Gains from sale-and-lease-back transactions resulting in a finance lease are recognised in income over the term of the lease. Losses, in contrast, are immediately recognised in the profit and loss statement as at the date of the transaction.

If a sale-and-lease-back transaction is classified as an operating lease, a gain or loss is recognised immediately if the transaction terms are demonstrably at fair value. If a loss is compensated for by future lease payments at below-market price, this loss is to be deferred and amortised over the term of the lease agreement. If the agreed purchase price is above fair value, the gain from the difference between these two values also has to be deferred and amortised.

Investment property

Property not occupied for use by subsidiaries and exclusively held to generate rental income and capital gains is recognised at amortised cost. This property is amortised over a period of up to 50 years.

Financial instruments

Financial instruments are contractual rights or obligations that will lead to an inflow or outflow of financial assets or the issue of equity rights. They also comprise derivative rights or obligations derived from primary financial instruments.

In accordance with IAS 39, financial instruments are broken down into financial assets or liabilities to be measured at fair value through profit or loss, loans and receivables, financial assets available for sale, financial assets held to maturity and other liabilities.

In terms of financial instruments measured at fair value through profit and loss, the TUI Group exclusively held derivative financial instruments which had to be classified as held for trading. The fair value option was not exercised. Moreover, the TUI Group held financial assets in the ‘loans and receivables’ and ‘available for sale’ categories. However, it did not hold any assets held to maturity in the present annual financial statements.

In the short financial year 2009 and in the previous financial year no reclassifications were effected within the individual measurement categories.

Primary financial assets

Financial assets are recognised at the value as at the trading date on which the Group commits to buy the asset. Primary financial assets are classified as loans and receivables or as financial assets available for sale when recognised for the first time. Loans and receivables as well as financial assets available for sale are initially recognised at fair value plus transaction costs.

Loans and receivables are non-derivative financial assets with fixed or fixable contractual payments not listed in an active market. They are shown under ’Trade accounts receivable’ and ‘Other receivables’ in the statement of financial position and classified as current receivables if they mature within twelve months after the balance sheet date.

In the framework of follow-up measurement, loans and receivables are measured at amortised cost based on the effective interest method. Value adjustments are made to account for identifiable individual risks. Where default of a certain portion of the receivables portfolio is probable, impairments are effected at an amount corresponding to the expected loss. Impairments and reversals of impairments are carried under ‘Cost of sales’ or ‘Administrative expenses’, depending on the technical nature of the transaction.

Financial assets available for sale are non-derivative financial assets either individually expressly allocated to this category or not allocable to any other category of financial assets. In the TUI Group, they exclusively consist of company shares and securities held. They have to be allocated to non-current assets unless the manage­ment intends to sell them within twelve months after the balance sheet date.

Financial assets available for sale are measured at their fair value in the framework of initial measurement. Changes in fair values are carried in equity outside profit and loss until the disposal of the assets. A permanent reduction in fair value gives rise to impairments recognised through profit or loss. In the event of subsequent reversal of the impairment, the impairment carried through profit or loss is not reversed for equity instruments but eliminated against equity outside profit and loss. Where a listed market price in an active market is not available for shares held and other methods to determine an objective market value are not applicable, the shares are measured at amortised cost. 

A derecognition of assets is effected as at the date on which the rights for payments from the asset expire or are transferred and therefore as at the date essentially all risks and rewards of ownership are transferred.

Derivative financial instruments and hedging

In the framework of initial measurement, derivative financial instruments are measured at the fair value attributable to them on the day of the conclusion of the agreement. The follow-up measurement is also effected at the fair value applicable at the respective balance sheet date. Where derivative financial instruments are not part of a hedge in connection with hedge accounting, they have to be classified as held for trading in accordance with IAS 39. The method used to carry profits and losses depends on whether the derivative financial instrument has been classified as a hedge and on the type of the underlying hedged item. As a matter of principle, the Group classifies derivative financial instruments either as fair value hedges to hedge against exposure to changes in the fair value of assets or liabilities or as cash flow hedges to hedge against variability in cash flows from highly probable future transactions.

Upon conclusion of the transaction, the Group documents the hedge relationship between the hedge and the underlying item, the risk management goal and the underlying strategy. In addition, an assessment is made and documented both at the beginning of the hedge relationship and on a continual basis as to whether the derivatives used for the hedge compensate for the changes in the fair values or cash flows of the underlying transactions in a highly effective manner. Derivative financial instruments held for trading are carried as current assets or liabilities.

The changes in the fair values of derivative financial instruments designated to hedge against exposure to changes in the fair value (fair value hedges) are carried in the profit and loss statement alongside the changes in the fair values of the hedged assets or liabilities allocable to the hedged risk. If the conditions for hedge accounting are no longer met and the previously designated underlying item is measured by means of the effective interest method, the necessary adjustment of the carrying amount of the underlying transaction has to be effected over its remaining term. The present annual financial statements did not include any fair value hedges of assets and liabilities.

The effective portion of changes in the fair value of derivatives forming cash flow hedges is recognised in equity. The ineffective portion of such changes in the fair value, by contrast, is recognised immediately in the profit and loss statement with an effect on results, depending on the nature of the transaction. Amounts taken to equity are reclassified to the profit and loss statement and carried as income or expenses in the period in which the hedged item had an effect on results.

If a hedge expires, is sold or no longer meets the criteria for hedge accounting, the cumulative gain or loss remains in equity and is only carried in the profit and loss statement with an effect on results when the originally hedged future transaction occurs. If the future transaction is no longer expected to take place, the cumulative gain or loss recognised directly in equity immediately has to be recognised through profit and loss.

Changes in the fair values of derivative financial instruments not meeting the criteria for hedge accounting are immediately carried in the profit and loss statement with an effect on results.

Inventories

Inventories are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price less the estimated cost incurred until completion and the estimated variable costs required to sell. All inventories are written down individually where the net realisable value of inventories is lower than their carrying amounts. Where the original causes of inventory write-downs no longer apply, the write-downs are reversed. The  measurement method applied to similar inventory items is the weighted average cost formula.

Cash and cash equivalents

Cash and cash equivalents comprise cash, call deposits, other current highly liquid financial assets with an original term of a maximum of three months and current accounts. Used credits in current accounts are shown as ‘Liabilities to banks’ under ‘Current financial liabilities’.

Non-current assets held for sale and Discontinued Operations

Non-current assets and disposal groups are classified as held for sale if the associated carrying amount will be recovered principally through sale rather than through continued use. Discontinued Operations are operations which may clearly be separated operationally and for accounting purposes from the remainder of the Company and have been sold or classified as held for sale.

The measurement is effected at the lower of carrying amount and fair value less costs to sell. Depreciation and at equity measurements have to be suspended. Impairments to fair value less costs to sell must be carried through profit and loss, with any gains on subsequent remeasurement resulting in the recognition of profits of up to the amount of the cumulative impairment cost.

Hybrid capital

In accordance with IAS 32, the hybrid capital issued at the end of financial year 2005 has to be recognised as one of the Group’s equity components due to the bond terms. Accordingly, the tax-deductible interest payments were not shown under interest expenses but treated in analogy to dividend obligations to the TUI AG shareholders. Any borrowing costs incurred were directly deducted from the hybrid capital, taking account of deferred income taxes.

Provisions

Provisions are formed when the Group has a current legal or constructive obligation as a result of a past event and where in addition it is probable that assets will be impacted by the settlement of the obligation and the level of the provision can be reliably determined. Provisions for restructuring measures comprise payments for the early termination of rental agreements and severance payments to employees. No provisions are carried for future operating losses.

Where a large number of similar obligations exists, the probability of a charge over assets is determined on the basis of this group of obligations. A provision is also carried as a liability if the probability of a charge over assets is low in relation to an individual obligation contained in this group. 

Provisions are measured at the present value of the expected expenses, taking account of a pre-tax interest rate, reflecting current market assessments of the time value of money and the risks specific to the liability. Risks already taken into account in estimating future cash flows do not affect the discount rate. Increases in provisions due to accrued interest are carried as interest expenses through profit or loss.

The pension provision recognised for defined benefit plans corresponds to the net present value of the defined benefit obligations (DBOs) as at the balance sheet date less the fair value of the plan assets. Measurement of these assets is limited to the net present value of the value in use in the form of reimbursements from the plan or reductions in future contribution payments. Actuarial gains and losses arising from the regular adjustment of actuarial parameters are eliminated against equity outside profit and loss when they occur. The DBOs are calculated annually by independent actuaries using the projected unit credit method. The net present value of the DBOs is calculated by discounting the expected future outflows of cash with the interest rate of high-quality corporate bonds.

Past service cost is immediately recognised through profit or loss if the changes in the pension plan do not depend on the employee remaining in the Company for a defined period of time (vesting period). In this case, the past service cost is recognised through profit or loss on a straight-line basis over the vesting period.

For defined contribution plans, the Group pays contributions to public or private pension insurance plans on the basis of a statutory or contractual obligation or on a voluntary basis. The Group does not have any further payment obligations on top of the payment of the contributions. The contributions are carried under personnel costs when they fall due.

Liabilities

As a matter of principle, liabilities are carried at the date on which they arise at fair value less borrowing and transaction costs. Over the course of time, liabilities are measured at amortised cost based on application of the effective interest method.

When issuing bonds comprising a debt component and a second component in the form of conversion options or warrants, the funds obtained for the respective components are recognised in accordance with their character. At the issuing date, the debt component is carried as a bond at a value that would have been generated for the issue of this debt instrument without corresponding conversion options or warrants on the basis of current market terms. If the conversion options or warrants have to be classified as equity instruments, the difference over the issuing proceeds generated is transferred to the capital reserve with deferred taxes taken into account.

As a matter of principle, the currency differences resulting from the translation of trade accounts payable are reported as a correction of the cost of sales. Currency differences from the translation of liabilities not resulting from normal performance processes are carried under ‘Other income’/’other expenses’ or ‘Administrative expenses’, depending on the nature of the underlying liability.

Deferred taxes

In accordance with IAS 12, deferred taxes were determined using the balance sheet liability method. Accordingly, probable future tax reliefs and charges are recognised for all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Expected tax savings from the use of loss carryforwards assessed as recoverable in the future are capitalised. Although there was no time limit for German loss carryforwards, as before, the annual use of such carryforwards was restricted by means of minimum taxation. Foreign loss carryforwards frequently had to be used within a given country-specific time limit and were subject to restrictions concerning the use of these loss carryforwards for profits on ordinary activities, which were taken into account accordingly in the measurement.

Deferred taxes are directly charged or credited to equity if the tax relates to items directly credited or charged to equity in the same or some other period.

Deferred tax assets are carried to the extent that it is probable that future taxable profits will be available against which the temporary difference or an unused tax loss can be utilised.
 
Deferred taxes are measured at the tax rates and tax provisions applicable at the balance sheet date or essentially adopted by law and expected to be applicable at the date of realisation of the deferred tax claim or the payment of the deferred tax liability. Deferred tax items of German companies were measured at a tax rate of 31.0%, as in 2008.

Current income taxes

As in financial year 2008, the German companies of the TUI Group had to pay average trade income tax of approx. 15.2%. As in 2008, the corporation tax rate was 15.0%, plus a 5.5% solidarity surcharge on corporation tax.

The calculation of foreign income taxes was based on the laws and provisions applicable in the individual countries. The income tax rates applied to foreign companies varied from 10.0% to 41.0%.

Income tax provisions were offset against the corresponding tax refund claims where they existed in the same fiscal territory and had the same nature and maturity.

Share-based payments

All share-based payment schemes in the Group were payment schemes paid in cash or via equity instruments.

For transactions with cash compensation, the resulting liability for the Group was charged to expenses at its fair value as at the date of the performance of the service by the beneficiary. Until payment of the liability, the fair value of the liability was remeasured at every closing date and all changes in the fair value were carried through profit and loss.

In the Tourism Segment, share-based payment schemes exist in the form of share award programmes granted by TUI Travel PLC. Under these payment schemes, directors and employees are entitled to acquire shares in TUI Travel PLC. The fair value of the options granted is carried under ‘Personnel costs’ with a corresponding direct increase in equity. The fair value is determined at the time of the granting of the options and spread over the vesting period during which the employees become entitled to the options.

The fair value of the option granted is measured using option valuation models, taking into account the terms and conditions upon which the options were granted. The amount to be carried under personnel costs is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to market-based performance conditions not meeting the thresholds for vesting.

Transactions to acquire shares in TUI Travel PLC to perform the share option plans were directly taken to the revenue reserve in equity.

Key estimates and judgements

All estimates and judgements are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations concerning future events.

Goodwill was tested for impairment as at the balance sheet date. Details concerning the implementation of goodwill impairment tests are presented in the section ‘Goodwill and other intangible assets’ in the chapter ‘Accounting and measurement methods’.
 
In order to review the carrying amounts of property, plant and equipment, an annual assessment for signs of potential impairment is performed. These indications relate to various areas, e.g. the market-related or technical environment but also physical condition. If such signs are identified, management has to assess the recoverable amount on the basis of expected future cash flows and appropriate interest rates. Moreover, key estimates and judgements are made in determining useful economic lives and residual values of property, plant and equipment items, to be tested at least on an annual basis. Details concerning useful lives and residual values of property, plant and equipment items are provided in the section ‘Property, plant and equipment’ in the chapter ‘Accounting and measurement methods’.

In accounting for business combinations, the identifiable assets, liabilities and contingent liabilities acquired have to be measured at their fair values. In this context, cash flow-based methods are regularly used. Depending on the assumptions underlying such methods, different results may be produced. In particular, judgement and estimation is required in determining the economic useful lives of intangible assets and the fair values of contingent liabilities.

The classification of non-current assets or disposal groups as ‘held for sale’ requires judgement in determining whether the planned disposal is highly probable and able to be realised within 12 months. The measurement of these assets or disposal groups at their fair value less costs to sell can also require judgement if there is no active market.

In accounting for provisions, judgement is required in determining occurrence probability, maturity and level of the risk. In order to determine the obligation under defined benefit pension schemes, actuarial calculations are used. They strongly depend on the underlying mortality assumptions and the selection of the discount rate, newly determined at the end of every year. The discount rate used is the interest rate for first-rate corporate bonds denominated in the currencies in which the benefits are paid and with maturities corresponding to those of the pension obligations. At the same time, current market expectations are used in determining the expected return on plan assets. Detailed information is outlined in the explanatory information on the recognised pension provisions under Note 32.

Judgement is required in the assessment of the effectiveness of hedges at hedge inception and during the period over which hedge accounting is adopted. Moreover, the assessment of the probability of the expected forecast transactions underlying the cash flow hedges can involve judgement.

The Group is liable to pay income taxes in various countries. Judgement is required in determining the income tax provisions. For certain transactions and calculations the final tax charge is impossible to determine during the ordinary course of business. The level of the provisions for expected tax audits is based on an estimation of whether and to what extent additional income taxes will be due. Judgements are corrected, if necessary, in the period in which the final tax charge is determined.