Results of Operations, Financial Position and Net Assets

The Volkswagen Group’s segment reporting comprises the four reportable segments of Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services, in compliance with IFRS 8 and in line with the Group’s internal management and reporting structures. As a result of enhancements to the management structure of the Volkswagen Group, we allocate the Volkswagen Commercial Vehicles brand to the Passenger Cars segment as of January 1, 2019, renaming this segment the Passenger Cars and Light Commercial Vehicles segment. The Commercial Vehicles segment continues to correspond to the Commercial Vehicles Business Area, but now excludes the Volkswagen Commercial Vehicles brand. The prior-year figures have been adjusted accordingly.

At Volkswagen, segment profit or loss is measured on the basis of the operating result.

The reconciliation contains activities and other operations that do not, by definition, constitute segments. These include the unallocated Group financing activities. Consolidation adjustments between the segments (including the holding company functions) are also contained in the reconciliation. The purchase price allocations for Porsche Holding Salzburg and Porsche, Scania and MAN are allocated to their corresponding segments.

The Automotive Division comprises the Passenger Cars and Light Commercial Vehicles segment, the Commercial Vehicles segment and the Power Engineering segment, as well as the figures from the reconciliation. The Passenger Cars and Light Commercial Vehicles segment is combined with the reconciliation to form the Passenger Cars Business Area, while the Commercial Vehicles and Power Engineering segments are identical to the corresponding business areas. The reorganization of the Volkswagen Commercial Vehicles brand has not led to any changes in the Automotive Division. The Financial Services Division corresponds to the Financial Services segment.

APPLICATION OF NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS

The new accounting standard IFRS 16, which came into effect on January 1, 2019, amends the previous lease accounting rules with the central aim of recognizing all leases in the balance sheet. Accordingly, it establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. They will instead generally be required to recognize a right-of-use asset and a lease liability in the balance sheet for every lease. The right-of-use assets are recognized in the balance sheet under those items in which the assets underlying the lease would have been reported if they were owned by the Volkswagen Group.

Using the modified retrospective method (adjustments to the opening balance sheet), right-of-use assets were recognized under noncurrent assets and lease liabilities as financial liabilities for the first time as of January 1, 2019. This led to an increase in total assets but did not affect equity.

The new approach resulted in a slight increase in operating profit in 2019, because the only items allocated to operating profit as of January 1, 2019 are depreciation charges on right-of-use assets. Interest expenses on lease liabilities in the Automotive Division are recognized in the financial result, with a corresponding negative impact.

Gross and net cash flow increased by €0.9 billion in the reporting period because of the modified presentation of leases in the statement of income as a result of the new IFRS 16 (depreciation is a non-cash expense). Repayments of the principal portion of the lease liability had a corresponding negative impact on cash flows from financing activities.

The initial recognition of lease liabilities as financial liabilities in the balance sheet led to a marked increase in third-party borrowings in the cash flow statement, which in turn resulted in a negative one-off effect of €−4.8 billion on the disclosure of the Automotive Division’s net liquidity as of January 1, 2019.

The prior-year figures have not been adjusted.

SPECIAL ITEMS

Special items consist of certain items in the financial statements whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance.

In the reporting period, negative special items in connection with the diesel issue amounting to €−2.3 (−3.2) billion affected operating profit in the Passenger Cars Business Area. They are attributable to the final administrative fine of €0.5 billion imposed by the Stuttgart Public Prosecutor, which ended the ongoing regulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG, as well as higher expenses for legal risks and legal defense costs (€2.1 billion). The reversal of provisions for technical measures had an offsetting effect (€0.3 billion).

COMPENSATION PAID TO THE NONCONTROLLING INTEREST SHAREHOLDERS OF MAN SE

In August 2018, the control and profit and loss transfer agreement with MAN SE was terminated by extraordinary notice as of January 1, 2019. Following the announcement that the termination of the control and profit and loss transfer agreement had been recorded in the commercial register, the noncontrolling shareholders of MAN SE were entitled under the provisions of the control and profit and loss transfer agreement to tender their shares to Volkswagen within a two-month period. This resulted in cash outflows of €1.1 billion in 2019 for the acquisition of shares tendered and for compensation payments. The “Put options and compensation rights granted to noncontrolling interest shareholders” item reported in the balance sheet was reduced accordingly. The put options granted to noncontrolling interest shareholders of MAN SE expired on March 4, 2019. The remaining amount of €0.7 billion was reclassified directly to equity; €0.3 billion of this amount is attributable to noncontrolling interests.

IPO OF TRATON SE

Since June 2019, shares of TRATON SE have been traded on the regulated market of the Frankfurt Stock Exchange and the NASDAQ Stockholm Exchange. The offer price was set at €27.00 per share. This led to an increase of €1.4 billion in the Volkswagen Group’s equity, of which €1.2 billion is reported as noncontrolling interests. The cash inflow occurred at the beginning of the third quarter of 2019.

CONTRIBUTION OF AUTONOMOUS INTELLIGENT DRIVING

In July 2019, Volkswagen announced that, together with Ford Motor Company, it would be investing in Argo AI, a company that is working on the development of a system for autonomous driving.

Volkswagen will contribute its consolidated subsidiary Autonomous Intelligent Driving (AID) to this venture. The contribution of AID is planned for the first half of 2020, subject to the required regulatory approvals and other conditions precedent.

SALE OF INTEREST IN RENK AG

In January 2020, the Board of Management and Supervisory Board of Volkswagen AG resolved to sell the Volkswagen Group’s 76% interest in RENK AG. The sale is expected to be completed in the second half of 2020, subject to regulatory approval.