The Bertelsmann Consolidated Financial Statements include the financial statements of the parent company and its subsidiaries, joint ventures and associates.

Subsidiaries are companies controlled by Bertelsmann SE & Co. KGaA in accordance with IFRS 10. Consolidation begins on the date on which the ability to exercise control exists and ends when Bertelsmann loses the ability to exercise control. Profit or loss and each component of total comprehensive income are attributed to the shareholders of the parent company and the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
In accordance with IFRS 3, business combinations are accounted for using the acquisition method. Non-controlling interests are measured at the proportionate fair value of the assets and liabilities. If the consideration transferred for the business combination or the fair values attributable to the identifiable assets and liabilities of the company acquired can only be provisionally identified on the date of initial accounting, the business combination is accounted for using these provisional values. Initial accounting is completed in accordance with IFRS 3.45, taking into account the one-year measurement period. Comparative information for reporting periods prior to the completion of initial accounting is presented as if it had already been completed on the acquisition date.
Changes in the parent’s ownership interest in a subsidiary that do not lead to a loss of control are accounted for as equity transactions. After the loss of control of a subsidiary, it is deconsolidated in accordance with the requirements of IFRS 10. Any investment retained in the former subsidiary and any amounts owed by or to the former subsidiary are accounted for in accordance with the applicable IFRSs from the date when control is lost.

Joint ventures in accordance with IFRS 11 and associates are included in the Consolidated Financial Statements using the equity method in accordance with IAS 28. Associates are companies over which Bertelsmann exercises a significant influence. This is generally the case for voting rights between 20 percent and 50 percent. Smaller shareholdings are accounted for using the equity method if there is a significant influence in accordance with IAS 28.6.

When changing the accounting treatment of investments to the equity method, IFRS 3 is applied correspondingly so that the fair value of the previously held interest is used in determining the cost of the investment accounted for using the equity method on the transition date. The difference between the fair value and the carrying amount of the previously held interest is recognized in profit or loss. When applying the equity method to an associate or a joint venture that is an investment entity, Bertelsmann, which is a non-investment entity, generally retains as investor the fair value measurement applied by the associate or joint venture to its interests in subsidiaries.

The Bertelsmann Group recognizes immaterial investments in accordance with IAS 39.

Bertelsmann is the majority shareholder of RTL Group with an interest of 75.1 percent and Penguin Random House with an interest of 75 percent (previous year: 53 percent). Gruner + Jahr, BMG, Arvato, the Bertelsmann Printing Group, the Bertelsmann Education Group and Bertelsmann Investments are each wholly owned by Bertelsmann.

A total of 213 (previous year: 227) companies without significant business operations were excluded from the scope of consolidation due to their negligible importance for the financial position and financial performance of the Bertelsmann Group. The complete list of the Bertelsmann Group’s shareholdings will be published in the “Bundesanzeiger” (“Federal Gazette”) as an annex to these Consolidated Financial Statements in accordance with section 313 (2) of the German Commercial Code and will be presented at the General Meeting.

In the financial year 2017, the cash flow from acquisition activities totaled €-213 million (previous year: €-278 million), of which €-178 million (previous year: €-250 million) related to new acquisitions during the reporting period less cash and cash equivalents acquired. The consideration transferred in accordance with IFRS 3 amounted to €273 million (previous year: €354 million) taking into account contingent consideration of €19 million (previous year: €21 million). In addition, put options in the amount of €12 million (previous year: €18 million) related to the acquisitions were accounted for.

In January 2017, BMG fully acquired the American group of companies BBR Music Group (BBRMG), which includes the country music labels Broken Bow Records, Stoney Creek Records and Wheelhouse Records, and the music publisher Magic Mustang Music. Concluding this transaction guarantees BMG a leading role in the capital of country music – Nashville, Tennessee (United States) – and promises numerous benefits to the artists and songwriters under contract with BBRMG and BMG. By becoming a part of BMG’s global platform, the customers of BBRMG will also benefit from a significantly larger international reach. At BMG, the musicians also have access to a wide range of marketing resources. The consideration transferred amounts to €95 million and is paid fully in cash. The purchase price agreement includes a variable consideration dependent on future sales figures of artists under contract with BBRMG. The maximum variable consideration amounts to US$25 million. As of December 31, 2017, Bertelsmann anticipates no payment from this variable consideration. The purchase price allocation resulted in tax-deductible Goodwill  amounting to €6 million, mainly representing potential synergy effects to be realized and increased future sales opportunities combining BBRMG and BMG. Due to exercising an optional right in the United States, the acquisition is treated as an asset deal from a tax perspective. On an individual level, the total consideration transferred is tax deductible over 15 years. In the financial year 2017, transaction-related costs amounted to €1 million and have been recognized in profit or loss.

In July 2017, Penguin Random House acquired an interest of 100 percent in the publishing group Ediciones B from Spain’s Grupo Zeta media group. Penguin Random House considers the acquisition a reinforcement of Penguin Random House Grupo Editorial’s market position and cultural importance in Spain, Latin America and the entire Spanish-speaking world. The consideration transferred amounted to €37 million and was fully paid in cash. The purchase price allocation resulted in non-tax-deductible goodwill of €28 million, mainly representing synergy potential to be realized from efficiency optimization in direct and structural expenses. In the financial year 2017, transaction-related costs amounted to €2 million and have been recognized in profit or loss.

In addition, the Bertelsmann Group made several acquisitions in the financial year 2017, none of which was material on a stand-alone basis. Payments net of acquired cash and cash equivalents amounted to €-93 million; the consideration transferred in accordance with IFRS 3 for these acquisitions amounted to €141 million taking into account contingent consideration of €19 million. The other acquisitions resulted in goodwill totaling €133 million reflecting synergy potential, of which €7 million is tax deductible. In the financial year 2017, transaction-related costs amounted to €2 million and have been recognized in profit or loss.

In addition, the Bertelsmann Group made several acquisitions in the financial year 2016, none of which was material on a stand-alone basis. Payments net of acquired cash and cash equivalents amounted to €105 million; the consideration transferred in accordance with IFRS 3 for these acquisitions amounted to €185 million taking into account contingent consideration of €12 million. The acquisitions resulted in goodwill totaling €118 million, which reflects synergy potential and is tax deductible in the amount of €46 million. The transaction- related costs amounted to €4 million and have been recognized in profit or loss.

The purchase price allocations consider all the facts and circumstances prevailing as of the respective dates of acquisition that were known prior to preparation of the Consolidated Financial Statements. In accordance with IFRS 3, should further facts and circumstances become known within the 12-month measurement period, the purchase price allocation will be adjusted accordingly.

The following table shows the fair values of the assets and liabilities of the acquisitions on their dates of initial consolidation based on the purchase price allocations, some of which are currently preliminary:

Since initial consolidation, all new acquisitions in accordance with IFRS 3 in the financial year 2017 have contributed €115 million to revenue and €-13 million to Group profit or loss. If consolidated as of January 1, 2017, these would have contributed €156 million to revenue and €-17 million to Group profit or loss. On the acquisition date, the fair value of the acquired receivables was €35 million. Of that amount, €33 million is attributable to trade receivables and €2 million to other receivables. Trade receivables are impaired in the amount of €6 million, so that the gross amount of trade receivables amounts to €39 million. The other receivables are only impaired to a minor extent so that the fair value is equal to the gross amount.

The fair values of the identifiable assets, liabilities and contingent liabilities acquired are measured in accordance with IFRS 3, primarily using the market price-oriented method. According to this method, assets and liabilities are measured at the prices observed in active markets. If measurement using the market price-oriented method is not feasible, the capital value-oriented method is to be applied. According to that method, the fair value of an asset or a liability corresponds to the present value of the future cash inflows or outflows (cash flows).

After considering the cash and cash equivalents disposed of, the Bertelsmann Group recorded cash flows in the amount of €4 million (previous year: €-28 million) from disposals. The disposals resulted in a loss from deconsolidation of €-10 million (previous year: €-33 million), which is recognized in the item “Results from disposals of investments.” The following table shows their impact on the Bertelsmann Group’s assets and liabilities at the time of deconsolidation:

Earnings after taxes from discontinued operations of €-7 million (previous year: €1 million) comprise follow-on effects related to the disposal of companies of the former Direct Group division.

The carrying amounts of the assets classified as held for sale and related liabilities are presented in the following table:

In October 2016, RTL Group entered into an agreement to sell Media Properties Sàrl, which owns RTL Group’s new buildings in Luxembourg (“RTL City”). The disposal was expected to be completed during the second quarter of 2017. The buildings were therefore recognized as assets held for sale at the end of 2016. In May 2017, the parties decided to renounce the transaction by common agreement. RTL Group management decided not to pursue the sale process over the coming year. Accordingly, the buildings were reclassified in the amount of €83 million from assets held for sale back into property, plant and equipment, and the related amortization expense was retrospectively recognized over the second quarter for an immaterial amount.

For disposal groups, which are measured at fair value less costs to sell, Impairment  losses were recognized in the amount of €-14 million in the previous year, which were mainly attributable to a planned disposal in the Arvato division. The disposal was completed in the financial year 2017. The fair values are based on level 3 of the hierarchy of non-recurring fair values. Valuations for level 3 are based on information from the contract negotiations. The impairment losses are recognized in profit or loss in the item “Other operating expenses.”

Transactions denominated in a currency other than a subsidiary’s functional currency are recorded in the functional currency at the exchange rate applicable on the day of their initial accounting. At the end of the reporting period, monetary assets and liabilities denominated in foreign currency are revalued into the functional currency using the closing rate applicable at that time. Gains and losses from these currency translations are recognized in profit or loss. Non-monetary balance sheet items in foreign currency are carried at the exchange rate applicable on the date of initial recognition.

The financial statements of subsidiaries, joint ventures and associates that were prepared in foreign currencies are translated into euros using the functional currency concept set out in IAS 21 before they are included in the Consolidated Financial Statements. Assets and liabilities are translated into the reporting currency at the closing rate at the end of the reporting period, while income statement items are translated at the average rate for the financial year. Currency translation differences are recognized in other comprehensive income. Such differences arise from translating items in the balance sheet at a closing rate that differs from the previous closing rate and from using the average rate for the period and the closing rate at the end of the reporting period to translate the Group profit or loss. At the time of deconsolidation of Group companies, the respective accumulated currency translation differences recognized in other comprehensive income and accumulated in a separate component of equity are reclassified from equity to the income statement. The following euro exchange rates were used to translate the currencies most significant to the Bertelsmann Group.