Grenke AG, a global provider of asset finance for SMEs, has received a decision on error findings from the German Federal Financial Supervisory Authority (BaFin) as part of the enforcement procedure for the 2019 audit of consolidated financial statements. With the announcement of these error findings, the enforcement procedure is now concluded, Grenke said in a statement.
BaFin’s criticisms of Grenke described in the notice dated 16 July this year relate to the accounting treatment of franchise companies, the determination of risk provisions in accordance with IFRS 9, and the goodwill reported for Portugal and Poland in the 2019 consolidated financial statements.
German Federal Financial Supervisory Authority BaFin
Dr Sebastian Hirsch, chief financial officer of Grenke AG, said: “For us, this decision, above all, marks the end of this intensive review. Because we have already anticipated all the key issues, the decision contains no surprises but is instead another important step towards normality.”
On 22 July 2021, BaFin ordered Grenke AG to disclose the errors identified. The corresponding formal announcement was made on 27 July 2021 in the German Federal Gazette (www.bundesanzeiger.de) and via DGAP (www.dgap.de).
Grenke AG said it had already addressed the relevant issues that have now also been identified as errors in its announcements on 26 February and 30 April of this year and in the 2020 Annual Report.
Grenke AG had also adjusted items material for accounting purposes in its 2020 consolidated financial statements and retroactively for 2019 and is taking them into account in the current financial statements.
In Grenke’s assessment, there is no further need to adjust the 2020 consolidated financial statements or earlier financial statements as a result of the declaratory decision. It is the understanding of the company that BaFin also sees no further need to adjust financial statements based on the enforcement procedure that has been announced as completed.
The details of the error findings in Grenke AG’s consolidated financial statements for the 2019 financial year are listed below.
Accounting treatment of franchise companies
According to BaFin’s assessment, Grenke AG failed to include 12 subsidiaries in its consolidated financial statements. In the assessment of BaFin, the non-inclusion of these companies was not corrected by a retroactive adjustment in the consolidated financial statements as of 31 December 2019.
In addition, BaFin’s assessment stated that Grenke AG failed to include a further eight subsidiaries in its consolidated financial statements as of the date of obtaining control. BaFin argues that Grenke AG instead incorrectly accounted for business combinations at the time of the respective acquisition of the subsidiaries and only included the subsidiaries in the consolidated financial statements as of that date.
As a result, goodwill was overstated by €54.3m as of 31 December 2019, among other things. In the 2020 Annual Report, the company’s assets as of31 December 2019 were therefore adjusted and reported as a total of €7.098bn. As of 31 December 2020, these assets amounted to €7.332bn.
As already disclosed in the 2020 Annual Report, the franchise companies were included in Grenke AG’s scope of consolidation retroactively from the start of business activities or as of the application of IFRS 10 and consolidated retroactively for 2019. This reduced the equity on the balance sheet by €85.1m as of 1 January 2019. Following the adjustment, Grenke AG reported equity of approximately €980m as of 1 January 2019 and €1.143bn as of 31 December 2019.
Determination of risk provisioning according to IFRS 9
Another point of criticism expressed by BaFin relates to the impairments of lease receivables and the related determination of risk provisioning. BaFin points out that, in its opinion, the lease receivables reported under current assets were reported too high in the total amount of €22.7m as of 31 December 2019 because payment expectations that were too high had been taken into account for the determination of the expected credit loss and thus for the risk provisioning. After the adjustment, lease receivables reported under current assets amount to a total of €1.952bn as of 31 December 2019.
Furthermore, according to BaFin, lease receivables reported under non-current assets were overstated by €1.1m because, in BaFin’s view, payment expectations that were too high had been taken into account in determining the expected credit loss and, consequently, the risk provisioning.
In the opinion of BaFin, Grenke AG had taken only past information into account when determining the expected credit losses and thus risk provisioning for lease receivables. After the adjustment, lease receivables reported under non-current assets amounted to €3.823bn as of the reporting date of 31 December 2019.
Grenke AG adapted the determination of risk provisioning in its 2020 Annual Report and adjusted the prior-year figures for 2019 accordingly in the consolidated financial statements as of 31 December 2020 and is taking them into account in the current financial statements.
Goodwill of subsidiaries in Portugal and Poland
According to BaFin, goodwill was overstated by €6.2m.
Of this amount, €4.2m is attributable to the Polish subsidiary. BaFin states that, in its opinion, the related impairment test was not based on the planning that applied on the valuation date, but on overly optimistic revenue estimates and an excessively low-cost growth factor.
€2m of the amount is attributable to the subsidiary in Portugal. BaFin states that, in its opinion, a component of the related purchase price paid in that amount was not related to the acquisition of the subsidiary in Portugal in 2012 but instead served to settle a previously failed transaction between Grenke AG and the seller of the Portuguese subsidiary.
As previously announced, Grenke AG recognised goodwill impairment on the business in Poland in the amount of €4.2m as well as an adjustment of the purchase price allocation for the Portuguese franchise company in the amount of €2m retroactively for 2019 in the 2020 consolidated financial statements.
In September 2020, BaFin assumed the audit of Grenke AG’s consolidated financial statements as of 31 December 2019 and the combined group management report and management report for the financial year 2019 from the German Financial Reporting Enforcement Panel (FREP). This was assumed in addition to the special audit carried out by BaFin in accordance with Section 44 of the German Banking Act.