284 BMW Group Report 2024 To Our Stakeholders Combined Management Report Group Financial Statements Responsibility Statement and Auditor’s Report Remuneration Report Other Information Notes to the Group Financial Statements IFRS 16 requires that lease payments are discounted as a gen- eral rule using the interest rate implicit in the lease. However, since the interest rate in leases entered into by the BMW Group cannot readily be determined, amounts are discounted on the basis of the incremental borrowing rate. The incremental borrowing rate comprises the risk-free interest rate in the relevant currency for matching maturities plus a pre- mium for the credit risk. Specific risks attached to an asset are generally not taken into account, given that collateral received in the context of alternative financing arrangements is not relevant within the BMW Group. Determining which items are to be counted as lease payments – including the issue of the lease term underlying those payments – and which discount rate to apply involves using estimates and assumptions that may differ from actual outcomes. As lessee, the BMW Group makes use of the application exemp- tions available for short-term leases and leases of low-value as- sets. Group products recognised by BMW Group entities as leased products under operating leases are measured at manufactur- ing cost and all other leased products at acquisition cost, in each case including initial direct costs. All leased products are depre- ciated over the period of the lease using the straight-line method down to their expected residual value. Where the recoverable amount of a lease exceeds the asset’s carrying amount, changes in residual value expectations are rec- ognised by adjusting scheduled depreciation prospectively over the remaining term of the lease. If the recoverable amount is lower than the asset's carrying amount, an impairment loss is recognised for the shortfall. A test is carried out at each balance sheet date to determine whether an impairment loss recognised in prior years no longer exists or has decreased. In such cases, the carrying amount of the asset is increased to the recoverable amount, at a maximum up to the amount of the asset’s amor- tised cost. Assumptions and estimations are required regarding future re- sidual values, since these represent a significant part of future cash inflows. Relevant factors to be considered include the trend in market prices and demand on the pre-owned automobile mar- ket. The expected change in the drive-system mix going forward, which is subject to regular analysis, is also taken into account. The BMW Group has developed and implemented methods and processes that enable sustainability aspects of residual value risks, particularly climate-related aspects, to be appropriately as- sessed and managed. A scenario-based approach is applied to quantify the impact of the transition towards zero-emissions mo- bility and factor in the technological progress of the products in- volved, resulting potentially in the need to adjust the estimated residual values of both internal combustion and electrified vehi- cles. However, the transition to new drive systems will stretch over a period of time. Under these circumstances, regulatory as- pects, customer behaviour and the structure of the product range all have to be taken into account. To varying degrees, the afore- mentioned aspects will play a role in bringing about changes to the existing product portfolio over the coming years. The nature of these planned changes can already be anticipated today to some extent, highlighting potential but calculable risks for future operations. Disproportionate risks are only likely to arise in the event of unexpected regulatory changes that would also be to the detriment of customers. In addition to these various considera- tions, the vehicle portfolio subject to residual value risks is re- measured on a quarterly basis, allowing new aspects to be incor- porated in the valuation at an early stage. In this case, valuations relevant for new business which are subject to the same turn of events would also be adjusted. The models used to determine residual value are also subject to regular review and can be sup- plemented where appropriate to include aspects relating to changes in the market. Using this approach, different scenario analyses can be used to take into account upward or downward adjustments to esti- mated values. The assumptions are based on internally available historical data and current market data, as well as on data from external institutions. Furthermore, assumptions are regularly val- idated by comparison with external data. Certain types of con- tracts require a high degree of judgement when deciding whether they give rise to operating leases or receivables from sales fi- nancing. Investments accounted for using the equity method are measured – provided no impairment has been recognised – at cost of investment adjusted for the Group’s share of earnings and changes in equity capital. If there is any indication that an investment is impaired, an impairment test is performed on the basis of the discounted cash flow method. An indicator exists, for example, in the event of a serious shortfall compared to budget, the loss of an active market or if funds are required to avoid in- solvency. With the exception of lease receivables, financial assets are measured on initial recognition at their fair value. Financial as- sets include, in particular, other investments, receivables from sales financing, finance receivables, trade receivables and cash and cash equivalents. As a general rule, initial recognition takes place as soon as the BMW Group becomes a party to a contract. In the case of so-called “regular way” purchases or sales of non- derivative financial assets, initial recognition takes place at the settlement date. Financial assets are derecognised when con- tractual cash flows attached to them have expired or are trans- ferred and all significant risks and rewards have been passed on to the acquirer. Depending on the business model and the structure of contrac- tual cash flows, financial assets are classified as measured at amortised cost, at fair value through comprehensive income or at fair value through profit or loss. The category “measured at fair value through comprehensive income” at the BMW Group com- prises mainly marketable securities and investment funds used for liquidity management purposes. In the BMW Group, selected marketable securities, shares in investment funds, money mar- ket funds and convertible bonds are measured at fair value through profit or loss, as their contractual cash flows do not solely represent payments of principal and interest.