36.2. Credit and default risk

The credit and default risk arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the claims under carrying amounts receivable from them and the irrevocable credit commitments. The maximum potential credit and default risk is reduced by collateral held and other credit enhancements. Collateral is held predominantly for financial assets in the “at amortized cost” category. It relates primarily to collateral for financial services receivables and trade receivables. Collateral comprises vehicles and assets transferred as security, as well as guarantees and real property liens. Cash collateral is also used in hedging transactions.

For level 3 and level 4 financial assets with objective indications of impairment as of the reporting date, the collateral provided led to a reduction in risk by €1.2 billion (previous year: €1.3 billion). Collateral of €237 million (previous year: €285 million) has been accepted for assets measured at fair value through profit or loss.

Significant cash and capital investments, as well as derivatives, are only entered into with national and international banks. Risk is additionally limited by a limit system based primarily on the equity base of the counterparties concerned and on credit assessments by international rating agencies. Financial guarantees issued also give rise to credit and default risk. The maximum default risk is determined by the guarantee amount. The corresponding amounts are presented in the Liquidity risk section.

There were no material concentrations of risk at individual counterparties or counterparty groups in the past fiscal year due to the global allocation of the Group’s business activities and the resulting diversification. There was a slight change in the concentration of credit and default risk exposures to the German public banking sector as a whole that has arisen from Group-wide cash and capital investments as well as derivatives: the portion attributable to this sector was 6.0% at the end of 2020 compared with 5.2% at the end of 2019. Any existing concentration of risk is assessed and monitored both at the level of individual counterparties or counterparty groups and with regard to the countries in which these are based, in each case using the share of all credit and default risk exposures accounted for by the risk exposure concerned.

For China, credit and default risk exposures accounted for 26.1% at the end of 2020, as against 34.2% at the end of 2019. There were no other concentrations of credit and default risk exposures in individual countries.

LOSS ALLOWANCE

The Volkswagen Group consistently uses the expected credit loss model of IFRS 9 for all financial assets and other risk exposures.

The expected credit loss model under IFRS 9 takes in both loss allowances for financial assets for which there are no objective indications of impairment and loss allowances for financial assets that are already impaired. For the calculation of impairment losses, IFRS 9 distinguishes between the general approach and the simplified approach.

Under the general approach, financial assets are allocated to one of three stages, plus an additional stage for financial assets that are already impaired when acquired (stage 4). Stage 1 comprises financial assets that are recognized for the first time or for which the probability of default has not increased significantly. The expected credit losses for the next twelve months are calculated at this stage. Stage 2 comprises financial assets with a significantly increased probability of default, while financial assets with objective indications of default are allocated to stage 3. The lifetime expected credit losses are calculated at these stages. Stage 4 financial assets, which are already impaired when acquired, are subsequently measured by recognizing a loss allowance on the basis of the accumulated lifetime expected losses. Financial assets classified as impaired on acquisition remain in this category until they are derecognized.

The Volkswagen Group applies the simplified approach to trade receivables and contract assets with a significant financing component in accordance with IFRS 15. The same applies to receivables under operating or finance leases accounted for under IFRS 16. Under the simplified approach, the expected losses are consistently determined for the entire life of the asset.

The tables below show the reconciliation of the loss allowance for various financial assets and financial guarantees and credit commitments:

CHANGES IN LOSS ALLOWANCE FOR FINANCIAL ASSETS MEASURED AT AMORTIZED COST

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Simplified approach

 

Stage 4

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount at Jan. 1, 2019

 

750

 

946

 

896

 

634

 

146

 

3,372

Foreign exchange differences

 

6

 

4

 

3

 

3

 

0

 

16

Changes in consolidated group

 

2

 

 

0

 

1

 

 

3

Newly extended/purchased financial assets (additions)

 

464

 

 

 

255

 

1

 

719

Other changes within a stage

 

−64

 

−222

 

157

 

−3

 

−32

 

−165

Transfers to

 

 

 

 

 

 

 

 

 

 

 

 

Stage 1

 

39

 

−75

 

−12

 

 

 

−48

Stage 2

 

−91

 

206

 

−16

 

 

 

98

Stage 3

 

−45

 

−76

 

334

 

 

 

213

Financial instruments derecognized during the period (disposals)

 

−146

 

−106

 

−145

 

47

 

−4

 

−354

Utilization

 

 

 

−322

 

−177

 

−16

 

−516

Changes to models or risk parameters

 

−2

 

1

 

0

 

2

 

 

1

Classified as held for sale

 

0

 

 

 

−2

 

 

−2

Carrying amount at Dec. 31, 2019

 

913

 

677

 

893

 

760

 

94

 

3,336

CHANGES IN LOSS ALLOWANCE FOR FINANCIAL ASSETS MEASURED AT AMORTIZED COST

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Simplified approach

 

Stage 4

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount at Jan. 1, 2020

 

913

 

677

 

893

 

760

 

94

 

3,336

Foreign exchange differences

 

−33

 

−32

 

−89

 

−29

 

−5

 

−189

Changes in consolidated group

 

13

 

−2

 

24

 

2

 

 

37

Newly extended/purchased financial assets (additions)

 

415

 

 

 

252

 

18

 

685

Other changes within a stage

 

79

 

69

 

−35

 

16

 

5

 

134

Transfers to

 

 

 

 

 

 

 

 

 

 

 

 

Stage 1

 

22

 

−61

 

−14

 

 

 

−53

Stage 2

 

−126

 

320

 

−42

 

 

 

152

Stage 3

 

−167

 

−88

 

513

 

 

 

258

Financial instruments derecognized during the period (disposals)

 

−197

 

−121

 

−170

 

−154

 

−6

 

−647

Utilization

 

 

 

−257

 

−33

 

−21

 

−311

Changes to models or risk parameters

 

9

 

23

 

1

 

1

 

2

 

36

Carrying amount at Dec. 31, 2020

 

929

 

786

 

825

 

814

 

87

 

3,440

The gross carrying amount of assets measured at amortized cost is €136.0 billion (previous year: €137.7 billion), of which €16.7 billion (previous year: €18.5 billion) is attributable to the simplified approach.

CHANGES IN LOSS ALLOWANCE FOR FINANCIAL GUARANTEES AND CREDIT COMMITMENTS

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Stage 4

 

Total

 

 

 

 

 

 

 

 

 

 

 

Carrying amount at Jan. 1, 2019

 

18

 

1

 

1

 

0

 

19

Foreign exchange differences

 

0

 

0

 

0

 

0

 

0

Changes in consolidated group

 

0

 

 

 

 

0

Newly extended/purchased financial assets (additions)

 

10

 

0

 

0

 

0

 

10

Other changes within a stage

 

0

 

0

 

−1

 

0

 

0

Transfers to

 

 

 

 

 

 

 

 

 

 

Stage 1

 

0

 

0

 

 

 

0

Stage 2

 

−2

 

1

 

 

 

−1

Stage 3

 

0

 

0

 

 

 

0

Financial instruments derecognized during the period (disposals)

 

−9

 

0

 

 

0

 

−10

Utilization

 

 

 

0

 

 

0

Changes to models or risk parameters

 

0

 

0

 

 

 

0

Classified as held for sale

 

0

 

 

 

 

Carrying amount at Dec. 31, 2019

 

17

 

2

 

0

 

0

 

18

CHANGES IN LOSS ALLOWANCE FOR FINANCIAL GUARANTEES AND CREDIT COMMITMENTS

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Stage 4

 

Total

 

 

 

 

 

 

 

 

 

 

 

Carrying amount at Jan. 1, 2020

 

17

 

2

 

0

 

0

 

18

Foreign exchange differences

 

−1

 

0

 

0

 

0

 

−1

Changes in consolidated group

 

0

 

 

 

 

0

Newly extended/purchased financial assets (additions)

 

8

 

0

 

0

 

0

 

8

Other changes within a stage

 

1

 

1

 

0

 

0

 

2

Transfers to

 

 

 

 

 

 

 

 

 

 

Stage 1

 

0

 

0

 

 

 

0

Stage 2

 

0

 

1

 

 

 

1

Stage 3

 

0

 

0

 

0

 

 

0

Financial instruments derecognized during the period (disposals)

 

−4

 

−1

 

 

0

 

−5

Utilization

 

 

 

−1

 

 

−1

Changes to models or risk parameters

 

0

 

0

 

 

 

0

Carrying amount at Dec. 31, 2020

 

19

 

3

 

0

 

0

 

22

CHANGES IN LOSS ALLOWANCE FOR LEASE RECEIVABLES AND CONTRACT ASSETS

 

 

SIMPLIFIED APPROACH

€ million

 

2020

 

2019

 

 

 

 

 

Carrying amount at Jan. 1

 

1,312

 

1,193

Foreign exchange differences

 

−29

 

14

Changes in consolidated group

 

0

 

6

Newly extended/purchased financial assets (additions)

 

377

 

249

Other changes

 

225

 

261

Financial instruments derecognized during the period (disposals)

 

−314

 

−282

Utilization

 

−107

 

−88

Changes to models or risk parameters

 

51

 

−42

Classified as held for sale

 

 

0

Carrying amount at Dec. 31

 

1,516

 

1,312

The gross carrying amounts of lease receivables and contract assets declined from €55.6 billion to €54.8 billion in the fiscal year under review.

The loss allowance on assets measured at fair value in Stage 1 rose by €0 million (previous year: €2 million) in fiscal year 2020, resulting in a closing balance of €3 million (previous year: €3 million). Of this amount, €2 million is attributable to Stage 1 (previous year: €2 million) and €1 million to Stage 2 (previous year €1 million).

The amount contractually outstanding for financial assets that have been derecognized in the current year and are still subject to enforcement proceedings is €221 million (previous year: €331 million).

MODIFICATIONS

There were contract modifications to financial assets in the reporting period that did not lead to the derecognition of the asset. These were primarily attributable to credit ratings and relate to financial assets for which loss allowances were measured in the amount of the expected lifetime credit losses. For trade and lease receivables, the treatment is simplified by considering the credit rating-based modifications where the receivables are more than 30 days past due. Before the modification, amortized cost amounted to €493 million (previous year: €120 million). In the reporting period, contract modifications resulted in net income/net expenses of €6.4 million (previous year: €−0.2 million).

As of the reporting date, the gross carrying amounts of financial assets that have been modified since initial recognition and were simultaneously reclassified from stage 2 or 3 to stage 1 in the reporting period amounted to €81 million (previous year: €28 million). As a result, the measurement of the loss allowance for these financial assets was changed from lifetime expected credit losses to 12-month expected credit losses.

MAXIMUM CREDIT RISK

The table below shows the maximum credit risk to which the Volkswagen Group was exposed as of the reporting date, broken down by class to which the impairment model is applied:

MAXIMUM CREDIT RISK BY CLASS

€ million

 

Dec. 31, 2020

 

Dec. 31, 2019

 

 

 

 

 

Financial instruments measured at fair value

 

3,545

 

3,139

Financial instruments measured at amortized cost

 

151,497

 

149,045

Financial guarantees and credit commitments

 

3,788

 

5,988

Not allocated to a measurement category

 

52,914

 

53,938

Total

 

211,744

 

212,109

RATING CATEGORIES

The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scoring systems for the high-volume business and rating systems for corporate customers and receivables from dealer financing. Receivables rated as good are contained in risk class 1. Receivables from customers whose credit rating is not good but have not yet defaulted are contained in risk class 2. Risk class 3 comprises all defaulted receivables.

The table below presents the gross carrying amounts of financial assets by rating category:

GROSS CARRYING AMOUNTS OF FINANCIAL ASSETS BY RATING CATEGORY AS OF DECEMBER 31, 2019

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Simplified approach

 

Stage 4

 

 

 

 

 

 

 

 

 

 

 

Credit risk rating grade 1
(receivables with no credit risk – standard loans)

 

120,926

 

8,272

 

 

66,344

 

89

Credit risk rating grade 2
(receivables with credit risk – intensified loan management)

 

3,240

 

5,031

 

 

3,226

 

43

Credit risk rating grade 3
(cancelled receivables – non-performing loans)

 

 

 

2,514

 

901

 

359

Total

 

124,166

 

13,303

 

2,514

 

70,470

 

490

GROSS CARRYING AMOUNTS OF FINANCIAL ASSETS BY RATING CATEGORY AS OF DECEMBER 31, 2020

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Simplified approach

 

Stage 4

 

 

 

 

 

 

 

 

 

 

 

Credit risk rating grade 1
(receivables with no credit risk – standard loans)

 

112,446

 

10,109

 

 

65,040

 

106

Credit risk rating grade 2
(receivables with credit risk – intensified loan management)

 

5,278

 

12,926

 

 

2,877

 

64

Credit risk rating grade 3
(cancelled receivables – non-performing loans)

 

 

 

2,709

 

1,157

 

288

Total

 

117,725

 

23,035

 

2,709

 

69,074

 

458

Furthermore, the default risk exposure for financial guarantees and credit commitments is presented below:

DEFAULT RISK FOR FINANCIAL GUARANTEES AND CREDIT COMMITMENTS AS OF DECEMBER 31, 2019

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Stage 4

1

Prior-year figures adjusted.

 

 

 

 

 

 

 

 

 

Credit risk rating grade 1
(receivables with no credit risk – standard loans)

 

3,3731

 

178

 

 

0

Credit risk rating grade 2
(receivables with credit risk – intensified loan management)

 

100

 

25

 

 

0

Credit risk rating grade 3
(cancelled receivables – non-performing loans)

 

 

 

7

 

3

Total

 

3,474

 

203

 

7

 

4

DEFAULT RISK FOR FINANCIAL GUARANTEES AND CREDIT COMMITMENTS AS OF DECEMBER 31, 2020

€ million

 

Stage 1

 

Stage 2

 

Stage 3

 

Stage 4

 

 

 

 

 

 

 

 

 

Credit risk rating grade 1
(receivables with no credit risk – standard loans)

 

3,368

 

201

 

 

0

Credit risk rating grade 2
(receivables with credit risk – intensified loan management)

 

66

 

82

 

 

1

Credit risk rating grade 3
(cancelled receivables – non-performing loans)

 

 

 

10

 

2

Total

 

3,434

 

283

 

10

 

3

Collateral that was accepted for financial assets in the current fiscal year was recognized in the balance sheet in the amount of €159 million (previous year: €149 million). This mainly relates to vehicles.