Section 1 General information and significant accounting policies

General information

NV Nederlandse Spoorwegen has its registered office on Laan van Puntenburg in Utrecht, the Netherlands (Chamber of Commerce number 30012558). The company’s consolidated financial statements for the 2018 financial year include the company and its subsidiaries (hereinafter referred to as the ‘Group’) and the Group’s share in associates and companies that it controls jointly with third parties. NV Nederlandse Spoorwegen is the holding company of NS Groep NV, which in turn is the holding company of the operating companies that carry out the Group’s various business operations. The figures for the consolidated financial statements of NS Groep NV are the same as the consolidated figures for NV Nederlandse Spoorwegen. The operating companies of NS Groep NV are listed in note 32. The Group's activities consist mainly of passenger transport and the management and development of property and station locations.

The Executive Board prepared the financial statements on 21 February 2018. In its preliminary report to the General Meeting of Shareholders, the Supervisory Board advised that the financial statements should be adopted unaltered. On 21 February 2019, the Executive Board and Supervisory Board approved the publication of the financial statements. Adoption of the financial statements is on the agenda of the General Meeting of Shareholders on 18 March 2019.

Acquisition and disposal of companies

No acquisitions or sales took place in 2018.

Significant accounting policies

Below is a description of the principles for consolidation, valuation of assets and liabilities and determination of the result of the Group. These policies are in accordance with IFRS, insofar as they are accepted by the EU and are applied consistently to all information that is presented. Furthermore, insofar as applicable, the financial statements comply with the legal regulations as included in Part 9 of Book 2 of the Netherlands Civil Code. As a valuation principle, the Group applies the historical cost price system, unless stated otherwise.

The Group has implemented the following change in accounting policies in 2018:

Change in accounting policies relating to defined benefit pension plans in the United Kingdom

In the financial statements of 2018, the Group has changed the way it accounts for defined benefit rail pension schemes in the United Kingdom impacting the income statements. In the current franchise agreements it has been agreed upon that the franchisee is only responsible for agreed contributions, or a pension deficit over the period of the concession. When the concession has ended, all rights and obligations with regard to the employees will be transferred to the new franchisee.

As such only the portion of the surplus or deficit relating to the pension plan is recognized on the Group statement of financial position, that is expected to be realized during the term of the concession based on the assumptions and agreements on the balance sheet date. As a result, on 31 December 2018 and 31 December 2017, no net surplus or deficit has been recognized. This approach is unchanged in comparison to previous years.

The Group has changed the accounting policies for the pension costs in the income statement. From now on, only the costs that are expected to be borne by the franchisee (the Group) during the term of the concession are recorded in the income statement. These net pension costs are therefore calculated, taking into account that part of the costs that will be borne by the employees (40%) and by other parties after the end of the current concession period. This net calculation does take into account any allocation within the concession period that may (possibly) occur with the triennial assessments during the concession period or adjustments to the annual contributions over the concession period.

Up to and including 2017, the full IAS 19 service costs were recognised in the income statement. The Company has revised its accounting policy to now only recognise the Group’s resulting share of service costs in its income statement. The net service cost is therefore calculated looking at the near term liability for the employees only, and the costs of the employer only, over the life of

the franchise rather than costs that will be borne by other parties. This compares to the previous approach where the full service cost was included within the income statement and the franchise adjustments arising were recognised through the statement of comprehensive income.The adjusted accounting policy provides a better insight into the part of the costs actually borne by the Group in the various concessions. This amendment also ties in with the corresponding change that a number of other franchisees in the United Kingdom have made in recent years.

The adjustment of this basis has also been made in the valuation of the group's interest in the joint venture Merseyrail Ltd.

The effect for 2018 and 2017 and also for the coming years is that the pension costs in the profit and loss account will decrease and the pension benefits in the overview of the total result will decrease accordingly.Based on the previous valuation principles, the 2018 result before income tax would have been € 35 million lower and the net result would have come in € 28 million lower.

The tables below provide a detailed overview of the effect of the changes made to the 2017 consolidated income statement and the 2017 consolidated statement of comprehensive income.The change has no effect on the size of the equity or other balance sheet items.

(in millions of euros)

Reported in financial statements 2017

Change accounting policy

Revised 2017

    

Revenue

5,121

-

5,121

Total operating expenses

5,107

-23

5,084

Share in result of investees recognises using the equity method

18

2

20

Result from operating activities

32

25

57

Finance income

16

 

16

Finance expenses

-21

 

-21

Net finance result

-5

-

-5

Result before income tax

27

25

52

Income tax

-2

-3

-5

Result for the period

25

22

47

    

Attributable to:

   

Shareholder of the company

24

22

46

Minority interests

1

-

1

Result for the period

25

22

47

    
    

(in millions of euros)

Reported in financial statements 2017

Change accounting policy

Revised 2017

    

Result for the period

25

22

47

    

Other comprehensive income items that are or may be classified to profit and loss

   

Currency translation differences on foreign activities

-3

-

-3

Effective portion of changes in fair value of cash flow hedges

3

-

3

Income tax

-

-

-

Effective portion of changes in fair value of cash flow hedges as a consequence of revaluation of investments in equity accounted investees

-

-

-

 

-

-

-

    

Other comprehensive income items that never be reclassified to profit and loss

   

Actuarial result for defined benefit plans

21

-20

1

Income tax

-2

2

-

Actuarial result for defined benefit plans as a consequence of revaluation of investments in equity accounted investees

2

-2

-

 

21

-20

1

    

Other comprehensive income recognised in equity

46

2

48

    

Attributable to:

   

Shareholder of the company

45

2

47

Minority interest

1

-

1

Total comprehensive income

46

2

48

As of 1 January 2018, the Group has adopted the following new standards and amendments to standards, including all consequent changes deriving from them in other standards.

IFRS 15 — Revenue from Contracts with Clients

IFRS 9 contains requirements for the recognition and measurement of financial assets, financial liabilities and some contracts for the acquisition or sale of non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. NS applies this standard as per 1 January 2018 without adjustment of the comparative figures.The details of the new accounting policy for financial reporting and the nature and effect of the changes with respect to the previous accounting policy are set out below.

IFRS 15 provides a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces IAS 18 Revenues, IAS 11 Construction Contracts and related interpretations. Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. Determining the timing of the transfer of control - at a certain point in time or in the course of time - generally requires judgment.

The Group has applied IFRS 15 using the cumulative effect method (without using practical expedients), with the effect of initial application of this standard at the date of first application (i.e. 1 January 2018). Accordingly, the information presented for 2017 has not been restated, i.e. the information has been presented in accordance with IAS 18, IAS 11 and related interpretations. In addition, the disclosure requirements in IFRS 15 have generally not been applied to the comparative figures.

The application of IFRS 15 has no material impact on the balance sheet and profit and loss account compared to the treatment under the previous guidelines. The group's products are predominantly non-combined products, with revenue being recognised over time or over time. For the Group, the time of conversion under IFRS 15 of these products is identical to that of IAS 18.

IFRS 9 – Financial Instruments

Classification and measurement of financial assets and financial liabilities

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the following IAS 39 categories for financial assets: ‘held to maturity’, ‘loans and receivables’ and ‘available for sale’. The application of IFRS 9 has not had a significant effect on the Group’s accounting policies for financial reporting with respect to financial liabilities and derivatives. The impact of IFRS 9 on the classification and measurement of financial assets is set out below. Under IFRS 9, a financial asset was measured on initial recognition at ‘amortised cost’, ‘fair value recognised through comprehensive income — investments in debt instruments’, ‘fair value recognised through comprehensive income — investments in equity instruments’ or ‘fair value through the income statement’. The classification of financial assets under IFRS 9 is based on the NS business model within which the financial asset is managed and the characteristics of the contractual cash flows.

The following accounting policies for financial reporting apply to the application of subsequent measurements of financial assets.

Financial assets in the case of fair value via the income statement

These assets are subsequently valued at their fair value. Net profits and losses, including any interest or dividend income, are recognised in the income statement.

Financial assets at amortised cost

These assets are valued at amortised cost using the effective interest method. Impairment losses are deducted from the amortised cost. Interest income, exchange rate gains and losses, and impairments are recognised in the income statement. Any profit or loss as a result of the removal from the balance sheet is recognised in the income statement.

Fair value recognised via comprehensive income — investment in debt instruments

These assets are subsequently valued at their fair value. Interest income is calculated using the effective interest method; exchange-rate gains and losses, and impairments are recognised in the income statement. Other net profits and losses are recognised in comprehensive income. On derecognition, the cumulated profits and losses in the comprehensive income are reclassified to the income statement.

Fair value recognised via comprehensive income — investment in equity instruments

These assets are subsequently valued at their fair value. Dividends are recognised as revenue in the income statement unless the dividend clearly essentially constitutes recovery of part of the costs of the investment. Other net profits and losses are recognised in comprehensive income and are never reclassified to the income statement.

The following table gives an explanation of the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of financial assets in the Group as at 1 January 2018.

(in millions of euros)

    
 

Original classification under IAS 39

New classification under IFRS 9

Original carrying value under IAS 39

Nieuw carrying value under IFRS 9

Share in Eurofima

Available for sale financial assets

Fair value through other comprehensive income - investment in shares

36

81

Share in bonds

Available for sale financial assets

Fair value through other comprehensive income - investment in debt

12

12

Loans and receivables

Loans and receivables

Amortised costs

63

63

Financial leases

Loans and receivables

Amortised costs

45

45

Commodity derivatuves

Derivatives - fair value

Derivatives - fair value

1

1

Other financial fixed assets

Loans and receivables

Amortised costs

1

1

Under IAS 39, the share in Eurofima is measured at cost, as this interest does not have a quoted price in an active market and its fair value could not be reliably measured. No such option exists under IFRS 9 and equity investments shall be measured at fair value in accordance with IFRS 13. The net asset value of this interest was used as the best approximation of fair value. This resulted in a revaluation of this interest as at 1 January 2018 by € 45 million in favour of the fair value reserve.

Impairment of financial assets

IFRS 9 replaces the ‘incurred credit loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model applies to financial assets valued at amortised cost, contract assets, and investments in debt investments when the fair value is recognised via the comprehensive income, but not to investments in equity instruments. Credit losses are recognised at an earlier stage in IFRS 9 than in IAS 39. This change has not led to material adjustments to the Group’s figures.

Hedge accounting

The Group has elected to continue with the hedge accounting requirements of IAS 39. As a consequence, no changes were made.

Other

The following new or amended standards have not had a significant impact on the Group's consolidated financial statements:

  • Foreign currency transactions and prepayment transactions (IFRIC interpretation 22)

  • Transfer of real estate (Amendments to IAS 40)

  • Classification and valuation of share-based payment transactions (Amendment of IFRS 2)

  • Annual IFRS improvements cycle 2014-2016

  • The application of IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)

New standards and amendments to standards that are mandatory from 2019 or later

The Group has not voluntarily opted for the early adoption of any new standards or amendments to existing standards or interpretations that are only mandatory with effect from the financial statements for 2019 or later.

The Group is currently investigating the consequences of the following new standards, interpretations and amendments to existing standards, the application of which is mandatory with effect from the 2019 financial statements, or later where specified.

IFRS 16 — Leases

On January 13, 2017, a new IFRS 16 Leases directive was published. This directive must be applied from 1 January 2019 onwards. IFRS 16 fundamentally changes the accounting of leasing contracts: the current distinction between on-balance finance and operational leasing (off-balance) is eliminated. Instead, all leases (with a single exception) are reflected on balance. This also means that the costs of operational lease contracts will be presented as depreciation costs and interest costs.

The Group has started the analysis of the impact of IFRS 16 in 2018. The application of IFRS 16 has a major impact on the balance sheet and the result of the group and results from the processing of lease contracts, which are currently operational lease contracts presented as off balance obligations. The impact of the adoption of IFRS 16 is shown below.

The Group will apply IFRS 16 from 1 January 2019, applying the adjusted retrospective approach. Therefore, the cumulative effect of the adoption of IFRS 16 as an adjustment to the opening balance sheet on January 1, 2019 is processed, without adjustment of comparative information.

For the lease contracts in Germany and the United Kingdom, the right of use of assets as of 1 January 2019 has been determined as if IFRS 16 had been applied from the start of the lease contracts based on the interest rate as at the transition date. The valuation of the right of use of assets in the Netherlands was determined on 1 January 2019 on the basis of the lease commitments as at that date. Given the recent start date of the number of large contracts in the Netherlands, processing does not differ significantly from that in Germany and the United Kingdom.

Based on the information currently available, the application of IFRS 16 with effect from 2019 is expected to lead to the recognition of a right of use of assets of € 1,756 million, lease obligations of € 1,788 and an impact on the shareholders' equity of € 26 million negative. The operating result for 2019 is expected to be approximately € 42 million higher as a result of depreciation being higher than lease payments, financing costs € 49 million higher and the result after taxes € 4 million lower. There is no expected impact on financing covenants, as the financing covenants do not set requirements with regard to ratios that are influenced by the application of IFRS 16. This also applies to the credit rating of NS since the current lease obligations not included in the balance sheet have already been taken into account in the rating.

The disclosure of off-balance sheet commitment liabilities as at 31 December that was prepared in accordance with the requirements of IAS 17 and the expectations regarding the valuation of the right of use per 1 January 2019 in accordance with IFRS. There are substantial differences, this is mainly caused by:

    • Commitments as at 31 December 2018 that relate to concluded lease contracts, whereby assets are delivered in the future, lead to the inclusion of the notes under IAS 17, but do not lead to a recognition of a right of use of assets under IFRS 16.

    • Specific lease contracts in the United Kingdom classified as lease under IAS 17 but not under IFRS 16. These payments are accounted for as usage fees as from 1 January 2019.

The final impact of the application of the standard on January 1, 2019 can change, because the elaboration by NS will be finalised in 2019.

Other matters

The following new or amended standards have no significant impact on the consolidated financial statements of the Group:

  • Uncertain tax positions (IFRIC interpretation 23)

  • Long-term interests in associates and joint ventures (Amendments to IAS 28)

  • Annual IFRS improvement cycle 2015-2017

  • Plan adjustments, restrictions and regulations (Amendments to IAS 19)

  • Changes in references to the conceptual framework in IFRS

  • Amendments to IFRS 3 Business Combinations

Estimates and assessments

The preparation of the financial statements requires the Executive Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported value of assets and liabilities, and income and expenses. The estimates and corresponding assumptions are based on experiences from the past and various other factors that could be considered reasonable under the circumstances. The actual outcomes may differ from these estimates.

The estimates and underlying assumptions are reviewed on a regular basis. Revisions of estimates are recognised in the period in which the estimate is revised or in future periods if the revision has consequences for these periods.

The key estimates and assessments concern: mainly estimates of infrastructure levy and concession fees (note 7), receivables (note 17), provisions / off-balance sheet arrangements (note 30 and note 31) and valuation of deferred tax assets (note 10).

The accounting policies described below have been applied consistently to the periods presented in these consolidated financial statements.

Principles of consolidation

Subsidiaries

The Group has control over an entity if its involvement with that entity means that the Group is exposed to or is entitled to variable returns and that it has the power to influence those returns by virtue of its say in that entity. The financial statements of the subsidiaries are incorporated in the consolidated financial statements as from the date on which control commences until the date on which control ceases.

In the event of a loss of control over the subsidiary, the subsidiary's assets and liabilities, any minority interests and other equity components associated with the subsidiary are no longer recognised in the balance sheet. Any surplus or shortfall is recognised in the income statement. If the Group retains an interest in the former subsidiary, that interest is recognised at the fair value on the date on which the Group ceased to exercise control.

Acquisition of subsidiaries

Business combinations are recognised according to the acquisition method as at the date on which control is transferred to the Group. The remuneration for the acquisition is assessed at its fair value, as are the net identifiable assets that are acquired. Any goodwill deriving from this is assessed annually for impairments. Any gain from a beneficial sale is recognised directly in the income statement. Transaction costs are recognised at the time when they are incurred.

Elimination of transactions on consolidation

Intra-group balances and transactions plus any unrealised gains and losses on transactions within the Group or income and expenses from such transactions are eliminated. Unrealised gains arising from transactions with investments that are recognised according to the equity method are eliminated in proportion to the Group's interest in the investment. Unrealised losses are eliminated in the same way as unrealised profits, but only insofar as there are no indications that they should be treated as an impairment.

Currency translation

Foreign currency transactions

Transactions denominated in foreign currency are converted to the functional currency of the Group entity in question at the exchange rate applying on the transaction date. Foreign currency monetary assets and liabilities are converted to the functional currency at the exchange rate applying on the balance-sheet date. Non-monetary assets and liabilities denominated in foreign currency that are assessed at fair value are converted to the functional currency using the exchange rates that applied on the dates when the fair values were determined. Non-monetary assets and liabilities denominated in foreign currency that are assessed at historical cost are not recalculated.

The exchange rate differences on conversion of the following items are recognised in the unrealised results:

  • financial liabilities that are designated as a hedge of the net investment in a foreign operation

  • qualifying cash-flow hedges, insofar as the hedging is effective

Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into euros at the exchange rates applying at the reporting date. The revenues and costs of foreign operations are converted into euros at an average exchange rate that approximates to the exchange rate on the transaction date.

Currency conversion differences are included in the unrealised results and recognised in the translation reserve. If the sale of a foreign operation means that the Group ceases to exercise control, significant influence or joint control, then the cumulative amount in the translation reserve associated with that foreign operation will be transferred to the income statement when the profit or loss from the sale is recognised. If the Group only sells part of its interest in a subsidiary, while retaining control, then a proportionate share of the cumulative amount will be reassigned to the minority interest. If the Group only sells part of its interest in an associate or joint venture, while retaining significant influence or joint control, then a proportionate share of the cumulative amount will be transferred to the income statement.

Determination of fair value

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values for measurement and/or disclosure purposes were determined using the following methods.

Property, plant and equipment

The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The fair value is calculated on the basis of up-to-date purchase prices, or is determined by the historic cost, using an index to convert to current prices.

Investment property

In view of the nature, diversity and locations (station areas), the fair value of the investment property portfolio is not determined on a regular basis unless indications of impairment applies. The fair value is expected to be greater than the carrying amount of the investment property.

Investments in bonds and deposits

The fair value of investments in bonds is determined using the price on the reporting date. The fair value of share in Eurofima has determined on the latest available financial statements.

Derivatives

The fair value of derivatives is based on the derived market prices, taking account of the current interest rates and estimated creditworthiness of the counterparties to the contract.

Non-derivative financial liabilities

The fair value of non-derivative financial liabilities is determined for disclosure purposes and is calculated based on the present value of future repayments and interest payments, discounted at the market interest rate as at the reporting date. For finance leases, the market interest rate is determined by reference to similar lease agreements.

Leasing

Operating lease payments

Lease agreements in which none or virtually none of the benefits and disadvantages associated with ownership lie with the lessee are designated operating leases. Operating lease payments are recognised in the income statement during the lease period using the straight-line method.

Finance lease payments

Lease agreements in which all or virtually all of the benefits and disadvantages associated with ownership lie with the lessee are designated ‘finance leases’. The minimum lease payments are recognised partly as financing costs and partly as repayments of the outstanding liability. The financing costs are attributed to the individual periods comprising the total lease term in such a way that this results in a constant interest rate for the remaining balance of the liability.

Segment information

The Group is under no obligation to comply with the requirements of IFRS 8 because it is not listed on a stock exchange. Segment information with a breakdown of revenue and FTEs by geographical area has been included in order to comply with the requirements of Dutch legislation and regulations.

Accounting policies for the consolidated cash flow statement

The cash flow statement is drawn up using the indirect method, using a comparison between the initial and final balances for the financial year in question. The result is then adjusted for changes that did not generate income or expenses during the financial year.