Consolidated Financial Statements Notes to the Consolidated Financial Statements 215 Notes to the Consolidated Financial Statements of the Volkswagen Group as of December 31, 2020 Basis of presentation Volkswagen AG is domiciled in Wolfsburg, Germany, and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484. The fiscal year corresponds to the calendar year. In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2020 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. All the IFRSs adopted by the EU and required to be applied have been complied with. The accounting policies applied in the previous year were generally retained. The only changes required resulted from new or amended standards. Moreover, all the provisions of German commercial law that Volkswagen is additionally required to apply, as well as the German Corporate Governance Code, have been complied with in the preparation of the consolidated financial statements. For information on notices and disclosures of changes regarding the ownership of voting rights in Volkswagen AG in accordance with the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), please refer to the annual financial statements of Volkswagen AG. The consolidated financial statements were prepared in euros. Unless otherwise stated, all amounts are given in millions of euros (€ million). All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. The income statement was prepared using the internationally accepted cost of sales method. Preparation of the consolidated financial statements in accordance with the aforementioned standards requires management to make estimates that affect the reported amounts of certain items in the consolidated balance sheet and in the consolidated income statement, as well as the related disclosure of contingent assets and liabilities. The consolidated financial statements present fairly the net assets, financial position and results of operations as well as the cash flows of the Volkswagen Group. The Board of Management completed preparation of the consolidated financial statements on February 16, 2021. On that date, the period ended in which adjusting events after the reporting period are recognized. Effects of new and amended IFRSs Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year 2020. On January 1, 2020, an amended definition of a business in IFRS 3 (Business Combinations) entered into force. According to the new definition, a set of activities and assets is a business only if it includes, as a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. At the same time, the definition of an output has been narrowed by focusing on goods and services provided to customers and on generating investment income. The reference to an ability to reduce costs as a single criterion has been removed. In addition, an optional concentration test has been introduced that permits an assessment of whether an acquired set of activities and assets is not a business. 216 Notes to the Consolidated Financial Statements Consolidated Financial Statements Furthermore, amendments to IFRS 16 entered into force on June 1, 2020. These amendments exempt lessees from having to consider whether a rent concession in connection with the Covid-19 pandemic in relation to lease payments that, according to the original agreement, would have been due on or before June 30, 2021 is a lease modification and allows lessees to account for such rent concessions as if they were not lease modifications. The Volkswagen Group is electing not to apply this option. In addition, as from January 1, 2020, the application of amendments to IFRS 9, IAS 39 and IFRS 7 (Benchmark Interest Rate Reform – Phase 1) became mandatory. In the previous year, the Volkswagen Group had voluntarily opted for early application of these amendments. This affects hedges that existed at the beginning of the reporting period or have subsequently been designated as such. In application of the associated practical expedient, the Volkswagen Group regards the effectiveness of designated hedges as given and not negatively impacted by the IBOR reform so that it will consequently not be necessary to terminate any hedges. Also as of January 1, 2020, amendments to IAS 1 and IAS 8 entered into force, which clarify and standardize the definition of “material”. The amendments referred to above do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. New and amended IFRSs not applied In its 2020 consolidated financial statements, Volkswagen AG did not apply the following accounting pronounce- ments that have been adopted by the IASB until December 31, 2020, but were not yet required to be applied for the fiscal year. Published by the Application Adopted by Standard/Interpretation IASB mandatory1 the EU Expected impact Updating a Reference to the IFRS 3 Conceptual Framework May 14, 2020 Jan. 1, 2022 No No material impact Extension of the Temporary IFRS 4 Exemption from Applying IFRS 9 June 25, 2020 Jan. 1, 2021 Yes None IFRS 4; IFRS 7; IFRS 9; IFRS 16 Interest Rate Benchmark Reform and IAS 39 (Phase 2) Aug. 27, 2020 Jan. 1, 2021 Yes No material impact IFRS 17 Insurance Contracts May 18, 2017 Jan. 1, 20232 No No material impact Insurance Contracts – several IFRS 17 amendments June 25, 2020 Jan. 1, 2023 No No material impact Classification of liabilities as current IAS 1 or non-current Jan. 23, 2020 Jan. 1, 2023 No No material impact Property, Plant and Equipment: IAS 16 Proceeds before intended use May 14, 2020 Jan. 1, 2022 No No material impact Onerous contracts – cost of fulfilling IAS 37 a contract May 14, 2020 Jan. 1, 2022 No No material impact Annual Improvements 2018 – 20203 May 14, 2020 Jan. 1, 2022 No No material impact 1 Effective date from Volkswagen AG’s perspective. 2 On June 25, 2020, the IASB published amendments to IFRS 17, that led, among other things, to the effective date being deferred to January 1, 2023. 3 Minor amendments to a number of IFRSs (IFRS 1, IFRS 9 and IAS 41). Consolidated Financial Statements Notes to the Consolidated Financial Statements 217 Key events Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures recorded in testing and those measured in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a “Notice of Violation” alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. The so-called diesel issue is rooted in a modification of parts of the software of the relevant engine control units – which, according to Volkswagen AG’s legal position, is only unlawful under US law – for the type EA 189 diesel engines that Volkswagen AG was developing at that time. The decision to develop and install this software function was taken in late 2006 below Board of Management level. No member of the Board of Management had, at that time and for many years to follow, knowledge of the development and implementation of this software function. There are furthermore no findings that, following the publication in May 2014 of the study by the International Council on Clean Transportation, an unlawful “defeat device” under US law was disclosed either to the Ausschuss für Produktsicherheit (Product Safety Committee) or to the persons responsible for preparing the 2014 annual and consolidated financial statements as the cause of the high NOx emissions in certain US vehicles with 2.0 l type EA 189 diesel engines. Rather, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing these financial statements remained under the impression that the issue could be resolved with comparatively little expense. In the course of the summer of 2015, however, it became progressively apparent to individual members of Volkswagen AG’s Board of Management that the cause of the discrepancies in the USA was a modification of parts of the software of the engine control unit that was later identified as an unlawful “defeat device” as defined by US law. This culminated in Volkswagen's disclosure of a “defeat device” to the EPA and the California Air Resources Board, a department of the Environmental Protection Agency of the State of California, on September 3, 2015. According to the assessment at the time by the responsible persons dealing with the matter, the magnitude of the costs expected to result for the Volkswagen Group (recall costs, retrofitting costs, and financial penalties) was not fundamentally dissimilar to that in previous cases involving other vehicle manufacturers. It therefore appeared to be manageable overall considering the business activities of the Volkswagen Group. This assessment by Volkswagen AG was based, among other things, on the advice of a law firm engaged in the USA for regulatory approval issues, according to which similar cases had in the past been amicably resolved with the US authorities. The EPA's publication of the “Notice of Violation” on September 18, 2015, which the Board of Management had not expected, especially at that time, then presented the situation in an entirely different light. In fiscal year 2020, additional expenses of €0.9 billion had to be recognized in this context, primarily related to legal risks.