14. Impairments of non-current assets/onerous contracts

In view of the substantial impact of COVID-19 on passenger revenues, the Group has determined that there are indicators of asset impairment for some of the Group’s cash-generating units (CGUs). First of all, the various CGUs were identified by the Group, after which the assets of these CGUs were assessed for possible impairment. It was then assessed whether the creation of a provision for onerous contracts was necessary, in addition to the possible impairment to be recognised.

The assessment of the CGU at the end of 2020 for the impairment test of non-current assets has led to a change in the composition of the various CGUs of Abellio Germany, following a more regional structure. This is mainly due to the planned merger of a number of entities in 2021. In the assessment of goodwill, Abellio Germany has, as in previous years, been classified as a single CGU, as the Abellio brand is operated nationwide.

The recoverable amount of the CGUs was then determined based on the higher of value in use and fair value less costs to sell. The value in use was determined by discounting the expected cash flows as at the balance sheet date.

The discount rate is set after tax based on the interest rate of government bonds issued by the most creditworthy government in the relevant market and in the same currency as the cash flows, adjusted for a risk premium to reflect both the increased risk of investing in equities in general and the risk of the specific CGU. Due to the financing structure of the operations in Germany (mainly leasing), the discount rate for Germany is set at a lower level than in the other countries.

For each country, the following discount rate after taxation was employed:

• The Netherlands: 5.0%

• United Kingdom 6.3%

• Germany 1.9%

The assessment resulted in the following impairments:

The Netherlands

The COVID-19 pandemic has forced the Group to perform an analysis as to whether there is an impairment for the Netherlands. For the Netherlands, the main rail network contract has been classified as one CGU. This contract runs until the end of 2024. The fair value of the assets in question cannot be reliably determined given the strong connection between the assets and the main rail network contract, the trains are produced specifically for the Dutch railway network and there is no active market for these specific trains.

In determining the value in use, three scenarios were calculated. The range of impairment in these scenarios is between €1.2 billion and €2.5 billion. In the most likely scenario, the following key assumptions were made regarding:

• projected passenger revenue during the remaining contract term; with an assumed recovery in 2024 to 94% of the 2019 level, the pre-pandemic level. The development of passenger transport partly depends on macroeconomic factors such as economic growth, congestion and trends in travel behaviour;

• passenger transport revenues are partly dependent on timetable choices, which are coordinated with the Ministry of Infrastructure and Water Management;

• continuation of the current student public transport passes contract;

• an availability payment for 2021, which largely mitigates major risks related to passenger revenue for 2021. An availability payment of €601 million is forecast for 2021. No availability payment has been factored in for the years thereafter. The public transport sector is in talks with the Ministry about an extension of the arrangement. The prospect of an arrangement has been offered for the fourth quarter of 2021, but the conditions are not yet known;

• estimates regarding the outcomes of gearing the organisation to the lower passenger revenue with related cost savings and reduction of investments;

• in June 2020, the Ministry of Infrastructure and Water Management announced its intention to award the franchise privately to NS with effect from 2025. This was confirmed by the Dutch House of Representatives in September 2020. The term and conditions of the franchise are not yet known. For the period after 2024, it is assumed that award of the main rail network contract will take place under conditions where NS can earn the cost of capital.

The performance of the impairment test resulted in an impairment loss of €1,562 million. The main uncertainties causing the range of €1.2 and €2.5 billion are:

• medium/long-term effect of COVID-19 on economy and expected economic growth;

• medium/long-term effect of COVID-19 on traveller behaviour in different traveller segments.

The recognised impairment is the Group’s best estimate despite a relatively high maximum range (€2.5 million). The worst-case scenario assumes a structural and significant decrease in the uncertainties mentioned above, mainly relating to a slower and/or non-structural recovery of passenger revenues, which are not considered likely. The sensitivity of the cost of capital and recovery of passenger revenue is as follows:

• increase/decrease in the cost of capital by 1% has a positive/negative effect of approximately €100 million in relation to the recognised impairment;

• 10% lower passenger revenue per year in the years 2022 to 2024 leads to a higher impairment of approximately €0.6 billion compared to the recognised impairment.

The Group notes in this connection that the underlying analyses contain significant estimation uncertainties, with these uncertainties being magnified by uncertainties of how and when the Dutch economy will recover from COVID-19, the lasting impact this will have on traveller behaviour and the way in which public transport companies will be supported in the future. The realisation may differ, requiring a future adjustment of the impairment with a positive or negative effect on the result.

Impairment losses have been proportionally deducted from the carrying amounts of the mail rail network assets. The revised carrying amounts are amortised over the remaining useful lives of the assets.

No impairments have occurred in the other activities in the Netherlands (Station development and operation).

Abellio UK

The COVID-19 pandemic in March 2020 resulted in an enormous decrease in passenger revenue. The existing rail franchise contracts in the United Kingdom, with the exception of Merseyrail, have been replaced by short-term emergency measures agreements (EMA) with effect from 1 March 2020, with revenue and cost risks assumed in full by the UK government and carriers able to earn a management fee of up to 2%.

With respect to the three Abellio DfT franchises, the EMAs were replaced by Emergency Recovery Measures Agreements (ERMAs) on 20 September. Depending on the operator, these contracts vary in length from 6 to 18 months. As with the EMAs, the costs are borne by the DfT with a, albeit smaller, management fee. For East Midlands Railway (EMR), the ERMA contract expires at the end of March 2022, while for West Midlands and Greater Anglia it expires in September 2021 with an option for the DfT to extend it for up to seven four-week rail periods.

A basic precondition for agreeing to an ERMA contract is that each Train Operating Company (hereinafter: TOC) agrees to a process to terminate the existing franchise agreement at the end of the ERMA period upon payment of a termination fee (‘termination sum’), in order to then claim a new type of (management) contract.

The TOC has the option of not agreeing to this termination fee and reverting to the original contract. This is not an attractive alternative as the revenue risk related to passenger transport remains with the TOC. The DfT has started a process of transitioning to new contracts. Direct awards (privately awarded contracts) with a term of 4-6 years will replace ERMAs when the TOCs meet the qualification criteria. More details on the direct award process and the conditions are expected during 2021.

Based on the situation, an impairment test was performed at the end of 2020. Important assumptions were made with respect to this analysis:

• expectations regarding the continuation of operations in the United Kingdom;

• expectations regarding the content of the direct award contracts, as well as their term;

• amount of the termination fee payable and payments for the transfer of assets;

• cost reduction programme estimates;

• estimates with respect to the fair value of the assets.

For the impairment test of fixed assets, the carrying amount was assessed against either the value in use of the assets or the fair value less costs to sell, whichever was higher. Management’s estimate of the fair value of the assets exceeds the value in use and thus was the basis for the impairment determination.

The fair value has been estimated on the basis of the value that a third party would expect to receive at the end of the ERMA. This assessment took account of the franchise agreement, the ERMA and the relevant contracts. All significant assets not explicitly measured in these documents were then examined in detail to determine whether the net carrying amount expected at the end of the ERMA was a good indication of the fair value for a third party. This mainly relates to other property, plant and equipment. The sensitivity included in the fair value measurement is limited.

The performance of the impairment test resulted in an impairment loss of €103 million.

In addition to the asset impairment, unbilled revenue has been written down. This related to franchise fee revenue already recognised, which had been accounted for on the basis of the timing of underlying costs. However, due to the amended contract forms, it is unlikely that this revenue will still be realised. In addition, a write-down of an outgoing claim was recognised due to the changed political climate and increased uncertainty in the United Kingdom. This resulted in a write-down of receivables in the amount of €112 million.

Abellio Germany

Abellio Germany has no revenue risk and therefore the financial impact of the COVID-19 pandemic is relatively limited. In 2020, Abellio Germany nevertheless incurred a loss due to higher personnel costs that are not reimbursed through the current contracts and fines for, among other things, deteriorating punctuality whose causes were beyond the carrier’s control. In response, Abellio Germany performed an impairment test.

Key assumptions in the analysis are:

• the implementation of specific contractual provisions to arrive at additional compensation from the various commissioning parties, mainly with regard to compensation of increased personnel expenses and penalties owing to, for example, worsened punctuality, the cause of which is beyond the carrier's control; Realisation of these provisions are essential for future profitability;

• the successful implementation of performance optimisation programmes initiated during the remaining contract term, and their timing;

• non-termination of the franchise contracts before the end of the remaining term unless otherwise agreed.

For the impairment test of fixed assets, the carrying amount was assessed against either the value in use of the assets or the fair value less costs to sell, whichever was higher. Management’s estimate is that the value in use exceeds the fair value less costs to sell and thus has been the basis for the impairment determination.

The performance of the impairment test resulted in an impairment loss of €68 million. This impairment relates to fixed assets of individual franchises.

The sensitivity of the cost of capital and recovery of passenger revenue is as follows:

• increase/decrease in the cost of capital by 1% has a positive/negative effect of approximately €35 million in relation to the recognised impairment;

• Decrease of the expected cash flows by 10% has a negative effect of €84 million in relation to the recognised impairment;

At the time when the assumptions in the coming periods differ substantially from those used in the impairment test as at 31 December 2020, a new test will be performed and may result in an increase or reversal of the impairment. A reversal will not amount to more than the carrying amount of the impaired fixed assets taking the original depreciation pattern into account.