UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May, 2020

Commission File Number: 001-34656

Huazhu Group Limited

(Translation of registrant’s name into English)

No. 2266 Hongqiao Road

Changning District

Shanghai 200336

People’s Republic of China

(86) 21 6195-2011

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F  ☒ Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (7):  ☐

Huazhu Group Limited (the “Company”) completed the acquisition of all shares of Steigenberger Hotels Aktiengesellschaft (“Deutsche Hospitality”) on January 2, 2020. The financial statements of Deutsche Hospitality for the year ended December 31, 2019 were prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board. The unaudited pro forma condensed combined financial information included in Exhibit 99.2 to this report on Form 6-K has been prepared using the acquisition method of accounting under existing U.S. generally accepted accounting principles, or U.S. GAAP. The unaudited pro forma condensed combined financial information is based on certain assumptions and pro forma adjustments, which are preliminary and subject to further revisions as additional information becomes available and additional analyses are performed, including the final assessment of the determination of differences between IFRS and U.S. GAAP, and of the application of purchase price adjustments, and which have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. The table below sets forth the reconciliation of EBITDA to unaudited net loss extracted from the unaudited pro forma condensed combined financial information, which is the most directly comparable U.S. GAAP measure, for the year ended December 31, 2019 of Deutsche Hospitality:

Note:

The Company uses earnings before interest income, interest expense, income tax expense (benefit) and depreciation and amortization, or EBITDA, a non-GAAP financial measure, to assess Deutsche Hospitality’s results of operations before the impact of investing and financing transactions and income taxes. Given the significant investments that Deutsche Hospitality has made in leasehold improvements, depreciation and amortization expense comprises a significant portion of Deutsche Hospitality’s cost structure. The Company believes that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of Deutsche Hospitality’s financial performance.

The presentation of EBITDA should not be construed as an indication that future results of Deutsche Hospitality will be unaffected by other charges and gains that Company considers to be outside the ordinary course of Deutsche Hospitality’s business. The use of EBITDA has certain limitations. Depreciation and amortization expense, income tax, interest income and interest expense have been and will be incurred and are not reflected in the presentation of EBITDA. Each of these items should also be considered in the overall evaluation of the results of Deutsche Hospitality. Additionally, EBITDA does not consider capital expenditures or other investing activities and should not be considered as a measure of Deutsche Hospitality’s liquidity.

The term EBITDA is not defined under U.S. GAAP or IFRS, and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP or IFRS. When assessing the operating and financial performance of Deutsche Hospitality, you should not consider these data in isolation or as a substitute for its net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, EBITDA of Deutsche Hospitality may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as the Company does for Deutsche Hospitality.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX

Exhibit 99.1

Steigenberger Hotels AG

Consolidated financial statements as of and for the twelve months ended December 31, 2019

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2

3

Consolidated income statement

For the year ended December 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

4

Consolidated statement of comprehensive income

For the year ended December 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

Items in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in note 26.

5

Consolidated balance sheet

As of December 31, 2019

6

The accompanying notes are an integral part of these consolidated financial statements.

7

Consolidated statement of changes in equity

For the year ended December 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

8

Consolidated statement of cash flows

For the year ended December 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

9

Steigenberger Hotels AG (‘the company’) and its subsidiaries (together ‘the group’ or ‘Steigenberger Group’) are one of the leading hotel companies in Europe and are based in Frankfurt am Main (Lyoner Straße 25, 60528 Frankfurt am Main/Germany). As of December 31, 2019, the group currently held five separate hotel brands under a single umbrella named “Deutsche Hospitality”. Deutsche Hospitality operates 108 hotels located in 20 countries on 3 continents. Deutsche Hospitality stands for top class European hotel management with German tradition and international vision carrying the values of passion, perfection, and caring.

The detailed information of the five brands with Deutsche Hospitality are as follows:

These brands may be broken down into three categories on the basis of the contracts:

At December 31, 2019, D.H. DEUTSCHE HOSPITALITY Limited, Limassol, Cyprus, (formerly: Brierly Investments Limited), (“D.H. DEUTSCHE HOSPITALITY”) controlled 100% of the Steigenberger Group. On January 2, 2020, the group was acquired by the Huazhu Group through the company Huazhu GmbH & Co. KG (Frankfurt am Main) (“Huazhu”). The purpose of these financial statements is to meet the reporting requirements of Rule 3-05 of Regulation S-X of the Securities and Exchange Commission (SEC). As a result, these financial statements do not include comparative figures, which constitutes a departure from International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

The consolidated group balance sheet date as of December 31, 2019 corresponds to the reporting date of the annual financial statements of the parent company and the included subsidiaries, joint ventures and associated companies.

The consolidated financial statements were approved by the management board of the group on April 30, 2020.

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The consolidated financial statements have been prepared on the historical cost basis, except for certain assets and liabilities as separately stated in note 3 Summary of significant accounting policies. The consolidated financial statements were prepared under the assumption that the business will continue as a going concern. With respect to going concern, please refer to note 31 where the measures taken to improve operating performance and cash flows are described.

All amounts are reported in EURO (€) if not stated otherwise, which is the functional currency of the Steigenberger Group.

As a result of the presentation, deviations due to rounding may occur in the tables.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied within the entire reporting period, unless stated otherwise.

The consolidated financial statements of Steigenberger Group have been prepared in accordance with IFRS, as issued by the IASB, for the year ended December 31, 2019.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 6 Critical accounting estimates and judgments.

Only those standards and interpretations which are in principle relevant for the group are explicitly described below. No standard has been applied prior to the effective date.

Standards, amendments to existing standards and interpretations that have become effective in 2019

The following standards, amendments to existing standards and interpretations became effective in 2019 and have been applied in the reporting period for the first time. The nature and effect of the first-time adoption of IFRS 16 Leases is described in note 13 Leases.

Several other amendments and interpretations apply for the first time in 2019, but do not have a material impact on the consolidated financial statements of Steigenberger Group.

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Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the group

The following standards and amendments to existing standards have been published and are mandatory for the group’s accounting periods beginning on or after January 1, 2020, but the company has not early adopted them:

1) Standards, amendments to existing standards and interpretations that have already been endorsed by the EU

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2) Standards, amendments to existing standards and interpretations that have not yet been endorsed by the EU

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Subsidiaries are all companies that are directly or indirectly controlled by Steigenberger Group. According to IFRS 10, control only exists if an investor has the power over the investee, is exposed to variable returns, and is able to use power to affect its amount of variable returns. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities. Relevant activities are those activities that significantly affect the investee’s returns. The existence and effect of substantive potential voting right that are currently exercisable or convertible, including potential voting rights held by other group companies, are considered when assessing whether an entity is controlled. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases.

A business combination exists when Steigenberger Group obtains control of another entity. The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. If the consideration is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group.

Non-controlling interests have a share in the earnings of the reporting period. In general, the group treats transactions with non-controlling interests as transactions with equity owners of the group. As of December 31, 2019 there are no non-controlling interests within the group.

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

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When the group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss.

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

Regarding business combinations under common control, Steigenberger Group chose to account the business combination under common control according to the predecessor accounting method. Consequently, assets and liabilities are not restated to their fair values and no new goodwill is recorded. Any difference between the cost of the transaction and the carrying value of the net assets are recorded in equity.

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Associates are all entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost.

The group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the group and its associates are eliminated to the extent of the group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Similar to associates the group’s interests in jointly controlled entities are accounted for using the equity method and recognised at cost at the time of acquisition. The carrying amount of the investment may include goodwill as the positive difference between the cost of the investment and Steigenberger Group’s proportional share in the fair values of the entity’s identifiable assets and liabilities. The carrying amount of the investment is tested for impairment at each reporting date, provided there are indications of impairment. If the carrying amount of the investment exceeds its recoverable amount, an impairment loss must be recognised in the amount of the difference. The revocable amount is measured at the higher of fair value less costs of disposal and value in use. Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the group.

(a) Functional and presentation currency

Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in ‘EURO’ (€), which is the company’s functional and the group’s presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Foreign exchange gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are generally presented in the income statement within ‘other operating income/ expense’. As far as they relate to the translation of financial assets or liabilities they are included in ‘financial income/ expense’.

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(c) Group companies

The results and financial position of all the group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

The exchange rates of the Swiss Franc as the most important currency affecting foreign currency translation as well as for the United Arab Emirates Dirham (AED), Egypt Pound (EGP), Tunesian Dirham (TND) and Danish Krones (DKK) are as follows:

All property, plant and equipment are stated at historical cost less depreciation and accumulated impairment charge, if recorded. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

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Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within ‘other operating income/ expenses’ in the consolidated income statement.

The useful economic life is mainly defined as eight to 25 years for fittings in non-owned buildings and two to 20 years for technical equipment, plant and machinery as well as other equipment, operational and office equipment. The useful lives do not exceed the respective lease term.

Furniture, fixtures and equipment that is initially installed in leased hotels by Steigenberger prior to the commencement date is capitalized under property, plant and equipment. Those installments are accounted for as “failed” sale-and-leaseback transactions. The initially installed furniture, fixtures and equipment and the corresponding reinvestments in furniture, fixtures and equipment that are performed by Steigenberger along the lease term are separated into three clusters and depreciated over 1.5 or 10 years. Reinvestments in furniture, fixtures and equipment towards the end of the lease term are depreciated until the end date of the lease contract.

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Goodwill is tested annually for impairment and on an interim basis whenever events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount . Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

(b) Trademarks, licences & other rights

Separately acquired trademarks, licences and other rights are shown at historical cost. Trademarks, licences and other rights acquired in a business combination are recognised at fair value at the acquisition date. Trademarks, licences and other rights have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks, licences and other rights over their estimated useful lives of three to ten years.

Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets, that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Right-of-use assets under IFRS 16 are also subject to impairment in accordance with IAS 36. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

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Concerning the assessment of asset and goodwill impairment in the current period, please refer to notes 7 and 8.

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Assets

At initial recognition, the group measures the financial assets at their fair value. Financial assets are classified based on the model for managing the financial assets and the contractual terms of the cash flows.

For purposes of subsequent measurement, financial assets are classified in four categories:

The classification and measurement of financial assets is based on the one hand on the cash flow condition (the “solely payments of principle and interest” criterion), that is, the contractual cash flow characteristics of an individual financial asset. On the other hand, it also depends on the business model used for managing financial asset portfolios. Based on these two criteria, the following measurement categories for financial assets are relevant to Steigenberger:

Amortized Cost (AC)

Financial debt instruments measured at amortized cost include all assets with contractual terms that give rise to cash flows on specific dates, provided that these cash flows are solely payments of principal and interest on the principal amount outstanding in accordance with the cash flow condition in IFRS 9, to the extent that the asset is held with the intention of collecting the expected contractual cash flows over its term.

Fair Value through Other Comprehensive Income (FVOCI)

Financial debt instruments measured at fair value through other comprehensive income include all assets with contractual terms that give rise to cash flows on specified dates, which are solely payments of principal and interest on the principal amount outstanding in accordance with the cash flow condition in IFRS 9, to the extent that the asset is not just held with the intention of collecting the expected contractual cash flows over its term, but also generating cash flows from its sale. Under IFRS 9, there is in addition an option to measure equity instruments at fair value through other comprehensive income as far as they are not held for trading (without recycling). Steigenberger exercised this option for equity instruments.

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Fair Value through profit and loss (FVPL)

The category comprises financial assets that do not fall under the two other categories. As equity instruments are measured “at fair value through comprehensive income” by designation of Steigenberger, no assets are classified as at fair value through profit and loss.

Financial liabilities

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The group’s financial liabilities include trade and other payables and loans.

For purposes of subsequent measurement, financial liabilities are classified in two categories:

Fair Value through profit or loss (FVPL)

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. Steigenberger Group has not designated any financial liability as at fair value through profit or loss.

Amortized Cost (AC)

This is the category most relevant to the group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss.

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This category generally applies to interest-bearing loans and borrowings. For more information, refer to Note 11 Financial Instruments.

Financial assets and financial liabilities are recognized in the consolidated balance sheet when the Steigenberger Group becomes a party to a financial instrument. Financial assets are derecognized when Steigenberger no longer has a contractual right to the cash flows from the financial asset or when the financial asset is transferred together with all material risks and rewards of ownership and Steigenberger does not have control of the financial asset after it has been transferred. For example, receivables are derecognized when they are definitively found to be uncollectible. Financial liabilities are derecognized when the contractual obligations expire, are discharged or cancelled. Regular-way purchases and sales of financial instruments are accounted for using the settlement date.

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If pricing on an active market is available, for example in the form of share prices, these are used as the basis for the measurement. Otherwise, the measurement is based on internal measurement models using current market parameters or external measurements, for example, from banks. These internal measurements predominantly use the net present value method (compare Note 5.3).

The measurement of the categories of financial instrument is as follows:

Amortized Cost (AC)

Financial instruments measured at amortized cost are recognized at fair value upon addition. Insofar as future impairment is anticipated, it is considered for measurement unless immaterial. No-interest or low-interest bearing financial instruments with terms of more than one year are measured at present value. Subsequent to first-time recognition, such financial instruments are measured at amortized cost. That is the amount at which a financial asset was valuated upon first-time recognition, less repayments, plus or less the cumulative amortization of any difference between the originally assigned value and the amount repayable at final maturity based on the effective interest method, and less any valuation allowances for expected credit loss.

Fair Value through Profit or Loss (FVPL)

Financial instruments measured at fair value through profit or loss are recognized at fair value upon addition. Gains or losses resulting from subsequent measurement are to be recognized in profit or loss.

Fair Value through Other Comprehensive Income (FVOCI)

Debt instruments and equity instruments measured at fair value outside profit or loss are recognized at fair value upon addition. Gains or losses resulting from subsequent measurement are to be recognized in equity outside profit or loss. Upon disposal of debt instruments, gains or losses included in revaluation reserve are to be recognized in the income statement. With respect to equity instruments, there is no reclassification of the revaluation reserve equity through profit or loss. Only distributed dividends are recognized in profit and loss, unless the dividend clearly represents a recovery of part of the costs of the investment. Steigenberger exercises the option to subsequently measure equity instruments not held for trading through other comprehensive income.

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Financial liabilities are carried at amortised cost.

Trade receivables, other financial assets, investments, and cash and cash equivalents in the category “Financial assets at amortised costs” as well as debt instruments of the category “fair value through other comprehensive income” are subject to an impairment model as per IFRS 9 based on expected credit losses. The expected credit losses are calculated as the probability-weighted present value of all payment defaults during the term of the assets. A three-tier model is used for this purpose.

Stage 1: Recording expected credit losses over the entire term due to events within the next twelve months Includes new contracts and existing contracts with no significant increase to the credit risk.

Stage 2: Recording expected credit losses over the entire term without affecting the credit rating. Includes financial assets whose credit risk has risen significantly but whose credit rating is not affected.

Stage 3: Recording expected credit losses over the entire term with impairment of the credit rating includes financial assets whose credit ratings are impaired or have defaulted.

The criteria that the group uses to determine that there is objective evidence of an impairment loss at Stage 3 includes:

As required under IFRS 9, the Steigenberger Group uses the simplified approach for trade receivables and contract assets and determines the expected credit loss over the entire term (Stage 2). These were clustered according to customer groups, past due dates and the different business models of the Steigenberger Group. Two Impairment Matrices were calculated based on both external and future looking market data as well as internal information and historical events of default to determine future risks of defaults. Due to significant differences regarding the credit risk, the trade receivables and customers were generally clustered in the following 2 categories based on hotel business contracts:

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If future losses are expected for financial assets carried at cost, a write-down to the lower expected realizable value is made. Under the expected credit loss model, both incurred losses as well as losses expected in the future periods are recognized.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss.

Inventories are stated at the lower of cost and net realisable value. Inventories mainly include operating supplies and food and beverage inventory items.

Cost of inventory is determined using the First-In First-Out method.

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. For trade receivables without significant financing component, expected credit losses are determined using the simplified approach recognized as a risk provision item over the asset term pursuant to IFRS 9.5.5.15.

Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities on the consolidated balance sheet.

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At December 31, 2019, the sole shareholder of the group is D.H. DEUTSCHE HOSPITALITY. The subscribed capital amounts to € 12,480,000.00. The share capital is fully paid up, and consists of 480,000 no-par-value shares representing € 26 per share.

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Trade payables are derecognised when the obligation specified is cancelled or expires, or the primary responsibility for the liability is legally transferred to another party.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. Borrowings are derecognised when the obligation specified is cancelled or expires, or the primary responsibility for the liability is legally transferred to another party.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

In order to increase customer loyalty, Steigenberger awards bonus points for services purchased in its hotels. These bonus points can be exchanged into services from Steigenberger. Accumulated but as yet unused bonus points are deferred using the deferred revenue method to the extent that they are likely to be used on goods or services provided in the award catalogue. The fair value of points accumulated on the group’s services provided is recognised under deferred revenue in contract liabilities in the balance sheet.

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The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements and on tax losses carried forward. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither IFRS nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

(a) Pension obligations

Group companies operate different pension schemes. Steigenberger Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity. Within Steigenberger, the group pays contributions to governmental and private pension insurance organisations based on legal regulations. The group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

The majority of the employee benefit plans are defined benefit plans, either funded or unfunded. The major defined benefit plan is the German benefit plan which defines the amount of pension benefit that an employee will receive on retirement to depend on years of service and compensation. The defined benefit plans provide benefits in case of retirement, disability and death as life-long pension payments.

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The Swiss pension plan is funded through a Swiss pension fund; both employer and employee are obliged to contribute to the pension fund. The contributions depend on the salary in the respective year.

The liability recognised in the consolidated balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, if any, together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Remeasurements arising from experience adjustments and changes in actuarial assumptions are charged or credited to retained earnings in other comprehensive income in the period in which they arise.

Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

(b) Termination benefits

Termination benefits are payable when employment is terminated by the group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without a realistic possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to their present value.

Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

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Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group. The group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the group’s activities as described below. The group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue is measured at the amount, which the entities expect to receive for a satisfied performance obligation. Revenue is realised, when the customer obtains control over the promised goods or services and when the customer can benefit from these. The recognition of revenue is based on a five-step model according to IFRS 15:

1. Identification of contracts with a customer

2. Identification of separate performance obligations

3. Determination of the transaction price

4. Allocation of the transaction price to the separate performance obligations

5. Revenue recognition according to the timing of fulfilment of a performance obligation

By applying the five-step model, the Steigenberger Group identifies distinct performance obligations in each contract with a customer. The transaction price is determined and allocated to the performance obligations according to the requirements of IFRS 15. Variable consideration in contracts with customers – such as rebates, bonus agreements or other kinds of price concessions - is analyzed, measured and included in the revenue recognition. The allocation of the transaction price in case of more than one performance obligation would be performed based on the suggested approaches of IFRS 15. For every performance obligation, in accordance with IFRS 15, revenue recognition is determined to be at a point in time or to be satisfied over time. Multi-component contracts that contain distinct performance obligations with different timing of revenue recognition have been analysed and are not currently material.

Revenue from contracts with customers includes:

Revenues arising from the sale of goods are usually recognized point in time when control is transferred to the customer. Revenues arising from the sale of services are basically recognized over time. In hospitality practices, the period of service is short within days and their impact is immaterial. Therefore, their revenues are not deferred over time. When the services are rendered, the revenues are recognized. “Accomodation, Food & Beverages” are in many cases considered as a series of distinct goods or services. The bundled revenues are recognized when the material part of revenues accommodation service is rendered. In relation to revenue from assistance fees, revenue is recognized over time as the customer simultaneously receives and consumes the benefits provided by the performance of Steigenberger. If circumstances arise that may change estimates in relation to contracts with customers, those estimates are revised and accounted for in accordance with the applicable guidance of IFRS 15.

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Interest income is recognised using the effective interest method. When a loan and receivable is impaired, the group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loan and receivables are recognised using the original effective interest rate.

Dividend income is recognised when the right to receive payment is established.

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In January 2016, the IASB published IFRS 16 Leases, which has replaced IAS 17 Leases for all annual reporting periods beginning on or after January 1, 2019. IFRS 16 introduces a new definition of a lease, with a single lessee accounting model eliminating the previous distinction between operating leases and finance leases. Under IFRS 16, lessees are required to account for all leases in a similar manner to the current finance lease accounting recognising lease assets and liabilities on the Statement of Financial Position. Lessor accounting remains similar to current practice.

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC 15 Operating Leases-Incentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet.

The group mainly leases land, buildings and furniture, fixtures and equipment for its hotel properties and headquarters. The leases for hotels generally have a non-cancelable lease term of 20 to 25 years, and may include extension or termination options and variable lease payments. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The group also has lease agreements on other assets, such as offices, cars, car parks and IT equipment that usually have a lease term of 3 to 5 years. Sublease contracts exist mainly in relation to restaurants and stores located in its hotels. Low value assets which are expensed as incurred include mainly copy machines, telephones, minor hotel equipment and staff uniforms.

Lessee Accounting

The group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. The group has completed a review of its leasing commitments and adopted IFRS 16 Leases for the year ended 31 December 2019. The group adopted IFRS 16 in accordance with the modified retrospective approach per IFRS 16.C5(b).

IFRS 16 has been adopted by the group for the year ended December 31, 2019 in accordance with the modified retrospective approach under IFRS 16.C5(b) along with the simplifications given under IFRS 16.C8/C9/C10/C16. In particular, the group elected to adopt the practical expedient related to leases of all asset classes with a lease term of less than 12 months or for which the underlying asset is of low value and leases with a remaining lease term of less than 12 months at the transition date. In these cases, no right-of-use asset and lease liability is recognized. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

(a) Right-of-use assets

The group recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). At transition, the right-of-use assets are measured at cost equal to the remaining lease liability less any deferred lease incentives received as of January 1, 2019. Subsequently, right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.

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If ownership of the leased asset transfers to the group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment. Refer to the accounting policies in note 3.5 Impairment of non-financial assets.

(b) Lease liabilities

At the commencement date of the lease, the group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the group and payments of penalties for terminating the lease, if the lease term reflects the group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the group uses its incremental borrowing rates at the lease commencement date or January 1, 2019 if later because the interest rate implicit in the lease is not readily determinable. The different incremental borrowing rates used are reflective of the currency and lease term. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.

(c) Short-term leases and leases of low-value assets

The group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered to be low value. The recognition exemption for leases of low value assets is adopted on a lease-by-lease basis. Assets are considered to be low value if the underlying value of the asset amounts to less than k€ 5.

Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

(d) Lease components and non-lease components

Contracts often combine different kinds of obligations of the supplier, which might be a combination of lease components or a combination of lease and non-lease components. For hotel lease contracts that contain a lease component and additional lease and non-lease components, the group separates the components land and building, and furniture, fixtures and equipment (FF&E). Service related components are generally included in the calculation of the lease liability.

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(e) Sale & leaseback transactions

A transaction is accounted for as a sale of an underlying asset and a leaseback of that underlying asset only if the initial transaction qualifies as a sale in accordance with IFRS 15 Revenue from Contracts with Customers. To qualify as a sale of an asset under the revenue standard, the customer (buyer-lessor) needs to obtain control of the asset from the seller-lessee. If this is not the case, no sale has occurred and the transaction should be accounted for as a failed sale. To account for a failed sale as a financing arrangement, the seller-lessee does not derecognize the underlying asset and the seller-lessee continues depreciating the asset as if it was the legal owner. The sales proceeds received from the buyer-lessor are recognized as a financial liability. The “failed” sale & leaseback transaction is presented under Property, plant and equipment. (Note 7)

(f) Statement of cash flows

Lease payments are presented as follows in the Group statement of cash flows:

Lessor Accounting

A lessor shall classify each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all of the risks and rewards incidental to ownership of an underlying asset. Otherwise the lease is classified as an operating lease.

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.

The group acts as a lessor in connection with its sub-lease arrangements. Sub-leases of the group’s assets are typically classified as operating leases, as the risks and rewards of ownership are not substantially transferred to the sub-lessee. Accordingly, lease income is accounted for on a straight-line basis over the contract term and presented within revenue in the consolidated income statement.

Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

Dividend distribution to the company’s shareholders is recognised as a liability in the group’s financial statements in the period in which the dividends are approved by the company’s shareholders.

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As of December 31, 2019, the consolidation group comprised Steigenberger Hotels AG as well as eight domestic and eight foreign companies in relation to which Steigenberger Hotels AG directly or indirectly holds a majority of voting rights.

As of December 31, 2019, the following companies are for the first time consolidated:

Tunisian Hospitality was fully acquired by Steigenberger Hotels AG in the context of a step acquisition from 50% to 100% of the shares in August 2019. Tunisian Hospitality is therefore fully consolidated in the consolidated financial statements as of December 31, 2019.

Tunisian Hospitality

As of December 31, 2019, the following entities are included as investments in associates and joint ventures in the consolidated financial statements:

Steigenberger Group holds 50% of shares in the capital and voting rights of SME and Sourcify which are recognized as joint ventures and 49% of the joint venture Aurea Palacio Hospitality Limited. Furthermore, Steigenberger Group holds 51% of shares in the capital and voting rights of Zleep since February 2019. However, Zleep is not fully consolidated because the group only has joint control in the business and finance decisions due to voting right restrictions.

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For a detailed overview regarding the shareholdings of Steigenberger Group, readers are referred to the following chart:

The group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the group’s financial performance.

Financial risk management is carried out on group level. The responsibilities and controls necessary associated with risk management are determined by group management. Group Treasury and Controlling identify and evaluate financial risks in close co-operation with the group’s operating units.

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(a) Market risk

Market risk mainly includes currency risk, fair value interest rate risk, cash flow interest rate risk and price risk. Risks attributable to changes in prices or cash flow fluctuations are of minor significance for the Group.

The group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Steigenberger operates mainly in Germany, Austria the Netherlands and Belgium. Steigenberger also operates in United Arab Emirates, Egypt, Oman, Tunisia and China. Foreign exchange risk mainly relates to Swiss franc, Arabic dirham, Tunisian dinar, Danish crown and Egyptian pounds, but is of minor significance for the group.

As the group does not have material interest bearing assets and external bank loans the interest rate risks are of minor significance as well.

As Steigenberger Group is not exposed to any other price risks, like stock exchange prices or commodity prices, an increase or decrease of the relevant market prices within reasonable margins would not have an impact on the group’s profit or equity. Hence, the group’s exposure to other price risks is regarded as not material.

(b) Credit risk

Credit risk is monitored on group basis.

The credit risk incurred by the group is the risk that counterparties fail to meet their obligations arising from operating activities and from financial transactions. The group´s main financial assets are cash and cash equivalents and trade debtors and other accounts receivables. In general, cash and cash equivalents are kept in banks with high credit ratings. Default risks are continuously monitored in the operating business and are taken into consideration by way of adequate impairments.

Default and liquidity risks in the area of receivables are limited by refining cash-relevant processes as part of the internal control system, and maintaining a well-oiled accounts receivables management and dunning system.

For an overview of past-due receivables, refer to note 11 Trade and other receivables.

(c) Liquidity risk

To ensure the solvency and financial flexibility of Steigenberger, the Group retains a liquidity reserve through cash and cash equivalents. Liquidity reserve is monitored on an ongoing basis with regard to the group’s business performance and planned investments.

In order to optimise the consolidated Group-wide supply and management of liquidity, cash pool argreements existed between Steigenberger Hotels AG and all major foreign subsidiaries in 2019.

There are no liabilities to banks as of the balance sheet date.

On December 30, 2015, the shareholder credit line was reduced from m€ 6.0 to m€ 3.0. In 2016 the shareholder credit line has not been utilized and extended and ran out as of December 31, 2019.

As of December 31, 2019, the Steigenberger Group had a loan facility of with Commerzbank AG. Of this amount, m€ 2.5 can be used as current account credit and m€ 7.5 can be used for sureties and guaranties. The loan facility was extended until further notice.

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In addition, the Group had a loan facility covering m€ 5.0 with UniCredit Bank AG. Of this amount, m€ 2.0 can be used as an overdraft facility and m€ 3.0 for sureties and guaranties. Both facilities are available until further notice.

The tables below analyse the group’s primary financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

Based on an agreement dated April 30/May 2, 2012, StAG granted a loan facility up to the amount of m€ 3.0 to its sole shareholder D.H. Deutsche Hospitality. The loan matured on December 31, 2013, and was automatically prolonged for another year at each year-end unless terminated by at least one of the contracting parties, whereby a notice period of three months to the end of the term is to be observed. Interest is based on the 3-month EURIBOR plus a margin of 6 % per annum. Due to drawn amounts of the credit line, receivables due from the shareholder of m€ 2.7 were disclosed as of December 31, 2019 (plus interest of €m 1.2).

The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders, to ensure sufficient financial resources for investments and to maintain an optimal capital structure. The group’s objectives when managing capital are to ensure the availability of liquid funds within the group and the management of liquidity. The majority of Steigenberger´s operations are financed by the group’s operating cash flows. Net debt and liquidity are monitored in the short and medium term by means of regular cash flow forecast and treasury reports.

With regard to capital risk, the group manages its capital based on consolidated accounts. The capital structure is continuously reviewed by the Board of Directors. The review includes an assessment of the equity ratio, which is defined as the ratio of shareholders’ equity to total assets. The equity ratio was -0.03 % as of December 31, 2019.

Financial liabilities, which require compliance with financial covenants, are not in place.

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IFRS 13.76 for financial instruments requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The different hierarchy levels demand for different amounts of disclosure.

There were no transfers between levels 1 and 2 during the year.

As of December 31, 2019 a financial instrument referring to shares in a German company is measured at fair value based on level 2 measurement and is reported in other non-current financial assets.

For more information refer to note 3.6. Significant accounting policies – Financial instruments and note 10 Investments in associates and joint ventures.

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The application of the accounting and valuation methods prescribed by IFRS and IFRIC requires making a large number of estimates and assumptions. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Significant judgement in determining the lease term of contracts with renewal options

The group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The group has the option, under some of its hotel leases, to lease the assets for additional terms of five to ten years. The group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. The group considers all relevant factors that create an economic incentive for it to exercise the renewal, such as the existence of furniture, fixtures and equipment with a significant remaining value in its leased property assets. After the commencement date, the group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). Based on historic experience and the current expectations, the group includes all extension options for hotel lease contracts in the determination of the lease liability

(b) Judgement in estimating the incremental borrowing rate

The group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).

(c) Income taxes

The group is subject to income taxes in different jurisdictions. Significant judgement is required in determining the group-wide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

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(d) Pension benefits

The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.

The group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the group considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note 18 Other non-financial liabilities.

If the discount rate used differed +0.25%/ -0.25% from management’s estimates, the defined benefit obligation for pension benefits would be an estimated 2.7% lower or 2.89% higher.

(e) Provisions

Whether a present obligation is probable or not requires judgement. The nature and type of risks for these provisions differ and management’s judgement is applied regarding the nature and extent of obligations in deciding if an outflow of resources is probable or not. Provisions for termination benefits and restructuring provisions involve management’s judgement in estimating the expected cash outflows for severance payments.

(f) Estimated impairment of assets and goodwill

The group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 3 Summary of significant accounting policies. In case of any triggering event the group also tests if the carrying amount of other assets is impaired. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (for further details please refer to note 7 Property, plant and equipment and 8 Intangible assets).

(g) Obligations from customer loyalty programs

Accumulated but not yet used bonus points are deferred using the deferred revenue method to the extent that they are likely to be used on goods or services provided in the program catalogue. The fair value of points accumulated on the group’s services provided is recognised under deferred revenue in other payables in the balance sheet. Fair value is determined as the value for which the goods / services equivalent to the points could be sold separately, i. e. the average yield, taking booking class and region into account.

The group uses judgment in determining the likelihood of conversion of points accumulated as well as for the determination of the fair value.

(h) Useful lives of property, plant and equipment and intangibles assets

The group’s management determines the estimated useful lives and related depreciation/ amortisation charges for its property, plant and equipment and intangibles assets. This estimate is based on projected lifecycles. It could change as a result of external factors as severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or it will write-off or write-down obsolete or non-strategic assets that have been abandoned or sold.

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Notes to the consolidated balance sheet

Construction in progress mainly related to investments in digitizing and IT hardware in Hotels. Reclassifications relate to construction in progress and down payments on assets. Down payments are part of “Other non-financial assets” (note 12 Trade receivables and other financial assets) as long as the definition of an item of property, plant and equipment is not fulfilled. Once the construction finished, they are recognized as the additions into the applicable categories.

The other items of property, plant and equipment mainly comprise tenant fittings and furniture as well as restaurant and bistro assets for the hotels. Steigenberger Group is contractually obligated to invest in furnitures, fixtures and equipment in most of its leased hotels. In relation to the initial installment of furnitures, fixtures and equipment in leased hotels prior to the commencement date, Steigenberger Group capitalized m€ 15.6 (“failed” sale and lease back transactions with the lessor, refer to note 13 Leasing). As Steigenberger Group performs obligatory renewals of those assets during the lease term, reinvestments amounting to m€ 11.5 are capitalized as of December 31, 2019. Steigenberger Group is obligated to return installed furniture, fixtures and equipment to the lessor at the end of the contract term. Therefore, reinvestments in furniture, fixtures and equipment towards the end of the lease term are depreciated until the end date of the lease contract.

None of the assets are pledged as security.

Changes in scope of consolidation mainly refers to integration of Tunisian Hospitaliy PPE assets. (See note 9 Business Combinations)

Depreciation expenses and impairment losses have been charged to “Depreciation, amortisation and impairment” in the consolidated income statement.

The group monitors the business performance of each hotel separately. Each hotel is the smallest unit that generates cash inflows that are largely independent of the cash flows of other assets. Thus, each hotel represents a CGU according to IAS 36.

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Due to the loss history of the hotel, an impairment test was performed for the Steigenberger Wiltcher´s hotel in Brussels as of December 31, 2019. In order to identify if the assets are impaired, the carrying amount of the CGU is compared with its recoverable amount. The recoverable amount of the CGU has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by managementcovering a nine-year period. The cash flow projections are based on the past performance of the hotel (before the transfer), experience of Steigenberger with similar hotels and management’s expectations of market development. GOP margin is expected to increase moderately within the detailed planning period. Forecasts for other operating costs, which are not linked to revenues are adjusted based on the current structure of the business. They do not reflect any future restructuring or cost savings measures. Annual capital expenditures are based on historical experience and the planned refurbishment expenditure. Cash flows beyond the nine-year period until the end of the lease contract are extrapolated using an unchanged growth rate of 1.5 %. A discount rate of 6.2 % was used. This corresponds to level 3 of the fair value hierarchy according to IFRS 13. Comparing the carrying amount of the CGU with the value in use calculated there is an impairment loss recognition in 2019 amounting to k€ 239 in the “other equipment, operational and office equipment”.

The carrying amount of Goodwill relates to the pre-deal acquisition of InterCityHotel GmbH. At year end 2019 a goodwill impairment test has been performed. There was no impairment identified.

The goodwill addition is due to the step acquisition of Tunisian Hospitality during the current year and transaction price reflected the fair value of the goodwill. There was no impairment identified.

The trademarks, licenses & other rights increased by k€ 4,316 due to capitalization of the value customer contracts from the Tunisian Hospitality transaction.

None of the intangible assets are pledged as security.

Amortization charges have been recorded in to “Depreciation, amortizsation and impairment” in the consolidated income statement.

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On August 31, 2019, the Steigenberger Group acquired the remaining shares of Tunisian Hospitality in the context of a step acquisition from 50% to 100% for a purchase price of k€ 2,401. Before the acquisition Tunisian Hospitality had been recognised as joint venture with 50% share and accounted for using the equity method of accounting.

The enterprise value of Tunisian Hospitality is mainly based on three different management contracts with local hotels. The acquisition of Tunisian Hospitality is aimed to access the North African market.

At acquisition date the fair values of the assets and liabilities of Tunisian Hospitality were as follows:

As part of accounting for the business combination, Steigenberger Group remeasures the previous held interest of 50% at fair value, corresponding to the purchase price of k€ 2,401 for the 50% of shares acquired in 2019. This amount is taken into account in the determination of goodwill, whereas the difference between fair value and the carrying amount of the old shares amounting to k€ 1,691 is recognized in finance income in the consolidated income statement and in other non-cash-effective expenses / income in the consolidated cash flow statement.

Old Shares Adjustment Fair Value

From the date of acquisition, Tunisian Hospitality contributed k€ 244 of revenues and k€ 157 of profit before income taxes from continuing operations to Steigenberger Group results.

The movements in associates and joint ventures during the reporting period are as follows:

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With the acquisition of Steigenberg DMCC, Dubai/UAE (“DMCC”) the company gained joined control in the nominal capital of SME which is recognised as associated entity since November 1, 2016. SME’s principal activities are in the hotel industry.

Furthermore, Steigenberger Group entered into the joint venture Aurea Palacio Hospitality Limited in India with MBD Group as of December 31, 2016. The joint venture was originally set up to take care of the operational business activities and portfolio development in India.

At the balance sheet date, Steigenberger Group held 50 % of shares in the Sourcify GmbH, Frankfurt/Main (Germany). The electronic purchasing platform “Procure to pay” which had been successfully developed in prior years was outsourced as “Sourcify GmbH” in the year 2018. Since 2018, the Steigenberger Group has been offering the option of digital procurement not only to the hotels which belong to the company’s own brands but also to other partners in the catering, nursing care and hospital sectors. Kloepfel Operations GmbH, who holds the other 50%, has become involved as a sales partner in Sourcify GmbH.

Steigenberger Group acquired 50 % of the shares in Tunisia Hospitality in December 2016 and the remaining 50% shares in August 2019 to access the market in North Africa. Therefore, Tunisia Hospitality Group Limited is no longer accounted for at equity but fully consolidated in the consolidated financial statements as of December 31, 2019.

In February 2019, Steigenberger Group acquired 51 % of the shares in Zleep for a purchase price of k€ 11,416. With the acquisition, Steigenberger Group included a fifth hotel brand in its House of Brands and contributed to the planned expansion strategy in Europe. On the date of the acquisition, the portfolio of Zleep comprised ten hotels in Denmark and one hotel in Sweden. After acquisition Steigenberger Group provided an additional capital contribution of k€ 3,750.

The group’s interest in Zleep is accounted for using the equity method in the consolidated financial statements because the group has joint control only has joint control in the business and finance decisions due to voting right restrictions.

The share of the results of associates and the share of the assets and liabilities as at December 31, 2019 are as follows:

Furthermore, Steigenberger Group identified k€ 2,166 as value of customer contracts, as well as k€ 3,273 as value of trademark from the investment in Zleep Hotels A/S as of December 31, 2019.

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The reconciliation of the summarized financial information presented to the carrying amount of the interest in the associates & joint ventures is as follows:

The group holds the following financial instruments:

Net losses from financial instruments classified as Financial assets at amortised cost (AC) amount to k€ 838 and mainly relate to the additions to the provision for impairment of receivables.

Net gains relating to Financial assets at fair value through other comprehensive income (FVOCI) amount to k€ 474 and are recognized outside profit and loss in equity.

Net losses for Financial liabilities at amortised cost amounting to k€ 52,574 relate to interest expenses on lease liabilities (k€ 52,464) and interest expenses on borrowings (k€ 110).

The valuation categories and carrying amounts of the financial assets and financial liabilities in accordance with IFRS 9 are presented as follows:

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Trade receivables and cash and cash equivalents have short-term maturities. Their carrying amounts at the reporting date equal their fair values, as the impact of discounting is not significant.

Other financial assets are discounted where the impact of discounting is significant. In these cases, the fair value is determined based on expected future cash-flows and is classified as Level 2 fair value. Other financial assets include amongst others deposits paid on leased hotels and are carried at cost. As of December 31, 2019, also a restricted cash account was included.

Trade payables and other current financial liabilities have short periods to mature; therefore, the carrying amounts reported approximate the fair values. Other financial liabilities relate to accrued costs of various goods and services.

None of the financial assets that are fully performing have been renegotiated in the last year.

Interest income on impaired financial assets amounts to k€ 0.

Non-current financial assets are due within an average of 2 years .

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All other financial assets (except for Trade Receivables) are allocated to the Stage 1 pursuant the general approach of the impairment model (compare section 1.7 of the notes for details). As customers have a low risk of default and strong capacity to meet contractual cash flows, the financial assets are allocated to the category “Performing” (IFRS 7.35M).

At December 31, 2019 other non-current financial assets include bank deposits of k€ 416 that are restricted as well as shares in a German company of k€1,800.

The carrying amount of non-current financial assets corresponds to their fair value, as they earn market standard interest.

Movements on the group provision for impairment of trade receivables are as follows:

For trade receivables without significant financing component, expected credit losses are determined using the simplified approach recognized as a risk provision item over the asset term pursuant to IFRS 9.5.5.15 (refer to Section 3.7).

Expected credit losses for trade receivables in the group comprise as follows:

The amount at end of the period includes k€ 100 related to loss allowances booked in the year.

The trade receivables past due 91 days include claims amounting to m€ 1.6 against the government.

The creation and release of provisions for impaired trade receivables have been included in ‘other operating income/expenses’ in the consolidated income statement.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The group does not hold any collateral as security.

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Right-of-use assets

Set out below are the carrying amounts of right-of-use assets recognized by category of underlying assets and the movements during the period: