On September 18, 2015, the U.S. Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles with Volkswagen Group diesel engines. It has been alleged that we had used undisclosed engine management software installed in certain four-cylinder diesel engines used in certain 2009 to 2015 model year vehicles to circumvent NOx emissions testing regulations in the United States of America in order to comply with certification requirements. The US environmental authority of California – the California Air Resources Board (CARB) – announced its own enforcement investigation in this context. Following these announcements by EPA and CARB, authorities in various other jurisdictions worldwide commenced their own investigations.
In its ad hoc release dated September 22, 2015, the Volkswagen Group announced that there were discrepancies in relation to NOx emissions figures in vehicles with type EA 189 four-cylinder diesel engines. Around eleven million vehicles worldwide were affected. This is attributable to the engine management software. The vehicles remain technically safe and ready to drive.
Technical solutions have been prepared for the three European variants of the type EA 189 engine affected. These solutions have been approved in principle by the German Kraftfahrtbundesamt (German Federal Motor Transport Authority) for Volkswagen AG and AUDI AG. The Group brands SEAT and ŠKODA also received approvals in principle each from their respective type approval authorities – the Ministry of Industry in Spain and the Vehicle Certification Agency in the United Kingdom.
In North America, three variants of certain four-cylinder diesel engines are affected. Due to considerably stricter NOx limits in the USA, it is a greater technical challenge to refit the vehicles so that all applicable emissions limits can be met. Volkswagen is currently in intensive discussions with the EPA and CARB concerning remedial measures.
On November 2, 2015, the EPA issued another “Notice of Violation” alleging that irregularities had also been discovered in the software installed in vehicles with type V6 3.0 l diesel engines. CARB also issued a letter announcing its own enforcement investigation in this context.
After discussions with the EPA and CARB, Audi publicly announced on November 23, 2015 that it would revise the software parameters and resubmit them for approval in the USA. The technical solutions will be implemented as soon as they have been approved by the authorities. Around 113 thousand vehicles from the 2009 to 2016 model years of the Audi, Volkswagen Passenger Cars and Porsche brands are affected in the USA and Canada.
The technical solutions worldwide currently cover software and, in some cases, hardware modifications and repurchases, depending on the series, model year and country concerned. Consequently, the Volkswagen Group has recognized expenses directly related to the diesel issue in the total amount of €16.2 billion in operating result. This primarily entailed recognizing provisions for field activities (service measures and recalls) and for repurchases in the amount of €7.8 billion, as well as €7.0 billion for legal risks. In addition, impairment losses of €0.8 billion were recognized for assets and expenses of €0.6 billion were recognized for the sales programs directly related to the diesel issue. The carrying amount of the provisions reflects the current status of discussions with the relevant authorities and is measured as far as possible on the basis of past experience and on estimates, depending on the technical complexity of the remedial actions concerned. €0.9 billion of the expenses was recognized in distribution expenses and €7.0 billion in other operating expenses. The other expenses are attributable to cost of sales. Please refer to the “Litigation” section for a discussion of the legal risks associated with the diesel issue. The ongoing investigations mean that assessment of the circumstances is subject to estimation risk. In particular, the estimates may experience considerable change as the technical measures in the USA and Canada take shape and the legal risks crystallize.
In addition, internal risk regulations required hedging transactions to be discontinued in this context. In accordance with IAS 39.101(b), the cumulative gain or loss on the hedging instrument that has been recognized from the period when the hedge was effective remains separately in equity until the forecast transaction occurs.
Based on current information, fiscal year 2014 is not affected by the effects of the diesel issue. Even after the International Council on Clean Transportation (ICCT) study was published in May 2014, the discrepancies were initially regarded – on the basis of the facts currently known regarding the members of the Board of Management responsible at that time – as a technical problem that did not basically differ from other everyday technical problems at an automotive company. In the exhaust measurements carried out in-house at Volkswagen in the subsequent months, the test set-ups on which the ICCT study was based were repeated and the unusually high NOx emissions confirmed. CARB was informed of this result, and at the same time the offer was made to recalibrate the type EA 189 diesel engines as part of a service measure that was already planned in the USA. This measure was evaluated and adopted by the Ausschuss für Produktsicherheit (APS – product safety committee), which includes, among others, employees from the technical development, quality assurance, sales, production, logistics, procurement and legal departments, as part of the existing processes within the Volkswagen Group. The APS thus plays a central role in the internal control system at Volkswagen AG. There are currently no reliable findings to confirm that an unlawful software modification was reported by the APS as the cause of the discrepancies to the persons responsible for preparing the 2014 annual and consolidated financial statements. Instead, at the time that the annual and consolidated financial statements were being prepared, this group of people remained under the impression that the discrepancies could be eliminated with comparatively little effort as a part of a field measure. Based on what is currently known, the actual background of the discrepancies only became clear gradually to the members of the Board of Management dealing with the matter. It was only reliably recognized in the summer of 2015 that the cause of the discrepancies was a software modification, to be qualified as a so-called "defeat device" as defined by US environmental law. This culminated in the disclosure of the "defeat device" to the EPA/CARB on September 3, 2015. According to the assessment at that time of the members of the Board of Management dealing with the matter, the scope of the costs expected as a result by the Volkswagen Group (recall costs, retrofitting costs and financial penalties), was basically not dissimilar to that of previous cases in which other vehicle manufacturers were involved, and therefore appeared to be controllable overall with a view to the business activities of the Volkswagen Group. This appraisal by Volkswagen AG was based on the assessment of a law firm brought in in the USA for approval issues, according to which similar cases in the past were resolved amicably with the US authorities. Publication of a "Notice of Violation" by the EPA on September 18, 2015, which came as a surprise to the company, on the facts and possible financial consequences, then presented the situation in a completely different light.