The Bertelsmann SE & Co. KGaA Consolidated Financial Statements as of December 31, 2016, were prepared in accordance with International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and the related interpretations (IFRIC) of the IFRS Interpretations Committee (IFRS IC) that are applicable in the European Union (EU-IFRS). The supplementary requirements set out in section 315a of the German Commercial Code (HGB) were met as well. The Consolidated Financial Statements are prepared in euros. Unless otherwise stated, all amounts are given in millions of euros (€ million). For the sake of clarity, certain items in the consolidated income statement, the consolidated statement of comprehensive income and the consolidated balance sheet are combined. These items are disclosed and explained in greater detail in the notes.

Bertelsmann SE & Co. KGaA is a partnership limited by shares with its registered office in Gütersloh, Germany. The address of the company’s registered headquarters is Carl-Bertelsmann-Strasse 270, 33311 Gütersloh.

Bertelsmann is a media, services and education company that operates in about 50 countries worldwide. The geographic core markets are Western Europe – in particular, Germany, France and the United Kingdom – and the United States. In addition, Bertelsmann is strengthening its involvement in growth markets such as China, India and Brazil. The Bertelsmann divisions are RTL Group (television), Penguin Random House (books), Gruner + Jahr (magazines), BMG (music), Arvato (services), Bertelsmann Printing Group (printing), Bertelsmann Education Group (education) and Bertelsmann Investments (funds). Further information on the main activities of Bertelsmann SE & Co. KGaA and its subsidiaries is presented in detail in the Combined Management Report.

Impact of New Financial Reporting Standards

With the exception of the amendments to IAS 1, the firsttime application of new financial reporting standards and interpretations had no material impact on the Bertelsmann Group. The amendments to IAS 1 are intended to clarify the disclosure requirements. They relate to materiality, line-item aggregation, subtotals, structure of the notes, significant accounting policies and separate disclosure of the other comprehensive income of associates and joint ventures. Application of this amended standard resulted in changes to the structure and presentation of the notes.

Impact of Issued Financial Reporting Standards that Are Not Yet Effective

The Bertelsmann Group has not opted for early adoption of any additional standards, interpretations or amendments that have been issued by the IASB or the IFRS IC but are not yet mandatory. Financial reporting standards that are not yet effective that will have a material impact on Bertelsmann are IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.

The IASB issued the final version of IFRS 9 Financial Instruments in July 2014. The new version contains revised regulations for the classification and measurement of financial assets, new requirements for impairment of financial instruments and new requirements for hedge accounting. In 2016, an analysis was conducted to determine the extent to which the Bertelsmann Group is impacted by the new regulations of IFRS 9. In particular, the new regulations on classification of debt instruments require analysis of certain business models in the Group. As a result of the review of business models, financial assets previously measured at amortized cost could in the future be measured at fair value through other comprehensive income, at fair value through profit or loss or continue to be measured at amortized cost. In the future, all equity instruments are to be measured at fair value through profit or loss or at fair value through other comprehensive income. If changes in carrying amounts are recognized in other comprehensive income, they are no longer to be reclassified to profit or loss when these instruments are sold. Possible effects can be seen in sharp fluctuations in carrying amounts and fluctuations in the income statement and/or the statement of other comprehensive income. In the Bertelsmann Group, the new requirements for impairment of financial assets primarily concern the impairment of trade receivables. The new IFRS 9 regulations require that expected credit losses are also taken into consideration in the future for the measurement of the impairment. At this time, the effects of first-time application of IFRS 9 on the measurement of financial assets and the measurement of impairment of financial instruments cannot be conclusively assessed by the Bertelsmann Group. No material impacts are anticipated for the Consolidated Financial Statements from the new regulations for hedge accounting. For the Bertelsmann Group, IFRS 9 will be applied for the first time in the financial year 2018. Application of IFRS 9 must be generally retrospective, but various exceptions are granted, particularly in the area of hedge accounting.

IFRS 15 includes new comprehensive regulations for the recognition of revenue that are independent of a specific industry or transaction and replaces the current regulations in IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenues – Barter Transactions Involving Advertising Services. The new standard replaces the current risk and reward approach with a contract-based five-step model. In addition to substantially more extensive application guidance for the accounting treatment of revenue from contracts with customers, there are more detailed disclosure requirements. Upon endorsement, application of the standard is mandatory for financial years beginning on or after January 1, 2018, even though the endorsement is still outstanding for the clarifications to IFRS 15 issued in April 2016. Initial application must be generally retrospective, but various practical expedients are allowed. Bertelsmann has opted to apply the modified retrospective approach for its initial application of IFRS 15, according to which IFRS 15 will be applied prospectively on a Group-wide basis from January 1, 2018, recognizing the cumulative effect of first-time application in retained earnings. As part of the implementation of IFRS 15, Bertelsmann initiated a Group-wide project tailored to the individual needs of the respective divisions. According to the current status of the project, initial application of IFRS 15 is expected to have no material effects overall for the Bertelsmann Group regarding timing and measurement of revenue recognition. The effects of the implementation of IFRS 15 for licenses at RTL and BMG are currently being analyzed, while no material effects to timing and measurement of revenue recognition are expected overall at Arvato, due to the service character of its operations, and also at the Bertelsmann Printing Group. Anticipated returns at Penguin Random House and Gruner + Jahr are no longer to be offset against receivables but disclosed as return liabilities. Reviews are currently ongoing to assess whether the implementation of IFRS 15 is expected to have any effects on the Bertelsmann Education Group. In addition, analyses are currently ongoing to determine how the more specific definitions of “principal” and “agent” in terms of the control principle could influence the assessment of individual business models within the Bertelsmann Group. Effects could occur from the application of IFRS 9 regarding measurement of contract assets; in this context, IFRS 9 requires the application of the expected loss model instead of the previously applied incurred loss approach. As a result of expanded disclosure requirements for the balance sheet, income statement and the notes, corresponding adaptations are being prepared for the reporting system, the chart of accounts and disclosures schedules. Furthermore, through variance analyses conducted in the revenue-related processes of each of the divisions, the potential need for further adaptations is being assessed; this will be the basis for ensuring fulfillment of the process-related requirements of IFRS 15.

IFRS 16, issued in January 2016, sets out principles for recognition, measurement, presentation and disclosure requirements for leases. IFRS 16 replaces the current standards and interpretations of 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 changes mainly affect lessee accounting and generally require lessees to recognize contractual rights and obligations on the lessee’s balance sheet. The standard replaces the straight-line recognition of operating lease expense for those leases applying IAS 17 with the recognition of depreciation expenses for the right-of-use asset and interest expenses on the lease liability (included within the financial result). In addition, IFRS 16 includes more extensive disclosures in the notes for lessees. Compared to the current accounting rules under IAS 17, the IFRS 16 regulations for lessors are mostly unchanged. The standard is to be applied for the first time from 2019. The standard has not yet been endorsed by the European Union. IFRS 16 will be introduced in the Bertelsmann Group as part of a Group-wide transformation project. Under this project, the Bertelsmann Group’s material leases in which Bertelsmann is the lessee were identified. The material leases are mainly for the rental of property, buildings and technical broadcasting facilities. The analysis of material leases has not been completed. Under IFRS 16, the rental of technical broadcasting facilities classified as a service contract will not be in the scope of IFRS 16 in the future. The effects on the Consolidated Financial Statements will be quantified as part of the advanced analysis. Furthermore, the effects on the accounting processes are being analyzed in order to ensure consistent application of accounting policies for all leases. In particular, the accounting processes are also affected in regard to the treatment of intercompany leases and their consolidation and the treatment within segment reporting. In addition, the Bertelsmann Group is currently considering the introduction of IT-based solutions for the future treatment of leases in the Consolidated Financial Statements. No decision has been made within the Bertelsmann Group concerning the election to exercise the accounting options for short-term leases with a lease term of up to one year and for leases for low-value assets.

The Bertelsmann Group has not opted for early application of the standards of IFRS 9, IFRS 15 and IFRS 16.