36. Financial risk management and financial instruments

1. Hedging guidelines and financial risk management principles

The principles and responsibilities for managing and controlling the risks that could arise from financial instruments are defined by the Board of Management and monitored by the Supervisory Board. General rules apply to the Group-wide risk policy; these are oriented on the statutory requirements and the “Minimum Requirements for Risk Management by Credit Institutions”.

Operational risk management and the control of risks from financial instruments is the responsibility of Group Treasury and Investor Relations. The Group Board of Management Committee for Risk Management is regularly informed about current financial risks. In addition, the Group Board of Management and the Supervisory Board are regularly updated on the current risk situation. The Everllence (formerly: MAN Energy Solutions), Porsche AG, Porsche Holding Salzburg and TRATON GROUP subgroups and the Financial Services Division are in part included in Group Treasury’s operational risk management and control activities with regard to risks relating to financial instruments and also have their own risk management structures.

For more information, see the section on financial risks in the Report on Risks and Opportunities of the group management report.

2. Credit and default risk

The credit and default risk arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the claims under carrying amounts receivable from them and the irrevocable credit commitments. The maximum potential credit and default risk is reduced by collateral held and other credit enhancements. Collateral is held predominantly for financial assets in the “at amortized cost” category. It relates primarily to collateral for financial services receivables and trade receivables. Collateral comprises vehicles and assets transferred as security, as well as guarantees and real property liens. Cash collateral is also used in hedging transactions.

For level 3 and level 4 financial assets with objective indications of impairment as of the reporting date, the collateral provided led to a reduction in risk by €2.2 billion (previous year: €1.8 billion). Collateral of €34 million (previous year: €55 million) has been accepted for assets measured at fair value through profit or loss.

Significant cash and capital investments, as well as derivatives, are entered into with national and international banks. Credit and default risk is limited by a limit system based primarily on the equity base of the counterparties concerned and on credit assessments by international rating agencies. Financial guarantees issued also give rise to credit and default risk. The maximum default risk is determined by the guarantee amount. The corresponding amounts are presented in the Liquidity risk section.

There were no material concentrations of risk at individual counterparties or counterparty groups in the fiscal year due to the global allocation of the Group’s business activities and the resulting diversification. Any existing concentration of risk is assessed and monitored both at the level of individual counterparties or counterparty groups and with regard to the countries in which these are based, in each case using the share of all credit and default risk exposures accounted for by the risk exposure concerned. This analysis includes the review of the items held in treasury funds and money market funds but excludes the items of Chinese companies in which Volkswagen holds an interest of 50% or less.

The share of credit and default risk exposures attributable to Germany amounted to 20.9% at the end of 2025. Other than those, there were no material concentrations of credit and default risk exposures in individual countries.

Loss allowance

The Volkswagen Group consistently uses the expected credit loss model of IFRS 9 for all financial assets and other risk exposures.

The expected credit loss model under IFRS 9 takes in both loss allowances for financial assets for which there are no objective indications of impairment and loss allowances for financial assets that are already impaired. For the calculation of impairment losses, IFRS 9 distinguishes between the general approach and the simplified approach.

Under the general approach, financial assets are allocated to one of three stages, plus an additional stage for financial assets that are already impaired when acquired (stage 4). Stage 1 comprises financial assets that are recognized for the first time or for which the probability of default has not increased significantly. The expected credit losses for the next twelve months are calculated at this stage. Stage 2 comprises financial assets with a significantly increased probability of default, while financial assets with objective indications of default are allocated to stage 3. The lifetime expected credit losses are calculated at these stages. Stage 4 financial assets, which are already impaired when acquired, are subsequently measured by recognizing a loss allowance on the basis of the accumulated lifetime expected losses. Financial assets classified as impaired on acquisition remain in this category until they are derecognized.

The Volkswagen Group applies the simplified approach to trade receivables and contract assets in accordance with IFRS 15. The same applies to receivables under operating or finance leases accounted for under IFRS 16. Under the simplified approach, the expected losses are consistently determined for the entire life of the asset.

The tables below show the reconciliation of the loss allowance for various financial assets and financial guarantees and credit commitments:

The loss allowance on assets measured at fair value in Stage 1 increased by €0.4 million in fiscal year 2025 (previous year: decrease of €1 million) and those in Stage 2 rose by €1 million (previous year: increase of €1 million), resulting in a closing balance of €10 million (previous year: €11 million). Of this amount, €9 million is attributable to Stage 1 (previous year: €9 million) and €1 million to Stage 2 (previous year: €2 million).

The amount contractually outstanding for financial assets that have been derecognized in the current fiscal year and are still subject to enforcement proceedings is €377 million (previous year: €238 million).

Modifications

There were contract modifications to financial assets in the reporting period that did not lead to the derecognition of the asset. These were primarily the result of changes in credit ratings and relate to financial assets for which loss allowances were measured in the amount of the expected lifetime credit losses. For trade and lease receivables, the treatment is simplified by considering the credit rating-based modifications where the receivables are more than 30 days past due. Before the modification, amortized cost amount to €505 million (previous year: €285 million). In the reporting period, contract modifications resulted in net income (−)/net expenses (+) of €−0.4 million (previous year: €0.4 million).

As of the reporting date, the gross carrying amounts of financial assets that have been modified since initial recognition and were simultaneously reclassified from stage 2 or 3 to stage 1 in the reporting period amounted to €44 million (previous year: €27 million). As a result, the measurement of the loss allowance for these financial assets was changed from lifetime expected credit losses to 12-month expected credit losses.

Maximum credit risk

The table below shows the maximum credit risk to which the Volkswagen Group was exposed as of the reporting date, broken down by class to which the impairment model is applied:

Rating categories

The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scoring systems for the high-volume business and rating systems for corporate customers as well as receivables from dealer financing. Receivables rated as good are contained in risk class 1. Receivables from customers whose credit rating is not good but have not yet defaulted are contained in risk class 2. Risk class 3 comprises all defaulted receivables.

The table below presents the gross carrying amounts of financial assets by rating category:

Furthermore, the default risk exposure for financial guarantees and credit commitments is presented below:

Collateral that was accepted for financial assets in the current fiscal year was recognized in the balance sheet in the amount of €262 million (previous year: €257 million). This mainly relates to vehicles.

3. Liquidity risk

The solvency of the Volkswagen Group is managed on the basis of rolling liquidity planning. Liquidity is secured by a liquidity reserve, confirmed credit lines and the issuance of securities on the international money and capital markets. The volume of confirmed bilateral and syndicated credit lines stood at €30.6 billion as of December 31, 2025 (previous year: €32.4 billion), of which €0.1 billion (previous year: €2.1 billion) was drawn down.

Local cash funds in certain countries (e.g. China, Brazil, Argentina, South Africa and India) are available to the Group for cross-border transactions only in compliance with applicable capital controls and restrictions on foreign exchange movements. There are no significant restrictions over and above these. The liquidity risk in Argentina continues to be high. In fiscal year 2025, the Argentinian peso depreciated by 60% against the euro. It cannot be ruled out that the currency will depreciate further in fiscal year 2026.

Under the existing reverse factoring program, Volkswagen agrees an extension of payment terms with participating suppliers. If the program were to be terminated, the original payment terms would come into force again, and liabilities would have to be settled sooner as a result. The resulting effects on liquidity do not represent a liquidity risk, since the liabilities subject to reverse factoring arrangements are not a material part of total liabilities. Moreover, Volkswagen has enough financial instruments to meet short-term liquidity requirements on the credit, money, or capital markets. The reverse factoring program is intended by Volkswagen to provide long-term support to suppliers and stabilize the supply chain; there are no plans, therefore, to terminate the program in the near future.

The following overview shows the contractual undiscounted cash flows from financial instruments:

The cash outflows on other financial liabilities include outflows on liabilities for tax allocations amounting to €82 million (previous year: €18 million).

Derivatives comprise both cash flows from derivative financial instruments with negative fair values and cash flows from derivatives with positive fair values for which a gross settlement has been agreed. Derivatives entered into through offsetting transactions are also accounted for as cash outflows. The cash outflows from derivatives for which a gross settlement has been agreed are matched in part by cash inflows. These cash inflows are not reported in the maturity analysis. If these cash inflows were also recognized, the cash outflows presented would be substantially lower. This also particularly applies if hedges have been closed with offsetting transactions.

The cash outflows from obligations from loan commitments and irrevocable credit commitments are presented in the section entitled “Other financial obligations”, classified by contractual maturities.

As of December 31, 2025, the maximum potential liability under financial guarantees amounted to €459 million (previous year: €787 million). Financial guarantees are assumed to be due immediately in all cases.

4. Market risk

4.1 Hedging policy and financial derivatives

During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price, equity price and fund price risk. Corporate policy is to limit such risk by means of hedging. Generally, all necessary hedging transactions are executed or coordinated centrally; exceptions include, among others, the Everllence (formerly: MAN Energy Solutions), Porsche AG, Porsche Holding Salzburg and TRATON GROUP subgroups and the Financial Services Division, as well as some regions such as South America and China.

Disclosures on gains and losses from fair value hedges

Fair value hedges involve hedging against the risk of changes in the carrying amount of balance sheet items. As of the reporting date, both hedging instruments and hedged items are measured at fair value in relation to the hedged risk, and the resulting opposite changes in value are recognized in the corresponding income statement item.

The following table shows the gains and losses from fair value hedges by risk type:

Disclosures on gains and losses from cash flow hedges

Cash flow hedges are used to hedge against risks of fluctuations in future cash flows. These cash flows may arise from a recognized asset or liability, or from a highly probable forecast transaction. The following table shows the gains and losses from cash flow hedges by risk type:

The table presents effects taken to equity, reduced by deferred taxes.

The gain or loss from changes in the fair value of hedging instruments used in hedge accounting corresponds to the basis for determining hedge ineffectiveness. The ineffective portion of a cash flow hedge is the income or expense resulting from changes in the fair value of the hedging instrument that exceed the changes in the fair value of the hedged item. This hedge ineffectiveness is attributable to differences in the parameters for the hedging instrument and the hedged item. Such income and expenses are recognized in other operating income/expenses or in the other financial result.

The Volkswagen Group uses two different methods to present market risk from non-derivative and derivative financial instruments in accordance with IFRS 7. For quantitative risk measurement, interest rate and foreign currency risk in Volkswagen Group Mobility is measured using a value-at-risk (VaR) model on the basis of a historical simulation, while market risk in the other Group companies is determined using a sensitivity analysis. The VaR calculation indicates the size of the maximum potential loss on the portfolio as a whole within a time horizon of 365 days, measured at a confidence level of 99.9%. To provide the basis for this calculation, all cash flows from non-derivative and derivative financial instruments are aggregated into an interest rate gap analysis. The historical market data used in calculating VaR covers a period of up to ten years. In the previous year, risk was determined on the basis of a confidence level of 99% and a time horizon of 60 calendar days. The sensitivity analysis calculates the effect on equity and profit or loss by modifying risk variables within the respective market risks.

Disclosures on hedging instruments in hedge accounting

The Volkswagen Group regularly enters into hedging instruments to hedge against changes in the carrying amount of balance sheet items. The summary below shows the notional amounts, fair values and base variables for determining the ineffectiveness of hedging instruments entered into to hedge against the risk of changes in carrying amounts in fair value hedges:

In addition, hedges are used to hedge against risks of fluctuations in future cash flows. The table below shows the notional amounts, fair values and base variables for determining the ineffectiveness of hedging instruments designated in cash flow hedges:

The fair value change used to determine ineffectiveness corresponds to the fair value change of the designated component.

Disclosures on hedged items in hedge accounting

In addition to disclosures on hedging instruments, disclosures are also required on the hedged items, broken down by risk category and type of designation for hedge accounting. Below follows a list of hedged items designated in fair value hedges, separately from those designated in cash flow hedges:

Changes in the reserve

When accounting for cash flow hedges, the designated effective portions of a hedge are recognized in OCI I directly in equity. All changes beyond this in the fair value of the designated component are recognized as ineffectiveness in profit or loss.

The tables below show a reconciliation to the reserve: