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Annual Report on the Tenth Financial Year

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					Annual Report on the Tenth Financial Year




                      2003
Volkswagen Financial Services AG at a glance

                                                                        2003             2002           2001             2000
                                                                   thousands        thousands      thousands        thousands

    New contracts                                                         1,432           1,374           1,289           1,153
       Retail financing                                                        658           625              590           568
       Leasing                                                                290           287              265           267
       Insurance agency services / Service contracts 1                        484           462              434           318

    Current contracts                                                     4,006           3,813           3,690          3,210
       Retail financing                                                    1,698           1,579           1,529          1,475
       Leasing                                                              813             781             735            699
       Insurance agency services / Service contracts 1                    1,495           1,453           1,426          1,036

    Number of direct banking customers                                        579           522              459           381


                                                                  31.12. 2003       31.12. 2002    31.12. 2001      31.12. 2000
                                                                    € million         € million      € million        € million

    Balance sheet total                                                  32,557          29,357          26,839         24,315

    Receivables from
       Retail financing                                                   13,666          12,449          11,068         10,032
       Wholesale financing                                                 4,893           4,862           4,492          4,046
       Leasing transactions                                              10,112           9,095           8,632          7,954

    Leased assets                                                         1,635           1,086              969           806

    Liabilities to customers for deposits
    in direct banking                                                     6,744           5,613           4,546          3,411

    Equity                                                                2,632           2,671           2,755          2,715

    Pre-tax result                                                          565             501               401          385
    Taxes on income and earnings                                          – 236           – 142             – 137           96 2
    Net income                                                              329             359               264          481


                                                                               %             %                 %             %

    Cost Income Ratio 3                                                        57            55               55            53


                                                                      Number            Number       Number            Number

    Employees                                                             5,055           4,426             4,119        3,616
       In Germany                                                         3,389           3,042           2,804          2,525
       Abroad                                                             1,666           1,384           1,315          1,091


                                                                  Standard & Poor’s                Moody’s Investors Service
                                                                  short-        long-   outlook    short-      long-   outlook
                                                                  term          term               term        term

    Rating 2003 4
       Volkswagen Bank GmbH                                       A –1          A       negative   P–1         A2      stable
       Volkswagen Financial Services AG                           A –1          A       negative   P–1         A2      negative

1   Reported for the first time in 2001
2   Includes tax credits and positive effects from deferred tax liabilities
3   General administration expenses divided by surplus from lending and leasing transactions after provisions
    for risks and commission surplus
4   The rating of Volkswagen Financial Services AG and Volkswagen Bank GmbH (as a subsidiary of Volkswagen Financial
    Services AG) corresponds to the rating of Volkswagen AG (as the 100 % owner of Volkswagen Financial Services AG).
    The rating agencies regard the companies as captive finance companies and therefore as an integral business entity.
    Volkswagen Bank GmbH received a “stable” outlook rating from Moody’s.
Volkswagen Financial Services AG worldwide




Financial Services joins Automotive
• Sales promotion for Volkswagen Group products
• Support for our distribution partners
• Strengthening customer allegiance to the Group brands

Product sectors
• Finance
• Leasing
• Insurance
• Direct banking
• Fleet management
• Corporate finance

Volkswagen Financial Services AG is directly responsible
for the financial services business of the Volkswagen Group
in Europe and Asia Pacific.
Locations
Affiliates of Volkswagen
Financial Services AG
(Austria and Switzerland only
insurance agency services)

Germany
Australia
Austria
Belgium
China
Czech Republic
France
Great Britain
Ireland
Italy
Japan
Poland
Portugal
Singapore
Slovakia
Spain
Switzerland
Taiwan
Thailand
The Netherlands
Turkey
New locations

Russia
Sweden

Companies with which
service agreements exist

Argentina
Brazil
Canada
Mexico
USA


As at: 31.12. 2003
Successes in 2003


• Volkswagen Financial Services AG expanding
  in Sweden, Russia and the Netherlands

• First licence granted in China

• Volkswagen Financial Services AG’s new
  organisational structure proves its worth

• Use of capital market programmes
  on the increase

• Direct bank set for further growth
Volkswagen Financial Services AG | Annual Report 2003 | Contents




    4 Supervisory Board

    5 Report of the Supervisory Board

    6 Board of Management

    7 Foreword



The Group at a glance
10 The market centers and the regions
      10 Market Center Private Customers
      12 Market Center Corporate Customers
      14 Market Center Fleet Customers
      16 Market Center Asia Pacific
      18 Region Central
      20 Region North
      22 Region South
      24 Region East

26 The most important national companies

28 The capital market activities of Volkswagen Financial Services AG

30 Regulatory requirements for companies of the financial holding group
      and equity capital resources




2
                                                    Volkswagen Financial Services AG | Annual Report 2003 | Contents




Economic development and the Management Report of the Group
34 Economic development
    34 World economy
    34 Automobile business

35 Management Report of the Volkswagen Financial Services AG Group
    35 Key objectives
    35 Structure of Volkswagen Financial Services AG
    36 Changes in participations
    37 Refinancing and hedging strategy
    38 Business trends
    39 Income statement
    39 Lending business
    39 Deposit business and borrowings
    39 Equity
    39 Insurance agency services
    42 Risk report
    49 Personnel report
    51 Outlook



The consolidated annual financial statements
54 Income statement

55 Balance sheet

56 Statement of equity changes

57 Cash flow statement

58 Notes
    58 General comments
    58 Annual financial statements in accordance with International
        Financial Reporting Standards
    58 Accounting and valuation methods
    65 Principal accounting and valuation methods which differ from the
        German accounting regulations in accordance with HGB

66 Notes to the income statement

70 Notes to the balance sheet

87 Notes to the financial instruments

90 Segment reporting

93 Other notes

96 Principal companies

98 Independent auditors’ report to the Group



100 Index

102 Glossary




                                                                                                                  3
Volkswagen Financial Services AG | Annual Report 2003 | Supervisory Board




Dr. jur. Jens Neumann                                              Sabine Ferken
Chairman                                                           Executive of the Joint Works Council
Member of the Board of Management                                  of Volkswagen Bank GmbH
of Volkswagen AG
Group Strategy, Treasury, Legal Matters,                           Dr. rer. pol. h. c. Peter Hartz
Organisation                                                       Member of the Board of Management
                                                                   of Volkswagen AG
Prof. Dr. Rutbert Reisch                                           Human Resources
Deputy Chairman
Chief Financial Officer /General Manager                            Hans Dieter Pötsch (as of 1. 4. 2003)
of Volkswagen AG                                                   Member of the Board of Management
                                                                   of Volkswagen AG
Bernd Sudholt                                                      Controlling and Accounting
Deputy Chairman
Deputy Chairman of the Joint and Group Works                       Wolfgang Ritmeier
Council of Volkswagen AG                                           Head of Corporate Human Resources
                                                                   of Volkswagen Bank GmbH
Peter Abele (until 31. 3. 2003)
Member of the Board of Management of AUDI AG                       Alfred Rodewald
Finance and Organisation                                           2nd Deputy Chairman of the Joint Works Council
                                                                   of Volkswagen Bank GmbH
Dr. rer. pol. h. c. Bruno Adelt (until 31.12. 2003)
Member of the Board of Management                                  Rupert Stadler (as of 1.1. 2004)
of Volkswagen AG                                                   Member of the Board of Management of AUDI AG
                                                                   Finance and Organisation
Giesela Burmester
Chairwoman of the Wolfsburg Works Council                          Detlef Wittig
of Volkswagen Bank GmbH                                            Member of Volkswagen Brand Management
Deputy Chairwoman of the Joint Works Council                       Sales and Marketing
of Volkswagen Bank GmbH


Waldemar Drosdziok
Chairman of the Joint Works Council
of Volkswagen Bank GmbH




4
                                      Volkswagen Financial Services AG | Annual Report 2003 | Report of the Supervisory Board




During the period under report, the Board of Man-           financial statements, including the accounting and
agement informed the Supervisory Board regularly            the Management Reports, and issued an unquali-
about the situation of the Company, its business            fied Auditors’ Report in each case. The Supervisory
development and corporate policy. Based on the              Board approves the results of these audits.
written and verbal reports received from the Board
of Management, the Supervisory Board monitored              The Supervisory Board’s review of the consolidated
Company management continuously and was thus                financial statements in accordance with IFRS , the
able to perform the functions entrusted to it by law        annual financial statements in accordance with HGB
and by the Statutes without any restrictions. Busi-         and the Management Reports did not give rise to
ness subject to approval by the Supervisory Board           any reservations. The auditors were present at the
was examined and discussed with the Board of Man-           Supervisory Board meeting when this item of the
agement before resolutions were passed.                     agenda was dealt with and they reported on the
                                                            main results of their audit.
The Supervisory Board is made up of twelve mem-
bers. There were changes in membership compared             Pursuant to the existing control and profit transfer
to the previous year, which are shown on page 4.            agreement, the net profit achieved by Volkswagen
We wish to thank those members who have left the            Financial Services AG in the financial year 2003 will
Supervisory Board for their valuable contribution to        be transferred to Volkswagen AG .
the work of this body.
                                                            The Supervisory Board approved the annual financial
PwC Deutsche Revision Aktiengesellschaft Wirt-              statements prepared by the Board of Management
schaftsprüfungsgesellschaft, Hanover, was commis-           and the consolidated annual financial statements of
sioned to audit the consolidated annual financial            Volkswagen Financial Services AG . The annual finan-
statements in accordance with International Financial       cial statements are thereby adopted. The Super-
Reporting Standards (IFRS ) and the annual financial         visory Board authorises the proposed appropriation
statements of Volkswagen Financial Services AG in           of net profit.
accordance with the German Commercial Code
(HGB ) for the year ended 31 December 2003, includ-         The Supervisory Board wishes to acknowledge and
ing the accounting and the Management Reports.              express its sincere appreciation to the members
                                                            of the Board of Management, the managerial staff
The Supervisory Board had at its disposal the con-          and all the employees of Volkswagen Financial Ser-
solidated annual financial statements in accordance          vices AG and its affiliated companies for their work.
with IFRS and the annual financial statements of             Through their great dedication they have all con-
Volkswagen Financial Services AG in accordance              tributed to the ongoing development of Volkswagen
with HGB for the year ended 31 December 2003 and            Financial Services AG .
the Management Reports. The auditors, PwC Deut-
sche Revision Aktiengesellschaft Wirtschaftsprü-
fungsgesellschaft, Hanover, have audited these              Brunswick, 5 March 2004




                                                            Dr. jur. Jens Neumann
                                                            Chairman of the Supervisory Board




                                                                                                                           5
Volkswagen Financial Services AG | Annual Report 2003 |   Board of Management




The Board of Management of Volkswagen Financial                     Norbert M. Massfeller
Services AG (l. to r.): Dr. Hans-Peter Lützenkirchen,               Chairman of the Board of Management
Klaus-Dieter Schürmann, Norbert M. Massfeller,
                                                                    Market Center Asia Pacific,
Burkhard Breiing, Uwe R. Hoffmann, Rolf Grönig
                                                                    Support Center Company Control


                                                                    Burkhard Breiing (as of 1.10. 2003)


                                                                    Rolf Grönig (as of 1.1. 2004)
                                                                    Support Center Personnel


                                                                    Uwe R. Hoffmann
                                                                    Market Center Corporate Customers


                                                                    Dr. Hans-Peter Lützenkirchen
                                                                    Market Center Fleet Customers,
                                                                    Sales Care Center Fleet Customers /
                                                                    Corporate Customers,
                                                                    Service Center Information Systems


                                                                    Klaus-Dieter Schürmann
                                                                    Market Center Private Customers,
                                                                    Sales Care Center Private Customers /
                                                                    Corporate Customers




6
                                                        Volkswagen Financial Services AG | Annual Report 2003 | Foreword




My colleagues on the Board of Management and             On the other hand, we also face growing demands
I are pleased to report that Volkswagen Financial        from fleet customers in terms of comprehensive
Services AG can once again publish a record result.      mobility from a single source. For us it therefore
This result underlines the success of our business       makes sense to actively direct this process and to
policy – especially in the light of recent develop-      position suitable solutions in the market through
ments in the economy and the current situation in        Europcar Bank and Europcar Fleet Services GmbH.
the financial services industry.
                                                         Internationally we pushed ahead successfully with
As in the past, our core business remains our top        our expansion strategy in both Europe and the Asia
priority. We are therefore continuing to focus on our    Pacific region, thereby further increasing the share
activities in the manufacturer-tied financial services    of total added value accounted for by foreign mar-
business, thus enabling us to benefit even more           kets. The imminent market entry in China is an im-
than in the past from the automotive value chain.This    portant component in our strategy of providing
we achieve, for example, with products and product       appropriate financial services to effectively support
combinations that meet the requirement for greater       and secure the high growth potential for the Volks-
emphasis on the costs of running a vehicle, which        wagen Group in that country. Furthermore, we aim
is also becoming increasingly apparent amongst           to open up other foreign markets in the future in
private customers.                                       close cooperation with the Volkswagen Group.


Our non-manufacturer-related activities represent a      For the forthcoming year, we and our highly moti-
highly promising and lucrative addition to our core      vated and dedicated staff have set ourselves the
business. At the same time, there have been some         target of becoming still better. We would be pleased
fundamental changes in our operating environment.        if you would place your trust in us.
This concerns, on the one hand, the change in the
dealer structure, which is dictated by economic and
regulatory necessity (Block Exemption Regulation).




                                                         Norbert M. Massfeller
                                                         Chairman of the Board of Management




                                                                                                                      7
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




From financial services provider to mobility service
provider – in spite of complex challenges posed by
the global economy, we have developed our business
continuously and are now able to fulfil our cus-
tomers’ requirements even more efficiently. The new
organisational structure has utilised synergies and
contributed to sustainable growth.




8
                     Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The Group at a glance

10 The market centers and the regions
    10 Market Center Private Customers
    12 Market Center Corporate Customers
    14 Market Center Fleet Customers
    16 Market Center Asia Pacific
    18 Region Central
    20 Region North
    22 Region South
    24 Region East

26 The most important national companies

28 The capital market activities of Volkswagen Financial Services AG

30 Regulatory requirements for companies of the financial holding group
    and equity capital resources




                                                                                                9
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The market centers and the regions                                  New vehicle penetration further increased
                                                                    On the basis of this new structure, new vehicle pen-
                                                                    etration in the retail customer sector was increased
                                                                    to almost 60 % – in spite of the continuing weak state
                                                                    of the economy during the past year. Vehicle sales
                                                                    were also boosted by the financing and leasing
                                                                    campaigns with extremely attractive customer terms,
                                                                    which were implemented jointly with the Group
                                                                    brands. Used vehicle business was faced with ag-
                                                                    gressive competition, and was sustainably secured
                                                                    by means of special financing and leasing concepts.


                                                                    The adopted strategy of offering customers all-round,
                                                                    care-free mobility through new and enhanced prod-
Market Center Private Customers                                     ucts – in addition to a market-oriented terms policy –
                                                                    was a decisive factor contributing to the continu-
In 2003, as part of its new organisational structure,               ously good business development. In this context,
Volkswagen Financial Services AG amalgamated the                    particular mention should be made of the unem-
Market Centers Retail Customers and Direct Bank                     ployment insurance, which provides customers with
to form the Market Center Private Customers. All                    security for the first two years of a financing or leas-
activities and processes oriented towards private                   ing contract in the event of redundancy through
customers are now integrated in this market center,                 no fault of their own. As surveys confirm, in many
which thus covers all distribution channels for vehi-               cases this product relieved customers of worries
cle-related financial services business and direct                   and removed their reluctance to purchase a vehicle.
banking products. This new structure is even better                 Thus it not only complements the protection against
suited to meeting the wishes of customers, who are                  unforeseen risks, but also underlines in exemplary
now able to obtain all-round advice tailored to their               fashion the aim pursued by Volkswagen Bank GmbH,
particular situation at a Customer Care Center.                     namely to offer the customer innovative solutions
                                                                    which ensure carefree mobility.
Parallel to this, a joint Sales Care Center Private
Customers /Corporate Customers was established in                   New product developments confirm
order to efficiently pool the dealer-related process-                innovation leadership
es. On the one hand, it ensures a high level of advi-               With the introduction of RestschuldversicherungPlus
sory expertise, while on the other hand strengthen-                 in October 2003, unemployment insurance was in-
ing the constructive collaboration between the                      tegrated into the Residual Debt Insurance – further
dealer organisations of the Volkswagen Group and                    proof of the innovation leadership of Volkswagen
the companies of Volkswagen Financial Services AG                   Bank GmbH. The new product covers not only ill-
on a sustainable basis. Monetary incentives, sales-                 ness and death but also the risk of unemployment,
person workplace systems, training and field sales                   and thus offers protection targeted exactly at current
support additionally enable improved mutual coop-                   customer requirements.
eration and professional service for dealers.
                                                                    The basis of the comprehensive customer protec-
                                                                    tion for every aspect of auto-mobility continues to be
                                                                    PrämieLight Plus, with which the product offensive
                                                                    was launched back in 2002 – this product became
                                                                    even more firmly established in the market during
                                                                    the past year.




10
                                                Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




As the first vehicle insurance with a follow-on guar-        Europcar Bank successfully established
antee for new vehicles, PrämieLight Plus in combi-          Europcar Bank, a branch of Volkswagen Bank GmbH,
nation with an AutoCredit or lease covers the cost of       continuously expanded its marketing activities, which
unexpected repairs. It thus strengthens the relation-       began in 2002, by deploying its own field sales force
ship between customers and dealerships in the               as from the beginning of 2003.
medium and long term, and forms the basis for in-
tegral customer relationship management – support-          In the first stage, the new field sales force concen-
ed and supplemented by outbound activities of               trated on gaining financial services potential in the
Volkswagen Bank GmbH in the case of expiring                leisure sector and utilised the cooperative agree-
AutoCredit contracts.                                       ments concluded with the manufacturers, Hobby and
                                                            Fendt Caravan. In the second stage, the efforts to
The LifeTime Guarantee for the Volkswagen, Seat             win new customers are focusing on multi-brand
     ˇ
und Skoda brands, and CarLife Plus for Audi, have           dealers and independent used vehicle dealers as a
also contributed to the expansion of guarantee in-          result of the amendment to the Block Exemption Reg-
surance business, and thereby to the opening up of          ulation (BER ). Europcar Bank represents the success-
new fields of business. The guarantee module, which          ful creation of a platform in Germany for opening
is offered as an independent product in its own right,      up further areas of growth outside the Volkswagen
gives the customer additional protection beyond             Group with the objective of extending these activi-
the statutory warranty. It is available not only to         ties to important European volume markets.
customers who purchase a new car, but also to any-
one who is already the owner of a Group brand ve-
hicle. In this way the service area of the dealerships
has been increasingly integrated into the sales activ-
ities and customer support of Volkswagen Bank
GmbH: it can now enable dealers to increase work-
shop business while at the same time channelling
business to Sales. Efficient intermeshing of the two
areas thus allows the market potential to be utilised
even more successfully.


At the beginning of 2003, Volkswagen Bank direct
introduced Young Giro@home, a cost-free current
account for trainees and students which offers at-
tractive interest on credit balances, an EC /Maestro
card and a VISA card. With this product, customers’
borrowing requirements beyond the vehicle itself
can be met conveniently. Another milestone in the
systematic optimisation of the Internet products of-
fered is the introduction of the online account state-
ment. Furthermore, a convenient health insurance
has been added to the range of insurance products in
cooperation with the DKV – it offers persons insured
with Deutsche BKK the opportunity to increase their
health care cover with benefits tailored to their par-
ticular requirements.




                                                                                                                          11
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The A8 from Audi.




Market Center Corporate Customers                                   Expansion of the customer groups
                                                                    Also in the light of the new BER , the Market Center
The new organisational structure in the Market                      Corporate Customers has begun acquiring new
Center Corporate Customers was implemented with                     clienteles. Since the middle of the year, dealers of
effect from 1.1. 2003. Since then, the Market Center                the Hobby and Fendt brands have been able to
has concentrated primarily on sales tasks. Adminis-                 utilise the entire range of financing and insurance
trative departments are integrated in downstream                    products in the caravan segment. The intention is
organisational units, whereby the separation of                     that other authorised dealers in this segment will
“Market” and “Market Support” stipulated by the                     also be able to profit from the products of the Market
minimum requirements for the credit business of                     Center Corporate Customers in the future.
credit institutions (MRC ) was simultaneously imple-
mented at an early stage.                                           The excellent response to the products tailor-made
                                                                    for the automobile business is a clear indication
Reorganisation of the dealer distribution network                   that these products are an interesting alternative for
The new Block Exemption Regulation (BER ) has led                   dealers of other automobile brands.
to significant changes in the German and European
dealer network. Apart from restructuring the dealer                 In addition to extending the business to include
networks, the manufacturers and importers have                      non-Group brands, the dealers of the Volkswagen
also made necessary adjustments: All dealer agree-                  Group brands, Bentley and Lamborghini, have re-
ments were renewed with effect from 1.10. 2003,                     ceived offers for customised financing products
and distribution systems and processes have been                    designed to support the market launch of the new
adapted to the new rules. The Market Center Corpo-                  models,“Continental GT” and “Gallardo”.
rate Customers has revised its business procedures
in line with the new requirements.                                  New products
                                                                    In the field of used vehicle guarantee insurance, the
                                                                    product bearing the same name has been optimised
                                                                    in response to growing competition. The new prod-
                                                                    ucts PerfectCar and PerfectCar-PRO have been avail-
                                                                    able to Group dealers throughout Germany since
                                                                    1.1. 2004 – apart from a new, transparent premiums
                                                                    structure, insurance cover for other manufacturers’
                                                                    vehicles up to twelve years old is available on the
                                                                    same terms as for Group vehicles.




12
                                              Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Technical innovations
In the financial year ended, the new SAP -based DP
system was successfully implemented for all dealers.


User-friendly online banking software, to which an
important functionality has been added, enables
dealers to access their accounts: the dealer can now
apply for used vehicle financing conveniently via
the Internet, thus eliminating the previously neces-
sary paperwork. This means less administrative
work for both the dealer and the Market Center Cor-
porate Customers, thus speeding up the business
process significantly.


As part of the new organisational structure, the
“EURO CASH ” business sector was integrated into
the Market Center Corporate Customers.“EURO
CASH ” is a product package for handling card pay-
ments (EC and credit cards), which Group dealers
and also other corporate customers can make use of.
Apart from the hardware and software, the package
contains the entire payments handling and assump-
tion of risk in the case of card payments. The EURO-
CASH terminals were replaced everywhere during
the financial year ended – in favour of a new soft-
ware, which is already fulfilling the high demands of
the stricter security regulations due to come into
force as from 2005.




                                                                                                                        13
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The Cordoba from Seat.




Market Center Fleet Customers                                       The following trends in the fleet customer business
                                                                    are recognisable:
The Market Center Fleet Customers achieved further                  • The number of companies with internationally
growth in 2003, as in previous years. In view of the                  operating fleets is continuing to increase.
opposite trend in the industry as a whole – the mar-                • At present only around a quarter of all major Eu-
ket research company Dataforce reports a fall of 7.8 %                ropean companies have a European fleet solution.
in the number of vehicle registrations in the fleet                    A growing number of multinationals are seeking
sector in Germany compared to the previous year –                     to achieve a uniform international fleet strategy. In
this is an impressive achievement.                                    order to utilise the available cost saving potential
                                                                      optimally, companies are tending to concentrate
Market trends in fleet customer business                               on cooperation with a small number of vehicle
Cost efficiency is a major criterion for a company’s                   manufacturers and service providers – and in some
competitiveness, and due to the continuing weak-                      cases only a single fleet management company.
ness of the economy, it is increasingly becoming the                • A uniform company car policy promotes the con-
focus of attention. In order to realise cost-cutting                  centration of customer purchasing power. The
potential, more and more companies are putting                        proportion of European, and even worldwide, ten-
the management of their fleets into professional                       ders is on the increase.
hands, either entirely or in part.                                  • The enormous competition and still rising cus-
                                                                      tomer expectations will result in a considerable
                                                                      reduction in the number of fleet management
                                                                      suppliers in the medium term. Experts expect that
                                                                      around five to seven suppliers will eventually
                                                                      be left.
                                                                    • Many customers wish to minimise their economic
                                                                      risks associated with all aspects of vehicle use.
                                                                      Apart from vehicle-related risks, financial risks, such
                                                                      as the risk involved in the residual value, are in-
                                                                      creasingly being shifted to the service provider.




14
                                              Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Opportunities and risks                                   European expansion of
The trends described entail corresponding opportu-        Europcar Fleet Services GmbH
nities and risks for the leasing and fleet manage-         The presence in the major European markets is
ment companies. Nationally orientated companies           vital for the success of the fleet customer business
will find it increasingly difficult to withstand the        in view of the growing importance of multinational
pressure of competition to win the custom of inter-       fleet solutions. Europcar Fleet Services GmbH is
nationally operating companies. The Market Center         therefore systematically pursuing a strategy of ex-
Fleet Customers of Volkswagen Financial Services          panding its international activities. It operates in
AG , however, meets all the requirements for further      Great Britain, Italy, Spain, Portugal, Turkey and the
expanding its market share in both Germany and            Czech Republic, while market coverage in another 14
Europe thanks to its European business strategy. At       European countries is achieved via national partners.
the same time there is the risk of losing customers       It is planned to start up operations in France in 2004.
if the growing customer expectations are not met.
Furthermore, professional credit and residual risk        Customer requirements have a decisive influence
management as well as effective used vehicle mar-         on the strategic policies of the Market Center Fleet
keting are essential components in comprehensive          Customers. The experience of the last few years
and sustainable support for fleet customers.               clearly shows that implementing pan-European fleet
                                                          solutions is only successful if country-specific con-
Strategy                                                  ditions are respected and policy is adapted accord-
Two-brand strategy                                        ingly. By concluding national agreements, Europcar
The Market Center Fleet Customers is continuing to        Fleet Services GmbH takes due account of the tax
                          ,
use a “two-brand strategy” with Volkswagen Leasing        situation and regulatory framework of the particular
GmbH and Europcar Fleet Services GmbH, in order           country. The company thus offers integral European
to meet the diverse demands of different customer         fleet management concepts and, at the same time,
groups.                                                   provides the customer with individual support at the
                                                          local level.
Volkswagen Leasing GmbH is able, above all, to fulfil
all the requirements of the predominantly nationally      Standardisation and harmonisation
orientated fleet customers of the Volkswagen Group         In order to continue economic implementation of
in close collaboration with the dealer organisations.     the growth strategy and further expand the compa-
Mobility solutions for internationally operating fleet     ny’s international service business, it is necessary
customers and multi-brand fleets are provided by           to constantly harmonise products and processes –
Europcar Fleet Services GmbH – this strategy makes        from back-office functions through to the components
it possible to continue the above-average growth in       of the individual services provided. Nevertheless,
fleet business witnessed in previous years.                the necessary flexibility, taking account of different
                                                          national characteristics, must be maintained.




                                                                                                                        15
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




                ˇ
The Superb from Skoda.




Market Center Asia Pacific                                           The representative office is, however, only an inter-
                                                                    mediate stage, because its scope of action is limited.
The economy cooled down at the beginning of 2003                    Following approval by the Board of Managers and
as a result of the SARS crisis. Subsequently, how-                  Supervisory Board of Volkswagen Financial Services
ever, it picked up again, as was apparent particularly              AG , it is planned to convert the representative office
from developments in the People’s Republic of China.                into a management company at the beginning of
                                                                    2004.
The ASEAN states are also benefiting as a result of
the increased demand from China. Most govern-                       The locally operating company in Singapore, a joint
ments within ASEAN are currently stepping up struc-                 venture of Group Exklusiv Pte. Ltd. (49 %) and Volks-
tural change towards high-technology products.                      wagen Financial Services AG (51%), has recorded
Furthermore, they have signed bilateral free trade                  significant growth since it was established in 2001,
agreements with China, Japan and India.                             and not only in terms of new vehicle business.


In 2003, the region recorded impressive growth in                   Since then the focus has also been on expanding the
spite of the difficult economic situation, thus demon-               non-Group brand and used vehicle business in ad-
strating its growing importance for the Volkswagen                                               ˇ
                                                                    dition to the Volkswagen and Skoda brands. To boost
Group as a whole.                                                   the positive trend, the AutoCredit product, which is
                                                                    unique in this form in Singapore, was launched at
Singapore                                                           the beginning of August 2003.
In order to secure its market position and competi-
tiveness in the long term, Volkswagen Financial Ser-                The creation of a Debt Issuance Programme worth
vices AG decided in December 2000 to steer its op-                  over SGD 500 million takes due account of the com-
erations in the Asian and Pacific markets centrally                  pany’s growth and ensures appropriate implemen-
from Singapore. Establishing the representative                     tation of the refinancing strategy of Volkswagen
office there in 2001 enabled a more rapid response                   Financial Services AG .
to the challenges of the market and thereby a lasting
contribution to the company’s success in the region.                Australia
                                                                    The Australian vehicle market was characterised by
The principal task of this headquarters is control of               intense competition in 2003, and this was particu-
the region from within the region itself. This includes             larly apparent from the large number of promotions
not only the companies in Australia, Singapore,                     and incentives.
Taiwan and Thailand, but also those in China and
Japan.                                                              The Australian subsidiary, VOLKSWAGEN FINAN-
                                                                    CIAL SERVICES AUSTRALIA LTD. , has been operat-
                                                                    ing since March 2002 and has shown strong growth
                                                                    ever since. This was attributable primarily to the



16
                                               Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




diversified marketing activities of the Volkswagen          loyalty. Following the credit card, Audi Ambassador
Group brands and also the non-Group brand busi-            Card, the Volkswagen Card was also added to the
ness in both the retail and wholesale sectors. This        product range in 2003. Around 50 % of the vehicles
comprises a complete range of financing, leasing,           sold are financed, which has contributed to a sig-
insurance and wholesale financing products.                 nificant increase in Volkswagen Group sales.


In order to also underpin the rapidly growing busi-        Taiwan
ness with appropriate refinancing, a Debt Issuance          In spite of SARS , Taiwan’s economy continues to
Programme worth AUD 1 billion was created for              grow, with foreign trade, in particular, increasing
short- and medium-term refinancing.                         strongly.


China                                                      Volkswagen Financial Services Taiwan LTD. , a wholly-
The SARS crisis only braked growth in China in the         owned subsidiary of Volkswagen Financial Services
short term. With its gross domestic product grow-          AG , began operating in the first quarter of 2003. The
ing at an average of 8 %, China is one of the world’s      successful launch is reflected in the penetration rate
booming economies.                                         of 40 %. Systematic involvement in foreign market
                                                           business is also one of the success factors.
The automobile market, with disproportionately high
sales growth rates and with additional investments,        Thailand
forms the basis of Volkswagen Financial Services           Thailand’s economy boasts one of the highest growth
AG ’s involvement in China – alongside the fact that       rates in the Asia Pacific region alongside China. The
the Volkswagen Group is market leader.                     reasons for this include a very low inflation rate,
                                                           foreign trade surpluses and a stable government. On
The Chinese financial supervisory authority pub-            this basis, Thailand expects to achieve disproportion-
lished the rules for vehicle financing in October 2003,     ately high growth again in 2004.
thereby creating the basis for submission of a licence
application. On 24.12. 2003 the authority granted          In April 2000, a joint venture agreement between Thai
Volkswagen Financial Services AG a licence to es-          Commercial Auto Ltd., Yontrakit and Volkswagen
tablish and set up an operating automobile financing        Financial Services AG was signed, establishing an-
company. At present the company is working inten-          other Group company in the region. VOLKSWAGEN
sively on acquiring the second licence – permission        LEASING THAILAND LTD. thus holds primary re-
to begin operational business – with the aim of being      sponsibility for the financing of Volkswagen vehicles.
able to start operations in the summer of 2004.            The financial services market is extremely competi-
                                                           tive, since all the major players are active in what is
Japan                                                      a strategically important market. This is particularly
The economic indicators were at a relatively stable        reflected in the activities of the automobile manu-
level in 2003. The high growth momentum in the             facturers, almost all of whom have production plants
neighbouring Asian countries gives reason to be-           in Thailand. They are thus able to enter the market
lieve that this positive economic development will         within the ASEAN states taking account of the pre-
continue.                                                  vailing customs duties and taxes.


Since 1997 VOLKSWAGEN FINANCE JAPAN KK has
been active in the field of vehicle financing. It owes
its strong market position to a good product range
for both end customers and dealers, but also to the
fact that in 2002, for example, Volkswagen as market
leader in the import sector with some 60,000 vehi-
cles and Audi with around 12,000 sold in the luxury
segment are very well positioned. The extensive
product range in the retail and wholesale sectors
contributes to a high degree of customer and dealer



                                                                                                                         17
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The Golf V from Volkswagen.




Region Central                                                      The central task of Volkswagen Bank GmbH, with
                                                                    its retail financing, finance leasing and wholesale
The Region Central is made up of Germany, Switzer-                  financing products, is to promote the sale of prod-
land and Luxembourg. No branch or subsidiary has                    ucts of the Volkswagen Group and its brands. By
yet been established in Luxembourg.                                 continuously optimising its service function, Volks-
                                                                    wagen Bank GmbH fulfils this requirement and was
Germany                                                             able to expand its business volume in spite of the
Volkswagen Financial Services AG comprises the                      difficult economic situation.
companies, Volkswagen Bank GmbH, Volkswagen
Leasing GmbH, Volkswagen Leasing Anlagen GmbH,                      The continuously enhanced range of customer-
Europcar Fleet Services GmbH and Volim Volks-                       friendly products was further established in the
wagen Immobilien Vermietgesellschaft für VW-/ Audi-                 market by means of optimised services and attrac-
Händlerbetriebe mbH, all based in Brunswick, and                    tive offers. At the same time, intensive preparations
Volkswagen-Versicherungsdienst GmbH, whose                          were made for expanding the Bank’s international
head office is in Wolfsburg. The company is directly                 branch network utilising the “European Passport”.
responsible for the financial services business of the
Volkswagen Group in Europe and Asia Pacific. It is                   Volkswagen Leasing GmbH – also a wholly-owned
represented in 23 countries by subsidiaries, joint                  subsidiary of Volkswagen Financial Services AG –
ventures or representative offices.                                  was established in 1966 for the purpose of leasing
                                                                    vehicles, equipment and installations of all kinds.
The traditional financial services have been supple-
mented over the years with customised services;                     The business of Volkswagen Leasing GmbH is
furthermore, both car-owning and non-car-owning                     characterised principally by its membership of the
customers are offered a portfolio of insurance and                  Volkswagen Group. The emphasis is on sales pro-
direct banking activities from a single source.                     motion for Group vehicles by strengthening long-
                                                                    standing business relationships and winning new
Volkswagen Bank GmbH – a wholly-owned subsidiary                    customers, but equally it focuses on enlarging the
of Volkswagen Financial Services AG – was estab-                    product range so as to create auto-mobility. As in
lished in 1949 under the name Volkswagen-Finanzie-                  previous years, the positive development of busi-
rungsgesellschaft mbH and developed over the                        ness is based to a considerable extent on commercial
course of the years together with Volkswagen Bank                   customers – in particular, small and medium-sized
direct – one of Germany’s largest direct banks – into               businesses, trades companies and also large corpo-
one of the most important automotive finance banks                   rations. Business with public authorities and munici-
in the German market.                                               pal bodies is becoming increasingly important, and
                                                                    this has resulted in exceptionally large growth of the
                                                                    portfolio in this segment.




18
                                              Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Volkswagen Leasing Anlagen GmbH began operat-             During the past financial year, Volim Volkswagen
ing in January 1995. As a property-owning company,        Immobilien Vermietgesellschaft für VW-/Audi-
its exclusive function is to refinance the leasing         Händlerbetriebe mbH continued to invest in its core
business of its sole shareholder, Volkswagen Leasing      business, namely the construction and leasing of
GmbH. Since the parent company has alternative            commercial properties. In Brunswick, for example,
means of refinancing, which it also uses intensively,      the company has a total of nine administrative
no further investments are being made in the assets       buildings, built or renovated in previous years, all of
of this company.                                          which are leased to Volkswagen Bank GmbH, thus
                                                          providing a stable earnings situation. As an addi-
In the second quarter of 1999, Europcar Fleet Services    tional line of business, it supports business start-ups
GmbH – originally established under the name              by providing venture capital within the framework
ifm international fleet management GmbH – started          of the project co-initiated by Volkswagen AG . How-
business.                                                 ever, the development of the venture capital projects
                                                          does not have any appreciable influence on the
The wholly-owned subsidiary of Volkswagen Finan-          company’s result.
cial Services AG concentrated on the specific task of
producing customer-oriented mobility concepts for         Switzerland
fleet operators and harmonising processes and              Vehicle insurance, and also private property and
products at the European level. This policy enabled       liability insurance, is arranged via Volkswagen-Ver-
the company to create the basis for considerable          sicherungsdienst AG, based in Wallisellen. The com-
expansion of its international service business, at       pany was established in 1953 as a wholly-owned
the same time as greatly enlarging its leasing busi-      subsidiary of Volkwagen-Versicherungsdienst GmbH.
ness. The adopted strategy of acting as a provider of
comprehensive multi-brand fleet services on a pan-
European level was thus successfully reinforced.


Volkswagen-Versicherungsdienst GmbH, which first
began operating in 1948, became a wholly-owned
subsidiary of Volkswagen Financial Services GmbH
in the first half of 1999.


The field of business of Volkswagen-Versicherungs-
dienst GmbH comprises acting as an agent for all
types of insurance, in particular vehicle insurance,
and assisting customers with submitting insurance
claims within the catchment area of Germany. The
business volume is directly dependent on the market
situation of the Volkswagen Group products.


On 1.1. 2004, the private customer business of the
Volkswagen subsidiary, VW Versicherungsvermitt-
lungs-GmbH, was taken over and transferred to
Volkswagen Insurance Brokers GmbH, a subsidiary
of Volkswagen-Versicherungsdienst GmbH. In this
way new business segments are being opened up,
and it is planned to expand these in the current
financial year.




                                                                                                                        19
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Region North                                                        Also in 2002, the wholesale financing business
                                                                    began with the new vehicle stock financing product.
At the beginning of 2003, international responsibility              At the end of 2003, more than 50 distributors from
within Europe was divided up into regions and as-                                                   ˇ
                                                                    the Volkswagen, Audi, Seat and Skoda organisation
signed to the regional teams as a result of the re-                 were already direct customers of Volkswagen Bank
alignment. The Region North comprises Belgium, the                  GmbH.
Netherlands, Great Britain, Ireland, Finland, Scandi-
navia and the Baltic States.                                        With the launch of the used vehicle and demonstra-
                                                                    tion vehicle financing product at new year, the Bel-
The existing branches of Volkswagen Bank GmbH                       gian branch is pursuing the systematic expansion of
in Belgium and Ireland, together with Volkswagen                    this business sector, while simultaneously optimis-
Financial Services (UK) Ltd. in Great Britain, provided             ing the processes.
a solid foundation for the Region North to build on.
The Region North management team regards its                        Great Britain
task as being to successively utilise the existing po-              Volkswagen Financial Services (UK) Ltd. began oper-
tential in the individual countries of the region. To               ating in 1994. As a wholly-owned subsidiary of Volks-
achieve this, a two-tier approach is adopted.                       wagen Financial Services AG , the company has the
                                                                    task of actively supporting the dealerships of the
At the established branches and companies in Bel-                   Volkswagen Group brands in Great Britain, which
gium, Ireland and Great Britain, the current product                number over 750. The dealers have at their disposal a
range is being expanded from an economic view-                      tailor-made range of brand-specific financial services
point by the addition of new fields of business. Ac-                 products for their private and corporate customers.
quisitions, joint ventures with local financial services
companies and the establishment of new companies                    In dialogue with the dealers, the company has chosen
and branches are serving to fill in the “empty spaces”               to adopt an advisory approach which is supported
on the Volkswagen Financial Services AG map.                        by an appropriate CRM -based process. This process
                                                                    was developed in-house and is known as “Working
Belgium                                                             With Our Customers”.
The Belgian branch of Volkswagen Bank GmbH
opened its doors in October 1997.                                   400 full-time members of staff are employed at the
                                                                    Volkswagen Financial Services (UK) Ltd. location
In spite of the continuing decline in the automobile                in Milton Keynes, handling more than 180,000 con-
market in 2003 and an above-average drop in sales                   tracts at the present time. The company’s core busi-
of the Group brands, the branch of Volkswagen                       ness includes Hire Purchase, Contract Hire (opera-
Bank GmbH was able to increase its new business                     tional leasing) and the market leader, New Solutions,
by approx. 20 % compared to the previous year. This                 which is the British equivalent to AutoCredit. The
growth was achieved in 2002 without any increase                    traditional vehicle financing business is comple-
in personnel resources thanks to the launch of Credit               mented by a range of additional products such as
Online – the Internet link between distributors and                 Payment Protection (residual debt insurance), GAP
Volkswagen Bank GmbH in the Belgian market.                         Insurance (residual value insurance) and Fixed Cost
                                                                    Maintenance packages (maintenance and wear and
                                                                    tear). Vehicle and dealer insurance is arranged via
                                                                    Volkswagen Insurance Service (Great Britain) Ltd. in
                                                                    Milton Keynes – a joint venture between Volkswagen-
                                                                    Versicherungsdienst GmbH (51%) and VOLKSWAGEN
                                                                    Group United Kingdom Ltd. (49 %).




20
                                                 Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




With this product portfolio, the company is strategi-        In Sweden 100 % of the shares in Svenska Volks-
cally positioned in the market as an automotive              wagen Finans AB (publ), which were held by Volks-
supplier of financial services and, within the last ten       wagen AG ’s Swedish importer, Svenska Volkswagen
years, it has financed in excess of half a million new        AB , were transferred to Volkswagen Financial Ser-
and used vehicles. Net receivables amount to more            vices AG .
than GBP 1.5 billion per year.
                                                             In the Netherlands there is now a joint venture with
Ireland                                                      Pon Holdings B.V., as Volkswagen Financial Services
The Dublin-based Irish branch of Volkswagen Bank             AG has acquired a 60 % interest in Pon Financial Ser-
GmbH was established on 1. 3. 2001.                          vices B.V. The joint venture will in future be called
                                                             Volkswagen Pon Financial Services B.V. In the first
The business field adopted in the branch when busi-           quarter of 2004 the Dutch branch of Volkswagen
ness started up, namely vehicle financing for German          Bank GmbH started business.
members of staff of the Volkswagen Group, is now
firmly established and has recorded increasing profit          Both the Swedish and the Dutch market are becom-
growth rates. A variable call credit facility for Ger-       ing increasingly important for automotive financial
man private customers is planned for the beginning           services providers. The joint venture and the acqui-
of 2004. The facility can be drawn on exclusively via        sition of shares in Svenska Volkswagen Finans AB
the Internet.                                                (publ) mean that Volkswagen Financial Services AG
                                                             is able to participate in both these growth markets
In 2003, preliminary investigations were initiated           in its core business of vehicle financing and vehicle
to analyse the potential of Volkswagen Bank GmbH             leasing. The long experience of Pon Holdings B.V.
in the difficult Irish market – where there is a long-        in the Netherlands and that of Svenska Volkswagen
established independent importer – in terms of the           AB in Sweden will still be available.
automotive financial services business. These inves-
tigations are almost complete, and are being evalu-          The declared aim is to close the remaining gaps in
ated in 2004 in close cooperation with the Export            the product portfolio – e. g. in the private customer
Division of Volkswagen AG .                                  sector – and to open up new fields of business mak-
                                                             ing use of the “European Passport” of Volkswagen
The Netherlands                                              Bank GmbH.
Vehicle and dealer insurance is arranged by VOLKS-
WAGEN-VERZEKERINGS-SERVICE N. V. – a long-                   Taking into account the successfully established core
standing joint venture between Pon Holdings B.V.             business of Svenska Volkswagen Finans AB (publ),
(60 %) and Volkswagen-Versicherungsdienst GmbH               a market survey was carried out and the resulting
(40 %). In 2004, Volkswagen-Versicherungsdienst              feasibility studies regarding potential additional
GmbH will acquire a further 20 % of the shares.              fields of business in the Swedish market were suc-
                                                             cessfully completed. The measures formulated on
Geographical expansion in 2003                               this basis are being evaluated in 2004 and are to be
Within the framework of the geographical expansion           implemented where appropriate.
policy of Volkswagen Financial Services AG , the
Region North has made a substantial contribution:
activities have been initiated in Sweden and the
Netherlands, both with effect from 1.7. 2003.




                                                                                                                           21
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Region South                                                        Italy
                                                                    The Italian automobile market witnessed strong
The Region South comprises Southern Europe, the                     competition in 2003. In the race to win market share,
Mediterranean area, the Middle East and Africa (ex-                 manufacturers and their captive finance companies
cluding South Africa). During the first financial year                offered all kinds of discounts and special financing
with the new organisation of the Volkswagen Finan-                  campaigns with a 0 % interest rate, in some cases
cial Services AG Group, the Region South achieved                   even for new models. At the same time, major non-
results which exceeded the targets set. The region is               captives approached the dealer networks in an at-
represented by affiliated companies and branches                     tempt to benefit from the consequences of the new
in France, Italy, Portugal, Spain and Turkey. With re-              block exemption regulation, to develop new mar-
gard to expansion, the challenge to be met in terms                 kets and sales channels and to gain additional cus-
of the branch development strategy consists in es-                  tomers in the attractive consumer finance segment.
tablishing branches of Volkswagen Bank in Paris
and Athens, which will commence business during                     Thanks to the target group orientated product port-
the course of 2004.                                                 folio for private customers, dealers and fleet cus-
                                                                    tomers, the branches of Volkswagen Bank GmbH and
France                                                              Volkwagen Leasing GmbH succeeded in expanding
In comparison with 2002, the French passenger car                   their business and increasing market penetration in
market declined by 6.3 % to 2 million new registra-                 the fields of financing and insurance contracts in
tions. The market for light commercial vehicles de-                 spite of the difficult market conditions. Apart from
creased by 5.7 %. At the same time, the number of                   customised products and services, new projects
new registrations of vehicles from Groupe Volks-                    such as Solution, EuropCredit, a new credit card
wagen France S.A. fell by 12 % – primarily as a result              product and a GAP insurance (residual value insur-
of the difficulties experienced by the Volkswagen                    ance) were launched in 2003 or will be appearing
brand with sales of the Polo.                                       in 2004. On this basis, the outlook for the future is
                                                                    positive.
During the same period, new financing contracts
concluded by VOLKSWAGEN FINANCE S. A. in-                           Since the fourth quarter of 2000, Europcar Interrent
creased by 12.8 %. Thanks to increased dealer loyalty               Lease S.r.l., based in Rome, has also been a member
and an improvement in service quality, VOLKS-                       of the Volkswagen Financial Services AG Group.
WAGEN FINANCE S. A. is now in fourth place                          As a subsidiary of Europcar Fleet Services GmbH
amongst vehicle finance houses in France in terms                    in Germany, it is responsible for the fleet business
of “image” in relation to the distribution network.                 in Italy.


The level of wholesale financing receivables re-                     Portugal
mained stable even though the dealers experienced                   In 2003, Portugal was suffering a recession which
a drop in sales and their financial situation deterio-               led to a shrinking automobile market for the third
rated.                                                              year in succession. With the exception of Audi, the
                                                                    Volkswagen Group lost market share.
In 2003 VOLKSWAGEN FINANCE S. A. invested
substantially in the preparation of the two major                   Volkswagen Bank GmbH cooperates in Portugal with
projects that are to be launched in 2004: a branch of               Interbanco S.A., which is responsible for both the
Volkswagen Bank GmbH and an optical archive. By                     end customer business and the wholesale financing
the end of the year, the front-end system “SISTER ”                 business for the Volkswagen Group brands. At the
had been installed at 80 % of dealers, and two thirds               end of 2003 the Seat brand was successfully inte-
of contracts were processed via this system.                        grated into the cooperation. Volkswagen Bank GmbH
                                                                    participates in the business generated with the
                                                                    brands, and this has remained stable in spite of the
                                                                    difficult economic situation.




22
                                                Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Initial indicators point to an economic upturn dur-         Turkey
ing the course of 2004. Apart from the expectation          After two difficult years, the Turkish economy
of a modest recovery in the automobile market,              showed signs of recovery in 2003. The main factors
new Volkswagen Group models should lead to the              were a stable government with a clear, reform-
regaining of market share.                                  oriented policy directed towards gaining EU mem-
                                                            bership, and renewed confidence in the country’s
Since the fourth quarter of 2000 and the second quar-       economic prospects. The automobile market also
ter of 2002 respectively, Lisbon-based EUROPCAR             returned to recent volumes, more than doubling in
FLEET SERVICES – COMÈRCIO E ALUGUER DE BENS                 comparison with 2002. The prospects for the next few
DE EQUIPAMENTO E CONSUMO, S. A. , formerly                  years are positive, and therefore Turkey can be re-
Unirent Comèrcio e Aluguer de Bens de Equipamento           garded as one of the few growth markets in Europe.
e Consumo, S.A. – has also belonged to the Volks-
wagen Financial Services AG Group. As a subsidiary          As a result of this outlook, Volkswagen Financial
of Europcar Fleet Services GmbH in Germany, it op-          Services AG increased its involvement. It was decid-
erates the fleet business in Portugal.                       ed that, in addition to the existing joint venture,
                                                                                     . . .
                                                                          ˘ ¸
                                                            VOLKSWAGEN DO G US TÜKET I C I F I NANSMANI
Spain                                                       A. S. , a new company, VDF Otomotiv Servis ve
                                                               ¸
In 2003 Spain again enjoyed favourable economic             Ticaret A. S. , should be established under the um-
                                                                       ¸
conditions. The automobile market outperformed              brella of VDF Holding A. S. with the same share-
                                                                                     ¸
2002 by around 4 %. At the same time the Group              holding structure. This move was necessary in order
brands lost market share.                                   to penetrate the fleet management and used car
                                                            markets. For this purpose, the new company pur-
In spite of the reduced basis for its principal busi-       chased the assets of DOD , a wholly-owned sub-
ness and extremely aggressive competition on the                              ˘ ¸
                                                            sidiary of the DO G US Group, in January 2003. The
part of the banks, VOLKSWAGEN FINANCE, S. A. ,              company doubled its monthly sales and was able to
with which Volkswagen Bank GmbH has a service               further strengthen its position as the leading brand
contract, performed well. The business of the Volks-        in Turkey’s used vehicle sector. The fleet business
wagen Bank GmbH branch dealing with all the finan-           was established on a new basis by “Europcar Fleet
cial needs of the Volkswagen Group dealers im-                       ,
                                                            Services” which is owned by Volkswagen Financial
proved. The launch of additional bank products and          Services AG . It is thus the first and only fleet man-
services is in preparation.                                 agement company to offer long-term leasing and
                                                            fleet consultancy as well as sale and lease-back. With-
The continuing positive economic development in             in the first year it succeeded in catching up with the
Spain gives reason to expect further growth in the          leading local firms.
automobile market in 2004. Furthermore, the launch
of new volume models of the Volkswagen Group                The good results for 2003 show that the decision to
brands should make it possible to win back market           continue the consumer finance business in Turkey
share, so that positive effects for VOLKSWAGEN              without any interruption during a time of crisis was
                                                                                                                    . .
FINANCE, S. A. are to be expected.                                                       ˘ ¸
                                                            the right one. VOLKSWAGEN DO G US TÜKET I C I
                                                              .
                                                            F I NANSMANI A. S. is the undisputed market leader –
                                                                            ¸
Since the fourth quarter of 2000, Europcar Renting,         with a 70 % market share. Furthermore, the strategy,
S.A., based in Madrid, has also been a member of the        adopted in 2002, of moving into the multi-brand
Volkswagen Financial Services AG Group. As a sub-           business led to an enlargement of the reachable
sidiary of Europcar Fleet Services GmbH in Germany,         market, thereby also contributing to an increase in
it is responsible for the fleet business in Spain.           market share.




                                                                                                                          23
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Region East                                                         Leadership through development and recognition
                                                                    of business partners’ requirements are at the heart
Regional responsibility for Eastern Europe is cen-                  of the corporate philosophy: A Europe-wide bench-
tralised in Brunswick and encompasses Austria,                      mark was set with the development of the Quick
Poland, Russia, Slovakia and the Czech Republic.                    Check system, which simplifies enquiries by autho-
                                                                    rised service points in the event of customer claims
The enlargement of the European Union is a central                  and enables immediate repairs – a similar milestone
concern and is generating lively discussion about                   was achieved with the Imaging System, the devel-
all the economic, political and social implications.                opment of the paperless office.
But however much opinions may differ on this sub-
ject, one thing is certain: for companies in all sec-               Poland
tors of the economy, EU enlargement brings with it                  Back in 1998 Volkswagen Financial Services AG
far-reaching opportunities and enormous growth                      established VOLKSWAGEN BANK POLSKA S. A. and
potential.                                                          Volkswagen Leasing Polska Sp. z o.o. Volkswagen
                                                                    Bank GmbH and Volkswagen Financial Services AG
Volkswagen Financial Services AG recognised this                    hold direct or indirect interests amounting to 60 %.
trend and wasted no time in establishing national
companies in the candidate countries, Poland, Slo-                  The early efforts in the Polish market have proved
vakia and the Czech Republic as the basis for utilis-               to be a clear competitive advantage throughout the
ing the expected potential and opportunities in those               entire Region East. In its fifth year, the 2003 financial
countries.                                                          year, VOLKSWAGEN BANK POLSKA S. A. achieved
                                                                    the ambitious target of implementing the direct
The network of customers and partners built up and                  banking activities in the same form and scope as
constantly extended over the years thus offers a vital              Volkswagen Bank direct in Germany.
competitive advantage.
                                                                    Positive growth, the rising number of contracts in
Austria                                                             the areas of lending / leasing, non-vehicle-related
On 3.10. 2003, Volkswagen-Versicherungsdienst Ge-                   loans, direct banking and insurance paint an excel-
sellschaft m.b.H. (VVD Austria) celebrated its 50th                 lent picture of the business activities to date. But
anniversary. As the sole agency providing insur-                    that is not all. The public also acknowledged VOLKS-
ance for Volkswagen Group brands, VVD Austria                       WAGEN BANK POLSKA S. A. as a leading financial
has been expanding its predominant position since                   institution in Poland – in 2002 it was presented with
1953. VVD Austria is a wholly-owned subsidiary of                   one of the country’s most prestigious business
Volkswagen-Versicherungsdienst GmbH in Germany                                              ,
                                                                    awards, “Best Bank 2002” by the newspaper, Rzecz-
and its service concept provides advice, offer and                  pospolita. The decisive criteria for this award were
order processing for the customers of the Volkswagen                effectiveness, dynamism and security – analysed on
Group importers, dealers and authorised service                     the basis of 61 banks operating in the Polish market.
points as well as fleet insurance. The services pro-
vided are complemented by the issuing of policies,                  Further growth in the insurance business is expected
contract management and claims inspection in the                    to be secured by the cooperation agreement in the
collision damage insurance sector.                                  field of bank insurance concluded with the insurer,
                                                                    Cardif Polska S.A., in June 2003. VOLKSWAGEN
                                                                    BANK POLSKA S. A. is one of the first institutions in
                                                                    Poland to offer unemployment and GAP insurance.




24
                                               Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Russia                                                     Czech Republic
In spite of an unstable market situation and associ-                                         ˇ
                                                           Since it was established in 1992, SkoFIN s.r.o. has
ated economic risks, the numerous opportunities in         been one of the most important leasing and financing
the Russian market have become more tangible:              companies in the Czech market. As a wholly-owned
first economic reforms, favourable macroeconomic            subsidiary of Volkswagen Financial Services AG , it
indicators and a transition in corporate culture char-     promotes sales of the Group brands with a range of
acterise this development. Increased investment                                                         ˇ
                                                           competitive financial and insurance products. SkoFIN
and growth in the purchasing power of the Russian          s.r.o. offers the Group brand dealers purchase
population clearly illustrate the growth potential of      financing and other interesting products in the field
the Russian automobile market – in the short to            of real estate financing, equipment leasing and
medium term this development will also impact on           “working capital loans”.
the connected captive market.
                                                           The takeover of the third largest competitor in the
Against this background, Volkswagen Group Finanz           fleet management segment, Rentex Financial Ser-
OOO began operating in Moscow in April 2003.               vices a. s., took place in the second half of 2003. The
The company offers leasing and vehicle insurance           basis for this expansion of the portfolio with the
products for international fleet customers, and its         addition of financial services in the operational
launch has been a very promising success.                  leasing, full service leasing and fleet management
                                                           sectors was provided at the end of 2002 when
Slovakia                                                   ˇ
                                                           SkoLEASE s.r.o. began operating. Following the re-
                                 ˇné  ˇ
In October 2000, VOLKSWAGEN Financ sluzby                  naming of Rentex Financial Services a. s., fleet cus-
Slovensko s.r.o. was created by the amalgamation           tomers today also receive attractive all-round sup-
of the two largest providers in the Slovakian leasing      port for their entire fleet via Europcar Fleet Services
         ˇ
market, SkoFIN s.r.o. and SK-Auto Leasing spol.            a. s. The company is securing its lead over the com-
s r.o. Since then, Volkswagen Financial Services AG        petition by creating individual, customised financing
has held a 58 % share in the company, and Porsche          and service concepts and advisory services in the
Bank AG 42 %.                                              fields of bookkeeping, taxes and the choice of fleet
                                                           structure.
The amalgamation was the foundation stone for the
company’s extremely dynamic development and led
to the largest market share in the financial year 2003.


As a financial services provider with core competence
                                         ˇné
in the leasing business, VOLKSWAGEN Financ
sluzby Slovensko s.r.o. offers its customers solutions
   ˇ
for the areas of operational leasing, finance leasing,
equipment leasing and leasing with increased resid-
ual value.




                                                                                                                         25
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The most important                                                  Volkswagen-Versicherungsdienst GmbH,
national companies                                                  Wolfsburg
                                                                    Jörg Wälder
                                                                    Klaus-Dieter Schürmann
                                                                    Heinz Adolf Göbbels (until 26. 2. 2003)
                                                                              .
                                                                    Wolfgang P Kurth (until 26. 2. 2003)


                                                                    Volim Volkswagen Immobilien
                                                                    Vermietgesellschaft für
                                                                    VW-/Audi-Händlerbetriebe mbH,
                                                                    Brunswick
                                                                    Uwe R. Hoffmann
                                                                    Dietrich Paul


as at 31.12. 2003
                                                                    Region North


Region Central                                                      Great Britain

                                                                    Volkswagen Financial Services (UK) Ltd.,
Germany
                                                                    Milton Keynes
Volkswagen Bank GmbH,                                               Bryan Marcus
Brunswick                                                           Geoffrey N. Banks
Norbert M. Massfeller,
Chairman of the Management                                          The Netherlands
Rainer Blank
                                                                    Volkswagen Financial Services N.V.,
Burkhard Breiing (as of 1.10. 2003)
                                                                    Amsterdam
Uwe R. Hoffmann
                                                                    Alexis Oelrich
Dr. Hans-Peter Lützenkirchen
                                                                    Bernd Bode
Klaus-Dieter Schürmann
                                                                    Alwin Kleindienst (as of 1.1. 2004)

Volkswagen Leasing GmbH,
                                                                    Volkswagen Pon Financial Services B.V.,
Brunswick
                                                                    Amersfoort (as of 1. 7. 2003)
Dr. Hans-Peter Lützenkirchen
                                                                    Albert A. M. van den Bergh
Karl Heinz Schmidt
                                                                    Egon H. van Geenhuizen
Dietrich Paul (as of 20.11. 2003)
                                                                          .
                                                                    Dirk F H. Pans (as of 12.12. 2003)

Volkswagen Leasing Anlagen GmbH,
                                                                    Sweden
Brunswick
Dietrich Paul                                                       Svenska Volkswagen Finans AB (publ),
Bernd Bode                                                          Södertälje
                                                                    Peter Lindgren
Europcar Fleet Services GmbH,
Brunswick
Dirk H. Pinkvos                                                     Region South
Martin Soest
                                                                    France

                                                                    VOLKSWAGEN FINANCE S. A.,
                                                                    Villers-Cotterêts
                                                                    Jean Marc Langlois
                                                                    Dr. Ingwer Meinhold



26
                                            Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Italy                                                   VOLKSWAGEN BANK POLSKA S. A.,
                                                        Warsaw
FINGERMA S.r. l.,
                                                        Dr. Grzegorz Tracz
Milan
                                                        Przemysl aw Kowalczyk
                                                                   /


Dr. Vincenzo Condorelli
                                                        Wojciech Pietrasik
Dr. Bernhard Dyckhoff (until 28. 2. 2003)
                                                        Stefan Rasche (as of 1.1. 2004)
                                                        Sigfrido Caprano (until 31.12. 2003)
Europcar Interrent Lease S.r.l.,
Rome
                                                        Slovakia
Salvatore Catania
                                                                        ˇ       ˇ
                                                        VOLKSWAGEN Financ né sluzby
Portugal                                                Slovensko s.r.o.,
                                                        Bratislava
EUROPCAR FLEET SERVICES S. A.,
                                                        Dr. Günther Schönleitner
Lisbon
                                                        Dusan Benovic
                                                          ˇ     ˇ   ˇ
Paulo Moura
Theodor Henniges
                                                        Czech Republic

Spain                                                   ˇ
                                                        Sko FIN s.r.o.,
                                                        Prague
Europcar Renting, S. A.,
                                                        Michael Lüking
Madrid
                                                        Lutz Witkowski
Pedro Salvador (as of 1. 9. 2003)
Angel Remacha (until 31. 8. 2003)

                                                        Market Center Asia Pacific
Turkey
                          . .
                    ˘ ¸
VOLKSWAGEN DO G US TÜKET I C I                          Australia
   .
                ¸
F I NANSMANI A. S .,
                                                        VOLKSWAGEN FINANCIAL SERVICES
Istanbul
                                                        AUSTRALIA LTD.,
Kemal Ören
                                                        Sydney
Jirina Tapsiková (as of 1.10. 2003)
                                                        Chris Malberg
Alwin Kleindienst (until 30. 9. 2003)
                                                        Frank Schirmer (as of 3.7. 2003)


                                                        Japan
Region East
                                                        VOLKSWAGEN FINANCE JAPAN KK,
Austria                                                 Tokyo
                                                        Masayuki Yokose
Volkswagen-Versicherungsdienst
                                                        Marck M. G. Doell
Gesellschaft m.b.H.,
Vienna
                                                        Singapore
Erich Scheithauer
Alexander Brenner                                       VOLKSWAGEN FINANCIAL SERVICES
                                                        SINGAPORE LTD.,
Poland                                                  Singapore
                                                        Oliver Schmitt
Volkswagen Leasing Polska Sp. z o.o.,
                                                        Johnnie Soh
Warsaw
Wojciech Pietrasik
Przemysl aw Kowalczyk (as of 1.12. 2003)
           /




                                                                                                                      27
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




The capital market activities                                       In close collaboration with Group Treasury at Volks-
of Volkswagen Financial Services AG                                 wagen AG , the entire Volkswagen Group achieved a
                                                                    joint presence in the capital market and, at the same
                                                                    time, maintained the legal independence of Volks-
                                                                    wagen Financial Services AG ’s refinancing activities
                                                                    in relation to the Volkswagen Group. Pursuing this
                                                                    strategy, Volkswagen Financial Services AG and its
                                                                    companies employed various instruments in a num-
                                                                    ber of different markets in order to successfully place
                                                                    large-volume transactions.


                                                                    In January, Volkswagen Financial Services AG was
                                                                    the first automobile services company to open up the
                                                                    bond market in 2003 with a successful € 1.5 billion
In 2003 Volkswagen Financial Services AG , with its                 debenture issue with a term of seven years. With this
European subsidiaries and the companies in the                      additional bond, in the form of a benchmark bond,
Asia Pacific region, again utilised the refinancing                   Volkswagen Financial Services AG placed an inter-
possibilities offered by the capital markets.                       esting investment for both institutional and private
                                                                    investors – supplementing the existing large-volume
Challenged by the continued shortage and rise in                    bonds with terms of three, five and a half and ten
the cost of credit lines, on the one hand, and moti-                years.
vated by the strong growth of individual markets,
reaching an exceptional level in some cases, on the                 Last year, Volkswagen Bank GmbH issued two deben-
other hand, Volkswagen Financial Services AG re-                    tures in benchmark size. In June it made its largest
inforced its strategy of developing the refinancing                  issue yet, a bond with a volume of € 600 million and
of its business further in the direction of capital                 a term of four years. In October there followed a bond
market utilisation.                                                 issue worth € 500 million and with a three-year term.
                                                                    These variable coupon bonds are directed primarily
                                                                    at institutional investors, and in particular banks.


Security issues under the European Debt Issuance                    Due to its status as a bank, Volkswagen Bank GmbH
Programme of the Financial Services AG Group                        achieved more favourable refinancing costs than its
in € million
                                                                    parent company, Volkswagen Financial Services AG ,
                                                                    even though the two companies had equal ratings.
10,000                                                              The first issue of subordinated bonds totalling more
                                                                    than € 100 million and € 120 million in participation
8,000
                                                                    rights further strengthened the equity base of Volks-
                                                                    wagen Bank GmbH.

6,000


4,000


2,000


     0
              2000         2001         2002         2003


Outstanding volume at 31.12.




28
                                                   Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Volkswagen Financial Services AG opened up a                   The company in Singapore also issued a first two-
new circle of investors with its issue of so-called            tranche bond with a total value of SGD 75 million
“Samurai bonds” via its financing company Volks-                following the establishment of a local capital market
wagen Financial Services N.V., Amsterdam. This                 programme, thus taking advantage of the opportu-
very successful emission, which has won awards                 nity to gain international bond investors.
from several respected international capital market
agencies, is worth JPY 50 billion and has a term of            Within the framework of its Asset Backed Securities
five years. It is directed exclusively at Japanese ins-         activities, Volkswagen Leasing GmbH securitised
titutional investors – as a company group with an              € 1 billion of its leasing portfolio through VCL No. 6
international presence and growing capital require-            Limited. Furthermore, the scope of the existing re-
ment, opening up such new investor groups is of                volving Asset Backed Security transaction of Volks-
major importance.                                              wagen Financial Services (UK) Ltd. was increased
                                                               by GBP 142 million. With these successful transac-
Following the establishment of the Australian capi-            tions, Volkswagen Financial Services AG achieved
tal market programme, the resources of the capital             attractive funding costs as well as easing the pres-
markets were also opened up for the young Aus-                 sure on the capital ratio.
tralian company VOLKSWAGEN FINANCIAL SER-
VICES AUSTRALIA LTD. In June 2003 a debut bond
was issued in the amount of AUD 125 million. The
rapidly growing company will continue to utilise the
possibilities offered by the Australian capital market
in the future.




Funding within the framework of ABS transactions
of the Volkswagen Financial Services AG Group
in € million


                                    1,048
                                               903




                         750        1,000      1,000

   512           500




   1996          1999    2001       2002       2003



     Volkswagen Leasing GmbH
     Volkswagen Financial Services (UK) Ltd.




                                                                                                                             29
Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




Regulatory requirements                                             The regulatory requirements have become increas-
for companies of the financial holding group                         ingly strict in recent years, with the result that the
and equity capital resources                                        entry barriers for banking business have risen over-
                                                                    all. Essential elements of bank supervision are capi-
                                                                    tal adequacy and the regulations for limiting the
                                                                    risks of large exposures, which apply to both Volks-
                                                                    wagen Bank GmbH and the companies of the financial
                                                                    holding group, Volkswagen Financial Services AG .


                                                                    According to the provisions of Principle I, the bank
                                                                    supervisory authorities assume that there is an
                                                                    appropriate level of capital resources if the ratio
                                                                    between core capital and the weighted risk assets
                                                                    does not fall below 4.0 %, and the ratio between
The banking regulations constitute an important                     liable capital and weighted risk assets does not fall
subsidiary factor for Volkswagen Bank GmbH and                      below 8.0 %. At the same time, the equity ratio cal-
the companies belonging to the financial holding                     culated from the relationship between equity and
group, Volkswagen Financial Services AG , when                      the aggregate risk position must be at least 8.0 %.
taking major business policy decisions, as they do                  The aggregate risk position is calculated as the
for all banks and other market players subject to bank              sum of the weighted risk assets and 12.5 times the
supervision. Compliance with these regulations                      weighting amount of the market risk positions.
is ensured by the organisational unit, Bank Super-
vision and Reporting, which provides active and                     In the financial year 2002, Volkswagen Bank GmbH
professional guidance for the establishment and                     transferred € 92 million to Volkswagen AG via Volks-
acquisition of new companies, the setting up of                     wagen Financial Services AG , and Volkswagen AG in
new branches and the introduction of new products                   turn paid this sum into the capital reserve of Volks-
from the bank regulatory point of view.                             wagen Bank GmbH, again via Volkswagen Financial
                                                                    Services AG in 2003. The scheduled writing back of
                                       ,
With the aid of the “European Passport” Volkswagen                  the goodwill resulting from the takeover of the busi-
Bank GmbH is stepping up Europe-wide expansion                      ness of FINGERMA S. p. A. , amounting to € 78 mil-
of its banking business. Volkswagen Bank GmbH is                    lion, led to a further increase in the core capital of
thus in a position to open up a banking branch in                   Volkswagen Bank GmbH and the Group. As FIN-
any country of the European Union without having                    GERMA S. p. A. has discontinued its lending and
to undergo an elaborate, time-consuming approval                    leasing business, reserves of this company amount-
procedure, as would otherwise be the case. This                     ing to € 120 million were written back during the
creates distinct competitive advantages on the way                  financial year ended and paid to Volkswagen Finan-
to becoming a pan-European bank. At the present                     cial Services AG . This produced a net increase in the
time, Volkswagen Bank GmbH has branches in Bel-                     Group’s core capital of € 50 million. Other effects
gium, Ireland, Italy, Spain and the Netherlands. In                 raised the core capital by an additional € 1 million
the first quarter of 2004, the Dutch branch of Volks-                to € 1,406 million.
wagen Bank GmbH commenced business. Another
branch is to be established in France in the middle                 To strengthen the equity base, Volkswagen Bank
of 2004, and Volkswagen Bank GmbH plans to es-                      GmbH raised € 120 million by the issue of participa-
tablish further branches in Greece and Great Britain,               tion rights, and € 106 million in the form of subordi-
utilising the “European Passport”.                                  nated bonds issued on the capital market. Borrow-
                                                                    ings by VOLKSWAGEN BANK POLSKA S. A. also
                                                                    boosted the equity by € 4 million. The supplemen-
                                                                    tary capital thus increased by € 210 million to € 1,406
                                                                    million. The sum of € 18 million served recognition
                                                                    as third level funding.




30
                                               Volkswagen Financial Services AG | Annual Report 2003 | The Group at a glance




In order to optimise the equity utilisation, Volks-        Even with a rapidly increasing volume of business
wagen Leasing GmbH carried out another Asset               and geographical expansion, Volkswagen Bank
Backed Securities (ABS ) transaction to the value of       GmbH is in a position to secure appropriate capital
€ 1 billion in 2003. A “Middle Office” set up for the       resources for itself and the financial holding group,
purpose guarantees professional handling of com-           Volkswagen Financial Services AG , at short notice
plex ABS transactions. This body is responsible for        and at optimal cost by appropriate raising of sup-
process management, process organisation, han-             plementary capital in the form of participation right
dling, and reporting the ABS transactions of Volks-        liabilities and subordinated liabilities. In addition,
wagen Bank GmbH and Volkswagen Leasing GmbH                measures aimed at optimising equity management
to rating agencies and banks. The purpose of opti-         in the form of ABS transactions are becoming in-
mising equity utilisation is also served by the revolv-    creasingly important. As a result, Volkswagen Bank
ing securitisation of receivables of Volkswagen            GmbH and the companies of the financial holding
Financial Services (UK) Ltd. via a conduit, within the     group, Volkswagen Financial Services AG , have a
framework of an Asset Backed Commercial Paper              sound basis for further expanding their financial
Programme. Volkswagen Financial Services (UK)              services business.
Ltd. has sold balance sheet assets worth a total of
GBP 824 million on a revolving basis.                      At present, the Basel Committee, a bank regulatory
                                                           standardisation body recognised worldwide, is work-
The market risk positions result solely from foreign       ing on the further development of the regulatory
currency items.                                            structure standards. The planned New Basel Capital
                                                           Accord is expected to be far more comprehensive
Under §§ 10 and 10 a KWG (German Banking Act),             and complex than the current rules. Implementation
the following amounts and key figures result in con-        of these rules in national law represents a continu-
nection with the bank regulatory Principle I as at         ation of the trend towards higher entry barriers and
31.12. 2003:                                               rising standards.


                                                           The new supervisory architecture defined by the
                                     2003        2002
                                                           Basel Committee will in future consist of the revised
 Aggregate risk position            30,650     26,475      minimum capital requirements, the regulatory scruti-
 (€ million)                                               ny of capital resources appropriate to the risk profile,
   of which weighted risk assets    30,087     26,225      and extended disclosure regulations. The most im-
   of which market risk positions                          portant changes compared to the current minimum
   × 12.5                              563        250
                                                           capital requirements concern the treatment of credit
 Liable capital (€ million)          2,812      2,551      risk and an explicit equity backing for the opera-
   of which core capital             1,406      1,355      tional risk. In the future, methods based on internal
   of which supplementary capital    1,406      1,196      ratings for equity backing will also be permitted,
 Third level funding (€ million)        18            —    and obtaining regulatory recognition for these will
 Equity (€ million)                  2,830      2,551      place heavy demands on data histories and systems
                                                           at Volkswagen Bank GmbH and the financial hold-
 Core capital ratio (%)                 4.7          5.2
                                                           ing group. Back in 2001, Volkswagen Bank GmbH
 Capital ratio (%)                      9.3          9.7
                                                           initiated a project dealing with the implementation
 Equity ratio (%)                       9.2          9.6   of the statutory requirements and utilisation of the
                                                           opportunities arising from Basel II. It intends to suc-
                                                           cessively obtain regulatory recognition for internal-
The financial holding group’s equity ratio for Prin-        ratings-based methods regarding equity backing for
ciple I was therefore 9.2 % as at 31.12. 2003. The         all the important portfolios. For equity backing of
payment of € 263 million into the capital reserve of       the operational risks, Volkswagen Bank GmbH plans
Volkswagen Financial Services AG , which is planned        to implement the standardised approach for all
for the first half of 2004, from the profit transfer to      principal companies.
Volkswagen AG further strengthens the core capital
and therefore the equity ratio. The equity ratio of
Volkwagen Bank GmbH was 11.6 % as at 31.12. 2003.


                                                                                                                         31
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




               Economic development and the
               Management Report of the Group

               34 Economic development
                    34 World economy
                    34 Automobile business

               35 Management Report of the Volkswagen Financial Services AG Group
                    35 Key objectives
                    35 Structure of Volkswagen Financial Services AG
                    36 Changes in participations
                    37 Refinancing and hedging strategy
                    38 Business trends
                    39 Income statement
                    39 Lending business
                    39 Deposit business and borrowings
                    39 Equity
                    39 Insurance agency services
                    42 Risk report
                    49 Personnel report
                    51 Outlook




               A record result, increased involvement in Europe
               and Asia Pacific, successes in the world’s capital
               markets – with a high degree of commitment and
               intelligent products we have achieved some major
               objectives. We look forward to the opportunities
               that the future holds in store.



                                                                                                                33
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Economic development                                              Automobile business


                                                                  Worldwide new passenger car registrations rose by
                                                                  0.5 % in 2003 to a level of 39.0 million vehicles. The
                                                                  high growth rates in the passenger car markets of
                                                                  Asia and Eastern Europe more than made up for the
                                                                  fall in Western Europe and North and South America.
                                                                  Intensified sales promotion measures, particularly
                                                                  in the USA and Europe, produced a stabilisation in
                                                                  passenger car demand.


                                                                  At 14.2 million, new passenger car registrations in
                                                                  Western Europe fell short of the 2002 level by 1.3 %.
                                                                  Customer incentives, which have been increasingly
World economy                                                     used by suppliers since 2001, together with state
                                                                  subsidies prevented an even sharper decline. A
The world economy recovered far more slowly than                  further increase in demand for diesel vehicles also
expected in 2003. The Iraq war, high oil prices and               helped to stabilise the market. They reached a new
the outbreak of the respiratory disease SARS in the               record level of 43.7 % in the year under report.
Asia region had a restraining effect on economic de-              Amongst the large West European volume markets,
velopment, particularly in the first half of the year.             only Spain recorded a significantly higher number
World economic growth totalled 2.5 %, compared to                 of registrations than in the previous year (+ 3.8 %).
2.0 % in 2002.                                                    There, market growth was helped by sales promotion
                                                                  measures and also by positive macroeconomic
In Western Europe, economic growth remained low.                  stimuli.
The reasons for this included the continuing difficult
situation in the labour market, weak domestic de-                 With a 6 % increase to almost 2.2 million vehicles,
mand and a decline in exports. The euro gained in val-            Central and Eastern Europe experienced continued
ue by around 20 % against the US dollar as an aver-               growth in demand for passenger cars. This applied
age for the year. In Central and Eastern Europe strong            in particular to the EU candidate countries, with the
growth continued, primarily as a result of sustained              exception of Slovakia.
strong domestic demand.
                                                                  In Germany the recovery of the automobile economy
In Germany economic activity remained weak over-                  again failed to materialise in 2003. Following the de-
all in spite of a slight revival in the second half of the        cline in registrations during the first half of the 2003,
year. Gross domestic product was 0.1% below the                   demand for passenger cars stabilised during the
previous year’s level. Unemployment as an annual                  last months of the year so that cumulatively the pre-
average rose to almost 4.4 million.                               vious year’s level was almost reached. A total of
                                                                  3.5 million vehicles (– 0.6 %) were registered. At
                                                                  5.5 million units, 0.7 % more automobiles were pro-
Worldwide deliveries to customers in 2003                         duced than in 2002.
in thousands of vehicles

                                                                  The Volkswagen Group reinforced its leadership in
     3,526
                                                                  the German competition by recording an increase in
                                                                  its share of the passenger car market to 30.4 % (pre-
                                                                  vious year: 30.0 %).
                     1,231

                                         258

  Volkswagen        Audi               Commercial
  brand group       brand group        vehicles




34
            Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Management Report of the                                        Structure of
Volkswagen Financial Services AG Group                          Volkswagen Financial Services AG


                                                                The objectives of the new organisational structure,
                                                                which were presented in 2002, were again pursued
                                                                systematically. Apart from the three Market Centers –
                                                                Private Customers, Corporate Customers and Fleet
                                                                Customers – two Sales Care Centers for agencies
                                                                serving private / corporate customers and corporate
                                                                customers /fleet customers have been established.
                                                                The company’s “Market” section is assisted by Ser-
                                                                vice and Support Centers. While the priority for the
                                                                front office is to provide all-round advice and cus-
                                                                tomer support, the back office is structured with a
Key objectives                                                  view to achieving synergies. All the fields of respon-
                                                                sibility were transferred into the new structure with
The companies in the Volkswagen Financial Services              effect from 1.1. 2003.
AG Group have continued to develop from financial
services providers to mobility service providers.               In other European countries also, the organisations
                                                                of the branches and subsidiaries were examined and
The key objectives of Volkswagen Financial Services             aligned even more explicitly to the target groups.
AG have become more complex over the years and
now comprise:                                                   Implementation of the new organisational structure
• To promote sales of Group products in the interest            meant that important preconditions for efficient
 of the Group brands and the partners appointed                 Customer Relationship Management were created.
 to distribute them, and to strengthen customer al-
 legiance to the Group brands
• Service provider functions of the Volkswagen
 Group and its brands with optimised procedures,
 administrative structures and information systems
• Intensification of cross-border transfer of experi-
 ence and know-how and close cooperation with the
 national companies
• Utilisation of synergies from close cooperation
 with Group Treasury at Volkswagen AG for opti-
 mised refinancing in order to ease the liquidity
 situation for the parent company


In 2003, Volkswagen Financial Services AG again
pursued its strategy of geographical expansion. In
line with customer requirements, the portfolio of
products offered was successively expanded – and
this process of expansion will continue – by the ad-
dition of products which enable the customer to
achieve not only auto-mobility but also financial
mobility.


Fundamentally, it must be stated that providing
financial services is one of the core competences of
the Volkswagen Group, alongside its automobile
and after-sales business.



                                                                                                                            35
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Changes in participations                                         Against the background of the uniform European
                                                                  market presence in the multi-brand fleet business,
In April 2003, Volkswagen Financial Services AG es-               Unirent Comèrcio e Aluguer de Bens de Equipa-
tablished Volkswagen Group Finanz OOO in Moscow.                  mento e Consumo, S.A. in Portugal has been re-
The purpose of this company is to provide full serv-              named EUROPCAR FLEET SERVICES – COMÈRCIO
ice leasing for international fleet customers, thereby             E ALUGUER DE BENS DE EQUIPAMENTO E CON-
promoting sales for the Group’s importer. Opera-                  SUMO, S. A.
tional business began a short time later, in June.
                                                                  To strengthen the liable equity of the financial hold-
Capital increases in the companies, VOLKSWAGEN                    ing group, Volkswagen AG carried out a capital in-
FINANCIAL SERVICES AUSTRALIA LTD. and Volks-                      crease within the framework of the “pay out and
wagen Financial Services Taiwan LTD. led to a                     plough back” principle at Volkswagen Financial Ser-
strengthening of their respective equity positions.               vices AG . At the same time, Volkswagen Financial
                                                                  Services AG carried out a capital increase at Volks-
With effect from 1.7. 2003, the financial services                 wagen Bank GmbH.
company, Svenska Volkswagen Finans AB (publ) in
Sweden was acquired. The company’s purpose is to                  In 2004, as part of the expansion strategy, it is
enable financing of Volkswagen, Audi, Seat and                     planned to establish further branches in Greece,
ˇ
Skoda products.                                                   France and Great Britain utilising the “European
                                                                  Passport” – in addition to the existing branches in
                  ˇ
On the same date, SkoFIN s.r.o. in Prague took over               the Netherlands, Belgium, Ireland, Italy and Spain.
Rentex Financial Services a. s., which was renamed
in September 2003 and, as Europcar Fleet Services                 VDF Holding A.S., which was founded in Turkey in
                                                                                ¸
                              ˇ
a. s., underlines the goal of SkoFIN s.r.o., which is to          2002, is jointly owned by Volkswagen Financial
offer corporate customers professional service so-                                                ˘ ¸
                                                                  Services AG with 51% and the DO G US Group with
lutions in the fleet sector.                                       49 %. The company intends to acquire 100 % of the
                                                                  shares in the operating company VOLKSWAGEN
                                                                                . . .
In the second half of 2003, Volkswagen Financial                     ˘ ¸
                                                                  DO G US TÜKET I C I F I NANSMANI A.S. from Volks-
                                                                                                     ¸
Services AG acquired a 60 % share in Pon Financial                                                              ˘ ¸
                                                                  wagen Financial Services AG (51%) and the DO G US
Services B.V. in the Netherlands from Pon Holdings                Group (49 %) in 2004.
B.V. and renamed it “Volkswagen Pon Financial
              .
Services B.V.” At the end of 2003, Volkswagen Bank                The Chinese financial supervisory authority pub-
GmbH established a branch in the Netherlands, to                  lished the rules for vehicle financing in October 2003,
which the retail financing portfolio of Volkswagen                 thereby creating the basis for submission of a licence
Pon Financial Services B.V. is being transferred.                 application. On 24.12. 2003 the authority granted
                                                                  Volkswagen Financial Services AG a licence to estab-
In the second half of the year, Volkswagen Financial              lish and set up an operating automobile financing
Services (UK) Ltd. established the four new compa-                company. At present the company is working inten-
nies, SLB Property Holding No 1 Ltd. and SLB Prop-                sively on acquiring the second licence – permission
erty No 2 to 4 Ltd. At the same time it sold its existing         to begin operational business – with the aim of being
leased dealerships, and others still under construc-              able to start operations in the summer of 2004.
tion, to these companies.


Assivalor Consulting GmbH has been renamed
Volkswagen Insurance Brokers GmbH. Initially it
took over the retail business of VW Versicherungs-
vermittlungs-GmbH on 1.1. 2004. In the further
course of 2004, it is planned to set up a branch in
Greece.




36
              Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Refinancing and hedging strategy                                   Derivatives are entered into exclusively for hedging
                                                                  purposes and, as a rule, are held until the planned
Volkswagen Financial Services AG pursues a consis-                maturity date.
tent refinancing and hedging strategy with the aim
of achieving matching maturity refinancing for itself              Within the framework of the funding strategy of
and its subsidiaries. At the same time, the refinanc-              Volkswagen Financial Services AG , Asset Backed Se-
ing is to be placed on a broad base with various                  curities (ABS ) are becoming increasingly important
sources of funding.                                               as a strategic refinancing instrument.


In the financial year 2003, the systematic and in-                 This form of securitisation of receivables eases the
creased use of the capital market continued, with ex-             pressure on the regulatory equity. In addition, it en-
isting continuous issuing programmes being expand-                sures that Volkswagen Financial Services AG is able
ed by the addition of new issuers, and new capital                to refinance itself on extremely attractive and stable
market programmes being launched.                                 terms independently of its corporate rating, and to
                                                                  widen its investor base.
The Swedish financial services company, Svenska
Volkswagen Finans AB (publ) has now been included                 Volkswagen Leasing GmbH was a pioneer in Ger-
in the Multi Currency Commercial Paper Programme                  many with regard to ABS . Since 1996 it has been
of the Volkswagen Group as a new issuer, and in fu-               using this instrument regularly for refinancing its
ture will have direct access to this attractive source            leasing business through the sale of its leasing re-
of funding.                                                       ceivables to special purpose entities established
                                                                  specifically for this purpose, VCL No. 1 to 5 Limited.
A new issuer was also added to the Debt Issuance                  Following this tradition, Volkswagen Leasing GmbH
Programme of the Volkswagen Financial Services                    also securitised € 1 billion of its leasing portfolio in
AG Group, which is important for medium and long-                 2003 and set up VCL No. 6 Limited.
term refinancing. The integration of the Japanese
subsidiary VOLKSWAGEN FINANCE JAPAN KK                            2002 saw the beginning of expansion to include oth-
enables the company to, in future, maintain a direct              er categories of receivables and other subsidiaries.
presence in the international capital market under                For example, Volkswagen Financial Services (UK)
the guarantee of Volkswagen Financial Services AG .               Ltd. issued a revolving ABS transaction over three
In Australia and Singapore, on the other hand, two                years with a volume of GBP 682 million, whereby
independent capital market programmes have been                   receivables were sold into a receivables pool of a
established in the meantime. Consequently, these                  bank, a so-called conduit. To preserve the original
young, rapidly growing companies are in a position                transaction volume, and thereby the refinancing
to gain local investors in the Asia Pacific region, in             volume, the repaid receivables are replaced by new
addition to credit lines from banks. This diversifica-             ones on a monthly basis. At the end of the financial
tion of refinancing sources is intended to finance                  year, the volume of these ABS transactions had
and secure the expected strong growth of the Volks-               grown to GBP 824 million.
wagen Financial Services AG Group.
                                                                  The financial holding group’s equity base was
To achieve refinancing at matching maturities, funds               strengthened by the core capital being increased by
are always raised with a term corresponding to that               € 51 million. In addition, Volkswagen Bank GmbH is-
of the assets being refinanced. If necessary, deriva-              sued participation rights in the amount of € 120 mil-
tives (caps and swaps) are used to transform the                  lion as well as raising € 106 million by the issue of
refinancing funds into the desired interest payment                subordinated bonds on the capital market. Subordi-
period, following the principle of microhedging. In               nated borrowings by VOLKSWAGEN BANK POLSKA
other words, individual underlying transactions are               S. A. boosted the Group’s equity by a further € 4 mil-
linked with the derivatives to form evaluation units              lion. The financial holding group’s equity ratio ac-
in order to achieve, as far as possible, an efficient              cording to Principle I was 9.2 % at 31.12. 2003, and
hedging relationship, also in accordance with IAS 39.             that of Volkswagen Bank GmbH was 11.6 %.




                                                                                                                              37
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Business trends                                                   Within the leasing group, Volkswagen Leasing Anla-
                                                                  gen GmbH served solely to refinance the leased as-
In 2003 Volkswagen Financial Services AG again                    sets by forfaiting future receivables. The business
successfully continued its policy of expanding exist-             was substantially reduced on account of alternative
ing financial services companies and establishing                  sources of financing and will end in 2004. The com-
new ones. The financial year 2003 was again pleasing               pany reported a positive result, which was trans-
for the companies.                                                ferred to Volkswagen Leasing GmbH on the basis of
                                                                  the existing profit transfer agreement.
As in previous years, the German companies made
a major contribution to Volkswagen Financial Ser-                 Europcar Fleet Services GmbH recorded consider-
vices AG ’s success. Accounting for roughly 70 % of               able growth in both the domestic fleet business and
current contracts, they continue to be the companies              the international sector. In the German market,
with the largest business volume.                                 renowned customers were added as fleet customers
                                                                  within the scope of the European multi-brand strat-
In spite of the difficult economic situation, Volks-               egy, with the result that current domestic leasing
wagen Bank GmbH expanded its business volume                      contracts more than doubled during the financial year
once again during the year under report. The contin-              ended. Securing the high service standard required
uously enlarged range of customer-friendly prod-                  substantial expenditure on DP software. Due to the
ucts became more firmly established in the market                  additional up-front expenditure for the leasing busi-
thanks to optimised services and attractive offers,               ness, there was a net loss for the year, which was
accompanied by intensive preparations for expand-                 compensated for by Volkswagen Financial Services
ing the international branch network, utilising the               AG under a control and profit transfer agreement.
                   .
“European Passport” Within the framework of the
existing control and profit transfer agreement, Volks-             Volkswagen-Versicherungsdienst GmbH was not
wagen Bank GmbH transferred the result to Volks-                  able to fully make up for the decline in new vehicle
wagen Financial Services AG .                                     sales within the Volkswagen Group this year. Cur-
                                                                  rent vehicle insurance contracts were slightly down
Despite the continuing weakness of the domestic                   on the previous year.The volume of premium income
economy and a decline in vehicle registrations in the             from vehicle insurance business showed a minor
German market, Volkswagen Leasing GmbH was                        increase compared to the previous year, while the re-
able to increase its current leasing contracts – also             sult of ordinary business activities fell slightly short
due to the transfer of investment activity from Volks-            of the previous year’s figure.
wagen Leasing Anlagen GmbH to Volkswagen Leas-
ing GmbH. The receivables from leasing contracts                  All but three of the fully consolidated foreign finan-
shown in the Group accounts increased accordingly.                cial services companies belonging to Volkswagen
The result of ordinary business activities decreased              Financial Services AG are performing well and again
as a result of lower income from participations. Un-              generated positive results for the year.
der the existing profit transfer agreement, the result
was transferred to Volkswagen Financial Services AG .             As in previous years, the financial services compa-
                                                                  nies grouped together in Volkswagen Financial Ser-
                                                                  vices AG again expanded their business volume in
                                                                  2003. This is reflected in the increase in the balance
                                                                  sheet total by € 3.2 billion to € 32.6 billion (+10.9 %).




38
             Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Income statement                                                 Deposit business and borrowings


All the Market Centers of the financial service com-              The deposit-taking business of Volkswagen Bank
panies produced positive profit contributions. Ad-                GmbH reached a new record high of € 6.7 billion
equate provisions have been made for all risks. The              (+ 20.2 %) as at 31.12. 2003.
result before taxes amounted to € 565 million, which
corresponds to a 12.8 % increase.                                With this level of deposits, the direct bank belonging
                                                                 to Volkswagen Bank GmbH, which has been doing
Net income of the Volkswagen Financial Services AG               business under the name of Volkswagen Bank direct
Group amounted to € 329 million. On the basis of                 since April 1997, is one of the largest direct banks in
the existing control and profit transfer agreement,               the industry.
a sum of € 466 million was transferred to the sole
shareholder, Volkswagen AG .
                                                                 Equity


Lending business                                                 The subscribed capital of € 441 million remained
                                                                 unchanged in the financial year 2003. Compared
The loan volume from retail financing increased by                with the reporting date the previous year, the equity
€ 1.2 billion or 9.8 % to € 13.7 billion in the year ended.      of the Volkswagen Financial Services AG Group de-
The number of new contracts was 658,000, corre-                  creased by € 39 million to € 2,632 million.
sponding to a growth of 5.3 %.This meant that current
contracts were at a level of 1,698,000 at the end of
the year (+ 7.5 %).                                              Insurance agency services


The loan volume of wholesale financing (receivables               At the end of 2003 there were 1,422,000 insurance
from authorised dealers for financing of vehicles in              contracts on the books (+ 2.2 %) with new contracts
stock plus equipment and investment loans) rose to               unchanged at 417,000.
€ 4.9 billion (+ 0.6 %).


Receivables from leasing transactions amounted
to € 10.1 billion, an increase on the previous year.             Direct bank customer deposits
Leased assets grew by € 0.5 billion or 50.6 % to € 1.6           in € million
                                                                                                          6,744
billion. A total of 290,000 new leasing contracts
were concluded during the year under report. As at
                                                                                             5,613
31.12. 2003 there were 813,000 leased vehicles in
stock; this corresponds to a growth of 4.1%.
                                                                                 4,546


                                                                    3,411




                                                                    2000         2001        2002         2003




                                                                                                                             39
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Current contracts and new contracts
in thousands of contracts


                                                            Current contracts                                             New contracts

                                                 31.12.      31.12.          31.12.       31.12.
                                                  2003        2002            2001         2000               2003        2002      2001      2000

    Germany
       Retail financing                           1,137        1,117          1,073        1,052                411          421      388       404
       Leasing                                     547         529             529          508                202          193      190       190
       Insurance agency services /
       Service contracts 1                       1,050        1,071          1,066        1,036                282          281      306       318

    Italy
       Retail financing                             156         150             141          125                  91          86       76        57
       Leasing                                      70          66              51           42                  20          23       19        25
       Insurance agency services 1 /
       Service contracts 1                         136           95             74               —               82          91       47        —

    Austria 2
       Insurance agency services                   240         240             237               —               70          73       76        —

    Great Britain
       Retail financing                             170         134             148          145                  83          56       67        61
       Leasing                                      11          44              21           23                   3          22        4         8
       Service contracts 1                           3          10              49           —                   16           1        5        —

     Japan
       Retail financing                             122          113             99           85                  35          37       34        22
       Leasing                                       1            1              0            1                   1           0        0         0

    Czech Republic
       Retail financing                               1            0             —            —                    1           0       —         —
       Leasing                                     115          117            112          106                  37          36       41        36

    France
       Retail financing                              49           48             52           56                  21          19       19        19
       Leasing                                      24           24             22           19                  15          13       11         8
       Insurance agency services                    42           37             —            —                   18          16       —         —

    Sweden 3
       Retail financing                              44           —               —               —                9          —        —         —
       Leasing                                      26           —               —               —                4          —        —         —
       Service contracts                             2           —               —               —                1          —        —         —

    Belgium
       Retail financing                              19           17             16           12                   7           6           6      5
       Insurance agency services /
       Service contracts                              6          —               —               —                2          —        —         —

    Spain 4
       Leasing                                       9           —               —               —                4          —        —         —
       Service contracts                            12           —               —               —                9          —        —         —

    Portugal 4
       Leasing                                      10           —               —               —                4          —        —         —
       Service contracts                             4           —               —               —                4          —        —         —

1   reported for the first time in 2001   2   consolidated as of 2001   3   added on 1. 7. 2003       4   consolidated as of 2003




40
                      Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Development of new contracts
in thousands




                                                                           658
                                                    625
                             590
   568




                                                                                          484
                                                                   462
                                            434
                  318




                                                                                    290
                                                             287
            267




                                      265




           2000                      2001                   2002                   2003




Development of current contracts
in thousands
                                                                           1,698
                                                    1,579
                             1,529




                                                                                          1,495
   1,475




                                                                   1,453
                                            1,426
                  1,036




                                                                                    813
                                                             781
                                      735
            699




           2000                      2001                   2002                   2003



           Retail financing
           Leasing
           Insurance agency services / Service contracts
           (in 2001 for the first time)




                                                                                                                                      41
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




The Gallardo from Lamborghini.




Risk report                                                       Volkswagen Bank GmbH, as a subsidiary of Volks-
                                                                  wagen Financial Services AG , intensively follows
Strategy, standards and organisation of                           the “Minimum requirements for the credit business
risk management                                                   of credit institutions” (MRC ) published in December
Strategy and standards                                            2002. On the basis of internal analyses defining the
An essential feature of the business activity of                  effects of the MRC on the structural and procedural
Volkswagen Financial Services AG and its companies                organisation in the lending business and the iden-
is the utilisation of market opportunities in close in-           tification, control and monitoring of risks, an imple-
teraction with responsible acceptance of risks. The               mentation concept was developed and this concept
tasks of risk management are complex: possible                    was approved by the management of Volkswagen
risks must be identified and their threat potential                Bank GmbH and the Board of Management of Volks-
analysed. Decisions on whether to incur or avoid                  wagen Financial Services AG . The necessary adjust-
risks are just as necessary as their efficient handling            ments in line with these minimum requirements
by the selection and utilisation of the correct risk              from the point of view of structural and procedural
management instruments. Monitoring of risks, trans-               organisation are adopted on an inter-company
parent and direct communication with the Board of                 basis – to the extent that they are also of significance
Management and integrating newly acquired knowl-                  for the management of credit risks at Volkswagen
edge into risk management round off the aggregate                 Financial Services AG .
risk control at Volkswagen Financial Services AG .
                                                                  Corporate Lending and Risk Management is respon-
To limit the risks involved in the banking and leasing            sible for overall coordination of the MRC . In consul-
business, Volkswagen Financial Services AG has set                tation with the centres affected, firmly defined tasks
up a system for measuring and monitoring risk po-                 and deadlines ensure correct and timely implemen-
sitions and analysing the associated loss potential               tation of these bank regulatory requirements. The im-
(risk controlling) as well as managing such risks (risk           plementation status at each centre is communicated
management).The various elements of the system, its               to the overall coordinators via a dedicated reporting
methods and calculation procedures for risk quan-                 system. Parallel to this, Internal Auditing verifies
tification, and the appropriate parameters used are                that the MRC are complied with and communicates
documented, reviewed regularly by Internal Auditing               its findings to the MRC overall coordinators.
and during the audit of the annual financial accounts,
and developed further on a continuous basis.                      Corporate Lending and Risk Management informs
                                                                  the Board of Management of Volkswagen Financial
                                                                  Services AG about the status and progress of the
                                                                  MRC -related activities in a monthly “traffic light”
                                                                  report.




42
            Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Volkswagen Financial Services AG also attaches                  Risks in all business sectors are identified, moni-
high priority to the requirements of the New Basel              tored, evaluated, aggregated and reported in the
Capital Accord for banks. The expected new rules                form of an annual risk map. In addition to defining
are intended to ensure greater security and solidity            the likelihood of risks actually occurring and their
in finance by means of a risk-adjusted equity alloca-            possible negative effects, the risk map also contains
tion and continuous improvement of the risk man-                information about existing procedures and rules,
agement systems. Volkswagen Financial Services AG               areas of responsibility and derived measures. A risk
regards the revision of the Basel Accord as offering            manual is used for defining risks. This conforms to
the opportunity to generate competitive advan-                  the statutory requirements of § 91 Para. 2 AktG (in
tages, and is putting in place a Group-wide project             accordance with the Corporate Control and Trans-
in preparation for the possible changes.                        parency Act).


Organisation                                                    Furthermore, Corporate Lending and Risk Manage-
The risk management guidelines are laid down by                 ment reports on the credit and market risks and
the Board of Management of Volkswagen Financial                 legal risks by submitting a risk management report
Services AG .                                                   to the Board of Management and the Supervisory
                                                                Board at least once a quarter. For high-risk markets,
Risk management has been established as a contin-               reporting is on a monthly basis.
uous process and is a central element of business
activities and business management.                             Operating risk management in the sense of modern
                                                                portfolio management is integrated into the individ-
In 2003 a consistently customer-oriented reorganisa-            ual divisions as a basic rule; the separation of the
tion was carried out, in particular with regard to pri-         Market and Market Support areas effected by the
vate and corporate customers. This included further             structural organisation provides an additional level
separation – in line with the MRC requirements – be-            of risk monitoring. The responsibility of the divi-
tween the business-initiating departments (“Market”)            sions is governed by competences specified by the
and the control functions (“Market Support”) up to              Board of Management of Volkswagen Financial Ser-
management level. The staff and control functions               vices AG . Observing the guidelines issued by Cor-
for Volkswagen Financial Services AG and its sub-               porate Lending and Risk Management, the operating
sidiaries are organised in the “Corporate Control”              unit is responsible for setting up a functioning inter-
support center, including the Lending and Risk Man-             nal monitoring system and for risk management.
agement, Controlling and Accounting departments.                In addition to this, the product approval process was
                                                                also completely revised in line with the MRC require-
The Corporate Lending and Risk Management de-                   ments and integrated into the risk management
partment formulates guidelines for the risk man-                process during the year under report.
agement of Volkswagen Financial Services AG and
develops these continuously. The decision on the                The Treasury business unit is responsible for securing
guidelines is the responsibility of the Board of Man-           the supply of liquidity within the context of opera-
agement of Volkswagen Financial Services AG .                   tional risk management, and also for balance sheet
                                                                structuring with regard to controlling the interest
As a neutral, independent department, it reports                rate risk.
directly to the Board of Management of Volkswagen
Financial Services AG and bears responsibility for              Risk Controlling, which is integrated in the Control-
evaluating and enhancing the respective measuring               ling Department, is responsible for the measurement,
methods and for ongoing development of suitable                 analysis and monitoring of items affected by market
models.                                                         risks. In accordance with the minimum requirements
                                                                for conducting trade transactions, organisational
                                                                separation of risk management and risk controlling
                                                                is ensured at Board of Management level.




                                                                                                                            43
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Internal Auditing at Volkswagen Bank GmbH inde-                   Credit risk
pendently examines all operational and business                   A core competence of Volkswagen Financial Ser-
procedures of Volkswagen Financial Services AG on                 vices AG lies in utilising opportunities and assuming
behalf of the Board of Management of Volkswagen                   credit risks resulting from dealer and retail financing
Financial Services AG , taking due account of the                 and also from leasing business in the automobile
provisions of banking law. The foundation for this                business.
activity is an annual audit plan, which is drawn up on
the basis of the legal provisions in a risk-oriented              Apart from continuous quality assurance, the key
manner. Internal Auditing informs the Board of                    principles of credit risk policy are:
Management of Volkswagen Financial Services AG                    • Risk acceptance is approved by the Board of Man-
about the result of the audits carried out by submit-               agement. The Supervisory Board regularly moni-
ting audit reports and an annual summary report.                    tors the risk profile of the Volkswagen Financial
Implementation of the measures and recommenda-                      Services AG companies.
tions agreed in the audit reports is monitored.                   • Risk is spread across customers, products and
                                                                    countries.
Risk types                                                        • Credit processes and competences are regulated
Risk is defined as the possibility of negative future                by lending guidelines for the various divisions and
developments in the economic situation of Volks-                    within the scope of an approval procedure which
wagen Financial Services AG .                                       is dependent on limits.
                                                                  • Security is obtained for all vehicle and investment
The principal risks to which Volkswagen Financial                   financing loans.
Services AG is exposed are categorised in the follow-             • Risk provision is based on a conservative value
ing groups:                                                         adjustment policy.
• Risk of counterparty default:
  – credit risk                                                   Credit assessment and standardisation of lending
  – counterparty credit risk                                      decisions at Volkswagen Financial Services AG and
  – country risk                                                  its subsidiaries is carried out on the basis of scoring
  – shareholder risk                                              and rating procedures.
• Market risk:
  – interest rate risk                                            The scoring procedures integrated in the purchas-
  – currency risk                                                 ing systems for private customers provide an objec-
• Liquidity risk:                                                 tive decision-making basis for granting loans. Im-
  – liquidity risk in the narrow sense                            plementation of the purchasing policy is supported
  – refinancing risk                                               by defining limit values (cut-offs), while the cluster-
• Operational risk:                                               ing of comparable risks in score categories permits
  – DP and system risk                                            uniform treatment within the purchasing process.
  – personnel risk                                                Generic score cards and others based on the com-
  – legal risk                                                    pany’s own data are used in the portfolios of Volks-
• Other risk:                                                     wagen Financial Services AG . The information ob-
  – risk involved in the residual value                           tained from the purchasing processes flows into a
                                                                  database, which is updated and historicised each
Risk of counterparty default                                      month and used as the basis for a regular review of
Risk of counterparty default is taken to mean possible            the methods employed. The result of this monitor-
losses in value due to non-payment by a customer                  ing (stability, selectivity, individual feature analyses
or deterioration of a customer’s creditworthiness. A              etc.) is reported at regular intervals.
distinction is made between credit risks, counter-
party credit risks, country risks and shareholder risks.          Another reporting module designed to reflect the de-
Credit risks, which also include risks of counterparty            cision-making behaviour in internal reporting con-
default relating to leasing contracts, represent the              sists of the monthly publication of qualitative infor-
largest component of the indicated risk positions.                mation for part portfolios. Against the background




44
            Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




of the New Basel Capital Accord, the scoring proce-             monitoring with regard to the counterparty credit
dures are being reviewed and, where necessary,                  risk is conducted at Treasury of Volkswagen Bank
modified and upgraded.                                           GmbH. Here, the use of a counterparty limit system
                                                                helps to avoid potential financial losses.
The rating system employed by Volkswagen Finan-
cial Services AG comprises methods, processes,                  For each counterparty, the Board of Management
procedures, controls, data and DP systems which                 grants a counterparty limit as proposed by Risk
serve to determine credit risks, to assign internal             Controlling, against which all transactions are offset.
ratings and to quantify default estimates. The rating           When determining the limit, Risk Controlling takes
model contains a balance sheet rating and qualita-              account of the economic circumstances, particularly
tive information, which is condensed to give a credit-          the external rating and equity of the respective
worthiness category. The qualitative information                business partner. The counterparty limits approved
comprises, for example, the assessment of future                by the Board of Management are notified by Risk
business development, management quality, the                   Controlling to Treasury and the Back Office, who
market, the sector of industry or commerce and the              monitor compliance with the limits. The overall ex-
customer’s payment behaviour. Furthermore, the                  posure presented in this way enables counterparty-
degree of security cover is illustrated by means of             specific risk management and monitoring.
a security category.
                                                                Country risk
The results of the rating procedure are integrated              Country risk control in the Volkswagen Financial
into all processes within the framework of the credit           Services AG Group is based on proven country rating
assessment system. They form the foundation for                 procedures of the agencies Moody’s Investors Ser-
decision-making with regard to the purchase, pro-               vice Limited and the Standard & Poor’s Corporation.
longation and monitoring of individual transactions             The starting point for the rating is the long-term for-
and the risk provisions to be created on the basis              eign currency liabilities of a state (sovereign ratings).
of individual commitments. Furthermore, they pro-               The rating reflects the long-term risk of converting
vide the framework for risk-oriented competence                 income and transferring it in foreign currency, if
arrangements and risk cost-oriented price policy.               required, and also the direct creditworthiness risk
The portfolio developments are monitored and con-               of state authorities as borrowers. Measured against
trolled on the basis of the rating, risk provision and          the overall portfolio, the scope of country risks is
result information.                                             small.


In the light of the New Basel Capital Accord, the               Shareholder risk
rating procedure is being revised.                              Shareholder risk means the risk that after contribu-
                                                                tions of capital are made to a company, losses with
The assessment of security assignments is regulated             negative effects on the shareholding’s book value
by a lending guideline, which is applied during the             might occur. Corporate Lending and Risk Manage-
lending decision process to identify unsecured por-             ment reports on this risk in the form of a regular
tions. For this purpose, the valuations were stipulat-          risk map.
ed on the basis of historical empirical data and ex-
pert knowledge. This lending guideline is subject to            Market risk
continuous monitoring – as are the methods of as-               Market risk means the potential loss resulting from
sessing counterparty default risks described above.             disadvantageous changes in market prices or price-
                                                                influencing parameters. At Volkswagen Financial
Counterparty credit risk                                        Services AG it is subdivided into interest rate risk and
Volkswagen Financial Services AG defines counter-                currency risk.
party credit risk as the overnight deposit and term
money transactions carried out in the interbank
sector and the conclusion of transactions involving
interest rate derivatives. Risk management and




                                                                                                                            45
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




The Continental GT from Bentley.




Interest rate risk                                                Currency risk
Interest rate risk is the term used for the risk of a             The currency risk is always avoided by means of
negative discrepancy between a realised interest re-              currency congruent refinancing. In individual cases,
sult and an expected result due to changes in market              open currency items are conceivable. Measured
interest rates. The risk results from refinancing at               against the overall portfolio, however, the scope of
non-matching maturities and from different degrees                currency risk is small.
of interest rate elasticity of individual assets and
liabilities.                                                      Liquidity risk
                                                                  Risk control and monitoring with regard to the
Interest rate risks are managed on the basis of rec-              liquidity risk is conducted at Treasury.
ommendations given by the Asset / Liability Man-
agement Committee (ALM Committee), which draws                    The prime objective of cash flow management at
up risk-limiting requirements on behalf of the Board              Volkswagen Financial Services AG is to ensure the
of Management with regard to market risks and as-                 ability to pay at all times.
set / liability management. The ALM Committee is
composed of representatives from the Board of Man-                Liquidity risk in the narrow sense
agement of Volkswagen Financial Services AG , rep-                Liquidity risk in the narrow sense is taken to mean
resentatives of Treasury and Controlling and repre-               the risk that a company is not able to meet its pay-
sentatives of the Group Treasury of Volkswagen AG .               ment obligations. Control of cash flow is performed
                                                                  on a daily basis, the expected cash flows being bun-
The basis on which the resolutions of the ALM Com-                dled and evaluated at Volkswagen Bank GmbH. To
mittee are passed is provided by the interest rate                ensure professional cash flow management, Treasury
development statements submitted by the compa-                    establishes cash flow development statements and
nies of Volkswagen Financial Services AG and the                  carries out cash flow forecasts. Volkswagen Bank
interest rate forecasts established for various inter-            GmbH takes precautions to protect the Group against
est rate scenarios. After analysis of the figures by               potential cash flow bottlenecks by keeping confirmed
Treasury, the ALM Committee makes recommenda-                     credit lines at other commercial banks. The extent
tions as strategic decision-making support for the                of cash flow precautions takes into account parts of
respective interest rate policy course. The quantified             deposit-taking business and is tailored to the already
risk and the mismatch items are subject to uniform                known payment obligations and a potential growth
maximum limits – the ALM Committee monitors                       in loan volume.
Group-wide adherence to these limits and submits
a quarterly report to the Board of Management of
Volkswagen Financial Services AG .




46
               Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Refinancing risk                                                    DP and system risk
The refinancing structure is centrally controlled by                The global networking of Volkswagen Financial Ser-
Treasury on the basis of a funding plan. Volkswagen                vices AG , in particular, makes it necessary to define
Financial Services AG possesses a broad refinancing                 and implement security-related organisational struc-
base: liquidity is secured by a high degree of diver-              tures and processes. For this purpose, standardised
sification into different investor groups and markets,              security audits have been taking place since 2002.
involvement in several capital market programmes                   Furthermore, a globally accessible Computer Emer-
and a growing deposit-taking business. Further                     gency Response Team has been set up to act as co-
expansion of activities for securitising receivables               ordinator in the event of computer malfunctions.
has additionally strengthened the refinancing op-
portunities.                                                       Volkswagen Financial Services AG continues to
                                                                   make considerable investments in risk prevention in
The decision regarding the type of refinancing actu-                general. In 2002, system operation in mirror-image
ally undertaken is influenced by market conditions,                 computer centres was already expanded so as to
while the fixed-interest period is specified by the                  guarantee smooth operation. The constantly increas-
ALM Committee.                                                     ing importance of Internet applications led to the
                                                                   creation of extended organisational structures and
Operational risk                                                   processes – rounded off by periodic emergency
The operational risk of Volkswagen Financial Services              drills and enhanced arrangements for ensuring rap-
AG is defined as the risk entailed in business systems              id reaction times in the event of system failures.
or processes, especially in the form of business
risks arising from human error or technical failure or             In addition, existing access and admission authori-
from external influences. They also include legal                   sation concepts ensure the confidentiality, integrity
risks. Management of the operational risk is basical-              and availability of systems and data, and also guar-
ly the responsibility of the divisions, which are as-              antee the division of functions.
sisted in this task by departments of the service and
support centers, such as Personnel, the Legal De-                  Personnel risk
partment, Organisation, Internal Auditing and Cor-                 To prevent possible personnel risks – such as high
porate Lending and Risk Management.                                personnel turnover, insufficient availability of per-
                                                                   sonnel, inadequate personnel qualification and
The operational risk is managed by means of quali-                 human error – measures have been initiated by Hu-
tative measures. Regular risk maps report compre-                  man Resources in collaboration with the specialist
hensively on the risks, while cross-divisional risk                areas concerned. Suitable organisational arrange-
communication makes all the business units more                    ments further reduce the possible personnel risks,
aware of operational risks. The business processes                 while training courses ensure specialist qualification,
and the internal control system are permanently                    and the consistent division of functions helps to
adapted to the changed conditions and are quality                  avoid human error. Furthermore, a standardised
assured. In this context Corporate Lending and Risk                procedure, the so-called employee discussion, en-
Management draws up organisational guidelines                      ables the employee’s goals to be defined and to
which apply to all the centres and countries (e. g.                determine short and medium-term development
outsourcing guideline, product approval process),                  possibilities.
which are approved by the Board of Management.


In the light of the New Basel Capital Accord, appro-
priate measures are being formulated for setting
up a risk notification and analysis system for opera-
tional risks; an inter-company project has already
been established. Apart from existing databases for
recording losses in individual divisions, work is pro-
ceeding on the development of a central loss data-
base and operational risk quantification by the ap-
plication of self-assessment analyses.


                                                                                                                               47
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




The Veyron 16.4 from Bugatti.




Legal risk                                                        Summary of the risk situation
Detection and containment of legal risks constitutes              The essential feature of the banking business and
a key task of the legal department of Volkswagen                  financial services of Volkswagen Financial Services
Financial Services AG . It is responsible for continu-            AG is the conscious acceptance of risks in the con-
ously observing the legal situation, as well as super-            text of utilising market opportunities. The basis for
vision and quality assurance with regard to the                   this is a comprehensive system of identification,
drafting of contracts and regular reporting on legal              monitoring and control of risks as an integral com-
risks.                                                            ponent of a risk-return oriented control system.


Risk involved in the residual value                               Volkswagen Financial Services AG will continue to
Management of residual value risks pursues the                    invest in the optimisation of the comprehensive
objective of transparency and quantification of risks              control system and the risk management systems
and takes place in the form of a standardised resid-              so as to fulfil the statutory requirements – funda-
ual risk management process. In order to take ad-                 mental elements in this are process necessities in
vantage of market opportunities, selective obliga-                the lending business and the handling of risks.
tions are entered into for the repurchase of vehicles
at a residual value laid down at the beginning of
the contract (direct residual value risk). Contracts
concluded by the operational business sectors with
direct residual value risks are subjected to regular
evaluation throughout the year by means of individ-
ual contract analyses. If potential risks exist, a risk
provision is created. The results of the evaluations
and also the results of the company’s own vehicle
marketing activities at the end of the contract flow
into the process as determinants for new contracts
(residual risk management control loop).


Corporate Lending and Risk Management regularly
reviews the risk provision and submits a quarterly
report to the Board of Management and the Super-
visory Board of Volkswagen Financial Services AG .
The scope of the direct residual value risks entered
into is small.




48
             Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Personnel report                                                 Regular staff surveys are an important component
                                                                 of the corporate structure and provide a means of
The success of a company depends increasingly                    identifying potential for improvement in the com-
on deploying the right people with the right skills in           pany – weak points that are discovered are then im-
the right job at the right time.                                 proved by means of workshops held to analyse the
                                                                 survey results.
The importance of professional personnel work is
once again underlined by the minimum require-                    Company health management is another important
                                         ,
ments for lending business and “Basel II” with the               instrument for maintaining or improving employee
requirements they contain in terms of employee                   efficiency – in the interest of higher productivity
qualification.                                                    and lower costs. The health management principle
                                                                 is designed to minimise unnecessary work-related
Selection of employees                                           pressures and thereby improve the work climate on
In view of the demographic trend, increasing inter-              a sustainable basis.
nationalisation and continuously changing values
in society, it is of fundamental importance for Volks-           Our health management is based on an integral con-
wagen Financial Services AG , at a time of scarce re-            cept with diverse health promotion measures, for
sources in some sectors of the labour market, to be              example skin screening, thyroid gland screening, pre-
seen as an attractive employer on a long-term basis.             sentations on subjects such as stress, diabetes and
The company is therefore participating in various                diet, to name just a few. Following a successful test
personnel recruitment trade fairs and other events.              phase from July to December 2002, it was introduced
                                                                 throughout the company in 2003.
Furthermore, the company is seeking to win awards
and quality distinctions, such as “Germany’s Best                The essential core element of the concept consists
Employers 2003” and the “Max Spohr Prize 2003”.                  of personal discussions about welfare on return to
In 2003 the Total E-Quality distinction was awarded              work and regarding absence from work, which aim
for the second time.                                             to motivate the employee to assume greater respon-
                                                                 sibility in terms of health awareness.
The following figures confirm the success of these
special measures: In 2001 the company received                   These personal discussions about welfare on re-
5,453 job applications in Germany, followed by 9,013             turn to work and regarding absence from work
in 2002. In 2003 no less than 16,829 applications were           removed workplace and environment related prob-
sent to Volkswagen Financial Services AG .                       lems and thereby – in the words of many employees
                                                                 themselves – significantly increased their sense of
Efficient partnership                                             well-being. This is also reflected in the continuously
A good working environment is essential if staff are             rising level of good health.
to be dedicated to their jobs, and therefore able to
perform at the necessary high level of efficiency. On             At the international level, the employee discussion,
the principle of “Utilise diversity as a strength – Prac-        introduced at head office three years ago, now takes
                             ,
tice openness as a principle” the company actively               place at all the companies of the Volkswagen Finan-
encourages its workforce to value diversity, and                 cial Services AG Group – taking account of local
thereby contributes to a sense of well-being and mo-             circumstances in some cases. Regular discussions
tivation, while at the same time improving both cus-             with members of staff about objectives and aspira-
tomer relations and the overall business results.                tions are an indispensable instrument for effective,
                                                                 target-oriented, and therefore successful work.




                                                                                                                             49
Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




The Multivan from Volkswagen.




Personnel training and development                                Increased international cooperation was also evident
All the specialised and general qualification mea-                 in the larger number of so-called “Impatriates” in
sures are agreed during the staff discussions. Due to             Brunswick – meaning employees from foreign com-
the realignment into a CRM organisation (cross sell-              panies who work at the parent company in Bruns-
ing, sales training), the number of seminar days                  wick, usually for a period of three years.
rose by more than 30 % compared to the previous
year to an average of more than four seminar days                 The Potential Workshop, which the company created
per employee. The company’s even greater interna-                 in 2001, is a personnel development instrument
tional alignment is also reflected in the area of per-             that ensures consistent and objective appointments
sonnel development – development measures with                    when members of staff move up to managerial
an international element (language training, inter-               duties. Development potential can be recognised at
cultural seminars, specialised seminars, workshops                an early stage and utilised in a targeted manner. In
etc.) have increased by 40 % compared to the pre-                 2003, 16 workshops with 120 candidates were held.
vious year.
                                                                  As part of the diversity activities, the company par-
In vocational training too, it is an important objec-             ticipates in the Volkswagen Group’s mentoring pro-
tive to create greater awareness of intercultural                 gramme, offers self-assertion courses for women
differences and promote personal and social skills                and men, and initiates internal network formation for
alongside language skills. In a pilot project, bank and           a wide variety of groups (women with management
insurance employees worked for one week at the                    responsibility, secretaries, mentees / trainees, se-
Polish company in Warsaw during 2002. In addition,                verely disabled persons, QUEER direct – lesbian and
this can be a first step towards possible international            homosexual employees, international employees).
deployment later in an employee’s career. Follow-
ing assessment of this experience, a period abroad
has now been integrated as a fixed part of the train-
ing programme.


The objective in the Volkswagen Financial Services
AG Group is uniform treatment of careers. The first
steps towards equality of treatment were taken with
the appointment of international experts in the for-
eign companies and branches. In the Czech Republic,
the Assessment Centre, which meets the Volkswagen
Group’s qualification standards, and Volkswagen
Bank GmbH’s employee discussion were both im-
plemented.




50
                 Volkswagen Financial Services AG | Annual Report 2003 | Economic development and the Management Report of the Group




Outlook                                                                      Expansion into the vehicle insurance business was
                                                                             recognised as a growth market of the future – the
The Volkswagen Financial Services AG product                                 short-term objective is the analysis of an expansion
range fulfils customer requirements with regard to                            in Europe. First discussions have already been held
financial security and economy, and has become an                             with insurance companies that have, or will be
integral component of the Volkswagen Group. As                               adopting, a European orientation. This is consistent
a consequence of customer expectations for secure                            with the vehicle purchaser’s desire for optimisation
mobility, the importance of product packages is                              of running costs. The resulting market power can
growing all the time. They combine financing or a                             have the effect of reducing prices, to the customer’s
leasing contract with numerous insurance options                             benefit, given appropriate negotiations.
for ensuring that the customer is able to enjoy finan-
cial security. The close and reciprocal interaction of                       Volkswagen Financial Services AG has made prepa-
automobile manufacturer, dealer and Volkswagen                               rations for financing its business via the capital
Financial Services AG makes it possible to offer op-                         markets to a significantly greater extent than hither-
timal solutions.                                                             to, while at the same time pursuing the securitisa-
                                                                             tion of receivables more intensively.
A diverse range of services is designed to meet the
higher customer expectations, and the already                                The rating of Volkswagen Financial Services AG cor-
initiated orientation as a CRM organisation is being                         responds to that of the 100 % owner, Volkswagen AG .
advanced.
                                                                             In 2004, Volkswagen Financial Services AG will again
In 2003 the local importer in the Netherlands and                            pursue international expansion, principally utilising
Volkswagen Financial Services AG decided on wide-                                                   ,
                                                                             the “European Passport” by establishing branches
ranging cooperation in the manufacturer-tied finan-                           of Volkswagen Bank GmbH. For this purpose, proj-
cial services business. In Sweden, Volkswagen Finan-                         ects in Greece, France and Great Britain have been
cial Services AG acquired the local financial services                        launched.
provider, Svenska Volkswagen Finans AB (publ).
                                                                             For 2004 we expect the business volume and finan-
                                                                             cial result to show a level of growth commensurate
                                                                             with market conditions.


Employees by country
as at 31.12. 2003
   3,389


           436


                     413




                                           Total employees:
                            246




                                           5,055
                                     141


                                              116


                                                      84


                                                               78


                                                                        72


                                                                                51


                                                                                           22


                                                                                                7




   D       I        GB      CZ       F        A       P        S        E       J          B    IRL

 D – Germany; I – Italy; GB – Great Britain; CZ – Czech Republic; F – France;
 A – Austria; P – Portugal; S – Sweden; E – Spain; J – Japan; B – Belgium; IRL – Ireland




                                                                                                                                   51
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements
                 Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




               The consolidated annual financial statements

               54 Income statement

               55 Balance sheet

               56 Statement of equity changes

               57 Cash flow statement

               58 Notes
                   58 General comments
                   58 Annual financial statements in accordance with International
                        Financial Reporting Standards
                   58 Accounting and valuation methods
                   65 Principal accounting and valuation methods which differ from the
                        German accounting regulations in accordance with HGB

               66 Notes to the income statement

               70 Notes to the balance sheet

               87 Notes to the financial instruments

               90 Segment reporting

               93 Other notes

               96 Principal companies

               98 Independent auditors’ report to the Group




A record result is something worth reporting –
and in detail too: facts, figures and explanations –
our Group’s pleasing achievement in the tenth
financial year motivates us to keep following this
successful path in the future.




                                                                                                                 53
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Income statement
of the Volkswagen Financial Services AG Group from 1. 1. to 31. 12. 2003


                                                               1.1. – 31.12. 2003      1.1. – 31.12. 2002     Change
                                                 Notes                  € million               € million        in %

      Income from lending business                             1,351                    1,309                     3.2

      Net income from leasing trans-
      actions before provisions for risks                       855                      784                      9.1

      Interest expenses                                         869                      914                    – 4.9

  Surplus from lending
  and leasing transactions
  before provisions for risks                       (19)                   1,337                      1,179      13.4

  Provisions for risks arising from
  lending and leasing business                (9, 20, 31)                    258                       230       12.2

  Surplus from lending
  and leasing transactions
  after provisions for risks                                               1,079                       949       13.7

      Commission income                                         225                      207                      8.7

      Commission expenses                                       126                       118                     6.8

  Commission surplus                                (21)                      99                        89       11.2

  Result from derivative
  financial instruments                          (10, 22)                      15                        –7         X

  Result from joint ventures
  valued according to the
  equity method                                                                9                        26     – 65.4

  Result from other
  financial assets                                   (23)                       0                         0         —

  General administration
  expenses                                          (24)                     671                       575       16.7

  Other operating result                            (25)                      34                        19       78.9

     Pre-tax result                                                          565                       501       12.8

  Taxes on income
  and earnings                                   (6, 26)                   – 236                      – 142      66.2

  Net income                                                                 329                       359      – 8.4




54
                                Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Balance sheet
of the Volkswagen Financial Services AG Group as at 31. 12. 2003


                                                                     31.12. 2003             31.12. 2002                Change
 Assets                                        Notes                   € million               € million                   in %

 Cash reserve                                   (7, 27)                     125                      63                     98.4

 Receivables from financial
 institutions                              (8, 28, 30)                      728                     685                      6.3

 Receivables from customers
 resulting from
   Retail financing                                         13,666                   12,449                       9.8

   Wholesale financing                                       4,893                    4,862                       0.6

   Leasing business                                         10,112                   9,095                      11.2

   Direct banking business                                      36                      28                     28.6

   Other receivables                                          231                      227                       1.8

 Receivables from customers
 in total                               (8, 29, 30, 31)                  28,938                  26,661                      8.5

 Derivative financial instruments              (10, 32)                      363                     242                     50.0

 Joint ventures valued according
 to the equity method                             (33)                      194                      43                       X

 Other financial assets                         (11, 33)                      25                      20                     25.0

 Intangible assets                            (12, 34)                       77                      78                     – 1.3

 Property, plant and equipment                (13, 35)                      170                     133                     27.8

 Leased assets                                (14, 36)                    1,635                   1,086                     50.6

 Deferred tax assets                           (6, 37)                       51                     124                   – 58.9

 Other assets                                     (38)                      251                     222                     13.1

 Total                                                                   32,557                  29,357                     10.9


                                                                     31.12. 2003             31.12. 2002                Change
 Liabilities                                   Notes                   € million               € million                   in %

 Liabilities to financial institutions         (15, 39)                    2,768                   3,621                   – 23.6

 Liabilities to customers                     (15, 39)                    11,094                  8,920                     24.4

 Securitised liabilities                          (40)                   13,332                   11,591                    15.0

 Derivative financial instruments              (10, 41)                      149                     243                   – 38.7

 Provisions                                (16, 17, 42)                     187                     146                     28.1

 Deferred tax liabilities                      (6, 43)                      559                     671                   – 16.7

 Other liabilities                                (44)                      232                     166                     39.8

 Subordinated capital                             (45)                    1,604                   1,328                     20.8

 Equity                                           (46)                    2,632                   2,671                     – 1.5

   Subscribed capital                                         441                      441                        —

   Capital reserve                                            451                      359                     25.6

   Revenue reserves                                          1,547                   1,638                     – 5.6

   Consolidated net income                                    193                      233                    – 17.2

 Total                                                                   32,557                  29,357                     10.9



                                                                                                                                55
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Statement of equity changes
of the Volkswagen Financial Services AG Group


                                                                           of which       of which
                                                                           currency     reserve for    Consoli-
                            Subscribed       Capital       Revenue      translation      cash flow     dated net     Total
  € million                    capital       reserve       reserves         reserve        hedges       income    capital

  Level at
  1.1. 2002                       441            359           1,516             33            – 20        439     2,755

  Changes in value
  from currency
  translation                       —              —             – 15           – 15             —           3       – 12

  Valuation of hedging
  transactions                      —              —             – 22             —            – 22         —       – 22

  Capital increase                  —              —              —               —              —          —         —

  Net income                        —              —              —               —              —         359       359

  Dividends paid /
  profit transferred to
  Volkswagen AG                     —              —              —               —              —        – 415    – 415

  Transfers to / with-
  drawals from other
  revenue reserves                  —              —             153              —              —        – 153       —

  Other changes                     —              —               6              —              —          —          6

  Level at
  31.12. 2002 / 1.1. 2003         441            359           1,638              18           – 42        233     2,671

  Changes in value
  from currency
  translation                       —              —             – 16           – 16             —           1       – 15

  Valuation of hedging
  transactions                      —              —              24              —              24         —         24

  Capital increase                  —              92             —               —              —          —         92

  Net income                        —              —              —               —              —         329       329

  Dividends paid /
  profit transferred to
  Volkswagen AG                     —              —              —               —              —        – 466    – 466

  Transfers to / with-
  drawals from other
  revenue reserves                  —              —           – 104              —              —         104        —

  Other changes                     —              —               5              —              —          –8        –3

  Level at
  31.12. 2003                     441            451           1,547               2           – 18        193     2,632




56
                                  Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Cash flow statement
of the Volkswagen Financial Services AG Group from 1. 1. to 31. 12. 2003


  € million                                                                                             2003                 2002

  Net income                                                                                             329                   359

    Depreciation, value adjustments and write-ups                                                        587                   466

    Changes in provisions                                                                                 41                  – 57

    Change in other items not affecting payments                                                        – 258                – 408

    Result from the sale of financial assets and property, plant and equipment                             45                    53

    Interest result and dividend income                                                               – 1,213               – 1,111

    Other adjustments                                                                                    316                   271

    Change in receivables from financial institutions                                                     – 39                   13

    Change in receivables from customers                                                              – 2,161              – 2,399

    Change in other assets                                                                                12                  – 37

    Change in liabilities to financial institutions                                                     – 967               – 2,100

    Change in liabilities to customers                                                                 1,554               – 1,287

    Change in securitised liabilities                                                                   1,711                5,617

    Change in other liabilities                                                                           20                    29

    Interest and dividends received                                                                    2,082                 2,025

    Interest paid                                                                                      – 869                 – 914

    Income tax payments                                                                                 – 315                – 339

  Cash flow from current business activities                                                              875                   181

    Cash inflows from the sale of leased assets                                                           229                   197

    Cash outflows from the purchase of leased assets                                                    – 688                 – 500

    Cash inflows from the sale of other assets                                                             29                    15

    Cash outflows from the acquisition of subsidiaries                                                    – 61                   —

    Cash outflows from the purchase of other assets                                                      – 275                 – 79

  Cash flow from investment activities                                                                   – 766                – 367

    Cash inflows from changes in capital                                                                   92                    —

    Result transfer to Volkswagen AG                                                                   – 415                 – 220

    Change in funds resulting from subordinated capital                                                  276                   352

  Cash flow from financing activities                                                                      – 47                  132




  Funds available at the end of the previous period                                                       63                   117

    Cash flow from current business activities                                                            875                   181

    Cash flow from investment activities                                                                 – 766                – 367

    Cash flow from financing activities                                                                    – 47                  132

    Effects from exchange rate changes                                                                      0                    0

  Funds available at the end of the period                                                               125                    63


Comments on the cash flow statement are shown in the notes (27 and 52).




                                                                                                                                  57
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Notes
to the annual financial statements of the Volkswagen Financial Services AG Group as at 31. 12. 2003

General comments                                                    Accounting and valuation methods


Volkswagen Financial Services AG (VW FS AG ) has                    (1) Principles
its head office in Gifhorner Strasse, Brunswick, and                 All the Group companies have drawn up their annual
is registered in the Brunswick Register of Compa-                   financial statements as at the balance sheet date of
nies (under file number HRB 3790).                                   31.12. 2003.


The object of the company is the development, sale                  The accounting in the VW FS AG Group is carried out
and management of own and outside financial serv-                    in accordance with IAS 27 using uniform accounting
ices in Germany and abroad, which are appropriate                   and valuation methods throughout the Group.
for furthering the business of Volkswagen AG and
the companies affiliated with it.                                    Amounts are stated in millions of euros (€ million),
                                                                    unless indicated otherwise.
Volkswagen AG , Wolfsburg, is the sole shareholder
in the parent company, VW FS AG . A control and                     To improve clarity of presentation, individual items in
profit transfer agreement exists between Volkswagen                  the income statement and in the balance sheet have
AG and VW FS AG .                                                   been grouped together and explained in the notes.


The annual financial statements of the VW FS AG                      (2) Group companies
Group companies are included in the consolidated                    As a general principle, all companies are fully con-
annual financial statements of Volkswagen AG ,                       solidated in which VW FS AG has the possibility,
Wolfsburg, which are filed with Wolfsburg Local                      directly or indirectly, to determine the financial and
Court (under file number HRB 1200).                                  business policy in such a way that the VW FS AG
                                                                    Group benefits from the activities of these compa-
                                                                    nies (subsidiaries). Inclusion in the scope of consol-
Annual financial statements in accordance with                       idation begins at the point in time from which the
International Financial Reporting Standards                         possibility of control exists; it ends when the possi-
                                                                    bility of control ceases to exist. At the balance sheet
The non-statutory consolidated annual financial                      date, six German and 21 foreign Group companies
statements of VW FS AG have been prepared – as in                   were fully consolidated. In addition, the consolidated
the previous year – on the basis of the International               annual financial statements contain four special pur-
Financial Reporting Standards (IFRS ) approved and                  pose entities whose assets, regarded in economic
published by the International Accounting Standards                 terms, are attributable to the VW FS AG Group.
Board (IASB ) and the interpretation of these stan-
dards by the International Financial Reporting Inter-               In 2003, the number of fully consolidated Group com-
pretation Committee (IFRIC ). All the IFRS approved                 panies increased as a result of EUROPCAR FLEET
up to 31.12. 2003, whose application was obligatory                 SERVICES – COMÉRCIO E ALUGUER DE BENS DE
for the financial year 2003, have been taken into                    EQUIPAMENTO E CONSUMO, S. A. , Lisbon, Europcar
account in these consolidated annual financial                       Renting, S.A., Madrid, Svenska Volkswagen Finans
statements.                                                         AB (publ), Södertälje, SLB Property Holding No1,
                                                                    Jersey, SLB Property No 2, Jersey, SLB Property No 3,
In addition to the income statement and the balance                 Jersey, and SLB Property No 4, Jersey, being con-
sheet, the other components of the IFRS consolidated                solidated for the first time. This only has a minor in-
annual financial statements are the statement of                     fluence on the comparability with the previous year.
equity changes, a cash flow statement and the notes.
                                                                    27 foreign joint ventures and three associated com-
                                                                    panies are included in the consolidated annual finan-
                                                                    cial statements on the basis of the proportionate



58
                              Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




stockholders’ equity. The joint ventures also include           (3) Principles of consolidation
companies in which the VW FS AG Group has a ma-                 The capital consolidation is carried out by offsetting
jority of the voting rights and of the capital, if accord-      the book values of investments against the propor-
ing to the shareholders’ agreements material deci-              tionate newly valued equity of the subsidiaries at the
sions can only be taken unanimously (minority                   time of their acquisition or their first-time inclusion
protection).                                                    in the consolidated annual financial statements.


On the basis of the holdings in joint ventures, the             Differences on the assets and liabilities side result-
following values can be attributed to the Group:                ing from the acquisition of shares in consolidated
                                                                companies are capitalised as goodwill or as a nega-
                                                                tive difference, and depreciation is charged by the
 € million                              2003         2002
                                                                straight-line method over the expected economic
 Receivables from                                               useful life.
 financial institutions                      7          40

 Receivables from customers            2,043          293       Receivables, liabilities, expenses and income based
                                                                on business relations of companies within the scope
 Other assets                            283           90
                                                                of consolidation are eliminated within the frame-
 Liabilities to
                                                                work of debt, expense and income consolidation.
 financial institutions                 1,141          264
                                                                Here the accounting and evaluation methods appli-
 Liabilities to customers                 87           93
                                                                cable to the VW FS AG Group are used.
 Equity                                  160           31

 Other liabilities                       945           35       Consolidation procedures affecting the financial
 Income                                  358          145       result are subject to deferred taxes. Deferred tax
                                                                assets and liabilities are netted if the maturity and
 Expenses                                325          131
                                                                tax creditor agree.


Subsidiaries are not consolidated if they are of sec-           Interim results are not included.
ondary importance for the VW FS AG Group. Alto-
gether this concerns three German and ten foreign               Shares in subsidiaries which are not consolidated
companies.                                                      because they are of secondary importance and other
                                                                participations are shown under the other financial
One foreign company in which VW FS AG does not                  assets.
hold a majority interest is shown as a subsidiary on
account of the management control.                              Intra-Group transactions are conducted on prevailing
                                                                market terms.
Furthermore, there are eight branches outside Ger-
many which were set up by three German affiliated                The shares which Volkswagen AG and another com-
companies.                                                      pany in the Volkswagen Group hold in the equity and
                                                                result of two subsidiaries are less than € 0.5 million
In the financial year ended five subsidiaries were                and therefore they are not shown as a separate bal-
established. In addition, two subsidiaries and a joint          ance sheet item but under other liabilities.
venture with twelve subsidiaries were acquired.


Acquisition and formation costs arose primarily
from the acquisition of the joint venture, Volkswagen
Pon Financial Services B.V. with the associated sub-
sidiaries, which accounted for € 150 million, and the
acquisition of the subsidiary, Svenska Volkswagen
Finans AB (publ) at a cost of € 61 million. Both compa-
nies were acquired with effect from 1.7. 2003, and have
been consolidated in the Group as from this date.



                                                                                                                              59
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(4) Currency translation                                            The commission result contains income and ex-
The foreign companies belonging to the VW FS AG                     penses from the insurance agency services and from
Group are independent part units, whose financial                    the financing business.
statements are translated according to the concept
                        .
of “functional currency” According to this concept,                 Dividends are received at the time of the legal claim,
all asset and liability items, with the exception of                i. e. always upon passing of the resolution to dis-
equity, are translated using the exchange rate on the               tribute profits.
balance sheet date. The equity, on the other hand, is
carried at historical rates, with the exception of the              The general overheads are composed of the staff
reserve for cash flow hedges. The resulting currency                 and operating expenses, the depreciation of proper-
translation differences are treated as not affecting                ty, plant and equipment and intangible assets, and
the financial result and shown as a separate item in                 also other taxes.
the equity.
                                                                    The other operating result contains, as principal
The change data in the non-current assets schedule                  components, income from costs charged to affiliated
are translated at the weighted annual average ex-                   companies as well as goodwill amortisation.
                                                ,
change rate. A separate line, “Currency changes” is
dedicated to the arithmetical alignment with the bal-               In the VW FS AG Group, there was no extraordinary
ances brought forward, translated at the middle                     income or expenses. In this respect the result from
spot rates of the previous year, and the annual aver-               ordinary business activities is the same as the
age rates of the change data with the translated final               pre-tax result.
levels at the middle spot rate of the current year.
                                                                    (6) Income tax
In the income statement, weighted annual average                    Current income tax claims and obligations are valued
exchange rates are applied. The balance sheet result                using the tax rates at which the refund from or pay-
is translated at the middle spot rate on the balance                ment to the respective tax authorities is expected.
sheet date. The difference between the arithmetic an-               Current income tax is generally shown unnetted.
nual result and the balance sheet result at the rate
on the balance sheet date is shown in a separate item               Deferred income tax claims and liabilities are calcu-
between the annual result and the balance sheet                     lated from different valuations of a reported asset
profit.                                                              or an obligation and the respective fiscal valuation.
                                                                    It is expected that this will in future result in income
(5) Realisation of income and expense                               tax burden or relief effects (temporary differences).
Income and expenses are deferred pro rata temporis                  They are valued at the country-specific income
and are treated as profits or losses in the period to                tax rates of the particular country of incorporation,
which they are economically attributable.                           whose validity for the corresponding period of its
                                                                    realisation is to be expected. Deferred taxes on tax
The realisation of income in the income statement                   losses carried forward that have not yet been made
is always carried out according to the effective inter-             use of are shown in the balance sheet if it is likely
est rate method. Income from financing and leasing                   that taxable profits will occur in the future in the
transactions, and expenses for their refinancing,                    same tax unit. Deferred income tax claims and obli-
are contained in the surplus from lending and leasing               gations with the same maturity vis-à-vis the same
transactions. Interest for borrowings is not capi-                  tax authority are netted. Discounting for deferred
talised.                                                            taxes is not carried out.


                                                                    The tax expense chargeable to the pre-tax result is
                                                                    shown in the income statement of the Group under
                                                                    the item Taxes on income and earnings and in the
                                                                    notes it is divided into current and deferred income
                                                                    tax of the financial year. Other taxes that are not in-
                                                                    come-linked are reported in the item general admin-
                                                                    istration expenses.


60
                             Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(7) Cash reserve                                               (10) Derivative financial instruments
The cash reserve is shown at nominal value.                    The derivative financial instruments are made up of
                                                               assets and /or obligations from hedge-ineffective and
(8) Receivables                                                hedge-effective transactions. All the derivatives are
Originated receivables from financial institutions              stated at the attributable market value (fair value)
and from customers are stated in the balance sheet             and are shown in special items in the income state-
at continued cost of acquisition according to the              ment and balance sheet.
effective interest rate method. Profits or losses re-
sulting from the continued cost of acquisition are             The fair value is determined on the basis of bank con-
stated including the effects from exchange rate                firmations or suitable computer-assisted valuation
changes. For short-term receivables (residual term             methods which satisfy the requirements of IAS 39.
up to one year) neither compounding nor discount-
ing is performed for reasons of materiality.                   Derivatives are used as a hedging instrument to se-
                                                               cure the fair value or to secure the cash flow. We use
Receivables in foreign currency are translated at the          hedge accounting in accordance with IAS 39 only in
middle rate on the balance sheet date.                         the case of highly effective hedging transactions.


(9) Provisions for risks                                       Changes to the fair value of a derivative that has
We take full account of the non-payment risks of               been designated as a fair value hedge and fulfils the
banking business by means of individual value ad-              required conditions of IAS 39 are stated as affecting
justments and lump-sum allowances.                             income, as is the change to the fair value of the se-
                                                               cured asset or secured debt (underlying transaction)
For the credit risks in respect of receivables from cus-       attributable to the hedged risk. The effects of deriva-
tomers and from banks, individual value adjustments            tives and underlying transactions on the financial
have been made in the amount of the probable loss,             result balance each other out.
in accordance with standards applied uniformly
throughout the Group.                                          Changes to the fair value of a derivative that has
                                                               been designated as a cash flow hedge and fulfils the
We take account of latent credit risks in the form of          corresponding conditions are stated directly in the
lump-sum allowances. The benchmark for the level               equity in the reserve for hedging transactions. The
of lump-sum allowances to be made is the loan de-              deferred amounts here are stated in the periods of
faults from the past.                                          the income statement in which the hedged fixed
                                                               obligation or foreseen transaction has an effect on
The receivables are shown in the balance sheet at              income.
net book value. Notes to the provisions for risks are
stated separately. The provisions for risks for off-           Changes to the fair values of derivatives which do not
balance sheet transactions – guarantees, endorse-              fulfil the conditions of IAS 39 for hedge accounting
ment liabilities, credit commitments – are shown               are stated as affecting income.
as provisions for risks from lending business.
                                                               The VW FS AG Group documents all the relationships
Uncollectible debts are written off directly; recover-         between hedging instruments and secured items.
ies on loans written off are treated as income.                The effectiveness is assessed continuously. Trans-
                                                               actions intended solely to serve speculative purposes
                                                               do not exist in the VW FS AG Group.




                                                                                                                             61
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(11) Other financial assets                                          Regular depreciation is mainly charged on the basis
Under other financial assets we show participations                  of the following useful lives:
and shares in non-consolidated subsidiaries. The re-
porting in the balance sheet is at cost of acquisition,
                                                                      Property, plant and equipment       Useful life
since the fair values cannot be determined reliably.
                                                                      Buildings and
Furthermore, this balance sheet item contains long-                   property facilities                 10 to 50 years
term bonds and long-term investments whose valu-
                                                                      Operational and
ation is made at fair value and treated as affecting                  office equipment                     3 to 15 years
income.


(12) Intangible assets                                              Extraordinary depreciation is charged when the con-
Purchased intangible assets, essentially software,                  ditions of IAS 36 pertain, i. e. when the attainable
are capitalised at cost of acquisition and regular                  net sale price or utility value of the asset concerned
depreciation is charged by the straight-line method                 has fallen below the book value. If the reasons for
over their economic useful life of three years. Soft-               extraordinary depreciation charged in previous years
ware developed in-house is capitalised under the                    cease to apply, corresponding write-ups are per-
conditions of IAS 38. The depreciation is also charged              formed. Special tax allowances are not taken into
by the straight-line method over three years.                       account.


The existing licences are written down over the                     The cost of depreciation is contained in the general
expected useful life of 15 years.                                   administration expenses. Income from write-ups is
                                                                    contained in the other operating result.
Goodwill and negative differences from the consoli-
dation are amortised regularly pro rata temporis                    (14) Leasing business
over their expected useful life of between five and                  The Group as lessor
a maximum of 15 years.                                              The VW FS AG Group operates both the finance leas-
                                                                    ing business and – albeit on a much smaller scale –
Amortisation of the current year for goodwill and                   the operating lease business.This business concerns,
negative differences is shown in the other operating                in particular, vehicles, land and buildings and, on a
result.                                                             smaller scale, equipment and furnishings for dealers.


(13) Property, plant and equipment                                  In the case of finance leases, the economic owner-
Property, plant and equipment – land and buildings                  ship passes to the lessee. In the consolidated balance
and operational and office equipment – are valued                    sheet, receivables from finance leases are therefore
at cost of acquisition less regular depreciation ac-                shown within the receivables from customers, where
cording to the expected economic useful life. The                   the net investment value always corresponds to the
depreciation is charged by the straight-line method                 cost of acquisition of the leased assets. At the start
pro rata temporis over the expected useful life. Low-               of the agreement the cash value of the leasing re-
value purchases are written down completely and                     ceivables is shown in the income statement under
taken off the books in the year of acquisition.                     leasing income, while the net investment values of
                                                                    the leased assets are shown under leasing expenses.
                                                                    The income from finance leasing is shown as in-
                                                                    terest income under leasing income. The interest
                                                                    paid by the customer is received in such a way that
                                                                    a constant periodic rate of interest on the outstand-
                                                                    ing leasing receivables results.




62
                             Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




In the case of the operating lease business, the eco-          (15) Liabilities
nomic ownership of the object of the lease remains             Liabilities to financial institutions and to customers
with the lessor. In this case the leased items are             are stated at continued cost of acquisition according
shown in the consolidated balance sheet in the                 to the effective interest rate method. Profits or losses
separate item, leased assets, valued at the cost of            resulting from the continued cost of acquisition are
acquisition or at manufacturing cost less regular              stated including the effects from exchange rate
straight-line depreciation over the term of the lease,         changes. For short-term liabilities (residual term up
down to the imputed residual book value. Value re-             to one year) neither compounding nor discounting
ductions identified on the basis of the impairment              is performed for reasons of materiality.
test in compliance with IAS 36 are allowed for by
extraordinary depreciation and adjustment of the               Liabilities in foreign currency are translated at the
depreciation rates. Write-ups are made if the reasons          middle rate on the balance sheet date.
for extraordinary depreciation in previous years
cease to apply. Extraordinary depreciation and write-          (16) Pension provisions and similar obligations
ups are contained in the net income from leasing               In Germany there is a defined contribution basic state
business before provisions for risks. Leasing income           pension for employees which makes pension pay-
is reported linearly over the term of the lease and            ments at a level dependent on income and contribu-
comprises the interest and redemption portions.                tions paid. Contributions to the statutory pension
                                                               scheme are not contained in the contributions to de-
Land and buildings which serve to obtain rental in-            fined contribution plans.
come are shown in the balance sheet under invest-
ment property and are stated at continued cost of              For the company pension plan for employees there
acquisition. These are properties leased to dealers            are defined contribution and defined benefit pen-
in all cases. The fair values additionally contained in        sion commitments. In the case of the defined contri-
the notes are determined by discounting the esti-              bution plans, contributions are paid to state or pri-
mated future payment flows with the market interest             vate pension insurance providers under statutory or
rate. Depreciation is carried out by the straight-line         contractual provisions or on a voluntary basis. The
method over the agreed useful life of ten to 50 years.         defined benefit plans, on the other hand, are fi-
                                                               nanced by making provisions and, since 2001, also
The Group as lessee                                            by making transfers into an external pension fund.
The leasing instalments paid under operating
leases are shown under the general administration              In the case of defined contribution plans, the VW FS
expenses.                                                      AG Group does not enter into any payment obliga-
                                                               tions beyond payment of contributions to special-
For finance leasing as lessee, the respective leased            purpose funds. The expenses from contribution
assets are capitalised at the lower of cost of acquisi-        payments in the current period are shown in staff
tion or present value of the minimum leasing pay-              expenses. In the year under report, payments were
ments, and depreciated by the straight-line method             made to defined contribution pension plans amount-
according to the useful economic life or over the              ing to € 2 million (previous year: € 2 million).
term of the lease, whichever is shorter. The payment
obligations resulting from the future leasing instal-          In the case of defined benefit plans, provisions are
ments are discounted and carried as a liability.               made for pension obligations in respect of old age,
                                                               invalidity and surviving dependants’ benefits. The
                                                               defined benefit plans are valued on the basis of ac-
                                                               tuarial reports, which are determined in accordance
                                                               with IAS 19 (Employee Benefits) by means of the in-
                                                               ternational projected unit credit method. This means
                                                               that the future obligations are valued on the basis
                                                               of the benefit entitlements acquired up to the balance
                                                               sheet date. In the valuation, account is taken of trend
                                                               assumptions of relevant influencing factors which
                                                               affect the level of benefits.


                                                                                                                             63
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Since 2001 pension expenses for new expectancies                     (17) Other provisions
of employees have been financed through an exter-                     Other provisions are made in accordance with IAS 37
nal pension fund. The annual salary-related pension                  for uncertain liabilities vis-à-vis third parties and
expenses are invested in special funds by VW Pen-                    imminent losses from pending transactions in the
sion Trust e.V. acting as trustee. Since the fund shares             amount of the expected drawings. Provisions for
administered by the trustee fulfil the requirements                   future expenses not relating to an external obligation
of IAS 19 as plan assets, offsetting with the provi-                 do not exist.
sions is performed. This model offers the possibility
of increasing the pension entitlements through the                   (18) Trust transactions
fund’s investment, and also secures these entitle-                   Transactions which are based on administration
ments fully.                                                         or placement of assets for third-party account – trust
                                                                     transactions – are not shown in the balance sheet,
Actuarial profits / losses not yet reported result from               thus complying with IAS 30. Impacts on the financial
changes in current levels of actuarial assumptions                   result due to these transactions are contained in the
and variances between the expected and the actual                    income statement under the commission surplus.
development of the calculation parameters. In ac-
cordance with the rules of IAS 19, this amount is re-
ported in the balance sheet over the future average
residual period of service of the workforce and is
offset with regard to the result if the actuarial profits
or losses not reported at the beginning of the finan-
cial year exceed 10 % of the higher of the pension
obligation or the fair value of the plan assets at the
beginning of the financial year.


Material actuarial premises of the national compa-
nies applied:


                                                 Germany                                    Abroad

  %                                                   31.12. 2003          31.12. 2002           31.12. 2003     31.12. 2002

  Expected return on plan assets                              6.75                 6.75                  7.50           7.50

  Discount rate                                               5.75                 5.75          3.00 – 5.50     2.50 – 5.50

     Expected rate of salary increases                        2.75                 2.75                 3.70           3.50

  Expected rate of pension increases                   1.00 – 1.50          1.50 – 3.64           2.50 – 2.70          2.50

  Fluctuation rate                                            1.40                 1.40                 3.70             —




64
                              Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Principal accounting and valuation methods                      Pension commitments
which differ from the German accounting                         The pension commitments under IFRS are based
regulations in accordance with HGB                              on the projected unit credit method. The calculation
                                                                is made on the basis of future obligations, taking
Receivables and liabilities                                     account of future salary and pension increases and
The valuation of receivables and liabilities includes           also the expected inflation rate. The discounting
premiums, discounts and transaction costs.                      factor under IFRS is oriented towards the capital
                                                                market rate.
Securities
The valuation under IFRS is made at fair value. This            Other provisions
also implies that non-realised profits and losses are            Under IFRS , provisions may only be made if they
treated as income.                                              relate to an external obligation. According to IFRS ,
                                                                provisions with the character of a debt are shown
Derivative financial instruments                                 under the liabilities.The medium and long-term pro-
Positive and negative market values from derivative             visions are always valued at cash value.
financial instruments are shown under IFRS in sepa-
rate asset and liability items. Market value changes            Deferred income tax claims and obligations
in the case of hedge-ineffective derivatives and fair           The ascertainment of deferred income tax claims and
value hedges are stated in the income statement.                obligations is balance sheet-oriented under IFRS . Tax
For cash flow hedges, the market value changes are               losses carried forward must be capitalised under
shown in a separate item in equity. When these                  certain circumstances according to IFRS . The income
hedge relations end, reporting still takes place in             tax rates applied for valuing temporary differences
the income statement.                                           are future-oriented.


Self-produced intangible assets                                 Trust transactions
In contrast to the prohibition on showing certain               Under IFRS , trust transactions must not be stated
items in the financial statements under HGB , IFRS               in the balance sheet, as a basic rule.
requires even self-produced intangible assets to
be capitalised under the conditions of IAS 38.                  Result from other financial assets
                                                                In accordance with IFRS , the current income from
Property, plant and equipment and leased assets                 participations, the income from write-ups to partici-
In the case of operating leases, leased vehicles are            pations and securities treated as non-current assets
capitalised at cost of acquisition and depreciated              are shown in this item.
by the straight-line method down to the calculated
residual value over the term of the lease.


Half-year depreciations and special tax allowances
are not permitted under IFRS . Instead of the useful
life for tax purposes, we now use the commercial
useful life.




                                                                                                                              65
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Notes to the income statement


(19) Surplus from lending and leasing transactions                  (21) Commission surplus
before provisions for risks                                         The commission surplus of € 99 million (previous
                                                                    year: € 89 million) contains € 188 million (previous
                                                                    year: € 178 million) in income from insurance
  € million                                 2003         2002
                                                                    agency services.
  Interest income from credit and
  money market business                    1,351        1,309       (22) Result from derivative financial instruments
                                                                    This item contains the results from hedging trans-
  Income from
  leasing transactions                      7,185       6,278       actions and hedge-ineffective derivatives.

  Expenses from                                                     The result from hedging transactions contains in-
  leasing business                         6,060        5,305
                                                                    come and expenses from the fair value assessment
  Depreciation on leased assets              270          189       of hedging transactions and underlying transactions.
                                                                    Under the hedge-ineffective derivatives we show
  Interest expenses                          869          914       income and expenses from market value changes of
  Total                                    1,337        1,179       derivatives which do not fulfil the requirements of
                                                                    IAS 39 for hedge accounting. Furthermore, income
                                                                    and expenses from market value changes of deriva-
The extraordinary depreciation on account of the                    tives are shown here, which serve the purpose of
impairment test for leased assets amounted to € 1                   interest rate hedging for Group-internal underlying
million (previous year: € 1 million) and is contained               transactions. The resulting income amounted to
in the depreciation on leased assets. Income from                   € 249 million in 2003 (previous year: € 389 million)
write-ups on extraordinary depreciation carried out                 and expenses of € 234 million (previous year: € 396
in previous years on leased assets amounted to                      million).
€ 9 million (previous year: € 4 million) and is con-
tained in the income from leasing transactions.                     (23) Result from other financial assets
                                                                    The result from other financial assets comprises div-
The interest expenses contain refinancing expenses                   idend and sale results from participations and shares
from the credit and leasing transactions.                           in affiliated companies, and also income and ex-
                                                                    penses from long-term investments.
(20) Provisions for risks arising from lending and
leasing business                                                    (24) General administration expenses
The provisions for risks in the income statement of                 The general administration expenses in the Group
the Group is made up as follows:                                    are composed of staff and operating expenses and
                                                                    also depreciation on operational and office equip-
                                                                    ment, real estate and other intangible assets. They
  € million                                 2003         2002
                                                                    rose by 16.7 % compared to the previous year to
  Additions to provisions for risks          348          319       € 671 million.

  Release of provisions for risks            144          137

     Direct depreciation                      67           57

  Income from
  receivables written off                     13            9

  Total                                      258          230




66
                              Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The general administration expenses are made
up as follows:


 € million                                                                                          2003                 2002

 Staff expenses                                                                                      319                   274

 Operating expenses                                                                                  258                   206

 Costs of advertising, PR work and sales promotion                                                    54                    60

 Depreciation of property, plant and equipment and intangible assets                                  38                    33
 (not including goodwill)

 Other taxes                                                                                            2                    2

 Total                                                                                               671                   575



The operating expenses contain expenses for leased
assets from operating leases amounting to € 3 mil-
lion (previous year: € 3 million).


(25) Other operating result
The other operating result contains releases of pro-
visions which do not affect the lending business,
income from compensation claims, income and ex-
penses from the elimination of goodwill and negative
differences, income and expenses from the disposal
of property, plant and equipment and intangible as-
sets, and also income and expenses from charging
amounts passed on to or by Group companies.


The substantive amounts are contained in the
following items:


 € million                                                                                          2003                 2002

 Other operating income                                                                               78                    64

   Costs charged to Group companies                                                                   17                    16

   Release of provisions                                                                                5                    2

   Income from compensation claims                                                                      3                    3

   Rental and lease income                                                                              2                    1

   Income from the sale of used cars /operating equipment                                               1                    2

   Miscellaneous                                                                                      50                    40

 Other operating expenses                                                                             44                    45

   Amortisation of goodwill                                                                           18                    18

   Expenses from residual book values of used cars /operating equipment                                 1                    2

   Miscellaneous                                                                                      25                    25

 Other operating result                                                                               34                    19




                                                                                                                              67
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(26) Taxes on income and earnings
The income taxes are made up as follows:


  € million                                                                                           2003           2002

  Effective tax expense in Germany                                                                    – 273          – 264

  Effective tax expense abroad                                                                         – 30           – 52

  Effective tax expense                                                                               – 303          – 316

     of which, not attributable to the period under report                                     –3             – 19

  Income from the release of tax provisions and tax refunds                                              3             33

  Effective taxes on income and earnings                                                              – 300          – 283

  Deferred tax income /expense in Germany                                                              110            103

  Deferred tax income /expense abroad                                                                  – 46            38

  Deferred tax income /expense                                                                          64            141

     of which, not attributable to the period under report                                    – 11             25

  Total                                                                                               – 236          – 142


The deferred taxes of the financial year contain
deferred tax income on account of capitalisation of
unused tax losses carried forward amounting to
€ 3 million.


The actual tax expense in 2003 amounting to € – 236
million (previous year: € –142 million) was € 12 mil-
lion higher than the expected tax expense of € – 224
million (previous year: € –192 million), which would
have resulted if a tax rate of 39.7 % (previous year:
38.3 %) on the Group’s pre-tax result had been ap-
plied. The following transition calculation shows the
connection between taxes on income and earnings
and the pre-tax result in the financial year:




68
                                 Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




 € million                                                                                             2003                 2002

 Pre-tax result                                                                                         565                   501
 multiplied by the German income tax rate of 39.7 %
 (previous year: 38.3 %)

 = Arithmetical income tax expense in the financial year
   at the German income tax rate                                                                       – 224                – 192

    • Effects from tax credits                                                                             0                    3

    • Effects from German /foreign tax rate                                                                4                    1

    • Effects from tax rate changes                                                                        6                   –9

    • Effects from permanent valuation differences                                                      – 25                    8

    • Effects on account of tax-free participation income                                                  4                    3

    • Effects from losses carried forward                                                                  7                    6

    • Temporary valuation differences
      without calculation of deferred taxes                                                              –7                    –7

    • Taxes not attributable to the period under report                                                 – 11                   38

    • Other differences                                                                                  10                     7

 = Actual taxes on income and earnings                                                                 – 236                – 142


The domestic income tax rate chosen as the basis                   A reduction of € 7 million in current taxes on income
for the transitional account is made up of the corpo-              and earnings resulted in the financial year from the
ration tax rate applicable in Germany, which was                   realisation of tax losses carried forward from previ-
raised to 26.5 % (previous year: 25 %) for the 2003                ous years (previous year: € 6 million).
assessment period due to the flood victim solidarity
law, plus solidarity surcharge of 5.5 % (previous                  At 31.12. 2003 there were as yet unused tax losses
year: 5.5 %) and an average rate for trade tax of                  carried forward amounting to € 61 million (previous
16.3 % (previous year: 16.3 %). Taking into account                year: € 50 million). Of these, € 49 million is usable
the deductibility of trade earnings tax, the German                without any limitation, € 9 million is usable in the
income tax rate amounts to 39.7 % (previous year:                  medium-term and € 3 million in the long term. € 13
38.3 %). Income from German participations and                     million is realisable in the short term, € 8 million in
profit from the sale of participations in German cap-               the medium-term and € 1 million in the long term.
ital stock companies have not generally been sub-
ject to taxation on earnings since 1.1. 2002.                      Deferred taxes which were directly reported in the
                                                                   equity (cash flow hedges) amounted to € 8 million
The effects resulting from different rates of income               (previous year: € 9 million).
tax in other countries arise due to the income tax
rates of the individual countries where the Group
companies have their registered office. These rates,
which differ from the German income tax rate, are
between 28 % and 42 % (previous year: 30 % and 41%).




                                                                                                                                 69
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Notes to the balance sheet


(27) Cash reserve                                                   equipment and investment loans to the dealer or-
The cash reserve contains receivables from the                      ganisation. Here too, security assignments are used
Deutsche Bundesbank amounting to € 117 million                      as collateral, but also surety agreements and charges
(previous year: € 53 million).                                      on property. Receivables from leasing business
                                                                    contain receivables from finance leases and receiv-
(28) Receivables from financial institutions                         ables due from leased assets. The receivables from
The receivables from financial institutions include                  direct banking business contain credit lines and
receivables from a joint venture amounting to € 63                  overdraft facilities taken up by customers. Other
million (previous year: € 137 million).                             receivables essentially consist of receivables from
                                                                    companies in the Volkswagen Group.
(29) Receivables from customers
Receivables from customers include unsecuritised                    The terms of the contracts are between six and 72
receivables from affiliated companies amounting to                   months. The credit lines are, in principle, accorded
€ 99 million (previous year: € 92 million), receivables             without any time limit. The interest rates are be-
from joint ventures amounting to € 143 million (pre-                tween 3.1% and 20.3 %.
vious year: € 115 million) and receivables from par-
ticipation companies amounting to € 0 million (pre-                 Receivables from leasing transactions include due
vious year: € 1 million). There are receivables from                receivables amounting to € 224 million (previous
the sole shareholder, Volkswagen AG , amounting to                  year: € 188 million).
€ 4 million (previous year: € 6 million).
                                                                    The receivables from operating leasing transactions
Receivables from retail financing contain, in princi-                total € 128 million on the balance sheet date (previ-
ple, vehicle financing loan agreements with private                  ous year: € 93 million).
and commercial customers. As collateral for the
finance contracts for vehicles, the vehicle is usually               The receivables from finance leases are made up
assigned to us as security. The wholesale financing                  as follows:
contracts contain financing of vehicles in stock and


  € million                                                                                      31.12. 2003   31.12. 2002

  Gross receivables from finance leases                                                                10,986        9,973

  by residual term
    up to one year                                                                                    4,570         4,203

     more than one year and up to five years                                                           6,409         5,768

     more than five years                                                                                  7              2

  Interest not yet earned from finance leases                                                           1,002          971

  Net receivables from finance leases                                                                  9,984         9,002

  by residual term
    up to one year                                                                                     4,149        3,790

     more than one year and up to five years                                                           5,828         5,210

     more than five years                                                                                  7              2




70
                               Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




A provision for risks arising from outstanding mini-
mum lease payments was created in the amount of
€ 71 million (previous year: € 73 million).


(30) Residual terms of receivables from financial
institutions and from customers


                                             Receivables from                            Receivables from
                                             financial institutions                       customers

 € million                                         31.12. 2003            31.12. 2002         31.12. 2003             31.12. 2002

 a) payable on demand                                      631                   515                     —                    —

 b) by residual term
      up to three months                                    40                    66                  7,237                7,025

      more than three months and
      up to one year                                        25                    77                  6,482                6,057

      more than one year and
      up to five years                                       32                    25                 14,929               13,329

      more than five years                                    —                     2                   290                   250

 Total                                                     728                   685                 28,938               26,661



(31) Provisions for risks arising from lending
and leasing business
The provisions for risks in the lending and leasing
business are made in accordance with uniform
rules throughout the Group and cover all recognis-
able credit risks. For potential risks we have made
lump-sum allowances based on experience.


                                              Individual value             Lump-sum
                                              adjustments                  allowances                   Total

 € million                                         2003          2002           2003          2002            2003          2002

 As at 1. 1.                                        638           502            120           110              758          612

 New companies brought forward                         3             —             0            —                 3           —

 Additions                                          329           308             19            11              348          319

 Disposals                                          241           172              1             1              242          173

   of which uses                                     98              36           —             —                98           36

   of which releases                                143           136              1             1              144          137

 Provisions for risks arising from lending
 and leasing business as at 31.12.                  729           638            138           120              867          758



The provisions for risks were formed in the full
amount in respect of receivables from customers.




                                                                                                                                71
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(32) Derivative financial instruments
This item contains the positive market values from
hedging transactions and from hedge-ineffective
derivatives and is made up as follows:


  € million                                                                                      31.12. 2003     31.12. 2002

  Assets from hedging transactions                                                                      353             228

      Fair value hedges on assets (currency risk)                                               14              1

      Fair value hedges on liabilities (currency risk)                                          13             13

      Fair value hedges (interest rate risk)                                                  318              214

      Cash flow hedges on interest payments (currency risk)                                       0              0

      Cash flow hedges (interest rate risk)                                                       8              0

     Assets from hedge-ineffective derivatives                                                           10              14

     Total                                                                                              363             242



(33) Joint ventures valued according to the
equity method and other financial assets


                                                                          Companies
                                                              valued according to the                 Other
  € million                                                           equity method         financial assets            Total

  Cost of acquisition
  As at 1.1. 2003                                                                    50                  21              71

      Exchange rate changes                                                          –4                   0              –4

      Changes in scope of consolidation                                              —                   —               —

      Additions                                                                     168                  15             183

      Transfers                                                                      —                   —               —

      Disposals                                                                       4                  10              14

     As at 31.12. 2003                                                              210                  26             236

  Depreciation
  As at 1.1. 2003                                                                     7                   1               8

      Exchange rate changes                                                          —                    0               0

      Changes in scope of consolidation                                              —                   —               —

      Additions                                                                       9                   0               9

      Transfers                                                                      —                   —               —

      Disposals                                                                      —                    0               0

      Write-ups                                                                      —                    0               0

  As at 31.12. 2003                                                                  16                   1              17

  Book value 31.12. 2003                                                            194                  25             219

  Book value 1.1. 2003                                                               43                  20              63




72
                               Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(34) Intangible assets


                                  Franchises,
                           patents, licences,
                                trade marks                                                          Other
                           and similar rights                               Negative            intangible
 € million                    of such assets            Goodwill          differences               assets                Total

 Cost of acquisition
 As at 1.1. 2003                          25                   91                   —                   79                  195

   Exchange rate changes                   —                   —                    —                   –2                   –2

   Changes in scope
   of consolidation                        —                   —                    —                    3                    3

   Additions                               —                    5                  –6                   27                   26

   Transfers                               —                   —                    —                    1                    1

   Disposals                               —                   —                    —                    8                    8

 As at 31.12. 2003                        25                   96                  –6                  100                  215

 Depreciation
 As at 1.1. 2003                            4                  54                   —                   59                  117

   Exchange rate changes                   —                   —                    —                   –2                   –2

   Changes in scope
   of consolidation                        —                   —                    —                    2                    2

   Additions                                2                  19                  –1                    9                   29

   Transfers                               —                   —                    —                   —                    —

   Disposals                               —                   —                    —                    8                    8

   Write-ups                               —                   —                    —                   —                    —

 As at 31.12. 2003                          6                  73                  –1                   60                  138

 Book value 31.12. 2003                   19                   23                  –5                   40                   77

 Book value 1.1. 2003                     21                   37                   —                   20                   78




                                                                                                                               73
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(35) Property, plant and equipment


                                                                                                Operational
                                                                             Land and             and office
  € million                                                                  buildings           equipment    Total

  Cost of acquisition
  As at 1.1. 2003                                                                    95                120     215

     Exchange rate changes                                                           –1                 –1      –2

     Changes in scope of consolidation                                               —                   2       2

     Additions                                                                       15                 56      71

     Transfers                                                                       13                  0      13

     Disposals                                                                        1                 28      29

  As at 31.12. 2003                                                                 121                149     270

  Depreciation
  As at 1.1. 2003                                                                    20                 62      82

     Exchange rate changes                                                            0                 –1      –1

     Changes in scope of consolidation                                               —                   1       1

     Additions                                                                        3                 23      26

     Transfers                                                                        1                  —       1

     Disposals                                                                       —                   9       9

     Write-ups                                                                       —                   —      —

  As at 31.12. 2003                                                                  24                 76     100

  Book value 31.12. 2003                                                             97                 73     170

  Book value 1.1. 2003                                                               75                 58     133



Land and buildings include plant under construction
with a book value of € 4 million (previous year:
€ 3 million).




74
                           Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(36) Leased assets


                                                    Advance                                 Advance
                                                payments on                             payments on
                                Movable             movable           Investment         investment
 € million                 leased assets       leased assets             property           property                  Total

 Cost of acquisition
 As at 1. 1. 2003                  1,081                   28                 274                   28                1,411

   Exchange rate changes             – 12                  —                  – 20                  –2                 – 34

   Changes in scope
   of consolidation                  591                   —                    —                   —                   591

   Additions                         621                   12                   41                  15                  689

   Transfers                          28                  – 28                   7                 – 21                – 14

   Disposals                         485                   —                    —                   —                   485

 As at 31. 12. 2003                1,824                   12                 302                   20                2,158

 Depreciation
 As at 1. 1. 2003                    311                   —                    14                  —                   325

   Exchange rate changes              –6                   —                     0                  —                   –6

   Changes in scope
   of consolidation                  156                   —                    —                   —                   156

   Additions                         263                   —                     6                  —                   269

   Transfers                           —                   —                   –1                   —                    –1

   Disposals                         212                   —                    —                   —                   212

   Write-ups                          –9                   —                    —                   —                   –9

   Extraordinary
   depreciation                         1                  —                    —                   —                     1

 As at 31. 12. 2003                  504                   —                    19                  —                   523

 Book value 31.12. 2003            1,320                   12                 283                   20                1,635

 Book value 1.1. 2003                770                   28                 260                   28                1,086



The fair value of investment property amounts to
€ 330 million. During the year under report, mainte-
nance expenses of € 6 million (previous year: € 9
million) were incurred for the investment property.


We expect the following payments arising out of
the non-terminable leasing and rental contracts over
the next few years:


 € million                                              2004          2005 – 2008           from 2009                 Total

                                                            7                   18                  20                   45




                                                                                                                           75
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




For assets leased by means of finance leases the
underlying average interest rate is 2.99 %. The lease
payments due in the future with their present value
are shown in the following table:


  € 000                                                                           2004           2005 – 2008          Total

  Lease payments                                                                  1,990                  259         2,249

  Interest share                                                                     48                    8            56

  Book value /present value                                                       1,942                  251         2,193




(37) Deferred tax assets
The deferred tax assets consist exclusively of de-
ferred income tax claims, which are subdivided as
follows:


  € million                                                                                      31.12. 2003    31.12. 2002

  Deferred taxation                                                                                    3,444         3,050

  Capitalised benefits from unused tax losses carried forward                                              22            19

  Netting (with deferred tax liabilities)                                                             – 3,415       – 2,945

  Total                                                                                                   51           124



Of the deferred tax assets, € 1,270 million (previous
year: € 1,160 million) are short-term.


Tax deferments are formed in connection with the
following balance sheet items:


  € million                                                                                      31.12. 2003    31.12. 2002

  Derivative financial instruments (assets)                                                                 3             2

  Property, plant and equipment / Intangible assets                                                      188           224

  Leased assets                                                                                        2,991         2,614

  Other assets                                                                                           178           105

  Derivative financial instruments (obligations)                                                           33            54

  Provisions                                                                                               5             5

  Other liabilities                                                                                       46            46

  Total                                                                                                3,444         3,050




76
                               Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(38) Other assets
Other assets concern the following items:


 € million                                                                                    31.12. 2003          31.12. 2002

 Current tax claims                                                                                     55                   74

 Deferred income                                                                                        22                   23

 Vehicles taken back for resale                                                                         25                   17

 Miscellaneous                                                                                        149                   108

 Total                                                                                                251                   222



(39) Liabilities to financial institutions and
customers
The liabilities to financial institutions and customers
are all unsecuritised. The securitised liabilities are
shown separately.


                                              Liabilities                                Liabilities
                                              to financial institutions                   to customers

 € million                                         31.12. 2003           31.12. 2002          31.12. 2003          31.12. 2002

 a) payable on demand                                      159                    88                6,089                 4,885

 b) with agreed term or
    period of notice                                     2,609                 3,533                5,005                 4,035

    of which with a residual term of:
      up to three months                                   463                 1,023                3,101                 2,682

      more than three months and
      up to one year                                       696                 1,168                  649                   716

      more than one year and
      up to five years                                    1,393                 1,274                1,055                   532

      more than five years                                   57                    68                  200                   105

 Total                                                   2,768                 3,621               11,094                 8,920



For the liabilities to financial institutions the
weighted interest rate on the primary borrowing
at the balance sheet date is 2.79 %.


To meet the capital requirements of the leasing and
financing activities, the VW FS AG companies take
advantage of the funds made available by Volks-
wagen AG , Wolfsburg, Volkswagen International
Finance N.V., Amsterdam, Coordination Center
Volkswagen S.A., Brussels, and other Volkswagen
Group companies.




                                                                                                                               77
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The drawing on funds, which is shown as unsecu-                     The VW FS AG Group utilises ABS transactions, in
ritised liabilities to customers, amounts to € 2,619                addition to the options mentioned above, for the
million (previous year: € 1,615 million) in liabilities to          purpose of refinancing. At year’s end, the associated
affiliated companies – of which € 1,138 million (pre-                liabilities contained in the debentures issued amount-
vious year: € 785 million) is attributable to the sole              ed to € 1,092 million (previous year: € 684 million),
shareholder, Volkswagen AG , including the profit                    those in the liabilities to customers amounted to
transfer.                                                           € 1,029 million (previous year: € 922 million) and
                                                                    those in the subordinated liabilities amounted to
Liabilities to customers contain deposits of Volks-                 € 175 million (previous year: € 126 million). Receiv-
wagen Bank direct amounting to € 6,744 million                      ables arising from retail financing and the leasing
(previous year: € 5,613 million). For the main part,                business serve as security.
they are made up of overnight deposits, fixed-term
deposits and various savings certificates and plans.                 The residual terms of the securitised liabilities
Relative to the term, the contingency savings plan                  break down as follows:
has the longest investment horizon. The maximum
term is 30 years. For the financial year ended and
                                                                                                            31.12.       31.12.
the year before, the nominal interest rate for savings
                                                                      € million                              2003         2002
plans, savings certificates and fixed-term deposits
was between 2.0 % and 6.15 %. The average interest                    up to three months                    2,036            1,967
rate for overnight deposit accounts was 2.35 % at
                                                                      more than three months and
the balance sheet date.                                               up to one year                            1,745    3,056

(40) Securitised liabilities                                          more than one year and
                                                                      up to five years                           7,002    4,008
Debentures, money market papers (commercial
paper) and promissory notes are shown as securi-                      more than five years                   2,549        2,560
tised liabilities.
                                                                      Total                                13,332        11,591


                                           31.12.       31.12.
  € million                                 2003         2002
                                                                    (41) Derivative financial instruments
  Debentures issued                       12,425        9,808       This item contains the negative market values from
                                                                    hedging transactions and from hedge-ineffective
  Money market papers issued                 891        1,476
                                                                    derivatives and is made up as follows:
  Bills payable                               16          307

  Total                                   13,332       11,591                                               31.12.       31.12.
                                                                      € million                              2003         2002

For the money market papers, the weighted interest                    Obligations from
rate on the primary borrowing at the balance sheet                    hedging transactions                        89          164

date is 1.59 %, and for the debentures, 3.43 %.                         Fair value hedges on assets
                                                                        (currency risk)                     5            2

                                                                        Fair value hedges on liabilities
                                                                        (currency risk)                    43           86

                                                                        Fair value hedges
                                                                        (interest rate risk)                8           26

                                                                        Cash flow hedges
                                                                        (interest rate risk)               33           50

                                                                      Obligations from
                                                                      hedge-ineffective derivatives               60           79

                                                                      Total                                      149          243




78
                               Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(42) Provisions
The provisions break down as follows:


 € million                                                                                    31.12. 2003          31.12. 2002

 Provisions for pensions and similar obligations                                                       74                    68

 Tax provisions                                                                                        36                    21

 Other provisions                                                                                      77                    57

 Total                                                                                                187                   146


The provisions for pensions and similar obligations
are provisions for the obligations to provide company
retirement pensions on the basis of direct pension
commitments. The type and amount of pensions for
employees entitled to a company pension are deter-
mined by the pension rules applied (incl. pension
guidelines, pension regulations, defined contribution
pension rules, pension commitments on the basis
of individual contracts), which essentially depend on
when the period of employment began. According
to these rules, pensions are paid after entering re-
tirement either when the age limit is reached or pre-
maturely in the event of invalidity or death.


The pension commitments are determined annually
by an independent actuary according to the projected
unit credit method.


The following amounts were stated for defined
benefit plans in the balance sheet:


 € million                                                                                    31.12. 2003          31.12. 2002

   Present value of funded obligations                                                                 27                    23

   Fair value of plan assets                                                                           21                    16

 Deficit                                                                                                  6                    7

   Present value of unfunded obligations                                                               85                    78

   Unrecognised actuarial losses                                                                       19                    18

 Net liability stated in the balance sheet                                                             72                    67


The actual income from pension plan assets amount-
ed to € 2 million (previous year: € 15 million losses).




                                                                                                                               79
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The net liability stated in the balance sheet is con-
tained in the following items:


  € million                                                                                      31.12. 2003   31.12. 2002

  Pension provisions                                                                                     74            68

  Other assets                                                                                            2             1

  Net liability stated in the balance sheet                                                              72            67



In 2003 pensions amounting to € 2 million (previous
year: € 1 million) were paid.


The pension provisions almost exclusively concern
pension commitments of German companies.


The following amounts were stated in the income
statement:


  € million                                                                                            2003          2002

  Current service cost                                                                                    7             6

  Interest on obligation                                                                                  5             6

  Expected return on plan assets                                                                          1             2

  Net actuarial losses recognised for the year                                                            1             0

  Negative past service cost                                                                              1            —

  Total amount stated under staff expenses                                                               11            10




The changes of the net liability stated in the balance
sheet are as follows:


  € million                                                                                            2003          2002

  Net liability at 1.1.                                                                                  67            63

  Net expense in the income statement                                                                    11            10

  Pension benefits and fund allocations paid                                                               6             6

  Net liability at 31.12.                                                                                72            67




80
                             Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Changes in tax and other provisions:


                                                                   Tax provisions                          Other provisions

 € million                                                                           Human resources          Miscellaneous

 As at 1.1. 2003                                                                21                   39                    18

  Use                                                                            8                   23                     8

 Release                                                                         0                     1                    4

 Addition                                                                       23                   36                    20

 Other changes                                                                   0                     0                    0

 As at 31.12. 2003                                                              36                   51                    26



The other changes essentially contain changes in
the scope of consolidation, interest effects and cur-
rency translation differences.


The provisions for income tax are tax obligations
for which no legally binding tax assessment notice
has yet been issued.


The provisions in human resources include, in partic-
ular, one-off annual payments, payments on account
of staff anniversaries of company service and other
costs of the workforce. The other provisions essential-
ly contain the costs of litigation risks, and the costs
of the annual financial statements and the audit.


Terms of the tax and other provisions:



                                        31.12. 2003                                    31.12. 2002

                                        Residual term more                             Residual term more
 € million                              than one year            Total                 than one year            Total

 Tax provisions                                             3                   36                     5                   21

 Other provisions                                         20                    77                   15                    57

   Human resources                              20                   51                    13                   39

   Miscellaneous                                 0                   26                     2                   18

 Total                                                    23                   113                   20                    78




The outflow of payments of other provisions is
expected at 74 % in the following year, at 7 % in the
years 2005 to 2008 and at 19 % thereafter.




                                                                                                                             81
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(43) Deferred tax liabilities
The deferred tax liabilities are subdivided as follows:


  € million                                                                                      31.12. 2003    31.12. 2002

  Deferred income tax obligations                                                                      3,974         3,616

  Netting (with deferred tax assets)                                                                  – 3,415       – 2,945

  Total                                                                                                  559           671



Of the deferred tax liabilities, € 1,414 million (previous
year: € 1,420 million) are short-term.


The deferred taxes contain taxes from temporary
differences between valuations in accordance with
IFRS and amounts arising from the fiscal determi-
nation of profit of the Group companies.


Deferred income tax obligations were formed in
connection with the following balance sheet items:



  € million                                                                                      31.12. 2003    31.12. 2002

  Receivables from customers                                                                           3,715         3,423

  Derivative financial instruments (assets)                                                               127            61

  Property, plant and equipment / Intangible assets                                                       10             7

  Leased assets                                                                                            3             1

  Other assets                                                                                             2             0

  Derivative financial instruments (obligations)                                                            4             1

  Other liabilities                                                                                      113           123

  Total                                                                                                3,974         3,616




82
                                   Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(44) Other liabilities
Other liabilities concern the following items:


 € million                                                                                        31.12. 2003          31.12. 2002

 Deferred income                                                                                           96                    57

 Tax liabilities                                                                                           33                    52

 Liabilities within the framework of social security
 and the wage and salary settlement                                                                        15                    10

 Miscellaneous                                                                                             88                    47

 Total                                                                                                    232                   166



(45) Subordinated capital
The subordinated capital is issued and raised by
Volkswagen Bank GmbH, Volkswagen Leasing GmbH
and Volkswagen Financial Services (UK) Ltd., and is
divided as follows:


 € million                                                                                        31.12. 2003          31.12. 2002

 Subordinated liabilities                                                                                 774                   724

   of which: due within two years                                                                         140                   126

 Subordinated bonds                                                                                       105                    —

   of which: due within two years                                                                           —                    —

 Participation right liabilities                                                                          725                   604

   of which: due within two years                                                                           —                    —

 Total                                                                                                  1,604                 1,328



The subordinated liabilities are unsecuritised liabil-
ities, as defined under § 4 of the Ordinance on Ac-
counting for Banks (RechKredV). They are in respect
of three affiliated companies and there is no prema-
ture repayment obligation. A conversion into capital
or other form of debt has not been agreed, nor is it
planned.




                                                                                                                                   83
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The subordinated liabilities are listed below:


        Beginning                       Interest rate        Interest rate     New interest rate
          of term          € million               %           valid until     agreement based on        Date due

                                                                               6-month Eurolibor
        24. 9. 1997            25.6          2.84650            26. 5. 2004    plus 65 basis points    31. 12. 2007

                                                                               6-month Euribor
       12. 10. 1989             51.1         3.27200            26. 5. 2004    plus 107 basis points    26. 5. 2008

                                                                               6-month Euribor
       26. 11. 1994           102.3          3.27200            26. 5. 2004    plus 107 basis points    26. 5. 2008

                                                                               6-month Euribor
       26. 10. 1995            127.8         3.27200            26. 5. 2004    plus 107 basis points    26. 5. 2008

                                                                               6-month Euribor
       27. 10. 1999            50.0          2.97900            26. 4. 2004    plus 80 basis points    27. 10. 2009

                                                                               6-month Euribor
       16. 11. 1999            50.0          3.04700            16. 5. 2004    plus 80 basis points    16. 11. 2009

                                                                               6-month Euribor
       15. 12. 2000            50.0          3.05500            14. 6. 2004    plus 85 basis points    15. 12. 2010

                                                                               6-month Euribor
       28. 11. 2001            65.4          3.33400            27. 5. 2004    plus 111 basis points   28. 11. 2011

                                                                               3-month Euribor
       29. 11. 2001            46.3          3.30300            26. 2. 2004    plus 115 basis points   29. 11. 2011

                                                                               6-month Euribor
      30. 12. 2002             30.0          4.18200            28. 6. 2004    plus 200 basis points   28. 12. 2012

                                                                               1-month Euribor
       27. 11. 2003            34.7          2.96900            21. 1. 2004    plus 85 basis points     21. 1. 2009

                                                                               1-month GBP Libor
      22. 12. 2003            140.3*         4.79594            20. 1. 2004    plus 85 basis points     20. 1. 2004


* Borrowing in GBP



In the year under report, Volkswagen Bank GmbH
placed the following subordinated bonds on the
public capital market:


        Beginning                       Interest rate        Interest rate     New interest rate
          of term          € million               %           valid until     agreement based on        Date due

                                                                               Fixed interest rate
        11. 9. 2003             16.0         5.25000            11. 9. 2013    for the entire term      11. 9. 2013

                                                                               Fixed interest rate
        19. 9. 2003            50.0          5.12500            19. 9. 2013    for the entire term      19. 9. 2013

                                                                               6-month Euribor
        23. 9. 2003             10.0         2.98100            22. 3. 2004    plus 80 basis points     23. 9. 2013

                                                                               Fixed interest rate
        26. 9. 2003            20.0          5.40000            26. 9. 2023    for the entire term      26. 9. 2023

                                                                               Fixed interest rate
       19. 12. 2003             10.0         5.14200           19. 12. 2013    for the entire term     19. 12. 2013




84
                              Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




In the year under report an interest expense for sub-
ordinated liabilities and subordinated bonds amount-
ing to € 28 million (previous year: € 27 million) was
incurred in the Group.


The participation right liabilities serve to strengthen
the liable capital in accordance with the regulations
of § 10 Para. 5 of the German Banking Act. The par-
ticipating certificates issued amount to a nominal
€ 509 million in relation to the sole shareholder,
Volkswagen AG , a nominal € 120 million in relation
to another affiliated company and a nominal € 89
million in relation to non-Group third parties.


The primary borrowing is made up as follows:


       Beginning                    Interest rate        Interest rate     New interest rate
         of term       € million               %           valid until     agreement based on                        Date due

                                                                           12-month Eurolibor
      15. 12. 1995         281.2         3.84013          31. 12. 2003     plus 110 basis points                     2. 5. 2008

                                                                           12-month Eurolibor
       24. 9. 1997          25.6         3.84013          31. 12. 2003     plus 110 basis points                     2. 5. 2008

                                                                           12-month Eurolibor
      22. 12. 1998          51.1         3.84013          31. 12. 2003     plus 110 basis points                     2. 5. 2008

                                                                           12-month Eurolibor
      29. 11. 1999          50.0         4.02900          31. 12. 2003     plus 125 basis points                     3. 5. 2010

                                                                           Fixed interest rate
       27. 3. 2002          90.0         7.15000           31. 12. 2011    for the entire term                       2. 5. 2012

                                                                           Fixed interest rate
      30. 12. 2002         100.0         7.47000           31. 12. 2012    for the entire term                       2. 5. 2013

                                                                           Fixed interest rate
       8. 12. 2003         120.0         6.55000           31. 12. 2013    for the entire term                       2. 5. 2014


The expenses in connection with entering into
these liabilities were € 30 million (previous year:
€ 23 million).




                                                                                                                              85
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(46) Equity
The subscribed capital of VW FS AG is divided into
441,280,000 fully paid-up individual bearer shares,
all of which are held by Volkswagen AG , Wolfsburg.


The capital reserve grew by € 92 million to € 451 mil-
lion (previous year: € 359 million) due to a capital in-
crease at VW FS AG by Volkswagen AG. The revenue
reserves are subdivided into the statutory reserve
(€ 44 million, previous year: € 44 million) and other
reserves (€ 1,503 million, previous year: € 1,594 mil-
lion). The other reserves contain, as previously, a
provision for general banking risks amounting to
€ 26 million.


                                                                                        1.1. – 31.12. 2003    1.1. – 31.12. 2002
  Appropriation of profit                                                                         € million             € million

  Net income                                                                                           329                  359

  Result carried forward                                                                               233                  439

  Dividend paid / profit transferred to Volkswagen AG                                                  – 466               – 415

  Transfers to / withdrawals from other revenue reserves                                               104                – 153

  Changes to currency translation differences                                                            1                    3

  Other changes                                                                                         –8                   —

  Consolidated net income                                                                              193                  233



Within the framework of the existing control and
profit transfer agreement, € 466 million (previous
year: € 415 million) was transferred to the sole share-
holder, Volkswagen AG . In addition, there are still
distributable reserves and results carried forward of
VW FS AG amounting to € 508 million.




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                                Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Notes to the financial instruments


(47) Foreign currency items
In the VW FS AG Group the following assets and
liabilities contain the currencies shown, as at
31.12. 2003:


 € million                                         GBP        JPY       SEK          CZK     PLN     USD     Other            Total

   Receivables from financial institutions            22         2          1           0      10        0           0           35

   Receivables from customers                      2,743    1,208       348          550       —       54          24        4,927

 Assets                                            2,765     1,210      349          550      10       54          24        4,962

   Liabilities to financial institutions             104       800          3         215       —       —           24         1,146

   Liabilities to customers                        1,862       84       512           22       —       —            0        2,480

   Securitised liabilities                           43     1,298        37           96      24       —           42        1,540

   Subordinated capital                             140        —          —           —        —       —           —           140

 Liabilities                                       2,149    2,182       552          333      24        0          66        5,306




(48) Fair value of financial instruments                              the financial instruments, time-adjusted valuation
In the following table the fair values of the financial               models were applied due to the lack of market prices.
instruments are shown. The fair value is the amount                  For receivables and liabilities from /to financial in-
for which financial instruments can be sold or bought                 stitutions and customers with a residual term of
on the balance sheet date on fair terms. Wherever                    less than a year, the fair value was equated with the
market prices were available (e. g. for securities), we              balance sheet value for reasons of simplification.
have used these for valuation purposes. For part of


                                    Fair value                        Book value                     Difference

 € million                          31.12. 2003      31.12. 2002      31.12. 2003      31.12. 2002   31.12. 2003        31.12. 2002

 Assets
   Cash reserve                             125               63               125             63             —                 —

   Receivables
   from financial institutions               728              685               728            685             —                 —

   Receivables
   from customers                         29,031           26,714         28,938           26,661            93                 53

   Other financial assets                     25               20                25             20             —                 —

 Liabilities
   Liabilities
   to financial institutions                2,790            3,651          2,768            3,621            22                 30

   Liabilities to customers               11,096            8,910          11,094           8,920              2               – 10

   Securitised liabilities                13,316           11,608         13,332            11,591          – 16                17

   Subordinated capital                    1,701            1,292          1,604            1,328            97                – 36




                                                                                                                                  87
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(49) Notes to the hedging policy                                    mismatch items are subject to maximum limits that
Hedging policy and financial derivatives                             apply uniformly throughout the Group. For the quan-
On account of its activities in international financial              tified interest rate risk, this is 5 % of the current
markets, the VW FS AG Group is affected by interest                 planned operating result per company, while for the
rate fluctuations on the international money and                     mismatch items 30 % of the balance sheet total per
capital markets, while the exchange rate risk be-                   company applies.
tween foreign currencies and the euro plays a sub-
ordinate role. The general rules for the Group-wide                 The interest rate hedging and interest limitation con-
foreign currency and interest rate hedging policy                   tracts concluded contain interest rate swaps, com-
are laid down in Group-internal guidelines and fulfil                bined interest rate /currency swaps and other interest
the “Minimum requirements for conducting trade                      rate futures and options contracts (e. g. caps).
transactions by banks” issued by the Federal Finan-
cial Services Supervisory Authority (BAF in). First-                Currency risk
class national and international banks, whose credit-               To avoid currency risks, currency hedging contracts
worthiness is continuously scrutinised by rating                    consisting of forward exchange deals and interest
agencies, act as trading partners for the conclusion                rate /currency swaps are used. All payment flows in
of appropriate financial transactions. To limit the                  foreign currency are hedged.
currency and interest rate risks, appropriate hedging
transactions are concluded. For this purpose, market-               Liquidity risk /refinancing risk
able derivative financial instruments are also used.                 The VW FS AG Group makes provisions for securing
                                                                    against potential liquidity squeezes by maintaining
Market price risk                                                   confirmed credit lines at various commercial banks
A market price risk occurs when interest rate changes               and by using multi-currency-capable continuous
on the financial markets influence the value of fixed-                 issuing programmes.
interest financial instruments positively or nega-
tively. The market values shown in the tables were                  Non-payment risk
determined on the basis of the market information                   The non-payment risk from financial assets consists
available on the balance-sheet date and they repre-                 of the risk of non-payment by a contracting party
sent the elimination amounts (redemption values)                    and therefore the maximum amount at risk is the bal-
of the financial derivatives. The redemption values                  ance vis-à-vis the respective counterparties.
were determined on the basis of quoted prices or
standardised procedures.                                            As the transactions are only concluded with first-
                                                                    class counterparties, and trading limits are set for
Interest rate risk                                                  each counterparty within the framework of risk
Changes in interest rate levels on the money and                    management, the actual non-payment risk is con-
capital markets and changes in the interest rate                    sidered to be small.
structure curve constitute an interest rate risk in the
case of refinancing not at matching maturities. Inter-               The nominal volumes of the derivative financial
est rate risks are controlled on the basis of recom-                instruments are made up as follows:
mendations given by the Asset / Liability Manage-
ment Committee (ALM Committee), which draws up
risk-limiting requirements with regard to market
risks and asset / liability management. The basis on
which the resolutions of the ALM Committee are
passed is provided by the interest rate development
statements and also the interest rate forecasts estab-
lished for various interest rate scenarios. The ALM
Committee makes recommendations as strategic
decision-making support for the respective interest
rate policy orientation. The quantified risk and the




88
                               Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




 € million                                                                                    31.12. 2003          31.12. 2002

 Interest swaps                                                                                    17,528               10,358

 by residual term
   up to one year                                                                                   3,692                 3,178

     more than one year and up to five years                                                        10,796                 4,258

     more than five years                                                                            3,040                 2,922

 Interest option contracts                                                                          1,350                 3,260

 by residual term
   up to one year                                                                                   1,350                  300

     more than one year and up to five years                                                             —                 2,960

     more than five years                                                                                —                    —

 Cross-currency interest rate swaps                                                                 1,480                 1,582

 by residual term
   up to one year                                                                                     732                 1,483

     more than one year and up to five years                                                           748                    99

     more than five years                                                                                —                    —

 Currency futures contracts                                                                            13                     1

 by residual term
   up to one year                                                                                      13                     1

     more than one year and up to five years                                                             —                    —

     more than five years                                                                                —                    —

 Currency swaps                                                                                         —                    —

 by residual term
   up to one year                                                                                       —                    —

     more than one year and up to five years                                                             —                    —

     more than five years                                                                                —                    —

 Total                                                                                             20,371               15,201



Market values of the above-mentioned volumes of
derivative financial instruments are determined on
the basis of the market information on the balance
sheet date and suitable valuation methods. The dis-
counting at 31.12. 2003 was based on the following
interest structures:


                                              Interest structure table

 %                                                        EUR                  USD                   GBP                   JPY

 Interest for six months                                 2.100                 1.140                4.070                0.000

 Interest for one year                                   2.250                 1.350                4.310                0.000

 Interest for five years                                  3.674                 3.609                4.915                 0.717

 Interest for ten years                                  4.370                 4.615                4.995                 1.390




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Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Segment reporting


(50) Primary segment
The reporting in the primary segment of the VW FS
AG Group is conducted according to the geographical
markets of Germany and abroad. Foreign branches
of German subsidiaries are included in the abroad
segment. The abroad segment contains the segments
of subsidiaries and branches in Great Britain, Italy,
France, the Czech Republic, Austria, the Netherlands,
Belgium, Spain, Portugal, Sweden, Ireland and Japan.


Division by geographical markets:


                                                 Financial year 2003

                                                                                              Consolidation
  € million                                               Germany              Abroad            and other              Total

  Income from lending business                                930                   487                 – 66            1,351

  Net income from leasing transactions                        629                   226                    0             855

  Interest expenses                                           626                   309                 – 66             869

  Surplus from lending and leasing
  transactions before provisions for risks                    933                   404                    0            1,337

  Provisions for risks arising
  from lending and leasing business                           214                    44                    0             258

  Surplus from lending and leasing
  transactions after provisions for risks                     719                   360                    0            1,079

  Commission surplus                                          107                    –8                    0              99

  Result from derivative
  financial instruments                                           6                    7                    2              15

  Result from joint ventures valued
  according to the equity method                                10                   –1                    0               9

  Result from other financial assets                           226                     0                – 226               0

  General administration expenses                             480                   274                 – 83             671

  Other operating result                                       37                     9                  – 12             34

     of which: Amortisation of goodwill            – 15                   —                    –4               – 19

  Pre-tax result                                              625                    93                – 153             565

  Taxes on income and earnings                               – 177                 – 25                 – 34            – 236

  Net income                                                  448                    68                – 187             329

  Segment assets                                            22,914               10,909               – 2,135          31,688

  Segment liabilities                                       20,417               10,385               – 1,855          28,947




90
                                 Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The net income from leasing transactions breaks
down as follows:


                                                                                             Consolidation
 € million                                               Germany              Abroad            and other                   Total

 Income from leasing transactions                           5,313                1,872                     0                7,185

 Expenses from leasing transactions                         4,674                1,386                     0                6,060

 Depreciation of leased assets                                 10                  260                     0                  270

 Net income from leasing transactions                        629                   226                     0                  855




The picture for the previous year is as follows:


                                                Financial year 2002

                                                                                             Consolidation
 € million                                               Germany              Abroad            and other                   Total

 Income from lending business                                907                   491                  – 89                1,309

 Net income from leasing transactions                        604                   180                    —                   784

 Interest expenses                                           677                   327                  – 90                  914

 Surplus from lending and leasing
 transactions before provisions for risks                    834                   344                     1                1,179

 Provisions for risks arising
 from lending and leasing business                           181                    49                    —                   230

 Surplus from lending and leasing
 transactions after provisions for risks                     653                   295                     1                  949

 Commission surplus                                           98                    –9                    —                    89

 Result from derivative
 financial instruments                                           1                   –5                   –3                    –7

 Result from joint ventures valued
 according to the equity method                               21                     5                    —                    26

 Result from other financial assets                              2                    0                   –2                     0

 General administration expenses                             402                   240                  – 67                  575

 Other operating result                                       25                   145                 – 151                   19

   of which: Amortisation of goodwill             – 15                   –1                   –2                   – 18

 Pre-tax result                                              398                   191                  – 88                  501

 Taxes on income and earnings                               – 141                 – 33                   32                 – 142

 Net income                                                  257                   158                  – 56                  359

 Segment assets                                            21,663                9,689               – 2,658              28,694

 Segment liabilities                                       18,903                9,249               – 2,449              25,703




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Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




The consolidation in the income from lending busi-
ness and interest expenses results from the granting
of Group-internal refinancing funds between the
geographical markets. In the result from financial as-
sets, the consolidation is based on the elimination
of participation income at the parent company,
VW FS AG .


The investments in the case of the leased assets
amount to € 140 million (previous year: € 55 million)
in Germany and € 548 million (previous year: € 446
million) in the abroad segment. The investments in
the other assets are of secondary importance.


(51) Secondary segment
In the secondary segment, the reporting is conduct-
ed according to the products of lending and leasing
business. The leased assets and the receivables from
finance leases are shown under leasing business.
All other transactions are shown under lending
business.


                                                                                   Financial year 2003

  € million                                                                        Segment income             Segment assets

  Lending business                                                                                    1,351              19,554

  Leasing business                                                                                    1,781               11,747




The result for the previous year is as follows:


                                                                                   Financial year 2002

  € million                                                                        Segment income             Segment assets

  Lending business                                                                                    1,309              18,251

  Leasing business                                                                                    1,520              10,181


For improved comparability of the segment income,
the cash values of the leasing receivables booked
at the beginning of the contract are not contained in
the income from leasing transactions.




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                             Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Other notes


(52) Cash flow statement                                        (53) Off-balance sheet obligations
The cash flow statement of the VW FS AG Group
documents the change in funds available due to the
                                                                                                          31.12.       31.12.
payment flows resulting from current business ac-
                                                                 € million                                 2003         2002
tivities, investment activities and financial activities.
The payment flows resulting from investment activ-                Contingent liabilities
ities comprise payments resulting from the purchase                Liabilities from surety and
of leased assets and other assets, and the proceeds                warranty agreements                        22           35
from the sale of the same. The financial activities
                                                                 Other commitments
comprise all the payment flows resulting from trans-
                                                                   Irrevocable credit
actions with equity, subordinated capital and other                commitments                             1,406        1,280
financial activities. All other payment flows are
assigned to the current business activities, in accor-           Ordering commitment
dance with international practice for financial serv-               Investment property                        38           29
ices companies. The funds available, narrowly de-
fined, comprise only the cash reserve, which is made
up of the cash in hand and cash at central banks.              The obligations from non-terminable rental and leas-
                                                               ing contracts in the VW FS AG Group entail expenses
The changes to the balance sheet items applied for             of less than € 1 million per year in 2004 to 2008.
the development of the cash flow statement cannot
be derived directly from the balance sheet, as ef-             (54) Trust transactions
fects from changes in the scope of consolidation do            The trust transactions concluded, which are not
not influence payments and are separated out.                   shown in the balance sheet, comprised the follow-
                                                               ing volumes on the balance sheet date:


                                                                                                          31.12.       31.12.
                                                                 € million                                 2003         2002

                                                                 Receivables from customers                   26           27

                                                                 Trustee assets                               26           27

                                                                 Liabilities to financial
                                                                 institutions                                 26           27

                                                                 Trustee liabilities                          26           27




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Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




(55) Average number of employees                                    Volkswagen AG and its subsidiaries make refinanc-
during the financial year                                            ing funds available to the companies of the VW FS AG
                                                                    Group on normal market terms. In addition, leasing
                                                                    receivables have been assigned as collateral to
                                            2003         2002
                                                                    Volkswagen AG to cover any loans provided by the
  Salaried employees                       4,783        4,289       latter to finance Volkswagen Leasing GmbH’s leasing
                                                                    transactions. Furthermore, financial guarantees
  Trainees                                    64           71       from subsidiaries of the Volkswagen AG Group exist
  Total                                    4,847        4,360       in our favour within the framework of the operating
                                                                    business.


(56) Relations on related parties                                   To support sales promotion campaigns, the compa-
Related parties and enterprises, as defined by IAS 24,               nies of the VW FS AG Group receive financial contri-
are parties and enterprises which can be influenced                  butions from the production companies and import-
by the reporting company or which can influence                      ing companies of the Volkswagen Group.
the company.
                                                                    All business relations with joint ventures and non-
Volkswagen AG , Wolfsburg, is the sole shareholder                  consolidated subsidiaries are handled on normal
of VW FS AG .                                                       market terms.


A control and profit transfer agreement exists be-                   The major part of business with related companies
tween the sole shareholder, Volkswagen AG , and                     is shown in the following table:
VW FS AG . The business relations between the two
companies are handled on normal market terms.


  € million                                      Receivables        Liabilities         Interest income   Interest expenses

  VOLKSWAGEN BANK POLSKA S. A.,
  Warsaw, Poland                                           63                —                        3                  0

  Overlease S.r.l., Rome, Italy                             3                 0                       —                 —
                                    . .
                    ˘ ¸
  VOLKSWAGEN DO GUS TÜKET I C I
    .
  F I NANSMANI A.S., Istanbul, Turkey
                 ¸                                        122                —                        5                 —




94
                            Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Members of the Board of Management and Super-                 (57) Executive bodies of
visory Board of VW FS AG are members of boards of             Volkswagen Financial Services AG
directors and supervisory boards of other compa-              Please refer to pages 4 and 6 respectively for the
nies in the Volkswagen Group, with which, in some             names of the members of the Supervisory Board
cases, we do business within the framework of nor-            and Board of Management.
mal business activities. All the business relations
with these companies are conducted under the same             (58) Letter of comfort for our affiliated companies
conditions as are usual with external third parties.          With the exception of political risks, VW FS AG here-
                                                              by declares that, as the shareholder of its affiliated
The pension provisions for members of the Board of            companies, over which it has managerial control
Management amount to € 5 million. Within the frame-           and /or in which it holds a direct or indirect majority
work of the share option plan of Volkswagen AG ,              share of the capital stock, it will exert its influence
members of the Board of Management of VW FS AG                to ensure that the latter meet their liabilities to credi-
have taken up convertible bonds which vest the                tors in the agreed manner. Moreover, VW FS AG
right to subscribe to ordinary shares in Volkswagen           confirms that, for the term of the loans, it will make
AG . Details of the share option plans are contained          no changes to the share structures of these compa-
in the Annual Report of Volkswagen AG .                       nies which would adversely affect the letter of com-
                                                              fort without informing the lenders.


                                                              (59) Events after the balance sheet date
                                                              There were no significant events up to 10 February
                                                              2004.




                                                                                                                            95
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Principal companies of the Volkswagen Financial Services AG Group


                                                                                                       Share in capital held
  Name and registered office of the company                                                            and voting rights in %

  I. Subsidiaries
  In Germany
     Europcar Fleet Services GmbH, Brunswick                                                                          100.0

     Volim Volkswagen Immobilien Vermietgesellschaft für
     VW- / Audi-Händlerbetriebe mbH, Brunswick                                                                        100.0

     Volkswagen Bank GmbH, Brunswick                                                                                  100.0

     Volkswagen Leasing GmbH, Brunswick                                                                               100.0

       Volkswagen Leasing Anlagen GmbH, Brunswick                                                                     100.0

     Volkswagen-Versicherungsdienst GmbH, Wolfsburg                                                                   100.0

  Abroad
     EUROPCAR FLEET SERVICES – COMÉRCIO E ALUGUER DE BENS
     DE EQUIPAMENTO E CONSUMO, S. A., Lisbon, Portugal                                                                100.0

     Europcar Interrent Lease S.r.l., Rome, Italy                                                                     100.0

       Nolauto Genova System – N.G.S. S.r.l., Genoa, Italy                                                              97.5

     Europcar Renting, S. A., Madrid, Spain                                                                           100.0

     FINGERMA S.r.l., Milan, Italy                                                                                    100.0
     ˇ
     SkoFIN s.r.o., Prague, Czech Republic                                                                            100.0

     Svenska Volkswagen Finans AB (publ), Södertälje, Sweden                                                          100.0

     VOLKSWAGEN FINANCE JAPAN KK , Tokyo, Japan                                                                       100.0

     VOLKSWAGEN FINANCE S. A., Villers-Cotterêts, France                                                               99.7

     VOLKSWAGEN FINANCIAL SERVICES AUSTRALIA LTD., Sydney, Australia                                                  100.0

     Volkswagen Financial Services N.V., Amsterdam, The Netherlands                                                   100.0

     Volkswagen Financial Services Taiwan LTD., Taipei, Taiwan                                                        100.0

     Volkswagen Financial Services (UK) Ltd., Milton Keynes, Great Britain                                            100.0

     Volkswagen Group Finanz OOO, Moscow, Russian Federation                                                          100.0

     VOLKSWAGEN LEASING THAILAND LTD., Bangkok, Thailand                                                           49.99975

     Volkswagen-Versicherungsdienst Gesellschaft m.b.H., Vienna, Austria                                              100.0

  II. Joint ventures
  Abroad
     VDF Holding A.S., Istanbul, Turkey
                   ¸                                                                                                    51.0

       VDF Otomotiv Servis ve Ticaret A.S., Istanbul, Turkey
                                        ¸                                                                               51.0

     VOLKSWAGEN BANK POLSKA S. A., Warsaw, Poland                                                                      60.0

       Volkswagen Serwis Ubezpieczeniowy Sp. z o.o., Warsaw, Poland                                                    60.0
                             . . .
                   ˘ ¸
     VOLKSWAGEN DO GUS TÜKET I C I F I NANSMANI A.S., Istanbul, Turkey
                                                  ¸                                                                     51.0

     VOLKSWAGEN FINANCIAL SERVICES SINGAPORE LTD., Singapore                                                            51.0

                     ˇné sluzby Slovensko s.r.o., Bratislava, Slovakia
     VOLKSWAGEN Financ      ˇ                                                                                          58.0

     Volkswagen Leasing Polska Sp. z o.o., Warsaw, Poland                                                              60.0

     Volkswagen Pon Financial Services B.V., Amersfoort, The Netherlands                                               60.0




96
                          Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Brunswick, 10 February 2004
The Board of Management




Norbert M. Massfeller                                       Burkhard Breiing




Rolf Grönig                                                 Uwe R. Hoffmann




Dr. Hans-Peter Lützenkirchen                                Klaus-Dieter Schürmann




                                                                                                                          97
Volkswagen Financial Services AG | Annual Report 2003 | The consolidated annual financial statements




Independent auditors’report to the Group


We have audited the non-statutory consolidated                      the consolidated financial statements are examined
financial statements prepared by Volkswagen Finan-                   on a test basis within the framework of the audit.
cial Services AG , Brunswick, consisting of balance                 The audit includes assessing the accounting princi-
sheet, income statement, statement of changes in                    ples applied and significant estimates made by the
equity, cash flow statement and notes, for the finan-                 Company’s Board of Management, as well as evalu-
cial year from 1 January to 31 December 2003. The                   ating the overall presentation of the consolidated
preparation and content of these consolidated fi-                    financial statements. We believe that our audit pro-
nancial statements in accordance with the Interna-                  vides a reasonable basis for our opinion.
tional Financial Reporting Standards of the IASB
(IFRS ) are the responsibility of the Company’s Board               In our opinion, the consolidated financial statements
of Management. Our responsibility is to express an                  give a true and fair view of the net assets, financial
opinion, based on our audit, whether the consoli-                   situation and results of operations of the Group and
dated financial statements comply with IFRS .                        its cash flows for the financial year in accordance
                                                                    with IFRS .
We conducted our audit of the consolidated financial
statements according to the German audit regula-                    Our audit, which also covered the Group Manage-
tions and in accordance with the generally accepted                 ment Report prepared by the Board of Management
German auditing standards for the audit of financial                 for the financial year from 1 January to 31 December
statements promulgated by the Institut der Wirt-                    2003, has not led to any reservations. In our opinion,
schaftsprüfer (IDW ). Those standards require that we               on the whole the Group Management Report, to-
plan and perform the audit so that it can be judged                 gether with the other disclosures in the consolidated
with reasonable assurance whether the consolidated                  financial statements, provides a suitable understand-
financial statements are free of significant misstate-                ing of the Group’s situation and suitably presents
ments. Knowledge of the business activities and the                 the risks of future development.
economic and legal environment of the Group and
evaluations of possible errors are taken into account
in the determination of audit procedures. The evi-                  Hanover, 10 February 2004
dence supporting the valuations and disclosures in
                                                                    PwC Deutsche Revision
                                                                    Aktiengesellschaft
                                                                    Wirtschaftsprüfungsgesellschaft



                                                                    Gadesmann                         p. p. Ohlau
                                                                    Auditor                           Auditor




98
Volkswagen Financial Services AG | Annual Report 2003




                                                  99
Volkswagen Financial Services AG | Annual Report 2003 | Index




Index


A                                                                F
    Administrative expenses 54, 60, 62, 66, 90, 102                  Fair value 61f., 64 ff., 72, 75, 78, 87, 102
    Annual financial statements in accordance                         Financial assets 54 f., 59, 62, 65, 66, 72, 87, 90 f.
     with IFRS 5, 58                                                 Financial instruments 54 f., 61, 65, 66, 72, 76, 78,
    Asia Pacific 7, 16 ff., 27                                          82, 86 ff., 90, 102
    Asset Backed Securities 29, 31, 102                              Fleet customers 7, 14 f., 25, 35 f., 38
    Audi Ambassador Card 17                                          Fleet solution 14 f.
    Automobile business 34                                           Foreign currency items 31, 87
                                                                     Free trade agreement 16
B                                                                    Funding costs 29
    Basel 31, 43, 45, 47, 49                                         Funding strategy 37
    Benchmark Bond 28
    Block exemption regulation 7, 11                             G
    Board of Management 6 f., 42, 97                                 Group companies 58
    Bonds 28 ff., 37, 83 ff.                                         Growth markets 23
    Branch 18, 20 ff., 30, 35 f., 51, 90                             Guarantee insurance business 11
    Branch development strategy 22
    Business trends 10, 18, 38                                   H
                                                                     Hedging policy 88
C
    Capital market 28 ff., 37, 47, 65, 84                        I
    Cash flow statement 56 ff., 93, 98                                Impairment test 63, 66
    Cash reserve 55, 61, 70, 87, 93                                  Income tax 60, 68, 81
    Commission surplus Cover, 54, 64, 66, 90, 102                    Insurance agency services Cover, 14, 36, 39, 41, 60, 66
    Control and profit transfer agreement 5, 38, 39,                  Intangible assets 55, 60, 62, 64, 66, 73, 76, 82
     58, 86, 94                                                      Issues 28 f., 37, 88, 102
    Convenient health insurance 11
    Corporate customers 10, 12 f., 35, 43                        J
    Corporate structure 25, 49                                       Joint venture 16, 18, 20 f., 23
    Cost Income Ratio Cover, 102
                                                                 L
    Currency translation 56, 60, 80, 86
    Current contracts 38 f., 40 f.                                   Leased assets Cover, 54, 62, 64, 66, 75 ff., 82, 90, 93
                                                                     Lending and leasing business Cover, 30, 54, 66,
D                                                                     70 f., 90 ff., 102
    Debenture 28, 62, 78, 94, 102                                    Lending business 39
    Debt Issuance Programme 16 f., 28, 37, 102                       Letter of comfort 95
    Deferred tax assets 55, 59 f., 76                                Liabilities Cover, 31, 45, 59, 63, 65, 72, 83 f., 93 ff.
    Deferred tax liabilities Cover, 54, 59, 82                       Liabilities to financial institutions and customers
                                                                       55, 57, 59, 63, 77, 87
    Deposit business and borrowings 39
                                                                     Licence 17, 36, 62, 73
    Derivatives 37, 45, 54 f., 61, 65 f., 72, 76, 78, 82,
     88 – 91, 102
                                                                 M
    Direct bank Cover, 10, 18, 24, 39, 55
                                                                     Market Centers 10, 12 ff., 35, 39
    Diversity 50
                                                                     Market share 15, 22 f., 25, 34
E                                                                    Minimum requirements for the credit business
                                                                      12, 42, 49
    Employees Cover, 21, 49 ff., 63 f., 78, 80, 94
                                                                     Multibrand dealers 11
    Equity Cover, 28 ff., 36 f., 39, 43, 45, 47, 55 f., 58 f.,
     60 f., 65, 69, 85 f., 93                                        Multi Currency Commercial Paper Programme 37
    Equity capital resources 30
    Equity method 54 f., 72, 90 f., 102
    EU candidate countries 24, 34
    European Passport 18, 30, 36
    Executive bodies of Volkswagen Financial
     Services AG 95




100
                                                                          Volkswagen Financial Services AG | Annual Report 2003 | Index




N                                                                     S
    National companies 24, 35                                             Sales Care Centers 10
    Net income Cover, 39, 54, 56, 86, 90                                  Sales promotion 18, 35
    New contracts Cover, 39 ff., 48                                       Samurai bonds 29
                                                                          Scope of consolidation 30, 58
O                                                                         Secondary segment 92
    Off-balance sheet obligations 93                                      Securitised liabilities 57, 78
    Online banking software 13                                            Service and Support Center 35, 47
    Organisation 10, 12, 15, 22, 35, 42 f., 47, 50 f.                     Service contracts 40 f.
    Outlook Cover, 51                                                     Subordinated capital 54, 56, 83, 86, 92
                                                                          Supervisory Board 4 f., 95
P
    Pan-European fleet solutions 15                                    T
    Participation rights 28, 30                                           Taxes on income and earnings 60, 68 f., 90
    Participations 36                                                     Trustee business 64 f., 93
    Penetration 10                                                        Two-brand strategy 15
    Personnel 47, 49 f., 60, 63, 66, 80 f.
    Potential Workshop 50                                             U
    PrämieLight Plus 10, 11                                               Unemployment insurance 10
    Pre-tax result Cover, 39, 54, 60, 68 f., 90 f.                        Used vehicle guarantee insurance 12
    Primary segment 90
    Principles 42, 58 f., 98                                          V
    Principles of consolidation 59                                        Vocational training 50
    Private customers 10, 19, 21f., 35, 44
                                                                      Y
    Property, plant and equipment 54, 60, 62, 64, 66,
      74, 76, 82                                                          Young Giro@home 11
    Provisions 54, 56, 62, 63 f., 65 f., 76, 79, 80 f., 94

Q
    Quality distinctions 49
    Quick Check system 24

R
    Rating Cover, 28, 31, 37, 44 f., 51, 88
    Realisation of income and expense 60
    Receivables Cover, 37 ff., 59, 61f., 65, 92, 102
    Receivables from customers 55, 57, 59, 70 f., 82, 87, 93
    Receivables from financial institutions
     55, 57, 59, 61, 70 f., 87
    Refinancing 16 f., 19, 28, 35, 37 f., 45 ff., 66, 78, 88, 92, 94
    Refinancing and hedging strategy 37
    Regulatory requirements 30
    Relations on related parties 94
    Residual term 61, 63, 70, 71, 76, 78, 80 f., 87 f.
    Residual value risk 14 f., 45, 48
    RestschuldversicherungPlus 10
    Retail customers 10
    Retail financing Cover, 39
    Risk provision Cover, 44 f., 48, 54, 61f., 66, 70, 86, 90




                                                                                                                                   101
Volkswagen Financial Services AG | Annual Report 2003 | Glossary




Glossary


Asset Backed Securities Structure                                   Equity method
  Specific form of conversion of payment claims into negotiable       Method of consolidation for integrating companies into con-
  securities vis-à-vis a single-purpose company, which have          solidated annual financial accounts. It is based on the histori-
  come about through the bundling of certain financial assets         cal cost of acquisition of the participation, which is updated
  of a company. The redemption of these securities takes place       in line with the development of the pro rata on-balance sheet
  to the same extent as payment flows from the payment                equity in the following years.
  claims accrue.
                                                                    Fair value
Cap                                                                  Market value at which financial instruments can be bought
  Interest rate hedging agreement which leads to a compensa-         and sold.
  tory payment to the purchaser of the cap, which must be
  paid by the seller, if a fixed upper interest limit is exceeded.   Finance leasing
                                                                     Transfer of the economic ownership of the leased asset to
Captive                                                              the lessee.
  Finance company that is owned and /or managed by an
  industrial company.                                               Financial instrument
                                                                     Contract which simultaneously leads to a financial asset for
Cash flow                                                             one company and a financial liability or equity instrument
  Net payment flows of a period from the current business             for another.
  activities, investments and financial activity.
                                                                    Funding
Commercial Paper Programme                                           Refinancing
  Framework programme for short-term debentures which en-
  ables money market paper to be issued quickly and flexibly.        Goodwill
  The programme framework forms a stock for realising short-         The difference between the purchase price for an acquired
  term financing requirements.                                        company and the value of the net assets acquired.

Conduit                                                             Hedge accounting
  Purchasing and refinancing company of a bank. It pools claims       Presentation of opposing value development between deriv-
  from various sales of receivables and refinances these, usu-        ative and underlying transaction with the aim of minimising
  ally on a short-term basis on the commercial paper market.         the influence which the valuation result from the derivative
                                                                     transaction will have on the income statement.
Cost Income Ratio
  General administration expenses divided by surplus from           Microhedging
  lending and leasing transactions after provisions for risks and    Interest rate hedging with caps or swaps in a 1:1 ratio with
  commission surplus.                                                the underlying transaction being hedged.

Debt Issuance Programme                                             Operating leasing business
  Framework programme for medium and long-term deben-                The economic ownership of the leased asset remains with
  tures, which enables secured and /or unsecured debt                the lessor.
  instruments to be issued on a revolving basis. Issue volume,
  currency and term can be adapted according to the level of        Outbound
  funds required by the issuer.
                                                                     Active telemarketing, employed for telephone selling, active
                                                                     customer care, sales support and market research.
Derivative
  Financial instrument whose value depends on the value of          Special Purpose Entity
  another original financial instrument. Derivatives is a generic
                                                                     Special-purpose company established in order to achieve
  term covering, for example, options, futures, forwards, inter-
                                                                     a narrow, precisely defined objective, e. g. to carry out the
  est rate swaps and currency swaps.
                                                                     securitisation of financial instruments.
Derivative financial instrument (hedging transaction)
                                                                    Swap
  Rights and obligations for covering financial risks associated
                                                                     Exchange of payment streams which can also take place
  with original financial instruments, e. g. swaps or currency
                                                                     between different currencies.
  hedging transactions. Their value depends on interest rates
  and exchange rates, amongst other factors.
                                                                    Working Capital Loans
Effective interest rate method                                       Short-term equipment loan
  The inclusion of all fees paid and received between contact-
  ing parties and other remuneration.




102
Published by:
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Germany
Phone +49-5 31-212 35 99
Fax +49-5 31-212 31 99
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You will also find the annual report under
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The Annual Report for 2003 is published
in English and German. Should you require
any further information, please contact
the above office.
Volkswagen Financial Services AG
Gifhorner Strasse 57
38112 Braunschweig




                                   2003
Germany
Phone +49- 5 31-212 35 99
Fax +49- 5 31-212 31 99
info@vwfsag.de
www.vwfsag.de


Investor Relations
Phone +49- 5 31-212 2518

				
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