Leasepwc.pl/IFRS by lessee
– discover the
IFRS1 6 disclosures
Case study
2019
pwc.pl/IFRS
1. Overview of the Company and its previous lease disclosures
Tomasz Konieczny PwC Partner Capital Markets and Accounting Advisory Services
In January 2016 the International Accounting Standards Board (IASB) issued IFRS16 “Leases”, thereby starting a new era of lease accounting – at least for lessees. Whereas under the previous guidance in IAS17 “Leases”, a lessee had to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet), the new model requires the lessee to recognise almost all lease contracts on the balance sheet; the only optional exemptions are for certain short-term leases and leases of low-value assets. For lessees that have entered into contracts classified as operating leases under IAS17, this could have a significant impact on the financial statements. IFRS16 “Leases” is effective from 1 January 2019. The new standard replaces IAS17 “Leases”, IFRIC4 “Determining Whether an Arrangmenet Contains a Lease”, SIC-27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease” and SIC-15 “Operating Leases – Incentives”. This case study publication aims to concentrate on the disclosure aspect of the new standard for the lessee. Only incidental subleases are presented to indicate that the new lease model for lessee may impact also accounting for subleases, nevertheless this publication is not designed for lessors. We have deliberately selected a company with a relatively simple business model – a manufacturer of furniture and equipment sold through its own retail chain. We have provided the company’s background, followed by IAS17 disclosures and then presented extracts from the 2019 financial statements that incorporate the requirements of IFRS16. This is an example of the impact and disclosures of IFRS16 and, therefore, should not be perceived as being a comprehensive source of knowledge on IFRS16 or disclosure requirements. We hope you will find this case study useful and it will help you better understand the difference between the old and new disclosure requirements.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019 Leases by lessee – Discover the IFRS16 disclosures – Case study 2
1. Overview of the
Company and its previous lease
disclosures
Commentary
On the following pages we present details of the Company’s business and the IAS 17 disclosure from the financial statements for the year ended 31 December 2018. In the final part of this section, we have summarised the impact of IFRS16. Whilst the Company identified many differences on the adoption of the new standard, the list is not exhaustive and other companies may identify different adjustments arising from the adoption of IFRS16.
Marta Madejska Director
1. Overview of the Company and its previous lease disclosures `
Information about the Company The Company is a furniture manufacturer in Poland. The products are sold through 25 own-brand stores located in major European cities. All the stores are in the leased properties. The manufacturing plant is owned by the Company but is located on the plot of land which it uses based on a land lease agreement. The Company also leases a fleet of delivery vans to transport goods from the factory to the central warehouse and to the stores. The Company has some incidental subleases. The Company prepares its financial statements in accordance with EU IFRS. All leases were classified as operating leases under IAS17. The extracts from the financial statements relating to the Company’s lease arrangements are presented below. Comparative information has been omitted. For the purpose of financial reporting, the Company assumes that the total change in equity/net profit of EUR 150 thousand would be of material importance to investors and, therefore, it determined that the adjustments identified in respect of individual balance sheet items in excess of EUR 15 thousand (i.e. 10% of the overall materiality level) are always recognised in the financial statements.
Disclosures relating to leases in the Company’s financial statements for the year ended 31/12/2018
Note 10. Operating leases (extract from the financial statements)
Accounting policies
Leases in which substantially all the risks and rewards of ownership are not transferred to the lessee are classified as operating leases.
The Company is a lessee in operating lease arrangements. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight -li n e b a s is over the period of the lease. Contingent rents are recognised as an expense when incurred.
The Company i s a sublessor of certain assets leased under head operating lease cont r a c t s. T h o s e s u b l e a s e s a r e cl a s sifi e d a s operating leases . Lease income is recognised o n a straight -line basis over the lease term .
The Company does not have any leases classified as finance leases.
The lease where the Company is a lessee The Company uses the following assets based on operating lease arrangements: retail stores, an office building, a plot of land, delivery vans, other small equipment (e.g. computers, mobile phones). The leases have varying terms, termination and renewal rights. The main lease terms are summarised below: • Retail stores have a non-cancellable lease term between 5 and 8 years. The contracts contain an option to renew the lease. The lease payments are a fixed amount, plus percentage of sales exceeding a predetermined level. • The land lease agreement is for 99 years with a cancellation period of 3 months. All payments are variable based on the fair value of the leased land. • The office building has a non-cancellable lease term of 10 years with an option to renew the contract. The lease payments are fixed, adjusted for inflation. • The vans are leased for 1 year with an option to renew the lease. • Small equipment (e.g. computers, mobile phones) is leased for a fixed period of two years with the purchase option at fair value.
The Company subleases certain of those assets under operating lease agreement to the related party.
Lease by lessee – Discover the IFRS16 disclosures – Case study 4
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019 1. Overview of the Company and its previous lease disclosures
The table below presents minimum lease payments in relation to non-cancellable operating leases where the Company is a lessee:
(in EUR’000) 31/12/2018
Future minimum lease payments in relation to non-cancellable operating leases are
payable as follows: Within one year 3,150 Later than one year but not later than five years 12,383 Later than five years 10,859 Total 26,392
Not included in the above commitments are contingent rental payments which may arise in the event that sales generated by the stores exceed a pre-determined level. The contingent rent is 1% of sales revenue from the excess sales. The whole rent payable for the land lease is excluded from the minimum lease payments disclosed above as all payments are contingent rent based on the fair value of the land. The annual payment for the last financial year amounts to EUR 70 thousand.
The table below presents the lease expense in relation to operating leases which is recognised in profit or loss for the 12-month period ended 31/12/2018: Selling Administrative 2018 (in EUR’000) costs expenses Total
Rental expense relating to operating leases: Minimum lease payments 3,014 260 3,274 Contingent rent 191 - 191 Total operating lease expense 3,205 260 3,465
The following items resulting from operating lease contracts are recognised in the statement of financial position:
(in EUR’000) 31/12/2108
Other assets Prepaid rent in operating lease contracts (lease of stores) 510
Other liabilities Accrual for the rent free periods in operating lease contracts (lease of office buildings) 20
None of the Company’s leases were determined to be onerous.
The lease where the Company is a lessor The Company is as a lessor in incidental situations. The Company currently subleases part of its office space and some of its computers to a related party. Income from these leases amounts to EUR 40 thousand (2017: EUR 39 thousand). The future minimum lease payments in relation to non-cancellable operating leases are as follows:
(in EUR’000) 31/12/2018
Future minimum lease payments in relation to non-cancellable operating suleases leases are payable as
follows: Within one year 47 Later than one year but not later than five years 164 Later than five years 126 Total 331
None of the Company’s leases were determined to be onerous.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019 Leases by lessee – Discover the IFRS16 disclosures – Case study 5 1. Overview of the Company and its previous lease disclosures
Impact of the application of IFRS16
Method of initial application The Company is applying IFRS16 for the first time for the year commencing 1/1/2019. IFRS16 allows two methods of initial application: (1) full retrospective application with the restatement of comparatives and (2) modified retrospective approach without the restatement of comparatives and with certain simplifications available upon adoption. The Company has elected to use the second approach by implementing the standard retrospectively in relation to all leases in which the Company is a lessee without restating comparatives. The implementation of IFRS16 will not affect total equity. The adjustments to assets and liabilities are disclosed in Note 3 to the financial statements.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019 Leases by lessee – Discover the IFRS16 disclosures – Case study 6 1. Overview of the Company and its previous lease disclosures
Main areas of IFRS16 adjustments The following is a short summary of the differences the Company identified on adoption of IFRS16:
A r e a a n d impact of IFRS16 See further
A. Leases where the Company is a l e s s e e
A . 1 Accounting for all leases except for short - term leases and c e r t a i n leases of low - Note 3.1 in the value assets: For all leases, except for short - term leases and c e r t a i n leases of low - financial statements value assets, previously classified as operating leases: • as at 1/1/2019 the Company will recognise a lease liability measured at the present value of the remaining lease payments, disco unted using the Company ’ s incremental borrowing rate at 1/1/2019. • For all leases the Company has elected to recognise a right - of- use asset at an amount equal to the lease liability, adjusted by the amount of prepaid or accrued lease payments relating to those leases recognised in the statement of financial position immediately before the date of initial application.
A . 2 Practical expedients: The Company elected to use the following practical NoteNote 3.1 3.1 in in the the expedients: financialfinancial statements statements • a single discount rate will be applied to a portfolio of leases with reasonably s i m i l a r characterisctics; • the assessment of whether leases are onerous, applying IAS37 “ Provisions, Contingent Liabilities and Contingent Assets ” , immediately before 1/1/2019 will be used as an alternative to peform an impairment analysis. As the analysis of t h e o nerous contracts as at 31/12/2018 has not resulted in the need to recognise a provision, the right - of- use asset at 1/1/2019 will not be adjusted by any impairment allowance; • not to apply the new lessee accounting model to leases for which the lease term ends within 12 months after the date of initial application. Instead, those leases will be accounted for as short - term leases. Note 3.1 in the A . 3 Leases of low - value assets: The Company has elected to apply the exemption for lo w - Notefinancial 3.1 statements in the value assets such as small equipment (e.g. computers, mobile phones) o n a le a s e - by- financial statements lease basis. The Company has decided that for the leases where the asset is sub - l e a s e d (see point B below), a right - of- use asset is recognised with corresponding lease li a bilit y. For all other leases of low value asset, the lease payments associated with those leases will be recognised as an expense on a straight -line basis over the lease term. Note 3.1 in the financial statements A . 4 S h o rt-term leases: The Company has elected to apply the exemption for all short -t e r m Note 3.1 in the leases (up to 12 months) and therefore the lease payments associated with those leases financial statements will be recognised as an expense on a straight -line basis over the lease term.
B. Leases where the Company is a le s s o r Note 3.1 in the Sublease of a n office space will continue to be classified as a n operating lease. T h e financial statements C o m p a n y wi ll recognise the right - of- use asset resulting from the head lease . T he s u b l e a s e d portion of right - of- u s e a s s et wi ll b e classified as an investment pr o p e r t y. Revenue from the sub lease will be recognised over the term of the sub - l e a s e .
T h e s ublease of certain computers will be classified as a finance lease. The Company will der e c o g ni s e t h e ri g ht - of- u s e asset (to the extent that it is subject to the sub - l e a s e ) a n d recognise a fi n a n c e lease receivable ( net investment in the fin a n c e l e a s e ).
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019 Leases by lessee – Discover the IFRS16 disclosures – Case study 7 DisclosuresOverview of the Company and its previous revenue recognition policy
2. IFRS16 disclosures in
the annual financial
statements for 2019
Marta Madejska Director
Commentary
Due to a significant change in recognition and measurement, the implementation of IFRS16 significantly affects the amounts presented in the financial statements as well as the extent of the required disclosure. Lessees should disclose information that allows users of the financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee. The disclosure requirements for lessees are set out in paragraphs 51 to 60 of IFRS16. Also in relation to lease liabilities certain disclosures required by IFRS7 should be provided (e.g. Stypułkowska -Molga Suhrob Azimov contractual undiscounted cash flows in the liquidity table). Management should consider the level of detail needed to meet the disclosure objective. For example, an entity should aggregate or disaggregate information, as appropriate, to provide clear and meaningful information to a user of the financial statements. Management should also disclose the application of certain practical expedients, e.g. short-term leases, leases of low-value assets, and other expedients available only on first time adoption.
Upon transition, entities are required to provide disclosures required under IAS8 “Accounting Policies, Changes in Accounting Estimates and Erros”, inter alia the nature of the changes in the accounting policies, the amount of the adjustment for each financial statement line item affected, and the transitional provisions. These are all disclosed in Note 3. If comparatives are not restated, the accounting policies for the current period (i.e. IFRS16) and
the comparative period (i.e. IAS17) should be provided.
This part of the publication presents the disclosures prepared by the Company in its annual financial statements in the year of initial application of IFRS16. In compiling the illustrative disclosures, we
have made a number of assumptions in relation to the adoption of IFRS16. In particular, IFRS16 is adopted using a modified retrospective approach. The Company has also applied certain practical expedients.
The example disclosures are not the only acceptable form of presenting financial statements. Alternative presentations may be acceptable if they comply with the specific disclosure requirements prescribed in the IFRSs. Readers may find our IFRS disclosure checklist 2019 useful to identify other disclosures that may be relevant under the circumstances but which have not been illustrated in this publication.
The source for each disclosure requirement is given in the reference column on the left.
2. IFRS16 disclosures in the annual financial statements for 2019
Financial statements for the year ended 31 December 2019
Statement of financial position 10 Statement of profit or loss 11 Statement of comprehensive income 12 Statement of changes in equity 13 Statement of cash flows 14 Notes to the financial statements 14 Note 1. Basis of preparation of the financial statements ...... 15 Note 2. Accounting policies [excerpt relating to IFRS16 only] ...... 15 Note 3. New and amended standards adopted by the Company [excerpt relating to IFRS16 only] ...... 15 Note 4. Leases - the Company as a lessee ...... 17 Note 5 Lease – the Company as a sublessor ...... 23 Note 6 Debt (extract) ...... 24 Note 7. Alternative performance measures used by the Management ...... 25 Note 8. Financial risk management (extract) ...... 26
Commentary
This part of the publication illustrates the types of disclosures that would be required in the year of the first adoption o f I F R S 1 6 in the financial statements of our ficti ti o u s Company. It shows mainly the disclosures that are incrementally required as a r esult of adopting IFRS16 which are illustrated in this publication. Disclosure requirements which exist i n d e p e n dently of the adoption of IFRS16 are not illustrated (with some exceptions) and these can be found in the PwC publication “Illustrative IFRS co nsolidated financial statements”. The disclosures in this publication must be read in the context of the assumptions set out in t h e section “Overview of the Company and its previous l e a s e di s cl o s u r e s ”. Different facts and circumstances could result in diff er e nt a c c o u n ti n g .
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 9 2. IFRS16 disclosures in the annual financial statements for 2019
Statement of financial position
(i n E U R ’ 0 0 0 ) N o t e s 3 1 / 1 2 / 2 0 1 9 3 1 / 1 2 / 2 0 1 8 ASSETS N o n - current assets
Property, plant and equipment 2 1 , 8 0 0 1 8 , 0 0 0 IFRS16p47(a) R i g ht - of- u s e a s s e t s N o t e 4. 5. 1 2 6 , 6 0 1 -
IFRS16p48 Investment property N o t e 4. 5. 2 2 6 8 -
Loans granted 3 , 9 8 5 4 , 8 7 8 T o t al n o n - current assets 5 2 , 6 5 4 2 2 , 8 7 8 Current assets
Trade receivables 3 1 , 4 1 5 2 4 , 8 5 2 Investments in equity instruments 8 , 0 0 0 8 , 7 0 0 I n v e nt o r y 1 2 , 1 1 3 9 , 0 8 6 Other assets 2 6 9 1 4 Cash and cash equivalents 4 4 4 8 0 0 Total current assets 5 1 , 998 4 3 , 3 5 2 TOTAL ASSETS 1 0 4 , 652 6 6 , 2 3 0 EQUITY
Share capital 5 , 0 0 0 5 , 0 0 0 Accumulated other comprehensive income 3 2 4 1 , 3 7 7 Retained earnings 2 1 , 125 1 2 , 3 0 0 Total equity 2 6 , 4 49 1 8 , 6 7 7 LIABILITIES N o n - current liabilities
Borrowings N o t e 6 3 8 , 5 0 0 3 8 , 5 0 0 IFRS16p47(b) Lease liabilities N o t e 4 . 5. 3, 6 2 3 , 106 -
Deferred tax liability 38 53 T o t al n o n - current liabilities 6 1 , 644 3 8 , 5 5 3 Current liabilities B o r r o wi n g s 4 , 8 0 0 - IFRS16p47(b) Lease liabilities N o t e 4 . 5. 3, 6 2 , 9 2 7 -
Trade and other payables 8 , 8 3 2 9 , 0 0 0 Total current liabilities 1 6 , 5 5 9 9 , 0 0 0 TOTAL EQUITY AND LIABILITIES 1 0 4 , 6 52 6 6 , 2 3 0
Commentary
After analysing the requirements of IAS1 “Presentation of Financial Statements” a n d IF R S 1 6 , the Company decided to present separately r i g ht- of- u s e a s s et s (except for those items that are classified as investment property) a n d t h e lease liability. Nevertheless, I F R S 1 6 does not require these items to be presented separately in the statement of financial position . The lessee can present right - of- use assets either separately or in the same line item in which the underlying assets would be presented in the statement of financial position if they were owned . It can present lease liabilities either as a separate line item or together with other financial liabiliti es. If right- of- u s e assets or lease liabilities are not presented as separate line items, an entity discloses in the notes their carrying amounts and the line items in which they are included.
Where the c ompany sublease s the right - of- use asset in an operating lease , s u c h ri g ht - of- use asset is classified as investment property (underlying leased asset meets the definition of investment property) or righ t - of- use assets (subleases of assets other than those that meet investment property definition). Wher e t h e c ompany subleases the asset in finance lease, asset is presented as finance lease receivable at an amount equal to the net investment
i n t h e fi n a n c e le a s e . The finance sublease is not material for our Company thus the fi n a n c e lease receivable is not presented in the separate line item in the statement of financial position but included within “other assets” .
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 10 2. IFRS16 disclosures in the annual financial statements for 2019
Statement of profit or loss
12 months ended 12 months ended (in EUR’000) N o t e s 3 1 / 1 2 / 2 0 1 9 3 1 / 1 2 / 2 0 1 8
R e v e n u e 1 3 4 , 8 6 0 1 2 6 , 5 8 0
Cost of sales ( 9 2, 6 6 4 ) ( 9 4, 1 7 5 )
Gross profit 4 2 , 1 9 6 3 2 , 4 0 5
Distribution expenses ( 2 0, 0 4 3 ) ( 1 3, 4 0 2 )
Administrative expenses ( 7, 4 6 0 ) ( 3, 9 1 7 )
Impairment loss on financial assets ( 3 2 0 ) ( 1, 7 5 0 )
F ai r value gains/losses on financial instruments ( 1 7 0 ) -
Dividend income 5 2 0 5 4 0 Losses on early termination of leases Note 4.5.1 ( 2 1 0 ) - Other income/(expense) 42 - Interest income 109 2 0 0 IFRS16p49 Finance costs Note 6 ( 3, 7 3 0 ) ( 1, 9 8 0 )
Profit before income tax 1 0 , 9 3 4 1 2 , 0 9 6
Income tax expense ( 2, 1 0 9 ) ( 2, 3 0 1 )
Profit for the period 8 , 8 2 4 9 , 7 9 5
Earnings per share (basic and diluted) 1 1 , 7 1 0 , 9
Commentary
I F R S 1 6 r e q uir e s t h e pr e s e n t atio n of interest expense on the lease liability separately from the depreciation charge for t h e ri g ht - of- use asset. The lessee presents the depreciation charge of the right - of- use asset in the same line item/items in which similar expense is s h o w n in profit or lo ss. Interest expense on the lease liabilit y is presented as part of finance c o st s.
Due to the fact that the Company has applied the modified retrospective approach, the amounts presented in the current year and t h e comparatives are not comparable.
I n p a rticular we would like to draw your attention to the fact that adoption of I F R S 1 6 (especially if t h e simplified method is applied) may have an impact on t h e recognition of lease related expenses compared to the previo u s operating lease model. Under IAS17 to tal lease expense had to be recognised on a straight line basis over the lease term. Under IFRS16, while t h e ri g ht - of- u s e asset will most of the time be depreciated on a straight line basis as well, the interest expense will be recognised degres si v el y t o r eflect the amount of diminishing liability balance as the lease progresses. The combined effect of t h e depreciation of t h e ri g ht - of- u s e a s s et and interest charge will exceed operating lease expense in t h e early years of the lease and the situation will rev erse towards the end of the lease term. The chart below depicts that phenomen on.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 11 2. IFRS16 disclosures in the annual financial statements for 2019
Statement of comprehensive income
12 months ended 12 months ended (in EUR’000) N o t e s 3 1 / 1 2 / 2 0 1 9 3 1 / 1 2 / 2 0 1 8
Profit for the period 8 , 8 2 4 9 , 7 9 5 Other comprehensive income – Items that will not be reclassified to profit or loss Changes in the fair value of equity investments at FVOCI ( 7 0 0 ) 1 , 7 0 0 I n c o m e t a x 1 3 3 ( 3 2 3 ) Other comprehensive income – Items that will be reclassified to profit or loss Cash flow hedge ( 6 0 0 ) -
Income tax 1 1 4 - Other comprehensive income for the period, net of tax ( 1, 0 5 3 ) 1 , 3 7 7 Total comprehensive income for the period 7 , 7 7 1 1 1 , 1 7 2
Commentary
We do not expect other comprehensive income to be d ir e ctly affected by the n e w le a si n g st a n d a r d, u nl e s s revaluation model is applied by the entity to t h e ri g ht - of- u s e a s s et s .
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 12 2. IFRS16 disclosures in the annual financial statements for 2019
Statement of changes in equity
Accumulated OCI S h a r e F V C a s h fl o w R e t ai n e d (in EUR’000) N o t e s c a p i t al g a i n/l o s s h e d g e e a r n i n g s T o t al
Balance as at 1/1/2018 5 , 0 0 0 - - 3 , 5 0 5 8,505 Profit for the period - - - 9 , 7 9 5 9 , 7 9 5
Other comprehensive income - 1 , 3 7 7 - - 1 , 3 7 7 Total comprehensive income for
t h e p e ri o d - 1 , 3 7 7 - 9 , 7 9 5 1 1 , 1 7 2
D i vi d e n d - - - ( 1, 0 0 0 ) ( 1, 0 0 0 ) Transactions with owners - - - ( 1, 0 0 0 ) ( 1, 0 0 0 ) Balance as at 31/12/2018 5 , 0 0 0 1 , 3 7 7 - 1 2 , 3 0 0 1 8 , 677
Balance as at 1/1/2019 5 , 0 0 0 1 , 3 7 7 - 1 2 , 3 0 0 1 8 , 6 7 7
IFRS16pC5(b) Adjustment on the adoption of
N o t e 3 IAS 1.106 I F R S 1 6 - - - - - Balance as at 1/1/2019
(r e s t at e d ) 5 , 0 0 0 1 , 3 7 7 - 1 2 , 3 0 0 1 8 , 6 7 7 Profit for the period - - - 8 , 8 2 4 8 , 8 2 4 Other comprehensive income - ( 5 6 7 ) ( 4 8 6 ) - ( 1, 0 5 3 ) Total comprehensive income for
t h e p e ri o d - ( 5 6 7 ) ( 4 8 6 ) 8 , 8 2 4 7 , 7 7 1 Balance as at 31/12/2019 5 , 0 0 0 8 1 0 ( 4 8 6 ) 2 1 , 1 2 5 2 6 , 4 4 9
Commentary
A s t h e C ompany applied the simplified method of accou n ting for transition to IFRS16 , it recognised the ri g ht - of- u s e a s s et s at an amount equal to recognised lease liability subject to adjustments for previously recognised assets or liabilities relating to operating leases. There were no related deferred tax effects and, a ccordingly, the adopt i o n o f I F R S 1 6 had no impact on equity as at 1 January 2019.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 13 2. IFRS16 disclosures in the annual financial statements for 2019
Statement of cash flows 12 months ended 12 months ended (in EUR’000) N o t e s 3 1 / 1 2 / 2 0 1 9 3 1 / 1 2 / 2 0 1 8 Cash flows from operating activities Profit before income tax 1 0 , 9 3 4 1 2 , 0 9 6 Adjustments for: Amortisation and depreciation 2 , 8 6 3 6 6 0 Impairment of financial assets 3 2 0 1,750 Dividends received ( 5 2 0 ) ( 5 4 0 ) I nt er e st and finance lease i n c o m e ( 1 0 9 ) ( 2 0 0 ) Other income/(expense) N o t e 4. 5. 1 2 1 0 - Finance costs 3 , 7 3 0 1,980 Fair value gains/losses on financial instruments 1 7 0 - Income tax paid ( 2, 5 2 4 ) ( 2, 5 7 1 ) Change in working capital (Increase)/Decrease in trade receivables ( 7, 9 6 1 ) ( 3, 9 2 9 ) (Increase)/Decrease in i n v e n t o r y ( 2, 6 4 3 ) ( 1, 7 7 0 ) Increase/(Decrease) in trade payables 5 0 0 ( 5, 0 0 0 ) Net cash inflow (outflow) from operating activities 4 , 9 7 0 2 , 4 7 6
Cash flows from investing activities Payments for property, plant and equipment ( 4, 7 0 0 ) ( 4 9 0 ) Repayments of loans granted 8 0 0 - Dividends received 5 2 0 5 4 0 I nt er e st and finance lease income r e c ei v e d 109 2 0 0 Finance sublease receivable collected 5 - Net cash inflow (outflow) from investing activities ( 3, 2 66) 2 5 0
Cash flows from financing a c t i viti e s Dividend paid - ( 1, 0 0 0 ) IFRS16p50 Payments of principal on l e a s e s N o t e 6 ( 3, 1 5 3) - IFRS16p50 Payments of interest on lease s N o t e 6 ( 5 2 2 ) - Payments of lease termination penalty N o t e 4. 5. 1 ( 3 0 0 ) - Proceeds from b o r r o wi n g s N o t e 6 4 , 2 0 0 Payments of interest on borrowings N o t e 6 ( 2, 2 8 4 ) ( 1, 1 3 0 ) Net cash inflow (outflow) from financing activities 2 , 0 59 ( 2, 1 3 0 )
Net increase /(decrease) in cash and cash equivalents ( 3 5 6 ) 5 9 6
Cash and cash equivalents at the beginning of the year 8 0 0 2 0 4 Cash and cash equivalents at the end of the y e a r 4 4 4 8 0 0
Significant non-cash transactions (entering into new lease agreements) are disclosed in note 4.2.
Commentary
The operating lease payments were presented in 2018 within operating activit i e s, w h e r e a s in 2019 all lease payments are presented by lessee within financing activit i e s. The lessee classifies lease payments consistently with payments of other financial liabilities in the cash fl o w statement: - The parts of the lease payments that represent cash payments for the principal portion of the lease liabilities are presented as cash flows resulting from financing activities. - The parts of the lease payments that represent the interest portion are presented either as operating cash flows or as cash flows resulting from financing activities in accordance with the entity’s accounting policy i n r e s p e ct of the presentation of intere st payments. Lease payments which were not included in the measurement of the lease liabilities (including certain variable payments, short-term leases and leases of low - value assets) continue to be presented as operating cash flows.
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 14 2. IFRS16 disclosures in the annual financial statements for 2019
Notes to the financial statements
Note 1. Basis of preparation of the financial statements
These financial statements for the year ended 31 December 2019 have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as adopted by the EU.
Note 2. Accounting policies [excerpt relating to IFRS16 only]
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of new and amended standards as set out below in Note 3. The new accounting policies applied from 1/1/2019 are stated in the relevant notes.
Note 3. New and amended standards adopted by the Company [excerpt relating to IFRS16 only]
The Company has adopted IFRS16 “Leases” from 1/1/2019, which has resulted in changes in the accounting policies and adjustments to the amounts recognised in the financial statements.
Effective date and I F R S 1 6 was first issued in January 2016. transitional In accordance with the tr a n sitio n al pr o vi si o n s of I F R S 16, the Company has adopted the new p r o v i si o n s g ui d a n c e applying a modified retrospective approach with the cumulative effect of initially applying this standard as an adjustment to the opening balance of retained earnings in the period of initial application, i.e. 1/1/201 9 . Comparative prior year periods were not r e st at e d . Entities applying the modified retrospective approach may also elect to use certain pr a cti c a l e x p e di e nt s.
Summary of the The new standard sets out the principles for the recognition, measurement, presentation and main changes disclosure of leases. All leases result in the lessee recognising the right to use an asset at introduced by t h e commencement date of the lease, and if lease payments are made ov er time, also the standard recognising financing. Accordingly, IFRS16 eliminates the classification of leases as either operating leases or finance leases as required by IAS17 and, instead, introduces a single lessee accounting model. Lessees will be required to recogn ise: (a) assets and liabilities for all leases with a le a s e term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of ri g ht- of- u s e assets separately from interest on lease liabilities in profit or loss . IFRS16 substantially carries forward the lessor accounting requirements fr o m IAS17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. For subleases, i ntermediate lessors should classify subleases based on the right - of- use asset from the head lease, rather t han the underlying lease asset as it w a s under IAS 17 , t h u s there is increased li k eli h o o d t h at a sublease previously classified as operating lease will be classified as a finance lease under IFRS16 .
Note 3.1. The effect from adoption of IFRS16 on the Company’s financial statements
IFRS16pC5(b) The Company decided to implement the new standard retrospectively with the cumulative effect of initial IFRS16pC7 application recognised as at the date of initial application of IFRS16, i.e. 1 January 2019 with the corresponding effects recorded in equity (retained earnings). This means that the data presented for 2018 and 2019 is not comparable. IFRS16pC6 As required by the standard, this election has been consistently applied to all leases in which the Company is a lessee and sublessor.
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Note 3.1. The effect from adoption of IFRS16 on the Company’s financial statements (cont.)
IFRS16pC8(a) Company as the lessee
For all leases, except for short-term leases and leases of low-value assets other than those which are
subleased, previously classified as operating leases:
IFRS16pC8(b) • as at 1/1/2019 the Company has recognised a lease liability measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate at 1/1/2019; • for all leases the Company has elected to recognise a right-of-use asset at an amount equal to the lease liability, adjusted by the amount of prepaid or accrued lease payments relating to those leases recognised in the statement of financial position immediately before the date of initial application.
Low-value assets which are sub-leased are accounted for as a right-of-use asset with the corresponding lease liability.
IFRS16pC13 IFRS16pC10 The Company elected the following practical expedients:
• has applied a single discount rate to a portfolio of leases with reasonably similar characterisctics; IFRS16pC10(a) • relied on its assessment of whether leases are onerous applying IAS37 immediately before IFRS16pC10(b) 1/1/2019 as an alternative to peforming an impairment analysis. The analysis of the onerous
contracts as at 31/12/2018 has not resulted in a need to recognise an impairment allowance. The
right-of-use assets as at 1/1/2019 were therefore not adjusted for any impairment;
• not to apply the new lessee accounting model to leases for which the lease term ends within 12
months after the date of initial application. Instead, it has accounted for those leases as short-term IFRS16pC10(c) leases.
IFRS16pC12(b) The explanation of the difference between operating lease commitments disclosed as at 31/12/2018 when applying IAS17 to the lease liabilities recognised as at 1/1/2019 is presented in the table below:
(in EUR’000) 1/1/2019
IFRS16pC12(b) Operating lease commitments as at 31/12/2018 under IAS17 26,392 Leases previously not included (land) 3,488 Excluded short-term leases (19) Excluded low value assets (other than those which are subleased) (96) The effect of discounting using the incremental borrowing rate at 1/1/2019 (5,663) Lease liability as at 1/1/2019 24,102 Short-term portion 2,927 Long-term portion 21,175
Company as the lessor
The sublease of certain computers is classified as a finance lease. The Company derecognised the right- of use asset (to the extent that it is subject to the sub-lease) and recognised a finance lease receivable (net investment in the lease). The finance lease receivable is presented within “other assets” as the amount is not material.
Sublease of an office space is classified as operating lease. The Company continues to recognise the right-of-use asset resulting from the head lease. The subleased portion of right-of-use asset is classified as investment property (subsequently measured applying the cost model). Revenue from the sublease will be recognised over the term of the sublease.
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The initial value of the right-of-use assets is determined as follows:
(in EUR’000) 1/1/2019
Amount equal to lease liability as at 1/1/2019 under IFRS16 24,102
Adjusted for: Lease prepayments recognised as of 31/12/2018 510 Accrued lease payments as of 31/12/2018 (20) Provision for onerous contracts - Reclassification to investment property (operating sublease of office building) (298) Reclassification to finance lease receivable (sublease of low-value assets) (10) Right-of-use asset as at 1/1/2019 24,284
The following line items were affected by the adjustments and reclassifications made with respect to the amounts recognised at the date of initial application – 1/1/2019:
IAS17 IFRS16 IFRS16 (in EUR’000) 31/12/2018 adjustments 1/1/2019 Investment property - 298 298 Right-of-use assets - 24,284 24,284 Total non-current assets 22,878 24,592 47,470
Other assets 914 (500) 414 Total current assets 43 352 (500) 42 852 TOTAL ASSETS 66 230 24,092 90,322
Equity Retained earnings 12 300 - 12 300 Total equity 18 677 - 18 677
Lease liabilities - 21,175 21,175 Non-current liabilities 38 553 21,175 59,728
Lease liabilities - 2,927 2,927 Trade and other payables 9 000 (20) 8 980
Current liabilities 9 000 2,907 11,907 TOTAL EQUITY AND LIABILITIES 66 230 24,082 90,312
IFRS16pC12(a) The weighted average incremental borrowing rate applied to measure lease liabilities is 6% for land and 4.5% for retail stores and office building.
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Note 4. Leases - the Company as a lessee
IAS1p117 Accounting policies applied from 1 January 2019
Leases are recognised as right - of- u s e a s s e t s and corresponding liabilities at the date at which the leased asset s a r e available for use by the Company .
T h e ri g ht - of- use assets is presented separately in the statement of financial position, except for righ t- of- use assets that meet the definition of investment property which is presented in statement of financial position in separate line it e m – “investment property”.
At the commencement date, lease liabilities are measured at an amount equal to the present value of the following lease payments f or t h e underlying right - of- u s e a s s e t s d u ri n g the lease term : • fixed payments (including in - substance fixed payments), less any lease incentives receivable ; • variable lease p a y m e n t s that are based on an index or a rate ; • amounts expected to be payable by the C o m p a n y under residual value guarantees ; • the exercise price of a purchase option if the C o m p a n y is reasonably certain to exercise that option ; • payments of penalties for te rminating the lease, if the lease term reflects the C o m p a n y exercising that option. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be r e a di l y determined, or the C o m p a n y’ s incremental borrowing rate.
Each lease payment is allocated between the liability and finance cost. Lease liabilities are subsequently measured using the effective interest method. The carrying amount of liability is remeasured to reflect any reassessment, lease modification or revised in - substance fixed payments. The lease term is a non - cancellable period of a le a s e; periods covered by o pti o n s to extend and terminate the le a s e are only included in the lease term if it is reasonably certain that t h e le a s e will be extended or not terminated.
R i g ht - of- use assets are measured initially at cost comprising the foll o wi n g: • the amount of the initial measurement of t h e lease liability; • any lease payments made at or before the commencement date less any lease incentives received ; • any initial direct costs ; • restoration costs. Subsequently, t h e ri g ht- of- u s e a s s et s, ar e measured at cost less accumulated depreciation and a n y accumulated impairment losses , and adjusted for remeasurement of the lease liability due to reassessment or lease modifications.
T h e ri g ht - of- u s e a s s e t s ar e depreciated over the shorter of the a s s e t’ s useful life and the lease term on a straight - line basis. The amortisation periods f or t h e ri g ht - of- u s e a s s et s are as follows: • right of use f or the land 99 years • right of use f or the retail stores 5 – 1 5 y e a r s • right of use for the office buiding 1 0 y e a r s Payments associated with all s h o r t-term leases and c e rt ai n le a s e s of all lo w - value assets are recognised on a str ai g ht -line basis as an expense in profit or loss. The Company a p p li e s the exemption for low - value assets o n a le a s e - by- lease basis i.e. for the leases where the asset is sub - l e a s e d , a ri g ht - of- use asset is recognised wit h corresponding lease liability; f or all other leases of low value asset, the lease payments associated with those leases will be recognised as an expense on a straight -line basis over the lease term.
S h o r t-term leases are leases with a lease term of 1 2 months or less. L o w - value assets comprise c o m p u t e r s , t a b l et s, mobile phones and small items of office furniture.
Accounting policies applied until 31 December 2018
Leases in which substantially all risks and rewards of ownership i s not transferred to the Company as a lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a str ai g ht -line basis over the period of the lease.
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IFRS16p59 Note 4.1. Lease activities
IFRS16p59(a) The Company leases various properties (retail stores, office building, plot of land), delivery vans, other small equipment (e.g. computers, mobile phones). Leases are negotiated on an individual basis and contain a wide range of different terms and conditions (incl. termination and renewal rights). The main lease features are summarised below: • Retail stores are rented for a fixed period of 5 to 8 years. The contracts contain an option to renew the lease. The lease payments are usually fixed plus a percentage of sales exceeding the predetermined level (a wide range of sales percentages and sales levels are applied). • The land lease agreement is for 99 years with a cancellation notice period of 3 months. All payments are based on the value of the underlying land which is periodically adjusted for the property price index. • The office building is rented for a fixed period of 10 years with an option to renew the contract. The lease payments are fixed and adjusted for inflation. 50% of the total office space is rented out to the related party (see further information in the Note 5). • The delivery vans are leased for a fixed period of 1 year, with an extension option. • Small equipment (e.g. computers, mobile phones) is leased for a fixed period of 2 years with the purchase option at fair value. Certain items of the computers are sublease to related party. IFRS16.p59(c) The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
IFRS16p59(b) The future cash outflows to which the Company as a lessee is potentially exposed that are not reflected in the measurement of the lease liability arise from: • Variable lease payments – see further information in Note 4.2. • Extension and termination options – see further information in Note 4.3.
The Company does not provide any residual value guarantees.
IFRS16p59, pB49 Note 4.2. Variable lease payments
All retail store lease contracts contain variable payment terms that are linked to sales generated from a store. For individual stores, up to 100% of lease payments are on the basis of variable payment terms and a wide range of sales percentages is applied. Variable lease payment terms are used for a variety of reasons, and the primary reason is to minimise the fixed costs base for newly-established stores. In some cases, payment terms also contain minimum annual payments and caps. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs. Lease payments for the year ended 31/12/2019 are summarised below:
IFRS16p59, pB49 Number of Fixed Variable Total (in EUR’000) stores payments payments payments
Fixed rent only 5 710 - 710 Variable rent with no minimum 1 - 130 130 Variable rent with minimum 19 2,290 81 2,371 25 3,000 211 2,311
A 1% increase in sales across all stores would be expected to increase total lease payments by approximately 0.7%-0.9%. A 5% increase in sales across all stores would be expected to increase total lease payments by approximately 3.3%- 3.8%.
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IFRS16pB37 Note 4.3. Termination and extension option
IAS1p122 IFRS16p59(b)(ii) Critical judgments in determining the lease term
Extension and termination options are i n cl u d e d in a number of pr o p e r t y le a s e s (retail stores, land, office building). These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Company and not by the respective lessor. I n determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only includ ed in the lease term if the lease is rea sonably certain to be extended (extention option) or not terminated (termination option) . The assessment of whether the Company is reasonably certain to exercise an extention option, or not to exercise a termination o pti o n is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and is within the control of the C o m p a n y.
The management has a p p li e d j u d g m e n t t h at: • For the retail stores which are in the strategic l ocations (app r o x. 40% of all t h e Company’s stores) it i s reasonably certain that the extension option will be exercised resulting in a total lease term of 10 - 1 5 y e a r s, w h e r a s f or t h e remaining properties the extention period was not included in t h e lease term as there are no economic incentives to exercise the option. • T h e t ermination option in the land lease agreement will not be exercised as the Company has economic incentive to continue the lease of land on which the Company’s m ai n manufacturing f acility and warehouses are located. Therefore the lease term of 99 years is used. • For the office building the extention option was not included as it is not reasonabl y certain that the Company will continue the lease beyond t h e 10- y e a r p e ri o d. • The lease term of vans was assessed as a s h o rt-term lease as the alternative assets are easily available and there are no economic incentive s to continue beyond t h e basic period of 12 months.
T h e most significant impact of the manage ment’s assessment regarding t h e non- use of the extention options relates to the retail store rentals. The table below summarises potential future rental paymen ts relating to periods following the exercise dates of extention options in the contract s for the retail stores , when the extention periods were not reflected in the lease term :
31/12/2019 1/01/2019 31/12/2019 1/01/2019 Lease Potential future Lease Potential future Historical rate of exercise liability lease payments liability lease payments of extension options recognised not included in recognised not included in % (discounted) lease liabilities (discounted) lease liabilities (discounted) (discounted) Retail stores in the 10,100 -- 9,050 -- 98% 97% strategic location Retail stores – all 12,140 8,900 10,110 7,850 45% 43% other locations 22,240 8,900 19,160 7,850
During the current financial year, the financial effect of revising lease terms to reflect the effect of exercising extension options not previously included in the lease term was an increase in recognised lease liabilities and right - of- use assets of EUR 1,250 thousand. In total, potential future cash outflows of EUR 11,000 thousand have not been included in the lease liability because it is not reasonably certain that the leases will be extended (or not terminated).
IFRS16pB48 IFRS 16p55 Note 4.4. Short-term leases
Leases of vans are short-term leases and the costs are recognised on a straight-line basis during the reporting period. The total cost of short-term leases is disclosed in Note 4.5. The total amount of Company’s lease commitments for short-term leases equals to EUR 70 thousand.
Note 4.5. Amounts recognised in the statement of financial position
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Note. 4.5.1. Right-of-use assets The statement of financial position shows the separate line item for the right-of-use assets, which comprises the following:
IFRS16 IFRS16 (in EUR’000) Notes 31/12/2019 1/01/2019
IFRS16p53(j) Right-of-use assets (by class of assets) Retail stores 22,893 20,507 Buildings 268 298 Land 3,450 3,488 26,610 24,294
(in EUR’000) Notes Retail store Buildings Land Total Balance at 31/12/2018 - - - - IFRS16 adjustment Note 3 20,507 298 3,488 24,294 Balance at 1/1/2019 20,507 298 3,488 24,294 IFRS16p53(h) Additions – new lease contracts 4,950 - - 4,950 Termination of the lease contract (700) - - (700) Depreciation (1,864) (30) (39) (1,933) Balance at 31/12/2019 – IFRS16 22,893 268 3,450 26,610
In the current reporting period, the Company has terminated lease contracts for two retail stores as the result of the Management strategic decision to withdraw from the particular geographical area. The early termination resulted in a loss of EUR 210 thousand (presented in “losses on early termination of the leases”) which is the net effect of the derecognition of the carrying amount of righ-of-use asset of EUR 700 thousand, derecognition of corresponding lease liability of EUR 790 thousand and payment of the penalty of EUR 300 thousand.
Note. 4.5.2. Investment property (right-of-use asset)
IAS1p117 Accounting policies applied from 1 January 2019
The property (building) held by the Company ( a s ri g ht - of- u s e a s s e t s) t o e a r n r e nt a ls is classified as investment property. The Company measures its investment property applying the cost model. For the investment property held by the Company as a right - of- use asset, the cost for initial and subseq u e n t measurement is determined in a c c o r d a n c e with the accounting policy stated in the Note 4.
Accounting policies applied until 31 December 2018 Not applicable.
The Company subleases 50% of its whole office space to the related party. The sublease is classified as operating lease (further information is presented in the Note 5). The subleased portion of an office building is presented as investment property in a statement of financial position.
Investment (in EUR’000) Notes property Balance at 31/12/2018 - IFRS16 adjustment Note 3 298 Balance at 1/1/2019 298 Depreciation (30) Balance at 31/12/2019 – IFRS16 268
Commentary
For the investment property leased out, IFRS16 par. 96 requires to apply the disclosure requirements of IAS40.
For the purpose of this Case Study Publication, we do not present full disclosure which would be required by IAS40.
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Note 4.5.3. Lease liabilities IFRS16 IFRS16 (in EUR’000) Notes 31/12/2019 1/01/2019
IFRS16p47(b) Lease liabilities Short-term portion 3,400 2,927 Long-term portion 22,632 21,175 Note 6 26,032 24,102
IFRS16p53 Note 4.6. Amounts relating to leases recognised for the reporting period
The following amounts are recognised in profit or loss
IFRS16 IAS17 (in EUR’000) Notes 2019 2018
IFRS16p53(a) Depreciation charge for the right-of-use assets by class of assets Buildings 1,894 - Land 39 - Note 4.5.1 1,933 - Depreciation charge for the investment property Note 4.5.2 30 Total depreciation charge 1,963
IFRS16p53(b) Interest expense on lease liabilities (included in finance cost) 1,446 - IFRS16p53(c) Expense relating to short-term leases - vans (included in distribution - 60 expenses) IFRS16p53(d) Expense relating to leases of low-value assets that are not short-term - 190 leases (included in administrative and distribution expenses) IFRS16p53p(e) Expense relating to variable lease payments not included in lease - 211 liabilities (included in distribution expenses) Loss on termination of lease contract 210 Operating lease expense (IAS17) (included in administrative and - 2,465 distribution expenses) Total expenses related to leases 4,273 2,465
The following amounts are recognised in the cash flow statement
IFRS16 IAS17 (in EUR’000) Notes 2019 2018
IFRS16p53)(g) Cash outflow for leases (IFRS16) – financing activity Principal Note 6 2,229 - Interest Note 6 1,446 - Termination penalty Note 4.5.1 300 - 3,975 - Cash outflow for leases – operating activity 461 2,600 Total cash outflows 4,045 2,600
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Note 5 Lease – the Company as a sublessor
IAS1p117 Accounting policies applied from 1 January 2019
The Company is a sub - l e s s o r (intermediate lessor) of the right- of- u s e a s s et s. An intermediate lessor classifies the sublease as a finance lease or an operating lease as follows:
• if the head lease is a short -term lease that the entity, as a less e e, has accounted for as stated in t h e N o t e 4, the sublease is classified as a n operating lease, • o therwise, the sublease is classified by reference to the ri g ht - of- use asset arising from the head lease , r at h e r than by reference to the underlying asset. A lease is classified as a finance lease if it tran sfers substanti all y all the risks and rewards fr o m t h e ri g ht - of- u s e a s s e t resulting from the head lease; otherwise , it i s c l a s sifi e d as an operating lease. For subleases classified as finance lease, the intermediate lessor derecognises the right - of- use asset relating to the head lease that is transfers to the sublessee and recognises the net investment in t h e sublease; any difference between the righ t - of- u s e a s s et s and the net investment in the fi n a n c e sublease is recognised in profit or loss. A t the commencement date, n et investment in the fi n a n c e l e a s e is measured at an amount equal to the present value of the lease payments for the underlying right - of- use assets during the lease term (the lease payments included in the measurement are the same as disclosed in the Note 4 for the lease contract where the Company is a lessee). The lessor recognises finance income over the lease term, based on a pattern reflecting a constant period rate of return on the lessor’s net investment in the lease. For subleases classified as operating lease, the intermediate lessor recognises th e l ease income from o p e r ati n g le a s e s on a straight -line basis over the lease term. The respective leased asset is included in the statement of financial position based on its n a t u r e.
Accounting policies applied until 31 December 2018
The Company is a sub - lessor of the assets leased under head opera ting lease contracts. Those sub leases are classified as operating leases. Lease income from operating leases where the C o m p a n y is a lessor is recognised o n a straight -line basis over the lease term.
IFRS16p92 The Company is an intermediate lessor in incidental situations. It subleased to its related party 50% of its whole office space and some of its computers (head leases).
The sub-lease of office space is for 5 years and is classified as operating lease.The sublease payments are fixed and matches the payments under the head lease. The portion of the right-of-use asset, which is leased out, is presented as investment property (Note 4.5.2).
The sub-lease of the computers is for the same period as head lease (i.e. 2 years) and is classified as a finance lease. The sublease payments are fixed and match the payments under the head lease.
The following amounts are recognised in profit or loss:
IFRS16 IAS17 (in EUR’000) Notes 2019 2018
IFRS16p90(a)(ii) Finance leases Interest income on the net investment in the lease 1 - 1 -
IFRS16p90(b) Operating leases Lease income – fixed payments 42 47
Total income related to leases 43 47
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IFRS16p93 Finance sublease receivable (net investment in a finance lease) amounts to EUR 6 thousand as at 31/12/2019 (1/1/2019: EUR 10 thousand). The interest income recognised in the current period is disclosed in the table above. The payment of EUR 5 thousand obtained in the current period is presented as investing activity in cash flow statement.
IFRS16p97 The future minimum lease payments in relation to non-cancellable operating leases are as follows:
(in EUR’000) 31/12/2019
Future minimum lease payments in relation to non-cancellable operating suleases leases are
receivable as follows: Within one year 42 Later than one year but not later than five years 120 Later than five years - Total 162
Commentary
IFRS16 par. 89 - 97 provides more disclosure requirements for lessor than illustrated in our C a s e S tudy Publication as the publication is not designed for lessors. Our fictional Company presents only limited disclosure on the basis of materiality as the subleases are incide ntal to the Company’s operation; for example, the Company does not p r e s e n t the maturity analysis of the lease payments receivable a n d reconciliation of the undiscounted lease payments to the net investment in the lease as the amounts are not material.
Note 6 Debt (extract)
Note 6.1 Debt reconciliation
The table below analyses the movement in debt for each of the periods presented.
Cash and (in EUR’000) Lease cash Notes Borrowings liabilities Total debt equivalents Net debt Balance at 1/1/2018 (38,500) - (38,500) 204 (38,296) Cash flows 1,130 - 1,130 596 1,726 Interest accrued Note 8 (1,130) - (1,130) - (1,130) Balance at 31/12/2018 (38,500) - (38,500) 800 (37,700) IFRS16 adjustment Note 3 (24,102) (24,102) - (24,102) Balance at 1/1/2019 (38,500) (24,102) (62,602) 800 (61,802) Cash flows (1,916) 3,675 1,759 (103) 1,656 New lease contracts - (4,950) (4,950) - (4,950) Termination of the lease contract Note 4.5.1 - 790 790 - 790 Interest accrued Note 8 (2,284) (1,446) (3,730) - (3,730) Foreign exchange adjustments (600) - (600) - (600) Balance at 31/12/2019 Note 4.5.3, 10 (43,300) (26,032) (69,332) 697 (68,635)
Commentary
IAS7 par. 44A - 44E requires t he di s cl o s u r e of changes in liabilities arsing from financing activities (i.e. the liabilities for which cash flows are classified in the statement of cash flows as cash flows from financing activities), including both changes arising from cash flows and no n - cash changes. The lease liability recognised as a result of the application of I F R S 1 6 should be covered by this disc l o s u r e. The illustrative disclosure s presented above, show the debt and the net debt reconciliation (i.e. debt less cash and cash equivalents). As o pposed to debt, the net debt is a non - GAAP measure , t h e r ef or e , the disclosure required for n o n - G AAP measures should be provided (see further dis cussions in Note 7).
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Note 7. Alternative performance measures used by the Management
The Management uses the following measures to assess the performance and financial position of the Company: EBITDA (earnings before interest, taxes, depreciation and amortisation), EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent costs) and net debt.
EBITDA is a measure on the basis of which the Management takes economic decisions, decides about the allocation of resources (incl. decides about investments in new products). EBITDA is also a measure provided to investors and analysts.
EBITDAR is a measure which is not used regularly by the Management, nevertheless due to the fact that EBITDA calculated for the year 2019 and 2018 is not comparable as the result of the first application of IFRS16 (further details provided in the Note 3), the Management provides EBITDAR to ensure comparability of the profit measure between the presented periods. Management does not intend to present EBITDAR in the following years.
Net debt is used by the Management due to the bank covenants which require to maintain net debt at certain level. The definition of the net debt is the same as in the bank loan agreement.
The Company defines EBITDA as profit/(loss) for the period, as determined in accordance with IFRS, before depreciation and amortisation, impairment losses recognised/reversed on property, plant and equipment, intangible assets and right-of-use assets, interest income, finance expense, foreign exchange gains and losses and income taxes. EBITDAR is defined as profit/(loss) for the period, as determined in accordance with IFRS, before depreciation and amortisation, impairment losses recognised/reversed on property, plant and equipment, intangible assets and right-of-use assets, interest income, finance expense, foreign exchange gains and losses, income taxes, expense relating to leases not included in the measurement of the lease liability (i.e. for IFRS16: short term leases, low-value assets, variable lease payments not based on rate or index; for IAS17: operating lease expense), gains/loss on termination of the lease contracts . The Company defines the net debt as the carrying amount of the borrowings and lease liabilities (liabilities for which cash flows are classified in the statement of cash flows as cash flows from financing activities) at the reporting date less cash and cash equivalents. EBITDA, EBITDAR and net debt are not IFRS measures and should not be considered as an alternative to IFRS measures of profit/(loss) for the period or financial position at the end of the period, as an indicator of operating performance, as a measure of cash flows from operations under IFRS, or as an indicator of liquidity. EBITDA, EBITDAR and net debt are not a uniform or standardized measure and the calculation of these measures, accordingly, may vary significantly from one entity to another, and by itself the Company’s presentation and calculation of EBITDA, EBITDAR and net debt may not be comparable to that of other entities. Reconciliation of net debt to debt (total liabilities from financing activity) is presented in Note 5.1. Reconciliation of EBITDA and EBITDAR to profit/(loss) before income tax is presented below:
(in EUR’000) Notes 31/12/2019 31/12/2018
Profit for the period 8,824 9,795 Depreciation and amortisation 2,863 660 Interest income (109) (200) Loss on termination of the lease Note 4.5.1 210 Finance costs Note 8 3,730 1,980 Income tax expense 2,109 2,301 EBITDA 17,627 14,536 Expenses relating to leases not included in the measurement of the Note 4.6 461 2,465 lease liability EBITDAR 18,088 17,001
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 25 2. IFRS16 disclosures in the annual financial statements for 2019
Commentary
In June 2015 t he European Securities and Markets Authority (ESMA) issued the “ Guidelines on Alternative Performance Measures (APMs) ” for listed issuers. The objective of the guidelines is to encourage European issuers to publish transparent, unbiased and comparable information on their financial performance. This should provide users with a comprehensive understanding of their performance. A P M i s “ a financial measure of historical or future performances, financial position, or cash flows, oth e r t h a n a financial measure defined or specified in the applicable financial reporting framework ”. That is, an APM is a performance measure which is not defined or specified in the GAAP under which the entity is reporting. Examples of APMs most commonly us ed include EBIT (Earnings Before Interest & Tax), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), free cash flow, and underlying profit or net d e bt. Where entities use APMs in a relevant document, they should disclose the definitio ns of each APM in a clear and readable way, including their components, the basis of calculations and any material hypotheses or assumptions used. They should give APMs meaningful labels reflecting their content and the basis of calculation. Entities shoul d include a reconciliation of each APM to the amounts presented in the financial statements, separately identifying and explaining the material reconciling items. Users should be able to identify the reconciling items in the financial statements. Where an amount cannot be extracted directly from the financial statements, the entity should disclose how it is calculated. An entity should explain why it uses APMs, to enable users to understand their relevance and reliability – i n particular why the entity beli eves that an APM provides useful information on its financial position, cash flows or financial performance, together with the purposes for which it uses the specific APM within the business. Entities should not display APMs with more prominence, emphasis or authority than, nor distract from, measures directly stemming from financial statements. Entities should maintain consistent definitions and calculations of APMs over time.
In exceptional circumstances where entity d e ci d e s to redefine an APM, it should e xplain the changes, explain the reasons why these changes result in reliable and more relevant information on the financial performance, and provide restated comparative figures.
If an issuer stops disclosing an APM, the issuer should explain the reason for considering that this APM no longer provides relevant information .
Note 8. Financial risk management (extract)
The tables below analyse the financial liabilities into relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows.
Total (in EUR’000) Less than 6 6–12 1–2 2–5 Over 5 contractual Carrying At 31/12/2019 months months years years years cash flows amount Trade payables 9,500 - - - - 9,500 9,500 Borrowings 5,858 981 1,963 5,889 40,463 55,154 43,300 IFRS16p58 Lease liabilities 1,600 1,623 3,153 9,460 13,476 29,312 26,033 16,958 2,604 5,116 15,349 53,939 93,966 78,832
IFRS16p59(b) T he lease liabilities do not include variable lease payments which are not based on a rate or index (i.e. % of revenue generated by stores) . Estimated future variable lease payments amount to EUR 1,700 thousand. There were no leases not yet commenced to which the Company is committed, other than those disclosed in Note 4.3.
Total Carrying (in EUR’000) Less than 6 6–12 1–2 2–5 Over 5 contractual amount At 31/12/2018 months months years years years cash flows Trade payables 9,000 - - - - 9,000 9,000 Borrowings 960 960 1,920 5,760 42,340 51,940 38,500 9,960 960 1,920 5,760 42,340 60,940 47,500
Copy for: participant of IFRS 16: Leases - Annual IFRS Update Training 2019
Leases by lessee – Discover the IFRS16 disclosures – Case study 26
From the author,
This is our third publication in a series of publications relating to disclosures resulting from new standards. The preparation of meaningful and comprehensive disclosures is a challenging task, therefore we present you with a publication which is aimed Tomasz Konieczny at helping you in the preparation of your first disclosures under IFRS16. We P a r t n e r hope you find this publication useful. [email protected] The previous publications issued in 2018 cover disclosures required by IFRS9 “Financial Instruments” and IFRS15 “Revenue from Contracts with Customers”. Both publications are available on www.pwc.pl. Some other PwC publications or resources mentioned below on this page may be of assistance to you.
Publications and PwC resources relating to IFRS, which may be useful in the preparation of financial statements for 2019
I F R S Illustrative IFRS Disclosure I nf or m - o nli n e c o n s o li d at e d c h e c k li st r e s o u r c e. fi n a n ci al Authoritative statements literature for I F R S a n d P w C ’ s g ui d a n c e
I F R S 9, Revenue from Not only for Fi n a n ci al contracts with b a n k s - Instruments. c u st o m e r s – Discover IFRS 9 Understanding discover the in the world of t h e b a si c s I F R S 1 5 c o r p o r at e s disclosures
Our team dealing with implementation of IFRS 16
Accounting Paweł Wesołowski Accounting Radomił Maślak Advisory P a r t n e r Advisory D i r e ct o r [email protected] [email protected] tel. +48 502 18 42 77 tel +48 502 18 42 23
Training – Katarzyna Gospodarczyk Training – Dorota Lach - W a w r y s z u k open and in Senior Manager open and in Training coordinator company [email protected] company [email protected] t el. + 4 8 502 18 40 29 tel. +48 519 50 43 40 workshops workshops
© 2019 PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k (prev. PricewaterhouseCoopers Sp. z o.o.), ul. Polna 11, 00-633 Warsaw, Poland, T: +48 (22) 746 4000 , F:+48 (22) 742 4040 , www.pwc.pl PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k (prev. PricewaterhouseCoopers Sp. z o.o.) is entered into the National Court Register maintained by the District Court for the Capital City of Warsaw, under KRS number 0000750050, NIP 526-021-02-28. The seat of the Company is in Warsaw at Polna 11.
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