IFRS 16, description of effects of future adoption of new leasing standard

Electricité de France S.A. – Annual report – 31 December 2018

Industry: utilities

NOTE 1 GROUP ACCOUNTING POLICIES (extract)
1.2.4 Standards and amendments adopted by the European Union but only applicable after 31 December 2018 (extract)
1.2.4.1 IFRS 16 – Leases
IFRS 16 “Leases” was adopted by the European Union on 31 October 2017 and will be mandatory for financial years beginning on or after 1 January 2019.

IFRS 16 requires all leases other than short-term leases and leases of low-value assets to be recognised in the lessee’s balance sheet in the form of a “right-of-use” asset, with a corresponding financial liability. Existing contracts classified as “operating leases” are currently reported as off-balance sheet items (see note 46.1.1.3).

The EDF group’s lease contracts essentially concern real estate assets (office and residential properties), industrial installations (land, wind farms) and to a lesser extent vehicles and IT equipment.

The Group identified the potential impacts of the application of IFRS 16 via questionnaires sent to all its subsidiaries to collect information about the features of operating leases in existence at 31 December 2017. Based on the results, it was decided to apply the “modified” retrospective approach.

In compliance with the standard, the incremental borrowing rate is used to discount the lease liability to present value at the transition date. This rate is EDF’s incremental indebtedness rate, based on zero-coupon EDF bond rates, adjusted for the currency risk, a country risk premium, the term of the contracts and the subsidiary’s credit risk.

The Group also decided to apply the two exemptions allowed by IFRS 16, and therefore does not recognise:

  • Leases with a duration of 12 months or less (and for the transition, leases terminating within 12 months of the first application of the standard);
  • Leases of assets with individual value when new of less than USD5,000.

Based on the work done at 30 June 2018, application of IFRS 16 in the Group’s financial statements at 31 December 2017 under the modified retrospective approach would have resulted in an increase of €4.3 billion in net indebtedness (including Framatome) and would have had a positive impact of approximately €0.5 billion on the operating income before depreciation and amortisation (excluding Framatome and including a partial cancellation of realised gains on sale amounting to €0.2 billion), and the consolidated net income would not have been significantly different.

At 31 December 2018, the impacts of IFRS 16 were reviewed. Under the modified retrospective approach, application of the standard results in an increase of approximately €4.5 billion in net indebtedness at 31 December 2018; also, according to the Group’s calculations, application of IFRS 16 under the modified retrospective approach would have had a positive impact of approximately €0.5 billion on the operating income before depreciation and amortisation for 2018 (including a partial cancellation of realised gains on sale amounting to €0.2 billion), and the consolidated net income would not have been significantly different. The above effects on operating income before depreciation and amortisation and on the consolidated net income are reported for information purposes in compliance with IAS 8.30, due to use of the modified retrospective approach.
The difference between the lease liability estimated at 31 December 2017 and 31 December 2018 results from new lease contracts, revisions and updates of existing lease contracts, partly offset by repayments of the lease liability and deconsolidation of one entity.

The differences at 31 December 2018 between operating lease commitments presented in accordance with IAS 17 and the lease liability under IFRS 16 are explained as follows:

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