IFRS 16 adopted, half year report, policies, cumulative catch-up approach, para C12 transitional disclosures

ASML Holdings N.V. – Half year report – 1 July 2018

Industry: technology, computers

  1. Summary of Significant Accounting Policies (extract 1)

The accounting policies adopted in the preparation of the Consolidated Condensed Interim Financial Statements are consistent with those applied in the preparation of the Consolidated Financial Statements 2017, except for income tax expense which is recognized based on management’s best estimate of the annual income tax rate for the full financial year.

A number of new standards became applicable for the current reporting period and we had to change our accounting policies and make (retrospective) adjustments as a result of adopting the following standards:

  • IFRS 9 “Financial Instruments”;
  • IFRS 15 “Revenue from Contracts with Customers”; and
  • IFRS 16 “Leases”.

The impact of the adoption of these standards and the new accounting policies is disclosed below. We believe that the effect of all other standards (not yet) effective and (not yet) adopted by the EU is not expected to be material.

  1. Summary of Significant Accounting Policies (extract 2)

Leases

As of January 1, 2018, ASML has early adopted IFRS 16 “Leases”. We applied a cumulative catch-up approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 “Leases” and IFRIC 4 “Determining whether an arrangement contains a lease”. The most significant changes in our accounting policy (compared to IAS 17) are the recognition of Right-of-Use (ROU) assets and lease liabilities for operating leases and the classification of leases from a lessor perspective.

As per January 1, 2018:

  • We have recognized ROU assets and lease liabilities of EUR 113.7 million.
  • The short term portion of the lease liabilities of EUR 32.8 million has been classified as Current accrued and other liabilities.
  • The long term portion of the lease liabilities of EUR 80.9 million has been included in the Non-current accrued and other liabilities.

We are not required to make any adjustments on transition for leases in which we are a lessor and account for our new leases applying IFRS 16 from the date of initial application.

We elected the following practical expedients and applied these consistently to all of our leases (including those for which we are a lessee or a lessor):

  • We did not reassess whether any expired or existing contracts are or contain leases.
  • We excluded initial direct costs for any existing leases.

On adoption of IFRS 16, ASML recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using our incremental borrowing rate. The weighted average incremental borrowing rate applied to these lease liabilities on January 1, 2018 was 2.2 percent.

asml1

Accounting Policy – Leases from a Lessee Perspective

We determine if an arrangement is a lease at inception. Determining whether a contract contains a lease requires judgment. In general, arrangements are considered to be a lease when all of the following apply:

  • It conveys the right to control the use of an identified asset for a period of time in exchange for consideration;
  • We have substantially all economic benefits from the use of the asset; and
  • We can direct the use of the identified asset.

Lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The ROU asset also include all lease payments made and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

For leases, each lease payment is allocated between the liability and finance cost. The finance cost is charged to the Consolidated Statement of Profit or Loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The ROU asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis.

We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. For certain equipment and for leased warehouses we account for the lease and non-lease components separately. For warehouse leases the allocation of the consideration between lease and non-lease components is based on the relative stand-alone prices of lease components included in the lease arrangements. Additionally, for car leases, we apply a portfolio approach to effectively account for the ROU assets and liabilities.

Leases are included in ROU assets and Accrued and other liabilities.

Accounting Policy – Leases from a Lessor Perspective

We classify a lease as a finance lease when any of the following criteria are met at lease commencement:

  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
  • The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise;
  • The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease;
  • The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset; or
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

Revenue is recognized at commencement of the lease term of a finance lease. The present value of the lease payments is recognized as a finance receivable. The difference between the gross receivable and the present value of the receivable is unearned interest, which is recognized over time in the Consolidated Statement of Profit or Loss.

A lease is classified as an operating lease if the lease classification criteria (as described above) are not met. If we have offered our customers an operating lease arrangement, the contract consideration is recognized in the Consolidated Statement of Profit or Loss on straight-line basis over the period of the lease.

Finance leases

Leases where substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee are classified as finance lease arrangements. If we have offered the customer a finance lease arrangement, revenue is recognized at commencement of the lease term. The difference between the gross finance receivable and the present value of the minimum lease payments is initially recognized as unearned interest and presented as a deduction to the gross finance receivable. Interest income is recognized in the Consolidated Statement of Profit or Loss over the term of the lease contract using the effective interest method.

Operating leases

Leases whereby all the risks and rewards incidental to ownership are not transferred to the lessee are classified as operating lease arrangements. If we have offered the customer an operating lease arrangement, the system is included in property, plant and equipment upon commencement of the lease. Revenue from operating lease arrangements is recognized in the Consolidated Statement of Profit or Loss on a straight-line basis over the term of the lease contract.

Accounting Policy – Finance receivables

Finance receivables consist of receivables in relation to finance leases.

We perform ongoing credit evaluations on our customers’ financial condition. We periodically review whether an allowance for credit losses is needed by considering factors such as historical payment experience, credit quality, the aging of the finance receivables balances, expected lifetime losses and current economic conditions that may affect a customer’s ability to pay.

  1. Critical Accounting Judgments and Key Sources of Estimation Uncertainty

In the process of applying our accounting policies, management has made some judgments that have significant effect on the amounts recognized in the Consolidated Condensed Interim Financial Statements. The critical accounting judgments and key sources of estimation uncertainty are consistent with those described in the 2017 Integrated Report based on IFRS, with the exception of revenue recognition and leases. The changes related to the critical accounting estimates for revenue recognition and leases are included in Note 3 Summary of Significant Accounting Policies.

Advertisements