IFRS 16 adopted, modified retrospective method, policies, judgements, transitional disclosures

Telkom SA SOC Limited – Annual report – 31 March 2020

Industry: telkoms

2.2 Adoption of new accounting standards (extract)

2.2.1 Adoption of IFRS 16 Leases

The Group adopted IFRS 16 Leases with effect from 1 April 2019. IFRS 16 replaces IAS 17 Leases, along with the following three Interpretations: IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC 15 Operating Leases – Incentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The Group has adopted the new standard retrospectively, but has not restated comparatives, as permitted under the specific transitional provisions in the standard. Therefore, prior periods are still reported under IAS 17 along with the three Interpretations. The reclassifications and adjustments arising from the adoption of IFRS 16 are recognised in the opening statement of financial position as at 1 April 2019.

2.2.1.1 Transition

2.2.1.1.1 The Group as a lessee

On the adoption date, for leases classified as operating leases in terms of IAS 17, the Group measured the lease liability at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate, for the remaining lease terms, as at 1 April 2019.

Right-of-use assets were measured at an amount equal to the lease liability, adjusted for any prepaid or accrued lease payments that existed immediately before the date of adoption.

The following practical expedients were applied on adoption of IFRS 16:

The Group has also elected not to reassess whether a contract is, or contains a lease, on adoption of the standard. Instead, for contracts entered into before the adoption date, the Group relied on its assessment made, applying IAS 17 along with the three Interpretations. The Group has elected to apply the recognition exemption relating to low-value assets.

For finance leases, the carrying amount of the right-of-use asset and the lease liability at 1 April 2019 was determined as the carrying amount of the lease asset and lease liability under IAS 17, immediately before that date.

On transition to IFRS 16, the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 8.805% for Group and Company.

2.2.1.1.2 The Group as a lessor

The Group’s accounting policy under IFRS 16 has not changed from the comparative period. As a lessor, the Group classifies its leases as either operating or finance leases.

The Group has elected not to reassess whether a contract is, or contains a lease, on adoption of the standard. Instead, for contracts entered into before the adoption date, the Group relied on its assessment made, applying IAS 17 along with the three Interpretations.

2.2.1.2 Impact on the financial statements

The adoption of IFRS 16 Leases on 1 April 2019 affected the following line items on the statement of profit or loss and other comprehensive income, the statement of financial position and the statement of cash flows:

Earnings per share decreased by 34.42 cents per share for the year ended 31 March 2020 as a result of the adoption of IFRS 16.

Cash from operating activities includes interest paid on lease liabilities of R368 million for Group and R556 million for Company and cash used in financing activities includes R780 million for Group and R1 081 million for Company for the capital portion of lease liability repayments. Refer to the statement of cash flows. The cash flows relating to operating leases under IAS 17 were previously recognised as net cash generated from operations.

* On the adoption of IFRS 16, management undertook an extensive data clean-up process which sought to validate and align IAS 17 data to the requirements of IFRS 16, and it was discovered that in the prior period, operating lease commitments amounting to R748 million were erroneously not disclosed in the notes to the financial statements as per requirement of IAS 17. The error had no impact on the statement of profit or loss and other comprehensive income or the statement of financial position.

** The lease liability recognised on 1 April 2019 for Group, as previously disclosed in the 2019 interim results, increased as a result of leases, that were previously classified as low-value, being capitalised under IFRS 16 principles. The latter was a result of an assessment being performed to confirm the value of underlying assets for low-value leases.

2.2.1.3 The Group’s leasing activities and significant accounting policies

The Group’s leases include network equipment (which includes masts and towers and data equipment), property and vehicles.

Set out below are the new accounting policies of the Group upon adoption of IFRS 16:

2.2.1.3.1 The Group as a lessee

As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the lease.

For any new contracts entered into on or after 1 April 2019, the Group considers whether a contract is, or contains a lease. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. To apply this definition, the Group assesses whether the contract meets three key evaluations, which are whether:

the contract contains an asset, which is either explicitly or implicitly identified in the contract

the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract

the Group has the right to direct the use of the identified asset throughout the period of use. The Group assesses whether it has the right to direct how and for what purpose the asset is used throughout the period of use

Recognition of leases

At the commencement date of a lease, the Group shall recognise a right-of-use asset and lease liability for contracts that are, or contains, a lease, except in the case where recognition exemptions are elected.

The Group has elected to apply the following recognition exemptions:

Lease and non-lease components:

A number of lease contracts include both lease and non-lease components. The Group allocates the consideration in the contract to each lease and non-lease component based on the amount as stipulated in the lease agreement as the rental for the asset is separate from the operational costs in the majority of the agreements. In lease agreements, where the gross rental amount includes operational cost, an estimate will be made to determine which portion of the gross rental relates to operational costs, which will inform the separation of the operational costs on these contracts. The Group has not elected the practical expedient to account for non-lease components as part of its lease liabilities and right-of-use assets. Therefore, non-lease components are accounted for as operating expenses and are recognised in profit or loss as they are incurred.

Right-of-use assets – initial and subsequent measurement

After the adoption date, the Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). The right-of-use assets are measured at cost, which is made up of the initial measurement of the lease liabilities, any initial direct costs incurred by the Group, any lease payments made in advance of the lease commencement date, less any lease incentives received. Right-of-use assets are subsequently measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of any lease liabilities. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of the estimated useful life and the lease term. Right-of-use assets are subject to impairment in accordance with the principles of IAS 36 Impairment of Assets.

Lease liabilities – initial and subsequent measurement

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that are based on an index or rate (measured using the index or rate at commencement date) and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the Group is reasonably certain to exercise the option to terminate. The variable lease payments, that do not depend on an index or a rate, are recognised as an expense in the period in which the event or condition, that triggers those payments, occurs.

Subsequent to initial measurement, the lease liability will be reduced for payments made and increased by the interest cost. Interest costs are included in finance charges in the statement of profit or loss and other comprehensive income over the lease period. It is remeasured when there is a change in future lease payments arising from a change in index or rate, a change in the estimate of the amount payable under a residual value guarantee or, as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. Furthermore, a revision to Telkom’s rolling budget/forecast is considered a significant event which would trigger a reassessment of the lease term. Any change to the lease term would result in a remeasurement of the associated lease liability.

Significant judgements

Key judgements and practical expedients have been reassessed since the disclosures in the 31 March 2019 financial statements.

2.2.1.3.2 The Group as a lessor

Where the Group is a lessor, it determines at inception whether the lease is a finance lease or an operating lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset, and classified as an operating lease if it does not. The land and building elements of a lease of land and buildings are considered separately for the purposes of lease classification unless it is impracticable to do so.