IFRS 16, description of effect of future adoption with quantified information

Senior PLC – Annual report – 31 December 2018

Industry: manufacturing

  1. SIGNIFICANT ACCOUNTING POLICIES (extract)

Changes in accounting policies (extract)

c) IFRS 16 Leases. Effective for annual periods beginning 1 January 2019

Effective for annual periods beginning 1 January 2019, IFRS 16 Leases will replace IAS 17 Leases and requires lessees to recognise right of use assets and lease liabilities for all leases (be they operating or financing in classification under IAS 17), unless the lease term is 12 months or less or the underlying asset is low value. As at 31 December 2018, the Group holds a significant number of operating leases which under IAS 17 were expensed on a straight-line basis over the lease term (see Note 33).

The Group has undertaken a comprehensive review across all lease commitments and performed the required assessment of its cumulative adjustment on transition to IFRS 16 on 1 January 2019 and applied the standard from the transitional date using the modified retrospective approach and not restating comparatives. As at 1 January 2019, the Group’s audited right of use assets were £96.7m, finance lease liabilities were £96.3m and working capital and non-current liabilities decreased by £0.4m in total.

The estimated annual financial impact has also been updated from prior guidance in order to reflect the lease portfolio and financial conditions at the date of transition; actual financial impacts will differ as these conditions change. From the financial year ending 31 December 2019, depreciation (£10.2m annually as determined at the date of transition) on the right of use assets will be charged to the Consolidated Income Statement while interest (£3.6m annually as determined at the date of transition) will be accrued against the lease liabilities. These charges to the Consolidated Income Statement will be partly offset by operating lease rentals that will no longer be expensed to the Consolidated Income Statement (£11.3m annually as determined at the date of transition).

As a result of this accounting change and the related classification of certain items in the Consolidated Cash Flow Statement, in the financial year ending 31 December 2019, cash generated by Operations and free cash flow (as defined in Note 32) are expected to increase by £11.3m and £7.7m respectively. Capital repayments of lease liabilities will be classified to net cash used in financing activities, resulting in a neutral effect on the movement in cash and cash equivalents.

The adoption of IFRS 16 does not impact the Group’s lending covenants, as these are based currently on frozen GAAP.

The following practical expedients for IFRS 16 are expected to be taken on the transition date:

  • the Group will not reassess whether existing contracts are, or contain, a lease and will apply IFRS 16 only to existing contracts that were previously identified as leases under IAS 17;
  • the Group will apply a single discount rate to a portfolio of leases with reasonably similar characteristics; and
  • for leases which have a remaining term of less than 12 months from the transition date, the Group will treat these leases in the same way as short-term leases.

 

 

 

 

 

 

 

 

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