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

Senior PLC – Annual report – 31 December 2017

Industry: manufacturing


Changes in accounting policies (extract 1)

During the year, no new accounting standards or amendments to existing standards became effective which had a material impact on these Financial Statements. At the date of authorisation of these Financial Statements, a number of new standards and amendments to existing standards have been issued but are not yet effective. They have not been adopted early in these Financial Statements. A summary of the impact review performed on each standard is given below. None of these changes will have an effect on net cash from operating activities nor on free cash flow (see Note 32b).

Changes in accounting policies (extract 2)

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

This standard, which will replace IAS 17, requires lessees to recognise assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset is low value. As at 31 December 2017, the Group holds a significant number of operating leases which currently, under IAS 17, are expensed on a straight-line basis over the lease term (see Note 33).

Retrospective application in the comparative year ending 31 December 2018 is optional. The Group expects that it will not take this optional application and will apply the standard from the transitional date using the modified retrospective approach, adjusting opening retained earnings and not re-stating comparatives. This involves calculating the right-of-use asset and lease liability based on the present value of remaining lease payments on all applicable lease contracts as at the transition date.

The Group has collated the operating lease information across all the Divisions and head office in order to assess the updated cumulative adjustment on transition. If the new requirements were adopted in 2017, profit before tax would change by an immaterial amount, whilst lease liabilities and property, plant and equipment are estimated to increase between £50m and £70m (2016 – £50m and £70m). This is expected to result in an increase of the Group’s principal lending covenant, the ratio of net debt to EBITDA by 0.2x to 0.5x (2016 – 0.2x to 0.5x), except where it is determined at constant accounting standards. The ranges disclosed reflect the sensitivity of the adjustment to a +/-3 percentage point movement in the discount rate used to calculate the present value of the future cash flow commitments. The discount rate, the renewal of and changes to the lease portfolio and exchange rates on translation of financial statements of non-Sterling operations are all subject to change in future years, which will impact the actual transitional adjustment as at the expected transition date.

The Group will continue to monitor the impact until the transition date, providing further quantitative and qualitative measures as progress is made on implementation planning.