TalkTalk Telecom Group PLC – Annual report – 31 March 2017
- Accounting policies and basis of preparation (extract)
Future accounting developments (extract)
The Group has a variety of operating leases, however currently no finance leases are recognised within the consolidated financial statements. The accounting for these operating leases will change when IFRS 16 is implemented.
IFRS 16 requirements
Following a preliminary review by management of the implications of IFRS 16 the following can be noted:
- a number of lease contracts currently disclosed within note 24 to the financial statements, which currently give rise to recurring expenses within operating expenses, will be recognised on the balance sheet as a ‘Right of use asset’ for the year ended 31 March 2019;
- a corresponding lease liability (current and non-current) reflecting the Group’s commitment to pay consideration to third parties under these contracts will also be recognised, increasing the Group’s net debt, although the cash flow profile remains the same for the Group;
- the Group will depreciate the right of use assets with a charge to the income statement over the shorter of the assets useful lives and the assessed lease term;
- the Group will charge interest on the liability using the rate of interest implicit in the lease or the Group’s incremental borrowing rate. Interest will be charged to finance costs; and
- the profile of the overall expense in the income statement will change as the interest expense will be more front-loaded compared to a straight line operating lease rental expense.
Specifically, for management to conclude on whether a contract contains a lease, the following has been reviewed:
- whether there is an identified asset that the Group has the right to obtain substantially all the economic benefits;
- whether the Group has the right to direct how and for what purpose the asset is used;
- whether the Group has the right to operate the asset without the supplier having the right to change those operating instructions; and
- whether the Group has designed the asset in a way that predetermines how and for what purpose the asset will be used.
In addition, management has also considered other salient factors in the assessment of the standard such as:
- the length of assessed lease term taking into account the non-cancellable period of the lease including periods covered by an option to extend or an option to terminate if the Group is reasonably certain to exercise either option; and
- the applicability of interest rate implicit in the lease or the Group’s incremental borrowing rate.
Implications for TalkTalk
Following the above assessment, management has concluded that the following items that are currently classified as operating leases will be recognised in the financial statements using the new requirements:
- certain property, including offices and data centres;
- the Group’s backhaul network, being backhaul circuits rented from BTOR, Virgin Media and others;
- the Group’s collector ring, being collector circuits rented from BTOR and others;
- elements of the Group’s core network;
- all fibres and other cable links rented from third parties;
- the Group’s interconnect network, being primarily ISI circuits and ducts rented from BTOR and others;
- the Group’s recurring licences for systems, to the extent they are not capitalised perpetual licences or subscriptions to services; and
- IT equipment leases, including laptops, mobile phones and printers.
In addition, management has concluded that the following areas will be out of the scope of IFRS 16 and key judgements based upon the Group’s specific network circumstances:
- the footprint the Group rents from BTOR in the unbundled exchanges and in co-location data centres, as this is not considered to be an identifiable asset; and
- the copper and fibre connections the Group rents in the ‘last mile’, comprising copper between the exchange and customer/business premise for MPF and SMPF customers, and a combination of copper and fibre for our FTTC customers, as the Group does not have the total ability to control or direct the use of the equipment in full as stipulated within IFRS 16.
Management has also reviewed available exemptions contained within IFRS 16 and concluded that tie cables, being the tie pairs the Group rents from BTOR in the unbundled exchanges, will fall under the low value asset exemption. In addition, the Group does not intend to utilise the short term exemption for leases whose lease term represents a period of twelve months or less.
Beyond the information above in relation to IFRS 15 and 16 it is not currently practical to provide a reasonable financial estimate of the effect of these standards until the full implementation of each project has been concluded. Management expects to disclose the financial effect of these standards within the Group’s Annual Report for the year ended 31 March 2018 and will also continue to monitor the practical interpretation of these new standards within the telecommunications industry prior to full implementation.