Telenor ASA – Annual report – 31 December 2021
NOTE 2 Summary of significant accounting policies (extract)
Determining whether a contract is, or contains, a lease is based on the substance of the contract and requires an assessment of whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration, i.e. whether the Group or a lessee of the Group has the right to obtain substantially all of the economic benefits from use of the identified asset and has the right to direct the use of the identified asset throughout the period of use.
The Group as lessee
The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets for all leases where it is the lessee, except for low-value leases (i.e. leases of low-value assets, meaning mainly leased office equipment) and short-term leases. The Group has chosen to account for right to use spectrum as a lease. Short-term leases are leases with a lease term of 12 months or shorter that do not contain a purchase option, except for leases of spectrum licences. Lease payments on short-term leases and leases of low-value assets, are recognised as expenses on a straight-line basis over the lease term. Fixed non-lease components embedded in the lease contracts are not separated and hence recognised as lease liabilities and capitalised as right-of-use assets.
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). Right-of-use assets are measured at cost, less accumulated depreciation and impairments, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. The cost of a right-of-use asset also includes an estimate of costs to be incurred by the Group in dismantling and removing the underlying leased asset, restoring the site on which it is located or restoring the underlying leased asset to the condition required by the terms and conditions of the lease. Unless the Group is reasonably certain to exercise an option to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use asset is depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment assessments as described further below.
For spectrum licences, the Group might sometimes pay significant amounts up front and before the spectrum is available for the Group. The payments will under such circumstances be accounted for as a prepayment until commencement date.
Gains and losses arising from derecognition of right-of-use assets and corresponding lease liabilities (i.e. cancellation, transfer or sales of leases) are measured as the difference between the remaining net carrying amount of the right-of-use assets and corresponding lease liabilities, and any proceeds or termination fees, and are reported as other income or other expenses in the income statement as part of operating profit.
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 depend on an index or a rate, 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 lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period in which the event or condition that triggers the payment occurs.
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to exercise the option, or any periods covered by an option to terminate the lease, if it is reasonably certain not to exercise the option. For further information on judgement applied when evaluating lease term of contracts with renewal or termination options, see note 3.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. To arrive at the incremental borrowing rate the Group applies the respective country’s (economic environment) risk free rate for the term corresponding to the lease term, adjusted for own credit risk. For subsidiaries with external financing, the Group applies the external borrowing rate corresponding to the lease term available to those subsidiaries.
After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the Group remeasures the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments, or other modifications). Generally, the amount of remeasurement of the lease liability is recognised as an adjustment to the right-of-use asset.
The Group as lessor
Receivables on assets leased to others under finance leases are presented at an amount equal to the net investment in the leases. Finance income is allocated using a constant periodic rate of return on the net investment over the lease term. Direct costs incurred that are directly attributable to negotiating and arranging the leases, are included in the receivables.
Lease income from operating leases is recognised on a straight-line basis over the lease terms. Incentives provided to the lessees are aggregated and recognised as a reduction of income on a straight-line basis over the lease terms. Initial direct costs incurred in negotiating and arranging an operating lease are included in the carrying amounts of the leased assets and recognised as an expense over the lease term on the same basis as the lease. Contingent rents are recognised as revenue in the period in which they are earned.
In a transaction for which an underlying asset is re-leased by the Group to a third party, and the head lease between the head lessor and the Group remains in effect, the Group classifies the sublease as a finance lease or an operating lease by reference to the right-of-use asset arising from the head lease.
NOTE 3 Critical accounting judgements and key sources of estimation uncertainty (extract)
Critical judgements in applying the Group’s accounting policies (extract)
Lease term of contracts with renewal or termination options
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to exercise the option, or any periods covered by an option to terminate the lease, if it is reasonably certain not to exercise the option, within the period for which the contract is enforceable.
The Group determines the period for which the contract is enforceable considering the broader economics of the contract and not only contractual termination payments. For example, if the Group expects to use significant non-removable leasehold improvements beyond the date on which a lease contract can be terminated, the existence of those leasehold improvements may indicate that the Group might incur a more than insignificant penalty if it terminates the lease.
When the Group concludes that the enforceable period exceeds the notice period of a cancellable lease or the initial period of a renewable lease, the Group considers whether it is reasonably certain to extend the lease or not to exercise the option to terminate the lease. The threshold for being reasonably certain is not explicitly specified in IFRS 16 Leases. However, the Group considers reasonably certain to be lower than virtually certain and significantly higher than more likely than not under IAS 37 Provisions, Contingent liabilities and Contingent Assets. The Group applies judgement in evaluating whether it is reasonably certain to exercise an option to renew or not exercise an option to terminate a lease contract, considering all relevant factors that create an economic incentive for the Group to exercise the renewal or not exercise an option to terminate, including significant leasehold improvements.
The main part of the Group’s lease contracts excluding spectrum licences relates to the mobile networks (mainly towers) and land/property. For lease of land for own towers or leasing of towers from tower companies/other operators, factors considered in particular for assessing the lease term are technology development and potential changes in business models. Based on an assessment of these factors, the lease term for the Group’s leases relating to sites will normally be within a range of 4 to 7 years. This means that the lease term for sites with renewal options shall normally be the higher of a non-cancellable period or within a range of 4 to 7 years. Some sites may be in strategically important locations and it might be more than reasonably certain that the sites will be maintained beyond 7 years. In these exceptional cases, the lease term may be up to 10 years.
Key sources of estimation uncertainty – critical accounting estimates (extracts)
Depreciation and amortisation, see note 17, 18 and 19
Depreciation and amortisation expenses are based on management’s estimates of residual value, depreciation and amortisation method and the useful life of property, plant and equipment, right-of-use assets, and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions, climate change and other factors and may result in changes in the estimated useful life and in the amortisation or depreciation charges. Technological developments are difficult to predict and the Group’s views on the trends and pace of development may change over time. The impact of climate change on technological development, markets, and economic or legal environment, together with remaining licence period and general expected developments in technology and markets are critical estimates in the evaluations of useful lives. The useful lives are reviewed at least annually taking into consideration the factors mentioned above and all other important relevant factors. Estimated useful lives for similar types of assets may vary between different entities in the Group due to local factors such as growth rate, maturity of the market, history and expectations for replacements or transfer of assets, climate and quality of components used. A change in estimated useful life is a change in accounting estimate, and depreciation and amortisation plans are adjusted prospectively.
Asset retirement obligations (ARO), see note 25
Asset retirement obligations exist where the Group has a legal or constructive obligation to remove an asset and restore the site. The Group has asset retirement obligations relating primarily to equipment and other leasehold improvements installed on leased network sites and in administrative and network buildings. Where the Group is required to settle an asset retirement obligation, the Group has estimated and capitalised the net present value of the obligations and increased the carrying value of the related asset.
In most situations, the timing of asset removals will be well into the future and there is uncertainty as to whether and when the obligation will be paid. Provisions for asset retirement obligations are based on management’s estimates of the reasonably possible outcomes in terms of both the range of settlement dates and amount of expenses, as well as probabilities to be assigned to each of the reasonably possible outcomes. The actual gross removal costs that the Group will incur may be significantly different from the estimated costs, for example due to negotiation of prices for a large amount of removals or agreements that reduce or relieve the Group from its obligations. The actual timing of the removals may also differ significantly from the estimated timing, for example due to change in strategy, technological developments, changes in market conditions and other factors, and may result in changes in the provisions. The estimated cash flows are discounted at a pre-tax risk-free rate as risks are reflected in the cash flows.
NOTE 18 Leases
Group as lessee
The Group recognise lease liabilities related to lease payments over the lease term with corresponding right-of-assets under all lease agreements where the Group is a lessee. In addition, the right to use the underlying spectrum is accounted for as a lease. For information on judgement applied when evaluating lease term of contracts with renewal or termination options, see note 3.
Right-of-use assets are classified based on the nature of underlying assets as follow:
1) See table below for overview spectrum licences, including lease term.
For lease of network passive infrastructure (lease of tower space in networks and lease of part of buildings for own towers), land for own sites or towers and lease of buildings for office spaces, equipment and retail stores, lease agreements generally contain termination options or renewal options. These options are used to limit the period to which the Group is committed to individual lease contracts and to maximise operational flexibility in terms of dynamic network requirements. The Group has determined the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease on the same terms and conditions, if it is reasonably certain to exercise the option, or periods covered by an option to terminate the lease, if it is reasonably certain not to exercise the option. The remaining non-cancellable period for lease contracts under network passive infrastructure is 3 years on average, a reduction of 2 years from 2020 which is mainly due to exclusion of Myanmar from 2021 calculation and reduction of non-cancellable period after modifications of CAT lease agreement in Thailand. The non-cancellable period for lease contracts related to land is 2 years on average, which is mainly driven by non-cancellable lease agreements in Thailand.
On 1 February 2021, a state of emergency was declared under military leadership in Myanmar. Due to worsening of the economic and business environment outlook and a deteriorating security and human rights situation, Telenor saw limited prospects of improvement going forward. As a consequence, Telenor made an impairment of the right of use assets and at the same time reassessed the lease term of all the lease agreements in Myanmar, limiting the lease term to one year. Please see note 4 for further information.
The additions of spectrum licences in 2021 were primarily related to renewal of spectrum under the 900 MHz and 1800 MHz bands in Pakistan, acquisition of spectrum under 1800 MHz and 2100 MHz bands in Grameenphone, 3500 MHz band in Sweden and 3500 MHz and 26 GHz bands in Denmark. The additions of spectrum licences in 2020 were primarily related to acquisition of spectrum under the 700 MHz and 26 GHz bands in dtac, 900 MHz band in Denmark (the licences are held by TT Netværket), and 26 GHz band in DNA.
In 2021, the additions in network passive infrastructure were mainly related to site leases from towerco in Grameenphone, CAT equipment in dtac, tower spaces and part of building for own towers in Digi and Telenor Norway. The additions in cables were mainly in Sweden. The additions in building were mainly related to dtac and Telenor Infra. The additions in land were mainly related to land for own sites in dtac, Digi and Pakistan.
In 2020, the additions in network passive infrastructure were mainly related to tower spaces and part of building for own towers in DNA, Digi, Myanmar, and Telenor Norway. The additions in cables were mainly in Myanmar and Sweden. The additions in building were mainly related to dtac and leaseback of Fornebu headquarters in Norway (see more information related to the sale and leaseback transaction below). The additions in land were mainly related to land for own sites or towers in dtac, Digi and Pakistan.
For lease of spectrum, the agreements are generally non-cancellable. The Group has not considered periods covered by renewal options even if in some agreements the option to renew exists, given the uncertainty around terms and conditions of renewal of licences.
The following table sets forth the spectrum licences that the Group holds as of 31 December 2021:
1) The licences are held by Net4Mobility (a joint operation with Tele 2 owned 50% by the Group).
2) The licences are held by TT Netværket (a joint operation with Telia, owned 50% by the Group).
3) As a part the 900 MHz spectrum licencing conditions, dtac is entitled to use spectrum under the 850 MHz band before fully switching to the spectrum in the 900 MHz band.
4) The spectrum is held under capacity agreement with TOT and therefore, is not part of right-of-use assets.
5) The spectrum is held under agreement with Altel.
Telenor Pakistan’s 900 MHz and 1800 MHz spectrum licence expired on 25 May 2019, and the renewal fee was set to NOK 4.0 billion (USD 449 million) by the Pakistan Telecommunication Authority (PTA) for an extension period of 15 years. Telenor Pakistan disagrees with the terms and conditions for renewal, primarily on the price. Telenor Pakistan believes that the renewal price should have been NOK 2.5 billion (USD 291 million), which is the same as for prior renewals for other operators. Accordingly, Telenor Pakistan challenged the terms and conditions for renewal of said licence in Islamabad High Court. On 19 July 2021, the High Court decided the case in Telenor’s disfavor. Telenor Pakistan appealed the case to the Supreme Court on 31 August 2021. In December 2021, Telenor Pakistan signed the licence under protest whilst waiting for the Supreme Court’s hearing of the case. Telenor Pakistan has paid a total of NOK 2.8 billion (USD 314 million excl. interest) of the demanded licence renewal fee, which is considered adjustable against the final outcome of the case. Considering the unresolved dispute regarding the license payments, NOK 2.5 billion has been recognised as right-of-use asset representing the in substance fixed lease payments, and NOK 0.3 billion has been recognised as prepayment.
Lease liabilities measured at amortised cost:
The distribution of lease liabilities per currency and subsidiary as of 31 December 2021 is as follow:
The lease liabilities maturity profile is as follow:
The lease liabilities maturity profile is as follow:
Cash payments made relating to lease contracts are presented below:
Repayments of the principal portion related to total lease liabilities in 2021 of NOK 8.8 billion (NOK 9.0 billion in 2020) include instalment payment of spectrum licences of NOK 2.9 billion (NOK 3.6 billion in 2020) and repayments of other leases of NOK 6.0 billion (NOK 5.4 billion in 2020). During 2021, the instalment payments of spectrum licences were mainly in dtac, Norway and Pakistan whereas in 2020 it was mainly in dtac, Pakistan and Digi. Lease payments related to other lease contracts were mainly in dtac, Sweden, Digi, Myanmar, Pakistan and DNA in 2021 whereas in 2020 it was mainly in dtac, Sweden, Digi, and Myanmar.
Repayments of the interest portion of total lease liabilities in 2021 of NOK 1.0 billion include repayments of interest related to spectrum licences of NOK 0.3 billion (NOK 0.9 billion in 2020) and repayments of interest related to other lease contracts of NOK 0.7 billion (NOK 1.2 billion in 2020).
Payments of variable, short term and low value leases of NOK 3.5 billion include variable lease payments of NOK 3.2 billion and payments of short term and low value leases of NOK 0.3 billion.
Prepayments of investing activities of NOK 1.2 billion in 2021 mainly related to payments made at or before acquisition of spectrum licences of NOK 0.4 billion in Sweden for the bands of 3500 MHz and NOK 0.4 billion in Grameenphone for the bands 1800 MHz and 2100 MHz.
Expenses recognised in the income statement related to lease contracts are presented below:
Variable lease expenses of NOK 2.9 billion (NOK 3.1 billion in 2020) recognised in other operating expenses include NOK 2.5 billion (NOK 2.7 billion in 2020) related to spectrum and NOK 0.4 billion (NOK 0.4 billion in 2020) related to other lease contracts. Variable lease expenses related to spectrum agreements vary mainly with revenue, as a significant part of the expenses are based on share of revenues under the agreements. Variable lease expenses related to other lease contracts of NOK 0.4 billion (0.4 billion NOK in 2020) represent energy charges paid to lessors as part of the lease agreements for some mobile sites, and the expenses vary with the consumption of energy on those mobile sites.
Sale and leaseback in 2020
As part of the Group’s continued simplification program, the Group entered into two sale and leaseback transactions related to the headquarter office building at Fornebu, Norway, and development properties in Norway that will not be needed once the planned copper net decommissioning is completed.
Headquarter office building at Fornebu:
The Group disposed of its ownership of the headquarter office building at Fornebu, Norway, with a carrying amount of NOK 1.9 billion for a sale consideration of NOK 4.9 billion. Upon closing of the transaction, the Group entered into several lease agreements with Snarøyveien 30 AS for leasing back office space for parts of the building. The non-cancellable period under the lease agreements is between 7-15 years, with a lease term of 7-25 years. A lease liability of NOK 2.4 billion was recognised, and a right-of-use asset amounting to NOK 1.0 billion was recognised at the proportion of the previous carrying amount of the building that relates to the right-of-use retained by the Group. Consequently, a gain of NOK 1.2 billion (note 10) was recognised in the income statement which relates to the rights transferred. Under the lease agreements, in addition to the repayment of lease liability along with interest, the Group will make variable lease payment to the lessor for its share of common costs related to the use of the building.
The Group disposed of its ownership of several development properties in Norway with a carrying amount of NOK 0.1 billion for a sale consideration of NOK 0.9 billion. Upon closing of the transaction, the Group entered into lease agreements for leasing back those properties in their entirety for a period of 5 years. After the initial lease period, Telenor will rent small and limited areas to host fibre and mobile equipment. The non-cancellable period and lease term under these lease agreements are 5 years. A lease liability of NOK 0.2 billion was recognised, and a right-of-use asset amounting to NOK 24 million was recognised at the proportion of the previous carrying amount of the building that relates to the right-of-use retained by the Group. Consequently, a gain of NOK 0.5 billion (note 10) was recognised in the income statement which relates to the rights transferred.
Group as lessor
The Group has operating lease arrangements in which it is a lessor, mainly related to passive infrastructure sharing with other telecommunication operators. The Group has classified these leases as operating leases because they do not transfer substantially all the risks and rewards incidental to ownership of the underlying assets.
Revenue of NOK 4.9 billion (NOK 4.5 billion in 2020) (note 6) recognised in the income statement includes variable lease revenue of NOK 65 million (NOK 60 million in 2020) primarily relating to energy charges received from lessees based on the consumption.
The following table sets forth the maturity analysis of minimum lease payments to be received in nominal terms after the reporting date:
The Group has recognised receivables at present value of future lease payments to be received in lease arrangements where the Group has transferred substantially all the risks and rewards incidental to ownership of the underlying assets to the lessee.
During 2021, the Group recognised interest income of NOK 73 million (NOK 99 million in 2020) (note 12) related to finance lease receivables.
Sublease of land in Thailand
Dtac has Tower Service Agreement with CAT and under the agreement, dtac transferred towers that dtac procured under the concession agreement to operate and to provide cellular telephonic service and entered into lease agreement to use the towers. The right to use towers from CAT was recognised as right-of-use asset with corresponding lease liability. Under the agreement, dtac shall itself have lease agreements for the land with landowners and shall receive compensation from CAT for this. dtac recognised lease agreements as a lessee with the landowners for the land related to transferred towers to CAT with related lease liabilities. Right-of-use assets related to land was derecognised on 1 January 2019 based on the sublease arrangement with CAT and a finance lease receivable was recognised with reference to the tenure of the agreement with CAT.
Lease of satellite
The Group entered into a long-term lease with UPC on 1 April 2017 for the lease of 9 transponders on Thor 6, where the final payment from UPC will be made in January 2025. According to the agreement, substantially all the risks and rewards related to Thor 6 are transferred to UPC, and accordingly a finance lease receivable was recognised at present value, which represents the deferred payments to be received until January 2025. The following table sets forth the maturity analysis of lease receivables:
NOTE 10 Other income and other expenses
For the year 2021, other expenses consisted mainly of a fine from the Norwegian Competition Authority of NOK 788 million, losses on termination of leases in dtac of NOK 138 million, and workforce reductions (of which NOK 338 million in Grameenphone and NOK 168 million in Telenor Norway).
In 2020, total other income consisted mainly of the sale of Tapad of NOK 2.1 billion, the gain on sale and partial leaseback of the headquarter office building at Fornebu, Norway of NOK 1.2 billion, a gain of NOK 538 million from the sale and leaseback of development properties in Norway, and a NOK 310 million adjustment to the gain on the partial disposal of 701Search in 2019. Other expenses were mainly related to a provision of NOK 1.2 billion based on the decision from ESA (see note 34), and workforce reductions (of which NOK 308 million in Telenor Norway, NOK 139 million in Grameenphone, and NOK 110 million in Telenor Sweden).