IFRS 16, description of potential effects of future adoption, high level estimate of impact

Telenor ASA – Annual report – 31 December 2017

Industry: telecoms

Adoption of new and revised standards and interpretations (extract)

  • IFRS 16 Leases (effective from 1 January 2019). IFRS 16 establishes significant new accounting policies for lessees. IFRS 16 eliminates the current distinction between operating and finance leases as is required by IAS 17 Leases and, instead, introduces a single lessee accounting model. When applying the new model, the Group will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset) for all leases with a lease term of more than 12 months, unless the underlying asset is of low value, and recognise depreciation of the right-of-use assets separately from interest on lease liabilities in the income statement.

The Group will remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). Generally, the amount of the remeasurement of the lease liability will be recognised as an adjustment to the right-of-use asset.

The change will have a significant positive impact on EBITDA in the Group’s consolidated income statement and increase total assets and net debt. The implementation effect in 2019 is highly uncertain, due to changing business models, high uncertainty related to renewal options and the estimated lease period for significant part of our leases. This is particularly relevant for the lease liability, which will increase the interest bearing liabilities by a significant amount. Assets will increase by an amount corresponding to the lease liability.

The Group has made the following accounting policy choices and elected to apply the following practical expedients related to the implementation of IFRS 16:

– Fixed non-lease components embedded in the lease contract will not be separated and hence recognised as lease liabilities and capitalised as right-of-use assets.

– Leases with a lease term of 12 months or shorter will not be capitalised.

– Low-value leases, meaning mainly office equipment, will not be capitalised.

– Intangible assets, such as spectrum and licences, will be recognised as a lease.

– Lease assets and lease liabilities will be presented separately in the statement of financial position.

– The Group has elected to apply the modified retrospective approach for transition to IFRS 16, meaning the Group will not restate the comparatives for 2018. Right-of-use assets and liabilities will be measured at the same amount, taken into consideration prepayments and accruals recognised as of 31 December 2018.

A high level estimate of the effects on Telenor Group’s financial statements, considering todays lease contracts and a fixed lease term for our core infrastructure, is as follows:

– Annually lease expenses recognised as operational expenses will impact the EBITDA positively in the range of approximately NOK 4-5 billion.

– Annually depreciation of leased assets will increase in the range of approximately NOK 3-4 billion

– Annually interest expense related to the lease liability will increase by approximately NOK 1-2 billion.

– The effect on lease liability and right of use assets is estimated to approximately NOK 20-25 billion.