IFRS 16 adopted, modified retrospective method, policies, judgement, certain lessee and lessor disclosures, telecoms

Telenor ASA – Annual report – 31 December 2019

Industry: telecoms

NOTE 1 General information, compliance and changes in International Financial Reporting Standards (extract)
IFRS 16 Leases (effective from 1 January 2019)
IFRS 16 supersedes IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosures of leases. Lessees are required to account for most leases under a single on-balance sheet model, and the distinction between operating and finance leases for lessees as was required by IAS 17 has been eliminated. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. However, subleases will in some cases be classified differently by the Group as lessor under IFRS 16. A sublease agreement is assessed based on the terms in the head lease and not on the characteristics of the underlying asset under IFRS 16.

In accordance with IFRS 16, the Group recognises a liability to make lease payments (i.e. a lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. a right-of-use asset), and recognises depreciation of the right-of-use assets separately from interest on lease liabilities in the income statement. For a summary of new accounting policies, see note 2 in section Leases. For significant judgements related to leases, see note 3.

The effects of adoption of IFRS 16
The Group has lease contracts related to the mobile networks (mainly towers), land, buildings and other equipment.

Before the adoption of IFRS 16 Leases 1 January 2019, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as finance lease whenever the terms of the lease transferred substantially all the risks and rewards incidental to ownership to the Group. All other leases were classified as operating leases. Assets held under finance leases were recognised as assets of the Group at their fair value at inception of the leases or, if lower, at the present value of the minimum lease payments. The liabilities to the lessor were recognised as finance lease obligations in the statement of financial position. Lease payments were apportioned between finance expenses and reduction of the lease liability to achieve a constant periodic rate of interest on the remaining balance of the liability. In an operating lease, the leased asset was not capitalised, and the lease payments were recognised in the income statement on a straight-line basis over the lease terms. Any prepaid rent and accrued rent were recognised under prepayments and trade and other payables, respectively.

Upon adoption of IFRS 16, the Group recognised 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 short-term leases and leases of low-value assets. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term, subject to impairment assessments. 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 has made the following accounting policy choices:
• Low-value leases, meaning mainly leased office equipment, are not capitalised.
• Leases with a lease term of 12 months or shorter that do not contain a purchase option are not capitalised (short-term leases), except for leases of spectrum licences (separate class of underlying assets).
• The right to spectrum was previously treated as an intangible asset, while under IFRS 16 the right to use the underlying spectrum is treated as a lease.
• 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.
• Right-of-use assets and lease liabilities are presented separately in the statement of financial position.

In addition to the above accounting policy choices the Group elected to apply the following practical expedients related to the implementation of IFRS 16:
• The Group elected to apply the modified retrospective approach for transition to IFRS 16. Right-of-use assets and liabilities have been measured at the same amount, taking into consideration prepayments and accruals recognised as of 31 December 2018. Initial direct costs have been excluded from the measurement of the right-of-use asset at the date of initial application. The comparatives for 2018 have not been restated.
• The Group relied on its assessment of whether leases were onerous immediately before the date of initial application.
• A single discount rate was applied to portfolios of leases with reasonably similar characteristics.
• The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified as finance leases. The requirements of IFRS 16 were applied to these leases from 1 January 2019.

The tables below show the impacts arising from IFRS 16 on the opening balance and for the year 2019.

 

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The net effect on EBITDA is mainly explained by operating lease expenses previously recorded under other operating expenses. These leases are now recognised as right-of-use assets and lease liabilities, leading to a corresponding increase in depreciation and amortisation expenses and financial expenses. The decrease in revenue mainly relates to sublease agreements previously classified as operating leases under IAS 17.

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Main effects as at 1 January 2019:
• Additional non-current lease liabilities of NOK 33,443 million and current lease liabilities of NOK 5,735 million, NOK 39,178 million in total, were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application, including the reclassification of non-current interest-bearing liabilities and current interest-bearing liabilities related to spectrum licences.
• Right-of-use assets of NOK 58,268 million were recognised, including the reclassification of intangible assets related to spectrum licences and finance leases reclassified from property, plant and equipment.
• The net effect on other non-current assets is related to the Group as a lessor in sublease agreements. The effects on prepayments classified as trade and other receivables, and on accounts payable and accrued expenses, were related to operating leases under IAS 17 reclassified to right-of-use assets and lease liabilities.

The weighted average incremental borrowing rate applied to lease liabilities recognised in the statement of financial position as of 1 January 2019 was 6%.

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The improvement of net cash flow from operating activities and decrease in cash flow from financing activities is mainly due to reclassification of payments related to operating leases under IAS 17. The cash outflow for leases under IFRS 16 is presented as repayment of interest-bearing liabilities within financing activities. Interest paid is still classified as cash flow within operating activities.

The following table provides reconciliation from operating lease commitments as of 31 December 2018 under IAS 17 and lease liabilities recognised in the statement of financial position as of 1 January 2019:

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NOTE 2 Summary of significant accounting policies (extract)
Leases
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.

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.
Lease liabilities
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.

Subleases
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, rather than by reference to the underlying asset that is the subject of the 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.

NOTE 18 Leases
Group as lessee
Upon implementation of IFRS 16 on 1 January 2019, the Group recognised lease liabilities to make lease payments over the lease term with corresponding right-of-assets under all lease agreements where the Group is a lessee. Assets subject to finance leases under IAS 17 that were earlier recognised as part of property, plant and equipment were reclassified to right-of-assets as part of IFRS 16 implementation as of 1 January 2019. In addition, the right to spectrum was previously treated as an intangible asset, while under IFRS 16 the right to use the underlying spectrum is treated as a lease. For further information on the effects of implementation of IFRS 16, see note 1. For information on judgement applied when evaluating lease term of contracts with renewal or termination options, see note 3.

Right-of-use assets
Right-of-use assets are classified based on the nature of underlying assets as follow:

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1) See table for the spectrum licences below.

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 non-cancellable period for lease contracts under network passive infrastructure is 6 years on average, which is mainly driven by the non-cancellable CAT lease agreement in Thailand and non-cancellable tower agreements in Myanmar. The non-cancellable period for lease contracts related to land is 3 years on average, which is mainly driven by non-cancellable lease agreements in Thailand.

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 2019:

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Telenor Pakistan’s 900 MHz and 1800 MHz spectrum licence expired on 25 May 2019, and the renewal fee was set to USD 449 million by Pakistan Telecommunication Authority (PTA) for extending it for another 15 years. Telenor Pakistan disagrees with terms and conditions for renewal primarily based on the price where Telenor Pakistan believes that the renewal price should be USD 291 million that is the same as prior renewals for other operators. Accordingly, Telenor Pakistan has challenged the terms and conditions of renewal of said licence in Islamabad High Court. In the third quarter of 2019, Telenor Pakistan paid a deposit of USD 225 million (NOK 2.1 billion) of the demanded licence renewal fee awaiting conclusion of the case in Islamabad High Court. The payment
of deposit of NOK 2.1 billion is recognised as prepayment (note 21) which is considered adjustable against the final outcome of the case. Telenor Pakistan has a stay order until the final outcome and accordingly a right-of-use asset is recognised on a monthly basis with immediate amortisation for the continuing use of spectrum after 25 May 2019 with corresponding adjustment to already paid deposit.

Lease liabilities
Lease liabilities measured at amortised cost

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For 2018, lease liabilities for finance leases under IAS 17 amounted to a total of NOK 859 million of which NOK 54 million was classified as current and NOK 805 million was classified as non-current.

The right to spectrum was previously treated as an intangible asset, while under IFRS 16 the right to use the underlying spectrum is treated as a lease. Accordingly all fixed payments, including upfront fees payable in instalments over the lease term (or license period) are included as lease liabilities with corresponding right-of-use assets as of 1 January 2019. Before implementation of IFRS 16, license obligations for the upfront fees payable in instalments as of 31 December 2018 amounting to NOK 11,847 million were recognised as part of other interest-bearing liabilities, see note 28.

The distribution of lease liabilities per currency and subsidiary as of 31 December 2019 is as follow:

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The lease liabilities maturity profile is as follow:

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Changes in lease liabilities during 2019 are presented below:

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Cash payments made relating to lease contracts are presented below:

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Expenses recognised in the income statement related to lease contracts are presented below:

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Variable lease expenses of NOK 3.3 billion recognised in other operating expenses include NOK 2.7 billion related to spectrum agreements and NOK 0.6 billion 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 0.6 billion 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.

The portfolio of short term leases during 2019 is expected to reduce significantly during 2020 due to ongoing renegotiation of lease contracts.

Gain on derecognition of right-of-use assets amounted to NOK 0.1 billion (note 10). The gain was primarily related to sale and leaseback of a building in Denmark. The building was earlier leased under a finance lease arrangement with an option to purchase the building. The building was purchased on 1 April 2019 at the exercise price of NOK 0.1 billion. The building was sold at fair market value of NOK 0.4 billion, of which NOK 0.3 billion was received in cash. Simultaneously, the Group entered into a leaseback agreement for the continued use of the building and recognised a lease liability of NOK 0.1 billion.

Group as lessor
Operating leases
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 3.3 billion (note 6) recognised in the income statement includes variable lease revenue of NOK 131 million 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:

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Finance leases
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.

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During 2019, the Group recognised interest income of NOK 82 million (note 12) related to finance lease receivables.

Sublease of land in Thailand
During the year 2018, dtac entered into the Disputes Settlement and Tower Service Agreement with CAT. Under the agreement, dtac transferred disputed 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 on 1 January 2019 as part of the IFRS 16 implementation. 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 as of 1 January 2019. Right-of-use assets related to land was simultaneously 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:

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