IFRS 16, policies, judgement, certain lessee and lessor disclosures, including sale and leaseback, telecoms

Telenor ASA – Annual report – 31 December 2020

Industry: telecoms

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.

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 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. Critical estimates in the evaluations of useful lives include, but are not limited to, remaining licence period and expected developments in technology and markets. 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

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, while the right to spectrum was previously treated as an intangible asset, under IFRS 16 the right to use the underlying spectrum is treated 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

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 non-cancellable period for lease contracts under network passive infrastructure is 5 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 2 years on average, which is mainly driven by non-cancellable lease agreements in Thailand.

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. The additions of spectrum licences in 2019 were primarily related to acquisition of spectrum under the 700 MHz band in Telenor Norway.

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, Telenor Norway and leaseback of Fornebu headquarters. The additions in land were mainly related to land for own sites or towers in dtac, Digi, Telenor Norway, and Pakistan.

In 2019 the additions in network passive infrastructure were mainly to tower spaces and part of building for own towers in Digi and Pakistan. The additions in cables were mainly in Sweden and Myanmar. The additions in land for own sites or towers were mainly in dtac, Digi and Pakistan. The additions in buildings were mainly in Telenor Norway.

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 2020:

1) The licences are held by Net4Mobility (a joint operation with Tele 2 owned 50% by the Group).

2) Tele 2 and the Group transferred their respective licences (2×20 MHz) in the 2600 MHz band to Net4Mobility on 2 July 2012.

3) The licences are held by TT Netværket (a joint operation with Telia, owned 50% by the group).

4) As a part the 900 MHz spectrum licencing conditions, dtac is entitled to use spectrum under the 850 MHz band (up until 31 December 2021) before fully switching to the spectrum in the 900 MHz band.

5) The spectrum is held under capacity agreement with TOT and therefore, is not part of right-of-use assets.

6) 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 3.8 billion (USD 449 million) by the Pakistan Telecommunication Authority (PTA) for an extension period of 15 years. Telenor Pakistan disagrees with terms and conditions for renewal, primarily on the price. Telenor Pakistan believes that the renewal price should be NOK 2.5 billion (USD 291 million), which is the same as for prior renewals for other operators. Accordingly, Telenor Pakistan has challenged the terms and conditions for renewal of said licence in Islamabad High Court. In the third quarter of 2019, Telenor Pakistan paid a deposit of NOK 2.1 billion (USD 225 million) of the demanded licence renewal fee awaiting conclusion of the case in Islamabad High Court. In the second quarter of 2020, Telenor Pakistan paid an additional deposit of NOK 0.5 billion (USD 57 million). The total deposit of NOK 2.6 billion (USD 282 million) has been recognised as prepayment (note 21) and is considered adjustable against the final outcome of the case. Telenor Pakistan has a stay order until the final adjudication. Accordingly, a right-of-use asset is recognised monthly with immediate amortisation for the continuing use of spectrum after 25 May 2019, with corresponding adjustment to the paid deposit.

Lease liabilities

Lease liabilities measured at amortised cost:

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 licence period) are included as lease liabilities with corresponding right-of-use assets.

The distribution of lease liabilities per currency and subsidiary as of 31 December 2020 is as follow:

The lease liabilities maturity profile is as follow:

Changes in lease liabilities during 2020 are presented below:

Cash payments made relating to lease contracts are presented below:

Repayments of the principal portion related to total lease liabilities in 2020 of NOK 9.0 billion (NOK 5.4 billion in 2019) include instalment payment of spectrum licences of NOK 3.6 billion (NOK 1.1 billion in 2019) and repayments of other leases of NOK 5.4 billion (NOK 4.3 billion in 2019). During 2020, the instalment payments of spectrum licences were mainly in dtac, Pakistan and Digi whereas in 2019 it was mainly in Pakistan, Myanmar and Grameenphone. Lease payments related to other lease contracts were mainly in dtac, Sweden, Digi, and Myanmar whereas in 2019 it was mainly in dtac, Sweden, Digi, Myanmar, and Pakistan.

Repayments of the interest portion of total lease liabilities in 2020 of NOK 2.1 billion include repayments of interest related to spectrum licences of NOK 0.9 billion (NOK 0.2 billion in 2019) and repayments of interest related to other lease contracts of NOK 1.2 billion (NOK 1.1 billion in 2019).

Payments of variable, short term and low value leases of NOK 3.8 billion include variable lease payments of NOK 3.6 billion and payments of short term and low value leases of NOK 0.3 billion.

Prepayments of NOK 1.0 billion in 2020 mainly relates to payments made at or before acquisition of spectrum licences in the bands of 700 MHz and 26 GHz in dtac.

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

Variable lease expenses of NOK 3.6 billion (NOK 3.3 billion in 2019) recognised in other operating expenses include NOK 2.9 billion (NOK 2.7 billion in 2019) related to spectrum and NOK 0.5 billion (NOK 0.6 billion in 2019) 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 0.5 billion (0.6 billion NOK in 2019) 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 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.

Development properties:

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.

Sale and leaseback in 2019

During 2019, 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 4.5 billion (NOK 3.5 billion in 2019) (note 6) recognised in the income statement includes variable lease revenue of NOK 60 million (NOK 131 million in 2019) 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:

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.

During 2020, the Group recognised interest income of NOK 99 million (NOK 82 million in 2019) (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:

NOTE 10 Other income and other expenses

For the year 2020, other income consisted mainly of the gain on 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).

In 2019, other expenses consisted mainly of workforce reductions (of which NOK 255 million in Corporate Functions, NOK 208 million in Telenor Norway and NOK 167 million in dtac). Other income consisted mainly of gains on the partial disposal of 701Search of NOK 235 million and Digital Money Myanmar of NOK 216 million, as well as a gain of NOK 119 million in Telenor Denmark from a sale and partial leaseback of assets.