Associated British Foods plc – Annual report – 14 September 2019
Industry: food and drink, retail
Significant accounting policies (extract)
IFRS 16 Leases
IFRS 16 introduces a new model for the identification of leases and accounting for lessors and lessees. It replaces IAS 17 Leases and other related requirements. The group adopted IFRS 16 on 15 September 2019 and will apply it for the first time in the 2020 financial year.
IFRS 16 distinguishes leases from service contracts on the basis of control of an identified asset. For lessees, it removes the previous accounting distinction between (off-balance sheet) operating leases and (on-balance sheet) finance leases and introduces a single model recognising a lease liability and corresponding right-of-use asset for all leases except for short-term leases and leases of low-value assets.
For lessors, IFRS 16 substantially retains existing accounting requirements and continues to require classification of leases either as operating or finance in nature.
The group engaged external experts to support its implementation project and established a steering committee to oversee its governance, which reported to the Audit committee. During the current period, the group largely completed its implementation project.
IFRS 16 permits a choice of transitional approaches: a fully retrospective approach with an adjustment made to the opening retained earnings of the comparative period; or a modified retrospective approach where the cumulative effect of initial application is recognised at the date of initial application without restating prior periods.
The age, size and complexity of the group’s lease portfolio means that it would either be impossible or extremely costly and difficult to collate sufficient information to apply the fully retrospective approach. The group has therefore determined to adopt the modified retrospective approach.
The first results published under IFRS 16 will be the 2020 interim results.
Impact on the group’s results and financial position
The impact of IFRS 16 on the group’s results and financial position is significant.
Lease liabilities are measured initially at the present value of lease payments yet to be paid, subsequently adjusted for interest and lease payments as well as a number of other changes to lease provisions. Lease liabilities are included in net debt.
Right-of-use assets are measured initially at cost (including the value of the lease liability) and subsequently at cost less accumulated depreciation and any impairment losses, adjusted for any remeasurement of the lease liability. Right-of-use assets are reported as non-current assets.
There is no change to overall cash flows. Operating lease payments were previously presented as operating cash flows and finance lease payments were allocated between payments of principal and interest within financing cash flows. Under IFRS 16, lease payments are split between payments of principal and interest, presented as financing cash flows.
Operating lease expenses previously charged to operating profit will be replaced by depreciation of right-of-use assets (within operating profit) and interest cost (within finance expense). Although the aggregate income statement impact of each lease over its life will not change, the generally straight-line profile of operating lease expense will be more front-loaded under IFRS 16 because of the interest charge on the lease liability.
The changes set out below to the group’s assets and liabilities will be recorded from the transition date of 15 September 2019 in the 2020 financial year. The change will be charged against opening equity, firstly in the 2020 interim report and subsequently in the 2020 annual report.
IFRS 16 affects a number of other financial statement captions and ratios, including the following:
The group will reassess its incentive arrangements to align targets with the new accounting requirements.
IFRS 16 has the most significant impact on the Retail segment given the number of significant store leases to which Primark is a party.
The group’s current leasing disclosures are given in note 26 of this annual report.
Accounting estimates and judgements (extract)
Adoption of IFRS 16 Leases
The group has a significant volume of high value leases, especially in the Retail segment. Adoption of IFRS 16 has required management to make a number of judgements and estimates. These include the identification of lease arrangements required to be capitalised, consistent and reasonable assessment of the accounting lease term, and the derivation of appropriate discount rates to apply to gross lease obligations.
26. Lease commitments
The group acts as a lessee, lessor and sub-lessor for land and buildings, and plant and machinery, under operating leases.
Rental receipts of £8m (2018 – £7m) were recognised in the income statement in the period relating to operating leases. The total of future minimum rental receipts expected to be received is £50m (2018 – £45m).
Under the terms of the lease agreements, no contingent rents are payable.
The future minimum lease payments under operating leases are as follows:
Finance lease liabilities are payable as follows: