IFRS 16 adopted modified retrospective approach, policies, mining

Rio Tinto plc – annual report – 31 December 2019

Industry: mining

45 New standards and interpretations adopted in the current year (extract)
This note explains the impact of the adoption of IFRS 16 “Leases” and IFRIC 23 “Uncertainty over Income Tax Treatments” on the Group’s financial statements. The new accounting policies applied from 1 January 2019 are set out in note 1. Our previous accounting policy on current tax is included below. In addition, the Group early adopted “Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform” and applied it retrospectively; an explanation of our adoption of these amendments is given below. The adoption of “Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement” and other minor changes to IFRS applicable to 2019 did not have a significant impact on the Group’s financial statements.

The impact on Equity attributable to owners of Rio Tinto as at 1 January 2019 from the adoption of IFRS 16 and IFRIC 23 is as follows:

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IFRS 16 “Leases”
The Group implemented the standard as at 1 January 2019. For contracts in place at this date, the Group continued to apply its existing definition of leases under the previous standards, IAS 17 “Leases” and IFRIC 4 “Determining Whether an Arrangement Contains a Lease” (“grandfathering”), instead of reassessing whether existing contracts were or contained a lease at the date of application of the new standard.

For transition, as permitted by IFRS 16, the Group applied the modified retrospective approach to existing operating leases which are capitalised under the new standard (i.e. retrospectively, with the cumulative effect recognised at the date of initial application as an adjustment to the opening balance of retained earnings with no restatement of comparative information in the financial statements). For existing finance leases, the carrying amounts before transition represented the 31 December 2018 values assigned to the right of use asset and lease liability.

The Group made the following additional choices, as permitted by IFRS 16, for existing operating leases:

– not to bring leases with 12 months or fewer remaining to run as at 1 January 2019 (including reasonably certain options to extend) on balance sheet. Costs for these items continue to be expensed directly to the income statement.
– for all leases, the lease liability was measured at 1 January 2019 as the present value of any future lease payments discounted using the appropriate incremental borrowing rate. The carrying value of the right of use asset for property, vessels and certain other leases was generally measured as if the lease had been in place since commencement date. For all other leases the right of use asset was measured as equal to the lease liability and adjusted for any accruals or prepayments already on the balance sheet. The Group also excluded any initial direct costs (eg legal fees) from the measurement of the right of use assets at transition.
– an impairment review was required on right of use assets at initial application of the standard. The Group elected to rely on its onerous lease assessments under IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, as at 31 December 2018 as permitted by IFRS 16. Any existing onerous lease provisions were adjusted against the right of use asset carrying value upon transition.
– to apply the use of hindsight when reviewing the lease arrangements for determination of the measurement or term of the lease under the retrospective option.
– to separate non-lease components from lease components for vessels and properties for the first time as part of the transition adjustment.
– in some cases, to apply a single discount rate to a portfolio of leases with reasonably similar characteristics.

The impact of transition to IFRS 16 on the Group’s balance sheet at 1 January 2019 is an increase in lease liabilities (debt) of US$1,248 million, an increase in right of use assets and net investments in leases of US$1,067 million, net adjustments to other assets and liabilities of US$110 million, and a charge of US$69 million to retained earnings.

The weighted average incremental borrowing rate applied to the Group’s lease liabilities recognised on the balance sheet at 1 January 2019 is 4.7%.

The most significant differences between the Group’s undiscounted non-cancellable operating lease commitments of US$1,717 million at 31 December 2018 and lease liabilities upon transition of US$1,292 million are set out below:

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The Group’s activities as a lessor are not material and hence there is not a significant impact on the financial statements on adoption of IFRS 16. As the Group has some property sub lease arrangements, these were reassessed for classification purposes as operating or finance leases at transition.

The Group has implemented a lease accounting system which is used for the majority of the Group’s leases. A separate contract-linked system is in use for the Group’s shipping leases.

Contracts signed, or amended, after 1 January 2019 are assessed against the lease identification criteria under IFRS 16. To date, this has not had a significant impact on the number of contracts deemed to be leases compared with assessments of similar arrangements under IAS 17. Practical application of IFRS 16 continues to develop and the Group continues to monitor this.

EBITDA, as disclosed in the Financial Information by Business Unit on page 252, increased as the operating lease cost previously charged against EBITDA under IAS 17 has been replaced under IFRS 16 with charges for depreciation and interest which are excluded from EBITDA (although included in earnings). Short-term, low value and variable leasing costs and non-lease components associated with vessels and property continue to be charged against EBITDA.

Operating cash flows increased under IFRS 16 as the element of cash paid attributable to the repayment of principal is included in financing cash flow. The net increase/decrease in cash and cash equivalents remains unchanged.

1 Principal accounting policies (extract)
(k) Leases (notes 14, 22, 23 and 45)
IFRS 16 “Leases” applies to the recognition, measurement, presentation and disclosure of leases. Certain leases are exempt from the standard, including leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources. The Group does not apply IFRS 16 to arrangements which fall within the scope of IAS 38 “Intangible Assets”.

A significant proportion by value of the Group’s lease arrangements relate to dry bulk vessels and offices. Other leases include land and non-mining rights, warehouses, equipment and vehicles. The majority of lease terms are negotiated through the Group’s procurement function, although agreements contain a wide range of different terms and conditions.

The Group recognises all lease liabilities and corresponding right of use assets, with the exception of short-term (12 months or fewer) and low value leases, on the balance sheet. Lease liabilities are recorded at the present value of: fixed payments; variable lease payments that depend on an index or rate; amounts payable under residual value guarantees; and extension options expected to be exercised. Where a lease contains an extension option which the Group can exercise without negotiation, lease payments for the extension period are included in the liability if the Group is reasonably certain that it will exercise the option. Variable lease payments not dependent on an index or rate are excluded from the calculation of lease liabilities. Payments are discounted at the incremental borrowing rate of the lessee, unless the interest rate implicit in the lease can be readily determined. For lease agreements relating to vessels and properties, non-lease components are excluded from the projection of future lease payments and recorded separately within operating costs on a straight line basis. The right of use asset arising from a lease arrangement at initial recognition reflects the lease liability, initial direct costs, lease payments made before the commencement date of the lease, and capitalised provision for dismantling and restoration, less any lease incentives.

The Group recognises depreciation of right of use assets and interest on lease liabilities in the income statement over the lease term. Repayments of lease liabilities are separated into a principal portion (presented within financing activities) and interest portion (which the Group presents in operating activities) in the cash flow statement. Payments made before the commencement date are included within financing activities unless they in substance represent investing cash flows, for example where pre-commencement cash flows are significant relative to aggregate cash flows of the leasing arrangement.

Presentation of comparative financial information relating to leases is in accordance with the previous standard IAS 17 “Leases”. For further understanding of the impact of the transition to IFRS 16, refer to note 45.

14 Property, plant and equipment (extract)
Right-of-use assets – Leased

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(a) The net book value of right of use assets at 1 January 2019 was US$1,022 million, comprising an adjustment upon transition to IFRS 16 of US$991 million, and assets previously held under finance leases under IAS 17 of US$31 million. Refer to note 45 for additional information relating to the Group’s implementation of IFRS 16 “Leases”.
(b) Impairment charges related to the ISAL smelter (see note 6).

The leased assets of the Group comprise land and buildings (mainly office buildings) and plant and equipment, the majority of which are vessels. Lease terms are negotiated on an individual basis and contain a wide range of terms and conditions. Right of use assets are depreciated on a straight line basis over the life of the lease, taking into account any extensions that are likely to be enacted.

23 Leases
Transition
Refer to note 45 for additional information relating to our implementation of IFRS 16 “Leases” at 1 January 2019.

Lessee arrangements
We have made the following payments associated with leases during 2019:

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Lease liabilities
The maturity profile of lease liabilities recognised at the balance sheet is:

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At 31 December 2019, commitments for leases not yet commenced were US$119 million; commitments relating to short-term leases which had already commenced at 31 December 2019 were US$108 million. As permitted by IFRS 16, short-term and low-value leases are not recognised on the balance sheet as a lease liability and are expensed as incurred.

Lessor arrangements
We sub-lease owned and right-of-use assets in cases where we no longer require the assets for our own use. At 31 December 2019 the Group recognised a net investment asset of US$63 million relating to the discounted value of cash expected to be received from assets leased out under finance leases (refer to note 18). During the year, we also recognised sub-lease income of US$5 million within net operating costs. This represents the income received in the year relating to assets subject to operating leases.