IFRS 16, disclosure of future effect with quantification from initial analysis

Senior plc – Half year report – 30 June 2017

Industry: manufacturing

Notes to the Condensed Consolidated Interim Financial Statements (extract)

2. Accounting policies (extract)

c) IFRS 16 Leases Effective for annual periods beginning 1 January 2019, subject to EU endorsement.

This standard, which will replace IAS 17, requires lessees to recognise assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset is low value. As at 31 December 2016, the Group held a significant number of operating leases which, under IAS 17, are expensed on a straight-line basis over the lease term.

Retrospective application in the comparative year ending 31 December 2018 is optional. The Group expects that it will not take this optional application and will apply the standard from the transitional date using the modified retrospective approach, adjusting opening retained earnings and not restating comparatives. This involves calculating the right-of-use asset and lease liability based on the present value of remaining lease payments on all applicable lease contracts as at the transition date.

The Group has initiated a process to collect operating lease information across all the Divisions in order to assess the cumulative adjustment on transition. Based on an initial analysis performed for the year ending 31 December 2016, had the new requirements been adopted in 2016, profit before tax would have decreased by an immaterial amount, whilst it is estimated lease liabilities and property, plant and equipment would have increased between £50m and £70m. This is expected to result in an increase of the Group’s principal lending covenant, the ratio of net debt to EBITDA by 0.2x to 0.5x, except where it is determined at constant accounting standards. The ranges disclosed reflect the sensitivity of the adjustment to a +/3 percentage point movement in the discount rate used to calculate the present value of the future cash flow commitments. The discount rate, the renewal of and changes to the lease portfolio and exchange rates on translation of financial statements of non-Sterling operations are all subject to change in future years, which will impact the actual transitional adjustment as at the expected transition date.

The Group will continue to monitor the impact until the transition date, providing further quantitative and qualitative measures as progress is made on implementation.

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