IFRS 16, lease accounting policies and certain disclosures

Play Communications S.A. – Annual report – 31 December 2018

Industry: telecoms 

Consolidated financial statements prepared in accordance with IFRS as adopted by the European Union (extracts)

As at and for the year ended December 31, 2018

(Expressed in PLN, all amounts in tables given in thousands unless stated otherwise)

  1. Summary of significant accounting policies (extracts)

41.8 Right-of-use assets and lease liabilities

The Group is a party to lease contracts for, among others:

a) land for telecommunications constructions,

b) buildings:

  • office space, warehouses and points of sale space,

  • collocation centers,

  • other space for other telecommunications equipment,

c) telecommunications network and equipment- dark fiber-optic cables,

d) computers,

e) motor vehicles.

Leases are recognized, measured and presented in line with IFRS 16 ‘Leases’. 

Accounting by the lessee

The Group implemented a single accounting model, requiring lessees to recognize assets and liabilities for all leases excluding exceptions listed in the standard. The Group elected to apply exemptions for short term leases in relation to leases of billboards and not to apply exemptions for other short term leases or for leases for which the underlying asset is of low value.

Based on the accounting policy applied the Group recognizes a right-of-use asset and a lease liability at the commencement date of the contract for all leases conveying the right to control the use of an identified assets for a period of time. The commencement date is the date on which a lessor makes an underlying asset available for use by a lessee.

The right-of-use assets are initially measured at cost, which comprises:

– the amount of the initial measurement of the lease liability,

– any lease payments made at or before the commencement date, less any lease incentives,

– any initial direct costs incurred by the lessee,

– an estimate of costs to be incurred by the lessee in dismantling and removing the underlying assets or restoring the site on which the assets are located.

After the commencement date the right-of-use assets are measured at cost less any accumulated depreciation and any accumulated impairment losses and adjusted for any re-measurement of the lease liability.

Depreciation is calculated using the straight-line method over the estimated useful lives, as follows:

Description                                                            Term in years

Land                                                                       5-25

Buildings                                                                1-20

Telecommunications equipment                      1-10

Computers                                                             3-5

Motor vehicles                                                      2-5

If the lease transfers ownership of the underlying asset to the Group by the end of the lease term or if the cost of the right-of-use asset reflects that the Group will exercise a purchase option, the Group depreciates the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the Group depreciates the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

The Group recognizes asset retirement obligations mainly in relation to leased land for telecommunications constructions and other space for other telecommunications equipment (“sites”) which would need to be restored to previous state when the lease ends. Asset retirement obligations are capitalized as part of the cost of right-of-use assets and depreciated over the asset’s estimated useful life. The Group estimates the fair value of asset retirement obligations using number of sites available for use, average site reinstatement cost and the discount rate which equals the interest rate of long-term treasury bonds.

The lease liability is initially measured at the present value of the lease payments that are not paid at that date. These include:

– fixed payments, less any lease incentives receivable;

– variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

– amounts expected to be payable by the lessee under residual value guarantees;

– the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and

– payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

The lease payments exclude variable elements which are dependent on external factors such as e.g. sale volume in the point of sale leased. Variable lease payments not included in the initial measurement of the lease liability are recognized directly in the profit and loss.

The lease payments are discounted using the Group’s incremental borrowing rate or the rate implicit in the lease contract.

The lease term determined by the Group comprises:

– non-cancellable period of lease contracts,

– periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option,

– periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

After the commencement date the Group measures the lease liability by:

– increasing the carrying amount to reflect interest on the lease liability,

– reducing the carrying amount to reflect lease payments made, and

– re-measuring the carrying amount to reflect any reassessment or lease modifications.

Accounting by the lessor

In case of lease contracts based on which the Group is acting as a lessor each of its leases is classified as either operating or finance lease. Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership to the lessee. Examples of situations where the risks and rewards of ownership are considered as having been transferred to the lessee are as follows:

− the lease transfers ownership of the asset to the lessee by the end of the lease term,

− the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised,

− the lease term is for at least 3/4 of the economic life of the asset even if title is not transferred,

− at the inception of the lease the present value of the minimum lease payments amounts to at least 90% of the fair value of the leased asset; or

− the leased assets are of such a specialized nature that only the lessee can use them without major modifications.

2.5 Critical accounting estimates and judgments (extract)

2.5.2 Valuation of lease liabilities and right-of-use assets

The application of IFRS 16 requires the Group to make judgments that affect the valuation of the lease liabilities (please see Note 27.3) and the valuation of right-of-use assets (please see Note 14). These include: determining contracts in scope of IFRS 16, determining the contract term and determining the interest rate used for discounting of future cash flows.

The lease term determined by the Group generally comprises non-cancellable period of lease contracts, periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option and periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option. The same term is applied as economic useful life of right-of-use assets.

For all contracts signed since January 1, 2018 relating to properties for telecommunication sites, the Group has concluded that there are a number of scenarios where the Group might elect not to exercise the extension options. Therefore, the IFRS 16 criterion of being reasonably certain to exercise the extension options is not fulfilled. The periods covered by a potential use of an option to extend the lease were excluded from the lease term. For leases of property for telecommunication sites with indefinite term the Group previously estimated the length of the contract to be equal to the economic useful life of non-current assets located in the leased property and physically connected with it (e.g. economic useful life of foundations of telecommunications towers in case of lease of land on which the tower is located). In the three-month period ended March 31, 2018 the Group has reassessed its estimation of the non-cancellable period of such types of leases to be equal to the average or typical market contract term of particular type of lease. The above described changes were considered as change in estimate and were applied prospectively and resulted in a decrease of the lease liabilities balance of approximately 5% and in a decrease of the right-of-use assets balance of approximately 6%. For leases other than telecommunication sites with indefinite term the Group continuously estimates the non-cancellable period to be equal to the average or typical market contract term of particular type of lease. The Group will continue to monitor these assumptions in the future as a result of a review of the industry practice and the evolution of the accounting interpretations in relation to estimation of the lease terms among peer telecommunications entities when they also apply IFRS 16.

The present value of the lease payment is determined using the discount rate representing the rate of interest rate swap applicable for currency of the lease contract and for similar tenor, corrected by the average credit spread of entities with rating similar to the Group’s rating, observed in the period when the lease contract commences or is modified.

  1. Right-of-use assets

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The decreases in gross book value of Right-of-Use assets: Land and Buildings recorded during year ended December 31, 2018 result mainly from reassessment of estimation of lease term. For more details see Note 2.5.2. The transfers and reclassifications represent mainly assets that had been previously used under lease agreements and were purchased by the Group at the end of the lease term, now used as own property, plant and equipment.

The cost relating to variable lease payments that do not depend on an index or a rate amounted to PLN 1 thousand for the year ended December 31, 2018. There were no leases with residual value guarantees or leases not yet commenced to which the Group is committed. The expenses relating to leases for which the Group applied the practical expedient described in paragraph 5a of the IFRS 16 (leases with the contract term of less than 12 months) amounted to PLN 10,291 thousand for the year ended December 31, 2018.

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In the year ended December 31, 2017 the cost relating to variable lease payments that do not depend on an index or a rate amounted to PLN nil.

There were no leases with residual value guarantees or leases not yet commenced to which the Group is committed.

The costs relating to leases for which the Group applied the practical expedient described in paragraph 5a of the IFRS 16 (leases with the contract term of less than 12 months) amounted to PLN 10,126 thousand in the year ended December 31, 2017.

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In the year ended December 31, 2016 the cost relating to variable lease payments that do not depend on an index or a rate amounted to PLN 3,810 thousand.

There were no leases with residual value guarantees or leases not yet commenced to which the Group is committed.

The costs relating to leases for which the Group applied the practical expedient described in paragraph 5a of the IFRS 16 (leases with the contract term of less than 12 months) amounted to PLN 10,128 thousand in the year ended December 31, 2016.

  1. Finance liabilities – debt (extract)

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27.3 Lease liabilities

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For future payments payable under leases which are in place at the reporting date, please see Note 3.4.

27.4 Changes in finance liabilities

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Lines “Interest accrued” above represent interest calculated using the amortized cost method, i.e. including amortization of the loan origination fees.

Other payments relating to loans in the year ended December 31, 2017 represent the loan origination fees incurred in relation with the Senior Facilities Agreement signed in March 2017. Other payments relating to notes represent the early redemption fees paid in relation to repayment of the Senior Secured Notes and Senior Notes upon refinancing in March 2017.

  1. Financial risk management (extract)

3.4 Liquidity risk (extract)

Liquidity risk management implies maintaining sufficient cash and marketable securities as well as availability of funding through an adequate amount of committed debt facilities.

The tables below present the maturity of bank loans, notes, lease liabilities and other debt in contractual values (i.e. excluding the impact of expenses incurred in relation to the liability), increased by projected value of interest payments. Values are not discounted.

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  1. Depreciation and amortization

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  1. Other operating income and other operating costs (extract)

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  1. Finance income and finance costs (extract)

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Consolidated statement of cash flows

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[Note: IFRS 16 para BC221 suggests that the most useful information in respect of the maturity analysis of lease liabilities would be disclosure of the undiscounted cash flows for each of the first 5 years and a total for the periods thereafter, and, if the portfolio of leases extends for a period significantly longer than 5 years, more detailed information on the post 5 year period.]

 

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