IFRS 16 adopted, modified retrospective method, policies, maintenance provisions for leased aircraft, certain disclosures

easyJet plc – Annual report – 30 September 2019

Industry: transport

1B. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES (extract 1)
IFRS 16 LEASES
IFRS 16 has been early adopted, bringing the timing of adoption in line with IFRS 9 and 15. The standard provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed.

easyJet has applied the cumulative catch-up (‘modified’) transition method. The comparative information has not been restated, and the retrospective cumulative impact of IFRS 16 has been recognised within the opening balance of retained earnings as at 1 October 2018. The financial statement impact of IFRS 16 is shown within this note. Refer also to note 10 property plant and equipment and note 16 leases.

On initial adoption, easyJet has elected to use the following practical expedients proposed by the standard:
• the application of a single discount rate to a portfolio of leases with reasonably similar characteristics, for example aircraft with similar lease term;
• the use of hindsight when determining the lease term if the contract contains options to extend or terminate the lease;
• the exclusion of initial direct costs from the measurement of the right of use asset; and
• lease payments for contracts with a duration of 12 months or less and contracts for which the underlying asset is of a low value continue to be expensed to the income statement on a straight-line basis over the lease term.

Judgements made in applying IFRS 16 include assessing the lease term, identifying the discount rate to be used and assessing maintenance obligations. Further details are given below.

CAPITALISATION OF LEASE CONTRACTS
Under IFRS 16, easyJet has capitalised the right of use of all aircraft and properties previously held under operating leases. At the date of adoption 84 aircraft and six properties were capitalised. The lease term corresponds to the duration of the contracts signed except in cases where the Group is reasonably certain that it will exercise contractual extension or termination options.

easyJet has recognised a right of use asset representing its right to use the underlying asset and a corresponding lease liability representing its obligation to make lease payments. Operating lease expenses have been replaced by a depreciation expense on right of use assets recognised and an interest expense as the interest rate implicit in easyJet’s lease liabilities unwinds. When the interest rate implicit in the lease is not readily determined, easyJet’s incremental borrowing rate has been used.

Finance leases previously capitalised under IAS 17 ‘Leases’ have been reclassified to the right of use asset category under IFRS 16.

ACCOUNTING FOR THE MAINTENANCE OF LEASED AIRCRAFT
easyJet has contractual obligations to maintain aircraft held under leases. Previously, provisions were created over the term of the lease based on the estimated future costs of major airframe checks, engine shop visits and end of lease liabilities. These costs were discounted to present value with the corresponding income statement charge recognised within maintenance costs and the unwinding of the discount recognised within interest costs.

As at 1 October 2018 and going forward under IFRS 16, contractual maintenance obligations which are not dependent on the use of the aircraft are recognised in full on commencement of the lease. They have been capitalised as part of the right of use asset at the inception of the lease and will be depreciated over the lease term. Contractual maintenance obligations which are dependent on the use of the aircraft will continue to be provided for over the term of the lease based on the estimated future costs, discounted to present value. However they will be capitalised to the right of use asset rather than recognised within maintenance costs in the income statement. This asset will be depreciated immediately as the obligation has arisen as a result of flying hours/cycles already undertaken.

Where an aircraft is sold and leased back, other than when first delivered to easyJet, a maintenance catch-up liability resulting from past flying activity arises at the point the lease agreement is signed and a corresponding maintenance provision catch-up charge was previously recognised immediately in the income statement. Under IFRS 16 this maintenance provision catch-up has been capitalised as part of the right of use asset at the inception of the lease and depreciated over the lease term.

These changes will result in a decrease in maintenance costs and an increase in depreciation expense.

ACCOUNTING POLICY FOR LEASES
Finance leases and operating leases for the comparative period ended 30 September 2018, were recognised and measured in accordance with IAS 17 Leases. The accounting policies set out below are those applied to the current period, in accordance with IFRS 16.

When a contractual arrangement contains a lease easyJet recognises a lease liability and a corresponding right of use asset at the commencement of the lease.

At the commencement date the lease liability is measured at the present value of the future lease payments, discounted using the Group’s incremental borrowing rate where the interest rate in the lease is not readily determined. Subsequently, the lease liability is adjusted by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the lease payments made and remeasuring the carrying amount to reflect any reassessment or lease modifications.

The lease term is determined from the commencement date of the lease and covers the non-cancellable term. If easyJet has an extension option, which it considers it reasonably certain to exercise, then the lease term will be considered to extend beyond that non-cancellable period. If easyJet has a termination option, which it considers it reasonably certain to exercise, then the lease term will be considered to be until the date of the termination option.

At the commencement date the right of use asset is measured at an amount equal to the lease liability plus any lease payments made before the commencement date and any initial direct costs, less any lease incentive payments. An estimate of costs to be incurred in restoring an asset, in accordance with the terms of the lease, is also included in the right of use asset at initial recognition. Subsequently, the right of use asset is measured in accordance with the accounting policy for property, plant and equipment. Adjustment is also made to the right of use to reflect any remeasurement of the corresponding lease liability.

Short-term leases and low value leases are not recognised as lease liabilities and right of use assets, but are recognised as an expense straight line over the lease term.

easyJet enters into sale and leaseback transactions whereby it sells either new or mid-life aircraft to a third-party and immediately leases them back. Where sale proceeds received are judged to reflect the aircraft’s fair value, any gain or loss arising on disposal is recognised in the income statement, to the extent that it relates to the rights that have been transferred. Gains and losses that relate to the rights that have been retained are included in the carrying amount of the right of use asset recognised at commencement of the lease. Where sale proceeds received are not at the aircraft’s fair value, any below market terms are recognised as a prepayment of lease payments, and above market terms are recognised as additional financing provided by the lessor.

1B. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES (extract 2)

IMPACT ON THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 OCTOBER 2018
The following table summarises the impacts of adopting IFRS 9, 15 and 16 on the Group’s consolidated statement of financial position as at 1 October 2018.

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The following tables summarise the impacts of adopting IFRS 9, 15 and 16 on the Group’s consolidated income statement for the year ended 30 September 2019, its consolidated statement of financial position as at 30 September 2019, and its consolidated statement of cash flows for the year ended 30 September 2019. There has been an immaterial impact of IFRS 9 adoption on the income statement and cash flow statement.

IMPACT ON THE CONSOLIDATED INCOME STATEMENT

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IMPACT ON THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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IMPACT ON THE CONSOLIDATED STATEMENT OF CASH FLOWS

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1C.CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (extract)
1C.(II) CRITICAL ACCOUNTING ESTIMATES (extract)
AIRCRAFT MAINTENANCE PROVISIONS – £526 MILLION (NOTE 18)
easyJet incurs liabilities for maintenance costs in respect of aircraft leased during the term of the lease. These arise from legal and constructive contractual obligations relating to the condition of the aircraft when it is returned to the lessor. To discharge these obligations, easyJet will also normally need to carry out one heavy maintenance check on each of the engines and the airframe during the lease term.

On recognition of a right of use asset under IFRS 16 a provision is made in the income statement for maintenance not dependent on use of the aircraft, plus maintenance relating to previous use, based on hours or cycles flown, to provide for the cost of these obligations. Contractual obligations which are dependent on the ongoing use of the aircraft will be provided over the term of the lease based on the estimated future costs, discounted to present value. This will be capitalised to the right of use asset rather than recognised in maintenance in the income statement. This asset will be depreciated immediately as the obligation has arisen as a result of flying hours already undertaken. The most critical estimates required are considered to be the utilisation of the aircraft, the expected costs of the heavy maintenance checks at the time which they are expected to occur, the condition of the aircraft, the lifespan of life-limited parts and the rate used to discount the provision.

The bases of all estimates are reviewed annually, and also when information becomes available that is capable of causing a material change to an estimate, such as renegotiation of end of lease return conditions, increased or decreased utilisation, or changes in the cost of heavy maintenance services. No reasonable combination of changes to these estimates would result in a material movement to the carrying value of the provision.

2. NET FINANCE CHARGES

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  1. Included within net exchange gains on monetary assets and liabilities is an £24 million gain relating to the fair value gain on derivatives designated as fair value through profit or loss. See Note 24 for details.

3. PROFIT BEFORE TAX (extract)
The following have been included in arriving at profit before tax:

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  1. These are short-term leases where the treatment remains the same under IAS 17 and IFRS 16

In the comparative period ended 30 September 2018 aircraft operating lease rentals of £154 million included only the operating dry lease rental charges recognised in the period, as well as the impact of hedging the USD exposure on these lease rentals.

Wet leased aircraft rentals of £22 million (2018: £56 million) were recognised within other costs. Wet leases are fundamentally different to regular, long-term lease commitments as they are short-term in nature (with terms of less than one year) and they relate to the provision of aircraft, crew, maintenance and insurance (‘ACMI’).

10. PROPERTY, PLANT AND EQUIPMENT

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Information presented for the comparative period ended 30 September 2018, is presented in accordance with IAS 17. Information presented for the current period ended 30 September 2019, is presented in accordance with IFRS 16.

The net book value of aircraft includes £286 million (2018: 283 million) relating to advance and option payments for future deliveries. This amount is not depreciated.

Aircraft with a net book value of £71 million (2018: £73 million) which were classified as finance leases in 2018 are now included within the right of use asset created on adoption of IFRS 16 as at 1 October 2018. Right of use assets with a net book value of £497 million were recognised as at that date which were previously treated as operating leases.

easyJet is contractually committed to the acquisition of 110 (2018: 115) Airbus A320 family aircraft, with a total list price* of US$13.0 billion (2018: US$13.2 billion) before escalations and discounts for delivery in financial years 2020 (22 aircraft), in 2021 (26 aircraft), in 2022 (27 aircraft) and in 2023 (35 aircraft).

The ‘Other’ categories comprise of leasehold improvements, computer hardware, leasehold property and fixtures, fittings and equipment.

During the 2019 financial year we purchased land in Luton, UK with the intention to build a new head office.

  • Airbus no longer publishes list prices. The estimated list price is based on the last available list price published in January 2018 and escalated by Airbus’ standard escalation from January 2018 to January 2019 of 3.7%.

15. BORROWINGS AND LEASE LIABILITIES (extract)

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Information presented for the comparative period ended 30 September 2018, is presented in accordance with IAS 17 Leases. Information presented for the current period ended 30 September 2019, is presented in accordance with IFRS 16 Leases.

Finance lease obligations relate to aircraft and bear interest partly at fixed rates and partly at variable rates linked to USD LIBOR.

16. LEASES
Information presented in this note is in respect of the current period ended 30 September 2019 and is presented in accordance with IFRS 16. Information in respect of the comparative period ended 30 September 2018 is presented in accordance with IAS 17.

easyJet holds aircraft under leasing arrangements that are recognised as right of use assets and lease liabilities, with remaining lease terms ranging up to eight years. easyJet is contractually obliged to carry out maintenance on these aircraft, and the cost of this is provided based on the number of flying hours and cycles operated. Further details are given in note 1.

Information in respect of right of use assets, including the carrying amount, additions and depreciation, are set out in note 10 to these financial statements. Information in respect of the carrying value and interest arising on lease liabilities is set out in note 24 and note 2 respectively. A maturity analysis of lease liabilities is set out below.

easyJet also enters into short-term leases and low value leases which are not recognised as right of use assets and lease liabilities. The expense recognised in the period in relation to these leases is disclosed in note 3.

The weighted average incremental borrowing rate applied to the lease liabilities in the statement of financial position at the initial adoption on 1 October 2018 was 4.38%.

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