IFRS 16, IAS 8 para 30, description of new leasing standard with quantification of expected effects

DSV A/S – Annual report – 31 December 2017

Industry: distribution

Basis of preparation of the consolidated financial statements (extract)

New accounting regulations (extract 1)

The IASB has issued a number of new standards and amendments not yet in effect or endorsed by the EU and therefore not relevant for the preparation of the 2017 consolidated financial statements. The most significant of these are listed in the following, however only IFRS 16 Leases is expected to have a significant impact on the consolidated financial statements when implemented. DSV expects to implement these standards when they take effect.

New accounting regulations (extract 2)

IFRS 16 Leases

IFRS 16 Leases will take effect on 1 January 2019 and will be applied following the retrospective approach with full restatement for the comparison period, when implemented in 2019.

The standard broadens the criteria for recognition of lease assets and liabilities and will have a material impact on DSV’s financial statements, as off-balance operating leases will be capitalised and accounted for similar to our current finance lease accounting policies. Reported operating profit will increase, as operating lease expenses will be replaced by depreciation and interest expenses. The impact on net profit will be neutral over time, but a timing effect will occur due to frontloading of interest expenses. Reported cash flow from operating activities will increase but be offset by an increased cash outflow from financing activities, and, accordingly, there will be no change in the underlying cash flow for the year.

Impact assessments and implementation strategies are being adapted as the implementation progresses. Based on current estimates, the standard will have an effect on the Group’s consolidated balance sheet at 1 January 2018, where the leased assets are expected to increase by around DKK 6.5-7.5 billion, and the lease liabilities are expected to increase by around DKK 7.5-8.5 billion. The estimated impact on the consolidated income statement for 2018 is an expected increase in operating profit before amortisation, depreciation and special items of around DKK 2.4-2.9 billion, an expected increase in operating profit before special items of around DKK 0.2-0.4 billion, and an expected increase in financial expenses of around DKK 0.4-0.6 billion. The estimated effects are provisional and subject to significant uncertainties, and are based on analysis of our current contract portfolio and therefore do not take any future significant changes in activities or contracts in 2018 into account.

We continue our work with the implementation of the standard as well as the underlying accounting processes and will follow up on the impact assessment during 2018.

Adoption of IFRS 16 will not imply any major changes to our existing accounting policies for finance leases. In addition to our existing policies, we have elected not to recognise right-of-use assets, lease liabilities for leases with a lease term of 12 month or less or leases of low-value assets. Furthermore, any gains recognised on sale and leaseback transactions will be partly deferred and recognised over the duration of the lease as a reduction of depreciation expenses.