DSV A/S – Annual report – 31 December 2018
BASIS OF PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS (extract)
NEW ACCOUNTING REGULATIONS
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 2018 consolidated financial statements. DSV expects to implement these standards when they take effect.
Of these new standards, only IFRS 16 Leases is currently expected to have a significant impact on the consolidated financial statements when implemented.
IFRS 16 Leases
IFRS 16 Leases will take effect on 1 January 2019 and will be implemented on this date following the modified retrospective approach with the cumulative effect of applying the standard recognised in the opening balance of retained earnings. The retrospective approach with full restatement of comparative figures will not be applied as disclosed in the 2017 Annual Report. Right-of-use assets will be measured as if IFRS 16 had been applied since the commencement date, discounted using an applicable incremental borrowing rate at the date of initial application. Comparatives are not restated.
IFRS 16 broadens the criteria for recognition of right-of-use assets and lease 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 finance leases.
Reported operating profits will increase, as operating lease expenses will be replaced by depreciation and interest expenses. The impact on profit for the year 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 will be offset by an increased cash outflow from financing activities, and, accordingly, there will be no change in total cash flow for the year.
The implementation of IFRS 16 will have no impact on DSV’s agreement and terms with banks regarding long term funding.
Assuming that the 2018 year-end lease portfolio remains unchanged for 2019, implementation of the standard is estimated to impact the 2019 opening balance and full-year income statement as outlined below.
Based on the estimates, Group invested capital – which was DKK 21.4 billion at year-end 2018 – will increase by 9.2-9.6 billion. The net interest-bearing debt of DKK 5.8 billion will increase by DKK 9.9-10.3 billion.
Major accounting policy choices made in implementing the standard includes:
• only to apply IFRS 16 to contracts previously identified as containing a lease;
• not to recognise right-of-use assets and lease liabilities for leases with a lease term of 12 months or less;
• not to recognise right-of-use assets and lease liabilities for low-value lease assets;
• not to include non-lease components – e.g. service elements – as part of the right-of-use assets and lease liabilities recognised. These are accounted for separately;
• not to apply hindsight when assessing the lease term – e.g. when considering extension or termination options;
• to recognise right-of-use assets and lease liabilities for long-term lease contracts where the lease term ends within 12 months from 1 January 2019 (e.g. the short-term lease exemption is not applied).