Novartis AG – Annual report – 31 December 2022
1. Significant accounting policies (extract 1)
Leases and right-of-use assets
As lessee, at inception and upon the modification of a contract, the Group assesses whether the contract contains a lease. The Group elected to allocate the consideration in the contract to the lease and non-lease components on the basis of the relative standalone price of each component.
The Group recognizes a right-of-use asset and a corresponding lease liability for all arrangements in which it is a lessee, except for leases with a term of 12 months or less (short-term leases) and low-value leases. For these short-term and low-value leases, the Group recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease.
The lease liability is initially measured at the present value of the future lease payments as from the commencement date of the lease to the end of the lease term. The lease term includes the period of any lease extension that management assess as reasonably certain to be exercised by the Group. The lease payments are discounted using the interest rate implicit in the lease or, if not readily determinable, the Novartis incremental borrowing rate for the asset subject to the lease in the relevant market.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever there is a change to the lease terms or expected payments under the lease, or a modification that is not accounted for as a separate lease.
The portion of the lease payments attributable to the repayment of lease liabilities is recognized in cash flows used in financing activities, and the portion attributable to the payment of interest is included in cash flows from operating activities.
Right-of-use assets are initially recognized on the balance sheet at cost, which comprises the amount of the initial measurement of the corresponding lease liability, adjusted for any lease payments made at or prior to the commencement date of the lease, any lease incentive received, and any initial direct costs incurred by Novartis, and expected costs for obligations to dismantle and remove right-of-use assets when they are no longer used.
Right-of-use assets are depreciated on a straight-line basis from the commencement date of the lease over the shorter of the useful life of the right-of-use asset or the end of the lease term.
Right-of-use assets are assessed for impairment whenever there is an indication that the balance sheet carrying amount may not be recoverable using cash flow projections for the useful life.
In arrangements where the Group is the lessor, it determines at lease inception whether the lease is a finance lease or an operating lease. Leases that transfer substantially all of the risk and rewards incidental to ownership of the underlying asset to the counterparty (the lessee) are accounted for as finance leases. Leases that do not transfer substantially all of the risks and rewards of ownership are accounted for as operating leases. Operating lease payments received are recognized on a straight-line basis over the lease term in the consolidated income statement in “Other income.”
10. Right-of-use assets and lease liabilities
The following table summarizes the movements of the right-of-use assets:
1 Impairment charges in 2022 were recorded in the Innovative Medicines segment.
2 Lease contract terminations also includes modifications to existing leases that result in reductions to the right-of-use assets, and reductions due to sub-leasing.
The following table shows the right-of-use assets carrying value and depreciation charge at December 31, 2022 and 2021, by underlying class of asset:
The following table shows the lease liabilities by maturity at December 31, 2022 and 2021:
At December 31, 2022, and December 31, 2021, there were no material future cash outflows, including extension options, excluded from the measurement of lease liabilities. The Group’s most material lease with a lease term extension, representing a lease liability value of USD 0.7 billion (2021: USD 0.6 billion), has a determined lease term end date of 2071 (2021: 2071). Non-enforceable extension options of up to 10 years have not been included within the measurement of this lease liability, and do not have a material impact to the carrying value of the lease for both 2022 and 2021. Should the landlord agree to a lease extension, rent will be referenced to the market rates as at the commencement of the extension period.
In 2022, the Group completed three sale and leaseback transactions for certain property, plant and equipment as part of the Groups plans to focus on key operating locations. The transactions resulted in net cash inflows of USD 49 million and the recognition of USD 23 million of lease liabilities, and USD 13 million of right-of-use assets. The right-of-use assets value reflects the proportion of the property, plant and equipment retained. Extension options have been included where management believe that such options will be exercised. The liabilities reflect the net present value of future lease payments. The net gain on the sale and leaseback transactions amounted to USD 17 million. There were no significant sale and leaseback transactions in 2021 or 2020.
The following table provides additional disclosures related to right-of-use assets and lease liabilities for 2022, 2021 and 2020:
1 The weighted average interest rate is 3.3% (2021: 3.2%, 2020: 3.4%).
2 Cash flows from short-term and low-value leases are included within total net cash flows from operating activities. The portfolio of short-term leases to which the Group is committed to at December 31, 2022, 2021 and 2020, is similar to the portfolio of short-term leases the Group entered into during 2022, 2021 and 2020.
3 Included within total net cash flows from operating activities
4 Reported as cash outflows in financing activities net of lease incentives received, if any.
The net investment held and income from subleasing right-of-use assets were not significant for 2022, 2021, and 2020. Income from leasing Novartis property, plant and equipment to third parties for 2022, 2021 and 2020 was not significant.