TELUS Corporation – Annual report – 31 December 2018
2 accounting policy developments (extract)
(b) Standards, interpretations and amendments to standards not yet effective and not yet applied (extract)
In January 2016, the International Accounting Standards Board released IFRS 16, Leases, which is required to be applied for years beginning on or after January 1, 2019, and which supersedes IAS 17, Leases. The International Accounting Standards Board and the Financial Accounting Standards Board of the United States worked together to modify the accounting for leases, generally by eliminating lessees’ classification of leases as either operating leases or finance leases and, for IFRS-IASB, introducing a single lessee accounting model.
The most significant effect of the new standard will be the lessee’s recognition of the initial present value of unavoidable future lease payments as right-of-use lease assets and lease liabilities on the statement of financial position, including those for most leases that would currently be accounted for as operating leases. Both leases with durations of 12 months or less and leases for low-value assets may be exempted.
The measurement of the total lease expense over the term of a lease will be unaffected by the new standard. However, the new standard will result in an acceleration of the timing of lease expense recognition for leases that would currently be accounted for as operating leases; the International Accounting Standards Board expects that this effect may be muted by a lessee having a portfolio of leases with varying maturities and lengths of term, and we expect that we will be similarly affected. The presentation on the statement of income and other comprehensive income required by the new standard will result in the presentation of most non-executory lease expenses as depreciation of right-of-use lease assets and financing costs arising from lease liabilities, rather than as a part of goods and services purchased (executory lease expenses will remain a part of goods and services purchased); reported operating income would thus be higher under the new standard.
Relative to the results of applying the current standard, although actual cash flows will be unaffected, the lessee’s statement of cash flows will reflect increases in cash flows from operating activities offset equally by decreases in cash flows from financing activities. This is the result of the presentation of the payments of the “principal” component of leases that would currently be accounted for as operating leases as a cash flow use within financing activities under the new standard.
We will be applying the standard retrospectively, with the cumulative effect of the initial application of the new standard recognized at the date of initial application, January 1, 2019, subject to permitted and elected practical expedients; such method of application would not result in the retrospective adjustment of amounts reported for periods prior to fiscal 2019. The nature of the transition method selected is such that the lease population as at January 1, 2019, and the discount rates determined contemporaneously, will be the basis for the cumulative effects recorded as of that date.
As a transitional practical expedient permitted by the new standard, we will not reassess whether contracts are, or contain, leases as at January 1, 2019, applying the criteria of the new standard; as at January 1, 2019, only contracts that were previously identified as leases applying IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement contains a Lease, will be a part of the transition to the new standard. Only contracts entered into (or changed) after January 1, 2019, will be assessed for being, or containing, leases applying the criteria of the new standard.
IFRS 16, Leases, will affect the fiscal 2019 opening amounts to be reported in our fiscal 2019 Consolidated statements of financial position as follows:
The weighted average discount rate reflected in the lease liability recognized on transition was 4.55%. The difference between the total of the minimum lease payments set out in Note 19 and the additions to long-term debt set out in the table above arises because of the effect of discounting the minimum lease payments (approximately two-thirds of the difference) and because the minimum lease payments set out in Note 19 include payments for leases that have commencement dates subsequent to December 31, 2018 (approximately one-third of the difference).
We occupy leased premises in various locations and have the right of use of land, buildings and equipment under operating leases. Most of our leases for real estate that we use for office or network (including wireless site) purposes typically have extension options which we use to protect our investment in leasehold improvements (including wireless site equipment) and to mitigate relocation risk, and/or which reflect the importance of the underlying right-of-use lease assets to our operations. Our judgment of lease terms for leased real estate utilized in connection with our telecommunications infrastructure, more so than for any other leased asset, routinely includes periods covered by options to extend the lease terms, as we are reasonably certain to extend such leases.
For the year ended December 31, 2018, operating lease expenses, which are net of the amortization of deferred gains on the sale-leaseback of buildings and the occupancy costs associated with leased real estate, were $243 million (2017 – $245 million); occupancy costs associated with leased real estate totalled $99 million (2017 – $90 million).
As referred to in Note 16, we have consolidated our administrative real estate holdings and, in some instances, this has resulted in subletting land and buildings. The future minimum lease payments under operating leases are as follows:
Of the total amount above as at December 31, 2018:
- Approximately 28% (2017 – 33%) was in respect of our five largest leases, all of which were for office premises over various terms, with expiry dates ranging from 2024 to 2039 (2017 – ranging from 2024 to 2036); the weighted average remaining term of these leases is approximately 13 years (2017 – 13 years).
- Approximately 34% (2017 – 29%) was in respect of wireless site leases; the weighted average remaining term of these leases is approximately 14 years (2017 – 14 years).
See Note 2(b) for details of significant changes to IFRS-IASB which are not yet effective and have not yet been applied, but which will significantly affect the timing of the recognition of operating lease expenses and their recognition in the Consolidated statement of financial position, as well as their classification in the Consolidated statement of income and other comprehensive income and the Consolidated statement of cash flows.