Irish Continental Group plc – Half year report – 30 June 2019
Industry: shipping
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (extract)
FOR THE HALF YEAR ENDED 30 JUNE 2019
2. Accounting policies (extract)
IFRS 16 Leases
In the current period the Group has applied IFRS 16: Leases for the first time. The date of initial application was 1 January 2019.
IFRS 16 replaces IAS 17: Leases and related interpretations setting out the principle for the recognition, measurement, presentation and disclosure of leases for both lessee and lessor. A significant change arising from the application of IFRS 16 for leases is that leases previously defined as operating leases under IAS 17 and treated as “off-balance sheet” are now required to be recognised in the Statement of Financial Position as a “right of use” asset and a related lease liability. There has been no significant changes in accounting by lessors.
The Group has decided to apply IFRS 16 using the modified retrospective approach as permitted by the standard. Under the modified retrospective approach the Group as leasee has not restated comparative information and has instead recognised the cumulative effect in opening retained earnings.
The Group has availed of the following practical expedients as permitted by the standard;
i) Short-term leases where the lease term is or the remaining lease term at date of adoption was 12 months or less,
ii) Leases where the underlying asset is of low value,
iii) Adoption of a portfolio approach to individual containers leased under a master agreement,
iv) Non separation of the non-lease components from the lease component attaching to short term vessel leases.
The Group recognises the lease payments associated with those leases at (i) and (ii) above as an expense on a straight line basis over the lease term.
The majority of leases held by the Group in terms of contractual commitment relate to property and vessel charters all of which were previously classified as operating leases. At 1 January 2019, the principal property leases related to leases of property with outstanding terms of between 77 and 103 years with 7 year rent reviews. Vessel charters included short term time charters and a bareboat charter of a Ro-Pax vessel. These leases, after allowing for the practical expedients availed of, were recognised as a lease liability at the date of adoption measured at the present value of the remaining lease payments discounted using the Group’s incremental borrowing rate. The Group also recognised a right of use asset equal to the lease liability, adjusted for rentals prepaid or accrued which were not material.
In relation to the bareboat charter of the Ro-Pax vessel, the Group assessed the contractual terms and determined that the future lease rentals applying to an extension option should be added to the contractual commitments previously disclosed under IAS 17 as the Group was reasonably certain to exercise that option based on the conditions which existed as at 1 January 2019.
The Group does not classify that element of a contract as a lease where the right to control the use of an identified asset for a period of time is based on variable consideration based on activity levels. In these circumstances any variable consideration is expensed to Income Statement as the right is consumed.
The effects from adopting the standard were;
• On the opening statement of consolidated financial position at 1 January 2019; an increase the carrying value of right of use assets of €32.2 million, a reduction in the carrying value of property, plant and equipment of €1.2 million, an increase in lease obligations of €31.0 million and a net nil adjustment to equity attributable to shareholders.
• In the reporting period H1 2019: a reduction in operating expenses of €4.7 million, an increase in depreciation of € 4.3 million, an increase in finance costs of €0.5 million giving a net reduction in profit before tax of €0.1 million.
The adoption of IFRS 16 has not affected the Group’s lessor accounting in respect of charter revenues receivable.
In accordance with IFRS 16 Leases the deferred consideration receivable in relation to bareboat hire purchase sale agreement pertaining to the disposal of the Oscar Wilde in April 2019 has been treated as a finance lease receivable at an amount equivalent to the net investment in the lease.
Further detail of the effects of the adoption of IFRS 16 is given in note 10.
Arising from the adoption of IFRS 16 the Group’s accounting policy for leases has been updated as set out below.
Identifying a lease
Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
a. As Lessee
Where the Group acts as a lessee the Group recognises a right of use asset and lease liability at the lease commencement date, which is the date the underlying asset is available for our use.
Right of use assets are initially measured at cost, and subsequently measured at cost less any accumulated depreciation and impairment losses (if any), and adjusted for certain remeasurement of lease liabilities. The recognised right of use assets are depreciated on a straight-line basis over the shorter of their estimated useful lives and the lease term. Right of use assets are subject to impairment under IAS 36 ‘Impairment of assets’. Right of use assets are presented as a separate line item in the Statement of Financial Position.
Lease liabilities are initially measured at the present value of lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate if the interest rate implicit in the lease is not readily determinable. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. In the Condensed Consolidated Cash Flow Statement the payments made are separated in to the principal portion (presented within financing activities), and interest (presented in operating activities). It is remeasured if there is a change in future lease payments, a change in the lease term, or as appropriate, a change in the assessment of whether an extension option is reasonably certain to be exercised or a termination option is reasonable certain not to be exercised.
The Group has applied judgement in determining the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right of use assets recognised. The Group also applies judgement in estimating the incremental borrowing rate applicable to a lease.
b. As Lessor
The Group treats bareboat hire purchase sale agreements in relation to the disposal of vessels as finance leases. The sales proceeds recognised at the commencement of the lease term by the Group is that implied by the fair value of the asset, which together with any initial direct costs equal the net investment in the lease and is presented as a receivable in the Statement of Financial Position. Following initial measurement finance lease income is recognised in Revenue and is allocated to accounting periods so as to reflect a constant periodic rate of return on the outstanding net investment.
Lease payments receivable arising from the grant of a right to use vessel not relating to a sale is recognised as Revenue on a straight line basis over the term of the relevant charter.
3. Critical Accounting Estimates and Judgements
In the application of the Group’s accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities. In preparing these Condensed Financial Statements the approach to the making of these judgements, estimates and assumptions is consistent with that used in the Group Annual Report for the financial year ended 31 December 2018, other than judgements and estimates made in applying IFRS 16 Leases (page 24). In applying IFRS 16 the Directors exercised judgement in determining the incremental borrowing rate.
The Group used estimates of its incremental borrowing rate to calculate the present value of future lease payments at the date of adoption. For terms of up to 12 years the Group calculated its incremental borrowing rate based on existing loan facility arrangements. In relation to significant long term lease obligations extending for up to 103 years the Group modelled estimates of borrowing rates for similar terms, currency, counterparty risk and security. The weighted average incremental borrowing rate applied to lease liabilities at adoption was 3.0%.
10. Impact of the first time application of IFRS 16 Leases
The Group’s approach to the application of IFRS 16 Leases with effect from 1 January 2019 is set out at note 2 Accounting Policies. At initial application, the Group recognised right of use assets and related lease liabilities by adjusting the opening balances brought forward from the Statement of Financial Position reported at 31 December 2018. The impact of the application of IFRS 16 is set out below.
11. Net cash and borrowing facilities
i) The components of the Groups net cash/ (debt) position at the reporting date and the movements in the period are set out in the following table.
ii) The maturity profile and available borrowing and cash facilities available to the Group at 30 June 2019 are set out in the following table.
Bank overdrafts are stated net of trade guarantee facilities utilised of €0.6 million.
Obligations under the Group borrowing facilities have been cross guaranteed by the parent company and certain subsidiaries but are otherwise unsecured except for lease obligations which are secured by the lessors’ title to leased assets.
Accounts examples 