6. IFRS 16 Leases
The standard applies to annual periods starting on or after 1 January 2019. It replaced IAS 17, Leases, which was applicable to date. According to IFRS 16, a contract is a lease or contains a lease if it transfers the right to use an identified asset for a given period in exchange for consideration. An important element of the new definition of leasing is the requirement to exercise control over the leased asset and to obtain economic benefits from the asset component specified in the contract.
From the point of view of the lessee, IFRS 16 eliminates the classification of leases into operating leases and finance leases, introducing one model of recognition and measurement which is consistent with the recognition of financial leases under IAS 17. The lessee is required to recognize assets derived from the right of use of the leased asset in the statement of financial position and liabilities from lease payments, except for short-term lease contracts (up to 12 months) and lease contracts for non-significant assets.
2018
The lessee is also required to recognize the costs of depreciation of the asset from the right to use the leased asset and the interest expense on the lease liability in the income statement (according to IAS 17, expenditure related to the use of leased assets is included in general administrative expenses). The right of use of assets is subject to straight-line depreciation, while liabilities under lease contracts are measured using the amortized cost method.
The Group implemented the standard retrospectively, recognizing the cumulative effect of applying the standard to shareholders’ equity as at 1 January, 2019 without transforming the comparative data, including assets from the rights of use at an amount which is equal to the liabilities from the lease at the present value of the future lease payments, adjusted by the amount of prepayments recognized in the statement of financial position immediately before the date of first application.
The Group completed the implementation of IFRS 16 in the fourth quarter of 2018, in which the following implementation work was conducted:
- an analysis of all contracts concluded by the Bank for the purchase of goods and services, including, in particular, operational lease, rental and lease contracts, which were active as at the date of the first application of the standard, for the presence of leases in accordance with the definition contained in the new standard;
- the development of a methodology for identifying lease contracts and organizing the process of valuing and collecting contract data;
- changes in the accounting policies and internal procedures, as well as the Bank’s IT systems;
- the implementation of a tool for calculating the value of lease rights and obligations;
The implementation of the standard resulted in the Bank recognizing lease liabilities of PLN 922 million at the present value of future lease payments which are to be paid up to the start of the application of IFRS 16, which consist of fixed lease payments and variable lease payments, which depend on market indicators. The value of the liability was adjusted for costs paid in advance as at 31 December 2018 at a level of PLN 4 million.
The Group recognized assets from the right of use as at 1 January 2019 at a level of PLN 926 million, which include the amount of the initial valuation of the lease liability of PLN 922 million and lease payments of PLN 4 million paid in advance.
Additionally, in connection with the implementation, the Group classified the right of perpetual usufruct of land as a lease. Consequently, the Bank wrote down the right of perpetual usufruct of land disclosed in the accounting ledgers as at 31 December 2018, charging PLN 111 million to the undistributed financial result.
The implementation of IFRS 16 required the Group to adopt the following significant estimates affecting the measurement of lease liabilities and assets from the right of use:
- Establishment of the term of the lease for contracts concluded indefinitely
In the case of contracts concluded indefinitely regarding the Bank branches, the Group accepted a term of the lease which is consistent with the period of depreciation of non-depreciated investments made in these properties as at the date of transition and, in the absence of such investments, a 4-year term, taking into account any significant costs related to a change of location of the branches during their operation. The total impact of the extension of the term of the lease on the value of the liability in excess of the irrevocable term of the lease (contractual notice period) is PLN 227 million.
- Determining the interest rate used to discount future cash flows
The discount rates used by the Group to discount future lease payments (marginal lending rates) lie within the range of 2.06% to 8.68% for PLN, from 0.6% to 4.0% for EUR and from 3.8% to 4.0% for USD and 18% for UAH and were calculated on the basis of curves reflecting the cost of financing in the given currency, encompassing the tenor of the longest lease contract which is to be valued and reflecting – for the given currency – a fixed market interest rate and the cost of the Group’s financing. The tenors of lease contracts lie within the range of 1 to 99 years.
The total impact of the discount factor from the application of the above rates to the present value of lease liabilities was PLN 306 million.
The Group expects the application of the new standard to reduce the net result for 2019 by approximately PLN 11 million. There will be a change in the presentation of repayments of lease instalments in the cash flow statement. Payments of lease instalments will be recognized in the financing cash flows and not in operating cash flows, as to date.
The estimated annual cost of depreciation of assets under the right of use will amount to PLN 194 million, while the interest expense will be PLN 22 million.
The tax charged to financial institutions for the recognition of assets from the right of use will be approx. PLN 4 million per year.
The Group estimates that the increase in assets arising from recognizing assets from the right of use under lease contracts will result in an increase of PLN 78 million in capital requirements. In addition, in view of the write-down of the right of perpetual usufruct of land of PLN 111 million, the Group’s own funds will decline by this same amount. This will contribute to a reduction of the Tier 1 capital ratio by approx. 14 b.p. and the total capital ratio by approx. 15 b.p.
Reconciliation of the difference between the amounts of future lease charges from irrevocable operating leases disclosed in accordance with IAS 17 as at 31 December 2018 and the lease liabilities recognized as at 1 January 2019 in accordance with IFRS 16.
| Operating lease liabilities as at 31.12.2018 (not discounted) | 637 |
| Future payments in respect of rights to perpetual usufruct | 370 |
| Operating lease payments, together with future payments in respect of rights to perpetual usufruct 31.12.2018 (not discounted) | 1 007 |
| Short-term lease agreements | (6) |
| Impact of discounting at the incremental borrowing rate 2.62% | (306) |
| Adjusted for the difference in the recognition of the extension/termination option | 227 |
| Financial liabilities in respect of leases as at 01.01.2019 | 922 |
Impact of the implementation of IFRS 16 on the recognition of additional financial liabilities and the repsective assets from the right of use of assets:
| Impact on the statement of financial position | As at 31.12.2018 (under IAS 17) |
Write-off of the right to perpetual usufruct of land | Effect of recognizing lease agreements (with discount) | Total effect of recognizing lease agreements (with discount) | As at 01.01.2019 under IAS 16 |
|
| rights to perpetual usufruct | operating leases | |||||
| ASSETS | ||||||
| Property, plant and equipment, of which: | 2 931 | (111) | 124 | 802 | 926 | 3 746 |
| right-of-use asset | X | – | 124 | 802 | 926 | 926 |
| Land and buildings | 1 537 | (111) | – | – | – | 1 426 |
| Other assets, including: | 3 454 | – | – | (4) | (4) | 3 450 |
| prepayments | 222 | – | – | (4) | (4) | 218 |
| LIABILITIES AND EQUITY | ||||||
| Other liabilities, of which: | 3 685 | – | 124 | 798 | 922 | 4 607 |
| lease liabilities | X | – | 124 | 798 | 922 | 922 |
| EQUITY | 39 101 | (111) | – | – | – | 38 990 |
According to the best of our knowledge, the presented impact of the adjustments from the implementation of IFRS 16 on financial assets and liabilities, the net profit and the liability in respect of the tax on certain financial institutions is the best estimate at the time of publication of these consolidated financial statements.