NOTE F23 Right-of-use assets and lease liabilities

Accounting policy

As explained in the basis of preparation, the Group adopted IFRS 16 on January 1, 2019 using the modified retrospective approach. Hereinafter are disclosed the accounting policies applied in 2019 (IFRS 16 Leases). For accounting policies applied in 2018 (IAS 17 Leases), reference is made to the 2018 Annual Report. Transition impacts have been discussed in the basis of preparation.

Definition of a lease

At inception of a contract, which generally coincides with the date the contract is signed, the Group assesses whether a contract is, or contains, a lease. 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.

An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer. If the supplier has a substantive substitution right, then the asset is not identified. A substantive substitution right means that (a) the supplier has the practical ability to substitute the asset throughout the period of use, and (b) would economically benefit from doing so.

To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether, throughout the period of use, it has:

• the right to obtain substantially all of the economic benefits from use of the identified asset; and
• the right to direct the use of the identified asset. This is generally the case when the Group has the decision-making rights regarding how and for what purpose the asset is used.

Lease term

The Group determines the lease term as the non-cancellable period of a lease, together with both:

• periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option; and
• periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option.

In its assessment, the Group considers the impact of the following factors (non-exhaustive):

• contractual terms and conditions for the optional periods, compared with market rates;
• significant leasehold improvements undertaken (or expected to be undertaken) over the term of the contract;
• costs relating to the termination of the lease, including relocation costs, costs of identifying another underlying asset suitable for the Group’s needs, costs of integrating a new asset into the Group’s operations, and termination penalties;
• the importance of that underlying asset to the Group’s operations, including the availability of suitable alternatives;
• conditionality associated with exercising the option (i.e. when the option can be exercised only if one or more conditions are met), and the likelihood that those conditions will exist; and
• past practice.

Right-of-use asset and lease liability

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date, which is the date that the lessor makes the asset available for use by the Group.

Right-of-use asset

The right-of-use asset is initially measured at cost, which comprises:

• the amount of the initial measurement of the lease liability;
• any lease payments made at or before the commencement date, less any lease incentive received; and
• any initial direct costs incurred by the Group.

After the commencement date, the right-of-use asset is measured at cost less any accumulated depreciation and any accumulated impairment losses. Right-of-use assets are depreciated using the straight-line depreciation method, from the commencement date to (a) the end of the useful life of the underlying asset, in case the lease transfers ownership of the underlying asset to the Group by the end of the lease term, or the lease contains a purchase option that the Group is reasonably certain to exercise, or (b) the earlier of the end of the useful life and the end of the lease term, in all other cases.

Lease liability

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the respective Group entity’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following:

• fixed payments, less any lease incentives receivable;
• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
• amounts expected to be payable by the Group under residual value guarantees;
• the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
• payments of penalties for early terminating the lease, if the Group is reasonably certain to exercise an option to early terminate the lease.

Service components (e.g. utilities, maintenance, insurance, …) are excluded from the measurement of the lease liability.

After the commencement date, the lease liability is measured by:

• increasing the carrying amount to reflect interest on the lease liability;
• reducing the carrying amount to reflect the lease payments made; and
• remeasuring the carrying amount to reflect any reassessment or lease modifications, or to reflect the impact from a revised index or rate.