Exxaro report selector 2019

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Exxaro Resources Limited
Group and company annual financial statements for the year ended 31 December 2019

Currently viewing: CHAPTER 11 / 11.1 Changes in accounting policies from the adoption of IFRS 16 Leases

11.1 Changes in accounting policies from the adoption of IFRS 16 Leases

This note explains the impact of the adoption of IFRS 16 and also discloses the new leases accounting policies that have been applied from 1 January 2019.

Overview of changes resulting from the adoption of IFRS 16

IFRS 16 replaces IAS 17 Leases (IAS 17), IFRIC 4 Determining whether an Arrangement contains a Lease (IFRIC 4), SIC 15 Operating LeasesIncentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

The standard establishes a new definition and criteria to identify whether a contract is, or contains, a lease as well as principles for the recognition, measurement, presentation and disclosure of leases. For lessee accounting, a single accounting model is introduced that requires lessees to recognise assets and liabilities for all leases. The standard, however, allows an optional exemption to recognise leases with a lease term of less than 12 months (short-term leases) or leases of low-value assets in profit or loss on a straight-line basis. For lessor accounting, IFRS 16’s approach is substantially unchanged from IAS 17. Lessor’s continue to classify leases as either operating leases or finance leases. Subleases are classified with reference to the underlying right-of-use asset of the head lease.

Leasing activities (as lessee)

Various land, buildings and equipment are leased as the need arises. Lease contracts are typically made for fixed periods between 18 months and 15 years but may have extension options. Lease contracts are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease contracts do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Extension and termination options are included in a number of leases. These options are used to maximise operational flexibility in terms of managing lease contracts. The majority of extension and termination options held are exercisable only by the group and company and not by the respective lessor.

11.1.1 TRANSITION

11.1.1.1 Transition method, exemptions and practical expedients applied

As lessor

No adjustments were required for lessor accounting.

As lessee

IFRS 16 has been adopted using the cumulative effect method. In terms of this method, comparative information has not been restated. Instead, the cumulative effect of initially applying IFRS 16 has been recognised as an adjustment to the opening balance of retained earnings on date of initial application (being 1 January 2019).

In applying IFRS 16 for the first time, the following practical expedients have been elected:

(a) In applying the definition of a lease:
 
  • It has been elected not to re-assess whether a contract is, or contains, a lease at the date of initial application. Instead, the standard has been applied, at date of initial application, to all contracts previously identified as leases in terms of IAS 17 and IFRIC 4. Therefore the definition of a lease in terms of IFRS 16 will only be applied to contracts entered into or changed on or or after 1 January 2019.
(b) In determining the transition adjustments of leases previously classified as operating leases:
 
  • Leases of low-value assets were excluded as the exemption to not apply lease accounting to these leases from 1 January 2019 was elected
  • Leases with a lease term of less than 12 months on initial application were excluded and accounted for as short-term leases from 1 January 2019 (recognised through profit or loss on a straight-line basis)
  • Initial direct costs of leases were excluded from the measurement of the right-of-use assets recognised on 1 January 2019
  • Hindsight was applied to determine the lease term for contracts containing options to extend or terminate the lease.
   

11.1.1.2 Impact on retained earnings at 1 January 2019

The impact on retained earnings at 1 January 2019 is summarised as follows:

                  Group       
      Note           Rm       
Closing balance at 31 December 2018 (IAS 17)                32 797       
Adjustments from the adoption of IFRS 16, net of tax                 (12)      
Adjustments from Exxaro's adoption of IFRS 16, net of tax                 (1)      
–  Portion of gross carrying amount of right-of-use assets recognised relating to the present value of lease payments incurred before 1 January 20191                 10       
–  Accumulated depreciation on right-of-use assets recognised from commencement date of leases to 1 January 2019     11.1.1.5           (11)      
Share of equity-accounted investments' adjustment from the adoption of IFRS 16     9.5           (11)      
Opening balance at 1 January 2019 (after IFRS 16 restatement)                32 785       
1 Calculated as the difference between the gross carrying amount of the right-of-use assets recognised of R76 million (refer note 11.1.1.5) and the lease liabilities recognised of R66 million (refer note 11.1.1.4), that relate to leases previously classified as operating leases.

The IFRS 16 adoption impact, net of tax, has been adjusted by R1 million, compared to the interim results presented for the six-month period ended 30 June 2019, as a result of a lease in an offshore entity being remeasured applying a foreign incremental borrowing rate.

               Company    
      Note        Rm    
Closing balance at 31 December 2018 (IAS 17)             (4 903)   
Adjustments from the adoption of IFRS 16, net of tax              (1)   
–  Portion of gross carrying amount of right-of-use assets recognised relating to the present value of lease payments incurred before 1 January 20191                
–  Accumulated depreciation on right-of-use assets recognised from commencement date of leases to 1 January 2019     11.1.1.5        (3)   
Opening balance at 1 January 2019 (after IFRS 16 restatement)             (4 904)   
1 Calculated as the difference between the gross carrying amount of the right-of-use assets recognised of R21 million (refer note 11.1.1.5) and the lease liabilities recognised of R19 million (refer note 11.1.1.4), that relate to leases previously classified as operating leases.

11.1.1.3 Impact on the statements of financial position at 1 January 2019

The table below shows the reclassifications and adjustments recognised on initial application of IFRS 16 for each individual line item as per the statements of financial position.

               Group          
         At 
31 December 
2018
 
         At 
1 January 
2019
 
  
Statements of financial position (extract) Note     As 
presented 
Rm
 
   IFRS 16 
adjustment 
Rm
 
   Restated 
Rm
 
  
ASSETS                         
Non-current assets        52 226     54     52 280    
Property, plant and equipment  11.1.1.5     28 825     (14)    28 811    
Right-of-use assets  11.1.1.5           79     79    
Equity-accounted investments1  9.5     17 046     (11)    17 035    
Financial assets        2 634           2 634    
Lease receivables        66           66    
Deferred tax        523           523    
Other assets        3 132           3 132    
Current assets        7 641           7 641    
Inventories        1 604           1 604    
Financial assets        134           134    
Trade and other receivables        3 140           3 140    
Lease receivables                   
Cash and cash equivalents        2 080           2 080    
Other assets        678           678    
Non-current assets held-for-sale        5 183           5 183    
Total assets        65 050     54     65 104    
EQUITY AND LIABILITIES                         
Capital and other components of equity                         
Share capital        1 021           1 021    
Other components of equity        8 028           8 028    
Retained earnings        32 797     (12)    32 785    
Equity attributable to owners of the parent        41 846     (12)    41 834    
Non-controlling interests        (701)          (701)   
Total equity        41 145     (12)    41 133    
Non-current liabilities        15 745     39     15 784    
Interest-bearing borrowings        3 843           3 843    
Lease liabilities  11.1.1.4           39     39    
Other payables        152           152    
Provisions        3 952           3 952    
Retirement employee obligations        193           193    
Financial liabilities        713           713    
Deferred tax        6 874           6 874    
Other liabilities        18           18    
Current liabilities        6 823     27     6 850    
Interest-bearing borrowings        571           571    
Lease liabilities          27     29    
Trade and other payables  11.1.1.4      2 960           2 960    
Provisions        70           70    
Financial liabilities        757           757    
Overdraft        1 531           1 531    
Other liabilities        932           932    
Non-current liabilities held-for-sale        1 337           1 337    
Total liabilities        23 905     66     23 971    
Total equity and liabilities        65 050     54     65 104    
1 Relates to the share of equity-accounted investments’ adjustments from the adoption of IFRS 16.

 

          Company      
      At
31 December
2018
      At
1 January
2019
 
Statements of financial position (extract) Note   As
presented
Rm
  IFRS 16
adjustment
Rm
  Restated
Rm
 
ASSETS                
Non-current assets     16 407   18   16 425  
Property, plant and equipment     451       451  
Right-of-use assets 11.1.1.5       18   18  
Equity-accounted investments     2 721       2 721  
Investments in subsidiaries     9 246       9 246  
Financial assets     3 606       3 606  
Deferred tax     374       374  
Other assets     9       9  
Current assets     3 489       3 489  
Financial assets     2 583       2 583  
Trade and other receivables     213       213  
Cash and cash equivalents     676       676  
Other assets     17       17  
Non-current assets held-for-sale     4 725       4 725  
Total assets     24 621   18   24 639  
EQUITY AND LIABILITIES                
Capital and other components of equity                
Share capital     11 265       11 265  
Other components of equity     939       939  
Accumulated deficit     (4 903)   (1)   (4 904)  
Total equity     7 301   (1)   7 300  
Non-current liabilities     4 566   13   4 579  
Interest-bearing borrowings     3 233       3 233  
Lease liabilities 11.1.1.4       13   13  
Provisions     36       36  
Financial liabilities     1 297       1 297  
Current liabilities     12 754   6   12 760  
Interest-bearing borrowings     572       572  
Lease liabilities 11.1.1.4       6   6  
Trade and other payables     176       176  
Provisions     2       2  
Financial liabilities     10 839       10 839  
Overdraft     1 046       1 046  
Other liabilities     119       119  
Total liabilities     17 320   19   17 339  
Total equity and liabilities     24 621   18   24 639  

11.1.1.4 Lease liability recognised on initial application

Lease liabilities were recognised for leases, previously classified as operating leases under IAS 17, that had commenced prior to 1 January 2019, excluding leases of low-value assets and short-term leases. These liabilities were measured as the present value of the remaining lease payments discounted using the incremental borrowing rate at 1 January 2019 which ranged between 7.85% and 10.42%.

The table below shows the reconciliation between operating lease commitments (disclosed under IAS 17) at 31 December 2018 and lease liabilities recognised on 1 January 2019:

      Group    
      Rm    
Operating lease commitments at 31 December 2018 (adjusted)1     1 004    
Less: lease commitments relating to leases commencing on or after 1 January 2019     (864)   
Less: lease commitments that relate to short-term leases     (13)   
Less: lease commitments that relate to leases of low-value assets     (52)   
Lease commitments (remaining lease payments) to which initial application of IFRS 16 has been applied     75    
Less: discounting impact using the lessee's incremental borrowing rate at 1 January 2019     (9)   
Lease liabilities recognised on 1 January 2019     66    
–Non-current     39    
–Current     27    
1 Operating lease commitments at 31 December 2018, previously disclosed as R876 million, have been adjusted to an amount of R1 004 million, to include an additional R128 million worth of lease commitments (in terms of IAS 17 and IFRIC 4) that was erroneously excluded.

 

      Company    
      Rm    
Operating lease commitments at 31 December 2018 (adjusted)1     862    
Less: lease commitments relating to leases commencing on or after 1 January 2019     (778)   
Less: lease commitments that relate to short-term leases     (13)   
Less: lease commitments that relate to leases of low-value assets     (50)   
Lease commitments (remaining lease payments) to which initial application of IFRS 16 has been applied     21    
Less: discounting impact using the lessee's incremental borrowing rate at 1 January 2019     (2)   
Lease liabilities recognised on 1 January 2019     19    
–Non-current     13    
–Current       
1 Operating lease commitments at 31 December 2018, previously disclosed as R682 million, have been adjusted to an amount of R862 million, to include an additional R180 million worth of lease commitments (in terms of IAS 17 and IFRIC 4) that was erroneously excluded.

For leases previously classified as finance leases, the carrying amount of the lease liability immediately before transition was recognised as the carrying amount of the lease liability at the date of initial application. Therefore no adjustment was required for finance lease liabilities at 1 January 2019. The measurement principles of IFRS 16 have been applied since 1 January 2019.

11.1.1.5 Right-of-use assets recognised on initial application

Right-of-use assets were recognised for leases, previously classified as operating leases under IAS 17, that had commenced prior to 1 January 2019, excluding leases of low-value assets and short-term leases. These assets were measured as if IFRS 16 had been applied since the commencement date of the leases, but discounted using the incremental borrowing rate at date of initial application. In other words, the gross carrying amount of the right-of-use assets were determined taking into account the present value of all remaining lease payments at the commencement date of the leases, but discounted at the incremental borrowing rate of 1 January 2019. The accumulated depreciation was measured from the commencement date of the leases until 1 January 2019.

The right-of-use assets recognised at 1 January 2019 were considered for impairment in terms of IAS 36 Impairment of Assets, however, as the recoverable amounts are in excess of the carrying amounts, no impairment adjustments were required.

For assets acquired in terms of finance leases, as previously classified under IAS 17, the group recognised the carrying amount of these assets immediately before transition as the carrying amount of the right-of-use assets at 1 January 2019. Therefore no adjustment was required except that the carrying amount of these assets has been reclassified from property, plant and equipment to right-of-use assets. The measurement principles of IFRS 16 have been applied since 1 January 2019.

The table below shows the right-of-use assets, by class of asset, at 1 January 2019, reconciled to the reclassifications and adjustments made on initial application of IFRS 16:

      Group       
   Gross 
carrying 
amount 
Rm
 
Accumulated 
depreciation 
Rm
 
Net carrying 
amount 
Rm
 
  
Land and buildings       
Residential land and buildings       
Buildings and infrastructure  33  (4) 29    
Machinery, plant and equipment  54  (9) 45    
Total right-of-use assets  92  (13) 79    
– Relating to leases previously classified as operating leases recognised retrospectively on 1 January 2019  76  (11) 65    
– Relating to leases previously classified as finance leases reclassified from property, plant and equipment1  16  (2) 14    
1 Included in machinery, plant and equipment.

 

      Group       
   Gross 
carrying 
amount 
Rm
 
Accumulated 
depreciation 
Rm
 
Net carrying 
amount 
Rm
 
  
Buildings and infrastructure  21  (3) 18    
Total right-of-use assets  21  (3) 18