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 Leases – Incentives 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					2
–	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			5				5
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			2		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		6

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	1		1
Residential land and buildings	4		4
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