Stock releases

Adoption of IFRS 16 Leases standard at Aspo Group

Published Apr 29, 2019 4:20:00 PM

Aspo Plc
Stock exchange release
April 29, 2019 at 4.20 p.m.

 

Adoption of IFRS 16 Leases standard at Aspo Group

Aspo Group has adopted the IFRS 16 Leases standard as of 1 January, 2019. Under IFRS 16, all leases will be recognized in the lessee's balance sheet as the classification between operating and finance leases according to IAS 17 will no longer be valid. In accordance with the new standard, all assets related to lease agreement (right-of-use assets) and future lease payment obligations (lease liabilities) are recognized in the balance sheet. The only exceptions are the short-term leases and leases for which the underlying asset is of low value, the accounting treatment of which is explained below. The accounting treatment for lessors remains largely in line with IAS 17.

Aspo Group acts mainly as a lessee. The Group has customary business-related leases, such as contracts related to office and warehouse premises, as well as transportation vehicles and cars. Part of the office technology is also leased.

Transition to new accounting standard

Aspo has chosen a simplified method of transition to IFRS 16, and thus will not restate comparative financial figures. Aspo recognizes in the opening balance sheet of January 1, 2019 the right-of-use assets which consist of the lease liabilities and prepayments related to these leases at the time of transition.

The liabilities and assets of contracts previously classified as finance leases under IAS 17 have been included at the time of transition on January 1, 2019 in the lease liabilities and right-of-use-assets in accordance with IFRS 16. Financial leases that are subject to exemptions as short-term or low value right-of-use-assets have been derecognized and the difference was recognized in equity. The difference recognized in equity was not material.

Aspo has applied the following practical expedients in adoption of IFRS 16:

  • Leases with lease term less than 12 months remaining at the date of transition on January 1, 2019 have been accounted for as short-term leases and not recognized in the balance sheet. The election was made by class of underlying asset and has been applied to all other classes except cars, which are recognized in the balance sheet even if their remaining lease term would be less than 12 months at the time of transition.
  • The lease liability and the right-of-use-asset were not recognized in the balance sheet in respect of leases relating to low value assets. Aspo uses a threshold of EUR 5,000 for low value assets.
  • The leasing expenses of the two above-mentioned practical expedients are recognized in other operating expenses as equal payments over the lease term.
  • Lease agreements with reasonably similar characteristics are subject to one predetermined discount rate. The criteria used to determine the discount rate were the class of underlying asset, the geographic location, the currency, the maturity of the risk-free interest rate and the lessee’s credit risk premium. At the time of the transition, the weighted average of incremental borrowing rates was 2.33%.
  • In case of leases in which the lease term includes extension options or termination options, current knowledge was used in determination of the lease term.
  • The initial direct costs were not included into the right-of-use asset at the time of transition in January 1, 2019.

 

Management judgments

Aspo complies with IFRS 16 guidance for determining the lease term. In case of lease agreements where the lease term is defined valid until further notice, the expected lease term is based on management judgement. The financial impact of the sanctions included in the leases, such as those related to the early termination of the contract, has also been taken into account in determining the expected lease term.

For the contracts with lease term defined valid until further notice the most significant impact relates to vessels leased. If the vessel is leased for approximately a year, the lease term used to calculate the lease liability is 13 months (ongoing month + the next 12 months). As a significant part of the fleet is leased, it is likely that at the end of the lease term the same or similar vessel will be leased again. In case this does not apply, the agreement will be treated as a fixed term lease contract. The procedure has been designed to give investors a better understanding of the obligations associated with the lease liability and the significance of the right-of-use asset in the balance sheet.

According to the standard guidance, the option to extend or terminate the lease is taken into account in determining the lease term. The period covered by an option to extend the lease is included into the lease term if it is reasonably certain that the option will be exercised and, and correspondingly, if it is reasonably certain that the option to terminate the lease is not exercised the remaining period is included in the lease term.

When the agreement includes a lease component and a non-lease component, Aspo separates the non-lease components; such as maintenance, services, or crew, based on either the stand-alone prices given in the lease agreement or by using estimates.

Impact of the adoption of IFRS 16

The adoption of the standard will have a significant impact on the balance sheet of Aspo Group and the key figures derived from it. The structure of both the income statement and cash flow statement will change. As per the new standard, the interest-bearing debt and long-term assets recognized in the balance sheet are significantly higher than under the IAS 17 Leases standard previously followed. In terms of key figures, the adoption of IFRS 16 had the most significant impact on gearing, which increased by 31.1 percentage points.

In the income statement, expenses previously recognized as leasing expenses no longer exist, right-of use assets under lease agreements are depreciated, and the share of interest in leasing expenses is recognized under financial expenses. Therefore, the adoption of IFRS 16 does not have a significant impact on operating profit on an annual basis.

In the cash flow statement, the repayments of lease liabilities will increase the operating cash flow since those are presented in the cash flow from financing activities, while the total cash flow stays intact.

On January 1, 2019, the amount of the right-of-use assets recognized in the Group's opening balance sheet was EUR 38.5 million, the amount of prepaid lease payments was EUR 0.9 million, and the amount of lease liabilities EUR 37.6 million. Under the new standard, exemptions related to intangible assets and low value assets decreased the amount of financial leases by EUR 1.2 million compared to when reporting under the former IAS 17 standard. Of the lease liabilities in the Group’s opening balance sheet, the amount of non-current liabilities was EUR 10.4. million and the amount of current liabilities was EUR 27.2 million.

The impact of the leases in force at the time of transition January 1, 2019 in the income statement for 2019 is presented below (in millions of euros):

Increase in depreciations 13.0
Decrease in other operating expenses (leasing expenses) 13.8
Increase in operating profit 0.8
Increase in financial expenses 0.7
Profit before taxes, change 0.1

 

Impact on Aspo's opening balance sheet Dec 31,2018 Rigth-of-use assets Changes to practice under 
IAS 17
Jan 1,2019
  MEUR MEUR MEUR MEUR
Assets        
Tangible and intangible assets 184.0   -1.2 182.8
Right-of-use assets   38.5   38.5
Other non-current assets 47.3     47.3
Current assets 168.4 -0.9   167.5
Total assets 399.7 37.6 -1.2 436.1
         
Equity and liabilities        
Equity 116.6   0.0 116.6
Loans and overdraft facilities 199.4   -1.2 198.2
Lease liabilities   37.6   37.6
Other liabilities 83.7     83.7
Total equity and liabilities 399.7 37.6 -1.2 436.1

 

ASPO Plc


Aki Ojanen
CEO

For further information, please contact:
Arto Meitsalo, CFO, Aspo Plc, tel. +358 40 5511422, arto.meitsalo@aspo.com
Harri Seppälä, Group Treasurer, tel. +358 400 617 201, harri.seppala@aspo.com


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Aspo is a conglomerate that owns and develops business operations in Northern Europe and growth markets focusing on demanding b-to-b customers. Our strong company brands - ESL Shipping, Leipurin, Telko and Kauko - aim to be the market leaders in their sectors. They are responsible for their own operations, customer relationships and the development of these. Together they generate Aspo's goodwill. Aspo's Group structure and business operations are continually developed without any predefined schedules.