IFRS 16 Leases - Ernst & Young

IFRS 16 LeasesAccounting implicationsfor telecomsImpact of new leases standard for telecoms at a glance2009Discussionpaper2010First exposuredraft (ED)2013Second ED2014-15Redeliberationson second ED2016Redeliberationson IFRS 16Key changesprimarily affectinglesseesNew presentation and disclosure requirementsLessorsAccounting is substantially the sameAssets and liabilities recognition for most leasesThe new standard will be effective for annual periods beginning on or after 1 January 2019with limited early adoption allowed.Impact on telecoms Financial statements: balance sheet, incomestatement, cash flow statement and disclosures Key financial metrics and ratios, e.g., leverage(gearing), current ratio, asset turnover, interestcover, EBIT/operating profit, earnings beforeinterest, tax, depreciation and amortization (EBITDA) Debt covenants complianceInternational Financial Reporting Standards Systems, processes and controls Strategic business decisions, e.g., lease/buy andsale and leaseback Potential complexity and operational difficultiesfor lease accounting Significant data requirements for accounting,presentation and disclosure of leasetransactions

Determining whether an arrangement is or contains a leaseNoIs there an identified asset?1Discussion itemsfor telecoms:YesDoes the customer have the right toobtain substantially all of the economicbenefits from the use of the identifiedasset throughout the period of use?No Network andinfrastructure equipmentYesDoes the customer or supplier havethe right to direct how and for whatpurpose the identified asset is usedthroughout the period of use?CustomerSupplierNeither; how and what purpose is predeterminedYesDoes the customer have the right tooperate the asset throughout the period ofuse without the supplier having the rightto change those operating instructions?YesDid the customer design the asset (orspecific aspects of the asset) in a waythat predetermines how and for whatpurpose the asset will be usedthroughout the period of use?The contract is orcontains a lease. Capacity arrangementsfor fiber/wavelength/satellitesNoNo Customer premisesequipment, e.g., routers,set-top boxes, ITequipment, satellitedishes Contracts in which boththe supplier and thecustomer have someinvolvement, or theability to make,significant decisionsabout how and for whatpurpose the asset is used Identification of a leasesthat may requirejudgment, particularly forarrangements thatinclude significantservicesThe contract is not ordoes not contain a lease.Lessee accounting — measurement and presentationInitial recognition andmeasurementInitially measure right-of-use (ROU) asset and lease liability using anappropriate discount rateSubsequentmeasurement of leaseliabilityIncrease the lease liability to reflect interest on the lease liabilitySubsequentmeasurement of ROUassetDepreciate ROU asset, based on IAS 16 Property, Plant and EquipmentProfit and lossGenerally “front-loaded” expense for individual leasesReduce lease liability by payments madeAlternative measurement of ROU asset under the revaluation inInternational Accounting Standard (IAS) 16 or the fair valuep model underIAS 40 Investment PropertySeparate interest and depreciation presentation1 capacity portion of an asset is an identified asset if it is physically distinct (e.g., a floor of a building). A capacity or other portionAof an asset that is not physically distinct (e.g., a capacity portion of a fiber optic cable) is not an identified asset, unless it representssubstantially all of the capacity of the asset and thereby provides the customer with the right to obtain substantially all of theeconomic benefits from use of the asset.

Effective date and transition Effective for annual periods beginning on orafter 1 January 2019 Early application permitted if IFRS 15 isalso applied Lessees are permitted to choose between twotransition approaches and apply the electionconsistently to all leases Full retrospective; or Modified retrospective Lessors are not required to make anyadjustments on transition Except for intermediatelessors in a sublease Lessees and lessors are not requiredto reassess whether contracts are, orcontain, a lease Option to be applied to all contracts that areongoing at the date of initial applicationLessees modified retrospective approachExisting operating leases Do not restate comparative periods Lease liability PV of remaining leasepayments2 Choice (Present value) of measurement ofROU asset may affect future expenses: As if IFRS l6 had been applied sincecommencement date;Or Equal to lease liability Practical expedients adjusted by anyprepaid or accrued lease payments: Provide exemption for leases endingwithin 12 months Rely on onerous lease assessment Exclude initial direct costs from ROUasset May use hindsight Disclose explanation of any differencebetween: Operating lease commitments disclosedapplying IAS 17 at the end of the annualreporting period immediately precedingthe date of initial application, discountedusing the incremental borrowing rate atthe date of initial application Lease liabilities recognized at the date ofinitial applicationUsing incremental borrowing rate at the date of initialapplication2 Existing finance leases Carry forward asset and lease liabilityfrom IAS 17 Leases Apply IFRS 16 requirements from the dateof initial application

Impact on telecom businessExternal auditInvestor relationsCovenant managementCash tax, effective tax rateand tax reportingAccounting policyFinancial reportingFinancial controlBudgeting, forecastingand planningSystem architectureSystems of record, chartof accounts, nce frameworkAudit committeeInternal auditImpact on financial metricsand key performance indicatordesign, managementinformation design,balance sheet reconciliationsWorking capitalmanagementITsystemsExternalreporting, taxInternalcontrolManagementreportingPeople capabilitiesLearning anddevelopmentBonus and incentiveschemesIFRS 16outcomes:compliance, costand riskPeople,performanceand rewardCurrentchangeprogramsData governanceand managementCommercial,sales andmarketingProcurementand legalFinancetransformation,scope, requirements,timing and qualityData taxonomy andstandardsData cleanse andremediationIdentification of contractsthat contain a leaseData model designLease contract designLease contractmanagementImpacts on use ofoff-balance-sheetfinancing strategiesLease contractacquisition processImpact on lease termsand conditionsHow EY can help EY leasing enablerData entry areaProcessing areaReporting area

Added value of our modular approach:Selected applications: Quick modifications at any time in response tochanges (e.g., additional automated interfaces,to meet local accounting requirements) Impact analysis lAS 17 vs. IFRS 16 Simple configuration that speeds up projectprogress and the presentation of results Used on several projects over the past five years Ongoing improvements KPI dashboard Simulation options Disclosure “Buy-or-lease” decision Internal/external reporting Globally consistent use Applicable to IFRS and US GAAP LE as license-free project resultSemiautomated contract capturingOCRText miningManual supplementEY text mining toolEY relativity text analyzer tool Fast and consistent mass data collection Key term identification Marking of not found mandatory fields Reconciliation with model agreements Company cluster-related adaption ofsearch strings Text-of-contract benchmarks

EY ContactsHolger ForstAssurance LeaderEY Global Telecommunicationsholger.forst@de.ey.comAurélie FrostAssurance sector residentEY Global Telecommunicationsaurelie.frost@lu.ey.comPraveen JindalSenior Manager, IFRS servicesGlobal professional practicepraveen.jindal@uk.ey.comSwati PatelUS TelecommunicationsAssurance sector residentswati.patel1@ey.comEY Assurance Tax Transactions AdvisoryAbout EYEY is a global leader in assurance, tax, transaction andadvisory services. The insights and quality services wedeliver help build trust and confidence in the capitalmarkets and in economies the world over. We developoutstanding leaders who team to deliver on our promisesto all of our stakeholders. In so doing, we play a criticalrole in building a better working world for our people, forour clients and for our communities.EY refers to the global organization, and may refer to oneor more, of the member firms of Ernst & Young GlobalLimited, each of which is a separate legal entity.Ernst & Young Global Limited, a UK company limited byguarantee, does not provide services to clients. For moreinformation about our organization, please visit ey.com.How EY’s Global Telecommunications Sectorcan help your businessTelecommunications operators are facing a rapidlytransforming business model. Competition fromtechnology companies is creating challenges aroundcustomer ownership. Service innovation, pricing pressuresand network capacity are intensifying scrutiny of thereturn on investments. In addition, regulatory pressuresand shareholder expectations require agility and costefficiency. If you are facing these challenges, we canprovide a sector-based perspective on addressing yourassurance, advisory, transaction and tax needs. Our GlobalTelecommunications Sector is a virtual hub that bringstogether people, cultures and leading ideas from acrossthe world. Whatever your need, we can help you improvethe performance of your business. 2017 EYGM Limited.All Rights Reserved.EYG no. 00773-174GblBMC AgencyGA 0000 09184ED NoneIn line with EY’s commitment to minimize its impact on theenvironment, this document has been printed on paper with a highrecycled content.This material has been prepared for general informational purposesonly and is not intended to be relied upon as accounting, tax or otherprofessional advice. Please refer to your advisors for specific advice.ey.com/telecommunications

IFRS 16 Leases Accounting implications for telecoms . Lessors are not required to make any adjustments on transition Except for intermediate lessors in a sublease Lessees and lessors are not required to reassess whether contracts are, or contain, a lease