2016 Global Communications GAAP Summit Transition: Getting It . - PwC

2016 Global Communications GAAP Summit Transition: getting it right in a changing environment

Fi Dolan Welcome and introduction Global Communications GAAP Summit PwC June 2016 2

What’s in the news? Global Communications GAAP Summit PwC June 2016 4

What’s in the news? Global Communications GAAP Summit PwC June 2016 4

The industry is in a period of exponential change “How does a person go bankrupt? gradually, then suddenly” Hemingway Global Communications GAAP Summit PwC June 2016 6

Agenda Today Monday, 20 June 15:00 – 15:15 Introduction and welcome 15:15 – 16:00 Leasing: the new standard - plenary 16:00 – 17:45 Workshop 1: Leases – breakout rooms 18:15 Meet in the hotel lobby for bus departure to dinner 18:30 Buses depart for dinner at Kursalon Vienna Global Communications GAAP Summit PwC June 2016 6

Agenda Tomorrow Tuesday, 21 June 08:00 – 10:30 Workshop 2: Implementation of IFRS15 - breakout rooms 10:30 – 11:00 Coffee break 11:00 – 12:30 Revenue recognition - plenary 12:30 – 13:30 Lunch 13:30 – 14:30 Hot topics and what’s new in accounting - plenary 14:30 – 15:30 An industry perspective - plenary 15:30 – 16:00 Closing remarks Global Communications GAAP Summit PwC June 2016 7

Question Who will win Euro 2016? 1. Austria 6. Ireland 2. Portugal 7. Hungary 3. Germany 8. Poland 4. England 9. Russia 5. Spain 10. France 11. Other? Global Communications GAAP Summit PwC June 2016 8

Question Will the United Kingdom vote to leave the EU? 1. Yes 2. No 3. Undecided Global Communications GAAP Summit PwC June 2016 9

Question What would you like to achieve at the Summit? 1. Consistent industry view 2. Sharing of experiences and ideas 3. Networking 4. Other Please rank your answers in order of importance (i.e. 1 being the most important). Global Communications GAAP Summit PwC June 2016 10

Dinner Kursalon Vienna Buses depart promptly at 18:30 from the hotel lobby Back in your workshop rooms at 8:00am tomorrow morning Global Communications GAAP Summit PwC June 2016 11

Peter Hogarth Leasing: the new standard Global Communications GAAP Summit PwC June 2016 12

Where have we been? March 2009: Discussion paper August 2010: Exposure Draft May 2013: Revised exposure draft January 2016: Final standard July 1996: G4 1 - Leases: Implementation of a New Approach Effective date: 1 January 2019 Early adoption permitted when adopt IFRS 15 EU-Endorsement: TBD Global Communications GAAP Summit PwC June 2016 13

A quick reminder - what did the 2013 ED say? Current accounting Exposure draft Principle Risks and rewards Consumption Lessee Off-balance sheet operating lease All leases on-balance sheet (except short term leases) On-balance sheet finance lease Income statement: Financing approach (Type A) Straight line approach (Type B) Lessor Straight-line operating lease Straight-line Type B Up-front finance lease Up-front Type A Global Communications GAAP Summit PwC June 2016 14

Where has lessee accounting ended up? FASB IASB Balance sheet Income statement Right-of-use asset/ Lease liability Single Approach (All leases on balance sheet) (same as IASB) Dual Approach Amortisation (Right-of-use asset) Finance lease Operating lease Interest expense (Lease liability) Amortisation Lease expense Interest expense Global Communications GAAP Summit PwC June 2016 15

What’s the difference? 70,000 60,000 50,000 Finance lease – amortisation 40,000 Finance lease – interest expense 30,000 Finance lease – total expense 20,000 Operating lease – total expense IFRS and US GAAP US GAAP only 10,000 0 1 2 3 Global Communications GAAP Summit PwC 4 5 6 7 8 9 10 June 2016 16

Lessor accounting – no substantive change IASB (& FASB) Classification Distinction based on risk and rewards Finance lease Lease receiveable (net investment in lease) Operating lease Underlying asset \\ Global Communications GAAP Summit PwC Minimal change compared to current guidance June 2016 17

Lease term (lessee & lessor) Non-cancellable period of the lease Periods covered by an option to extend if the lessee is reasonably certain to exercise the option at inception if the lessee is reasonably certain not to exercise the option at inception Periods covered by an option to terminate Global Communications GAAP Summit PwC June 2016 18

What does ‘reasonably certain’ mean? Consider whether the lessee has an “economic incentive”: Contractual terms (eg renewal rates vs market prices) Remaining value of leasehold improvements (eg towers built on leased land) Costs of termination (eg relocation, alternate assets, AROs) Conditions attached to options Importance of leased asset for operations (eg are there alternatives?) Past practice is relevant, provided economic reasons for action can be determined Global Communications GAAP Summit PwC June 2016 19

Lease payments (lessee & lessor) Fixed payments Variable lease payments Residual value guarantees Including in-substance fixed payments Only if they depend on index/rate Measured using rate as at commencement date Expected payments lessee has to make Exercise price of a purchase option if the lessee is reasonably certain to exercise the option if the lease term reflects the termination by the lessee Penalties for terminating Global Communications GAAP Summit PwC June 2016 20

What will the lessee’s Balance Sheet look like? Right-of-use asset Lease liability Lease liability Lease payments Discount rate Lease payments made before commencement date Restoration costs Provision Initial direct costs Global Communications GAAP Summit PwC June 2016 21

Short-term lease and small asset exemptions Short-term leases (IASB/FASB) Leases with a lease term of 12 months or less can be accounted for as operating leases (payments recognised on a straight-line basis over the lease term) accounting policy choice Exemption for leases of ‘small’ assets (IASB only) Applicable only to leases of certain small assets Accounting policy choice applicable on a lease-by-lease basis (not group or portfolio) Applicable to leases of low-value assets ( 5,000, as new) Global Communications GAAP Summit PwC June 2016 22

Identifying a lease – the new on/off decision 1 The contract depends on the use of an identified asset No identified asset if the supplier has a substantive right to substitute the asset and 2 Customer controls the use of the identified asset throughout the period of use Right to obtain substantially all of the economic benefits that result from using the asset throughout the period of use; and Right to direct the use of the asset Global Communications GAAP Summit PwC June 2016 23

Identified asset - Substitution rights Right to substitute the asset is substantive if, at lease inception: a) supplier has practical ability to substitute; and b) supplier would benefit economically from substituting Practical ability: a) supplier has right to substitute asset; and b) alternative assets are readily available or could be sourced within a reasonable period of time Assessment made at lease inception and may only consider technology substantially developed at that stage Global Communications GAAP Summit PwC June 2016 24

Portions of assets Physically distinct portion eg. distinct dark fibres Identified asset (provided the other criteria are met) Global Communications GAAP Summit PwC Capacity portion eg. Wavelength within a fibre No identified asset (unless portion represents substantially all the capacity and other criteria are met) June 2016 25

Separating components of a contract Separate lease component Separate lease component Criteria: Lessee can benefit from the component on its own or with other readily available resources and Components are neither dependent nor highly interrelated non-lease component (eg O&M) Practical expedient for lessees to treat whole contract as lease Global Communications GAAP Summit PwC June 2016 26

Some important decisions to make? Should I take the expedients to scope out: No EBITDA low-value assets? and short-term leases? net debt Should I separate nonlease components of contracts? Global Communications GAAP Summit PwC Yes June 2016 27

Sale and leaseback transactions Transfer is sale Seller-lessee Right-of-use asset retained proportion of the previous underlying asset (compared to fair value). Gain/loss on sale proportion that relates to the rights retained by the buyer-lessor at the end of the lease. Buyer-lessor: No special requirements Transfer is not a sale Treat as a financing transaction Global Communications GAAP Summit PwC June 2016 28

Sale and leaseback transactions Sale at more than fair value Represents financing from buyer to seller Sale at less than fair value Adjustment to lease payments Global Communications GAAP Summit PwC June 2016 29

Transition Identifying a lease No mandatory reassessment required Lessee and lessor Retrospectively in accordance with IAS 8 or Simplified approach to measurement of right-of-use asset and lease liability (including no restatement of comparatives) Global Communications GAAP Summit PwC June 2016 30

PwC 2015 Global Lease Capitalisation Study 3,199 public companies were included in the survey Industry Median increase in debt Median increase in EBITDA All companies 22% 13% Retailers 98% 41% Airlines 47% 33% Professional services 42% 15% Health care 36% 24% Wholesale 28% 17% Transport & logistics 24% 20% Entertainment 23% 15% Telecommunications 21% 8% Source: PwC Global Capitalisation Study Global Communications GAAP Summit PwC June 2016 31

Impact on KPIs and beyond Changes from current off balance sheet accounting Balance Sheet Assets Liability Income Statement Many other KPIs are redefined: - Current ratio - Asset efficiency - Interest cover - ROCE - ROE - EV/EBITDA - Operating cash flows May also impact future transactions: - (re) financing or raising capital to fund growth - Acquisitions and mergers - Sale and leaseback - Lease vs buy decisions Lease expense/rent Depreciation Interest expense EBITDA EPS Cash Flow Statement Cash per ops Cash from finance Global Communications GAAP Summit PwC Impacting various arrangements: - Financing arrangements, borrowing limits and covenants - Supply arrangements - Remuneration and employee schemes - Tax arrangements - Hedging arrangements Need to manage stakeholders: - Banks/lenders - Investors/analysts - Rating agencies - Suppliers - Management/staff - Tax authorities - Oversight bodies June 2016 32

Workshop 1: Leases Global Communications GAAP Summit PwC June 2016 33

Workshop breakout rooms Group 1 – Pirouette Group 2 – Grosse Reitschule Group 3 – Kleine Reitschule You will find a listing of which group you have been allocated to on your table or on the delegate list. You will remain in the same group for both workshops. Global Communications GAAP Summit PwC June 2016 34

Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

2016 Global Communications GAAP Summit. Global Communications GAAP Summit PwC Fi Dolan Welcome and introduction June 2016 2. What's in the news? Global Communications GAAP Summit . Global Communications GAAP Summit PwC June 2016 28. Sale and leaseback transactions Sale at more than fair value Represents financing from buyer to seller .