5.3 Lease agreements
The Group’s leases mainly relate to office premises. The durations of the leases vary, and they may include options for extension and termination. The Group adopted the IFRS 16 standard on 1 January 2019.
A right-of-use asset and a corresponding liability are recognised for leases at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost.
|13. LEASES, 1,000 €||2019||2018|
|Right-of-use-assets, buildings and structures|
|Cost at 1 Jan||34,974|
|Increases 1 Jan - 31 Dec||220|
|Deprecation 1 Jan - 31 De||-2,620|
|Cost at 31 Dec||32,574|
|Carrying amount 31 Dec||32,574|
|Amounts recognised in the income statement:|
|Depreciation of right-of-use assets – buildings||2,620|
|Costs related to low value asset leases||964|
The outgoing cash flow from leases in 2019 totalled EUR 3.0 million.
The Group has mainly leased office premises, land areas under substations and transmission lines and some 110 kilovolt transmission lines and circuit breaker bays. The durations of the lease agreements range from less than one year to fifteen years, and the contracts can usually be extended after the original date of expiration. The index, renewal and other terms of the different agreements vary.
As of 1 January 2019, the Group has recognised right-of-use assets for leases in the balance sheet, with the exception of short-term leases or leases concerning underlying assets with a low value; more information in accounting principle Leases and in the above calculation. Until 31 December 2018, lease liabilities were disclosed as an off-balance sheet item:
|RENTAL LIABILITIES, € 1,000||2019||2018|
|Rental obligations from lease agreements:|
|In one year||4,223|
|In more than one year and not more than five years||14,716|
|In more than five years||11,273|
Lease obligations where the risks and rewards incident to ownership remain with the lessor are treated as other lease agreements. Lease obligations paid on the basis of other lease agreements are treated within other operating expenses and are recognised in the income statement as equally large items during the lease period. Other lease agreements primarily concern office facilities, land areas and network leases.
IFRS 16 Leases
A right-of-use asset and a corresponding liability are recognised for leases at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is recognised in the income statement over the lease term so that the interest rate on the remaining liability is equal in each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and lease term on a straight-line basis.
The assets and liabilities arising from leases are initially measured on a present-value basis. Lease liabilities include the net fair value of the following lease payments:
- fixed payments less any incentives to be received
- variable lease payments that depend on an index or a rate
- amounts that the lessee is expected to pay based on residual value guarantees
- the exercise price of a purchase option, if the lessee is reasonably certain to exercise that option
- payments of penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease
The lease payments are discounted using the Group’s incremental borrowing rate.
Right-of-use assets are measured at cost, which comprises:
- the amount equal to the lease liability at its initial recognition
- lease payments made before the commencement of the lease, less any incentives received
- any initial direct costs and
- cost of restoring the site to the original condition
Payments related to short-term leases and low value asset leases are expensed in equal instalments. Leases with a lease term of 12 months or less are considered short term. Where the value of an underlying asset is not material for Fingrid, the management has evaluated the asset as a low value asset.
Payments related to repayments of lease liabilities are stated as cash flows from financing activities, the interest expenses are recognised in consolidated interest expenses. Lease payments based on short-term leases and low value asset leases and variable lease payments not included in lease liabilities are stated as cash flows from operating activities.
Adoption of the IFRS 16 standard
Fingrid Oyj adopted the IFRS 16 standard on 1 January 2019, applying the modified retrospective transition approach. The cumulative impact of the adoption is presented in the opening balance on January 2019, and the comparison figures of the preceding year have not been adjusted. IFRS 16 replaced the previous IAS 17 Leases standard.
The standard requires the lessee to record all leases on its balance sheet. The lessee records on the balance sheet a right-of-use asset representing its right to use the asset and a lease liability representing its obligation to make lease payments. These right-of-use assets are depreciated over the shorter of lease term and useful life of the underlying asset. The interest cost of lease liabilities is recorded in finance costs. IFRS 16 provides for optional exemptions for short-term leases and low-value assets, which Fingrid Oyj makes use of. The payments related to these are expensed in the income statement. From the lessor’s perspective, reporting remains similar to that under IAS 17, with the leases being divided into finance leases and other leases. Fingrid does not have significant leases as a lessor.
Following the adoption of IFRS 16, Fingrid has recorded on its balance sheet new assets and liabilities, mainly for leases of office premises. On 1 January 2019, Fingrid recorded EUR 35 million in new right-of-use assets. On 31 December 2018, rental liabilities other than finance lease liabilities amounted to EUR 30.2 million. The difference on the date of adoption is primarily attributable to the fact that Fingrid has a few long-term leases related to office premises, and that the options for extension referred to in the standard were taken into account when measuring the leases on the date of adoption of IFRS 16. Management’s discretion has been used when assessing to what extent it can be expected that the options to extend the lease terms will be exercised. When adopting IFRS 16, the right-of-use assets were recorded based on an amount equal to the right-of-use asset’s discounted lease liability. The average weighted discount rate for the right-of-use liability on 1 January 2019 was 2.02%.
The IFRS 16 standard has an impact on how the cash flow calculation is presented. The new presentation improves the cash flow from operating activities before financing items and taxes. Under IFRS 16, lease liability payments are stated in the cash flow of financing activities and the related interest in interest expenses.
The standard provides for two optional recognition exemptions for the lessee. If the exemption is adopted, the accounting treatment is similar to the previous treatment of operating leases, i.e. the lessee recognises the lease payments in profit or loss. The exemptions concern short-term leases and leases of low-value assets. Fingrid applies the IFRS 16 standard’s exemption not to recognise on the balance sheet short-time leases with a lease term of 12 months or less and which do not include an option to purchase the underlying asset. Also where the value of an underlying asset is not material for Fingrid, the management has decided to make full use of the option.
The lease term corresponds to the non-cancellable period of the lease and leases where, according to management’s assessment, the options to extend the lease will be exercised with a high probability. The real-estate leases do not clearly define the interest rate implicit in the lease, which is why Fingrid uses as the interest rate an estimate of the company’s incremental borrowing rate for real estate leases. The incremental borrowing rate is determined for the entire real-estate lease portfolio, whereby all real-estate leases are discounted using the same interest rate. The discount rates applied in discounting leases under IFRS 16 are based on the market yield on the company’s publicly quoted bonds.
Short-term leases or leases of low-value assets, which are expensed in equal instalments, consist of vehicle lease payments, lease payments for land and water areas and lease payments for small machinery and equipment.
Impacts of the transition to IFRS 16
Reconciliation of lease liabilities and commitments related to leases on the transition date is presented below:
|Rental liabilities 31 Dec 2018||30.2|
|Impacts of determining the lease term||15.1|
|Impacts of discounting||-5.8|
|Short-term leases that are not recognised as dept||-0.1|
|Low-value asset leases||-4.3|
|Rental liabilities 1 Jan 2019||35.0|
|Current lease liabilities||2.3|
|Non-current lease liabilities||32.7|