Implementation of IFRS 16 Leases, Kesko Group’s restated comparison figures for January-September 2018
IFRS 16 Leases takes effect on 1 January 2019. The standard addresses the definition, recognition and measurement of lease agreements and other information given in relation to lease agreements in financial statements. According to the standard, the lessee recognises in its balance sheet right-of-use assets and financial liabilities. This release provides information on the impact of the implementation of the standard on Kesko Group’s IFRS financial statements after the financial statements for the 2018 reporting period, as well as the restated comparison figures for January-September 2018 calculated in accordance with the standard that takes effect on 1 January 2019.
Kesko Group leases store sites and other properties for use in its business operations in all of its operating countries. Kesko has a significant number of lease agreements that before the implementation of IFRS 16 Leases are categorised as operating leases and are recognised as lease expenditure in the income statement on a time apportionment basis. According to the new standard that takes effect on 1 January 2019, assets and liabilities corresponding to the present value of minimum lease payments of most of these leases will be recognised in the balance sheet at the commencement date of the leases, meaning assets and liabilities recognised in the balance sheet will increase significantly. At the end of 2017, Kesko Group had over 1,500 leased properties, the lease liability for which was €2,892 million, in addition to which the Group had other lease liabilities of €21 million. At the end of September 2018, lease liabilities for Kesko Group’s properties totalled €2,868 million and other lease liabilities amounted to €22 million. The content of lease agreements recognised in the balance sheet under IFRS 16 Leases differs from the current reporting of lease liabilities reported in the notes to balance sheet with regard to, for example, exemptions concerning short-term leases and asset items of low value. There are also timing-related differences, as lease liabilities reported under notes to the consolidated financial statements include also the nominal amount of liability for lease agreements that will enter into force in the future, while under IFRS 16 Leases, lease agreements are recognised in the balance sheet at the commencement date of the agreement.
According to IFRS 16, the measurement of the right-of-use assets and the lease liabilities is determined by discounting the minimum future lease payments. The Group will adopt the standard using a full retrospective method, and the impact on the date of transition (1 January 2018) has been calculated as if the standard had always been in effect. The discount rate should primarily be the interest rate implicit in the lease, if available. An interest rate implicit in the lease is not available for all lease agreements. In such cases, the Group will use the incremental borrowing rate, which comprises the reference rate, credit spread for the incremental borrowing, and a potential country and currency risk premium. With the full retrospective method, the incremental borrowing rate is determined and the minimum lease payments discounted at the commencement date of each lease agreement. IFRS 16 Leases includes exemptions for lease agreements with a term of less than 12 months and for asset items of low value, which the Group will adopt. The lessor’s reporting remains unchanged, meaning lease agreements are still divided into finance lease agreements and operating leases.
The Group has completed the assessment of the impact of IFRS 16 Leases on its financial statements. The new standard has a significant impact on the Group’s income statement and balance sheet and on some performance indicators. The implementation of IFRS 16 increases significantly the Group’s EBITDA and comparable EBITDA and operating profit and comparable operating profit, when the lease expenditure recognised in the income statement is replaced by depreciation of right-of-use-assets and interest expenses for liability recognised in finance costs. In addition, change in deferred tax is recognised in income taxes. Assets in the consolidated statement of financial position increase by the right-of-use-asset calculated for the commencement date of each lease agreement, to be depreciated over their lease term. The amount of interest-bearing liabilities in the consolidated statement of financial position increases by the discounted amount of lease liabilities. In addition, the implementation of the new standard affects the cash flow from operating activities and cash flow from financing activities in the consolidated statement of cash flows, as realised rent payments are allocated to cash flow from operating activities for the portion corresponding to finance costs and to cash flow from financing activities for the portion corresponding to part payment of debt. The new standard does not have impact on Kesko Group’s cash flows in practice, and the Group’s cash flow as a whole will not change. The standard only changes the way different items in the statement of cash flows are presented. The retrospective implementation of the new accounting standard will result in an equity recording at the date of transition on 1 January 2018 as the values of assets and liabilities recognised in the balance sheet differ at the date of transition.
In the opening balance of 1 January 2018 drawn in conjunction with the implementation of IFRS 16 and calculated in accordance with the standard, the Group’s right-of-use-assets total €1,996 million, and the corresponding interest-bearing liabilities €2,214 million. At the end of September 2018, the right-of-use-assets amounted to €1,989 million and the corresponding interest-bearing liabilities to €2,213 million. The implementation of the standard results in a €72 million increase in the comparable operating profit for continuing operations in January-September, as the operating profit is burdened by depreciation instead of rents. The interest costs on interest-bearing liabilities calculated in accordance with the standard are recognised in the income statement, which increases finance costs for January-September by €76 million. The impact on the January-September profit before tax is €-3.2 million. The impact on the January-September comparable earnings per share is €-0.02/share. The right-of-use-assets recognised in the balance sheet based on lease agreements increases capital employed by €1 995 million (January-September, cumulative average). Due to the combined impact of the increase in operating profit and capital employed, return on capital employed at the end of September (pro forma rolling 12 months) decreases to 9.7%. Interest-bearing liabilities in the balance sheet increase in total to €2,761 million, and interest-bearing net debt to €2,442 million. The Group’s net debt/EBITDA at the end of September (pro forma rolling 12 months) is 2.9 and equity ratio 30.8 %.
The table below depicts key performance indicators impacted by the implementation of IFRS 16 Leases. ’Reported’ figures in the table refer to performance indicators calculated in accordance with the IFRS standards in force in 2018, and ’Restated’ figures refer to performance indicators adjusted due to the implementation of IFRS 16, which takes effect on 1 January 2019. The latter will be used as comparison figures in 2019 following the implementation of IFRS 16.
|Reported EBITDA, comparable, € million||71.8||122.6||148.9||343.4|
|Impact of IFRS 16, € million||98.9||99.3||102.1||300.3|
|Restated EBITDA, comparable, € million||170.7||221.9||251.0||643.7|
|Reported operating profit, comparable, € million||40.0||89.0||112.6||241.7|
|Impact of IFRS 16, € million||23.8||24.2||24.4||72.3|
|Restated operating profit, comparable, € million||63.8||113.2||137.0||314.0|
|Reported operating profit, € million||36.6||81.6||110.0||228.2|
|Impact of IFRS 16, € million||23.8||24.2||24.4||72.3|
|Restated operating profit, € million||60.4||105.8||134.3||300.5|
|Reported profit before tax, comparable, € million||39.9||86.0||111.8||237.7|
|Impact of IFRS 16, € million||-1.6||-1.0||-0.6||-3.2|
|Restated profit before tax, comparable, € million||38.3||85.0||111.2||234.5|
|Reported profit before tax, € million||36.5||78.5||109.1||224.2|
|Impact of IFRS 16, € million||-1.6||-1.0||-0.6||-3.2|
|Restated profit before tax, € million||34.9||77.5||108.5||220.9|
|Reported earnings per share, comparable, €, basic||0.35||0.61||0.81||1.77|
|Restated earnings per share, comparable, €, basic||0.34||0.60||0.81||1.75|
|Reported earnings per share, €, basic||0.32||0.52||0.79||1.63|
|Restated earnings per share, €, basic||0.31||0.51||0.79||1.61|
|Reported return on capital employed, comparable, %, rolling 12 mo||13.8|
|Restated return on capital employed, comparable, %, rolling 12 mo, pro forma *)||9.7|
|Reported interest-bearing net debt, € million||-59||146||229||229|
|Restated interest-bearing net debt, € million||2,175||2,345||2,442||2,442|
|Reported interest-bearing net debt/EBITDA, rolling 12 mo||0.6|
|Restated interest-bearing net debt/EBITDA, rolling 12 mo, pro forma *)||2.9|
|Reported equity ratio, %||49.3||46.2||48.5||48.5|
|Restated equity ratio, %||31.4||29.3||30.8||30.8|
*) The pro forma rolling 12-month performance indicators have been calculated as indicative figures for 10/2017-9/2018.
The financial reporting for Kesko Group’s 2018 reporting period and Q4/2018, to be published on 6 February 2019, will comply with the Group’s IFRS accounting policies in force in the 2018 reporting period. After the implementation of IFRS 16 Leases on 1 January 2019, the restated 2018 figures presented in this release will be used in Kesko Group’s financial reporting as the comparison figures for January-September 2018. IFRS 16-compliant comparison figures for the whole 2018 reporting period will be published before the publication of the Q1/2019 interim report, in April 2019 at the latest.
Further information is available from Jukka Erlund, Senior Vice President, Chief Financial Officer, telephone +358 105 322 113, and Eva Kaukinen, Vice President, Group Controller, telephone +358 105 322 338.
Consolidated income statement 1-9/2018, 1-6/2018, 1-3/2018
Consolidated statement of financial position 30.9.2018, 30.6.2018, 31.3.2018, opening balance sheet 1.1.2018
Consolidated statement of changes in equity, condensed
Consolidated statement of cash flows, condensed 1-9/2018, 1-6/2018, 1-3/2018
Segment information, continuing operations, 1-3/2018, 1-6/2018, 1-9/2018
Segment information by quarter, continuing operations, 1-3/2018, 4-6/2018, 7-9/2018
Reconciliation of restated performance indicators to restated IFRS financial statements, 1-3/2018, 4-6/2018, 7-9/2018
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