IFRS 16 – Implementierung bei der Continental AG€¦ · International Financial Reporting Standards Der 16. IFRS Kongress 2017 in Berlin IFRS 16 – Implementierung bei der Continental

International Financial Reporting StandardsDer 16. IFRS Kongress 2017 in Berlin

IFRS 16 – Implementierungbei der Continental AGIFRS 16 in der Automobilzulieferindustrie

Holger Siebenthaler Jochen KirchContinental AG Ernst & Young GmbH

Jochen KirchExecutive DirectorIFRS Solutions Center GSA

Ernst & Young GmbHWirtschaftsprüfungsgesellschaft

Mergenthalerallee 3 – 5

65760 Eschborn/Frankfurt am Main

Tel.: +49 (6196) 996 24240

Fax: +49 (181) 3943 24240

Mobile: +49 (160) 939 24240

[email protected]

Financial Reporting,Year-End 2015

Ihre Referenten

Holger SiebenthalerSenior Vice PresidentAccounting

Continental AGVahrenwalder Str. 9

30165 Hannover / Germany

Tel.: +49 (511) 938 1056

[email protected]

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Continental at a glance

Age

nda

Project Overview

Identification of a Lease

Practical Expedients

Key Lease Concepts

Special Accounting Matters

Transition and Impact on KPI´s

PublicIFRS 16 Implementierung bei der Continental AG

› Since 1871 with headquarters in Hanover, Germany

› Sales of €40.5 billion

› 220,137 employees worldwide

› 427 locations in 56 countries

Continental CorporationOverview 2016

September 8, 20174Holger Siebenthaler © Continental AG

Chassis &Safety22%

Powertrain18%

Interior20%

Tires26%

ContiTech14%

Sales by division in %

Status: December 31, 2016


Continental CorporationFive Strong Divisions


PLT – Passenger and Light Truck Tires

Chassis & Safety

Vehicle Dynamics

HydraulicBrake Systems

Passive Safety &Sensorics

Advanced Driver AssistanceSystems (ADAS)

Powertrain

Engine Systems

Fuel &Exhaust Management

Hybrid ElectricVehicle

Sensors &Actuators

Transmission

Interior

Instrumentation &Driver HMI

Infotainment &Connectivity

Intelligent TransportationSystems

Body & Security

Commercial Vehicles &Aftermarket

Tires

PLT,Original Equipment

PLT, Repl. Business,EMEA

PLT, Repl. Business,The Americas

PLT, Repl. Business,APAC

CommercialVehicle Tires

Two Wheel Tires

ContiTech

Air Spring Systems

Benecke-Kaliko Group

Compounding Technology

Conveyor Belt Group

Elastomer Coatings

Industrial Fluid Solutions

Mobile Fluid Systems

Power Transmission Group

Vibration Control


Continental CorporationDistribution of Sales to Vehicle Manufacturers and Other Industries


Automotive originalequipment

Other industries

73%

27%

Status: December 31, 2016


Continental CorporationKey Figures for the Divisions in 2016


Salesin € millions

EBIT*in € millions

Adjusted EBIT**in € millions Employees

Continental Corporation 40,549.5 4,095.8 4,341.2 220,137

Automotive Group 24,496.4 1,526.6 1,632.2 124,753Chassis & Safety 8,977.6 580.8 591.7 43,907Powertrain 7,319.5 378.0 398.5 37,502Interior 8,324.7 567.8 642.0 43,344

Rubber Group 16,097.6 2,688.6 2,828.4 94,966Tires 10,717.4 2,289.4 2,306.0 52,057ContiTech 5,462.5 399.2 522.4 42,909*Earnings before interest and taxes.

**Before amortization of intangible assets from PPA, changes in the scope of consolidation, and special effects.


Continental CorporationSales and Employees by Region in 2016


Sales by market in % Employees by region in %

Germany26%

Europe(excludingGermany)

32%

Asia19%

North America19%

Other countries4%

Germany21%

Europe(excludingGermany)

29%Asia21%

North America26%

Other countries3%

Worldwide: €40.5 billion Worldwide: 220,137 Status: December 31, 2016


17,5

10

18,1

98

18,9

10

19,6

81

19,7

67

19,9

83

20,1

06

20,4

53

20,9

78

21,4

01

19.5%20.3%

21.6%20.9% 21.1% 21.2%

18.9%20.0% 20.0%

19.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016 2017

Trailing OA (mn €) Trailing ROCE

Corporation HighlightsSustainable Value Creation

9

1 Trailing operating assets are calculated as assets for the last twelve months (LTM)2 Trailing ROCE is calculated as reported EBIT for the last twelve months (LTM) divided by trailing operating assets

1 2



4,09

9

4,23

6

4,29

6

3,54

2

3,08

3

3,44

6

3,29

8

2,79

8

2,76

8

3,46

9

34% 34% 34%27%

23%26% 24%

19% 18%23%

Q1 H1 9M YE Q1 H1 9M YE Q1 H1 9M YE

2015 2016 2017

Net indebtedness (mn €)

Gearing ratio

10

Indebtedness and Cash FlowNet Indebtedness and Gearing Ratio


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Key Lease Concepts



1216. IFRS Kongress 2017

What will change for Group?

Managing the expectations of stakeholders while simultaneouslyimplementing various programs will be a challenge.

• The lessee will be required torecognize the majority ofleases in its balance sheet.

• Apart from some exemptions,the lessee will use a singleaccounting model for all leases.

• Lessor accounting will remainessentially unchanged.

• Disclosure requirements willincrease significantly.

Interaction with otheraccounting changes


Main hurdles within the IFRS 16 Project

► Completeness with regard to► All leases identified► All lease date captured

► Identify the best system with regard to► Current IT environment and integration requirement► Integration Issues

► Future decisions versus lease or buy (will lease qualify as capital expenditure)► Workflow needs to be adjusted in order to secure completeness at inception► Workflow needs to consider regular revisits of assumptions made

I. Completeness

II. System Implementation

III. Process Changes


Typical Accounting Workstreams

Workstep 1

Lessee / Lessor Accounting DecisionsDefinition of accounting rules specific for the company or group, including

- Scope of use of the standard

- Use of practical expedients

- Defining Accounting specific guidance on the application of the standard (lease term, interest, etc.)Workstep 2

Other Lease TopicsAccounting for Intercompany Leases

Accounting for Sale and Lease Back Transactions

Workstep 3

Identification of a leaseWhat contract types could possibly be identified as being a lease or containing a lease element?

Defining criteria under which future contracts should be analyzed (or possibly be structured)


High-level impact analysis for Continental AGbased on the published financials as of 31 December 2016

IFRS 16IAS 17

Assets

Liabilities

Rights and off-balance sheetitems

EBT

Other expenses

EBIT

Depreciation

EBITDA

Revenue

Finance cost

cur-rent

new

jjvvGGG

$$$$$$$

–

–

Depreciation

X

Allleases

j G

$$

–

–

Depreciation

X

Interest

Financeleases

–

–

vv

j G G

$$$$$

Leaseexpenses

–

X

–

Operatingleases

+ EUR 1.085 m

+ EUR 1.159 m

Retained earnings— EUR 74 m

+ EUR 2 m

- EUR 256 m

+ EUR 37 m

- EUR 219 m

+ EUR 256 m

X

- EUR 35 m

High-levelimpact analysis

Interest

Implications


16Holger Siebenthaler © Continental AG

IFRS 16 - Project Procedure (until now)

June 2016

Kick Off IFRS 16 project› Define main objective

› Team Commitment

› Workpackages

› Time Planning

1st & 2nd Quarter 2016

Initiation phase› Define Stakeholders

› Team / Steering formation

› Accounting requirements

3rd & 4th Quarter 2016

Understand Business› Excel Questionnaire (Cluster allowed)

› Trainings

› Actual process

› Tooling in scope?

1st & 2nd Quarter 2017

Develop future process› Define future process for three data

input channels (paper contract, SAPPO, batch input)

› Define new role: Lease Manager

› Input for ‘Request for Proposal’

2nd Quarter 2017

Posting concept› Basic posting logic

› Intercompany leases

› Consolidation logic

3rd Quarter 2017

Sourcing process› Define short list of providers

› Beauty Contest withselected providers

1st Quarter 2017

Market Screening› Presentations by several IT

tool providers

› Gathering information

3rd Quarter 2017

Contract inventory› Collect Lease contracts

› Scan to digital file

› Maintain local lease archive

2nd Quarter 2017

Practical expedients› Low value leases

› Short term leases

› Threshold 5.000 €

› …

September 8, 2017


Project Work ‘Business’• Contract inventory• Future lease process• Implementation ‘Lease Manager’ role/function• IFRS 16 expertise• Posting and consolidation logics

Sourcing phase• Beauty Contest with selected providers• Price negotiation• Sourcing decision• Finalization contracting (until release PO)

Implementation phase• Data input / migration• Interfaces to existing systems• Pilot / Roll-out concept• Implementation on divisional level as well as on Corporate

level (IT/data security, work council, support)• Training concept (both: IT solution; IFRS 16)• Change process

Go Live (incl. support)

06/17 12/17 06/18 08/18 12/18

IFRS 16 - Time Planning (until GoLive)

17

= Due Dates (fix) = Internal Milestones

Opening Balance 2019

RfP

BAT

Budget2019

Business Goal:IT solution can already supportbudget 2019 calculations andindicates the transition effect1st January 2019

Actualfigures

2019

RfP = Request for ProposalBAT = Business Acceptance Test

*

*

› Data input finished› Valid calculations

Holger Siebenthaler © Continental AGSeptember 8, 2017



Lease

Application

Data input by Corporate departments:› interest matrix› useful lives› FX rates

Interfaces› 51 SAP-Systems› Non SAP-Systems› Diversityà EHP release status

Reporting follows our standards:

Lease Engineà local systems à FIRE

Access to lease documents &ongoing tracking of lease contracts

Define Role &Authorization

concept

External and internallease transactions

Possibility for interfaces(e.g. to existing databases)

Data inputby local CUs

Reporting› Actual› Forecast› Budget (incl. 2019!)

› Tires / ContiTrade› ContiTech› Automotive› Holdings

Input channels for lease documents› csv.- files (e.g. car leases)› SAP Purchase Order (e.g. forklift leases)› Digital contracts (e.g. property leases)

IFRS 16 - Context Diagram

September 8, 2017

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Key Lease Concepts




Identifying a leaseScope and scope exclusions

• … except• Leases to explore for or use natural resources (e.g., oil)

• Leases of biological assets

• Service concession arrangements

• Licenses of intellectual property granted by a lessor

• Rights held by a lessee under licensing agreements

• Intangible assets: Lessees have the option to apply this standard• Leased property that is subleased (investment property):

Off-balance sheet recognition no longer an option

Scope: All leases (IFRS 16???)



Examples:› Leasing of SW licenses› Rights-of-use that could result from cloud service contracts

Decisionà Exercise practical expedient and put leases of intangible assets out of scope of IFRS 16.

Arguments to exclude from IFRS 16 scope

Transition date/Initial data migration: Less lease transactions to be considered

Ongoing reporting: Less complex and therefore less workload for local lease responsible› Distinction between “service” and “lease” is challenging and must be taken contract-by-contract.

› Simplification of process: Avoid Step 1 and enter directly into Step 2

Our assumption: Best practice on the market.

Avoid ICO sub-leasingà Most contracts are signed by Corporateà Push down to companies

Contract is a leaseaccording to IFRS 16?

If no: Distinction between„Service“ and „IntangibleAsset“ according to IAS 38

Step 1

Step 2

Accounting logic:

September 8, 2017

IFRS 16 - Practical Expedients: Intangibles


IFRS 16 — Definition of a lease

Does the fulfilment of the contract depend on the useof an identified asset (IFRS 16.B13 - B20) ?

“A contract, or part of a contract, that conveys theright to use an asset (the underlying asset) for aperiod of time in exchange for consideration.”

Does the customer have the right to direct the use ofthe asset throughout the period of use (IFRS 16.B24 -B30) ?

Supplier has the substantive right to substitute theasset throughout the period of use(IFRS 16.B14 - B19) ?

Supplier has the practical abilitythroughout the period of use ?

Supplier would benefit economically fromthe exercise of it’s right to substitute ?

LeaseNo lease (service)

Does the customer have the right to obtainsubstantially all of the economic benefits from use ofthe asset throughout the period of use (IFRS 16.B21 -B23) ?

Did the customerdesign the asset(IFRS 16.B24b(ii)) ?

Rightto

controltheuseId

enti

fied

asse

t Does the customer have the right to direct how and forwhat purpose the asset is used throughout the period(IFRS 16.B25 - B30) ?

Does the customer have theright to operate the asset(IFRS 16.B24b(i)) ?

Yes

No

No

Yes

Yes

Yes

No

No

Yes

Yes

No

No

Are the relevant decisions abouthow and for what purpose the assetis used predetermined?

Yes


Identifying a lease – practical expedientIFRS 16.C3 allows companies to keep the current results under IFRIC 4

An entity is not required to reassess whether a contract is, or contains,a lease at initial application (IFRS 16.C3)

• Contracts that have been identified as being, or containing, a lease are treatedas a lease for transition purposes

• Contracts that have been classified as not being, or not containing, a leaseare treated as a service for transition purposes

Problem:

• Contracts may not have been classified correctly under IFRIC 4• Mistake under IAS 17 was not relevant for the statement of earnings as

an operating lease contract was accounted for like a service contract andthe respective expense was shown in identical lines

• Mistake relevant for disclosures as respective disclosures under IAS 17 were not made• Contracts need to be revisited if renewed or amended


24

Push DownAccounting

Leadingsystem:

HB II

Contractmanagement

in localresponsibility

Nocentral

contractdatabase

CorporateControlling

=Internal supportregarding lease-vs-buy decision

CorporateAccounting

=Sets framework

and offersinternal support

ReportingUnit

Holger Siebenthaler © Continental AG

› Identified leased assets:› Land use rights› Administration buildings› Production buildings› Sales outlets› Forklifts› Vehicles› Other equipment› Transportation pallets› and many more

› Approximately 90% of outstandingobligation are property related.

› More than 200 reporting unitsreported lease transactions.Not

KPIdriven

September 8, 2017

IFRS 16 - Status Quo



IFRS 16 - Tooling

Sourcing/Supply Agreement(Teileliefervertrag)

+ additional Tooling Agreement(Werkzeugkaufvertrag)

Sourcing/Supply Agreement(Teileliefervertrag)

without additional Tooling Agreement(Kein Werkzeugkaufvertrag)

Similar to case ‘2 agreements’ butwithout transfer of legal ownership

(1) Customer buys series pieces

(2) Costumer pays an explicitlyagreed price for a specific rightto use the tool but that does notlead to a change of legalownership)

Actual accounting:Specific right = ‘Intangible Asset’according to IAS 38 within FS Item“Other Intangible Assets”.

Future accounting:Analysis case per case if IFRS 16 isapplicable.

Transfer of legal ownershipfor the tool that is used for series pieces

No transfer of legal ownershipfor the tool that is used for series pieces

Standard Tooling Casesfor Continental

Only very singleexception cases

2 agreements 1 agreement

No IFRS 16because this is a

purchase transaction

No IFRS 16because the customer does not have control

over the use of the underlying tools(“no decision making rights”)

Benefit Power

September 8, 2017

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Key Lease Concepts




Identifying a leaseShort-term leases

Example: Lease with a term of nine months + four months option

Nine months

Nine months

Four months

Non-cancellable lease term Optional extension period

A: Exercise of option is reasonably certain = not short-term lease

B: Exercise of option is not reasonably certain = short-term lease

Four months

Option to account for short-term leases:“Off-balance sheet” or “on-balance sheet”

• Lease term of 12 months or less• Only applies to lessees!• Option must be exercised consistently for each class of underlying asset


Identifying a leaseExemptions for small-ticket leases

• Definition according to IFRS 16.B5:• The lessee can benefit from use of the underlying asset on its own• The underlying asset is not highly dependent on, or highly interrelated with, other assets

• Rough threshold: USD 5,000ó ~ EUR 5,000ó ~ GBP 5,000• Off-balance sheet: No assets/no liabilities/straight-line expense• Anti-abuse rule on the “breakdown” of leases

Option to account for leases for which the underlying asset is of low value:“Off-balance sheet” or “on-balance sheet”


Identifying a leasePortfolio approach for similar leases

Option to group individual leases in a portfolio (IFRS 16.B1)

• Similar assets• Similar terms• If reasonably expects accounting for a portfolio of leases is not materially different to

that for individual leases• Option to freely select portfolios

Problem:

• Treatment of early termination• Future changes in the portfolio



› Examples for identified items by our Excel-Questionnaire: gas bottles, storage equipment, parking, printers, employee houses etc.

Decisionà Exercise practical expedient for all short-term leased assets (no distinction between asset classes).

Arguments to exclude short-term assets from IFRS 16 accountingTransition date/Initial data migration: Less lease transactions to be considered

Ongoing reporting: Less complex and therefore less workload for local lease responsible

Assumption: Best practice on the market

IFRS 16 - Practical Expedients: Short-term Leases

September 8, 2017


IFRS 16 - Practical Expedients: Small-ticket Leases


› The threshold of 5.000 USD, mentioned by IASB, has to be taken seriously and is not directly linked to the size of an entity.

› A future revision of threshold due to inflation and FX-development is applicable. In general the threshold will be stable as long as there are nosignificant economic reasons for a revision.

› ‚Threshold concept‘ vs ‚Cluster concept‘à Assumption: Threshold reduces workload especially with focus to assignment of assets to clusters.

Decisionà Exercise practical expedient for all leased assets of low value (5.000 EUR when new).

Arguments to exclude small-ticket leases from IFRS 16 accounting

Transition date/Initial data migration: Less lease transactions to be considered.

Ongoing reporting: Less complex and therefore less workload for local leaseresponsible

Assumption: Best practice on the market.

September 8, 2017



ClusterForklifts

Forklifts

„(Hoch-)Hubwagen“

Simple „Ameisen“< 4,5 k€

5,5 k€ - 9 k€

20 k€ - 30 k€

„Schlepper“10 k€ - 15 k€

ClusterHardware Server

Stand-alone servers2,5 k€ - 8 k€

Enclosures30 k€ - 80 k€

ClusterCopier / Printer

Office printers

Multi-functional

~ 500 €

2,5 k€ - 9 k€

10 k€

5 k€

Our mindset regarding the threshold of 5.000 USD mentioned by IASB:

à What will be best market practice? Assumption: 5 k€à Higher thresholds will set signals to the market.à To „double“ the IASB-recommendation up to 10 k€ is not applicable.

IFRS 16 - Practical Expedients

September 8, 2017



Decision for an accounting lease-by-lease

Arguments to consider leases on a lease-by-lease basisCompleteness and correctness of data:

› Current general accounting approach: Accounting for each single asset

Practical challenges:› Asset Categories must be created› Movements within portfolios must be defined (e.g. impairments, disposals, transfers)› Assignment of RoU assets to a portfolio leads to distinction issues.

Tracking-Process:› Portfolios must be reassessed recurrently by responsible Portfolio-Manager.

IFRS 16 - Practical Expedients: Portfolios

September 8, 2017


Lessee accountingQuantitative disclosures

Amortization expense forright-of-use assets

Short-term lease expense

Small ticket leaseexpense

Variable leaseexpense

Income fromsubleases

Interest on leaseliabilities

Gains and losses fromsale and leasebacktransactions

Cash outflow forleases

Additions to right-of-use assets

Carrying amount ofright-of-use assets(by class)

Maturity analysis oflease liabilities

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Key Lease Concepts




Identifying a leaseSeparating lease from non-lease components

• Lease and non-lease components must be separated

• Exemption for lessees: Option to combine both components and account for them as a singlelease component

• The option applies for each class of underlying asset

• Amounts payable to the lessor for administrative tasks are not separate components

Paper, toner, servicingServicing


Identifying a leaseAllocating contract consideration

80%

20%

LeaseServicing Consideration

• Lessees

• Allocate consideration on the basis of the relative stand-alone price

• If an observable stand-alone price is not readily available, the stand-alone price is estimated

• Maximize the use of observable information

• Apply estimation methods in a consistent manner

• Lessors allocate consideration in accordance with the provisions of IFRS 15

• Reallocation of consideration necessary in some cases


IFRS 16 - Practical Expedients: Components


Our Concept:

› Insignificance: If there are very small non-lease components included in the contract or if service component is not readily determinable:à For simplification purposes, companies will be allowed to combine non-lease component with lease component.

› Determinability: If service components are not readily determinable:à It is applicable to combine non-lease component with lease component.

› Approach for all other leased assets:à Separate non-lease component from lease component

• Equipment: In most of our equipment lease cases the price components are well-known (e.g. vehicle leasing).• Property: Service parts are well-known in most of property leases. Corporate favors the separation of components to ensure

comparability. Amount and content of service components could differ significantly.• Assumption: Lessor community will ‘react’ on this IFRS 16 requirement.

September 8, 2017


Key conceptsLease term

39

• Non-cancellable periods are always part of the lease term

• Optional periods are only part of the term if it is “reasonably certain” that the option will be exercised

• “Reasonably certain” has the same meaning as in IAS 17

• Assessment criteria, e.g.:

• Price of options

• Termination penalities

• Leasehold improvements

• Other leases

• Reassessment of lease term required?

• Lessees – upon the occurrence of significant events or significant changes in circumstances withinthe lessee’s control

• Lessors – no requirement to reassess


Key conceptsLease payments

44

Lease payments

Fixed paymentsPurchase options*

(exercise price)Residual value

guaranteesTermination option

penalties*

Variable leasepayments that

depend on an indexor rate

• Fixed payments also include variable payments which are in-substance fixed, e.g.,

• Minimum payments or minimum purchase volumes

• Penalties for failure to meet minimum purchase volumes, minimum amounts, etc.

• For residual value guarantees, Lessees use the amounts they expect to pay. Lessors include any guarantee

* Include only if reasonably certain of exercise.


Key conceptsDiscount rate

• Discount rate:

• Rule: Interest rate implicit in the lease (IRR)

• If no IRR can be readily determined: Incremental borrowing rate (lessees only)

• IRR = interest rate at which:

• IBR = lessee’s incremental borrowing rate

• The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, thefunds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

• Lessees reassess the discount rate upon:• Lease modification

• Change to lease term

• Changes in estimation whether the lessee will exercise a purchase option

• Change in lease payments resulting from a change in floating interest rates

Present value of lease payments

+

Present value of residual value

Fair value of underlying asset

+

Initial direct costs=


*Only applicable if calculation can be performed directly in the IT solution. A separate calculation tool must be avoided.

IFRS 16 - Practical Expedients: Discount Rate


Our Concept:

• Information will be provided by Corporate Department Finance & Treasury• IT Tool: Data must be provided centrallyà Interest matrix by Corporate• Lease term congruenceàAdjustment based on yield-curves (Interpolation)• Country specific adjustments to the discount rate

Hierarchy:(1) If interest rate is explicitly defined by contract: Interest rate implicit in the lease(2) If interest rate is not explicitly defined but readily determinable: Best Estimate*(3) If interest rate of the contract can’t be readily determined: Continental’s incremental borrowing rate (Interest matrix)(4) If lease contract can’t be linked to interest matrix: Workaround Concept

September 8, 2017

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Key Lease Concepts




Special topicsSubleases

“Head lease”

Owner SublesseeLessee/sublessor

• Head lease (as lessee) and sublease (as lessor) are generally accounted for as two separate leases

• Underlying asset of the sublease: ROU asset

• Balance sheet presentation: No offsetting of lease assets and liabilities

• Income statement presentation: Intermediate lessors’ revenue is generally presented gross

• Additional disclosure requirements

“Sub lease”


45

Divisions=

Segments

Steering byOperating

assets

Materiality:Only single casesof interdivisional

leases

ICO leasesbases on‘Service

Agreements’Allocations à No

specific leasecontract

Profit Centerdistribution of

underlyingleased asset

Requirementsof IFRS 8

Holger Siebenthaler © Continental AG

IFRS 16 – Intercompany Leases

Leaseterm?

Leaserate?

Our concept:› No adjustment to our

management approach.

› Posting and consolidation logicsmust be on-hand.

› Interdivisional lease transactionsmust be analyzed in detail.

› Materiality determinations andimpact on our segment report

› Lease engine must support ICOleases

Tendency today:› Keep existing processes

› Be prepared in case ofchanges due to materiality

Sharing within a‚Zebra‘ is not a

lease.2 legal entitiesneeded for a

lease contract

September 8, 2017

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Key Lease Concepts




Effective date and transitionOverview

• Effective date: 1 January 2019 – earlier application is permitted if IFRS 15 is also applied

Transition requirements:

• Lessor: Continues to apply existing lease accounting

• Lessee:

• Existing finance leases:

• Generally continues to apply existing accounting (some exceptions, e.g. Index linked leases)

• Existing operating leases:

• Lessees are permitted to choose either full retrospective or modified retrospective approach

• Applied consistently across entire portfolio of former operating leases

• Definition of a lease in IFRIC 4 can be retained for existing leases


Effective date and transitionOverview of transition options

FY 18 and prior FY 19 FY 20 FY 21 onwardsReporting under IAS 17/IFRIC4

Befo

read

optio

n Reporting Legacy GAAP Legacy GAAP

Footnotes Legacy GAAP and IAS 8 disclosures

Full retrospective

Afte

rad

optio

n Reporting Legacy GAAP New GAAP New GAAP New GAAP

FootnotesIAS 8 Accounting Policies, Changes in Accounting

Estimates and ErrorsEnhanced

Enhanced

Modified retrospective

Afte

rad

op-

tion Reporting Legacy GAAP Legacy GAAP New GAAP New GAAP

Footnotes Enhanced Enhanced

Further details:► Either the fully retrospective or modified retrospective transition approach is selected, and is

applied to all leases► Under both options:

► There is no requirement to reassess on transition whether a contract contains a lease► Disclosures required in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors, with certain revisions► Entities would not reassess historical sale and leasebacks to determine whether a sale occurred in

accordance with IFRS 15


Effective date and transitionModified Retrospective transition approach

Modified Retrospective Approach

For existing operating leases

Practical ExpedientsRequirements

Adjust ROU asset for previously recognised onerous leaseprovisions, instead of impairment review

Exclude initial direct costs from the measurement of ROUasset

Use incremental borrowing rate as discount rate at date ofinitial application (1 October 2019)

No restatement of comparatives

Cumulative effect of adoption recognised in retainedearnings

Exemption for leases ending 12 months from the date ofinitial application

Modified Retrospective Approach B (“ModB”):

ROU asset = lease liability, plus adj.

Lease liability =

PV of remaining lease payments

Single discount rate can be used for portfolio of assets

Use hindsight, such as in determining the lease term if thecontract contains options to extend or terminate

Modified Retrospective Approach A (“ModA”):

ROU asset = as if standard always applied

Modified Retrospective Approach for existing finance leases:

Carry over existing balances at the date of initial application of the new standard, with the fixed asset balance being reclassified to a ROUasset. The asset and corresponding lease liability are then accounted for under IFRS 16 from the date of initial application

Choiceon a

lease-by-leasebasis


Year 1 2 3 4 5 6 7 8 9 10

Lease liabilityAsset recognized as if IFRS 16 from beginningAsset recognized at value of liability

In transition to IFRS 16 a lease asset can be recognized inthe B/S:

1. At the value of the corresponding liability

2. As if the contract had been considered underIFRS 16 since it’s commencement date. This optionwould result in a lower RoU Asset at the time of firstrecognition.

› Option 2 would trigger an investigation of each singleleasing contract. Especially property leasing contractsare expected to be complex and have a long history.

Decision: Option 1à Avoid high transition efforts andreduce complexity

IFRS 16 - Practical Expedients: Modified retro. transition method


Initialrecognition

September 8, 2017


IFRS 16 – KPIs & Reporting

51

Key figures Expectedeffect Explanation

B/S: Assets Operate Leasing is not applicable anymore for lessees. Almost all lease contracts have to beaccounted for on-balance à Additions for right of use assets (RoU-Assets).

B/S: Liabilities Corresponding Lease Liabilities for the present value of future lease payments have to be recognized.

Gearing ratio Net indebtednessEquity

Key figure is used to assess the financing structure. Lease Liabilities =Interest bearing financial liabilities = Part of net indebtedness

P&L: EBIT Interest expenses are shown below EBIT.

OperatingAssets

The assignment of RoU-Assets and of the Lease Liabilities to Operating Assets will be decided incourse of the ongoing project work.

ROCEEBIT /

(OAQ1+OAQ2+OAQ3+OAQ4)4

ROCE (return on capital employed) describes theeconomic efficiency of operations.

CVC (ROCE – WACC) * OA CVC (Continental Value Contribution) is the absolute amountof value achieved.


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IFRS 16 – Implementierung bei der Continental AG€¦ · International Financial Reporting Standards Der 16. IFRS Kongress 2017 in Berlin IFRS 16 – Implementierung bei der Continental