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
Financial Reporting,Year-End 2015
Ihre Referenten
Holger SiebenthalerSenior Vice PresidentAccounting
Continental AGVahrenwalder Str. 9
30165 Hannover / Germany
Tel.: +49 (511) 938 1056
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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
PublicIFRS 16 Implementierung bei der Continental AG
Continental CorporationFive Strong Divisions
September 8, 20175Holger Siebenthaler © Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
Continental CorporationDistribution of Sales to Vehicle Manufacturers and Other Industries
September 8, 20176Holger Siebenthaler © Continental AG
Automotive originalequipment
Other industries
73%
27%
Status: December 31, 2016
PublicIFRS 16 Implementierung bei der Continental AG
Continental CorporationKey Figures for the Divisions in 2016
September 8, 20177Holger Siebenthaler © Continental AG
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.
PublicIFRS 16 Implementierung bei der Continental AG
Continental CorporationSales and Employees by Region in 2016
September 8, 20178Holger Siebenthaler © Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
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
September 8, 2017Holger Siebenthaler © Continental AG
PublicIFRS 16 Implementierung bei der Continental AG
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
September 8, 2017Holger Siebenthaler © Continental AG
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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
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
1316. IFRS Kongress 2017
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
1416. IFRS Kongress 2017
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)
1516. IFRS Kongress 2017
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
PublicIFRS 16 Implementierung bei der Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
18Holger Siebenthaler © Continental AG
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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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
2016. IFRS Kongress 2017
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???)
PublicIFRS 16 Implementierung bei der Continental AG
21Holger Siebenthaler © Continental AG
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
2216. IFRS Kongress 2017
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
2316. IFRS Kongress 2017
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
PublicIFRS 16 Implementierung bei der Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
25Holger Siebenthaler © Continental AG
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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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
2716. IFRS Kongress 2017
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
2816. IFRS Kongress 2017
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”
2916. IFRS Kongress 2017
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
PublicIFRS 16 Implementierung bei der Continental AG
30Holger Siebenthaler © Continental AG
› 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
PublicIFRS 16 Implementierung bei der Continental AG
IFRS 16 - Practical Expedients: Small-ticket Leases
31Holger Siebenthaler © Continental AG
› 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
PublicIFRS 16 Implementierung bei der Continental AG
32Holger Siebenthaler © Continental AG
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
PublicIFRS 16 Implementierung bei der Continental AG
33Holger Siebenthaler © Continental AG
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
3416. IFRS Kongress 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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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
3616. IFRS Kongress 2017
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
3716. IFRS Kongress 2017
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
PublicIFRS 16 Implementierung bei der Continental AG
IFRS 16 - Practical Expedients: Components
38Holger Siebenthaler © Continental AG
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
3916. IFRS Kongress 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
4016. IFRS Kongress 2017
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.
4116. IFRS Kongress 2017
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=
PublicIFRS 16 Implementierung bei der Continental AG
*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
42Holger Siebenthaler © Continental AG
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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Continental at a glance
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Project Overview
Identification of a Lease
Practical Expedients
Key Lease Concepts
Special Accounting Matters
Transition and Impact on KPI´s
4416. IFRS Kongress 2017
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”
PublicIFRS 16 Implementierung bei der Continental AG
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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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
4716. IFRS Kongress 2017
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
4816. IFRS Kongress 2017
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
4916. IFRS Kongress 2017
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
PublicIFRS 16 Implementierung bei der Continental AG
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
50Holger Siebenthaler © Continental AG
Initialrecognition
September 8, 2017
PublicIFRS 16 Implementierung bei der Continental AG
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.
September 8, 2017Holger Siebenthaler © Continental AG
Seite 52
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