JOTUN GROUP
23
11 Leases
Operating leases
Leases for which most of the risk and return associated with
the ownership of the asset have not been transferred to the
Jotun Group are classified as operating leases. Lease payments
are classified as operating expenses and recognised in the
consolidated income statement on a straight line basis over the
contract period.
Financial leases
Leases are classified as financial leases whenever the terms
of the lease transfer substantially all the risks and rewards of
ownership to the Jotun Group. Assets held under financial
leases are recognised as assets and depreciated over the shorter
of useful life or the lease term.
12 Financial instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments that are traded in active
markets at each reporting date is determined by reference to
quoted market prices or dealer price quotations (bid price for
long positions and ask price for short positions), without any
deduction for transaction costs. For financial instruments not
traded in an active market, the fair value is determined using
appropriate valuation techniques. Such techniques may include
using recent arm’s length market transactions, reference to the
current fair value of another instrument that is substantially
the same, a discounted cash flow analysis or other valuation
models. An analysis of fair values of financial instruments and
further details as to how they are measured are provided in note
12 and 13.
FINANCIAL ASSETS:
Initial recognition and measurement
Financial assets are classified at initial recognition and
subsequently measured at amortised cost or fair value
through profit or loss, correspondingly. The Group’s financial
assets include cash and short-term deposits, trade and other
receivables, loans and other receivables, quoted and unquoted
financial instruments and derivative financial instruments.
The classification of financial assets at initial recognition
depends on the financial asset’s contractual cash flow
characteristics and the Group’s business model for managing
them. Financial assets are initially measured at their fair value.
However, trade receivables that do not contain a significant
financing component or for which the Group has applied
the practical expedient are measured at the transaction price
determined under IFRS 15.
In order for a financial asset to be classified and measured
at amortised cost, it needs to give rise to cash flows that
are “Solely Payments of Principal and Interest” (SPPI) on the
principal amount outstanding. This assessment is referred to as
the SPPI test and is performed at an instrument level.
The Group’s business model for managing financial assets refers
to how it manages its financial assets in order to generate cash
flows. The business model determines whether cash flows will
result from collecting contractual cash flows, selling the financial
assets, or both.
Subsequent measurement
The subsequent measurement of financial assets depends on
their classification as follows:
Financial assets at amortised cost
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. After initial measurement, such financial assets are
subsequently measured at amortised cost using the effective
interest rate method (EIR), less impairment. Gains and losses
are recognised in the income statement when the assets are
derecognised, modified or impaired.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include
financial assets held for trading, financial assets designated
upon initial recognition at fair value through profit or loss
or financial assets mandatorily required to be measured at
fair value. Financial assets are classified as held for trading if
they are acquired for the purpose of selling or repurchasing
in the near term. This category includes derivative financial
instruments entered into by the Group that are not designated
as hedging instruments in hedge relationships as defined by
IFRS 9. Financial assets at fair value through profit and loss are
carried in the statement of financial position at fair value with
changes in fair value recognised in net financial items in the
consolidated income statement.
Derecognition
A financial asset, part of a financial asset or part of a group of
similar financial assets, is derecognised when:
• The rights to receive cash flows from the asset have expired
• The Group has transferred its rights to receive cash flows
from the asset or has assumed an obligation to pay the
received cash flows in full without material delay to a third
party under a ‘pass-through’ arrangement; and either (a) the
Group has transferred substantially all the risks and rewards
of the asset, or (b) the Group has neither transferred nor
retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.
Impairment of financial assets
Further disclosure relating to impairment of financial assets are
also provided in the following notes:
• Disclosure for significant assumptions, see note 1
• Trade and other receivables, see note 14
The Group recognises an allowance for Expected Credit Losses
(ECLs) for all debt instruments not held at fair value through
profit or loss. ECL are based on the difference between the
contractual cash flows due in accordance with the contract and
all the cash flows that the Group expects to receive, discounted
at an approximation of the original effective interest rate.
For trade receivables, the Group applies a simplified approach in
calculating ECLs. Therefore, the Group does not track changes
in credit risk, but instead recognises a loss allowance based on
lifetime ECLs at each reporting date.