5.4 Leases
The Group has lease contracts for various assets
(land, buildings, machinery and equipment and
transport vehicles) used in its operations.
Transition to IFRS 16 Leases
The Group has applied the simplified transition
approach with no restatement of comparative
amounts for the year prior to first adoption.
Jotun has elected to use the following
exemptions proposed by the standard:
• Not to reconsider if existing contracts are, or
include, a lease
• Not to recognise lease contracts for which the
lease terms end within 12 months as of the
date of initial application, and lease contracts
for which the underlying asset is of low value
Liabilities are measured as the present value of
the remaining lease payments, discounted using
Jotun’s incremental borrowing rate as of
1 January 2019. The weighted average
incremental borrowing rate applied to the lease
liabilities on 1 January 2019 was 6.08 per cent.
Lease payments are allocated between the
liability and financial cost. The financial cost is
charged to the income statement over the lease
period in order to produce a constant periodic
rate of interest on the remaining balance of the
liability for each period.
Accounting policy
The Group assesses at contract inception
whether a contract is, or contains, a lease. That
is, if the contract includes a right to control the
use of an identified asset for a period of time in
exchange for a financial consideration.
The Group applies a single recognition and
measurement approach for all leases. The Group
recognises lease liabilities for payment obligations
for leases and right-of-use assets representing
the value of the right to use the underlying
assets.
Right-of-use assets
The Group recognises right-of-use assets at the
date the underlying asset is available for use.
Right-of-use assets are measured at cost, less any
accumulated depreciation and impairment losses,
and adjusted for any remeasurement of lease
liabilities. The cost of right-of-use assets includes
the amount of lease liabilities recognised, initial
direct costs incurred, and lease payments made
at or before the commencement date less any
lease incentives received. Right-of-use assets
are depreciated on a straight-line basis over
the shorter of the lease term and the estimated
useful lives of the assets. When assessing the
life of the leases, the Group considers the non-cancellable
lease term and options to extend the
lease where Jotun is reasonably certain to extend.
Extension options are assessed for all lease’s
premises. For other assets, the life Is equal to the
non-cancellable lease period and extensions are
not considered for these.
Right-of-use assets are also subject to
impairment, using the same method as for
Property, plant and equipment, see note 3.3.
Lease liabilities
At the commencement date of the lease, the
Group recognises lease liabilities measured at the
present value of lease payments to be made over
the lease term. The lease payments include fixed
payments (including in substance fixed payments)
less any lease incentives receivable, variable lease
payments that depend on an index or a rate,
and amounts expected to be paid under residual
value guarantees. The lease payments also
include the exercise price of a purchase option
reasonably certain to be exercised by the Group.
Variable lease payments that do not depend on
an index or a rate are recognised as operating
expenses in the period in which the event or
condition that triggers the payment occurs.
In calculating the present value of lease
payments, the Group uses its incremental
borrowing rate at the lease commencement
date because the interest rate implicit in the
lease is not readily determinable. After the
commencement date, the amount of lease
liabilities is increased to reflect the accretion
of interest and reduced for the lease payments
made. In addition, the carrying amount of lease
liabilities is remeasured if there is a modification,
a change in the lease term or a change in the
lease payments. The Group’s lease liabilities are
included in interest-bearing debt, see Note 4.1.
Short-term leases and leases of low-value
assets
The Group applies the short-term lease
recognition exemption to all short-term leases,
which are leases that have a lease term of 12
months or less from the commencement date.
It also applies the lease of low-value assets
recognition exemption to leases of office
equipment that are considered to be low value.
Lease payments on short-term leases and leases
of low-value assets are recognised as expense on
a straight-line basis over the lease term.
Cash flow
The Group has classified the principle portion of
lease payments within financing activities and the
interest portion within operating activities in the
statement of cash flow.
Estimate and judgement
The Group cannot readily determine the interest
rate implicit in the lease, therefore, it uses its
incremental borrowing rate (IBR) to measure
lease liabilities. The IBR is the rate of interest
that the Group would have to pay to borrow
over a similar term, and with a similar security,
the funds necessary to obtain an asset of a
similar value to the right-of-use asset in a similar
economic environment. The IBR therefore reflects
what the Group ‘would have to pay’, which
requires estimation when no observable rates
are available (such as for subsidiaries that do
not enter into financing transactions) or when
they need to be adjusted to reflect the terms
and conditions of the lease (for example, when
leases are not in the subsidiary’s functional
currency). The Group estimates the IBR using
observable inputs (such as market interest rates)
when available and is required to make certain
entity-specific estimates (such as the subsidiary’s
stand-alone credit rating).
Back to Notes for the Group
JOTUN GROUP
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