10.7 Leases

At the moment of concluding a contract, the Group assesses whether the arrangement is a lease or contains a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

At the lease commencement date, the Group recognises a right-of-use asset and a lease liability.

The Group applies uniform principles of recognition and measurement of all leases, except for short-term or low-value assets lease contracts, which have been described below.

The Group recognises right-of-use assets at the lease commencement date (i.e. the day when the underlying asset is available for use). Right-of-use assets are measured at cost less any accumulated depreciation and any accumulated impairment losses, adjusted for any remeasurement of the lease liability. The cost of the right-of-use assets covers the amount of the recognised lease liabilities, the initially incurred direct costs, and any lease payments made on or before the commencement date, less any lease incentives received. If the Group has no reasonable certainty that at the end of the lease term it will obtain the ownership of the leased item, the recognised right-of-use assets are depreciated on straight-line basis for over the shorter of the two terms: the estimated useful life or the lease term. The right-of-use assets are tested for impairment.

At the commencement date, the Group measures the lease liabilities at the present value of the lease payments due as at that date. Lease payments cover fixed payments (including basically fixed lease payments), less any lease incentives due and variable payments that are tied to an index or rate, which are expected to be payable under residual value guarantees. Lease payments include also the exercise price of the purchase option, if it is reasonably certain that the Group will exercise the option, as well as penalties payable for terminating the lease, if the lease terms provide for the possibility of the lease termination by the Group. Variable lease payments that are not tied to an index or rate are recognised as cost in the period when the event or condition resulting in payment occurs.

In the calculation of the present value of the lease payments, the Group applies the weighted average incremental borrowing rate of the lessee, as at the lease commencement date, if the interest rates implicit in the lease cannot be easily determined. After the commencement date the amount of lease liabilities is increased in order to reflect interest, and reduced for the lease payments made. Moreover, the carrying amount of lease liabilities is subject to remeasurement if the lease term changes, the substantially fixed lease payments are revised or the judgement regarding the purchase of underlying assets is adjusted.

The Group applies an exemption from recognising short-term leases in reference to its short-term lease contracts (i.e. lease contracts for 12 months or shorter of the commencement date, without purchase option), for example for plant and machinery. Further, the Group applies an exemption from recognising low-value assets lease contracts. Lease payments under short-term lease contracts or low-value-assets-lease contracts are recognised as costs on straight-line basis over the lease term.

Leases under which the Group retains substantially all the risks and rewards of ownership of the leased item are operating leases. The initial direct costs incurred in the course of negotiating operating leases are added to the carrying amount of the property, plant and equipment being the leased item and disclosed over the entire lease term on the same basis as the rental income. Conditional lease payments are recognised as revenue in the period when they become due.

The Group determines the lease term as irrevocable, jointly with the lease terms covered with the lease extension option, if it is reasonably certain that the option will be effected, as well as periods covered with the lease termination option, if it is reasonably certain that the option will not be effected. The Group applies judgement in estimating whether there is a sufficient certainty of availing of the extension option.

The Group avails of lease contracts concluded for unlimited terms and ones that transformed into contracts for unlimited term in the situations specified in the Civil Code, in which both parties have the option of termination. Determining the lease term, the Group specifies the period of the contract enforceability.

As regards lease contracts, for which the Group is not able to easily determine the interest rate, it applies incremental borrowing rate of the lessee. It is the interest rate the Group would have to pay to borrow funds in the same currency and with similar security, to finance an asset similar to the lease’s right-of-use asset in value, over a similar term and in a similar economic environment.