Note 22 – Leases

Accounting principle

Leased tangible assets were classified either as finance or operating leases until the end of the 2018 financial year, see Note 2.2.1 for more information. As of January 1, 2019, leases are recognized as right-of-use assets and financial liabilities in the balance sheet.

Duni leases several offices, warehouses, machines, forklifts and cars. The leases are normally signed for binding terms between 2 and 8 years, but there may be an option to extend. The leases may include both lease and non-lease components. The Group allocates the remuneration of the contract to lease and non-lease components based on their relative independent prices. However, for lease payments relating to properties for which the Group is a tenant, the Group has opted not to separate lease and non-lease components, instead recognizing these as a single lease component. The terms and conditions are negotiated separately for each contract and have many different provisions. The leases do not contain any special conditions or restrictions expect that the lessor retains the rights to pledged leased assets. The leased assets cannot be used as collateral for loans.

Assets and liabilities that arise from leases are initially recognized at present value. Lease liabilities include the present value of the following lease payments:

• fixed payments or deductions for any benefits associated with signing the lease, variable lease payments that are based on an index or a price
• amounts expected to be paid by the lessee as per residual value guarantees
• the redemption price for a purchase option if the Group is reasonably certain it will exercise this option
• penalties due upon termination of the lease, if the lease term indicates that the Group will exercise an option to terminate the lease.

Lease payments that will be made for reasonably certain extension options are also included in the measurement of the liability.

The leases payments are discounted using the lease’s implicit interest rate. If this interest rate cannot be established easily, which is normally the case for the Group’s leases, the lessee’s incremental borrowing rate will be used, which is the interest rate that the individual lessee would pay for borrowing the funds required to purchase an asset similar in value to the right of use in a similar economic environment with similar terms and collateral.

Duni sets the incremental borrowing rate for new contracts as follows:

Duni’s current borrowing rate including maturity premiums and adjustments for the internal borrowing margin (corresponding to adjustments for the specific terms and conditions of the contract such as the lease term, country, currency and collateral).

The Group is exposed to any future increases in variable lease payments based on an index or interest rate that are not included in the lease liability until they occur. When adjustments of lease payments based on an index or interest rate occur, the lease liability is remeasured and adjusted to the right of use.

The lease payments are distributed between principal repayment and interest. The interest is recognized in the income statement over the term of the lease in a way that results in a fixed interest rate for the lease liability recognized in the respective period.

The assets with a right of use are measured at cost and include the following:

• the amount the lease liability was originally measured at
• lease payments paid at or before the start date, less any benefits received upon signing the lease
• initial direct expenses
• expenses for restoring the asset to the condition stipulated in the lease terms and conditions.

Rights of use are normally amortized on a straight-line basis over the shorter of the useful life and lease term. If the Group is reasonably certain it will exercise a purchase option, the right of use is amortized over the useful life of the underlying asset.

Payments for short contracts for equipment and vehicles and all low-value leases are recognized as an expense on a straight-line basis in the income statement. Short contracts are leases with a lease term of 12 months or less. Low-value leases include IT equipment and minor office equipment. Low value is defined as below USD 5 thousand.

As per RFR 2, the rules of IFRS 16 do not need to be applied in legal entities. In such cases, a company that is the lessee shall recognize lease payments as an expense on a straight-line basis over the term of the lease. The right of use and lease liability shall thus not be recognized in the balance sheet. Duni AB has chosen to apply the exemption in RFR 2 and leases will therefore be classified as operating leases in the Parent Company going forward.

Significant estimates and judgments

Upon recognition of leases under IFRS 16, estimates and assumptions must be used. The two most significant are the judgments of the lease term’s length and what discount rate will be used.

Establishing the lease’s length, management considers all information available that provides an economic incentive to exercise an extension option, or to not exercise an option to terminate a lease. Options to extend a lease are only included in the lease’s length if it is reasonably certain that the lease will be extended (or not terminated). Individual assessments on extensions are made regularly, lease by lease.

For leases for warehouses, offices and equipment, the following factors are normally the most significant:

• If the leases have significant fees for termination (or not extend them), the Group normally estimates that it is reasonably certain that they will be extended (or not terminated).
• If the Group has leasehold improvements and expects that they have a significant residual value, it is usually reasonably certain that the leases will be extended (or not terminated).
• In other respects, the Group takes into account other factors, including historical lease terms, and the expenses and business disruptions required to replace the leased asset.

The majority of extension options for leases of offices and vehicles have not been included in the lease liability because the Group can replace these assets without significant expenses or business disruptions.

The lease term is reassessed if an option is exercised (or not exercised) or if the Group is forced to exercise the option (or not exercise it). The judgment that it is reasonably certain is only reassessed if some significant event or change in circumstances occurs that impacts this judgment and the change is within the control of the lessee. There was no need for any such reassessment during the financial year.