PPS Integrated Report 2021 151 | Group Accounting Policies In terms of IFRS, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: ~ fixed payments (including in-substance fixed payments), less any lease incentives receivable; ~ variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date; ~ amounts expected to be payable by the Group under residual value guarantees; ~ the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and ~ payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the Group: ~ where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received; ~ uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, which does not have recent third-party financing; and ~ makes adjustments specific to the lease, e.g. term, country, currency and security. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: ~ the amount of the initial measurement of lease liability; ~ any lease payments made at or before the commencement date less any lease incentives received; ~ any initial direct costs; and ~ restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. While the Group revalues its land and buildings that are presented within property, plant and equipment, it has chosen not to do so for the right-of-use buildings held by the Group. Payments associated with short-term leases of offices are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Leases for low value assets are expensed. Leases where a Group entity is the lessor Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Rental income from other property is classified part of other income.
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