International Consolidated Airlines : IAG IFRS 16 financial statements impacts 2018

IFRS 16 - Financial statements impacts

17 April 2019

IFRS 16 - Financial statements impacts

This presentation contains a summary of the impacts of IFRS 16 on IAG's financial statements for 2018

•IAG applies the new accounting standard IFRS 16 'Leases' from 1 January 2019.

•This presentation contains a summary of the impacts of IFRS 16 on IAG's financial statements for 2018

•Preliminary balance sheet - impact on adoption of IFRS 16 on 1 January 2019 (also in 2018 IAG Annual Report and Accounts, note 33)

•Pro-formaincome statement for 2018

•Pro-formacash flow statement for 2018

•Pro-formaquarterly income statements for 2018

•The information has not been audited, apart from the preliminary balance sheet on adoption of IFRS 16 at 1 January 2019.

•For 2018,pro-formapre-exceptional operating profit under IFRS 16 is higher than reported operating profit but pre-exceptional PBT is slightly lower due to right of use depreciation plus lease finance cost being higher than reported lease rental costs. There is no impact on net cash flow.

•In 2019, we intend to publish quarterly and full yearpro-forma income statements for 2018 alongside statutory information.

•We intend to provide further information on the impacts of IFRS 16 on our KPI definitions, including Return on Invested Capital (RoIC) and Equity Free Cash Flow (EqFCF), at 1Q 2019 results.

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IFRS 16 'Leases' has been adopted from 1 January, 2019

The new standard eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model. We have adopted the modified retrospective transition method which does not permit the restatement of the statutory comparator information (the 2018 income statement, balance sheet and cash flow statement). IAG has prepared a quarterly and full year pro-forma income statement for 2018 which it intends to publish alongside its statutory information.

•The Group has a number of operating leases for assets including aircraft, property and other equipment.

•The main changes arising on the adoption of IFRS 16 will be as follows:

1)Interest-bearingborrowings and non-current assets will increase on implementation of the standard as obligations to make future payments under leases currently classified as operating leases will be recognised on the Balance sheet at their discounted present value, along with the related 'right-of-use' (ROU) asset. The Group has opted to use the practical expedients in respect of leases of less than 12 months duration and leases for low value items and excluded them from the scope of IFRS 16. Rental payments associated with these leases will continue to be recognised in the Income statement on a straight-line basis over the life of the lease.

2)There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense.

3)The adoption of IFRS 16 has required the Group to make a number of judgements, estimates and assumptions. These include:

•The approach to be adopted on transition

•The estimated lease term

•The discount rate used to determine the present value of the lease liability

•Terminal arrangements

•Restoration obligations

4)For future reporting periods after adoption, foreign exchange movements on lease obligations, which are predominantly denominated in US dollars, will be remeasured at each balance sheet date, however the ROU asset will be recognised at the historic exchange rate. This will create volatility in the Income statement. The Group intends to manage this volatility as part of its risk management strategy.

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IFRS 16 - Impact of adoption on preliminary balance sheet

Operating leases recognised on the balance sheet in the form of a right of use (ROU) asset (aircraft, property and equipment) and associated debt

Consolidated balance sheet 2018 (€m)	2018 as	IFRS 16	Restated for	Notes
	reported	Impact	IFRS 16
Non-current assets
Fleet	10,790	3,730	14,520	Addition of right of use aircraft assets (around 280 out of 573 aircraft)
Property and equipment	1,647	755	2,402	Addition of right of use property and equipment assets
Deferred tax assets	536	130	666
Other non-current assets	4,968	-	4,968
Current assets
Other current assets	10,093	(35)	10,058	Decrease in other current assets (lease prepayments)
Total assets	28,034	4,580	32,614
Total equity	6,720	(550)	6,170	Reduction in equity due to discounted ROU liabilities more than depreciated ROU
				assets
Non-current liabilities
Interest-bearing long term borrowings	6,633	4,315	10,948	Addition of right of use liabilities due after one year (discounted at incremental
				borrowing rate)
Deferred tax liability	453	(40)	413
Provisions for liabilities and charges	2,268	120	2,388	Increase in restoration and handback provisions
Other non-current liabilities	910	(125)	785	Decrease in other non-current liabilities (deferred income on sale and leasebacks)
Current liabilities
Current portion of long term borrowings	876	880	1,756	Addition of right of use liabilities due within one year
Other current liabilities	10,174	(20)	10,154
Total liabilities	21,314	5,130	26,444
Total equity and liabilities	28,034	4,580	32,614
As reported in the 2018 IAG Annual Report and Accounts (note 33)				4	4

IFRS 16 - Pro-forma income statement before exceptional items

Increase in operating profit offset by increase in finance cost; impact on PBT slightly negative overall but in future subject to revaluation of ROU liabilities and related hedges due to currency

Consolidated income statement 2018 (€m)	2018 as	IFRS 16	Adjusted for	Notes
	reported	Impact	IFRS 16
Total revenue	24,406	-	24,406
Employee costs	4,812	-	4,812
Fuel, oil costs and emissions charges	5,283	-	5,283
Other supplier costs	8,019	22	8,041	Mainly wet lease costs, offset by reduction in maintenance provisions.
Property, IT and other costs	918	(129)	789	Property and non-aircraft operating lease rentals recognised as depreciation and
				lease finance costs
EBITDAR	5,374	107	5,481	Increase in EBITDAR following reclassification of property and non-aircraft rentals
Aircraft operating lease costs	890	(890)	-	Aircraft operating lease rentals recognised as depreciation and lease finance costs
EBITDA	4,484	997	5,481
Depreciation, amortisation and impairment	1,254	742	1,996	Aircraft ROU depreciation (€634m) and property and non-aircraft ROU depreciation
				(€108m)
Operating profit	3,230	255	3,485
Net non-operating costs	(191)	(330)	(521)	Aircraft lease finance cost (€294m) and property and non-aircraft lease finance cost
				(€36m)
Revaluation of ROU lease liabilities2	-	-	-	Change in mark-to-market value of ROU liabilities (mainly in US dollars)
Gains/(losses) on hedges2	-	-	-	Change in mark-to-market value of hedges related to ROU liabilities
				PBT slightly negative overall due to relatively young lease portfolio (relatively high
Profit before tax (before exceptional items)	3,039	(75)	2,964	lease finance cost). Reported PBT will vary due to revaluation of ROU obligations
				and gains/(losses) on hedge accounting
Tax	(558)	16	(542)
Profit after tax (before exceptional items)	2,481	(59)	2,422

1.	Adjustments have been translated at the actual quarterly exchange rates.	5	5
2.	USD ROU lease liabilities and related hedges not retranslated in 2018 pro-forma.