Chapters
Annual Report 2019

12. Leases

Accounting policy

Accounting policy applied until 31 December 2018

Finance leases

Lease contracts whereby the risks and rewards associated with the ownership lie wholly or primarily with the lessee are classified as finance leases. The minimum lease payments are recognized partly as finance costs and partly as settlement of the outstanding liability. The finance costs are charged to each period in the total lease period to produce a constant, regular interest rate on the outstanding balance of the liability. The interest element is charged to the consolidated Income Statement over the lease period and recognized as finance costs.

The corresponding rental obligations, net of finance costs, are classified as current liabilities unless the Group has an unconditional right to postpone settlement of the liability for, or the liability is due to be settled at least 12 months after the balance sheet date.

Operating Lease commitments

The lease commitments relate mainly to the lease of the Group's own stores and leases for stores that are subleased to the Group's franchisees. Lease commitments also include leases for offices, warehouses, vehicles and equipment. The Group has the option, under some of its leases, to lease the assets for an additional period or to terminate early. Some of the Group's leases include a clause to increase the fixed minimum rental charge based on achieved revenue targets. The rental charge is also affected by changes in indexation.

The amounts in 2018 contain lease extension options which are legally not yet exercised, but for which management has assessed that it is reasonably certain that these options will be exercised by the Group in the future.

At 31 December 2018, the future aggregate minimum lease payments under non-cancellable operating leases were as follows:

in thousands of EUR

31 December 2018

Not later than 1 year

353,152

Later than 1 year and not later than 5 years

825,704

Later than 5 years

241,085

1,419,941

Accounting policy applied from 1 January 2019

Definition of a lease

The lease contracts relate mainly to the lease of the Group's own stores and leases for stores that are subleased to the Group's franchisees. Lease contracts also include leases for offices, warehouses, vehicles and equipment.

At the inception date of the contract, GrandVision assesses if it has the right to obtain substantially all of the economic benefits from use of the leased asset throughout the period of use in exchange for consideration; and if it can direct how the leased asset is used.

The following contracts are not considered to be a lease and shall be expensed to the consolidated Income Statement when incurred:

  • The contracts with rent payments, which are based on variables such as revenue, volume or traffic levels.
  • When a lessor has a substantive substitution right, for example the landlord can benefit by moving the store/corner or office during the lease contract, with only limited costs or efforts of the landlord, while GrandVision cannot prevent the landlord from moving the store.

Lessee Accounting

At the lease commencement date GrandVision recognises a right-of-use asset and a lease liability. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus key money paid when entering the lease and any other incremental costs of obtaining the lease.

Subsequently the cost of a right-of-use asset is depreciated using the straight-line basis to reduce the right-of-use asset's carrying value to its residual value over the shorter of its estimated useful life and the lease term (see also paragraph “Significant accounting estimates and judgments”). Right-of-use assets are adjusted for remeasurements of lease liabilities. Right-of-use assets are subject to regular impairment assessment and for annual impairment test purposes included in the carrying amount of relevant CGU, which represents a country or group of countries.

The residual value of right-of-use asset is assumed to be zero, except for initial costs Droit au Bail in France as these costs relate to the right to lease, which can be sold at the end of the lease term. These costs are treated as a separate component. The residual value is reviewed on a regular basis. The fair value is calculated by external valuators taking into account cost per square meter and latest similar transactions for the main shopping malls, which are publicly available. Changes in residual value are recognized in consolidated Income Statement.

The lease liability is initially measured at the present value of outstanding lease payments during the lease term, discounted using the incremental borrowing rate (see also paragraph “Significant accounting estimates and judgments”). The Group has elected to include both lease and non-lease components (e.g. fixed service costs) to the amount of lease liability.

The lease liability is subsequently measured at amortised cost using the effective interest method and is remeasured when there is a change in future lease payments arising, for example, from renegotiations of the lease contract, a change in an index, or if GrandVision changes its assessment of whether it will exercise extension or termination options (see also paragraph “Significant accounting estimates and judgments”). A corresponding adjustment is made to the carrying amount of the right-of-use asset, and excess over the carrying amount of the asset, if any, being recognised in the consolidated Income statement within occupancy costs.

At the end of the lease term or at early termination of the lease, the cost of the right-of-use asset, accumulated depreciation, and outstanding lease liability, are written-down with the difference, if any, recorded in the consolidated Income statement within other occupancy costs.

Short-term and low-value leases

The Group has elected that the lease payments associated with lease contracts with a term of 12 months or less and leases of low-value assets (individual value of below €5,000, when new, such as computer equipment or mobile phones) are recognized on a straight-line basis over the lease term.

Lessor accounting

The Group subleases some of its right-of-use assets to franchisees or third parties. When substantially all the risks and rewards transfer to the lessee, the sublease is classified as finance lease, otherwise the sub-lease is an operating lease.

When the sublease is classified as finance lease, the right-of-use asset in the head lease is de-recognized and a lease receivable is recognized. The lease receivable is initially measured at the present value of future lease receipts, which include both lease and non-lease components. Any difference on initial recognition of finance sublease is recorded in the consolidated Income statement within occupancy costs. Subsequently, the interest income and interest expense are accrued on the lease receivable and lease liability respectively applying the effective interest method. Rental income from operating subleases is recognised in the consolidated Income statement within other revenue.

Significant Accounting Estimates and Judgments

Lease term

The lease term comprises the non-cancellable period of a lease contract, plus periods covered by a reasonably certain renewal option and periods covered by a termination option, which are not reasonably certain to be exercised. GrandVision assesses whether it is reasonably certain to exercise renewal and termination options at lease commencement date and subsequently, if there is a change in circumstances. When determining the lease term only the options within control of GrandVision are considered.

When assessing renewal and termination options related to real estate leases, a distinction is made between new and existing locations, as well as between the stores based on their performance.

The lease term for a new store is the longest of the non-cancellable period with a minimum of 3 years. In addition, the Group considers the other circumstances, including recent leasehold improvements, local legislation, chain strategy, etc. and then decides if a different period is more appropriate.

Towards the end of the lease term the probability of exercising renewal or termination options is reconsidered based on business strategy, performance of the store and other considerations. In general, options are considered to be reasonably certain at the moment when the landlord is notified about the extension or termination. In case the contract has automatic renewal options, the remaining lease term is equal to the shortest possible extension of the lease, but is not less than 5 years for high performing stores or not less than 3 years for other stores.

The Group is reasonably certain not to exercise a termination option if the term with possible termination would become less than 5 years for high performing stores or less than 3 years for other stores.

The periods of 5 years for high performing stores and 3 years for new and other stores is determined considering Group practice and experience, developments in (optical) retail markets, real estate rental markets, regulations, economic environment and technology. These estimates are reassessed periodically. 

Discount rate

The Group uses incremental borrowing rates (IBR’s) as a discount rate, since the interest rate implicit in the lease contract generally cannot be readily determined for most of the leases in lease portfolio of the Group. The IBR is the rate that a lessee would pay to attract required funding to purchase the asset over a similar term, with a similar security and in a similar economic environment. In determining the IBR, the comparable uncontrolled price method was selected. The IBR is determined as the sum of a reference rate, credit risk premium and sovereign risk premium. The sovereign risk premium is based on the Credit Default Swaps’ market.

The calculation of IBR takes into account the currency of the lease contract, the lease term, type of leased assets, the country of the lessee and the credit rating of the lessee. The credit rating of the lessee is determined based on financial assessment, in which a scoring approach is applied to key financial ratios of the lessee.

The IBR’s are determined on a country by country basis with a distinction between the currency of the lease contract, as well as lease term. A single IBR is applied to a portfolio of leases, which are similar in nature and in lease term within a country.

The movements in the right-of -use assets are as follows:

in thousands of EUR

Notes

Buildings

Other

Total

At 1 January 2019

Cost

1,385,118

8,430

1,393,548

Accumulated depreciation and impairment

-

-

-

Carrying amount

1,385,118

8,430

1,393,548

Movements

Acquisitions

4

23,212

66

23,278

Additions

119,372

4,506

123,878

Reassessment/modification

251,054

97

251,151

Disposal

-846

-2

- 848

Depreciation charge

-349,818

-4,936

- 354,754

Impairment

-5,695

-

- 5,695

Exchange differences

12,366

30

12,396

At 31 December 2019

1,434,763

8,191

1,442,954

Cost

1,778,412

12,117

1,790,529

Accumulated depreciation and impairment

- 343,649

- 3,926

- 347,575

Carrying amount

1,434,763

8,191

1,442,954

The balance at 1 January 2019 represents initial recognition of right-of-use following adoption of IFRS 16, including amounts reclassified from other current and non-current assets and liabilities and related to key money and rental incentives. The residual value of right-of-use assets at end of December 2019 is €126,498.

In 2019, acquisitions relate mainly to McOptic in Switzerland.

The movements in the lease liabilities and financial lease receivables are as follows:

in thousands of EUR

Notes

Lease liabilities

Financial lease receivables

Non-current

461

-

Current

411

-

At 31 December 2018

872

-

Adjustment on initial application of IFRS 16:

Non-current

1,001,045

47,636

Current

361,608

17,257

At 1 January 2019

1,363,525

64,893

Acquisitions

4

20,506

-

Additions

127,304

9,911

Reassessment/modification

254,716

5,421

Payments/Receipts

- 400,492

- 16,717

Accrued interest

30,265

650

Exchange differences

14,747

12

At 31 December 2019

1,410,571

64,170

Non-current

1,037,293

48,090

Current

373,278

16,080

At 31 December 2019

1,410,571

64,170

The maturity of the lease liabilities is as follows:

in thousands of EUR

31 December 2019

31 December 2018

Within 1 year

373,278

411

1 - 2 years

310,831

230

2 - 5 years

536,867

231

After 5 years

189,595

-

Total

1,410,571

872

The future receipts from subleases are as follows:

in thousands of EUR

Notes

31 December 2019

31 December 2018

Finance subleases

Operating subleases

Total subleases

Within 1 year

16,243

910

16,954

1 - 2 years

13,982

709

14,798

2 - 3 years

11,719

570

12,819

3 - 4 years

9,314

492

10,000

4 - 5 years

6,163

295

7,224

After 5 years

7,602

447

11,120

Total undiscounted receipts

65,023

3,423

72,915

Unearned finance income

- 853

n.a

n.a

Finance lease receivables

16

64,170

n.a

n.a