G5. Changes due to new accounting rules

IFRS 16 Leases

When the new standard came into effect on January 1, 2019, Essity chose to apply the modified retrospective approach, entailing an adjustment of the opening balance with the cumulative effect of initially applying the standard on the first date of initial application. Comparative years were not be restated. Upon transition on January 1, 2019, the lease liability was measured at the outstanding lease payments during the remaining lease term and the right-of-use asset for all leases totaled an amount corresponding to the lease liability, adjusted for any prepaid lease payments and accrued lease payments recognized on December 31, 2018. For onerous leases, Essity has chosen to apply the simplification rule to adjust the value of the right-of-use asset downward in an amount that in the 2018 year-end accounts was recognized as non-current and current provisions relating to onerous leases in accordance with IAS 37. This practical solution was chosen as an alternative to performing impairment testing in conjunction with the transition to IFRS 16. Only marginal reclassifications took place concerning provisions for onerous leases and accrued and prepaid lease payments. An incremental borrowing rate has been set by currency. The average incremental borrowing rate on January 1, 2019 was approximately 3%. The transition did not have any impact on equity.

Essity has decided to apply the exemption rules for short-term leases and leases where the underlying asset has a low value. These leases are not included in the right-of-use asset or the lease liability. In its application of the standard, Essity has determined that a time horizon of five years can generally be applied to leases of offices and distribution centers with no fixed end date even if the formal lease term is shorter.

When the standard became effective on January 1, 2019, the following adjustments were recognized in Essity’s balance sheet.

The preliminary adjustments in Essity’s balance sheet attributable to the transition to IFRS 16 Leases were published in the Annual and Sustainability Report 2018. During the first quarter of 2019, new information emerged concerning a number of leases which led to an increase in the preliminary opening balance pertaining to right-of-use assets from SEK 3,694m to SEK 3,781m and lease liability increased from SEK 3,684m to SEK 3,786m.