YIT Oyj — Audit Report / Information 2019

Apr 18, 2019

IFRS 16 – adoption and accounting principles

Date of application and transition method

The company starts applying the standard on January 1, 2019. The company will apply the modified retrospective approach in transition and thus, the comparative figures will not be restated.

The table below presents relevant accounting policy decisions that YIT has initially made.

Relevant accounting policies Short description of the policy to be applied

Transition method	The company will apply the modified retrospective approach in transition. The
	lease liabilities are recognised based on the
	remaining lease payments discounted using
	incremental borrowing rates at the date of initial application.
Measurement of the right-of-use assets in transition	The company will measure the right-of-use assets at an amount equal to the
	lease liability (adjusted by the amount of any
	prepaid or accrued lease payments relating to that
	lease recognised in the statement of financial
	position immediately before the date of initial application).
Measurement and recognition exemption for leases	The company will not recognise leases, for which
for which the underlying asset is of low value	the underlying asset is of low
	value, in the balance sheet.
Measurement and recognition exemption for leases	The company will not recognise short-term leases
for which the underlying asset is of low value	in the balance sheet. Short -term leases are lease
	contracts that have a lease term of 12 months or
	less.

Description of practical expedients used in transition

• The company shall not reassess existing lease contracts but shall apply the guidance regarding the definition of a lease only to contracts entered into (or changed) on or after the date of initial application. This applies to both contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4 and those that were previously identified as leases in IAS 17 and IFRIC 4. This expedient it shall be applied to all of the company's contracts.
• The company shall apply a single discount rate for a portfolio of similar leases.
• The company shall rely on previous assessment made at the date of initial application as to whether a lease is onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent assets instead of performing an impairment review.
• The company shall exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.
• The company shall use hindsight for example in determining the lease period if the lease contract contains options to extend or terminate the contract.

Accounting principles

Lease agreements

The Group assesses whether an agreement is, or contains, a lease at the inception date of an agreement. An agreement, or a part of an agreement, is classified as a lease, when the underlying asset can be identified, the lessee has the right to obtain substantially all the economic benefits from the use of the asset and has the right to direct how and for what purpose the asset is used throughout the period of use.

The Group as a lessee

The Group's most significant lease agreements include plot lease agreements related to own building development in Finland and lease agreements related to buildings and structures and machinery and equipment.

If the agreement or part of the agreement is classified as a lease, the lease liability and right-of-use asset are recognised at the commencement date of an agreement. The commencement date is the date when the underlying asset is available for use by the lessee.

The Group recognises lease payments related to short-term leases (lease term is 12 months or less) and leases for which the underlying asset is of low value on straight-line basis as an expense in income statement.

Measurement and presentation of lease liability

Lease liabilities are measured by discounting expected future lease payments to present value. Lease payments include fixed lease payments (including in-substance fixed payments), expected amounts payable related to residual value guarantee and possible exercise price of purchase option, if the decision to use a purchase option is reasonably certain. If the Group is reasonably certain to exercise a termination option, the possible termination fee is included in the lease liability. Lease term is the non-cancellable period of the lease covered by options to terminate if the termination is not reasonably certain. Possible extension options are included in the lease term, if the Group is reasonably certain to exercise the options.

The lease payments are discounted using the interest rate implicit in the lease, if the rate is readily determinable. If the interest rate implicit in the lease is not readily determined, the Group uses incremental borrowing rate as a discount rate.

The lease liabilities are subsequently measured using effective interest rate method and the Group remeasures the carrying amount to reflect any re-assessments or lease modifications. Reassessment of the lease liability takes place, if the cash flow changes based on the original terms and conditions of the lease, for example, if the lease term changes or if the lease payments change based on an index or a variable rate.

Many of the Group's significant lease agreements include lease payments, which are tied to an index. Lease liability is initially measured using the index at the commencement day of the lease agreement. Future changes in the index are considered in the measurement when there is a change in the cash flow.

Reassessment of extension and termination options are done only when a significant event or change in circumstances occur, that is within the control of the Group and affects whether the Group is reasonably certain to exercise an option. The discount rate used in the reassessment varies based on the nature of the reassessment. For example, the reassessment due to an index change is done based on the original discount rate and reassessments due to the changes in the lease term is done using revised discount rate.

The lease liability is presented as a separate line item in the balance sheet as non-current and current liability.

Measurement and presentation of right-of-use asset

Right-of-use assets are measured at cost based on the amount of the initial measurement of lease liability. Initial direct costs, restoration costs or any lease payments made at or before the commencement date less any lease incentives received are also included in the measurement of the right-of-use asset. The right-ofuse assets are depreciated over the shorter of the lease term and the useful life of the asset, unless there is a transfer of ownership or a purchase option, which is reasonably certain to be exercised at the end of the lease term. Then the right-of-use asset is depreciated over the useful life of the underlying asset. Any remeasurements of the lease liability will be treated as a corresponding adjustment to the right-of-use asset.

Right-of-use assets related to tangible assets are presented on a separate line item in the balance sheet as leased property, plant and equipment. Right-of-use assets related to leased plots are presented on a separate line item in the balance sheet as leased inventory.

Treatment of plot lease agreements related to own building development

The Group has plot lease agreements related to own building development in Finland and in Russia. The plot lease agreements are presented in the balance sheet and income statement in a similar manner as the Group's own plots in inventory.

In Finland, the Group has own building development projects, where typically residential buildings are built either on to an owned or a leased plot. The plot lease agreements in Finland are typically long-term agreements, usually between 20-50 years. The leased plots related to own building development projects, as well as Group's own plots in inventory, form part of the performance obligation under the revenue recognition guidance to sell apartments to the customers. The leased plots related to own building development projects are initially measured according to measurement requirements of IFRS 16.

When the Group enters in Finland in the plot lease agreement related to own residential building development and the development project has not started, the right-of-use asset of the plot lease agreement is recognised in inventories and in the lease liability in the balance sheet. The plot lease agreement related to own building development will be derecognised from inventories under change in inventories when sale is recognized based on the revenue recognition policies of the Group.

The lease liability of plot lease agreements related to incomplete own residential building development projects in Finland is presented in the balance sheet either in lease liability or advances received depending on the degree of sale. The portion of the unsold apartments related to incomplete own residential building development projects is presented in lease liability in the balance sheet. The liability related to the sold apartments of incomplete own residential building development projects, is a non-cash consideration, and it is presented in advances received based on the underlying nature of the transaction. At the point of revenue recognition, the lease liability on the sold apartments will be recognised as revenue in income statement. The lease liability on completed unsold apartments is presented in lease liability in the balance sheet.

The Group as a lessor

The Group has subleased business premises it leases from third parties and these are treated as other lease agreements instead of finance leases. The classification is done with reference to the right-of-use asset of the original lease agreement. Rental income is recorded as income in the income statement during the lease period. The Group's activities as a lessor are not material.

Critical accounting estimates and judgements of Group Management

Significant management judgement related to lease agreements

The assessment of lease term and incremental borrowing rate have a significant impact on measurement of lease liabilities and right-of-use assets. When assessing the lease term, the Group will include the periods covered by extension options and termination options whether it's reasonably certain to exercise or not to exercise such an option. The Group considers, for example, contractual terms and conditions for optional periods or costs related to termination of lease and signing of new replacement. Overall, the Group is always considering the importance of a certain asset to its operations. Typically, the plot lease agreements related to own building development are in the Group's possession only for a short period of time. Considering the

Group's use of the of the plot lease agreements related to own building development, it can be assumed that the Group will not use possible termination, purchase or extension options. With office agreements the Group is considering the significance of the leasehold improvements and possible relocation costs.

If the lease term is indefinite, the Group assesses the period when the contract is enforceable to define what's the earliest point in time at which both parties (lessee and lessor) can leave the contract and its contractual obligations without no more than an insignificant penalty. As a significant penalty the Group considers not only direct penalty payments to lessor but also indirect or economic penalties for both parties. The Group considers the facts and circumstances mentioned above, including the nature of the leased asset in relation to the corresponding business plan, to assess when it will be reasonably certain to terminate the lease contract. The lease term is assessed accordingly. The Group's indefinite lease contracts are typically related to buildings and machinery and equipment.

In the definition of incremental borrowing rate, the Group has considered the nature of a leased asset, risk factors of the Group and geographical location, underlying currency and duration of an agreement.

Consolidated statement of financial position

		IFRS 16
EUR million	Dec 31, 2018	impact of adoption	Jan 1, 2019
ASSETS
Non-current asstes
Property, plant and equipment	202.3	-18.9	183.4
Leased property, plant and equipment		137.9	137.9
Goodwill	319.2		319.2
Other intangible assets	47.5		47.5
Investments in associated companies and joint
ventures	150.7		150.7
Equity investments	2.2		2.2
Interest-bearing receivables	50.3		50.3
Other receivables	2.3		2.3
Deffered tax assets	64.4		64.4
Non-current assets total	839.0	118.9	957.9
Current assets
Inventories	1,880.1		1,880.1
Leased inventories		187.4	187.4
Trade and other receivables	495.5		495.5
Interest-bearing receivables	14.8		14.8
Income tax receivables	1.8		1.8
Cash and equivalents	263.6		263.6
Current assets total	2,655.8	187.4	2,836.6
Total assets	3,494.8	306.3	3,801.1
EQUITY AND LIABILITIES
Total equity attributable to the equity holders of the
parent company	1,049.8		1,049.8 1,049.8
Equity total	1,049.8
Non-current liabilities			28.8
Deferred tax liabilities	28.8		2.6
Pension obligations	2.6
Provisions	82.2	-1.5	80.7
Borrowings	424.1	-9.5 245.5	414.6 245.5
Lease liabilities			52.2
Other liabilities	52.2	234.4	824.4
Total non-current liabilities	590.0
Current liabilities		13.8	752.9
Advances received	739.1		575.9
Trade and other payables	575.9
Income tax payables	19.5	-6.5	19.5 46.4
Provisions	53.0	-8.3	459.3
Borrowings	467.6
Lease liabilities		72.9	72.9
Total current liabilities	1,855.1	71.9	1,926.9
Liabilities total	2,445.0	306.3	2,751.3
Total equity and liabilities	3,494.8	306.3	3,801.1

Finance lease assets, related to previous IAS 17 standard, are transferred from property, plant and equipment to leased property, plant and equipment and related finance lease liabilities are transferred from borrowings to lease liabilities. In addition, onerous lease contracts related to right-of-use assets are transferred from provisions to leased property, plant and equipment line item.

Capital employed

EUR million	Housing Finland and CEE	Housing Russia	Business premises	Infrastructure projects	Paving	Partnership properties	Other items and eliminations	Group, IFRS
Capital employed Dec 31, 2018	584.9	294.3	38.2	83.0	123.7	145.0	332.1	1,601.2
IFRS 16 impact of adoption	170.8	13.0	6.4	7.2	31.7	0.0	71.5	300.6
Capital employed Jan 1, 2019	755.7	307.3	44.6	90.2	155.4	145.0	403.6	1,901.8

The most significant items increasing the capital employed are leased plots, leased property as well as machinery and equipment. Leased plots increase the capital employed by approximately EUR 190 million, leased properties by approximately EUR 90 million and machinery and equipment approximately by EUR 30 million.

Key figures

EUR million	Jan 1, 2019
Equity ratio, %	34.4
Adjusted equity ratio, %	38.6
Interest-bearing net debt	863.5
Adjusted interest-bearing net debt	545.1
Gearing ratio, %	82.3
Adjusted gearing ratio, %	51.9

The adoption of the IFRS 16 standard did not have an impact on the key figures for 2018.

Definitions of financial key performance indicators

Key figure	Definitions	Reason for use
Capital employed	Capital employed includes tangible and intangible assets, shares in associates and joint ventures, investments, inventories, trade receivables and other non-interest bearing receivables, provisions, advance payments and other non-interest bearing debts excluding items related to taxes, finance items and profit distribution.	Capital employed presents capital employed of segment's operative business.
Adjusted capital employed	Capital employed includes tangible and intangible assets less leased property, plant and equipment, shares in associates and joint ventures, investments, inventories less leased inventories, trade receivables and other non-interest bearing receivables, provisions, advance payments and other non-interest bearing debts excluding items related to taxes, finance items, profit distribution and IFRS 16 impact.	Adjusted capital employed improves comparability to previous years.
Interest-bearing debt	Non-current borrowings and current borrowings.	Interest-bearing debt is a key figure to measure YIT's total debt financing.
Adjusted interest bearing debt	Non-current borrowings less lease liabilities and current borrowings less lease liabilities.	Adjusted interest-bearing debt improves comparability to previous years.
Interest-bearing net debt	Interest-bearing debt less cash and cash equivalents and interest-bearing receivables.	Interest-bearing net debt is an indicator to measure YIT's net debt financing.
Adjusted interest bearing net debt	Adjusted interest-bearing debt less cash and cash equivalents and interest-bearing receivables.	Adjusted interest-bearing net debt improves comparability to previous years.
Equity ratio, %	Total equity / total assets less advances received.	Equity ratio is one of YIT's key longterm financial targets. It is a key figure to measure the relative proportion of equity used to finance YIT's assets.
Adjusted equity ratio, %	Total equity / total assets less advances received, leased property, plant and equipment and leased inventory.	Adjusted equity ratio improves comparability to previous years.
Gearing, %	Interest-bearing debt less cash and cash equivalents and interest-bearing receivables/total equity.	Gearing ratio helps to understand how much debt YIT is using to finance its assets relative to the value of its equity.
Adjusted gearing, %	Adjusted interest-bearing debt less cash and cash equivalents and interest-bearing receivables/total equity.	Adjusted gearing ratio improves comparability to previous years.