The Group generally purchases its production-related buildings and equipment (see note 12). However, it also enters into lease contracts. Right-of-use assets relate to lease contracts that the Group has entered into as a lessee. The contracts mainly cover leases of assets such as office buildings, production-related buildings and equipment, warehouses and cars.

Impact of new IFRS standards

Upon the adoption of IFRS 16 Leases on 1 January 2019, an amount of €15.9 million relating to lease contracts that previously were accounted for as operating leases was recognised as right-of-use assets and will be depreciated over the remaining term of the respective lease contracts. At the same time, assets with a carrying amount of €27.6 million relating to lease contracts that were previously accounted for as finance leases were reclassified from PP&E to right-of-use assets. They continue to be depreciated over the same period. See further note 5.2.

Composition of right-of-use assets

(In € million)

 

Buildings

 

Plant and
equipment

 

Cars

 

Total

Carrying amount as of 1 January 2019

 

 

 

 

Initial effect of adopting IFRS 16

 

12.0

 

1.1

 

2.8

 

15.9

Reclassification from PP&E upon adoption of IFRS 16

 

14.3

 

13.3

 

 

27.6

Additions

 

2.0

 

10.1

 

2.3

 

14.4

Additions through business combination

 

0.9

 

0.5

 

0.1

 

1.5

Depreciation

 

(5.3)

 

(3.1)

 

(1.6)

 

(10.0)

Other adjustments

 

(0.2)

 

(0.5)

 

(0.3)

 

(1.0)

Effect of movements in exchange rates

 

0.4

 

0.2

 

 

0.6

Carrying amount as of 31 December 2019

 

24.1

 

21.6

 

3.3

 

49.0

The Group’s most significant lease is the 20 year lease contract entered into in 2018 relating to the SIG Tech Centre in China (approximately 60% of the carrying amount of leased buildings as of 31 December 2019). The lease term of other assets is most commonly in the range of three to five years.

Depreciation of right-of-use assets

Depreciation of right-of-use assets is recognised in the following components in the statement of profit or loss and other comprehensive income.

(In € million)

 

Year ended
31 Dec. 2019

 

Year ended
31 Dec. 2018

Cost of sales

 

5.8

 

Selling, marketing and distribution expenses

 

1.8

 

General and administrative expenses

 

2.4

 

Total depreciation

 

10.0

 

Lease commitments

In the year ended 31 December 2019, the Group signed a 20 year lease contract relating to a second sleeves manufacturing facility in China. The Group expects the lease of the facility to commence in early 2021. The Group has also signed a few lease contracts concerning mainly production equipment, with the leases expected to commence within the next year. The present value of the estimated future lease payments under these contracts approximates €74 million as of 31 December 2019.

Accounting policy

At the commencement date of lease, the Group recognises a lease liability and a related right-of-use asset. The accounting for lease liabilities is described in note 22.

The right-of-use asset represents the Group’s right to use the leased asset. A right-of-use asset is initially measured at cost, which in many cases will equal the amount recognised as a lease liability. However, adjustments are required for any lease payments made at or before the commencement date of the lease and any initial direct costs incurred. The cost also includes the estimated cost to dismantle and remove the leased asset, to restore it to the condition required under the lease contract or to restore the site on which it is located, to the extent such an amount is recognised as a provision.

Subsequent to initial recognition, a right-of-use asset is measured at cost less accumulated depreciation and impairment losses. A right-of-use asset is subsequently also adjusted for certain remeasurements of the related lease liability.

Right-of-use assets are depreciated on a straight-line basis from the commencement date of the lease over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.

As for PP&E, right-of-use assets are reviewed regularly and at least annually to identify whether there is an indication of impairment. If an impairment indicator exists, the asset’s recoverable amount is estimated. See note 5.5.3 for further details about impairment testing of non-financial assets.