Galenica - Annual report 2022

15. Leases

Right-of-use assets

in thousand CHF	Real estate	Vehicles	Total right-of-use assets
Net carrying amount as at 31.12.2020	210,074	251	210,325
Addition	27,954	83	28,037
Reassessment of existing lease contracts	20,341	–	20,341
Depreciation	–49,012	–190	–49,202
Impairment	–22	–	–22
Addition to scope of consolidation	5,904	117	6,021
Translation differences	–	–4	–4
Net carrying amount as at 31.12.2021	215,239	257	215,496
Addition	23,456	76	23,533
Reassessment of existing lease contracts	35,497	12	35,509
Depreciation	–51,059	–197	–51,255
Impairment	–1,644	–	–1,644
Reversal of impairment	1,492	–	1,492
Addition to scope of consolidation	3,951	52	4,002
Disposal from scope of consolidation	–444	–	–444
Translation differences	–	–4	–4
Net carrying amount as at 31.12.2022	226,489	196	226,685

Lease liabilities

in thousand CHF	2022	2021
Net carrying amount as at 1 January	223,051	218,001
Addition	23,533	28,630
Reassessment of existing lease contracts	35,509	20,341
Interest expense on lease liabilities	2,455	2,298
Repayment of lease liabilities (including interest)	–54,914	–52,237
Addition to scope of consolidation	4,002	6,021
Disposal from scope of consolidation	–455	–
Translation differences	–4	–4
Net carrying amount as at 31 December	233,178	223,051
– of which current lease liabilities	50,173	49,717
– of which non-current lease liabilities	183,005	173,334

Leases recognised in profit or loss

in thousand CHF	2022	2021
Rental income from operating leases (included in other income)	1,805	1,818
Short-term lease expense (included in other operating costs)	–1,154	–1,325
Low-value lease expense (included in other operating costs)	–17	–36
Variable lease expense (included in other operating costs)	–4,002	–3,685
Depreciation of right-of-use assets	–51,255	–49,202
Impairment of right-of-use assets	–1,644	–22
Reversal of impairment of right-of-use assets	1,492	–
Interest expense on lease liabilities	–2,455	–2,298

The total cash outflow for leases including short-term leases, leases of low-value-assets and variable lease expenses was CHF 60.1 million (previous year: CHF 57.3 million).

Maturity profile of undiscounted lease liabilities

in thousand CHF	2022	2021
Up to 3 months	13,371	13,279
In 3 to 12 months	39,339	38,441
In 2 years	45,869	45,327
In 3 years	37,945	36,024
In 4 to 5 years	54,879	49,171
In 6 to 10 years	45,534	43,103
In more than 10 years	5,303	5,782
Total future cash flows from undiscounted lease liabilities	242,240	231,127

Possible future cash outflows related to extension options in an amount of CHF 183.1 million (previous year: CHF 163.2 million) are not included in lease liabilities because it is not reasonably certain that these options will be exercised.

The cash outflows for variable lease expenses in 2023 is expected to be similar to the amount recognised in 2022.

Galenica has entered into various lease contracts that have not yet commenced as at 31 December 2022. The future lease payments for these non-cancellable lease contracts amount to CHF 38.9 million (previous year: CHF 39.6 million).

Accounting principles leases

A lease is a contract in which the right to use an asset (the underlying asset) is granted for an agreed-upon period in return for consideration. Galenica has lease contracts for vehicles and a large number of contracts for real estate, mainly store locations, which include fixed rental payments and variable sales-based components. The significant majority of these lease contracts concerns locations of the pharmacies in the operating segment Products & Care.

Galenica determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain at inception of the contract to be exercised. Galenica has the option, under some of its leases, to lease the assets for additional terms of several (three, five or more) years. Galenica applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. In doing so, Galenica considers all relevant factors including economic incentives. Galenica reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise, or not to exercise, the option to renew (e.g. a change in business strategy of the underlying asset).

At the commencement date right-of-use assets are capitalised at a value equivalent to the lease liability, plus initial direct costs and lease payments made before the commencement date, less any lease incentives received.

Galenica uses the recognition exemptions for lease contracts that have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).

The lease liability represents the net present value of fixed or in substance fixed lease payments over the lease term. Lease liabilities are discounted using the incremental borrowing rate if the rate implicit in the lease is not readily determinable. Non-lease components are not included in the lease liabilities and are accounted for in accordance with applicable standards. The interest charge is presented as interest expense on lease liabilities.

Right-of-use assets are depreciated over the shorter of the useful life of the right-of-use asset or the lease term.

Right-of-use assets are tested for impairment whenever there are indications that they could be impaired. Any impairment is recognised in profit or loss under depreciation and amortisation and disclosed separately as an impairment. Reversal of impairments on right-of-use assets are recognised immediately in profit or loss.