2 accounting policy developments

(a) Initial application of standards, interpretations and amendments to standards and interpretations in the reporting period

In January 2016, the International Accounting Standards Board released IFRS 16, Leases, which is required to be applied for years beginning on or after January 1, 2019, and which supersedes IAS 17, Leases. The International Accounting Standards Board and the Financial Accounting Standards Board of the United States worked together to modify the accounting for leases, generally by eliminating lessees’ classification of leases as either operating leases or finance leases and, for IFRS-IASB, introducing a single lessee accounting model.

The most significant effect of the new standard is the lessee’s recognition of the initial present value of unavoidable future lease payments as right-of-use lease assets and lease liabilities on the statement of financial position, including those for most leases that would previously have been accounted for as operating leases. Both leases with durations of 12 months or less and leases for low-value assets may be exempted.

The measurement of the total lease expense over the term of a lease is unaffected by the new standard. However, the new standard results in an acceleration of the timing of lease expense recognition for leases that would previously have been accounted for as operating leases; the International Accounting Standards Board expects that this effect may be muted by a lessee having a portfolio of leases with varying maturities and lengths of term, and we expect that we will be similarly affected. The presentation on the statement of income and other comprehensive income required by the new standard results in the presentation of most non-executory lease expenses as depreciation of right-of-use lease assets and financing costs arising from lease liabilities, rather than as a part of goods and services purchased (executory lease expenses remain a part of goods and services purchased); reported operating income is thus higher under the new standard.

Relative to the results of applying the previous standard, although actual cash flows are unaffected (but certain operating metrics are), the lessee’s statement of cash flows reflects increases in cash flows from operating activities offset equally by decreases in cash flows from financing activities. This is the result of the presentation of the payments of the “principal” component of leases, which were previously accounted for as operating leases, as a cash flow use within financing activities under the new standard.

We have applied the standard retrospectively, with the cumulative effect of the initial application of the new standard recognized at the date of initial application, January 1, 2019, subject to permitted and elected practical expedients; such method of application does not result in the retrospective adjustment of amounts reported for periods prior to fiscal 2019. The nature of the transition method selected is such that the lease population as at January 1, 2019, and the discount rates determined contemporaneously, serve as the basis for the cumulative effects recorded as of that date.

Implementation

As a transitional practical expedient permitted by the new standard, we have not reassessed whether contracts are, or contained, leases as at January 1, 2019, applying the criteria of the new standard; as at January 1, 2019, only contracts that were previously identified as leases applying IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement contains a Lease, are a part of the transition to the new standard. Only contracts entered into (or changed) after December 31, 2018, have been assessed for being, or containing, leases applying the criteria of the new standard.

The weighted average discount rate reflected in the lease liability recognized on transition was 4.16%. The difference between the total of the minimum lease payments set out in Note 19 of our consolidated financial statements for the year ended December 31, 2018, and the additions to long-term debt set out in (c) following arises because of the effect of discounting the minimum lease payments (approximately two-thirds of the difference) and because the minimum lease payments set out in Note 19 of our consolidated financial statements for the year ended December 31, 2018, include payments for leases that have commencement dates subsequent to December 31, 2018 (approximately one-third of the difference).

The new standard requires a number of incremental recurring disclosures, as well as setting out how those disclosures are to be made; we have made these disclosures, or incorporated them by cross-reference from other notes to the financial statements, in Note 19.

(b) Standards, interpretations and amendments to standards not yet effective and not yet applied

In October 2018, the International Accounting Standards Board amended IFRS 3, Business Combinations, seeking to clarify whether an acquisition transaction results in the acquisition of an asset or the acquisition of a business. The amendments are effective for acquisition transactions on or after January 1, 2020, although earlier application is permitted. The amended standard has a narrower definition of a business, which could result in the recognition of fewer business combinations than under the current standard; the implication of this is that amounts which may have been recognized as goodwill in a business combination under the current standard may now be recognized as allocations to net identifiable assets acquired under the amended standard (with an associated effect in an entity’s results of operations that would differ from the effect of goodwill having been recognized). We are currently assessing the impacts and transition provisions of the amended standard; however, we expect that we will apply the standard prospectively from January 1, 2020. The effects, if any, of the amended standard on our financial performance and disclosure will be dependent on the facts and circumstances of any future acquisition transactions.

IFRS 16, Leases, affected our Consolidated statement of income and other comprehensive income as follows:


		Excluding
		effects of		IFRS 16		As currently
Year ended December 31, 2019 (millions except per share amounts)	Note	IFRS 16		effects		reported
Operating revenues		$	14,656	$	2	$	14,658
Operating expenses
Goods and services purchased			6,369		(299)		6,070
Employee benefits expense			3,034		—		3,034
Depreciation			1,742		187		1,929
Amortization of intangible assets			648		—		648
			11,793		(112)		11,681
Operating income			2,863		114		2,977
Financing costs			669		64		733
Income before income taxes			2,194		50		2,244
Income taxes			455		13		468
Net income			1,739		37		1,776
Other comprehensive income
Cumulative foreign currency translation adjustment			15		5		20
Other			(242)		—		(242)
			(227)		5		(222)
Comprehensive income		$	1,512	$	42	$	1,554
Net income attributable to:
Common Shares		$	1,708	$	38	$	1,746
Non-controlling interests			31		(1)		30
		$	1,739	$	37	$	1,776
Comprehensive income attributable to:
Common Shares		$	1,475	$	41	$	1,516
Non-controlling interests			37		1		38
		$	1,512	$	42	$	1,554
Net income per Common Share	28(b)
Basic		$	2.84	$	0.06	$	2.90
Diluted		$	2.84	$	0.06	$	2.90

IFRS 16, Leases, affected our opening January 1, 2019, Consolidated statement of financial position as follows:


		Excluding
		effects of		IFRS 16		As currently
As at January 1, 2019 (millions)	Note	IFRS 16		effects		reported
Current assets
Prepaid expenses		$	539	$	12	$	551
Non-current assets
Property, plant and equipment, net	17	$	12,091	$	1,041	$	13,132
Current liabilities
Accounts payable and accrued liabilities		$	2,570	$	(6)	$	2,564
Provisions		$	129	$	(9)	$	120
Current maturities of long-term debt		$	836	$	180	$	1,016
Non-current liabilities
Provisions	25	$	728	$	(48)	$	680
Long-term debt		$	13,265	$	1,201	$	14,466
Other long-term liabilities		$	731	$	(50)	$	681
Deferred income taxes		$	3,148	$	(53)	$	3,095
Owners’ equity
Retained earnings		$	4,474	$	(153)	$	4,321
Accumulated other comprehensive income – cumulative foreign currency translation adjustment	11	$	12	$	(1)	$	11
Non-controlling interests		$	82	$	(8)	$	74

IFRS 16, Leases, affected our Consolidated statement of cash flows as follows:


	Excluding
	effects of		IFRS 16		As currently
Year ended December 31, 2019 (millions)	IFRS 16		effects		reported
OPERATING ACTIVITIES
Net income	$	1,739	$	37	$	1,776
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		2,390		187		2,577
Deferred income taxes		102		13		115
All other operating activities line items		(540)		(1)		(541)
Cash provided by operating activities		3,691		236		3,927
INVESTING ACTIVITIES
Cash used by investing activities		(5,044)		—		(5,044)
FINANCING ACTIVITIES
Redemptions and repayment of long-term debt		(5,025)		(236)		(5,261)
All other financing activities line items		6,499		—		6,499
Cash provided (used) by financing activities		1,474		(236)		1,238
CASH POSITION
Increase (decrease) in cash and temporary investments, net	$	121	$	—	$	121
SUPPLEMENTAL DISCLOSURE OF OPERATING CASH FLOWS
Interest paid	$	(645)	$	(69)	$	(714)

IFRS 16, Leases, affected certain of our capital management measures (see Note 3) as follows:


	Excluding				As currently
	effects of		IFRS 16		reported
As at,or for the 12-month period ended December 31, 2019 ($ in billions)	IFRS 16		effects		(Note 3)
Components of debt and coverage ratios
Net debt	$	16.6	$	1.6	$	18.2
EBITDA* – excluding restructuring and other costs	$	5.4	$	0.3	$	5.7
Net interest cost	$	0.7	$	0.1	$	0.8
Debt ratio
Net debt to EBITDA – excluding restructuring and other costs		3.06		0.14		3.20
Coverage ratios
Earnings coverage		4.3		(0.3)		4.0
EBITDA – excluding restructuring and other costs interest coverage		7.8		(0.3)		7.5