Note 1 - Accounting policies

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019
(All figures are expressed in millions of euros unless otherwise specified)

In application of European Commission Regulation (EC) 1606/2002 of 19 July 2002, the consolidated financial statements of the Lagardère group have been prepared in accordance with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB).
All IFRS standards and interpretations of the IFRS Interpretation Committee (IFRS-IC) endorsed by the European Union at 31 December 2020 have been applied. They can be viewed on the website of the European Commission at https://ec.europa.eu/ info/business-economy-euro/company-reporting-and-auditing/ company-reporting_en.
The new standards and/or amendments to IFRSs adopted by the European Union that are effective for periods beginning on or after 1 January 2020, are as follows:

  • Amendment to IFRS 3 – Definition of a Business.
  • Amendments to IAS 1 and IAS 8 – Definition of Material.
  • Amendments to the IFRS Conceptual Framework.
  • Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform Phase 1.

The impact on the consolidated financial statements of applying these amendments is not significant.
As of 1 January 2020, the Group elected to apply the amendment to IFRS 16 – Covid-19-Related Rent Concessions. Further details are provided in note 18 to the consolidated financial statements.
The Group did not elect to adopt the following new amendments which had been endorsed by the European Union but which will only be effective subsequent to 1 January 2020:

  • Amendments to IFRS 9, IAS 39, IFRS 7 and IFRS 16 – Interest Rate Benchmark Reform Phase 2.

The new standards and amendments to existing standards published by the IASB at 31 December 2020 which have not yet been endorsed by the European Union and which will be effective subsequent to 2020 are as follows:

  • Amendments to IAS 1 – Classification of Liabilities as Current or Non-current.
  • Annual Improvements to IFRSs (2018–2020 Cycle). The Group is currently analysing the potential impact on its consolidated financial statements of applying the above amendments.

The consolidated financial statements were approved for issue by the Managing Partners on 25 February 2021 and are subject to the approval of the General Meeting of Shareholders on 30 June 2021. 

Measurement principles
The financial statements have been prepared using the historical cost method, except for certain financial assets and liabilities which have been measured at fair value where applicable under IFRS. 

Use of estimates and judgements
The preparation of financial statements requires the use of estimates and assumptions to determine the value of assets and liabilities and contingent amounts at the year-end, as well as the value of income and expenses for the year.
As part of the Group’s strategic refocusing around two divisions, initiated in 2018, continued in 2019 and completed in 2020, gains and losses on disposals of the assets of the former Lagardère Active and Lagardère Sports divisions take account of estimates, especially those relating to earn-out clauses and vendor warranties for which provisions have been accrued.
Management reviews these estimates and assumptions at regular intervals, based on past experience and various other factors considered as reasonable, which form the basis of its assessment of the carrying amount of assets and liabilities. Actual amounts may differ from these estimates due to changes in assumptions or circumstances. The accounting principles and valuation methods applied by the Group are described in full in note 3.

1.1 IMPACT OF THE COVID-19 PANDEMIC

On 30 January 2020 following the outbreak and rapid spread of Covid-19, the WHO declared a public health emergency.
From March 2020 onwards, the border closures, travel restrictions and lockdown measures introduced to curb the spread of the virus in France, Europe and across the globe led to severe temporary difficulties in operating the Group’s various businesses, particularly Travel Retail, the impacts of which were felt first in Asia-Pacific, and then in Europe and North America. Lagardère Publishing was affected as from the second half of March 2020, when its brick-andmortar points of sale closed in Europe and North America following government-imposed restrictions. Other Activities were affected by the impacts of the health crisis on the advertising market and by the closure of venues. The new measures introduced by governments as from September 2020 to stem the second wave of Covid-19 in Europe and the United States, including curfew measures followed by a new lockdown in certain countries, put additional pressure on trading, particularly for Travel Retail.
In this context, the Group put in place corrective measures as from the first quarter in order to mitigate the impacts of the Covid-19 pandemic in its businesses and at the corporate level as far as possible. These included:

  • cancelling the proposed 2019 dividend to be paid in 2020, on the initiative of Arnaud Lagardère and unanimously approved by the Supervisory Board;
  • reducing the remuneration payable to the Executive Committee by 20%, on the initiative of its members, until the summer;
  • creating a Covid-19 Solidarity Fund to finance the Group’s initiatives in support of its employees and partners worldwide.

The fund is endowed with (i) €5 million deducted from the cash initially set aside to pay the dividend, (ii) the full amount of the reduction in Executive Committee remuneration, and (iii) additional sums voluntarily contributed by Supervisory Board members.
On 25 March 2020, in view of the uncertainty over the duration and scale of the epidemic and government-imposed lockdowns and closures, the Group suspended its market guidance announced on 27 February 2020 for its recurring operating profit of fully consolidated companies for 2020.
As of 30 April 2020, amid persistent uncertainties and the impossibility of accurately and reliably assessing the impacts of the health crisis on revenue and recurring operating profit (loss) of fully consolidated companies, the Group nevertheless estimated that the impact of the revenue decline on its recurring operating profit (loss) of fully consolidated companies could be between 20% to 25% for Lagardère Travel Retail and between 20% and 30% for Lagardère Publishing.
Lagardère Travel Retail, which was severely hit due to the business’ strong exposure to the air industry, was quick to put in place measures to ensure the health and safety of its employees, customers and partners, while at the same time organising the temporary closure of its network in close cooperation with airports, and cutting costs across the board. The main measures taken involved: (i) renegotiating the financial terms of its concession agreements, obtaining cancellations of fixed lease payments, a lower rate of variable payments and deferred maturities; (ii) reducing the number of points of sale opened and adjusting opening times in agreement with concession grantors; (iii) reducing payroll costs at all levels, with the introduction of furlough schemes if financed by local government, or of layoffs or pay cuts where no such financing was available; (iv) drastically reducing or revising downwards virtually all non-essential costs (i.e., costs not needed for the company to operate), such as business travel costs, consulting fees, maintenance and cleaning costs and royalties paid.
Lagardère Publishing adopted measures to protect earnings and cash, while providing support to the industry hard hit by the crisis. This support included prompt payments to thirdparty publishers, authors and printers, and extended payment terms for independent booksellers. The main measures adopted included (i) introducing remote working wherever possible; (ii) ensuring that distribution activities continued, along with physical and digital deliveries; (iii) reducing payroll costs, marketing and advertising expenditures and consulting fees payable; and (iv) putting on hold or cancelling investments and deferring certain costs (rent, social security payments, etc.). Lagardère Publishing’s revenue for 2020 was virtually the same as the 2019 figure.
In 2020, Group revenue fell 38% or €2,727 million, including a decline of €9 million for Lagardère Publishing, €2,544 million for Lagardère Travel Retail and €59 million for Other Activities. This decline had an adverse impact on recurring operating profit of fully consolidated companies, which was a negative €155 million in the year (positive €378 million in 2019), reflecting large-scale cost-cutting measures but also unavoidable costs. These mostly relate to overheads, fixed lease payments, payroll costs for idle staff net of any payouts received, and closed points of sale and distribution centres.
At 31 December 2020, in view of the uncertainty as to the duration and scale of the epidemic and the resulting government measures, the Group has adopted assumptions that allow it to assess the impacts of the pandemic on its financial statements using past experience along with other factors deemed reasonable in the circumstances. The Group has drawn up business recovery scenarios in this respect, which have been used within the scope of the cash flow forecasts to test goodwill and other non-current assets for impairment, and to determine the variable components of contingent consideration.

Impairment tests on goodwill and intangible assets with indefinite useful lives
The impairment tests carried out at the end of the year took into account the Covid-19 pandemic and its far-reaching impact on business operations. Based on these impairment tests, the Group recognised €132 million in impairment losses (see note 10), including:

  • €61 million for intangible assets at Lagardère Travel Retail, of which €55 million for the Rome airport concession;
  • €31 million for International Duty Free group goodwill in Belgium at Lagardère Travel Retail;
  • €20 million for goodwill relating to Mexican operations, Brainbow and the Anaya group at Lagardère Publishing;
  • €14 million for property, plant and equipment at Lagardère Travel Retail;
  • €6 million for Bataclan goodwill.

The assumptions used for each division and impairment test sensitivity are detailed in note 10.

Renegotiations of lease payments under concession agreements
Most lease negotiations with lessors (airports and stations) had been finalised at 31 December 2020. The renegotiated terms take different forms depending on the geographic area concerned as well as the clauses set out in the initial agreements. They may concern:

  • the cancellation of all or part of fixed lease payments or guaranteed minimum payments over a given period and/or the replacement of such payments by variable lease payments;
  • the cancellation of fixed lease payments or guaranteed minimum payments based on applicable contractual conditions;
  • more general revisions to lease payments, lease terms and the premises leased.

Only renegotiated terms effective at 31 December 2020 have been taken into account. The IFRS 16 amendment published in May 2020 was applied where the renegotiated leases met the requisite conditions. Under this amendment, rent concessions obtained in connection with Covid-19 may be recognised as a deduction from lease liabilities against a gain in the income statement.
At 31 December 2020, lease liabilities and right-of-use assets in respect of concession agreements were reduced by €915 million and €744 million, respectively, as a result of Covid-19-related lease negotiations. This reduction breaks down as:

  • a reduction in lease liabilities recognised against a gain on leases, representing €171 million, of which €101 million meets the conditions set out in the IFRS 16 amendment;
  • a reduction in lease liabilities recognised against right-of-use assets, representing €530 million in lease modifications and €214 million in lease remeasurements.

The impact of applying IFRS 16 only to concession agreements is neutralised when calculating recurring operating profit of fully consolidated companies, since the fixed rental expense for the period is added back and the depreciation charged against the right-of-use asset is cancelled.
The positive impact of renegotiated fixed lease payments or guaranteed minimum lease payments obtained in and allocated to the period is included in recurring operating profit (loss) of fully consolidated companies in 2020 in an amount of €362 million.
The impacts of lease payment negotiations on the consolidated financial statements are described in note 18.

Counterparty and credit risks
The Group’s exposure to counterparty and credit risks was fairly limited at 31 December 2020.
Trade receivables, which totalled €1,050 million, were written down based on the occurrence of default events and on estimated losses in an amount of €26 million, €10 million of which concerns the write-down of amounts due from Presstalis, renamed France Messagerie in July 2020.
Plan assets managed in connection with post-employment benefits, which amounted to €280 million at 31 December 2020, including €259 million for the United Kingdom, were not written down at 31 December 2020.

Inventories – Other receivables
Inventories of perishable goods and fashion items belonging to the Travel Retail business were written down by €18 million at 31 December 2020.
Amounts receivable on disposals and earn-outs were also tested for impairment. As a result, impairment losses were recognised in a total amount of €14 million for credit risk associated with buyers and for the risk that the underlying operating targets (i.e., postponement of the tournaments in Asia under the AFC contract) will not be met.

Grants received or receivable
Certain entities benefited from state or local authority support packages and furlough schemes during the period. These grants amounted to €71 million in 2020, and were recognised as a deduction from the corresponding expense items in the income statement.

Lagardère Travel Retail restructuring
The health crisis led to the closure of points of sale for which the Group recognised €36 million in restructuring costs in 2020.

Deferred taxes recognised on tax losses
The Group reviewed its tax loss carryforwards at 31 December 2020 and wrote down deferred tax assets at Lagardère Publishing in an amount of €9 million. The utilisation of tax loss carryforwards in 2020 takes account of the future prospects of the entities concerned.

Liquidity
At 31 December 2020, the Group’s liquidity stood at €1,637 million, comprising €687 million in cash and cash equivalents and an undrawn amount of €950 million on the €1,250 million renewable credit facility granted by a syndicate of the Group’s banking partners.
In April 2020, the Lagardère group reached an agreement with the aforementioned banking syndicate to waive the covenant (leverage ratio) for June 2020 and December 2020.
In December 2020, the Lagardère group consolidated its financial position by arranging the following, effective from early January 2021:

  • a loan for €465 million, 80% of which is backed by the French state (“PGE”). The maturity of this loan is 12 months, with an extension option for up to five additional one-year periods (exercisable at the Company’s discretion at the end of the one-year term);
  • an amendment and extension of its revolving credit facility with its banking partners, which involved adjusting the amount of the facility to €1,102 million and extending the term of a €1,002 million tranche from May 2022 to March 2023.

As a result of this financing, the covenants were redefined to take account of the impacts of the health crisis (see note 29).
The Group considers that it has sufficient liquidity to cover its financing requirements in 2021, both in relation to funding its operations and to repaying €493 million in debt falling due (including €158 million in commercial paper at 31 December 2020). Its analysis adopted a conservative scenario which factors in IATA forecasts as of 3 February 2021 of a 13% year-on-year rise in passenger traffic in 2021 versus 2020 for Lagardère Travel Retail.