| 2.1. | Basis of Preparation |
The consolidated financial statements of LATAM Airlines Group S.A. for the period ended December 31, 2017, have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (“IASB”) incorporated therein and with the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRIC).
The consolidated financial statements have been prepared under the historic-cost criterion, although modified by the valuation at fair value of certain financial instruments.
The preparation of the consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to use its judgment in applying the Company’s accounting policies. Note 4 shows the areas that imply a greater degree of judgment or complexity or the areas where the assumptions and estimates are significant to the consolidated financial statements.
During 2016 the Company recorded out of period adjustments resulting in an aggregate net decrease of US$ 18.2 million to "Net income (loss) for the period" for the year ended December 31, 2016. These adjustments include US$ 39.5 million (loss) resulting from an account reconciliation process initiated after the Company's afiliate TAM S.A. and its subsidiaries completed the implementation of the SAP system. A further US$ 11.0 million (loss) reflect adjustments related to foreign exchange differences, also relating to the Company's subsidiaries in Brazil. The balance of US$ 32.3 million (gain) includes principally the adjustment of unclaimed fees for expired tickets for the Company and its affiliates outside Brazil. Management of TAM S.A. has concluded that the out of period adjustments that have been identified are material to the 2015 financial statements of TAM S.A., which should therefore require a restatement in Brazil. However, Management of LATAM has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluding that due to their relative size and to qualitative factors they are not material to the annual consolidated financial statements for 2016 of Latam Airlines Group S.A. or to any previously reported consolidated financial statements, therefore no restatement or revision is necessary.
In order to facilitate comparison, some minor reclassifications have been made to the consolidated financial statements for the previous year.
| (a) | Accounting pronouncements with implementation effective from January 1, 2017: |
| (i) Standards and amendments | Date of issue | Mandatory Application: Annual periods beginning on or after | ||
| Amendment to IAS 7: Statement of cash flow | January 2016 | 01/01/2017 | ||
| Amendment to IAS 12: Income tax | January 2016 | 01/01/2017 | ||
| (ii) Improvements | ||||
| Improvements to International Financial Reporting Standards (2014-2016 cycle): IFRS 12 Disclosure of interests in other entities | December 2016 | 01/01/2017 |
The application of standards, amendments, interpretations and improvements had no material impact on the consolidated financial statements of the Company.
(b) Accounting pronouncements not yet in force for financial years beginning on January 1, 2017 and which has not been effected early adoption
| (i) Standards and amendments | Date of issue | Mandatory Application: Annual periods beginning on or after | ||
| IFRS 9: Financial instruments. | December 2009 | 01/01/2018 | ||
| Amendment to IFRS 9: Financial instruments. | November 2013 | 01/01/2018 | ||
| IFRS 15: Revenue from contracts with customers (1). | May 2014 | 01/01/2018 | ||
| Amendment to IFRS 15: Revenue from contracts with customers. | April 2016 | 01/01/2018 |
| Mandatory | ||||
| Application: | ||||
| (i) Standards and amendments | Date of issue | Annual
periods beginning on or after | ||
| Amendment to IFRS 2: Share-based payments | June 2016 | 01/01/2018 | ||
| Amendment to IFRS 4: Insurance contracts. | September 2016 | 01/01/2018 | ||
| Amendment to IAS 40: Investment property | December 2016 | 01/01/2018 | ||
| IFRS 16: Leases (2). | January 2016 | 01/01/2019 | ||
| Amendment to IFRS 9: Financial Instruments | October 2017 | 01/01/2019 | ||
| Amendment to IAS 28: Investments in associates and joint ventures | October 2017 | 01/01/2019 | ||
| IFRS 17: Insurance contracts | May 2017 | 01/01/2021 | ||
| Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures. | September 2014 | To be determined | ||
| (ii) Improvements | ||||
| Improvements to International Financial Reporting Standards. (cycle 2014-2016) IFRS 1: First-time adoption of international financial reporting standards and IAS 28 investments in associates and joint ventures. | December 2016 | 01/01/2018 | ||
| Improvements to International Financial Reporting Standards. (cycle 2015-2017) IFRS 3: Business combinations, IAS 12: Income tax, IFRS 11: Joint arrangements and IAS 23: Borrowing costs | December 2017 | 01/01/2019 | ||
| (iii) Interpretations | ||||
| IFRIC 22: Foreign currency transactions and advance consideration | December 2016 | 01/01/2018 | ||
| IFRIC 23: Uncertain tax positions | June 2017 | 01/01/2019 |
The Company’s management believes that the adoption of the standards, amendments and interpretations described above but not yet effective would not have a significant impact on the Company’s consolidated financial statements in the year of their first application, except for IFRS 15 and IFRS 16:
| (1) | IFRS 15 Revenue from Contracts with Customers supersedes actual standard for revenue recognition that actually uses the Company, as IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standards supersedes IFRS 15 supersedes, IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers; and SIC-31 Revenue - Barter Transactions Involving Advertising Services. |
The Company evaluated the possible adoption impacts that this new standard will have on the consolidated financial statements and has identified changes in: i) the recognition of the income associated with the fines for changes, which were previously recognized at the time of the sale and now will be considered as a modification of the initial transport contract and therefore the recognition must be deferred until the rendering of the service; ii) the moment of recognition of the income from the sale of some services or products, where the Company concluded that it acted as principal, and therefore the revenues must be deferred until the service is rendered; and iii) the presentation of the income associated with the sale of products, where the Company concluded that it acted as agent and therefore the income must be presented net of the associated costs.
As of December 31, 2017, the effect of the changes indicated above As of December 31, 2017, the effect of the changes indicated above will not have a significant impact on the Company’s consolidated financial statements in the year of its first adoption.
| (2) | The IFRS 16 Leases add important changes in the accounting for lessees by introducing a similar treatment to financial leases for all operating leases with a term of more than 12 months. This mean, in general terms, that an asset should be recognized for the right to use the underlying leased assets and a liability representing its present value of payments associate to the agreement. Monthly leases payments will be replace by the asset depreciation and a financial cost in the income statement. |
We are evaluating the impact that the adoption of the new lease rule will have on the consolidated financial statements. Currently, we believe that the adoption of this new standard will have a significant impact on the consolidated statement of financial position due to the recording of an asset for right of use and a liability, corresponding to the recording of the leases that are currently registered as operating leases.
LATAM Airlines Group S.A. and subsidiaries are still assessing this standard to determinate the effect on their Financial Statements, covenants and other financial indicators.