IBERSOL | Integrated Management Report 2022

INTEGRATED MANAGEMENT REPORT 2022 b) any reduction in lease payments only affects payments due on or before June 30, 2022; It is c) there are no substantive changes to other terms and conditions of the lease. Judgments and estimates Lease term and incremental financing rate The Group estimates lease terms and the incremental financing rate. The Group determines the lease term as the non-cancellable period of the lease, taking into account the periods covered by an option to extend the contract, if it is reasonable for the Group to exercise it, or any periods covered by an option to terminate. the contract, if it is reasonably certain that the Group will not exercise it. When determining the lease term, the Group therefore makes a judgment about the relevant factors that create an economic incentive to exercise the renewal or termination (in cases where such options are of the lessee and the lessor, the Group exercises judgment about the lessor and lessee economic incentives). Among other aspects, the Group takes into account: - the value of the non-transferable investments made in each commercial space and the estimate of the period for recovery and use of such investments; - if the renewal/termination option takes place in a shorter or more distant time horizon (the shorter the non-cancelable period of the contract, the greater the probability that the Group will exercise the renewal option, the opposite being true in the case of contracts with long non-cancellable periods); - conditions for contract renewal – for example with regard to the renewal period or rent conditions: - termination penalties; - location of assets and existence of viable alternatives for other commercial spaces. In most leases, the Group is not able to readily determine the interest rate implicit in the contracts, so it considers its incremental financing rate to measure lease liabilities. The incremental financing rate is the interest rate that the Group would have to pay to obtain loans with similar terms and guarantees, to acquire an asset identical to the lease asset in a similar economic environment. In this way, the incremental financing rate reflects what the Group would have to pay, which requires an estimate when there are no observable rates available (such as, for example, in subsidiaries that do not carry out financing operations) or when they need to be adjusted to reflect the terms and conditions of the lease (for example when contracts are not in the Group’s functional currency). The Group estimates the incremental funding rate using observable information (such as market interest rates) when available, making it necessary to make some specific estimates based on consultations with funding institutions such as banks and investment funds. The average incremental funding rate used by the Group to discount lease liabilities was 5.54% in Portugal and 5.11% in Spain (5.12% and 5.44%, respectively, in Portugal and Spain on 31 December 2021). 457