IFRS 16 lessee accounting policies, significant estimates, paras 51-60, certain lessee disclosures

Spark New Zealand Limited – Annual report – 30 June 2019

Industry: telcoms

2.3 Operating expenses (extract)
Lease expenses
Expenses relating to short-term leases and leases of low-value assets were $6 million (30 June 2018 Restated: $6 million).

2.4 Finance income, finance expense, depreciation, amortisation and net investment income


1 Includes $3 million transferred from the cash flow hedge reserve for the year ended 30 June 2019 (30 June 2018: $3 million).
2 Interest was capitalised on property, plant and equipment and intangible assets under development for the year ended 30 June 2019 at an annualised rate of 4.2% (30 June 2018: 4.6%).

3.4 Right-of-use assets
Spark is a lessee for a large number of leases, including:
• Property – Spark leases a number of office buildings and retail stores. These leases generally have rights of renewal that are reasonably certain to be exercised and therefore may have long effective lease terms;
• Capacity arrangements – Spark enters into a number of indefeasible right-of-use capacity arrangements for cable capacity;
• Mobile sites – Spark has entered into a number of agreements to allow the operation of mobile network infrastructure throughout New Zealand; and
• Motor vehicles – Spark leases motor vehicles for use in sales, field operations and maintenance of infrastructure equipment.

Movements in right-of-use assets is summarised below:


All capacity additions for the year ended 30 June 2019 were fully paid on control being obtained and therefore deemed capital expenditure as reconciled in note 2.5 (30 June 2018 Restated: $16 million fully paid and deemed capital expenditure).

Income from sub-leasing right-of-use assets for the year ended 30 June 2019 was $3 million (30 June 2018 Restated: $4 million).

Key estimates and assumptions
At inception of a contract, Spark uses judgement in assessing whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, Spark assesses whether:
• The contract involves the use of an identified asset;
• Spark has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
• Spark has the right to direct the use of the asset.

At inception or on reassessment of a contract that contains a lease component, Spark allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. Spark recognises a right-of-use asset at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically assessed for impairment losses and adjusted for certain remeasurements of the lease liability.

3.5 Leased customer equipment assets

Spark acts as the intermediate party (as a lessee and a lessor) in a number of back-to-back lease arrangements for customer premises equipment. Such arrangements may also include an initial sale and leaseback transaction. A sale and leaseback transaction contains a genuine sale if control of an asset is transferred under NZ IFRS 15. For Spark’s back-to-back lease arrangements, we have assessed that a sale does not occur as control over the equipment remains with Spark instead of passing to the buyer-lessor.

Spark as the seller-lessee continues to recognise the leased customer equipment asset, which is initially measured at cost. The asset is subsequently depreciated using the straight-line method based on the expected lease term. Movements in leased customer equipment assets are summarised below:


Leased customer equipment assets are on-leased to customers under operating leases. Amounts recovered from customers for the year ended 30 June 2019 were $19 million (30 June 2018 Restated: $19 million).

4.1 Payables, accruals and provisions (extract)


Trade accounts payable and sale and leaseback liabilities are financial instruments and held at amortised cost.

4.2 Lease liabilities


1 Relates to the discounted lease liability for future minimum rental commitments for non-cancellable periods of leases, excluding rights of renewal, which are at Spark’s option.

Key estimates and assumptions
Spark recognises a lease liability at the lease commencement date. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, Spark’s incremental borrowing rate. Generally, Spark uses its incremental borrowing rate as the discount rate, with adjustments for the type and term of the lease.

Lease payments included in the measurement of the lease liability comprise:
• Fixed payments, including in-substance fixed payments;
• Variable lease payments that depend on an index or a rate initially measured using the index or rate as at the commencement date;
• Amounts expected to be payable under a residual value guarantee;
• The exercise price under a purchase option that Spark is reasonably certain to exercise; and
• Lease payments in an optional renewal period if Spark is reasonably certain to exercise an extension option.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in Spark’s estimate of the amount expected to be payable under a residual value guarantee or if Spark changes its assessment of whether it will exercise a purchase or extension option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Spark has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have lease terms of 12 months or less and leases of low-value assets. Spark recognises the lease payments associated with these leases within operating expenses on a straight-line basis over their lease terms.

5.2 Financial risk management (extract)
Maturity analysis
The following table provides an analysis of Spark’s remaining contractual cash flows relating to financial liabilities. Contractual cash flows include contractual undiscounted principal and interest payments.