IFRS 16, description of effects of future adoption of new standard with quantification

Spark New Zealand Limited – Annual report – 30 June 2018

Industry: telcoms

6.8 New accounting standards not yet adopted (extract)

NZ IFRS 16 Leases

NZ IFRS 16 Leases (NZ IFRS 16) replaces NZ IAS 17 Leases and will have a material impact on Spark. Spark has elected to early adopt NZ IFRS 16 from next financial year, being the year ending 30 June 2019 and apply the full retrospective transition method, with restatement of the year ended 30 June 2018.

NZ IFRS 16 will require Spark to recognise most leases, where Spark is a lessee, on the statement of financial position. Similar to the current finance lease model, this will result in the recognition of ‘right of use’ assets and related lease liability balances. The expense previously recorded in relation to operating leases will move from being included in operating expenses (and within EBITDA), to depreciation and finance expense. The impact on net earnings before income tax of an individual lease over its term remains the same, however, the new standard will result in a higher interest expense in early years, and lower in later years of a lease, compared with the current straight-line expense profile of an operating lease.

Spark’s leases

Spark is the lessee for a large number of operating leases, including:

  • Property – Spark leases a number of office buildings and retail stores. These leases will have the most significant impact on adoption of NZ IFRS 16 given their high value and, taking into accounting rights of renewal that are reasonably certain to be exercised, long lease terms;
  • Mobile sites – Spark has entered into a number of land access agreements to allow the operation of mobile network infrastructure throughout New Zealand;
  • Equipment – 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. Under the new standard Spark has assessed that the initial sale of the equipment does not result in control being passed. As a result the equipment will not be derecognised following the initial sale and remain within property, plant and equipment. The leaseback will be accounted as a financial liability in scope of NZ IFRS 9 and the sub-lease as either an operating lease or finance lease;
  • Motor vehicles – Spark leases motor vehicles for use in sales, field operations and maintenance of infrastructure equipment; and
  • Other leases – other leases include items such as general IT equipment and photocopiers. Spark intends to utilise the recognition exemption for leases of low-value assets to these leases where appropriate.

Spark also acts as a lessor, including for the following:

  • Space in exchanges – Spark has leases for space in exchange buildings, including as a lessor for space in Spark exchanges and a lessee for space in Chorus exchanges. These leases include a legal right of offset, as Spark and Chorus settle the payments on a net basis and are therefore shown as a net finance lease receivable on the statement of financial position. Spark has assessed there will be no impact on adoption for exchange space leases (more information is included in note 3.1); and
  • Property subleases – Spark has entered subleases in relation to excess property that are all currently classified as operating leases. Each sublease has been assessed to determine whether it is a finance or operating lease under NZ IFRS 16. A number of these will be now classified as finance subleases because they are for the whole remaining term of the head lease.

Adoption project

Spark has undertaken a significant project to facilitate the early adoption of NZ IFRS 16. This has included the implementation of a lease management and accounting system. This system now retains Spark’s leases where Spark is a lessee and includes all details in relation to each lease, such as the lease contract, lease type and location, lease term (including rights of renewal), lease discount rate and lease payments. The lease system calculates the value of right-of-use-assets, lease liabilities, depreciation expenses and finance expenses based on this information. Spark has performed testing over the accuracy and completeness of lease data and the outputs provided from the lease system and re-performed calculations for a number of leases, including for material leases, and issues identified have been resolved.

Spark will continue to test the accuracy of lease data within the system and its outputs. The lease system and its calculations have also been reviewed by external parties and the system provider intends to issue a controls opinion during the year ending 30 June 2019.

Estimated financial impact

The new standard will have a significant impact on the financial position and performance of Spark on adoption. We have performed an assessment of the financial impact on Spark based on leases in effect in the year ended and as at 30 June 2018. The estimated impact on the statement of profit or loss and other comprehensive income is a decrease in operating expenses of approximately $67 million and an increase in lease income of $2 million offset by an increase in depreciation and amortisation of $49 million and an increase in net finance expense of $29 million. This would result in an increase in EBITDA of $69 million but a decrease in net earnings before income tax of $9 million. The estimated impact on the statement of financial position is an increase in total assets of $426 million, an increase in total liabilities of $490 million and a decrease in equity of $64 million.

As outlined above the adoption of NZ IFRS 16 would have reduced net earnings before tax for the year ended 30 June 2018 by approximately $9 million and reduced retained earnings by approximately $64 million. This is primarily because of the lease profile of Spark’s long-term corporate property leases, with the depreciation and interest expense (which is higher in earlier years of these leases) exceeding the current operating expense. The difference over the life of the leases will be nil and there is no impact on cash flows.


In calculating the above estimated impacts several judgements were required. These include determining the lease term (which can be complex where leases include rights of renewal or cancellation), the discount rate applicable to each lease and the lease payments, which may not be fixed and may vary depending on an index.

6.6 Commitments (extract)

Operating lease commitments – Spark as lessee

Spark has entered into commercial operating leases on properties, network infrastructure, motor vehicles and equipment. Certain leases are subject to Spark being able to renew or extend the lease period based on terms that would then be agreed with the lessor. Future minimum rental commitments for all non-cancellable operating leases are:


The total of future minimum sublease payments expected to be received under non-cancellable subleases as at 30 June 2018 is $18 million (30 June 2017: $25 million).