Auckland International Airport Limited – Annual report – 30 June 2022
Industry: transport
2. Summary of significant accounting policies (extract)
(a) Basis of preparation (extract)
Measurement base
The financial statements have been prepared on a historical cost basis, except for investment properties, land, buildings and services, runway, taxiways and aprons, infrastructural assets and derivative financial instruments, which have been measured at fair value.
(f) Property, plant and equipment
Properties held for airport operations purposes are classified as property, plant and equipment.
Property, plant and equipment are initially recognised at cost.
Vehicles, plant and equipment are carried at cost less accumulated depreciation and impairment losses.
Land, buildings and services, runway, taxiways and aprons and infrastructural assets are carried at fair value, as determined by an independent registered valuer, less accumulated depreciation and any impairment losses recognised after the date of any revaluation. Land, buildings and services, runway, taxiways and aprons and infrastructural assets acquired or constructed after the date of the latest revaluation are carried at cost, which approximates fair value. Revaluations are carried out with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the balance date.
Revaluations
Revaluation increases are recognised in other comprehensive income and accumulated as a separate component of equity in the property, plant and equipment revaluation reserve, except to the extent that they reverse a revaluation decrease of the same asset previously recognised in the income statement, in which case the increase is recognised in the income statement.
Revaluation decreases are recognised in the income statement, except to the extent that they offset a previous revaluation increase for the same asset, in which case the decrease is recognised in other comprehensive income and accumulated as a separate component of equity in the property, plant and equipment revaluation reserve.
Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amounts of the assets and the net amounts are restated to the revalued amounts of the assets.
Depreciation
Depreciation is calculated on a straight-line basis to allocate the cost or revalued amount of an asset, less any residual value, over its estimated useful life.
The estimated useful lives of property, plant and equipment are as follows:
Land (including reclaimed land) Indefinite
Buildings and services 5 – 50 years
Infrastructural assets 5 – 80 years
Runway, taxiways and aprons 12 – 40 years
Vehicles, plant and equipment 3 – 10 years
Leased assets
Space within the terminals and certain properties used for aeronautical purposes, where the group acts as a lessor, are leased to tenants under operating leases with rentals payable monthly. Lease payments for some contracts include CPI increases, sales-based concession fees and adjustments to rentals depending on the passenger numbers.
To manage credit risk exposure where considered necessary, the group may obtain bank guarantees for the term of the lease. Although the group is exposed to changes in the residual value at the end of the current leases, the group typically enters into new operating leases and therefore will not immediately realise any reduction in residual value at the end of these leases. Expectations about the future residual values are reflected in the fair value of the properties.
3. Significant accounting judgements, estimates and assumptions (extract)
(b) Carrying value of property, plant and equipment
Judgement is required to determine whether the fair value of land, buildings and services, runway, taxiways and aprons and infrastructural assets has changed materially from the last revaluation. The determination of fair value at the time of the revaluation requires estimates and assumptions based on market conditions at that time. Changes to estimates, assumptions or market conditions subsequent to a revaluation will result in changes to the fair value of property, plant and equipment.
Remaining useful lives and residual values are estimated based on management’s judgement, previous experience and guidance from registered valuers. Changes in those estimates affect the carrying value and the depreciation expense in the income statement.
The carrying value of property, plant and equipment and the valuation methodologies and assumptions are disclosed in note 11(c).
(c) Movements in the carrying value of property, plant and equipment
When revaluations are carried out by independent valuers, the valuer determines a value for individual assets. This may involve allocations to individual assets from projects and allocations to individual assets within a class of assets. The allocations to individual assets may be different to the allocations performed at the time a project was completed or different to the allocations to the individual asset made at the previous asset revaluation. These differences at an asset level may be material and can impact the income statement.
(d) COVID-19
During March 2020 the World Health Organization declared a global pandemic in relation to COVID-19. The New Zealand Government responded to COVID-19 by closing the international border for non-residents and introducing an alert level system with restrictions on business activity and societal interaction. This had a significant impact on Auckland Airport. Passenger numbers fell, both domestically and internationally, significantly impacting both the aeronautical and non-aeronautical business activities of the company. In response, Auckland Airport initiated a number of actions as reported in the 2020 and 2021 Financial Statements.
The following measures remained in place throughout the 2022 financial year:
- Suspension of dividends (see note 9);
- Reduced operating expenditure; and
- Suspension of some capital expenditure projects.
During February 2022, Auckland Airport renegotiated its banking facility interest coverage covenants for the measurement periods between June 2022 and June 2024. The following table sets out the new EBITDA-based interest coverage covenants, with the covenant for the 12 months to 31 December 2024 onwards remaining unchanged.
Border closures and travel restrictions to keep New Zealand free of COVID-19 have severely impacted Auckland Airport since late in the 2020 financial year. In the second half of the 2022 financial year, the Omicron variant became widely established throughout New Zealand, and the New Zealand Government has as a result progressively removed border and travel restrictions. Now that COVID-19 is widespread, and the population widely vaccinated, the likelihood of the reimposition of border and travel restrictions has greatly reduced.
Auckland Airport’s actual interest coverage for the 12 months ended 30 June 2022 was 2.58x. Given the New Zealand Government’s progressive removal of border and travel restrictions over the second half of the 2022 financial year, and the strong rebound in international arrivals that this has enabled, Auckland Airport’s 12-month interest coverage metrics are likely to progressively strengthen going forward.
The pandemic has continued to impact key estimates and judgements used in these financial statements, including:
- Recognition of rent abatements as negative variable rent (see note 2(l) and note 5);
- Impairment and write-off of capital works in progress (see note 11 and note 12);
- Provision for expected credit losses (see note 14); and
- Revaluations of property, plant and equipment and investment properties (see note 11 and note 12).
11. Property, plant and equipment
(a) Reconciliation of carrying amounts at the beginning and end of the year
1 The comparatives are restated following the IFRIC decision on cloud computing. Refer to note 2.
Additions for the year ended 30 June 2022 include capitalised interest of $7.2 million (2021: $4.1 million).
The group includes leased properties within property, plant and equipment when the properties are held for the purpose of airport operations. The following categories of property, plant and equipment are leased to tenants:
- Aeronautical land, including land associated with aircraft, freight and terminal use carried at $319.8 million (30 June 2021: $296.3 million);
- Land associated with retail facilities within terminal buildings carried at $1,452.4 million (30 June 2021: $2,004.8 million); and
- Terminal building premises (within buildings and services), being 14% of total floor area and carried at $183.0 million (30 June 2021: 13% of total floor area or $120.1 million).
1 The comparatives are restated following the IFRIC decision on cloud computing. Refer to note 2.
(b) Carrying amounts measured at historical cost less accumulated depreciation
(c) Revaluation of land, buildings and services, infrastructure, runway, taxiways and aprons
At the end of each reporting period, the group makes an assessment of whether the carrying amounts differ materially from fair value and whether a revaluation is required. The assessment considers movements in the capital goods price index since the previous valuation, mid-year desktop reviews by the previous valuers and changes in valuations of investment property as an indicator of property, plant and equipment valuation movement.
Valuations are completed in accordance with the company’s asset valuation handbook, which is prepared in accordance with financial reporting and valuation standards. Management reviews the key inputs, assesses valuation movements and holds discussions with the valuers as part of the process. Discussions about the valuation processes and results are held between the group’s management and the Board.
The group’s valuers considered the impact of COVID-19 in all revaluations.
Land assets were independently valued at 30 June 2022 by Savills Limited (Savills), Jones Lang LaSalle Limited (JLL), CBRE Limited (CBRE) and Aon Risk Solutions (AON). Building and services assets were independently valued by Beca Projects NZ Limited (Beca) at 30 June 2022.
Infrastructure and runway, taxiways and aprons were not revalued at 30 June 2022. The assessment is that there is not a material difference between the carrying value and the fair value of those asset classes at 30 June 2022. The assessment was supported by an initial review by Beca at 31 December 2021, to determine whether a revaluation was likely to be required, followed by management’s review of subsequent evidence at 30 June 2022. Both the Beca review and management’s assessment were based on movements in relevant subcategories of the capital goods price index. The valuation approach is the optimised depreciated replacement cost. Movements in the relevant capital goods price index subcategories provide a strong indication of movements in the cost of replacing these assets as at 30 June 2022.
The group assessed there were no indicators of impairment for property, plant and equipment assets carried at fair value. The group considered the independent valuations and the group’s assessment of the fair value of assets not revalued at 30 June 2022.
Impairment and write-offs
The group has also assessed indicators of impairment for assets held at depreciated cost. There are no indicators of impairment in the vehicles, plant and equipment portfolio. The group has reassessed the capital work in progress portfolio and, for the year ended 30 June 2022, has reported additional impairments of $6.1 million (30 June 2021: $1.2 million). The impairment assessment methodology was consistent with the prior year and the group considered the following factors, including the extent to which projects:
- Are designed, consented, currently active and intended to be completed;
- Are still contemplated by the airport masterplan or are a strategic priority; and
- For aeronautical-related projects, whether or not they are still expected to be included in the regulated asset base.
Projects that did not satisfy the relevant above factors were written off. Where projects satisfied the relevant above factors, the group further categorised them according to the likelihood of being completed to the original scope and design. If a project is not completed to the original design, a portion of the work already performed may be abandoned in the future. Such projects were grouped according to the assessed likelihood of material future scope changes and impaired by between 25% and 75%.
Following the revaluations, and impairment of capital work in progress, the group has also considered whether there is any further indication of impairment at the cash-generating unit level. The group has assessed that it has a single core cash-generating unit, which comprises all assets other than investment property. The group has considered its enterprise market valuation and the long-term nature of its assets and concluded that there is no further impairment at the cash-generating unit level.
Fair value measurement
The valuers use different approaches for valuing different asset groups. Where the fair value of an asset is able to be determined by reference to market-based evidence, such as sales of comparable assets, the fair value is determined using this information. Where fair value of the asset is not able to be reliably determined using market-based evidence, discounted cash flows or optimised depreciated replacement cost is used to determine fair value. Assets acquired or constructed after the date of the latest revaluation are carried at cost, which approximates fair value.
The group’s land, buildings and services, infrastructure, runway, taxiways and aprons are all categorised as Level 3 in the fair value hierarchy as described in note 18(c). During the year, there were no transfers between the levels of the fair value hierarchy.
Land valuations
The valuers applied significant judgement in the valuation of land associated with car park facilities and retail facilities within terminal buildings at 30 June 2022. The major inputs and assumptions that required judgement included:
- The potential outcomes of the Duty Free tender planned for the second half of the 2024 financial year, as well as other upcoming retail lease renewals;
- Forecasts of the recovery of domestic and international air travel; and
- Expected passenger flows and their expected car parking and retail expenditure.
The valuers reviewed management’s internal forecasts and compared them with external evidence including forecasts by the International Air Transport Association (IATA), published on their website www.iata.org/.
The retail land valuations have declined materially despite the valuer’s continued expectation of a material recovery in future passenger flows and retail income. This is primarily due to uncertainty regarding the future outcomes of the Duty Free tender and lease renewals. The valuers now expect retail lease income to recover materially later than they previously forecast.
The table below summarises the valuation approach and the principal assumptions used in establishing the fair values:
The valuation inputs for land are from the 2022 valuation, while the prior year’s comparatives are from the 2021 valuation of these assets. The valuation inputs for buildings and services are from the 2022 valuation, while the prior year’s comparatives are from the 2019 valuation of these assets. The valuation inputs for infrastructure and runway, taxiways and aprons are unchanged from the 2020 valuation. These asset classes were not revalued in 2022 as the carrying value was not assessed to be materially different from fair value.
The table below includes descriptions of different valuation approaches:
The table below summarises each registered valuer’s valuation of property, plant and equipment:
1 Land assets were revalued at 30 June 2022. This class was previously revalued at 30 June 2021.
2 Terminal buildings were revalued at 30 June 2022. This class was previously revalued at 30 June 2019.
3 Buildings and serviced assets were revalued at 30 June 2022. This class was previously revalued at 30 June 2019.
4 At 30 June 2022, the assessment is that there is no material change in the fair value of infrastructure assets compared with carrying values. This class was last revalued at 30 June 2020.
5 At 30 June 2022, the assessment is that there is no material change in the fair value of runway, taxiways and aprons compared with carrying values. This class was last revalued at 30 June 2020.
The following table shows the impact on the fair value due to a change in a significant unobservable input:
Accounts examples 