PPE carried at valuation, policy, IFRS 13 para 93 fair value hierarchy and disclosure of unobservable inputs, COVID – 19

Auckland International Airport Limited – Annual report – 30 June 2021

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 Financial Statements.

The following measures remained in place throughout the 2021 financial year:

  • Suspension of dividends (see note 9);
  • Reduced operating expenditure;
  • Suspension of some capital expenditure projects; and
  • Financial covenant waivers until 31 December 2021 (see note 18(a)).

During the financial year ended 30 June 2021, New Zealand and Australia remained predominantly COVID-19 free, allowing a substantial recovery in domestic passenger numbers. As a result, in April 2021 the New Zealand and Australian Governments introduced the trans-Tasman travel bubble allowing two-way quarantine-free border crossings for passengers travelling between New Zealand and Australia. This delivered a partial recovery of international passenger numbers through Auckland Airport during the final quarter of the 2021 financial year. Since then, however, Australia has experienced widespread outbreaks of the highly infectious delta variant, sending several states into lockdown. On 23 July, the New Zealand Government announced the suspension of quarantine-free trans-Tasman travel until 17 September, and this initial eight-week suspension might be extended. As a result, Auckland Airport brought forward its planned bank discussions regarding:

  • extending nearly $700.0 million of bank facilities due to mature over January-April 2022 ($128.0 million drawn at 30 June 2021) to support short term liquidity; and
  • modifying the interest coverage covenant after the current waiver expires on 1 January 2022.

The company is very pleased with the support provided by all eight banks which has resulted in $688 million of facilities being extended by between 7-19 months from the original maturity dates and the interest coverage covenant being converted from the previous 1.5x EBIT-based measure (excluding revaluations) to a new EBITDAbased measure (also excluding revaluations) that steps up progressively broadly in line with the anticipated recovery in international passengers. The EBITDA-based interest coverage covenant will start at 2.0x for calendar 2022, rising to 2.5x for calendar 2023 and settling at 3.0x for calendar 2024 onwards. As previously, there will be two measurement dates each year, these being 30 June and 31 December. The company forecasts that it will exceed the new covenant at the first measurement date on 30 June 2022.

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

Additions for the year ended 30 June 2021 include capitalised interest of $4.1 million (2020: $6.8 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 $296.3 million (30 June 2020: $216.0 million);
  • Land associated with retail facilities within terminal buildings carried at $2,004.8 million (30 June 2020: $1,667.5 million); and
  • Terminal building premises (within buildings and services), being 13% of total floor area and carried at $120.1 million (30 June 2020: 13% of total floor area or $113.7 million).

(b) Carrying amounts of land, buildings and services, infrastructure, runway, taxiways and aprons if 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.

Land assets were independently valued at 30 June 2021 by Savills Limited (Savills), Jones Lang LaSalle Limited (JLL), CBRE Limited (CBRE) and Aon Risk Solutions (AON). Buildings and services, infrastructure and runway, taxiways and aprons were not revalued at 30 June 2021. 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 2021.

Impairment and write-offs

Infrastructure and runway, taxiways and aprons were last revalued at 30 June 2020. Buildings and services were last revalued at 30 June 2019. To check for any indicators of impairment for these asset classes, which are periodically revalued using the optimised depreciated replacement cost method, the group considered the movements in the capital goods price index since 30 June 2020 and 30 June 2019, respectively. There are no indicators of impairment.

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 2021, has reported additional impairments of $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.

Impact of COVID-19

Due to the effects of COVID-19, the previous valuations at 30 June 2020 were prepared on the basis of ‘significant market uncertainty’ or ‘material valuation uncertainty’, except for reclaimed land.

The valuations of airfield land and aeronautical land associated with aircraft, freight and non-retail terminal uses at 30 June 2021 are no longer subject to ‘material valuation uncertainty’ due to the strength of the property market and recent sales evidence.

The valuations of land associated with car park facilities and retail facilities within terminal buildings at 30 June 2021 remain subject to ‘material valuation uncertainty’ and therefore the valuers have advised that less certainty should be attached to their valuations than would normally be the case. The revenue streams remain severely affected by the closure of New Zealand’s borders. The major inputs and assumptions that required judgement included forecasts of the international economic recovery from COVID-19, the recovery of domestic and international air travel and expected passenger flows. 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 http://www.iata.org/. The valuations have improved due to the ongoing vaccine rollout, evidence of growing passenger numbers and lower observed yields for retail properties.

The group has not revalued buildings and services, infrastructure or runways, taxiways and aprons at 30 June 2021 as the group assessed there is not a material difference between the carrying value and the fair value of those asset classes. The assessment was supported by an initial review by Beca at 31 December 2020, to determine whether a revaluation was likely to be required, followed by management’s review of subsequent evidence to assess the potential difference at 30 June 2021. Both the Beca review and management’s assessment were based on movements in the capital goods price index, which is a relevant benchmark as when these asset classes are revalued, the valuation approach is the optimised depreciated replacement cost of the asset. The group and its valuers consider that those asset classes are no longer subject to ‘significant market uncertainty’.

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 2021 valuation, while the prior year comparatives are from the 2020 valuation of these assets. The valuation inputs for infrastructure and runway, taxiways and aprons are unchanged from the 2020 valuation, while the valuation inputs for buildings and services are unchanged from the 2019 valuation. These asset classes were not revalued in 2021 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 2021. This class was previously revalued at 30 June 2020.

2 At 30 June 2021, the assessment is that there is no material change in the fair value of buildings and services assets compared with carrying values. This class was last revalued at 30 June 2019.

3 At 30 June 2021, 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.

4 At 30 June 2021, 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.