Auckland International Airport Limited – Annual report – 30 June 2023
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.
(g) 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.
Revaluation surpluses are transferred from the property, plant and equipment revaluation reserve to retained earnings on derecognition of the asset or if the asset is transferred to investment properties.
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
The financial position and performance of the group continued to reflect the ongoing recovery of the aviation industry from the COVID-19 pandemic. The timing of full traffic recovery to pre-pandemic levels remains uncertain and constrained by staffing shortages and return of aircraft to service across the industry.
During February 2022, Auckland Airport renegotiated its bank facility interest coverage covenants for a transitionary period until December 2024. The following table sets out the EBITDA-based interest coverage covenants.
Auckland Airport’s actual interest coverage for the 12 months ended 30 June 2023 was 6.52x. Given the strong rebound in the aviation market during the year ended 30 June 2023 and industry-wide optimism for further recovery, 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(m) and note 5); and
- Impairment and write-off of capital works in progress (see note 11 and note 12).
(f) Flood-related insurance matters
On 27 January 2023, Auckland experienced widespread flashflooding caused by record-breaking rainfall. Auckland Airport experienced flooding across the precinct and particularly the international terminal building. Both the domestic and international terminals were closed for short periods starting that evening, with domestic flights resuming at midday on 28 January 2023 and international flights from the morning of 29 January 2023.
Material damage
Auckland Airport suffered flood damage to assets across its precinct. The most significant areas of damage were to check-in, baggage and vertical transportation at the international terminal building. Auckland Airport has material damage, business interruption and construction works insurance policies in place.
The group has engaged independent experts to estimate the likely extent of damage. The experts do not yet have sufficient information to complete a full assessment.
As a result, these financial statements include a number of significant judgements and estimates related to the floodflood event. It is possible that the actual financial impacts will differ from those included in these financial statements and these differences may be material. Details of the judgements and estimates made are provided in the following parts of this note.
Asset impairment and write-off
The group has commenced the repair and replacement of damaged assets. Repairs completed during the year ended 30 June 2023 have been recognised as an expense during the period. Assets that have been replaced during the period have been treated as a disposal with the cost of replacement recognised as capital expenditure.
Impairments are recognised for any assets that remain damaged at year end. Impairments are recognised in the consolidated 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. The group has engaged independent experts to identify damaged assets and estimate the extent to which the carrying value in the financial statements may be impaired. However, assessments remain incomplete.
Other insurance
In addition to recovery of the expected reconstruction costs, Auckland Airport is able to seek recovery of additional items, including the following:
- Business interruption costs and loss of revenue while the Auckland precinct was closed or affected by the flood;
- Costs of professional advisors assisting the company as a result of the flood; and
- Additional ongoing operating costs as a result of the damage.
The additional expenses are recognised when incurred and any recovery of these items is recognised when recovery is virtually certain.
Insurance recovery income
The group recognises the expected insurance proceeds when they can be reliably estimated and the recovery is virtually certain. The insurers have acknowledged the flood event damage. However, as described above, assessments of the full extent and costs to remediate are incomplete.
During the year ended 30 June 2023, the insurers agreed to an initial payment of $5.0 million, which the group has recognised as income.
The flood related amounts recognised during the year ended 30 June 2023 in the consolidated income statement and the consolidated statement of comprehensive income are shown in the table below:
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 2023 include capitalised interest of $16.7 million (2022: $7.2 million).
Impairments and write-offs for the year ended 30 June 2023 include write-downs related to the flood damage. Refer to note 3(f).
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 $344.7 million ( 30 June 2022: $319.8 million);
- Land associated with retail facilities within terminal buildings carried at $1,661.0 million ( 30 June 2022: $1,452.4 million); and
- Terminal building premises (within buildings and services), being 15% of total floor area and carried at $224.0 million (30 June 2022: 14% of total floor area or $183.0 million).
(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.
Land assets were independently valued at 30 June 2023 by Savills Limited (Savills), Jones LangLaSalle Limited (JLL), CBRE Limited (CBRE) and Aon Risk Solutions (AON). Infrastructure and runway, taxiways and aprons assets were independently valued by Beca Projects NZ Limited (Beca) at 30 June 2023.
Buildings and services assets were not revalued at 30 June 2023 but were impaired for damage caused by the January 2023 flood event as described below. The revaluation assessment is that, following the impairments, there is not a material difference between the carrying value and the fair value of this asset class at 30 June 2023. The revaluation assessment was supported by an initial review of replacement costs by Beca at 31 March 2023, to determine whether a revaluation was likely to be required, followed by management’s review of subsequent evidence at 30 June 2023. 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 2023. The impairment assessment is described below.
Impairment and write-offs – flood damage
The group assessed that certain assets in the following asset classes were impaired due to damage from the January 2023 flood event:
- Buildings and services; and
- Vehicles, plant and equipment.
The most significant areas of damage were to check-in, baggage and vertical transportation at the international terminal building. The group engaged independent experts to estimate the costs to repair or replace damaged assets and has recognised the following impairments:
- Buildings and services, $21.0 million recognised as a reduction in revaluation reserve and $0.2 million through profit or loss; and
- Vehicles, plant and equipment, $0.1 million recognised as an expense in the income statement.
The group has assessed that there were no indicators of impairment to land, infrastructure or runways, taxiways and aprons assets that are carried at fair value.
Impairment and write-offs – capital work in progress
In response to reduced aeronautical activity during the COVID-19 pandemic, Auckland Airport suspended some capital expenditure projects and impaired its capital work in progress portfolio. The group has reassessed the capital work in progress portfolio and, for the year ended 30 June 2023, has reported additional impairments of $1.7 million ( 30 June 2022: $6.1 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. The group recognised $2.1 million of write-offs during the year (2022: $0.8 million). 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 impairments of flood-damaged assets and 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 2(e). 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 2023. The major inputs and assumptions that required judgement included
- 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 table below summarises the valuation approach and the principal assumptions used in establishing the fair values:
The valuation inputs for land are from the 2023 valuation, while the prior year’s comparatives are from the 2022 valuation of these assets. The valuation inputs for infrastructure and runway, taxiways and aprons are from the 2023 valuation, while the prior year’s comparatives are from the 2020 valuation of these assets. The valuation inputs for buildings and services are unchanged from the 2022 valuation. This asset class was not revalued in 2023 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:
Land assets were revalued at 30 June 2023. This class was previously revalued at 30 June 2022.
At 30 June 2023, the assessment is that there is no material change in the fair value of terminal buildings assets compared with carrying values. This class was last revalued at 30 June 2022.
At 30 June 2023, the assessment is that there is no material change in the fair value of building and services assets compared with carrying values. This class was last revalued at 30 June 2022.
Infrastructure assets were revalued at 30 June 2023. This class was last revalued at 30 June 2020.
Runways, taxiways and aprons were revalued at 30 June 2023. 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 