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 2020

Industry: transport

2. Summary of significant accounting policies (extract)

(a) Basis of preparation (extract)

Measurement base(extract)

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.

The effects of these measures on Auckland Airport has been significant. Passenger numbers, both domestically and internationally, have fallen as a result of the travel restrictions, significantly impacting both the aeronautical and non-aeronautical business activities of the company. As a result, Auckland Airport has taken a number of actions, including:

  • Suspension of dividends (see note 9);
  • Reduced operating expenditure;
  • Reduced the company’s workforce;
  • Rationalised operations to reflect the new environment;
  • Terminated or suspended capital expenditure projects;
  • Obtained extensions on all bank facilities maturing before 31 December 2021 (see note 18(a));
  • Obtained bank and USPP financial covenant waivers from 30 June 2020 to 31 December 2021, inclusive (see note 18(a)); and
  • Raised $1.2 billion in equity (see note 15).

The pandemic has resulted in impacts to key estimates and judgements used in these financial statements, including:

  • Recognition of rent abatements as negative variable rent (see note 2(c), note 2(l) and note 5);
  • Impairment and write-off of works in progress (see note 11 and note 12);
  • Provision for contract termination costs (see note 21);
  • 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 2020 include capitalised interest of $6.8 million (2019: $5.2 million).

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 $216.0 million (30 June 2019: $188.6 million);
  • Land associated with retail facilities within terminal buildings carried at $1,667.5 million (30 June 2019: $2,232.0 million); and
  • Terminal building premises (within buildings and services), being 13% of total floor area or $113.7 million (30 June 2019: 14% of total floor area or $127.9 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 and changes in valuations of investment property as an indicator of property, plant and equipment.

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 by Savills Limited (Savills), Jones Lang LaSalle Limited (JLL), CB Richard Ellis Limited (CBRE) and Aon Risk Solutions (AON) at 30 June 2020. Infrastructure assets and runway, taxiways and aprons were independently valued by Beca Projects NZ Limited (Beca) at 30 June 2020.

Building and services assets were not revalued at 30 June 2020. The assessment is that there is not a material difference between the carrying value and the fair value of this asset class.

Impairment and write-offs

Land, infrastructure and runway, taxiways and aprons have been revalued at 30 June 2020. Building and services were last revalued at 30 June 2019. To check for any indicators of impairment for this asset class, which is periodically revalued using the optimised depreciated replacement cost method, the group considered the movements in the capital goods price index since 30 June 2019. There are no indicators of impairment.

The group has also assessed indicators of impairment for assets held at cost. There are no indicators of impairment in the vehicles, plant and equipment portfolio. However, the group assessed that the capital work in progress portfolio was impaired at 30 June 2020. 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

The valuations least affected by COVID-19 are in respect of the group’s specialised assets, including buildings and services, infrastructure and runways, taxiways and aprons and reclaimed land, which are valued on an optimised depreciated replacement cost basis. The short-term effect of COVID-19 may increase competition for construction businesses, reducing replacement costs. These may be offset by cost increases due to a lack of materials and specialised labour forces.

Airfield land is valued using the market value alternative use approach. The major inputs and assumptions that required judgement include prices for alternative land uses based on an alternative land-use plan. The alternative land-use plan assumes a large-scale multi-use development with a high proportion of residential property. The valuation has been affected by negative market sentiment for large-scale residential developments due to the expected economic downturn resulting from COVID-19.

Aeronautical land associated with aircraft, freight and non-retail terminal uses has remained stable despite COVID-19. These valuations are based on discounted cash flow analyses and have been supported by high-quality tenants who are expected to continue to trade despite COVID-19.

The most affected categories are land associated with car park facilities and retail facilities within terminal buildings. The revenue streams have been severely affected by the closure of New Zealand’s borders. The major inputs and assumptions that required judgement included forecasts of the international recovery from COVID-19, the recovery of local 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 www.iata.org/.

Valuers have carried out the valuations by applying assumptions regarding the reasonably possible impacts of COVID-19 based on information available as at 30 June 2020. Given the circumstances, all of the valuations as at 30 June 2020, except for reclaimed land, have been prepared on the basis of ‘significant market uncertainty’ or ‘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 table below summarises the valuation approach and the principal assumptions used in establishing the fair values.

The valuation inputs for land, infrastructure and runway, taxiways and aprons are from the 2020 valuation, while the prior year comparatives are from the 2018 valuation, 2016 valuation and the 2015 valuation of these assets, respectively. The valuation inputs for buildings and services are unchanged from the 2019 valuation. These assets were not revalued in 2020 as the carrying value was not assessed to be materially different from fair value.

Description 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 2020. This class was previously revalued at 30 June 2018.

2 At 30 June 2020, 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 Infrastructure assets were revalued at 30 June 2020. This class was previously revalued at 30 June 2016.

4 Runway, taxiways and aprons were revalued at 30 June 2020. This class was previously revalued at 30 June 2015.

The following table shows the impact on the fair value due to a change in a significant unobservable input.