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Notes to and forming part of the Financial Statements

Overview

Basis of preparation

Airservices is an Australian Government owned for-profit entity. The financial statements are required by section 42 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and are general purpose financial statements for the year ended 30 June 2020.

The financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and Financial Reporting Rules (FRR) made under the PGPA Act.

The financial statements were authorised for issue in accordance with a resolution of the Board on 16 September 2020.

Historical cost convention

These financial statements have been prepared on an accrual basis and under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit and loss, and certain classes of property, plant and equipment.

Compliance with IFRS

The financial statements comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of Airservices are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The financial statements are presented in Australian dollars, which is Airservices functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Translation differences on financial assets and liabilities carried at fair value, and non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are reported as part of the fair value gain or loss.

Taxation

Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST) is applicable to Airservices. Refer to Note 1.3 Taxation for further information relating to income tax.

Use of estimates, assumptions and judgements

The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in the following notes:

Use of Estimates, Assumptions and Judgements

  • Recoverability of trade and other receivables

Note 2.1

  • Valuation of property, plant, equipment and intangibles

Note 2.3

  • Recoverable amount of other financial assets

Note 2.6

  • Measurement of lease liabilities

Note 2.7

  • Long Service Leave & Early Retirement Benefits

Note 4.1

  • AvSuper defined benefits

Note 4.2

Impact of Coronavirus (COVID-19)

COVID-19, which is a respiratory illness caused by a new virus was declared a world-wide pandemic by the World Health Organisation in March 2020. Measures to slow the spread of the virus, have since had a significant impact on global economies and equity, debt and commodity markets. Airservices has considered the impact of COVID-19 and other market volatility in preparing its financial statements.

While the specific areas of judgement have not changed, the impact of COVID-19 has resulted in the application of further judgement within certain areas. Given the dynamic and evolving nature of COVID-19 and limited recent experience of the economic and financial impacts of such a pandemic; Airservices have formed estimates based on information available as at 30 June 2020. The actual economic conditions are likely to be different from the estimates used and this may result in material differences between the accounting estimates applied and the actual results of Airservices for future periods.

Processes applied

As a consequence of the COVID-19 pandemic and in preparing these financial statements, management have:

  • re-evaluated whether there were any additional areas of judgement or estimation uncertainty beyond what has been disclosed below
  • updated its economic outlook – principally for the purposes of input to its Expected Credit Loss (ECL) model through the application of forward looking information, but also for input into the impairment analysis of financial and non-financial asset classes and disclosures such as fair value disclosure of financial assets and liabilities
  • reviewed external market communications to identify other COVID-19 pandemic related impacts
  • reviewed public forecasts and experiences from previous downturns
  • conducted several internal processes to ensure consistency in the application of the expected impact of the COVID-19 pandemic across all asset classes
  • assessed the carrying value of its assets and liabilities and determined the market impact thereon as a result of market inputs and variables impacted by the COVID-19 pandemic
  • ran multiple stress testing scenarios, integral to the capital adequacy assessment process and going concern assumption
  • considered the impact of the COVID-19 pandemic on Airservices financial statement disclosures.
Impact of COVID-19 on estimation uncertainty

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying Airservices accounting policies. The ongoing COVID-19 pandemic has increased the estimation uncertainty in the preparation of these financial statements. The estimation uncertainty is associated with:

  • the extent and duration of the disruption to travel and aviation sector arising from the actions by government, airlines, businesses and consumers to contain the spread of the virus
  • the extent and duration of the expected economic downturn (and forecasts for key economic factors including GDP, employment and house prices). This includes the disruption to increasing unemployment, declines in consumer discretionary spending, reductions in production because of decreased demand, and other quarantining activities
  • the effectiveness of government measures that have and will be put in place to support the domestic economy and the aviation industry through this disruption and economic downturn.
Going concern

Airservices reported a net loss of $25.0m in the financial year ended on 30 June 2020 compared to a net profit of $62.4m in the previous financial year. Net current assets deficiency of $255.5m (2019: $152.6m net current assets) include borrowings and working capital facilities of $479.6m (2019: $5.0m).

This year’s financial results were influenced by the downturn experienced by the aviation industry as a result of COVID-19 quarantine measures enforced by governments restricting international and domestic airways activity. Nevertheless, the Board consider Airservices to be a going concern on the basis of the following:

  • Continued funding and support from the Department of Infrastructure, Transport, Regional Development and Communications. To date, the entity has received $250m by way of government financial assistance and a commitment of a further funding of $581.8m for the 2020-21 financial year. Refer to Note 1.1 Revenue for further details.
  • In addition, Airservices has entered into a number of new short and long-term debt facility arrangements which will provide it with the ability to balance its short and long-term needs. As of 30 June 2020, the total uncommitted debt facilities is $715m. Refer to Note 3.4 Standby arrangements and unused credit facilities for further details.

The Board consider Airservices to be a going concern and will be able to meet its debts and obligations as they fall due.

No adjustments have been made to the financial statements relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should Airservices not continue as a going concern.

New Accounting Standards

Adoption of new Australian Accounting Standard requirements

Airservices applied AASB 16 Leases for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.

AASB 16 applies to annual reporting periods beginning on or after 1 July 2019. Airservices has applied AASB 16 as of 1 July 2019. As a result, Airservices has changed its accounting policy for leases as detailed below. AASB 16 replaces existing lease accounting guidance and contains significant changes to the accounting treatment applied to leases. It requires a single accounting model to be applied to all types of leases, with the primary change being a requirement for lessees to recognise assets and liabilities for all leases, except for short-term leases (with a duration of less than twelve months) and leases of low-value assets.

To ensure consistency for Whole of Government reporting, Airservices will adopt the Department of Finance’s position and apply AASB 16 on 1 July 2019 using the modified retrospective approach. Accordingly, comparative information has not been restated and continues to be reported under AASB 117 Leases and associated guidance.

Airservices has applied the practical expedient to not apply the new recognition requirements to short-term leases and leases of low-value assets. The lease payments under these contracts are generally recognised on a straight-line basis over the lease term as other expenses in the Statement of Comprehensive Income.

Impact of new definition of a lease

The change in the definition of a lease mainly relates to the concept of control. AASB 16 defines a lease as an arrangement in which a customer obtains the right to control the use of an identified asset for a period in exchange for consideration. Airservices applies the definition of a lease, and related guidance set out in AASB 16 to all lease contracts entered into or modified on or after 1 July 2019.

Impact on lessee accounting

As a lessee, Airservices previously classified leases as operating, or finance leases based on its assessment of whether the lease transferred significantly all the risks and rewards incidental to the ownership of the underlying asset to Airservices.

Applying AASB 16, for all leases other than those that are short term or leases of low-value assets, Airservices:

  • recognises a lease liability measured at the present value of future minimum lease payments, discounted using the incremental borrowing rates.
  • measures the right-of-use asset at its’ carrying amount as if AASB 16 had been applied since the commencement date, discounted using the incremental borrowing rates at the date of initial application.
  • recognises depreciation on right of use assets and interest on lease liabilities in the statement of comprehensive income.
  • separates the total amount of cash paid into a principal portion (financing activities) and interest (operating activities) in the statement of cash flows.

Payments made before the commencement date and incentives received from the lessor are also included in the carrying amount of the right-of-use asset.

Airservices applies the following practical expedients when applying AASB 16 to leases previously classified as an operating lease under AASB 117:

  • applies the modified retrospective model on initial application of AASB16.
  • recognises a right-of-use asset for leases previously classified as an operating lease at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease immediately before the date of initial application.
  • adjusts retained earnings for the de-recognition of lease incentive and straight-lining provisions recognised under AASB117 and Interpretation 115.
  • applies a single discount rate to a portfolio of leases with similar characteristics.
  • applies the exemption not to recognise right of use assets and liabilities for leases less than twelve months in duration.
  • adjusted the right of use assets by the amount of AASB 137 onerous contract provision immediately before the date of initial application, as an alternative to impairment review.
  • excludes initial direct costs from measuring right of use asset at the date of initial application.
  • used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
Impact on Transition of AASB 16
Impact on Transaction of AASB 16

1 July 2019

Right-of-use assets - property, plant and equipment

126,269

Lease liabilities

(121,833)

Retained earnings

(8,874)

The following table reconciles the Departmental minimum lease commitments disclosed in the entity's 30 June 2019 annual financial statements to the amount of lease liabilities recognised on 1 July 2019:

1 July 2019

Minimum operating lease commitment at 30 June 2019 (GST Inclusive)

219,512

Minimum operating lease commitment at 30 June 2019 (GST Exclusive)

199,556

Less: non-lease components that do not meet recognition criteria of AASB 161

(9,629)

Less: commitments subject to variable payments under managed services2

(41,204)

Less: short-term leases not recognised under AASB 16

(754)

Less: low value leases not recognised under AASB 16

(11,349)

Plus: effect of extension options reasonable certain to be exercised

4,751

Undiscounted lease payments

141,371

Less: effect of discounting using the incremental borrowing rate as at the date of initial application

(25,024)

Plus: additional lease liabilities because of the initial application of AASB 16 at 1 July 2019

5,486

Lease liabilities recognised at 1 July 2019

121,833

1Non-lease components that do not meet recognition criteria of AASB16 including Software as a Service and other support services.

2Operating lease commitments that were subject to variable payments under the managed services contract for Infrastructure as a Service.

Where the incremental borrowing rate is used, Airservices will reference a 30-year Australian Medium-Term Note (MTN) corporate bond yield curve which has been built to reflect our costs of borrowings. The curve can be used to represent the entity’s borrowing rate across asset categories and tenures.

No other new standards were issued prior to the sign-off date and are applicable to the current reporting period had a material effect, and are not expected to have a future material effect on the entity’s financial statements. No accounting standard has been adopted earlier than the application date, as stated in the standard.

1. Our Financial Performance

This section analyses the financial performance of Airservices Australia for the year ended 2020.

1.1 Revenue

Airways Revenue

2020

2019

$'000

$'000

Airways Revenue

Airways Revenue1

745,743

1,093,958

1Airways revenue is net of waivers for domestic aviation charges under the Government’s COVID-19 relief package ($92.5m YTD).

Domestic Flight Waivers

On 18 March 2020, the Minister for Infrastructure, Transport and Regional Development announced a relief package for the Australian aviation industry to refund and waive a range of charges including Airservices charges on domestic airline operations. These measures were effective from 1 February 2020 and are in response to an unprecedented and likely sustained period of falling international and domestic aviation demand related to the impact of the COVID-19 pandemic. As at 30 June, domestic flight waivers totalling $92.5m have been recognised.

Economic dependency

Airservices is dependent on airline activity in the Australian aviation industry, of which the Qantas and Virgin Groups are the dominant operators. Of the airways revenue earned during the year 34 per cent (2019: 35 per cent) related to the Qantas Group including the Jetstar Group, and 16 per cent (2019: 18 per cent) related to the Virgin Group (including Tiger Airways Australia). In lieu of revenue foregone from waiving domestic aviation charges and in support of critical operating costs that would have otherwise have been funded through debt facilities, the Government has provided Airservices with funding of $831.8m until June 2021 to ensure that air navigation services continue to be provided as the industry recovers. Of this balance, $250m has been received as at the year ended 30 June 2020. Refer Government Assistance note below for further details.

Accounting Policy
Airways revenues

Revenue is recognised when services are rendered for both airways and other business revenue. The prices charged for regulated services are in accordance with the agreements negotiated with customers and endorsed by the Australian Competition and Consumer Commission (ACCC). Underpinning this agreement are risk-sharing provisions which compensate parties where either airways activity volumes exceed or do not achieve agreed levels, costs vary due to regulatory change, or capital expenditure levels vary substantially from agreed investment levels.

Government Assistance
Government Assistance

2020

2019

$'000

$'000

Government Assistance

Government Grant

250,000

-

250,000

-

Government Assistance Package

Airservices will receive a total grant of $831.8m from the Government’s COVID-19 relief packages that will enable the waiving of domestic aviation charges for the period February to December 2020 and support Airservices critical operating costs. The first instalment of $250m has been received for the 2019-20 financial year with another $581.8m to be received during the 2020-21 financial year.

Finance Income

2020

2019

$'000

$'000

Finance income

Deposits

2,154

5,393

Cash at bank

240

445

Other

86

141

Total finance income

2,480

5,979

Accounting Policy
Finance income

Finance income is recognised using the effective interest method as set out in AASB 9 Financial Instruments. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability.

Net gain on disposal of non-current assets
Net gain on disposal of non-current assets

Net gain on disposal of non-current assets

Property, plant and equipment:

Proceeds from sale

-

20,371

Written down value of scrapped assets

-

(19,661)

Net gain on disposal of non-current assets

-

710

1.2 Expenses

Expenses

2020

2019

$'000

$'000

Employee benefits

Wages and salaries

452,771

441,935

Superannuation (defined contribution funds)

51,557

49,507

Leave and other entitlements

115,138

138,863

Separation and redundancies - other

3,255

542

Employee benefits (excluding defined benefit superannuation expense)

622,721

630,847

Net defined benefit superannuation expense recognised in employee benefits

Current service cost

25,621

24,681

Net interest expense

(6,244)

(10,990)

Defined benefit superannuation expense

19,377

13,691

Total employee benefits

642,098

644,538

Finance Costs

Borrowing costs

15,760

20,232

Interest rate swap fair value loss

3,078

1,674

Interest on lease liabilities

2,361

-

Total finance costs

21,199

21,906

Impairment loss on financial instruments

Impairment on trade and other receivables

20,020

(1,138)

Bad debts written off

270

1,756

Total impairment loss on financial instruments

20,290

618

Write-down and impairment of other assets

Impairment of property, plant and equipment

2,994

6,405

Revaluation (increments)/decrements

(23)

4,622

Total write-down and impairment of other assets

2,971

11,027

Net loss on disposal of non-current assets

Proceeds from disposal of non-current assets

(1,600)

-

Written-down value of disposed non-current assets

2,097

-

Proceeds from disposal of assets held for sale

(3,272)

-

Written-down value of disposed assets held for sale

3,272

-

Net loss on disposal of non-current assets

497

-

Other expenses

Operating lease rentals (1)

2,020

14,966

Short-term leases

676

-

Low value leases

4,426

-

Variable lease payments

652

-

7,774

14,966

(1) The Entity has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117. For the 2019-20 financial year, the ‘operating lease rentals’ line item includes any non-lease components not included in the measurement of the lease liability.

The above lease disclosures should be read in conjunction with the accompanying notes 2.3 Property, plant and equipment and intangibles and 2.7 Other assets and other liabilities.

Accounting Policy
Employee Benefits

Accounting policies for employee-related expenses is contained in the Our People section (refer to section 4. Our People ).

Short-term leases and leases of low-value assets

The Entity has elected not to recognise right-of-use assets and lease liabilities for short-term leases of assets that have a lease term of 12 months or less and leases of low-value assets (less than $10,000). The Entity recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

1.3 Taxation

Taxation

2020

2019

$'000

$'000

Income tax expense

Current tax expense

6,863

39,666

Deferred tax expense

(18,394)

(14,252)

Income tax expense attributable to profit from continuing operations

(11,531)

25,414

Reconciliation of income tax expense to prima facie tax payable

Profit from continuing operations before income tax expense

(36,500)

87,821

Prima facie income tax expense at 30%

(10,949)

26,346

Tax effect of amounts which are not deductible/assessable in calculating taxable income:

Non-deductible legal costs

2

25

Prior year over provision of tax

(661)

792

Other non-deductible/(assessable) expenditure

77

(1,749)

Income tax expense

(11,531)

25,414

Accounting Policy
Income tax

The income tax expense for the year is the tax payable on the current year’s taxable income based on the notional income tax rate. It is then adjusted for any changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

Income taxes relating to items recognised directly in equity are recognised in equity and not in the Statement of Comprehensive Income.

Deferred tax liability
Deferred tax liability

2020

2019

$'000

$'000

Deferred tax liability

The balance comprises temporary differences attributable to:

Amounts recognised in the statement of comprehensive income

Depreciation for accounting purposes

(1,341)

(8,970)

Allowance for impairment

6,689

684

Employee benefits

60,056

57,828

Provision for revenue to be returned to customers

187

182

Provision for legal costs

386

548

Other provisions

27,318

24,721

Accruals

1,759

1,670

95,054

76,663

Amounts recognised directly in equity

Foreign exchange hedge reserve

735

387

Revaluation of land, buildings, plant and equipment

(52,093)

(51,676)

Defined benefit (asset)/liability

(25,291)

(39,626)

Transition to AASB 16

(2,662)

-

(79,311)

(90,915)

Net deferred tax (liability) / assets

15,743

(14,252)

Movements:

Opening balance at 1 July

(14,252)

(41,246)

Charged to the statement of comprehensive income

18,391

14,252

Credited to equity

11,604

12,742

Closing balance as at 30 June

15,743

(14,252)

Tax losses

Airservices has capital losses of $4.9m (2019: $5.0m) that are available indefinitely for offset against future capital gains. Deferred tax assets have not been recognised in respect of these losses as management has evaluated and concluded that it is not probable that future capital gains will be available, against which Airservices can utilise these losses in the foreseeable future.

Accounting Policy
Deferred tax assets and liabilities

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction that at the time of the transaction did not affect either accounting or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences only if it is probable that future taxable amounts will be available to utilise those temporary differences.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

1.4 Dividends

Dividends paid

A final dividend of $5.4m for the year ended 30 June 2019 was paid on 3 March 2020 (2019: a $5.0m final dividend for the year ending 30 June 2018 was paid on 28 February 2019). No interim dividend for the year ending 30 June 2020 was paid (2019: a $4.8m interim dividend for the year ending 30 June 2019 was paid on 15 June 2019).

Franking credits

Franking credits available for subsequent financial years based on a tax rate of 30 per cent (30 June 2019: 30 per cent) are $339.9m (30 June 2019: $294.1m).

The above amounts represent the balance of the franking account as at the end of the financial year.

Accounting Policy
Dividends

A provision is made for the amount of any dividend approved by the Board but unpaid, prior to the end of the year.

2. Our Asset Base

This section analyses Airservices Australia’s assets used to generate financial performance and the operating liabilities incurred as a result. Employee-related information is disclosed in the Our People section.

2.1 Receivables

Receivables

2020

2019

$'000

$'000

Trade and other receivables

Trade receivables, net of waivers (a)

49,952

124,854

Less impairment loss allowance (b)

(22,298)

(2,278)

27,654

122,576

Accrued revenue and interest

2,969

3,908

Other receivables

2,120

178

Total current receivables

32,743

126,662

(a) Ageing analysis of trade receivables

Current

19,823

95,781

Overdue by:

1 to 30 days

4,521

25,688

31 to 60 days

1,648

1,524

61 to 90 days

10,892

881

90 + days

13,068

980

Total trade receivables

49,952

124,854

Trade and other receivables (net) expected to be recovered

No more than 12 months

49,952

124,854

Total trade and other receivables (net)

49,952

124,854

(b) Reconciliation of the impairment loss allowance

Opening balance

2,278

3,416

Increase recognised in net profit/(loss)

20,020

(1,138)

Closing balance

22,298

2,278

The provision for impairment of receivables is aged as follows:

Current

1,260

151

Overdue by:

1 to 30 days

1,118

356

31 to 60 days

666

283

61 to 90 days

8,184

390

90 + days

11,070

1,098

Total provision for impairment of receivables

22,298

2,278

Credit terms for goods and services are 28 days.

Notes:

Domestic Flight Waivers

On 18 March 2020, the Minister for Infrastructure, Transport and Regional Development announced a relief package for the Australian aviation industry to refund and waive a range of charges including Airservices charges on domestic airline operations. The trade receivables balance at 30 June 2020 is net of domestic flight waivers totalling $6.2m. Refer to Note 1.1 Revenue for further information.

Provisions for expected credit losses (ECL)

COVID-19 has had a significant impact on global and domestic economies and as such, many of Airservices customers. The current and prospective rapid deterioration in the economy, particularly within the aviation industry due to COVID-19 has resulted in a significant increase in the provision for Expected Credit Loss (ECL) to $22.3m (30 June 2019: $2.3m).

Modelled provision for ECL

The modelled provision for ECL is a probability weighted estimate of multiple scenarios using the roll-rate approach based on historical analysis of receivable balances, provisioning and delinquencies. A further Standard & Poors average probability of default measurement for our key customer’s receivables of 1.49 per cent was applied. Together this is representative of Airservices view of the forward-looking distribution of potential loss outcomes. The increase in provisions as a result of changes in modelled ECL are reflected through the line item “increase recognised in net loss”.

COVID-19 overlay

While the impacts on the economy and travel sector generally are included in the assumptions used in the model and the weightings applied to the scenarios, the general wide impacts will not reflect the specific impact on individual customers. As the full impact of the COVID-19 pandemic is yet to be felt at the balance to date, Airservices is still to see the anticipated increase in delinquencies, downgrades and defaults. As these likely future downgrades are not currently captured in the modelled outcome, Airservices has considered the likely industry impacts and raised a $1.4m overlay in addition to the modelled provision of $20.9m.

Airservices will reassess this treatment as the situation evolves and the longer term impacts of the COVID-19 pandemic become clearer. Beyond the specific COVID-19 government support packages it is likely some airline customers will move into general hardship arrangements and thus will represent an increased credit risk.

2.2 Assets classified as held for sale

Five land assets have been identified as surplus to the requirements of Airservices and have been classified as assets held for sale. Disposal is expected to be completed within the 2020-21 financial year. The carrying amount of the asset amounts is $0.4m (30 June 2019: $3.3m).

2.3 Property, plant and equipment and intangibles

Non-current assets - property, plant, equipment and intangible

Non-current assets - property, plant, equipment and intangible

Land

Buildings

Plant and equipment

Total property, plant and equipment2

Internally developed software

Other intangible assets

Total intangibles

Assets under construction1

Total

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

As at 1 July 2019

Gross book value

25,950

410,144

731,775

1,167,869

344,675

83,301

427,976

259,903

1,855,748

Accumulated depreciation and impairment

-

(57,439)

(198,443)

(255,882)

(252,735)

(80,611)

(333,346)

-

(589,228)

Net book value 1 July 2019

25,950

352,705

533,332

911,987

91,940

2,690

94,630

259,903

1,266,520

Recognition of right of use asset on initial application of AASB 16

44,122

79,455

2,693

126,270

-

-

-

-

126,270

Adjusted total as at 1 July 2019

70,072

432,160

536,025

1,038,257

91,940

2,690

94,630

259,903

1,392,790

Additions

-

-

2,535

2,535

-

-

-

294,521

297,056

Right-of-use assets additions

171

131

7,762

8,064

-

-

-

-

8,064

Revaluations and impairments recognised in other comprehensive income

-

508

-

508

-

-

-

-

508

Revaluations recognised in profit and loss

(73)

5,897

-

5,824

-

-

-

-

5,824

Revaluations and impairments recognised in other comprehensive income for right-of-use assets

-

-

-

-

-

-

-

-

-

Impairments - recognised in profit and loss

-

-

-

-

-

-

-

(2,994)

(2,994)

Impairments - recognised in other comprehensive income

-

-

-

-

-

-

-

-

-

Impairments on right-of-use assets recognised in net cost of services

-

-

-

-

-

-

-

-

-

Commissioned assets under construction

-

18,310

20,485

38,795

9,267

2,330

11,597

(50,394)

(2)

Depreciation/amortisation expense

-

(31,267)

(85,318)

(116,585)

(15,640)

(3,157)

(18,797)

-

(135,382)

Depreciation on right-of-use assets

(3,405)

(9,411)

(4,245)

(17,061)

-

-

-

-

(17,061)

Other movements of ROU assets

-

-

-

-

-

-

-

-

-

Disposals - other

(1,539)

(31)

(470)

(2,040)

-

(57)

(57)

-

(2,097)

Transferred to assets held for sale

(445)

-

-

(445)

-

-

-

-

(445)

Transfers - other

3

233

(233)

3

-

-

-

-

3

Net book value 30 June 2020

64,784

416,530

476,541

957,855

85,567

1,806

87,373

501,036

1,546,264

Net book value as of 30 June 2020 represented by:

Gross book value

68,189

490,665

755,625

1,314,479

353,749

82,330

436,079

501,036

2,251,594

Accumulated depreciation and impairment

(3,405)

(74,135)

(279,084)

(356,624)

(268,182)

(80,524)

(348,706)

-

(705,330)

64,784

416,530

476,541

957,855

85,567

1,806

87,373

501,036

1,546,264

Carrying amount of right-of-use assets

40,888

70,175

6,210

117,273

-

-

-

-

117,273

1Total Assets under Construction includes $314.6m of intangible assets which is mainly comprised of the OneSKY - Civil Military Air Traffic Control System and $186.5m of property, plant and equipment.

2Total property, plant and equipment includes right-of-use assets leased to third-parties as an operating lease of $0.3m at 30 June 2020.

Non-current assets - property, plant, equipment and intangible

Non-current assets - property, plant, equipment and intangible

Land

Buildings

Plant and equipment

Total property, plant and equipment

Internally developed software

Other intangibles assets

Total intangibles

Assets under construction

Total

Land

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

As at 1 July 2018

Gross book value

49,547

399,040

761,112

1,209,699

321,254

86,594

407,848

219,061

1,836,608

Accumulated depreciation and impairment

-

(25,516)

(215,059)

(240,575)

(235,687)

(80,993)

(316,680)

-

(557,255)

Net book value 1 July 2018

49,547

373,524

546,053

969,124

85,567

5,601

91,168

219,061

1,279,353

Additions - internally developed

-

9,700

65,590

75,290

28,266

52

28,318

145,677

249,285

Revaluations

(3,605)

3,027

10,967

10,389

-

-

-

-

10,389

Impairments - recognised in profit and loss

-

(66)

(247)

(313)

(2,631)

(78)

(2,709)

(3,383)

(6,405)

Impairments - recognised in other comprehensive income

-

-

(67)

(67)

-

-

-

-

(67)

Commissioned assets under construction

-

-

-

-

-

-

-

(101,452)

(101,452)

Depreciation/amortisation expense

-

(32,225)

(87,665)

(119,890)

(18,932)

(2,828)

(21,760)

-

(141,650)

Transfers

-

-

-

-

-

-

-

-

-

Disposals - other

(16,720)

(1,255)

(1,299)

(19,274)

(330)

(57)

(387)

-

(19,661)

Transfers to assets held for sale

(3,272)

-

-

(3,272)

-

-

-

(3,272)

Net book value 30 June 2019

25,950

352,705

533,332

911,987

91,940

2,690

94,630

259,903

1,266,520

Net book value as of 30 June 2019 represented by:

Gross book value

25,950

410,144

731,775

1,167,869

344,675

83,301

427,976

259,903

1,855,748

Accumulated depreciation and impairment

-

(57,439)

(198,443)

(255,882)

(252,735)

(80,611)

(333,346)

-

(589,228)

25,950

352,705

533,332

911,987

91,940

2,690

94,630

259,903

1,266,520

(a) Revaluation of land, buildings, plant and equipment

The valuation basis for land, buildings, plant and equipment is fair value as outlined in Note 2.4 Fair value disclosure.

Airservices engaged accredited valuers Marsh to value its land and buildings. The effective date of the revaluation was 30 June 2020.

Property valuation uncertainty

Market uncertainty comes about when a market, as at the valuation date, is disrupted by current or very recent events such as a sudden economic or political crisis. The event(s) that cause market uncertainty may be macroeconomic, for example the current the COVID-19 pandemic, or microeconomic such as a change to a law or regulation which resets or disrupts a market sector.

In the real estate market, macroeconomic event(s) may result in valuation uncertainties as the only evidence available to be considered by the valuer is most likely to have taken place before the event occurred, the impact of which will not be reflected in market evidence The impact on sale prices and volumes will not be known until the market has stabilised and a new normal has been established.

Accordingly, the valuation undertaken for reporting purposes has attached less weight to previous market evidence for comparison purposes to inform opinions of value. The market the property/assets(s) are being transacted in or assessed in is impacted by the uncertainty that the COVID-19 pandemic has caused. Market conditions are changing daily, and the current response to the COVID-19 pandemic means that an unprecedented set of circumstances was faced on which to base a judgement. In the event that impacts are more material or prolonged than anticipated, this may have a material impact to the fair value of Airservices property portfolio and the future prices achieved if any properties are sold.

(b) Contractual commitments for the acquisition of property, plant, equipment and intangible assets

Capital commitments for property, plant, equipment and intangibles was $923.9m (2019: $1.2bn) and includes GST where relevant.

(c) Impairment

In line with accounting standards, management has performed an impairment review of both existing assets and assets under construction. Principally, the review has focused on future use of existing assets, and changes in project, technology and business system requirements.

(d) Carrying amounts that would have been recognised if land, plant and equipment were measured using the cost model:
(D) Carrying amounts that would have been recognised if land, plant and equipment were measured using the cost model

2020

2019

$'000

$'000

Land

At cost

2,065

2,271

2,065

2,271

Buildings

At cost

583,413

565,340

Accumulated depreciation

(271,824)

(249,283)

Net book amount

311,589

316,057

Plant and Equipment

At cost

1,350,581

1,357,994

Accumulated depreciation

(839,748)

(786,567)

Net book amount

510,833

571,427

(e) Borrowing Costs

The total borrowing costs capitalised at 30 June 2020 is $18.2m (2019: $9.3m) of which $10.6m (2019: $5.1m) were capitalised during the year. As Airservices borrows money generally to fund both operating and capital expenditure, the weighted average cost of borrowings of 3.88 per cent (2019: 3.71 per cent) was used as the capitalisation rate.

Accounting Policy
Asset recognition threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases less than $5,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

Cost and valuation

Property, plant and equipment are measured at cost or at fair value, less, where applicable, accumulated depreciation and any accumulated impairment losses.

Assets purchased by Airservices are initially recorded at cost and represent costs directly attributable to the acquisition. Labour and direct overheads incurred in installation are capitalised and added to the cost. Assets constructed by Airservices are initially recognised at the cost of materials, labour, direct overheads and borrowing costs incurred on qualifying assets.

All costs associated with repairs and maintenance are charged to the Statement of Comprehensive Income during the financial period in which they are incurred.

Revaluations

Following initial recognition at cost, property, plant and equipment (excluding ROU Assets) are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Independent valuations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from the asset’s fair value at the reporting date. Revaluations are conducted by an independent qualified valuer.

Any revaluation surplus is credited to the asset revaluation reserve included in the equity section of the Statement of Financial Position unless it reverses a revaluation decrease of the same asset previously recognised in the Statement of Comprehensive Income, in which case the increase is recognised in profit or loss. Any revaluation deficit is recognised in the Statement of Comprehensive Income, except that a decrease offsetting a previous surplus for the same asset is debited directly to the asset revaluation reserve to the extent of the credit balance existing in the revaluation reserve for that asset. Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the re-valued amount of the asset. The revaluation surplus is accounted for net of deferred tax in the asset revaluation reserve.

Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings.

Lease Right of Use (ROU) Assets

At inception of a contract, Airservices assesses whether an arrangement is, or contains a lease. An arrangement contains a lease if a customer has the right to control the use of an identified asset for a period in exchange for consideration. Airservices is a party to lease contracts for the following ROU asset classes–land, building, plant and equipment as at 30 June 2020.

The entity has elected not to separate non-lease components and account for its lease and non-lease components as a single lease component only if immaterial, as allowed by the Department of Finance. Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability amount, initial direct costs incurred when entering into the lease less any lease incentives received. The commencement date is the date on which a lessor makes an underlying asset available for use by a lessee.

If the lease transfers ownership of the underlying asset to Airservices by the end of the lease term or if the costs of the ROU asset reflects that Airservices will exercise a purchase option, the asset will be depreciated from the commencement date to the end of the useful life of the underlying asset.

These assets are accounted for as separate asset classes to corresponding assets owned outright, but included in the same column as where the corresponding underlying assets would be presented if they were owned.

On initial adoption of AASB 16, Airservices has adjusted the ROU assets at the date of initial application by the amount of any provision for onerous leases recognised immediately before the date of initial application. Following initial application, an impairment review is undertaken for any ROU lease asset that shows indicators of impairment and an impairment loss is recognised against any ROU lease asset that is impaired. Lease ROU assets continue to be measured at cost after initial recognition in Airservices and Whole of Government financial statements.

Derecognition and disposal

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising from de-recognition, calculated as the difference between net disposal proceeds and carrying value, is included in the Statement of Comprehensive Income in the year the asset is derecognised.

Impairment of non-financial assets

The carrying values of property, plant and equipment (including ROU assets) are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable, and, as a minimum, at least annually. All assets were assessed for impairment as at 30 June 2020.

For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which it belongs. If any impairment indication exists, and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

Recoverable amount of non-current assets

All assets are subjected to impairment tests at each reporting date. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made. Where the carrying amount exceeds the recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

The recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for each asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash flows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a market-determined risk adjusted discount rate.

Depreciation

Depreciable property, plant and equipment are written-off to their estimated residual values over their estimated useful lives to Airservices, using in all cases, the straight-line method of depreciation.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives.

Depreciation

2020

20191

Buildings (e.g. control towers, fire stations, commercial property)

10-45 years

10-45 years

Building equipment

1-40 years

2-40 years

Other Assets (e.g. building equipment, airways technical equipment, vehicles)

2-40 years

2-40 years

1 Comparatives have been updated to reflect actual useful lives applied in depreciation rates. This was previously disclosed using standard useful lives.

The depreciation rates for ROU assets are based on the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term.

Spares

Asset-specific spare parts (repairable spares) have been treated as plant and equipment and depreciated over the useful life of the parent asset to which they are related.

Decommissioning and site rehabilitation

Where Airservices has an obligation to incur site rehabilitation costs and the requirements outlined below in Note 2.5 Other provisions and payables, have been met, the estimated cost to make good the site has been recorded as a provision.

The net present value of the make-good obligation is measured by discounting using market yields at the reporting date on high quality corporate bonds (AA and AAA rated bonds only) with terms to maturity that match, as closely as possible the estimated future cash-flows of the related make-good obligation.

Intangible assets

Intangible assets acquired separately are initially measured at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and impairment losses. Where amortisation is charged on assets with finite lives, this expense is taken to the Statement of Comprehensive Income. Software is amortised on a straight-line basis over 3-10 years.

Research costs associated with in-house developed intangible assets are expensed as incurred. Costs incurred on development projects (relating to the design and testing of new, improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technical feasibility and its cost can be measured reliably. The carrying value of development costs is reviewed for impairment annually or more frequently if there is evidence to suggest that the carrying value may not be recoverable. All intangibles were assessed for indicators of impairment as at 30 June 2020.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying value of the asset as at the date of de-recognition and are recognised in the Statement of Comprehensive Income.

Borrowing costs

Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.

2.4 Fair value disclosure

The following tables provide an analysis of assets and liabilities that are measured at fair value. The remaining assets and liabilities disclosed in the Statement of Financial Position do not apply the fair value hierarchy.

The different levels of the fair value hierarchy are defined below.

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

Fair value measurements

Fair value measurements at 30 June 2020 by hierarchy for assets and liabilities

Fair value measurements at the end of the reporting period

Valuation technique

Inputs used

2020

2019

Category (Level 1, 2, or 3)

$'000

$'000

Financial assets

Forward exchange contracts

681

709

2

ADCF

[1]

Foreign currency receivable

-

-

2

ADCF

[1]

Interest rate swaps

16,688

15,785

2

ADCF

[2]

Total financial assets at fair value

17,369

16,494

Non-financial assets

Land

23,896

25,950

2

DC

[3]

Buildings

346,355

352,705

3

DRC

[4]

Plant and equipment

470,331

533,332

3

DRC

[5]

Assets held for sale

445

3,272

2

DC

[3]

Total non-financial assets at fair value

841,027

915,259

Total fair value measurements of assets

858,396

931,753

Financial liabilities

Forward exchange contracts

3,169

1,974

2

ADCF

[1]

Interest rate swaps

17,675

13,757

2

ADCF

[2]

Total financial liabilities at fair value

20,844

15,731

Total fair value measurements of liabilities

20,844

15,731

Financial Liabilities not measured at fair value in the statement of financial position

Medium Term Notes

994,600

712,458

1

DC

[6]

Commercial Paper

134,905

4,991

1

DC

[6]

Total financial liabilities not measured at fair value

1,129,505

717,449

Notes:

DC - Direct Comparison

DRC - Depreciated Replacement Cost (Cost Approach)

DCF - Discounted Cash flows

ADCF - Adjusted Discounted Cash flows

WA – Weighted Average

[1] Current foreign exchange market rates.

[2] Current market interest rates.

[3] Direct comparison with a wide range of land sales on a rate per square metre basis. Professional judgement has been utilised to determine fair value taking into account tenure, encumbrances, town planning, location, size and shape.

[4] Historical capitalised costs adjusted to current date by the application of specific indices (range used: +1.5 per cent - +3.75 per cent)

[5] Asset class subject to high level review only. Historical capitalised costs adjusted to current date by the application of specific indices considered appropriate to particular asset categories (range used: -4 per cent - +2 per cent). Indices adopted have no material movement compared to 2019.

[6] Medium term note and commercial paper fair values reflect the price that an existing investor is prepared to receive if they were to sell their investment in the secondary market.

Airservices engages external, independent and qualified valuers to assess the fair value of Airservices property plant and equipment on an annual basis. Highest and best use is the same as current use.

Valuation techniques used to determine Level 2 and Level 3 fair values
Land

The fair value of freehold land assets has been derived using the direct comparison approach whereby the evidence derived from analysis of recent sales of similar properties is used to establish the value of the subject property (Level 2 Inputs). In this regard, sales evidence has been collected as close to the date of valuation as possible and compared to the subject property on the basis of area, contours, locations, access and alternate potential. The sales were then analysed on a sale price per square metre of land area and adjusted accordingly to reflect any character differences between the subject property and the comparable sales data.

Buildings

Non-specialised building assets where the asset can be identified as having the capability to be compared to open market conditions have been valued using the capitalised income approach whereby a yield is applied to the properties income (actual or assumed) to assess the value.

Specialised buildings and site improvements have been valued on the basis of Depreciated Replacement Cost (Summation Method). This has been determined by first establishing the estimated cost to replace with an equivalent new asset less depreciation for their physical, functional and economic obsolescence.

Most building assets possess an alternate use potential, however, that potential can only be realised if the underlying conditions of the land permit an alternate use. In most instances the land lease agreements Airservices Australia has entered into preclude using the underlying land and the buildings upon the land in any other way than to provide the specialised services specifically related to Airservices. Where the land lease conditions preclude Airservices from partaking in otherwise normal market conditions, the building assets were valued as a specialised asset.

Plant and Equipment

These assets represent a specialised group of assets integrated to perform the control, monitoring and safety requirements of air and ground movement of commercial aircraft and airport support vehicles within Australia. Generally, the plant and equipment assets are typical at each airport and only vary subject to the operational requirements of each airport. Airservices assets include navigational aids, en-route surveillance systems, airport infrastructure and fire and rescue vehicles. As such, all plant and equipment assets are considered to be specialised and are valued using the Cost Approach (depreciated replacement cost). For the current assessment year, cost indices were reviewed and indicated there has been no material movement in costs to current date. As such, net book values are considered to reflect fair value.

Financial assets and liabilities

The fair values of foreign currency Forward Exchange Contracts (FECs) and Interest Rate Swaps (IRSs) are calculated using a credit adjusted discounted cash-flow methodology. FEC and IRS contracted rates are compared to current market rates to calculate future cash flows which are then discounted to arrive at a present value.

Reconciliation for recurring Level 3 fair value measurements
Reconciliation for recurring Level 3 fair value measurements

Recurring Level 3 fair value measurements - reconciliation for assets

Non-financial assets

Buildings

Plant and equipment

Total

2020

2020

2020

$'000

$'000

$'000

Opening balance

352,705

533,332

886,037

Total gains/(losses) recognised in Statement of Comprehensive Income (1)

-

485

485

Total gains/(losses) recognised in Other Comprehensive Income (2)

508

(485)

23

Purchases

233

2,302

2,535

Commissioned

18,310

20,485

38,795

Disposals

(31)

(470)

(501)

Depreciation

(31,267)

(85,318)

(116,585)

Closing balance

340,458

470,331

810,789

(1) These gains/(losses) are presented in the Statement of Comprehensive Income under Reversal of previous asset write-down.

(2) These gains/(losses) are presented in the Statement of Comprehensive Income under Changes in asset revaluation reserve.

2.5 Other provisions and payables

Other provisions and payables

2020

2019

$'000

$'000

Current payables and other provisions

Current trade and other payables

Trade payables

13,361

14,927

Employees

Salaries and wages

15,385

12,695

Superannuation

1,648

1,594

Tax payables

Accrued payroll tax

9,483

2,847

Net goods and services tax payable

-

13,267

Group tax payable

5,784

6,149

Revenue received in advance

678

1,153

Interest payable

3,775

2,806

Other accrued expenses

71,381

51,328

Total current trade and other payables

121,495

106,766

Current other provisions

Revenue to be returned to customers

622

607

ARFFS decontamination

11,892

15,743

Litigation and legal costs

1,288

1,825

Makegood on leasehold assets

213

614

Other

1,893

823

Total current other provisions

15,908

19,612

Total current provisions and payables

137,403

126,378

Non-current other provisions

ARFFS decontamination

47,417

38,781

Makegood on leasehold assets

27,559

24,032

Total non-current provisions

74,976

62,813

Description of provisions

Aviation Rescue and Fire Fighting Services (ARFFS) decontamination
The provision relates to the assessment, management and containment of possible contaminated ARFFS training sites as outlined in 5.1 Contingent liabilities.

Accounting Policy
Provisions

Provisions are recognised when Airservices has a present obligation (legal or constructive) as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the reporting date. Where the effect of the time value of money is material, the obligation is measured using a discount rate which reflects current market assessments and the risks specific to the liability. Increases in the provision due to the passage of time (unwinding of the discount) are then recognised as an expense.

Accounting Judgements and Estimates
Other provisions

An estimate of expected future costs has been used to establish the provision for the assessment, management and containment of possible contaminated Aviation Rescue and Fire Fighting Services (ARFFS) training sites and the remediation and restoration of leased property sites.

Movements in provisions
Movements in provisions

2020

2019

$'000

$'000

Movements in provisions

(i) Revenue to be returned to customers (Current)

Carrying amount at start of period

607

505

Additional provisions made

15

102

Carrying amount at end of period

622

607

(ii) ARFFS decontamination (Current/Non-current)

Carrying amount at start of period

54,524

56,177

Additional provisions made

14,441

4,191

Payments

(9,656)

(5,844)

Carrying amount at end of period

59,309

54,524

(iii) Litigation and legal costs (Current)

Carrying amount at start of period

1,825

844

Additional provisions made

1,288

1,825

Payments

(1,825)

(844)

Carrying amount at end of period

1,288

1,825

(iv) Makegood on leasehold assets (Current/Non-current)

Carrying amount at start of period

24,646

22,629

Additional provisions made

3,394

2,161

Payments

(268)

(144)

Carrying amount at end of period

27,772

24,646

(v) Restructuring costs (Current)

Carrying amount at start of period

-

7,260

Amounts reversed

-

(5,200)

Payments

-

(2,060)

Carrying amount at end of period

-

-

(vi) Other (Current)

Carrying amount at start of period

823

1,413

Additional provisions made

1,160

-

Payments

(90)

(590)

Carrying amount at end of period

1,893

823

2.6 Other financial assets and liabilities

Other financial assets and liabilities

2020

2019

$'000

$'000

Other current financial assets

Interest rate swaps

3,608

-

Forward exchange contracts

416

338

Foreign currency receivable

-

-

Total other current financial assets

4,024

338

Other non-current financial assets

Interest rate swaps

13,080

15,785

Forward exchange contracts

265

371

Total other non-current financial assets

13,345

16,156

Other current financial liabilities

Interest rate swaps

944

506

Forward exchange contracts

795

335

Total other current financial liabilities

1,739

841

Other non-current financial liabilities

Interest rate swaps

16,731

13,251

Forward exchange contracts

2,374

1,639

Total other non-current financial liabilities

19,105

14,890

Refer to Note 2.4 for basis of fair value measurement.

2.7 Other assets and other liabilities

Other assets and other liabilities

2020

2019

$'000

$'000

Other current liabilities

Lease liability (1)

Land

2,733

375

Buildings

6,753

-

Plant and equipment

4,110

-

Total other current liabilities

13,596

375

Other non-current liabilities

Lease liability (1)

Land

35,169

4,063

Buildings

66,538

-

Plant and equipment

1,710

-

Other (2)

58,463

85,062

Total other non-current liabilities

161,880

89,125

(1) The Entity has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117. Total cash outflow for leases for the year ended 30 June 2020 was $14.8m.

(2) This represents the excess of amounts received from the Department of Defence under the On-Supply Agreement, over Defence’s share of work conducted by Thales under the Civil-Military Air Traffic Management System (CMATS) acquisition contract.

The above lease disclosures should be read in conjunction with the accompanying Notes 1.2 Expenses, 2.3 Property, plant and equipment and intangibles.

Accounting Policy
Lease liabilities

The lease liability is measured at the present value of future lease payments, discounted using the implicit interest rate (IIR), if available, otherwise the incremental borrowing rates (IBR) is used. The discount rate represents Airservices borrowing rate with the asset portfolio adjusted for the profile of the underlying asset (and its securitisation), currency and the tenor.

Where the incremental borrowing rate is used, Airservices will reference a 30-year Australian Medium-Term Note (MTN) corporate bond yield curve which has been built to reflect our costs of borrowings. The curve can be used to represent the entity’s borrowing rate across asset categories and tenures.

Lease payments to be included in the measurement of the lease liability comprise fixed payments (including in-substance fixed payments) less any lease incentives; variable lease payments that depend on an index or a rate; the exercise price of a purchase option if reasonably certain of exercise; amounts expected to be payable under a residual value guarantee; and any payments of penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.

Lease payments not included in the initial measurement of the lease liability are recognised directly in profit and loss. Overall, the variable payments constitute up to 3 per cent of Airservices entire lease payments as at 30 June 2020. Airservices expects this ratio to remain constant in the future years. Refer to Note Expenses for further detail.

The lease term determined comprises the non-cancellable period of lease contracts, periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

After the commencement date, Airservices measures the lease liability by reducing the carrying amount to reflect any lease payments made, and increasing the carrying amount to reflect interest on the lease liability.

Airservices remeasures the lease liability whenever there is a change in future lease payments arising from change in an index or rate, if there is a change in the entity’s estimate of the amount expected to be payable under a residual value guarantee, or if the entity changes its assessment of whether it will exercise a purchase, extension or termination option. Any remeasurement is generally adjusted against the right-of-use (ROU) asset.

Refer to the Overview section for accounting policy on transition to AASB16 Leases and Note 2.3 Property, plant and equipment and intangibles for the accounting policy for ROU assets.

3. Our Funds Management

This section identifies Airservices Australia’s funding structure.

3.1 Cash and cash equivalents

Cash and cash equivalents

2020

2019

$'000

$'000

Cash and cash equivalents

Cash at bank and in hand

43,608

36,006

Deposit at call

264,200

80,700

Term deposits

210,000

265,000

Total cash and cash equivalents

517,808

381,706

(a) Cash at bank and in hand

Cash at bank has a floating interest rate of 0.45 per cent (30 June 2019: 1.45 per cent) for balances up to $25m. For balances greater than $25m, the interest rate is 0.25 per cent (30 June 2019: 1.25 per cent). Cash in hand and some non-interest bearing bank accounts have a zero interest rate.

(b) Deposits at call

The deposits at call have a floating interest rate of 0.25 per cent (30 June 2019: 1.25 per cent). These 11am cash deposits are rolled over on a daily basis.

(c) Term deposits

This represents $35m maturing on 28 July 2020, $40m maturing on 16 September 2020, $60m maturing on 22 September 2020, $35m maturing on 14 October 2020 and $40m maturing on 28 October 2020. Term deposits have a weighted average interest rate of 0.75 per cent.

Accounting Policy
Cash and cash equivalents

Cash is recognised at its nominal amount. Cash in the Statement of Financial Position comprises cash at bank and in hand and deposits at call which are readily convertible to cash on hand. For the purposes of the cash flow statement, cash includes cash and cash equivalents net of outstanding bank overdrafts.

3.2 Reconciliation of cash and cash equivalents

Reconciliation of cash and cash equivalents

2020

2019

$'000

$'000

Reconciliation of net profit/(loss) after income tax to net cash flows from operations

Net profit/(loss) after income tax

(24,969)

62,407

Adjustments for:

Depreciation expense

152,443

141,650

Impairment recognised for property, plant and equipment

2,994

6,405

Reversal of previous asset write-downs

(485)

(955)

Net gain on sale/write-down of non-current assets

-

(710)

Net loss on sale/write-down of non-current assets

790

2,258

Fair value adjustments to derivatives

-

(1,410)

AvSuper defined benefit contributions movement (after tax)

(33,448)

(27,363)

Change in assets

(Increase)/decrease in gross receivables

73,899

(1,312)

(Increase)/decrease in inventories

(165)

(99)

(Increase)/decrease in prepayments

620

923

(Increase)/decrease in other assets

(875)

(6,733)

(Increase)/decrease in deferred tax

(29,995)

(27,095)

Change in liabilities

Increase/(decrease) in employee benefits

60,521

61,134

Increase/(decrease) in allowance for impairment

20,020

(1,138)

Increase/(decrease) in legal provisions

(537)

981

Increase/(decrease) in other liabilities

(57,470)

100,658

Increase/(decrease) in other provisions

5,587

(226)

Increase/(decrease) in creditors and accruals

5,220

12,427

Increase/(decrease) in revenue to be returned to customers provision

15

102

Net cash flow from operating activities

174,165

321,904

3.2 Reconciliation of cash and cash equivalents

Reconciliation of cash and cash equivalents

2020

2019

$'000

$'000

Unsecured borrowings

Current (1)

479,593

4,989

Non-current (2)

671,599

672,354

Total borrowings

1,151,192

677,343

(1) This represent amounts issued under a $975m medium term note program, a $300m commercial paper program and two committed standby cash advance facilities. It includes a $275m medium term note tranche maturing 19 November 2020, a $10m commercial paper tranche maturing 8 July 2020, a $25m commercial paper tranche maturing 23 July 2020, a $5m commercial paper tranche maturing 21 August 2020, a $20m commercial paper tranche maturing 30 September 2020, a $75m commercial paper tranche maturing 5 October 2020, a $60m cash advance maturing on 23 September 2020 and a $10m cash advance maturing on 24 September 2020.

(2) This represents amounts issued under a $975m medium term note program and includes a $200m tranche maturing on 15 May 2023, a $200m tranche maturing on 15 May 2026 and a $275m tranche maturing on 15 May 2030.

3.4 Standby arrangements and unused credit facilities

Standby arrangements and unused credit facilities

2020

2019

$'000

$'000

Unused credit facilities - bank overdraft

5,000

5,000

Borrowing facilities

Commercial paper program

300,000

300,000

Medium term note program

975,000

975,000

Committed standby cash advance facilities

535,000

180,000

Uncommitted 11am borrowing

60,000

60,000

Total borrowing facilities

1,870,000

1,515,000

Amount utilised

(1,155,000)

(680,000)

Unused borrowing facilities

715,000

835,000

3.5 Financial instruments

Airservices has exposure to credit risk, liquidity risk, market risk (comprising of interest rate and foreign exchange risk) arising from its operations and use of financial instruments. Airservices uses financial instruments to manage these risks within a framework consisting of a comprehensive set of risk management policies. These risks are managed centrally and speculative trading is strictly prohibited.

Financial assets and liabilities – classification and measurement
Cash and cash equivalents

Airservices cash and cash equivalents are overnight or short term deposits that are held to maturity and have cash flows that solely represent principal and interest. All cash and cash equivalents are classified under AASB 9 as financial assets at amortised cost.

Trade and other receivables

All Airservices trade receivable cash flows solely represent principal and interest payments and are classified under AASB 9 as financial assets at amortised cost. When measuring its trade and other receivables, Airservices has adopted the AASB 9 simplified approach to measure the impairment loss allowance at an amount equal to the lifetime expected credit loss.

Committed standby cash advances

Airservices standby cash advances are short term bank loans that are held to maturity and have cash flows that solely represent principal and interest. All committed standby cash advances are classified under AASB 9 as financial liabilities at amortised cost.

Medium term notes and commercial papers

Airservices financial liabilities include medium-term notes and commercial papers which are initially measured at fair value less transactions costs and subsequently remeasured using the effective interest method. Under AASB 9, these instruments are all classified as financial liabilities at amortised cost.

Trade and other payables

Supplier and other payables are recognised at amortised cost as all cash flows solely represent payment of principal. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

Derivative financial instruments

Under AASB 9, all Airservices derivative financial liabilities are measured and classified as financial assets or liabilities at fair value through profit and loss.

Derivative financial instruments - hedge accounting under AASB9

Airservices uses derivative financial instruments, such as Forward Exchange Contracts (FECs) and Interest Rate Swaps (IRSs) to hedge its foreign currency risks and interest rate risks, respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value on reporting date. Derivatives are carried as current or non-current financial assets when the fair value is positive and as current and non-current financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion, which is recognised in other comprehensive income.

Fair value measurements

The fair values of Airservices FECs and IRSs are calculated using a credit adjusted discounted cash-flow methodology. FEC and IRS contracted rates are compared to current market rates to calculate future cash flows which are then discounted to arrive at a present value.

Airservices uses only observable market data as inputs. This has not changed as a result of COVID-19.

Airservices does not apply netting to the fair values of its financial assets and liabilities. The Statement of Financial Position separates the fair values into current and non-current financial assets and liabilities. However, as at 30 June 2020, if netting was applied to the FEC portfolio, then FEC financial assets of $681,128 would have been reduced by FEC financial liabilities of $3,169,301 to the net liability amount of $2,488,173 (30 June 2019: FEC financial assets of $709,022 would have been reduced by FEC financial liabilities of $1,973,853 to the net liability amount of $1,264,831).

If netting was applied to the IRS portfolio, then IRS financial assets of $16,687,904 would have been reduced by IRS financial liabilities $17,675,456 to the net liability amount of $987,552 (30 June 2019: IRS financial assets of $15,784,746 would have been reduced by IRS financial liabilities of $13,756,379 to the net asset amount of $2,028,367).

Medium-term note and commercial paper fair values reflect the price that an existing investor is prepared to receive if they were to sell their investment in the secondary market. These prices are provided by independent secondary market traders.

There is no secondary market for committed standby cash advances as they are executed under bilateral agreements with bank counterparties. As a result, their fair value is equal to the carrying amount. Refer to Note 2.4 Fair value disclosure for the fair value measurement basis of these instruments.

Fair value measurements

Carrying amount

Fair vaule

Carrying amount

Fair value

AASB 9 accounting classification

2020

2020

2019

2019

$'000

$'000

$'000

$'000

Assets

Forward exchange contracts

FVTPL

681

681

709

709

Cash and cash equivalents

AC

517,808

517,808

381,706

381,706

Receivables

AC

32,743

32,743

126,662

126,662

Interest rate swaps

FVTPL

16,688

16,688

15,785

15,785

Total assets

567,920

567,920

524,862

524,862

Liabilities

Forward exchange contracts

FVTPL

3,169

3,169

1,974

1,974

Interest rate swaps

FVTPL

17,675

17,675

13,756

13,756

Medium Term Notes

AC

946,378

994,600

672,354

712,458

Trade and other payables

AC

121,495

121,495

106,766

106,766

Commercial Paper

AC

134,814

134,905

4,989

4,991

Standby cash advances

AC

70,000

70,000

-

-

Total liabilities

1,293,531

1,341,844

799,839

839,945

Notes:

AC – Amortised Cost

FVTPL – Fair Value Through Profit and Loss

Financial risk

The financial risk management policy is aligned to Airservices risk appetite statement. The policy identifies financial risks and provides effective guidance on how Airservices manages the risks faced by the organisation. It sets the risk limits, identifies the controls and determines the process for monitoring and adhering to limits. The policy is designed to add value without adding to the overall risks of the organisation.

The financial risk management policy and systems are reviewed regularly to reflect changes in market practices and Airservices activities. Internal audit undertakes ad hoc reviews of financial risk management policy, controls and procedures, the results of which are reported to the Board Audit and Risk Committee.

Airservices uses financial instruments to manage its financial risks. The central Treasury unit identifies and evaluates the financial risks in close co-operation with other Airservices units and seeks to minimise potential adverse effects on the financial performance.

As a result of the nature of Airservices business and internal policies dealing with the management of financial risk, Airservices residual exposure to credit, liquidity and market risk is considered to be low.

Credit risk

Credit risk represents the risk that one party to a transaction will fail to discharge an obligation and cause the other party to suffer a financial loss. Airservices invests money and enters into financial derivative contracts with authorised counterparties whose long term credit rating is at, or above, A- (Standard and Poor's) or A3 (Moody's). There are currently only four approved counterparties. The maximum credit limit for each approved counterparty is currently $200m. Counterparty credit exposure is assessed using the principles of the 'Current Exposure Method'. As at 30 June 2020, the maximum risk exposure to all authorised counterparties after applying the Current Exposure Method was $548.1m (30 June 2019: $471.8m).

Airservices is exposed to credit risk arising from potential default of debtors. This is equal to the total amount of trade and other receivables (2020: $32.7m and 2019: $126.7m). Airservices has assessed the risk of default on payment and has allocated $22.3m in 2020 (2019: $2.3m) as an allowance for impairment.

Airservices trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it Airservices policy to securitise its trade and other receivables.

Credit risk of financial instruments not past due or individually determined as impaired

Not past due nor impaired

Not past due nor impaired

Past due or impaired

Past due or impaired

2020

2019

2020

2019

$'000

$'000

$'000

$'000

Loans and receivables

19,283

95,781

30,129

29,073

Total

19,283

95,781

30,129

29,073

Airservices is exposed to concentration of risk with respect to trade receivables. 50 per cent of revenues earned are from the following dominant operators: Qantas Group (including Jetstar), Virgin Group (including Tiger Airways Australia).

Liquidity risk

Liquidity risk management is concerned with ensuring there are sufficient funds available to meet financial commitments in a timely manner while also planning for unforeseen events which may reduce cash inflows and cause pressure on liquidity.

The primary objectives of short-term liquidity risk management are to ensure sufficient funds are available to meet daily cash requirements, while ensuring that cash surpluses in low interest bearing accounts are minimised.

The primary objective of long-term liquidity risk management is to ensure that funding (i.e. debt) facilities are in place to meet future long-term funding requirements.

Liquidity risk-2020

Average interest rate

Floating interest rate

1 year or less

1 to 5 years

More than 5 years

Non- interest bearing

Total

2020

%

$'000

$'000

$'000

$'000

$'000

$'000

Financial liabilities

Non-derivative

Trade and other payables

-

-

-

-

-

121,495

121,495

Standby cash advances

0.96

-

70,337

-

-

-

70,337

Commercial paper

0.63

135,000

-

-

-

135,000

Medium term notes

3.42

-

299,581

261,200

511,750

-

1,072,531

Derivative

Interest rate swaps (1)

-

-

(7,371)

(9,899)

526

-

(16,744)

Interest rate swaps (2)

-

-

5,899

11,537

602

-

18,038

Net financial liabilities

135,000

368,446

262,838

512,878

121,495

1,400,657

(1) weighted average interest rates as at 30 June were pay float at 0.15 per cent and receive fixed at 2.84 per cent.

(2) weighted average interest rates as at 30 June were pay fixed at 2.52 per cent and receive float at 0.15 per cent.

Liquidity risk-2019

Average interest rate

Floating interest rate

1 year or less

1 to 5 years

More than 5 years

Non- interest bearing

Total

2019

%

$'000

$'000

$'000

$'000

$'000

$'000

Financial liabilities

Non-derivative

Trade and other payables

-

-

-

-

-

106,766

106,766

Commercial paper

1.61

5,000

-

-

-

-

5,000

Medium term notes

3.89

-

25,063

524,031

213,000

-

762,094

Derivative

Interest rate swaps (3)

-

-

(6,604)

(8,655)

(870)

-

(16,129)

Interest rate swaps (4)

-

-

3,717

9,837

638

-

14,192

Net financial liabilities

5,000

22,176

525,213

212,768

106,766

871,923

(3) weighted average interest rates as at 30 June were pay float at 1.59 per cent and receive fixed at 3.33 per cent.

(4) weighted average interest rates as at 30 June were pay fixed at 2.73 per cent and receive float at 1.61 per cent.

Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates. The following table is a sensitivity analysis of the market risk that Airservices is exposed to through the use of foreign exchange and interest rate derivatives, as well as investments and borrowings.

Interest rate sensitivity analysis is calculated on a 'reasonably possible' basis with reference to the key drivers of interest rates, market expectations and historical data. In analysing interest rate sensitivities Airservices has adopted to vary actual interest rates by +/- 0.09 per cent (2019: +/- 0.20 per cent).

Airservices has adopted a simplified approach to calculate market risk sensitivities for foreign exchange contracts. A standard sensitivity variable of 8.41 per cent (2019: 8.70 per cent) has been applied to all currencies. Airservices acknowledges that it is necessary to monitor annual movements in currencies to ensure the relevance of using a single constant rate.

Market Risk

2020

Effect of positive movement

Effect of negative movement

Carrying amount

Change in risk variable

Profit and loss

Equity

Profit and loss

Equity

$'000

+/-%

$'000

$'000

$'000

$'000

Currency risk

Buy USD

180

8.41

-

(1,145)

-

1,338

Buy EUR

(2,668)

8.41

(101)

(3,062)

119

3,431

Interest rate risk

Cash and cash equivalents

517,808

0.09

452

-

(452)

-

Medium term notes

946,378

-

-

-

-

-

Interest rate swaps

(988)

0.09

19

-

-

-

Commercial paper

134,814

0.09

(122)

-

122

-

2019

Effect of positive movement

Effect of negative movement

Carrying amount

Change in risk variable

Profit and loss

Equity

Profit and loss

Equity

$'000

+/-%

$'000

$'000

$'000

$'000

Currency risk

Buy USD

681

8.70

-

(928)

-

1,066

Buy EUR

(1,946)

8.70

(73)

(4,420)

87

4,740

Interest rate risk

Cash and cash equivalents

381,706

0.20

737

-

(737)

-

Medium term notes

672,354

-

-

-

-

-

Interest rate swaps

2,028

0.20

116

-

(116)

-

Commercial paper

4,989

0.20

(10)

-

10

-

Forward exchange contracts

Airservices uses Forward Exchange Contracts (FECs) to hedge foreign currency exchange rate risk arising from committed transactions, primarily relating to capital expenditure program undertakings. Airservices accounts for all of its FECs as cash flow hedges. Airservices policy is to achieve 100 per cent hedge effectiveness. All foreign currency exposures have a greater than 95 per cent certainty of occurring, as all exposures are committed. As a result of the COVID-19 pandemic, Airservices conducted a review of its capital expenditure program and where foreign currency exposures were no longer identified as having a greater than 95 per cent certainty of occurring, all applicable FECs were cancelled and cash flow hedge accounting for those hedge relationships was terminated.

The effectiveness test is on a FEC rate to market rate comparison. Prospective testing is on a critical terms basis with the retrospective test based on an effectiveness ratio of 80-125 per cent. Gains or losses are recognised on the hedging instrument (i.e. the FEC) and hedged item (i.e. the committed foreign exchange exposure) with any ineffectiveness recognised in the statement of comprehensive income.

At balance date, the details of outstanding contracts are (Australian dollar equivalents):

Forward exchange contracts

Buy EUROs

Sell Australian Dollars

Average Exchange Rate

2020

2019

2020

2019

$'000

$'000

EURO/$1

EURO/$1

Maturity

3 months or less

5,855

5,944

0.5961

0.6131

Greater than 3 months but less than 1 year

6,492

16,407

0.5896

0.6011

Greater than 1 year

30,262

34,389

0.5519

0.5550

Buy US Dollars

Sell Australian Dollars

Average Exchange Rate

2020

2019

2020

2019

$'000

$'000

US/$1

US/$1

Maturity

3 months or less

4,889

2,189

0.7068

0.7382

Greater than 3 months but less than 1 year

6,801

2,820

0.6711

0.7582

Greater than 1 year

2,797

5,814

0.7394

0.7590

Capital management

Airservices is a price regulated government-owned corporate commonwealth entity with a capital management strategy that currently targets a long-term gearing ratio of 40-50 per cent with short term buffers of +/-15 per cent. This target is aligned to Airservices risk appetite statement and provides for a minimum investment grade credit rating of ‘BBB’.

When managing capital structure, Airservices considers its current and forecast net debt and shareholder’s equity positions to develop funding and liquidity strategies that achieve the longer term optimal capital structure and provide a balance between cost and risk. These strategies are then incorporated into the annual planning cycles.

Airservices reviews its longer term optimal capital structure on a regular basis and there were no changes to Airservices approach to capital management during the year.

4. Our People

This section describes a range of employment and post-employment benefits provided to our people and our relationships with other key people.

4.1 Employee provisions

Employee provisions

2020

2019

$'000

$'000

Current employee provisions

Employee benefits

Recreation leave

53,708

62,212

Long service leave

142,623

137,639

Separations and redundancies

7,117

9,023

On-costs associated with employee benefits

11,992

12,124

Workers compensation

272

313

Total current employee provisions

215,712

221,311

Non-current employee provisions

Employee benefits

Long service leave

33,532

36,000

Separations and redundancies

1,377

2,273

On-costs associated with employee benefits

2,106

2,257

Workers compensation

2,114

2,087

Total non-current employee provisions

39,129

42,617

Description of provision
Employee benefits
Workers compensation

These provisions represent Airservices self-insured liability for workers compensation prior to 1 July 1989, which is calculated annually by an independent actuary.

Separations and redundancies

This includes $6.7m (30 June 2019: $7.7m) in early retirement benefits which have been elected to be taken by employees as a lump sum on retirement, and $1.8m (30 June 2019: $3.6m) for redundancy provisions.

The provision for early retirement benefits includes $6.3m (30 June 2019: $7.2m) for ATC employees who were employed by Airservices on 1 July 1998 and continue to meet the eligibility requirements under the relevant enterprise agreement.

Accounting Policy
Employee benefits
Salaries, wages and termination benefits

Liabilities for short-term employee benefits and termination benefits expected to be wholly settled within 12 months of the end of the reporting period are measured at their nominal amounts. Liabilities for salary and wages are recognised, and are measured as the amount unpaid at the reporting date at pay rates which will be applicable when paid, in respect of employees’ services up to that date.

Recreation leave

The provision for recreation leave is not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. Accordingly, the employee benefit provision is measured as a long-term benefit by calculating the present value of expected future payments to be made in respect of services provided by employees up to the reporting date.

Long service leave and early retirement benefit

Employee benefit provisions for long service leave and early retirement benefits are assessed by qualified actuaries on an annual basis. Various actuarial assumptions are required when determining Airservices obligations, and these are discussed below.

The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, using the projected unit credit method. A liability for early retirement benefit is recognised within the provision for separations and redundancies in accordance with the applicable Group Collective Agreement and is measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date.

Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds (AA and AAA rated bonds only) with terms to maturity that match, as closely as possible, the estimated future cash outflows.

On-costs associated with recreation leave and long service leave are classified as separate provisions from employee benefits, in accordance with section 24 of the FRR.

4.2 Defined benefit fund asset

Superannuation plan

Airservices is the principal sponsor of the superannuation fund, AvSuper. The plan has a defined benefit scheme and a defined contribution section. The defined benefit section provides benefits based on the length of service and final average salary. The defined contribution section receives fixed contributions and Airservices Australia’s legal or constructive obligation is limited to these contributions.

The following sections set out details relating only to the defined benefits section of the Plan. Note that the defined benefits section has been closed to new membership since 2002.

Defined benefit fund asset

2020

2019

$'000

$'000

Benefit asset

The amounts recognised in the statement of financial position are determined as follows:

Present value of the defined benefit obligation

(698,840)

(710,657)

Fair value of defined benefit plan assets

842,378

921,059

Net benefit asset - non-current

143,538

210,402

Categories of plan assets

The major categories of plan assets are as follows:

Cash

101,875

173,896

Equity instruments

399,877

381,595

Debt instruments

133,358

148,935

Other assets

207,268

216,633

842,378

921,059

Reconciliations

Reconciliation of the present value of defined benefit obligation:

Balance at the beginning of the year

710,657

659,384

Current service cost

25,621

24,681

Contribution by members

9,142

9,372

Interest cost

19,936

26,098

Remeasurements

Effect of changes in financial assumptions

(13,416)

56,694

Effect of experience adjustments

2,081

(9,306)

Benefits paid

(55,181)

(56,266)

Balance at the end of the year

698,840

710,657

2020

2019

$'000

$'000

Reconciliation of the fair value of plan assets:

Balance at the beginning of the year

921,059

922,223

Interest Income

26,180

37,088

Remeasurements

Return on plan assets (excluding interest income)

(59,118)

8,298

Contribution by Airservices

295

344

Contribution by members

9,142

9,372

Benefits paid

(55,180)

(56,266)

Balance at the end of the year

842,378

921,059

Net amount recognised in the Statement of Comprehensive Income

2020

2019

$'000

$'000

The amounts recognised in the Statement of Comprehensive Income are as follows:

i. Defined benefit cost recognised in profit or loss

Current service cost

25,621

24,681

Interest on the net defined benefit asset

(6,244)

(10,990)

Total included in employee benefits expense

19,377

13,691

ii. Remeasurements (recognised in Other Comprehensive Income)

Effect of changes in financial assumptions

(13,416)

56,694

Effect of experience adjustments

2,081

(9,306)

Return on plan assets (excluding interest income)

59,118

(8,298)

Total remeasurements included in Other Comprehensive Income

47,783

39,090

iii. Total defined benefit income recognised in the Statement of Comprehensive Income

67,160

52,781

Actual return on plan assets

(11,139)

47,954

Principal actuarial assumptions

The principal actuarial assumptions used (expressed as weighted averages) were as follows:

Principal actuarial assumptions

2020

2019

Discount rate

2.70%

2.90%

Future salary increases

3.10%

3.50%

The economic assumptions used by the actuary to make the funding arrangements were:

  • a discount rate of 2.70 per cent p.a. derived by applying the yield curve reported by Milliman to the expected cashflows of AvSuper and equating this to a single equivalent rate.
  • the salary increase rate assumption is equivalent to a liability weighted single rate assumption of 3.1 per cent p.a.

Sensitivity analysis

A sensitivity analysis for the key actuarial assumptions, holding other assumptions constant, and their potential impact on the defined benefit obligation are shown below.

Sensitivity analysis

Increase

Decrease

2020

$'000

$'000

Discount rate (0.5% movement)

38,843

(35,826)

Future salary increases (0.5% movement)

(33,430)

36,987

Increase

Decrease

2019

$'000

$'000

Discount rate (0.5% movement)

43,818

(38,217)

Future salary increases (0.5% movement)

(35,627)

41,832

Maturity profile

The following payments are expected to be made in future years out of the defined benefit plan obligation.

Maturity profile

2020

2019

$'000

$'000

Undiscounted Benefit Payments

1 year or less

47,541

42,538

2 to 5 years

227,503

214,034

5 to 10 years

244,318

255,328

Greater than 10 years

744,749

883,377

Total expected payments

1,264,111

1,395,277

The average duration of the defined benefit plan obligation at the end of the reporting period is 9 years (2019: 10 years).

Employer contributions

Employer contribution rates are reviewed by the Employer as required under the Trust Deed. The Trustee receives advice on contribution rates with each actuarial investigation of the Plan undertaken for the Trustee. The Employer also reviews contributions rates as required if the financial position of the plan deteriorates. An actuarial investigation of the Plan is made each year (current practice), and the last such assessment was made as at 30 June 2019. This disclosed a surplus of $240m.

For the year ended 30 June 2020 the employer contribution rate was:

  • 3 per cent of gross salary for those employees who remain members of the Commonwealth Superannuation Scheme (CSS category) (2018-19: 3 per cent)
  • From 1 July 2018 contributions ceased for other Airservices employees (FULL category) under a contribution holiday.

The Employer and Trustee have in place an agreement on the contributions required should the Fund's financial position become unsatisfactory.

The objectives in setting the contribution rate are to ensure:

  1. the benefit entitlements of members and other beneficiaries are fully funded by the time they become payable
  2. there is a low probability that the assets are insufficient to meet the minimum benefit liabilities of the Fund should it terminate.

To achieve the first objective, the actuary has adopted a method of funding benefits known as the Attained Age Normal funding method. This funding method seeks to have benefits funded by means of a total contribution which is expected to be a constant percentage of members’ salaries over their remaining working lifetimes. To achieve the second objective, the actuary undertakes scenario testing of the short-term financial position of the Plan.

Employer contributions expected to be paid by Airservices for the year ending 30 June 2021 are $0.3m due to the contribution holiday for FULL members, not including any additional contributions required.

Net Financial position of the plan

In accordance with AAS 25 Financial Reporting by Superannuation Plans, the Plan's net financial position is determined as the difference between the present value of the accrued benefits and the net market value of Plan assets. This was determined as at the date of the most recent financial report of AvSuper (30 June 2019), when a surplus of $240.3m was reported. Last year in these financial statements, Airservices recognised a defined benefit asset of $210.4m as at 30 June 2019. The difference between the amounts is due to the different accounting treatment of the net financial position for the employer under AASB 119, and the Plan under AAS 25.

As at 30 June 2020, these financial statements disclose a defined benefit asset of $145.5m (30 June 2019: $210.4m). AvSuper's net financial position for the Plan under AAS 25 will not be available until after these financial statements have been signed.

Accounting Policy
Superannuation

Contributions are made predominantly to AvSuper (sponsored by Airservices) and Commonwealth Superannuation Corporation (ComSuper) which administers the Commonwealth Superannuation Scheme (CSS) and Public Sector Superannuation (PSS) funds. AvSuper has a defined benefit section and an accumulation section within its fund. Contributions to the AvSuper defined benefit fund are made in accordance with advice received from the fund’s actuary. Contributions to accumulation funds are in accordance with the organisation’s Enterprise Agreement(s) and other employee contracts, having regard to legislative requirements. Contributions to ComSuper for the PSS and CSS funds are in accordance with actuarial reports as notified by the Department of Finance.

Contributions to all funds except the AvSuper defined benefit fund are recognised as an expense as they become payable. With respect to the AvSuper defined benefit fund, the net interest on the net defined benefit asset is recognised in the profit before income tax, whereas actuarial gains and losses are recorded in other comprehensive income.

A liability or asset in respect of the AvSuper defined benefit superannuation plan is recognised in the Statement of Financial Position and is measured as the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets as outlined above. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the interpolation between the yield on high quality corporate bonds (AA and AAA rated bonds only) that have terms approximating to the terms of the related obligation. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service.

Accounting Judgements and Estimates
AvSuper defined benefit plan

Various actuarial assumptions are required when determining Airservices obligations under the AvSuper defined benefit plan. The assumptions relied on for the period to 30 June 2020 are discussed above.

Long Service Leave and Early Retirement Benefits

Various actuarial assumptions are required when determining Airservices obligations for long service leave and the early retirement benefit scheme. The assumptions relied on for the period to 30 June 2020 are based on collective agreements that were applicable during the financial year. These include a 2.2 per cent annual salary increase for the first four years and 3.2 per cent p.a. thereafter, staff turnover rates ranging from 7 per cent to 19 per cent (depending on period of service), and average long service leave taken of 0.23 months per annum. The Discount Rate is derived from a yield curve based on interpolation of high quality corporate bonds (AA and AAA rated bonds only) based on the durations to reflect the estimated mean term of the liabilities, they are as follows:

Long Service Leave and Early Retirement Benefits

Liability

Mean term

Corporate Bonds

Discount Rate

Defined Benefits

9.0 years

Discount rate derived by applying Milliman’s yield curve to expected cashflows of AvSuper and equating this to a single rate

2.7% p.a.

Long Service Leave

6.4 years

6 year and 7 year

1.9% p.a.

Early Retirement Benefit

4.2 years

3 year and 5 year

1.1% p.a.

Recreation leave

0.8 years

1 year and 2 year

0.6% p.a.

4.3 Key management personnel remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of Airservices, directly or indirectly, including any Board member. Airservices has determined the key management personnel to be the Board members, Chief Executive Officer and 7 Executive General Managers. Key management personnel remuneration is reported in the table below:

Key management personnel remuneration

2020

2019

$'000

$'000

Key executive remuneration expense for the reporting period

Board

Short-term employee benefits:

Salary

660

542

Allowances and other benefits

33

92

Total short-term employee benefits

693

634

Post-employment benefits:

Superannuation (post-employment benefits)

64

59

Total post-employment benefits

64

59

Total Board remuneration

757

693

The information about non-executive Board members included in the table above relates to 10 individuals (2019: 8 individuals)

Key Executive Management

Short-term employee benefits:

Salary (1)

2,977

3,056

Allowances and other benefits

119

58

At risk component (2)

-

242

Total short-term employee benefits

3,096

3,356

Post-employment benefits:

Superannuation (post-employment benefits)

294

293

Total post-employment benefits

294

293

Other long-term benefits:

Long service leave

43

69

Total other long-term benefits

43

69

Total Key Executive Management remuneration

3,433

3,718

Total key management personnel remuneration (3)

4,190

4,411

(1) Salary includes recreation leave paid and the net movement in recreation leave balance in the current reporting period. Prior year comparative for recreational leave has moved from other long-term benefits to short-term employee benefits.

(2) Executive remuneration packages include an at risk element that is awarded based on executives meeting or exceeding objectives and key performance measures, which are linked to specific annual business objectives.

(3) The above key management personnel remuneration excludes the remuneration and other benefits of the Portfolio Minister. The Portfolio Minister's remuneration and other benefits are set by the Remuneration Tribunal and are not paid by the entity.

The information about executives included in the above table relates to 7.1 Full Time Equivalents (FTEs) (2019: 7.3 FTEs).

4.4 Related party transactions

(a) Board members

The names of persons who were Board members of Airservices during the financial year and up to the date of signing these financial statements are as follows:

Board members

Status

Commenced

Finished

Chairman

John Weber

On-going

3 June 2018

Current

Deputy Chairman

Mark Binskin

On-going

13 September 2018

Current

Board members

Fiona Balfour

Ceased

3 June 2013

2 September 2020

Samantha Betzien

Ceased

4 June 2012

3 September 2019

Anne Brown

On-going

4 December 2019

Current

Sue-Ellen Bussell

On-going

4 December 2019

Current

Marlene Kanga

On-going

4 September 2017

Current

David Marchant

On-going

21 July 2014

Current

John McGee

Ceased

4 September 2015

3 December 2019

Tim Rothwell

On-going

21 July 2014

Current

Chief Executive Officer

Jason Harfield

On-going

11 August 2015

Current

(b) Executives

The names of persons who were Executives of Airservices during the financial year (excluding the CEO, included above) and up to the date of signing these financial statements are as follows:

Executives

Executives

Title

Commenced

Finished

Peter Curran

Executive GM Air Navigation Services

6 May 2019

30 August 2020

Peter Curran

Chief Customer Experience & Strategy Officer

31 August 2020

Current

Michelle Bennetts

Executive GM Customer Service Enhancement

16 April 2018

30 August 2020

Michelle Bennetts

Chief Service Delivery Officer

31 August 2020

Current

Lucinda Gemmell

Chief People & Culture Officer

1 June 2020

Current

Paul Logan

Chief Financial Officer

2 July 2015

Current

Mark Hind

A/g Chief Information Officer

27 April 2020

30 August 2020

Mark Hind

A/g Chief Technology Enablement Officer

31 August 2020

Current

Chris Seller

Chief Information Officer

1 July 2016

24 April 2020

Claire Marrison

Executive GM Safety & Assurance

3 November 2018

30 August 2020

Claire Marrison

Chief Safety & Risk Officer

31 August 2020

Current

Rob Porter

Executive GM Aviation Rescue Fire Fighting Services

7 January 2019

31 August 2020

(c) Transactions with related parties

Certain Board member-related entities have transactions with Airservices that occur within normal customer or supplier relationships on terms and conditions no more favourable than those which it is reasonable to expect Airservices would have adopted if dealing with the Board member-related entity at arm’s length in similar circumstances. These transactions include the following entities and have been described below where the transactions are considered likely to be of interest to users of these financial statements:

2020

  • Airservices received professional services from Klynveld Peat Marwick Goerdeler under a standing panel arrangement amounting to $304,544 for the period 1 July 2019 to 30 June 2020 during which time Sue Bussell was a board member of Airservices Australia and held a contract with KPMG to undertake work on an ad hoc basis through her own business, DAIS.
  • Airservices provided rent payments to Sydney Water Corporation amounting to $21,167 for the period 1 July 2019 to 30 June 2020 during which time Dr Marlene Kanga was both a Board member of Airservices Australia and a Board member of the Sydney Water Corporation.
  • Airservices provided rent payments to Queensland Rail Limited amounting to $70,476 for the period 1 July 2019 to 30 June 2020 during which time David Marchant was both a Board member of Airservices Australia and a Chair of the Queensland Rail Limited.
  • Airservices provided air navigation services to BAE Systems Flight Training amounting to $48,404 for the period 1 July 2019 to 30 June 2020 during which time Mark Binskin was both Deputy Chair of the Airservices Board and Non-Executive Director of BAE Systems Australia.
  • Airservices entered into a contract with PrimeNext Consulting to receive IT consulting services from Chris Seller which amounted to $27,720 for 2019-20. Chris Seller was Chief Information Officer of Airservices until his resignation on 24 April 2020. The contract with PrimeNext Consulting was executed on 15 April 2020.

2019

  • Airservices received legal services from Minter Ellison under a standing panel arrangement amounting to $334,461 for the period 1 July 2018 to 30 June 2019 during which time Samantha Betzien was both a Board member of Airservices Australia and a partner with Minter Ellison.
  • Airservices received professional services from PriceWaterhouseCoopers under a standing panel arrangement amounting to $3,840,601 for the period 1 July 2018 to 30 June 2019 during which time John Weber was Chairman of the Airservices Board and Advisor for PriceWaterhouseCoopers. John Weber was acting as an Advisor for PriceWaterhouseCoopers up until 30 September 2018.
  • Airservices provided rent payments to Sydney Water Corporation amounting to $20,353 for the period 1 July 2018 to 30 June 2019 during which time Dr Marlene Kanga was both a Board member of Airservices Australia and a Board member of the Sydney Water Corporation.
  • Airservices provided rent payments to Queensland Rail Limited amounting to $67,120 for the period 1 July 2018 to 30 June 2019 during which time David Marchant was both a Board member of Airservices Australia and a Chair of the Queensland Rail Limited.
  • Airservices provided annual fire alarm monitoring services to BAE Systems Australia amounting to $1,039 and provided air navigation services to BAE Systems Flight Training amounting to $95,440 for the period 1 July 2018 to 30 June 2019 during which time Mark Binskin was both Deputy Chair of the Airservices Board and Non-Executive Director of BAE Systems Australia. During this period, in relation to the services provided to BAE Systems Flight Training, $89 of charges were written off to bad debts.

To the extent permitted by law, Airservices provides indemnities to its Board members and officers to complement the insurance arrangements that it has in place.

The Board adheres to a strict Conflict of Interest Protocol which includes a review of Board members’ personal interests at each Board meeting. The management of any conflict is dependent on its nature and severity and may include the exclusion of Board members from receiving related material or withdrawal from discussion or decision making.

5. Managing Uncertainties

This section analyses how Airservices Australia manages financial risks within its operating environment.

5.1 Contingent liabilities

Airservices had contingent liabilities at 30 June 2020 in respect of:

Aviation Rescue & Fire Fighting Services (ARFFS) potential contaminated site management

Airservices has identified a number of sites around the country that may have been contaminated with chemicals contained in certain firefighting foams formerly used by Airservices. Airservices has been managing issues arising from the use of these firefighting foams, now known to have contained per- and poly- fluorinated alkyl substances (PFAS), since it became aware of concerns about PFAS in the early 2000s. These foams were widely used around the world because of their superior performance and to meet regulatory requirements. Airservices and its predecessors used them from approximately 1978 until 2010.

Significant investment has been made to enable site investigations, site specific management actions including research and development, and stakeholder engagement activities. The focus of the 2019-20 financial year has been to continue to progress site investigations to understand the extent of potential PFAS contamination due to Airservices past operations; to conduct research and development activities to identify potential practicable solutions to manage existing contamination for which Airservices is responsible; and to continue working with Commonwealth and State/Territory agencies and regulators to consistently manage PFAS contamination at airports within Australia at which Airservices operates.

To facilitate this work and continued PFAS related activity, a sum of $59.3m has been provided at 30 June 2020 (2019: $54.5m).

As site investigations progress and jurisdictional requirements mature, further investigations and site specific management actions may be required to mitigate specific risks. While uncertainty remains in relation to the regulatory environment, these actions may include implementation of containment strategies, and stakeholder communications and engagement activities. These actions cannot be quantified at this time as the extent of any Airservices obligation is not known or otherwise cannot be estimated with sufficient reliability to be provisioned.

Legal claims

Brisbane Airport Corporation (BAC) has commenced proceedings against Airservices in the Queensland Supreme Court seeking compensation for alleged Per- and Poly- Fluorinated Alkyl Substances (PFAS) contamination by Airservices at Brisbane Airport from the historical use of fire fighting foams containing PFAS. Airservices disputes BAC’s claim and has filed its defence. The matter is in its early stages, and Airservices is not in a position to quantify any potential liability at this stage.

Accounting Policy
Contingent liabilities and contingent assets

Contingent liabilities and contingent assets are not recognised in the Statement of Financial Position but are reported in the notes. They may arise from uncertainty as to the existence of a liability or asset or represent an asset or liability in respect of which the amount cannot be reliably measured. Contingent assets are disclosed when settlement is probable but not virtually certain and contingent liabilities are disclosed when settlement is greater than remote.

6. Other Information

6.1 Aggregate Assets and Liabilities

Aggregate Assets and Liabilities

2020

2019

$'000

$'000

Aggregate assets and liabilities

Assets expected to be recovered in:

No more than 12 months

565,488

503,777

More than 12 months

1,746,766

1,535,641

Total assets

2,312,254

2,039,418

Liabilities expected to be settled in:

No more than 12 months

840,225

397,708

More than 12 months

975,323

891,988

Total liabilities

1,815,548

1,289,696

6.2 Remuneration of auditors

Remuneration of auditors

2020

2019

$

$

Remuneration of auditors

Auditing services provided by the Australian National Audit Office

341,000

337,000

6.3 Monies held on behalf of third parties

Airservices has been contracted by the Solomon Islands Civil Aviation Authority and the Republic of Nauru to provide airspace management and accounts receivable services. The contracts require Airservices to retain cash received and to remit funds at a later date to the Solomon Islands and Nauru Governments as required under the respective agreements. At balance date, the money held on behalf of third parties totalled $0.3m (2019: $0.6m) for the Solomon Islands and $0.6m (2019: $0.1m) for Nauru.

6.4 Events after the Reporting Date

On 13 July 2020, the CEO announced a restructuring program known as the One Airservices Plan to respond to the disruption caused by COVID-19 to the aviation industry, and to reposition the organisation to support industry growth into the future. The One Airservices Plan includes short-term cost savings and efficiency measures, and a realignment of the operating model. These will be implemented during the course of the 2020-21 financial year.