Note 1 - Reporting Entity

Australian Rail Track Corporation (the parent) is a Company limited by shares incorporated in Australia located at 11 Sir Donald Bradman Drive, Keswick Terminal, South Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2020 comprise the Company and its subsidiaries together referred to as the “Group”. The Group is a Government Business Enterprise (GBE) and the ultimate controlling entity is the Commonwealth Government.

The financial report of ARTC for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the Directors on 27 August 2020.

Note 2 - Basis of accounting

These general purpose financial statements have been prepared in accordance with Public Governance Performance and Accountability Act 2013 (PGPA Act), Australian Accounting Standards, the requirements of the Corporations Act 2001 and other authoritative pronouncements of the Australian Accounting Standards Board. Australian Rail Track
Corporation Ltd is a for profit entity for the purpose of preparing the financial statements.

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

Where necessary, comparative figures have been adjusted to conform to changes in the presentation of the Financial Statements in the current year, with the exception of the application of AASB 16 Leasing which has not been restated as permitted in the standard.

The financial statements are prepared on a historical cost basis except for certain classes of plant and equipment, held for sale assets and derivatives which are measured at fair value.

Where applicable the significant accounting policies are contained in the notes to the financial statements to which they relate and note 19 (Other accounting policies).

The financial statements have been prepared on a going concern basis. See note 19(f).

Note 3 - Functional and presentation currency

The financial statements are presented in Australian dollars and all values are rounded to the nearest thousand dollars ($'000) unless otherwise stated under the option available to the Group under ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191. The Group is an entity to which the Instrument applies.

Note 4 - Significant accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that may have a significant risk of causing a material adjustment to the individual carrying amounts of assets and liabilities or may involve a higher degree of judgement or complexity within the next financial year are found in the following notes:

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

5(a) - Access Revenue

Accounting Policy

ARTC generates access revenue through granting access to train paths to operators covered by an Interstate track access agreement, or a Hunter Valley coal network undertaking.

Under AASB 15, there is a distinct performance obligation in a contract for access to the Interstate or Hunter Valley networks. Revenue is considered variable in nature and transaction prices for access and usage are consistent with the standalone selling price. The Group assessed that the point at which the performance obligation is satisfied is over time using the output method and therefore revenue is recorded for the actual distance travelled. All access pricing is currently regulated by the ACCC. The Hunter Valley access revenue is determined on an expense recovery
basis, within the parameters of the Hunter Valley Access Undertaking agreement.

The Group determined that the estimates of expense recovery are subject to a compliance assessment by the ACCC to ensure the amount recognised is within the guidelines of the Access Undertaking and have recognised a refund liability or receivable asset where applicable, being the estimated obligation to refund some or all of the consideration received (or receivable) from the customer. The amount is constrained to annual compliance assessment estimated receivable or payable from or to the customer. The Group updates its estimates of refund liabilities and receivable assets at the end of each reporting period based on the outcomes of ACCC assessments.

5(b) - Employee benefits expenses

Accounting policy

Accounting policies for employee benefits refer to note 7(f) and 7(g).

5(c) - Infrastructure costs

Infrastructure costs expensed reflect Inland Rail and Port Botany project costs that are not capital in nature, e.g. including pre-construction concept and feasibility work. As these projects progress it is expected that the expense component will reduce. Amounts will vary with the specific work undertaken each year.

5(d) - Depreciation & Amortisation

Accounting policy

Depreciation and amortisation

Accounting policies for depreciation and amortisation refer to note 7(c) and 19(d).

5(e) - Net incident costs

Accounting policy

Recoveries and costs associated with rail access related incidents

Income attributable to insurance or other recoveries arising from rail access related incidents is only recognised where a contractual agreement is in place and receipt of amounts outstanding is virtually certain. Costs of rectification are recognised when incurred as operating or capital expenditure as appropriate in line with the company's accounting policies.

Where the Group has suffered damage to its rail network due to other parties, the recourse is commercial negotiation and, if not successful, legal proceedings are initiated, as appropriate.

Potential liabilities and assets are reviewed throughout the year and finalised at reporting date for inclusion in the financial statements.

5(f) - Other expenses

Comparative figures have been adjusted to conform to changes in the presentation in the current year.

5(g) - Finance costs

Accounting policy

Finance costs

Borrowings are initially recognised at fair value, net of directly attributable transaction costs incurred and thereafter at amortised cost.

Borrowing costs on Bonds, including fees paid on establishment, are recognised as they accrue using the effective interest method. This is a method of calculating the amortised cost of a financial liability and allocating the interest and other costs over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash flows through the expected life of the financial liability to the net carrying amount of the financial liability.

Syndicated Debt Facility borrowing costs are recognised as they accrue using the effective interest method, however the fees and interest applicable have different durations to the facility and the variable rates are linked to the market. As a result the shorter period is utilised to undertake the recognition of the individual components of the borrowing costs. As the duration is generally shorter than a year, there is generally no difference between effective interest method and straight line recognition.

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds.

From time to time the Group may undertake short term borrowings, such as bridging facilities for contingency or other purposes, and to the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment and amortised over the period of the facility to which it relates.

Refer to the Right of use interest policy in note 19(d).

5(h) - Income tax expense/(benefit))

The Group's current tax expense for the year ended 30 June 2020 is nil (2019: nil) due to the existence of tax deductions available to the Group as a result of the Group’s ability to claim tax depreciation on NSW lease assets utilising Division 58 of the Income Tax Assessment Act 1997 and to utilise offsets generated in previous years.

Accounting policy

Income tax

Accounting policies related to income tax refer to note 7(e).

Reconciliation of Tax Expense to Income Tax Payable

The tax law and accounting standards contain different rules around the timing of when amounts may be assessable or deductible. These differences give rise to temporary differences which are recognised in deferred tax expense.

The deductible temporary differences in relation to property, plant and equipment exist as a result of ARTC’s ability to claim tax depreciation on its leased assets in NSW under Division 58 of the Income Tax Assessment Act (1997) in addition to the cumulative impact of impairments and fair value reductions to the accounting value of infrastructure assets.

Numerical reconciliation of Accounting profit before tax to prima facie tax expense

ARTC had an Effective Tax Rate (ETR) of 9.36% as a result of the movement in unrecognised temporary differences. Excluding the deferred tax asset recognition, the normalised ETR is 29.83%.

Amounts charged or credited directly to equity

The income tax charged directly to equity of $13.7m (2019: $58.3m) is the tax effect of the net revaluations of $45.7m (2019: $194.3m), see note 7(c). The income tax charged directly to equity of $1.1m (2019:$1.1m) is the tax effect of the defined benefit amount included in other comprehensive income $3.7m (2019: $3.5m), see note 7(g).

5(i) - Recognition/(reversal) of impairment

Accounting policy

Impairment

Accounting policies for impairment refer to note 7(c) and 19(d).

5(j) - Reconciliation EBITDAI and EBIT to Income Statement

6(a) - Cash and cash equivalents

Cash at bank earns interest at floating rates based on daily bank deposit rates. The carrying amount of cash and cash equivalents equates to the fair value. The Group's exposure to interest rate, credit risk and rates earned for the above is set out in note 11.

6(b) - Trade and other receivables

Information on credit risk, impairment and fair value of trade and other receivables can be found in note 11.

6(c) - Trade and other payables

Information about the Group's exposure to financial risk is set out in note 11.

Accounting policy

Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid and are measured at amortised cost. The amounts are unsecured and are usually paid within 30 days of recognition.

6(d) - Interest bearing liabilities

The cashflow movement (excluding lease liabilities) of $110.0m (2019: $85.5m) differs from the variance between the balances above due to the impact of effective interest. The cashflow movement on lease liabilities of $17.5m does not relate to the current component of lease liabilities due to additions, variations and terminations in the year.

6(e) - Other liabilities

Other liabilities are primarily comprised of a refund liability in respect of the over recovery of constrained network coal revenue arising from Compliance Assessments which remain open pending final ACCC determination. See note 5(a).

Significant accounting estimate and judgements

Access Revenue - Hunter Valley Coal liability
As at 30 June 2020 provision has again been made for the ACCC Compliance Assessments which remain open i.e. relating to Calendar Years 2017-9 and to 30 June 2020 for the 2020 calendar year assessment (which is not due for lodgement until 2021).

6(f) - Changes in liabilities

Other movements include lease liability additions in the year and effective interest elements.

7(a) - Inventories

Accounting policy

Inventories

Inventories are valued at lower of cost and net realisable value. Cost is assigned on a first in first out basis.

7(b) - Held for sale

Current held for sale assets relate to rail, land and parts. Rail was expected to be sold last year and while partially settled the transaction has not been fully completed. It is now expected to be sold within the next 12 months. Land and parts have sale plans with expectations of being sold within the next 12 months. Gains and losses on the sale of the assets are recognised in the consolidated income statement under profit/(loss) on sale of assets.

On transfer to held for sale assets the assets were reviewed for impairment with no impairment required.

7(c) - Property, plant and equipment

Non - Current Assets

(i) Basis of valuation
Property, plant and equipment, excluding construction in progress, is recognised at cost of acquisition, and subsequently carried at fair value less depreciation and impairment. At 30 June 2020 the Group undertook a fair value assessment using an income method approach as there are no similar market quoted assets. The net present value of the cash flows for each business unit is compared with the current carrying value. Gains on revaluation are recognised in the revaluation reserve, while revaluation decrements are reversed out of the revaluation reserve to the extent available, after which, decrements are recognised as an impairment expense in the Consolidated Income Statement. Property, plant and equipment discount cash flow reviews are undertaken annually to ensure significant movements are identified and accounted for.

The 30 June 2020 assessment resulted in a downward revaluation of the Interstate business unit's assets. The result of this year's assessment is a $366.0m valuation decrement of which nil can be reversed out of the revaluation reserve (2019: $216.6m) with the balance of $366.0m, being recognised as an impairment expense in the Consolidated Income Statement (2019: $288.0m).

The Hunter Valley business unit assets were previously revalued. The result of this year's assessment is a $45.7m valuation decrement (2019: $22.3m valuation increment) recognised through the revaluation reserve. For further details on the calculation refer to note 11(d).

If infrastructure assets were stated on the historical cost basis less impairment, the amounts would be as follows:

Construction in progress assets are carried at cost less impairment. The Group assesses at the end of each reporting period whether there is any indication that an asset may be impaired, and if such indicators exist, the Group performs an assessment to determine the recoverable amount of an asset. At 30 June 2020 the Group undertook an impairment assessment on the assets that are not in a fair value asset grouping. The expenditure has been assessed on an individual asset basis in accordance with each identifiable assets highest and best use and compared to
market values where available. Where market values were not available the Group determined the recoverable amount of assets using the income approach. While the assets are expected to make an operating profit on completion, capital recovery will take a significant period of time, as such this assessment has resulted in an impairment of $400.5m (2019: $158.4m) including $0.6m (2019: $nil) on right of use assets for 30 June 2020.

(ii) Right of use assets

The Group leases several assets including buildings, equipment and motor vehicles. The average lease term is 4.6 years (2019: 5.4 years). The group has options to extend for an additional period at the end of the lease term for a number of contracts. Where the Group is reasonably certain to exercise the option, the measurement of the RoU asset and lease liability takes into account payments made during the extended period.

At 30 June 2020, the Group is committed to nil (2019: nil) for short-term leases and nil (2019: nil) for leases for which the contract terms have been agreed but the lease has not yet commenced.

Additions to RoU assets during the 2020 financial year were $97.5m (2019: nil) of which $36.1m was on transition to AASB 16 Leases (Note 19 (a)).

Significant accounting estimates and judgements

Fair Value

In order to comply with relevant accounting standards the Group undertook a fair value assessment of its infrastructure assets, the results of which are detailed in this note and note 11(d)(iii). Key assumptions when completing the assessment are: forecast data including revenue, expense and capital cash flows and the discount rate used. Therefore, management has reviewed the cash flow to account for any known variables and to ensure a market participant would view the positions taken as reasonable. In addition, the discount rate used is compiled with the support of an external specialist. Note (11(d)(iv)) and (v) contains further detail on the process and valuation
technique.

Accounting policy

Property, plant and equipment

Infrastructure is valued on a fair value basis while all non-infrastructure is on a cost basis and therefore is subject to an impairment/revaluation assessment at each reporting date.

Fair Value
The fair value for infrastructure assets is calculated using the income method approach taking into account the characteristics of the asset that market participants would consider, whereby the measurement reflects current market expectations of future cashflows discounted to their present value for each asset grouping that would be considered reasonable by a normal market participant. The estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects an expert's assessment of current market assessments of the time value of money and the business risk.

Fair value assessments are not applied to non-infrastructure assets on the basis that these assets such as motor vehicles, information technology and other non-infrastructure assets are transferable within the Group and have a short life and a ready market. The written down value of these assets is in line with their fair value.

All other property, plant and equipment are stated at historical cost less accumulated depreciation, and any accumulated impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Revaluation
The Group’s infrastructure assets are revalued each year end as a result of the fair value assessment. Infrastructure assets are shown at fair value (inclusive of revaluations and impairments) less accumulated depreciation. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset.

Any revaluation increment is credited to the asset revaluation reserve included in the equity section of the Consolidated Balance Sheet, except to the extent that it reverses a revaluation decrement of the same asset previously recognised in the Consolidated Income Statement, in which case the increase is recognised in the Consolidated Income Statement (net of tax). Revaluation increments and decrements recognised are allocated to the infrastructure asset carrying amounts within the asset grouping on a pro rata basis.

At the commencement of the application of Australian International Financial Reporting Standards the Group elected that the deemed cost of assets on hand at 30 June 2005 was the revalued amount of those assets. Any accumulated depreciation as at the revaluation date was eliminated against the gross carrying amount of the asset and the net amount was restated to the revalued amount of the asset. Items of property, plant and equipment are either derecognised on disposal or when no further future economic benefits are expected from its use. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the Consolidated Income Statement. Upon disposal or derecognition, any revaluation reserve relating to the asset is transferred to retained earnings.

Impairment
The carrying amounts of the Group’s non-financial assets, other than inventories, deferred tax assets and infrastructure assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any indication exists, then the asset’s recoverable amount is estimated. An impairment expense is recognised if the carrying amount of an asset or cash generating unit (CGU) exceeds it recoverable amount.

The recoverable amount of non-infrastructure assets is determined based on the fair value less costs to sell.

Cost
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Consolidated Income Statement during the financial period in which they are incurred.

Depreciation
Land is not depreciated. The cost of improvements to or on leasehold properties is amortised over the expected lease term or the estimated useful life of the improvement to the Group, whichever is the shorter. Depreciation on other assets is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows:

Maximum Economic Useful Life*

Infrastructure assets
Ballast 60 years
Bridges 100 years
Culverts 100 years
Rail 110 years
Sleepers 70 years
Signals & Communications 30 years
Turnouts 60 years
Tunnels 100 years

Non-Infrastructure assets
Buildings 50 years
IT & Other equipment 4 years
Motor vehicles 5 years
Other equipment 40 years

* Depending on the age and location of particular assets, the economic life may vary. The maximum economic useful lives are reviewed at the end of each financial year end and adjusted if required.

Capital work in progress and capitalisation
Work in progress comprises expenditure on incomplete capital works. Expenditure on the acquisition of new infrastructure assets is capitalised when these new assets are ready for economic use.

Infrastructure assets in the course of construction are classified as capital work in progress. Capital works in progress are recorded at cost including borrowing costs capitalised where applicable and are not depreciated until they have been completed and the assets are ready for economic use.

Right of use assets
Accounting policies relating to right of use assets are located in note 19(d).

7(d) - Intangible assets

Accounting policy

Intangible assets

Computer software has a finite useful life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of computer software over its estimated useful life of four years.

ARTC recognises corridor land access rights when costs are incurred to obtain land which ARTC does not retain title but through operating agreements has the ability to utilise the land. Under operating arrangements, ARTC may provide funds to other government bodies to acquire additional land holdings to enable the infrastructure to be expanded. ARTC is not entitled to be reimbursed for this expenditure but has the right to use the land. The land rights have a finite useful life, expiring in conjunction with the relevant lease and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of land
rights over its estimated useful life.

Other intangible assets relate to contractual rights in relation to a wholesale access agreement which provides a pricing cap over the third party infrastructure asset between Kalgoorlie and Perth which completes track access between the east and west coast of Australia. These rights have a finite useful life and amortisation is calculated using the straight line method to allocate cost over the estimated useful life of 14.6 years.

Annual impairment considerations are undertaken through the fair value less cost to sell approach as these assets are part of the asset grouping in the highest and best use assessments.

7(e) - Deferred tax balances

(i) Deferred tax assets

Net deferred tax asset

At 30 June 2020, the Group has unrecognised deferred tax assets in relation to temporary differences of $739.3m (2019: $424.1m) associated with the Group's ability to claim tax depreciation on NSW lease assets utilising Division 58 of the Income Tax Assessment Act 1997 and also due to the cumulative impacts of impairment of assets on the North South Corridor within the Interstate Rail Network.

The Group has an unrecognised deferred tax asset in relation to a carried forward capital loss of $1.3m (2019: $1.3m). It is not recognised on the basis that there are no forecast future capital gains against which the loss could be utilised.

(ii) Deferred tax liabilities

Tax Strategy, Risk Management and Governance

ARTC has developed a Board approved Tax Governance Policy to guide the way in which the Group manages its tax obligations and is consistent with the Group’s corporate governance framework reflecting the ASX “Corporate Governance Principles and Recommendations” and the Group’s low risk appetite.

The Policy is supported by tax related procedures and processes which ensure ARTC effectively manages its tax risk.

ARTC’s approach to taxation aligns with the Group’s business strategy, code of conduct and values. As a Government Business Enterprise, ARTC is governed by the Public Governance, Performance and Accountability Act (2013) (PGPA Act) and Government Business Enterprise (GBE) Guidelines. ARTC considers the interests of its Shareholder in the adoption of low risk tax strategies and avoidance of non-compliant tax practices.

ARTC seeks to uphold the reputation of the Group and its Shareholder by giving due consideration to its social and corporate responsibility to pay the right amount of tax, at the right time, in the right jurisdiction and be transparent in the conduct of its tax affairs.

Tax Planning and Relationship with Tax Authorities

ARTC does not undertake transactions of a contrived or artificial nature for the purpose of obtaining a tax benefit. All transactions are undertaken in the context of the commercial needs of the company, which are of primary importance.

ARTC engages in Tax Planning in order to legitimately achieve the best after tax outcomes, that is, through claiming available deductions, tax rebates, offsets and credits. ARTC is committed to observing all applicable tax laws, rulings and regulations in meeting its tax compliance obligations in all jurisdictions where ARTC operates.

Professional opinions are obtained from reputable external advisors on matters where the amount of the tax involved is significant and the tax treatment is complex or relates to non-routine transactions. Where management considers it appropriate, ARTC engages with the tax authorities to obtain formal guidance (including private binding rulings) in relation to the taxation consequences of complex or non-routine transactions or where there is uncertainty in the application of the tax laws.

Significant accounting estimates and judgements

Deferred tax recognition

The Group has recognised a net deferred tax asset as set out in this note in relation to deductible temporary differences to the extent that a deferred tax liability exists in relation to taxable temporary differences, which are expected to reverse over the same periods. In addition, an excess deferred tax asset has been recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. The recognition of the net deferred tax asset is considered appropriate following an assessment of the
overall forecast accounting profit and tax payable position of the Group.

Accounting policy

Income tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current periods taxable income and any adjustments in respect of prior years. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.

Deferred tax liabilities (DTLs) are recognised for all taxable temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for taxation purposes.

Deferred tax assets (DTAs) are recognised for all deductible temporary differences, carry forward of unused tax offsets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the unused tax offsets and losses can be utilised.

Division 58 of the Income Tax Assessment Act 1997 (“Division 58"), has entitled the Group to value certain assets, for taxation purposes, using pre-existing audited book values or the notional written down values of the assets as appropriate. This effectively means the tax depreciable value of these rail infrastructure and related assets significantly exceeds the carrying value. Accordingly, Division 58 results in significant deductible temporary differences and potential DTAs. The carrying amount of DTAs is reviewed at each reporting date and adjusted to the extent that it is probable that sufficient taxable profit will be available to allow the deferred tax asset to be utilised.

DTAs and DTLs are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. DTAs and DTLs are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the DTAs and DTLs relate to the same taxable entity and the same taxation authority.

Tax consolidation

Australian Rail Track Corporation Ltd and its wholly owned Australian controlled entities consolidated for income tax purposes as of 1 July 2003.

The head entity, Australian Rail Track Corporation Ltd, and the controlled entities in the income tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the stand alone taxpayer approach, consistent with the requirements of Interpretation 1052, in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the income tax consolidated group. In addition to its own current and deferred tax amounts, Australian Rail Track Corporation Ltd also recognises the current tax
liabilities (or assets) and the DTAs arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.

Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group.

Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidated entities.

7(f) - Provisions

(i) Information about individual provisions and significant estimates

The Biodiversity provision is recognised for the first time due to Inland Rail construction in NSW. The balance represents the Group’s estimate of amounts required to settle obligations under the NSW Biodiversity Offset Scheme and associated legislation.

The incident provision recognises the Group's estimate of the liability with respect to costs associated with damage caused by incidents such as derailments, which occurred whilst using the Group's rail infrastructure.

Significant accounting estimates and judgements

Incident recognition

The provision for incidents recognises the Group’s estimated liability with respect to costs associated with damage caused by incidents such as force majeure, derailments, including the potential for third party and/or insurance recoveries. Significant judgement is required to estimate the cost to repair damaged assets.

Biodiversity recognition

The provision for biodiversity credits recognises the Group's estimated liability to settle obligations arising from Inland Rail construction in NSW under Critical State Significant Infrastructure Conditions of Approval issued by NSW Department of Planning, Infrastructure and Environment. There are multiple ways to settle the biodiversity offset obligations under the Biodiversity Conservation Act 2016. ARTCs' intention is to support landholder's entry into the
Biodiversity Offset Scheme through paying "Lost Opportunity Cost" and a "Total Fund Deposit" to support the land parcels entry into the scheme.

ARTC is currently in various stages of negotiations to identify and support land parcels for inclusion in the scheme. Estimates of the amounts required to complete these negotiations have been included in the provision based on valuations of the land where available and utilising the NSW Government approved calculation.

(ii) Movements in provisions
Movements in each class of provision during the financial year are set out below:

Accounting policy

Employee benefits

(i) Short term obligations
Liabilities for wages and salaries, including non-monetary benefits expected to be settled within twelve months of the reporting date are recognised in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled.

(ii) Long term obligations
The liability for long service leave and associated on-costs is accumulated from the date of commencement. They are measured at the amounts expected to be paid when the liabilities are settled and discounted to determine their present value. Consideration is given to expected future wage and salary levels with an allowance for expected future increases.

Annual leave is measured on a discounted basis utilising high quality corporate bond rates when there is an expectation of the leave not being taken within twelve months. Otherwise they are measured at the amounts expected to be paid when the liabilities are settled.

Provisions

Provisions for legal claims and incident provisions, Biodiversity legal requirements, service warranties and make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses or capital improvements.

Where there are a number of similar obligations, the likelihood that an economic 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 managements' best estimate of the expenditure required to settle the obligation at the reporting date.

7(g) - Non-current liabilities - Defined benefit plans

(i) Consolidated Balance Sheet amounts

The amounts recognised in the balance sheet and the movements in the net defined benefit obligation over the year as follows:

(ii) Superannuation plan

On commencement of the 60 year lease on 5 September with the NSW Government to operate the NSW interstate main lines, the Hunter Valley business unit and dedicated metropolitan freight lines to the Sydney Ports, employees previously employed by Rail Infrastructure Corporation/State Rail Authority and now currently employed by ARTC, are members of the three defined benefit funds listed below. As part of that arrangement ARTC is required to make an annual contribution that covers all three schemes to assure that the schemes are sufficiently funded.

State Authorities Superannuation Scheme (SASS)

SASS is a split benefit scheme, which means it is made up of an accumulation style contributor financed benefit and a defined benefit style employer financed benefit. Employees can elect to contribute between 1% and 9% of their salary to SASS and can vary their contribution rate each year. Generally, each percentage of salary that a member contributes each year buys the member one benefit point which is used in the calculation of the employer financed benefit.

State Superannuation Scheme (SSS)

SSS is a defined benefit scheme which means that benefits are based on a specified formula, and as such are not affected by investment returns. SSS members contribute towards units of fortnightly pension throughout their membership.

State Authorities Non-Contributory Superannuation Scheme (SANCS)

SANCS is a productivity type superannuation benefit accrued by SASS members in addition to their contributory scheme benefits. Calculated at 3% of final average salary or final salary, depending on the mode of exit, for each year of service from 1 April 1988. It is fully employer financed.

All the schemes are closed to new members.

The schemes in the Pooled Fund are established and governed by the following NSW legislation: Superannuation Act 1916, State Authorities Superannuation Act 1987, Police Regulation (Superannuation) Act 1906, State Authorities Non-contributory Superannuation Scheme Act 1987, and their associated regulations.

Under a Heads of Government Agreement, the New South Wales Government undertakes to ensure that the Pooled Fund will conform to the principles of the Commonwealth’s retirement incomes policy relating to preservation, vesting and reporting to members and that member benefits are adequately protected.

An actuarial investigation of the Pooled Fund is performed every three years. The last actuarial triennial review was performed as at 30 June 2018.

The Fund's Trustee is responsible for the governance of the Fund. The Trustee has a legal obligation to act solely in the best interests of fund beneficiaries. The Trustee has the following roles:

• Administration of the fund and payment to the beneficiaries from fund assets when required in accordance with the fund rules;
• Management and investment of the fund assets; and
• Compliance with other applicable regulations.

(iii) Categories of plan assets

The asset recognised does not exceed the present value of any economic benefits available in the form of reductions in future contributions to the plan.

All Pooled Fund assets are invested by SASS Trustee Corporation at arm’s length through independent fund managers, assets are not separately invested for each entity and it is not possible or appropriate to disaggregate and attribute fund assets to individual entities. As such, the disclosures below relate to total assets of the Pooled Fund and therefore will not match the balance of ARTC fair value of plan assets as disclosed in g(i).

(iv) Actuarial assumptions and sensitivity

Actuarial assessment undertaken by Mercer as at 30 June 2020 contains the following significant independent actuarial assumptions (expressed as weighted averages):

The pensioner mortality assumptions are as per the 2018 Actuarial Investigation of the Pooled Fund. These assumptions are disclosed in the actuarial investigation report available from the trustee's website. The report shows the pension mortality rates for each age.

Scenarios related to changes to the discount rate (effectively investment return), salary growth rate and rate of CPI increase relate to sensitivity of the total defined benefit obligation to economic assumptions, and scenarios related to pensioner mortality relate to sensitivity to demographic assumptions. The assumption as to the expected rate of return on assets is determined by weighing the expected long term return for each asset class by the target allocation of assets to each class. The returns used for each class are net of investment tax and investment fees.

The sensitivity of the total defined benefit obligation as at 30 June 2020 under several scenarios is shown below.

*Assumes the short term pensioner mortality improvement factors for years 2020-2023 also apply for years after 2023
**Assumes the long term pensioner mortality improvement factors for years post 2023 also apply for years 2020 to 2023

The defined benefit obligation has been recalculated by changing the assumptions as outlined above, whilst retaining all other assumptions.

(v) Risk exposure

There are a number of risks to which the Fund exposes the employer. The more significant risks relating to the defined benefits are:

• Investment risk - The risk that investment returns will be lower than assumed and the employer will need to increase contributions to offset this shortfall.
• Longevity risk - The risk that pensioners live longer than assumed, increasing future pensions.
• Pension indexation risk - The risk that pensions will increase at a rate greater than assumed, increasing future pensions.
• Salary growth risk - The risk that wages or salaries (on which future benefit amounts for active members will be based) will rise more rapidly than assumed, increasing defined benefit amounts and thereby requiring additional employer contributions.
• Legislative risk - The risk is that legislative changes could be made which increase the cost of providing the defined benefits.

The defined benefit fund assets are invested with independent fund managers and have a diversified asset mix. The Fund has no significant concentration of investment risk or liquidity risk.

(vi) Defined benefit liability and employer contributions

In accordance with the Occupational Superannuation Standards Regulations and Australian Accounting Standard AASB 1056 "Superannuation Entities" funding arrangements are reviewed at least every three years following the release of the triennial actuarial review and was last reviewed following completion of the triennial review as at 30 June 2018. Contribution rates are set after discussions between the employer, STC and NSW Treasury.

The next triennial review is at 30 June 2021, the report is expected to be released by the end of 2021.

Funding positions are reviewed annually and funding arrangements may be adjusted as required after each annual review.

Expected contributions to defined benefit plans for the year ending 30 June 2021 are $1.4m. Following the triennial review of the Defined Benefit Fund as at 30 June 2018 it was determined that ARTC employer contribution would remain at $1.4m p.a. for each of the 3 years and be subject to ongoing review.

The weighted average duration of the defined benefit obligation is 12.4 years (2019: 12.6 years).

(vii) Amounts recognised in consolidated income statement

The amounts recognised in the consolidated income statement in employee benefits expense are as follows:

(viii)Amounts recognised in other comprehensive income

Significant accounting estimates and judgements

Defined benefit plan

Various actuarial assumptions are required when determining the Group's defined benefit obligations that are highlighted in this note above.

Accounting policy

Defined benefit plan

Actuarial gains and losses arising from experience, adjustments and changes in actuarial assumptions are recognised in the period in which they occur, in other comprehensive income. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss.

The defined benefit asset or liability recognised in the consolidated balance sheet represents the present value of the defined benefit obligation, less the fair value of the plan assets. Any asset resulting from this calculation is limited to the present value of available refunds and reductions in future contributions to the plan.

High quality corporate bond rates have been utilised when discounting employee benefit liabilities as of 30 June 2020.

7(h) - Liabilities - Deferred income government grants

The grants received primarily arise from rail projects delivered under the Infrastructure Investment Programme, including the Inland Rail Project, to improve efficiency and safety of the National Land Transport Network. Previously the Company has been awarded other grants from the Government of Victoria and other state funded projects.

Accounting policy

Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Where the grants have attached conditions and/or are project specific, they are recognised at their fair value and initially credited to deferred income upon receipt, then recognised in the Consolidated Income Statement over the period necessary to match them with the costs that they are intended to compensate. Where those grants relate to expenditure that is to be capitalised, they are credited to the Consolidated Income Statement on a straight line basis over the expected lives of the related assets from the date of commissioning. Grants that compensate the Group for expenses incurred are recognised in the income statement on a systematic basis in the periods in which expenses are recognised e.g. Inland Rail Project.

8(a) - Contributed equity

(i) Share capital

Equity injections for Inland Rail of $425.7m (2019: $194.7m) and Adelaide to Tarcoola Re-Railing Project of nil (2019:$96.0m) have been received throughout the year.

(ii) Ordinary shares

On a show of hands every holder of ordinary shares present at a meeting in person, or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.

Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held.

Accounting policy

Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

8(b) - Reserves

(i) Asset revaluation reserve
The property, plant and equipment revaluation reserve is used to record increments and decrements on the revaluation of infrastructure assets.
(ii) Profit reserve
The profit reserve is used to preserve current profits for the purpose of paying dividends in future years.
(iii) Hedge reserve - cash flow hedges
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Amounts are reclassified to the Consolidated Income Statement when the associated hedged transaction settles.

8(c) - Retained earnings

Movements in retained earnings were as follows:

9(a) - Reconciliation of profit after income tax to net cash inflow from operating activities

9(b) - Right of use assets - payments

Some of the leases in which the Group is a lessee contain variable lease payment terms that are linked to usage rates of the assets. The breakdown of the Group's total lease payments for these leases are as per above.

The total cash outflow for leases amounts to $17.5m.

10(a) - Risk management

The Group's objectives when managing capital are to:

• safeguard the ability to continue as a going concern (refer to note 19(f)), so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
• maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

During 2020 the Group's objective was to maintain a gearing ratio under 40% (2019: 40%). The gearing ratios were as follows:

Total borrowings include trade and other payables and the impact of amortised interest and fees. Adjusted equity equates to equity as reported plus adjusted net debt as calculated above.

10(b) - Dividends - Ordinary shares

Note 11 - Financial risk management

The Group's principal financial instruments comprise receivables, payables, bonds, banking facilities, cash, short term deposits and derivatives. The carrying amount equates to the fair value of the financial instruments.

Risk management framework

The Group's Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Treasury Committee, a committee reporting to the CEO, is responsible for reviewing, monitoring and endorsing funding and risk management strategies. Treasury identifies, evaluates and monitors compliance and manages financial risks in accordance with the Treasury Policy and Strategy. Treasury provides updates to the Audit and Compliance Committee which oversees adequacy, quality and effectiveness of governance and financial risk management.

The Group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Note the Group’s current activities do not expose it to price risk. The Group's overall financial risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses fixed rate debt instruments, derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge cash flow risk exposures. Derivative financial instruments are exclusively used for hedging purposes, that is, not as trading or other speculative instruments. The Group uses different methods to identify and measure various different types of risk to which it is exposed.

11(a) - Market risk

(i) Foreign exchange risk
Foreign exchange risk arises from future commercial transactions such as purchases of equipment and supplies from overseas. All significant non - Australian dollar denominated payments require Treasury to assess and mitigate the Group's foreign exchange risk.

Forward contracts are generally used to manage foreign exchange risk predominantly in USD purchases. Treasury is responsible for managing the Group's exposures in each foreign currency by using external foreign currency instruments in accordance with Board approved Treasury Policy.

The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the cash flows occur, the Group releases the component recognised previously in Other Comprehensive Income to the Consolidated Income Statement.

During the year ended 30 June 2020 there were no reclassifications of cash flow hedge from equity to the income statement (2019: $0.0m) as there was no equity balance as at 30 June 2019. There was no hedge ineffectiveness in the current year expensed to the income statement (2019: $0.0m).

(ii) Interest rate risk
The Group’s policy is to invest its available cash reserves with due regard to the timing and magnitude of operational cash flow requirements. The Group manages its interest rate risk by entering into and designating interest rate related authorised hedging instruments as hedges. As at the reporting date, cash reserves are being held as cash and short term investments.

The gain or loss from re-measuring the hedging instruments at fair value is recognised in other comprehensive income and deferred in equity in the hedging reserve, to the extent that the hedge is effective. It is reclassified into the income statement when the hedged interest expense is recognised. For the year ended 30 June 2020 there were no interest rate hedges established, therefore, there was no impact on the financial statements. Refer to the accounting policy at the end of this note.

(iii) Classification of derivatives
Derivatives are designated and documented as hedging instruments and for the effective portion of the hedge accounted for at fair value in other comprehensive income and deferred in equity in the hedging reserve. It is reclassified into the income statement when the hedged interest expense is recognised.

(iv) Sensitivity analysis - interest rate and foreign currency

This analysis assumes all other variables are constant. All current bonds are issued at fixed rates. Foreign currency derivatives balances were low or nil in both the current and previous financial periods and therefore excluded from the above sensitivity analysis.

11(b) - Credit risk

(i) Risk management
The Group's exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount. Credit risk is managed on a Group basis. Credit risk arises predominantly from trade and other receivables and a very minimal amount from cash and cash equivalents. The Group does not hold any credit derivatives to offset its credit exposure.

The Group's Treasury Policy mitigates credit risk including that related to cash and cash equivalents by outlining the approach to the management of counterparty credit risk as approved by the Board. A number of criteria are utilised to manage and spread the level of risk such as: minimum credit rating of counterparty (investment grade), maximum credit exposure to any one counterparty and consideration of counterparty concentration risk. The Group generally utilises large A-1/AAA rated banks and therefore as a result credit risk is very minimal on cash and cash equivalents.

The Group's policy is that all customers enter into access agreements meeting the terms and conditions as set out in the agreement before entering the Group's rail network and receiving any trade credit facilities.

The Group’s exposure to bad debts has been historically low and statistically insignificant which has continued this year despite the impact of Covid-19 on the economy. The Group's extension to some customers of longer payment terms for a period of time has been considered in the risk component of the ECL calculations. The Group does have significant concentration of credit risk associated with major customers providing a high proportion of access revenue. Bad debt provisions are assessed on an individual basis in addition to an expected credit loss calculation.

(ii) Credit quality: Allowance for impairment
The Group has chosen to use the Simplified Approach in determining its expected credit loss allowance for trade receivables which is made up of accruals or amounts where credit risk is non - existent are assessed using relevant impairment indicators. Under the Simplified Approach, a matrix has been used as the practical expedient to determine expected credit losses on trade receivables. The matrix incorporates forward looking information and historical default rates which has been reassessed in light of Covid -19 impacts on the economy. The inputs to the matrix include revenue, trade receivable collections, trade receivable write-offs and reasons for bad debts. The output of the matrix is an average 3 year default rate for each aged trade receivable range, with the addition of the specific provision for impaired receivables included. The average default rate is then applied to the aged trade receivable balances at each reporting date to calculate the expected credit loss allowance.

The individually impaired items primarily relate to rental on property where the lessees have fallen behind on lease payments.

The following table provides information about the exposure to credit risk and expected credit losses for trade and other receivables as at 30 June 2020.

Trade receivables

Movements in the allowance for expected credit losses of trade receivables are as follows:

The creation and release of the allowance for expected credit losses has been included in 'other expenses' in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash.

11(c) - Liquidity Risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of committed credit facilities to support funding requirements and the ability to close out market positions. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and maintaining adequate liquidity reserves to support forecast net business expenditure requirements for a minimum of twelve months on a rolling monthly basis.

As at 30 June 2020, $435.0m of the $800m syndicated debt facility has been utilised (2019: $150m). The Group has a $1,500m Australian Dollar Domestic Note programme of which $125m is issued (note 6(d)). The Group also has access to business card facilities of $2m (2019: $2m).

Maturities of financial assets and liabilities based on contractual maturities
The tables below analyse the Group's financial assets and liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date.

The amounts disclosed in the table are the contractual principal and accrued interest undiscounted cash flows.

11(d) - Fair value measurements

(i) Fair value hierarchy and accounting classification
Judgements and estimates are made in determining the fair values of the items that are recognised and measured at fair value in the financial statements. The reliability of the inputs used in determining fair value has been classified into the three levels prescribed under AASB 13. An explanation of each level follows underneath the table.

Level 1: The fair value of instruments traded in active markets (such as publicly traded derivatives and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. These instruments are included in level 1.

Level 2: The fair value of instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

Disclosed fair values
The carrying amounts of trade receivables and payables, bonds, banking facilities, cash and short term deposits equates approximately to their fair values due to their nature and are carried at amortised cost.

There were no transfers between levels 1, 2 and 3 for recurring fair value measurements during the current or the previous financial year. The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.

(ii) Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

• The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. The present values and discounted rates used were adjusted for counterparty and own credit risk and are not considered a significant input.
• The fair value of foreign contracts is calculated as the present value of the future cash flows based on the forward exchange rates at the consolidated balance sheet date.
• The fair value of infrastructure assets is determined using risk adjusted discounted cash flow projections based on reasonable estimates of future cash flows.

(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 items for the periods ended 30 June 2019 and 30 June 2020 for the Group:

(iv) Valuation inputs and relationships to fair value
The following table summarises the information about the significant unobservable inputs used in level 3 fair value infrastructure asset measurements. See (ii) above for the valuation techniques adopted.

(v) Valuation processes
The Group calculates the fair value for infrastructure assets using the income method approach, whereby the measurement reflects current market expectations of future cashflows discounted to their present value for each asset group that would be considered reasonable by a normal market participant. The estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the business risk.

ARTC’s policy is to assess both Business Units annually to ensure compliance, as Standards require review if the fair value of the revalued asset class differs materially from its carrying amount. Property, plant and equipment reviews are undertaken annually to ensure significant movements are identified and accounted for. At 30 June 2020, the Group undertook a fair value assessment on an income method approach as there are no similar market quoted assets. The net present value of the cash flows for each business unit is compared with the current carrying value and any significant variance is taken to the financial statements.

The main level 3 inputs used by the Group for this process are derived and evaluated as follows:

• The Interstate business unit comprises the East West and North South corridors, the underlying cash flows are compiled on the basis that the CGUs operate as a combined Interstate business unit.
• Due to the long life of the asset base of the business, cash flows are considered for the ACCC approved remaining mine life for Hunter Valley or 20 years for the Interstate network.
• Expected cash flows are based on the terms of existing contracts, along with the entity’s knowledge of the business and assessment of the likely current economic environment impacts, adjusted to account for an expected arm's length market participant’s view of cash flow risks.
• Growth rates for income are derived from the underlying contract data, GDP growth rates, inflation estimates and pricing assumptions. Long term average growth rates used range from 1.6% to 3.6% (2019: 2.8% to 4.2%).
• An external expert is used to determine a nominal post-tax weighted average cost of capital range that reflects current market assessments of the time value of money and the risks specific to the relevant business units. As at 30 June 2020, the range determined across all business units is 5.1% - 6.4% (2019: 5.8% - 7.1%). The rates applied were selected from within the range applicable to each business unit.

Summarised sensitivity analysis
For the fair values of infrastructure assets, reasonably possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant would have the following effects: