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C8 Other financial liabilities

Lease liabilities and right of use licenses

NBN Co Group

30 June 2019

30 June 2018

$m

$m

Current

Lease liabilities and right of use licences

276

161

Total

276

161

NBN Co Group

30 June 2019

30 June 2018

$m

$m

Non-current

Lease liabilities and right of use licences

8,277

7,037

Total

8,277

7,037

The majority of other financial liabilities relates to right of use licences to access Telstra’s network infrastructure, including ducts, pits, exchange rack space and dark fibre. The terms of the right of use licences are governed by the Revised Definitive Agreements (RDAs) with Telstra (refer to Note F1).

These right of use licences are accounted for as finance leases. The Group also leases industrial buildings under finance leases with various occupancy terms of up to 20 years.

Recognition and measurement
The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets.

Leases of property, plant and equipment (including network infrastructure), where the Group as lessee has substantially all the risks and rewards of ownership, are classified as finance leases.

Finance leases are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Incremental contingent rentals such as movements in the Consumer Price Index (CPI) are excluded from minimum lease payments and are therefore, not included in lease liabilities. Contingent rentals paid during the year are included as an expense in the Statement of profit or loss and other comprehensive income.

At inception, key elements of the lease arrangement such as interest rate, lease term and valuation methodology are assessed. Each lease payment is allocated between the liability and finance charges. The finance charges are expensed to profit or loss over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Property, plant and equipment (including network infrastructure) acquired under finance leases are depreciated over the shorter of the asset’s useful life or the lease term. Depreciation on network and non-network assets under lease commences when they are installed and ready for use, otherwise termed as ‘in service’.

Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the lease term. Lease incentives are recognised in profit or loss as an integral part of the total lease expense.

Operating leases include leases over certain properties, commercial vehicles, pole infrastructure and wireless base stations.

Lease income from operating leases where the Group is a lessor, is recognised as income on a straight-line basis over the lease term.

Key estimates and judgements:

Finance lease determination
The Group classifies leases between finance and operating depending on whether the Group holds substantially all of the risks and rewards incidental to ownership or not. In making this assessment, the Group primarily considers the asset ownership at the end of the lease term, any purchase options, the lease term in respect to the assets’ life, the present value of future lease payments in relation to the assets’ fair value and the nature of the assets. A number of key estimates and judgements have been made in determining the present value of minimum lease payments (MLP) associated with network infrastructure right of use licences with Telstra, which are accounted for as finance leases. In determining the present value of the MLP, a discount rate representing the estimated implicit rate of return at the inception date of the Definitive Agreements. The discount rate remains unchanged. For lease accounting purposes, the term of each right of use licence, of up to 35 years, does not include possible renewal as the exercise of such options was not considered reasonably certain at inception of the agreements. The renewal period being two options exercisable by NBN Co each for ten additional years. A proportion of the payments under the RDA are expensed directly to profit or loss as an estimate of the cost of the repairs and maintenance activities undertaken by the lessor.

Net finance costs
Net finance costs primarily relate to the right of use licences to access Telstra’s network infrastructure, which are accounted for as finance leases.

NBN Co Group

30 June 2019

30 June 2018

For the year ended

Note

$m

$m

Finance charges on finance lease arrangements

(649)

(534)

Unwinding of the discount on other lease related provisions

(2)

(2)

Interest on borrowings

E2

(352)

(70)

Interest income

10

26

Total

(993)

(580)

Finance lease commitments
This note and Note F1 disclose the agreements with Telstra to provide NBN Co with access rights to various infrastructure, including dark fibre, exchange rack space in exchange buildings, ducts and associated duct infrastructure. These right of use licences are accounted for as finance leases and result in the recognition of finance lease liabilities. In addition, finance lease liabilities have been recognised for certain property leases of industrial buildings.

Lease payments comprise of a base amount and an incremental contingent rental amount, which is based on movements in the Consumer Price Index (CPI). Contingent rent, representing the portion of the lease payments made that were not fixed and subject to CPI contract clauses are expensed in the period in which they were incurred. Current levels of CPI at the reporting date are included in future finance and other charges in the table below for disclosure purposes only.

NBN Co Group

30 June 2019

30 June 2018

$m

$m

Finance lease and right of use licenses are payable as follows:

Within one year

985

787

Later than one year but not later than five years

3,297

2,719

Later than five years

18,708

16,062

Minimum lease payments

22,290

19,568

Future finance and other charges

(14,437)

(12,370)

Recognised as a liability

8,553

7,198

Representing finance lease and right of use license liabilities:

Current

276

161

Non-current

8,277

7,037

Total

8,553

7,198