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H8 Other significant accounting policies

Impairment of financial assets
Financial assets are assessed at each reporting date to determine whether there is any objective evidence that they are impaired. A financial asset is impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

Significant financial assets are tested for impairment individually. The remaining financial assets are assessed in groups that share similar credit risk characteristics.

The Group recognises loss allowances for ECLs on financial assets measured at amortised cost and contract assets (as defined in AASB 15). Loss allowances are deducted from the gross carrying amount of the financial asset and recognised in profit or loss. ECLs are based on the difference between contractual cashflows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the effective interest rate of the financial asset.

NBN Co has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

The provision rates are based on days past due for groupings of various customers with similar loss patterns (i.e. by geographic region, customer type and rating). The calculation reflects the probability-weighted outcome, the time value of money and reasonable supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.

Inventories
Inventories include spare parts to be used in maintaining the nbn™ access network. Costs are assigned to individual items of inventory on the basis of weighted average costs. Inventories are valued at the lower of cost and net realisable value.

Foreign currency translation
Foreign currency transactions are translated into the functional currency of the Group 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 profit or loss.

Goods and Services Tax (GST)
Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the Statement of financial position.

The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows.

Interest income
The Group records interest income on an accruals basis. For financial assets, interest revenue is determined by the effective yield on the instrument.

Gifted assets and government grants
Government grant income is recognised when the performance obligations of the grant are satisfied.

When the grant relates to an asset or assets received for no consideration, the gifted asset is recorded at fair value and the resulting gain is credited to deferred income.

The gain is released to profit or loss on a straight line basis, over the expected period of provision of services which is estimated to be the useful life of the relevant asset or assets.

Subscriber costs
Subscriber costs primarily include contractual payments to Telstra regarding the disconnection of services and to Optus regarding the migration of subscribers as well as expenditure for medical alarm and satellite subsidy schemes. Expenditure is recognised in the period as the disconnection or migration service is rendered.

Changes in significant accounting policies

Except for the changes below, the Group has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

The Group adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers with an initial adoption date of 1 July 2018. As a result, the Group has changed its accounting policies as detailed below.

AASB 9 Financial Instruments
AASB 9 sets out the requirements for recognising and measuring financial assets and financial liabilities and some contracts to buy or sell non-financial items. It replaces AASB 139 Financial Instruments: Recognition and Measurement.

AASB 9 contains three principal classification categories of financial assets: Amortised cost, Fair value through other Comprehensive Income (FVOCI) and Fair Value through Profit and Loss (FVTPL). The classification of financial assets under AASB 9 is based upon the nature of the business model in which the financial asset is managed and its contractual cash flow characteristics. AASB 9 eliminates the previous AASB 139 categories of held to maturity, loans and receivables and available for sale.

AASB 9 largely retains the existing requirements in AASB 139 for the classification and measurement of financial liabilities.

The adoption of AASB 9 has not had a significant effect on the Group’s accounting policies. All non-derivative financial assets and liabilities continue to be held at amortised cost.

The Group continues to recognise derivative financial instruments as cash flow hedges and there has been no change in the Group’s accounting policies in relation to cash flow hedges as the policies fully align with the requirements of AASB 9.

Impairment of financial assets
AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. In line with the requirements of AASB 9, the Group recognises loss allowances for ECLs on financial assets measured at amortised cost and contract assets (as defined in AASB 15). Loss allowances are deducted from the gross carrying amount of the financial asset. ECLs are based on the difference between contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the effective interest rate of the financial asset.

As a result of the adoption of AASB 9, there are consequential amendments to AASB 101 Presentation of Financial Statements which require impairment of financial assets to be presented in a separate line item in the statement of profit or loss and other comprehensive income. The Group presents impairment losses on financial assets under other operating expenses, similar to the presentation under AASB 139, and not separately in the statement of profit and loss and other comprehensive income as this amount is not material to the Group.

At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Given the nature of the Group’s financial assets the Group has determined that no adjustments were required for impairment losses on transition to the ECL impairment model, and that the adoption of the ECL impairment model did not result in the recognition of any significant impairment in the twelve months to 30 June 2019.

Transition
Changes in accounting policies resulting from the adoption of AASB 9 have been adopted retrospectively with the exception of the Group electing to take the exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements.

There were no material differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of AASB 9, therefore no adjustment was recorded in retained earnings as at 1 July 2018 to reflect the adoption of AASB 9. Accordingly, the comparative information presented for FY18 is prepared on the basis of AASB 139, rather than AASB 9. Details of the comparative period’s accounting policies can be found in the 2018 Annual Report.

AASB 15 Revenue from Contracts with Customers
AASB 15 replaces AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations. It establishes principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers and requires revenue to be recognised in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services.

This is achieved by applying the following five steps:

  • identify the contract with the customer;
  • identify performance obligations in the contract;
  • determine the transaction price;
  • allocate the transaction price to the performance obligations in the contract based on their standalone selling prices; and
  • recognise revenue when (or as) performance obligations are satisfied.

NBN Co’s accounting policy for contracts with customers reflects the five-step model outlined in AASB 15 (see Note B1 for more details on the accounting policy).

Transition
The Group adopted AASB 15 using the cumulative effect method – i.e. by recognising the cumulative effect of initially applying AASB 15 as an adjustment to the opening balance of equity at 1 July 2018. Therefore, comparative information has not been restated and continues to be reported under AASB 118 and AASB 111. Details of the comparative period’s accounting policies can be found in the 2018 Annual Report.

The adoption of AASB 15 has not had a material impact on the results of the Group. There is no adjustment to the opening balance of retained earnings as at 1 July 2018 and there is no difference between the consolidated financial statements for the twelve months ended 30 June 2019 as presented using AASB 15 and consolidated financial statements for the twelve months ended 30 June 2019 as presented under AASB 118 and AASB 111.

New standards and interpretations available for early adoption
Certain new accounting standards, amendments to existing standards and interpretations have been published that are not mandatory for the 30 June 2019 reporting period. These standards, amendments to existing standards and interpretations have not been early adopted by the Group.

Of those standards that are not yet effective, only AASB 16 Leases is expected to have a material impact on the Group’s financial statements in the period of initial application. The impact of AASB 16 is discussed below.

AASB 16 Leases
NBN Co will apply the standard from its mandatory adoption date of 1 July 2019. AASB 16 replaces the previous definitive guidance and interpretations found within: AASB 117 Leases; IFRIC 4 Determining whether an arrangement contains a lease; SIC–15 Operating Leases – Incentives; and SIC–27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. This effectively removes the classification of leases as either operating leases or finance leases for the lessee – effectively treating all leases as finance leases. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make future lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases.

NBN Co established a project team to facilitate the transition to AASB 16. The project team has identified and evaluated the requirements of AASB 16 and subsequently determined NBN Co’s transition approach including the implementation of an upgraded leasing system, preparation of lease data for transition and assessment of the financial impact of AASB 16 upon NBN Co.

NBN Co will apply the modified retrospective transition approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. NBN Co intends to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply AASB 16 to all contracts entered into before 1 July 2019 which were assessed to contain leases in accordance with AASB 117 and IFRIC 4.

Leases in which the Group is a lessee
NBN Co will recognise new right of use assets and lease liabilities for leases previously recognised as operating leases (see Note F3), except where NBN Co applies the practical exemption to not apply AASB 16 for leases of low value assets. Management consider low value assets as those assets valued at less than $10,000, with the low value assessment based on the value of the asset when it is new. On transition the lease liabilities will be recognised at the present value of the remaining lease payments discounted at the Group’s incremental borrowing rate as at 1 July 2019. Under the modified retrospective transition approach, the Group have elected to recognise the right of use assets at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.

Based on the information currently available, the Group estimates that it will recognise additional right of use assets of between $525 million and $575 million and lease liabilities of between $550 million and $600 million as at 1 July 2019 in relation to existing operating leases. However, these estimates may be subject to change following the completion of the adoption procedures.

In accordance with AASB 16, there will also be a transition impact expected for the Group’s leases previously recognised as finance leases. Under AASB 16 contingent rental payments that depend on an index or rate, which were previously excluded from minimum lease payments under AASB 117 (see Note C8), and non-lease components for certain asset classes, for which NBN Co intends to apply the practical expedient not to separate lease components from any associated non-material non-lease components, will be included within future lease payments. This will result in an adjustment to the lease liabilities and right of use assets recognised as a result of the remeasurement of these finance leases to reflect these increased lease payments. The Group intends to incorporate these changes and remeasure the right of use assets and lease liabilities from 1 July 2019.

Based on the information currently available, the Group estimates that it will recognise additional right of use assets and lease liabilities of between $975 million and $1,025 million as at 1 July 2019 in relation to the remeasurement of existing finance leases. However, these estimates may be subject to change following the completion of the adoption procedures.

Following the adoption of AASB 16, the Group’s operating profit will improve, while both its depreciation expense and interest expense will increase due to the remeasurement of the lease liabilities and right of use assets. This is due to the change in the accounting treatment for leases that were classified as operating leases under AASB 117 as well as the incorporation of contingent rental payments and non-lease components into the right of use assets and lease liabilities for leases which were previously classified as finance leases.

Leases in which the Group is a lessor
There is no expected financial impact for leases in which the Group is a lessor. Under AASB 16, these leases continue to be assessed as either finance or operating leases. The Group will continue to recognise rental income on a straight line basis for operating leases entered into as a lessor.