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

The Group also leases certain commercial properties, commercial vehicles, and wireless base stations with various terms that are due to expire within one to thirty years. Lease payments generally comprise a base amount plus an incremental contingent rental amount based on movements in the Consumer Price Index and periodic reviews to market-based levels.

In the prior year, the Group only recognised lease liabilities in relation to leases that were classified as finance leases under AASB 117 Leases. As of 1 July 2019, the Group adopted AASB 16 Leases which resulted in the recognition of additional lease liabilities for leases previously classified as operating leases under AASB 117, as well as the remeasurement of existing lease liabilities for leases previously classified as finance leases under AASB 117. For further information on the adoption impact of AASB 16 refer to note H8.

Recognition and measurement from 1 July 2019 under AASB 16 Leases

The Group recognises leases where the Group has the right to control the use of an identified asset for a period of time in exchange for consideration.

Leases in which the Group is a lessee

Leases are recognised as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use by the Group, except where the Group applies the practical exemption to not apply AASB 16 for leases of low-value assets. Management considers low-value assets as those assets valued at less than $10,000, with this assessment based upon the value of the asset when it is new. The payments for these low-value assets will be recognised as operating expenditure on a straight-line basis (or other systematic basis). For the year ended 30 June 2020, $209 million has been recognised as operating expenditure in the income statement for lease arrangements that have been classified as low-value assets.

Right-of-use assets and lease liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

• Fixed payments (including in-substance fixed payments), less any lease incentives receivable
• Variable lease payments that are based on an index or a rate that are known at the reporting date
• Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

The lease liability is subsequently increased by the interest charged on the lease liability and decreased by lease payments made. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

The lease liability is remeasured when there is a change in future lease payments. The lessee shall recognise the amount of any remeasurement of the lease liability as an adjustment to the right-of-use asset. The Group is exposed to potential future changes in variable lease payments that are based on an index or rate, such as payments linked to Consumer Price Index (CPI). Changes to these variable lease payments will result in a remeasurement of the lease liability (and corresponding adjustment to the right-of-use asset) at the point when these changes due to the movement in an index or rate become known.

The Group applies judgement to determine the lease term for some lease contracts in which it is a lessee that include purchase, renewal or termination options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which affects the value of lease liabilities and right-of-use assets recognised.

Leases in which the Group is a lessor

The Group does not have significant leases where it acts as the lessor. Under AASB 16, the Group will continue to classify each lease as either an operating lease or a finance lease. A lease will be classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset.

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

Recognition and measurement applicable before 1 July 2019 under AASB 117

As explained above, the Group has changed its accounting policy for leases where the Group is the lessee. The impact of the change in accounting policy is disclosed in Note H8.

Until 30 June 2019, the determination of whether an arrangement was or contained a lease was based on the substance of the arrangement and required an assessment of whether the fulfilment of the arrangement was dependent on the use of a specific asset or assets and the arrangement conveyed a right to use the asset or assets.

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

Finance leases were 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) were excluded from minimum lease payments and were therefore, not included in lease liabilities. Contingent rentals paid during the year were 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 were assessed. Each lease payment was allocated between the liability and finance charges. The finance charges were 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 were depreciated over the shorter of the asset’s useful life or the lease term. Depreciation on network and non-network assets under lease commenced when they were installed and ready for use, otherwise termed as ‘in service’.

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

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

Key estimates and judgements:

Determination whether a contract contains a lease

At the inception of a contract, the Group will assess whether the contract is, or contains a lease. The Group will recognise a lease where a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In making this assessment the Group primarily considers if there is an identified asset, who has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use, and who can direct how and for what purpose the asset is used throughout the period of use.

Determination of the net present value of a lease

A number of key estimates and judgements have been made in determining the net present value of applicable lease payments. In determining the net present value of a lease, the applicable lease payments are discounted using the interest rate implicit in the lease. Where this cannot be readily determined, a discount rate representing the estimated incremental borrowing rate at the commencement of the lease is used.

The incremental borrowing rate is the rate of interest the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

The Group determines the incremental borrowing rate based upon the rate at which NBN Co, as a stand-alone company, can borrow funds. When determining the incremental borrowing rate for a lease, consideration is given to the term of the lease, indicative credit ratings for NBN Co, comparable market transactions and the nature of the assets being leased.

Determination of lease term

Extension and termination options are included in a number of leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the group’s operations. In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the Group.

For network infrastructure right-of-use licenses with Telstra, 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.

Lease commitments

The aging profile of future lease and right-of-use license payments is shown below. This includes the payments associated with the additional leases recognised on the balance sheet following the adoption of AASB 16.

In the prior year, the Group only recognised lease liabilities in relation to leases that were classified as finance leases under AASB 117 Leases.

Net finance costs

Net finance costs primarily relate to the right-of-use licences to access Telstra’s network infrastructure, and interest charged on related party borrowings.