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 Expected Credit Losses (ECLs) on financial assets measured at amortised cost and contract assets (as defined in AASB 15 Revenue from Contracts with Customers). 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 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.
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.
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.
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 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 services 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 16 Leases with an initial adoption date of 1 July 2019. As a result, the Group has changed its accounting policies as detailed below.
AASB 16 Leases
AASB 16 replaced 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 introduced a new definition for leases and for lessee accounting applied a single, on-balance sheet lease accounting model. This effectively removed the classification of leases as either operating or finance leases. As a result, the Group has recognised right-of-use assets representing its right to use the underlying asset and lease liabilities representing its obligation to make lease payments for certain assets for which it is the lessee. There has been no significant change to lessor accounting as a result of this new accounting standard, i.e. lessors continue to classify leases as either finance or operating leases.
A summary of the transition approach and adoption impact of AASB 16 are outlined below. See Notes C3 and C8 for further details on the accounting policy with respect to lease accounting.
The Group has applied the modified retrospective approach for the adoption of AASB 16. Under this approach, the cumulative effect of adopting AASB 16 has been recognised as an adjustment to the opening balance sheet on 1 July 2019 and there is no restatement of comparative information, which continues to be reported under AASB 117.
In adopting AASB 16 the Group has used the following practical expedients permitted by the standard:
- Apply the ‘grandfather’ exemption to maintain the previous assessment as to whether a contract contains a lease which was made under AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease. Therefore, no formal reassessment of existing contracts is required.
- Apply the expedient to continue to account for low-value leases, previously classified as operating leases, on a straight-line basis over the lease term. This is consistent with NBN Co’s ongoing accounting policy.
- Use of a single discount rate across a portfolio of leases with reasonably similar characteristics.
- Rely on NBN Co’s assessment of whether leases are onerous under AASB 137 Provisions, Contingent Liabilities and Contingent Assets as at 30 June 2019 as an alternative to performing an impairment review upon adoption. The carrying value of the right-of-use assets is adjusted by the amount of any provision for onerous leases held as at 30 June 2019.
- Exclude initial direct costs from the measurement of the right-of-use asset upon transition.
- Where practicable, and by class of underlying asset, arrangements that contain both lease and non-lease components will be accounted for as though they comprise a single lease component.
In line with the requirements of AASB 16, the Group has recognised lease liabilities and associated right-of-use assets for all leases that do not meet the low-value asset exemption criteria. The adoption impacts for both leases previously classified as finance leases and leases previously classified as operating leases are discussed below.
For leases previously classified as finance leases, the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. Therefore, there is no AASB 16 adoption impact for leases previously classified as finance leases. However, the measurement principles of AASB 16 differ to those of AASB 117. Lease payments under AASB 16 now include lease payments due to contingent rental payments that depend on an index or rate and non-lease component payments for certain asset classes. The measurement principles of AASB 16 were applied immediately after the initial application of AASB 16 resulting in adjustments of $1,005 million to reflect the increased lease payments under AASB 16, excluding any reclassification of accruals previously recognised under AASB 117. The remeasurements of the lease liabilities were recognised as adjustments to the related right-of-use assets. The impact of this remeasurement has been presented as an adoption impact of AASB 16 as it was applied from 1 July 2019.
For leases previously classified as operating leases under the principles of AASB 117 Leases, the Group recognised additional lease liabilities of $558 million. The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s estimated incremental borrowing rate applicable to the specific assets as at 1 July 2019.
Associated right-of-use assets of $8,251 million were recognised equivalent to the value of the corresponding lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 30 June 2019. This recognition of right-of-use assets is offset by the derecognition of existing leased assets of $6,707 million. This results in a net adoption impact of an increase in recognised assets of $1,544 million. There were no onerous lease provisions as at 30 June 2019, which were included as an adjustment to the right-of-use asset.
As a result of the AASB 16 adoption approach and elections applied, there has been no impact on the accumulated losses of the Group.
There was no significant adoption impact for lessor accounting.
The impact of AASB 16 transition is summarised below (only financial statement items affected by AASB 16 are shown):
30 June 2019 (under AASB 117)
1 July 2019 (under AASB 16)
Land - right-of-use assets
Buildings and leasehold improvements - right-of-use assets
Furniture and equipment - right-of-use assets
Network assets - right-of-use assets
Other current assets
Current trade and other payables
Other balance sheet items
Current lease liabilities
Non-current lease liabilities
When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using its incremental borrowing rate at 1 July 2019. The weighted average rate applied is 6.8%.
Operating lease commitments disclosed as at 30 June 2019
(Less): Commitments for low-value leases not recognised as a lease liability under AASB 16
(Less): adjustments relating to changes in contingent rental payments and non-lease components
(Less): Operating lease commitments with a commencement date after 1 July 2019 not recognised as a lease liability under AASB 16
Operating lease commitments to be discounted using the lessee's incremental borrowing rate at the date of initial application
Discounted using the lessee's incremental borrowing rate at the date of initial application
Add: adjustments as a result of different treatment of extensions and termination options
Increase in lease liability from operating leases recognised as at 1 July 2019
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 2020 reporting period. These standards, amendments to existing standards and interpretations have not been early adopted by the Group and are not expected to have a material impact on the Group’s financial statements in the period of initial application.