Certain new accounting standards are not mandatory for the 30 June 2019 reporting period, including AASB 16 Leases (AASB 16), which has not been early adopted by Snowy Hydro. AASB 16 is adopted on 1 July 2019 for the 2020 financial year. The estimated impact of the adoption of AASB 16 is based on assessments undertaken to date and is summarised below. The actual impact of adopting AASB 16 as at 1 July 2019 may change as the new accounting policies are subject to change until the Group presents its first financial statements that include the date of initial application.
In addition to AASB 16, other issued amendments and new standards are not expected to have a material impact on Snowy Hydro’s financial statements.
AASB 16 Leases
AASB 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessees and lessors. AASB 16 will supersede the current lease guidance including AASB 117 Leases and the related interpretations when it becomes effective. The new standard is effective for all periods beginning on or after 1 January 2019, and will be adopted by Snowy Hydro on 1 July 2019, for the year ending 30 June 2020.
Classification and measurement
For lessees, the previous distinction between an operating lease and a finance lease has been removed in the new standard, and all but short-term leases, and leases of low-value assets must be accounted for in a manner similar to the existing finance lease approach, using the concept of a right-of-use (ROU) asset and corresponding financial liability for lease payments. Previously, the Group recognised operating lease expenses on a straight-line basis and recognised assets and liabilities only when there was a timing difference between actual lease payments and the expense recognised.
On 1 July 2019, the Group will recognise new assets and liabilities for its operating leases of land and buildings (Note 25). The lease liabilities will be measured at the present value of the remaining lease payments, discounted using the lease’s incremental borrowing rate. In line with the chosen transition method, the ROU assets will initially be recognised at a value equal to their corresponding lease liabilities.
The Group has applied the modified retrospective transition approach, which does not require comparative information to be restated in the financial statements for the year-ended 30 June 2020. Any cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019.
As permitted by AASB 16, a number of practical expedients will be applied on transition. These include ‘grandfathering’ the old definition of a lease for any contracts signed prior to the initial application date. This means that, on transition, the requirements of AASB 16 will only be applied to existing contracts which were previously identified as leases under AASB 117 and its related interpretations. Subsequent to the initial application date, all new contracts must be assessed to determine if they meet the definition of a lease under AASB 16.
The Group will also apply the short-term lease and lease of low value-assets exemptions, meaning right of use assets and financial liabilities will not be recognised for any leases which meet these definitions.
The Group’s existing finance leases are not impacted by the transition to AASB 16.
Based on the chosen transition approach, the Group will recognise $106.8m of lease liabilities and $103.8m of ROU assets on 1 July 2019. This will result in a nil impact to retained earnings on the initial application date, as the difference between the lease liability and ROU asset is due to the ROU asset being adjusted for amounts currently recorded on the balance sheet. These balances were previously used to ‘straight-line’ the rent expense under AASB 117, representing the difference between the cumulative lease expense recognised and actual cash payments.