McConnell Dowell 2020 Annual Review

61 Annual Review 2020 AASB Interpretation 4 Determining whether an Arrangement contains a Lease (AASB Interpretation 4) and related interpretations. AASB 16 establishes a comprehensive framework for determining the recognition, measurement and disclosures of leases, and to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. It replaces AASB 116, AASB Interpretation 4 and related interpretations. On adoption of AASB 16, the Group recognised lease liabilities in relation to leases which had been previously classified as ‘operating leases’ under the principles of AASB 117 as well as those contracts which may meet the definition of leases under AASB 16, not previously classified as ‘operating leases’ under AASB 117. The Group measured the lease liability (and corresponding right-of-use asset) at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at 1 July 2019. Transitional expedients The Group as a lessee has elected to use the following optional transitional expedients on a lease-by-lease basis at the transition date: – n ot to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the Group elects to not apply AASB 16 to contracts that were previously identified as leases applying AASB 117 and AASB Interpretation 4; – t o apply a single discount rate to a portfolio of leases with reasonably similar characteristics; – t o account for short-term leases with a lease term that ends within 12 months of the date of initial application as an expense on either a straight-line basis over the lease term or another systematic basis. The lessee’s weighted average incremental borrowing rate applied to the lease liabilities on 1 July 2019 was between 4,55% and 6,5%, based on the portfolio in which the lease was included. Determining whether a contract is, or contains a lease At inception of a contract, the Group assesses whether a contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether: – t he contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; – t he Group has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and – t he Group has the right to direct the use of the asset. The Group has the right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where all the decisions about how and for what purpose the asset is used are predetermined, the Group has the right to direct the use of the asset if either: - the Group has the right to operate the asset; or - the Group designed the asset in a way that predetermines how and for what purpose it will be used. The Group has applied this approach to contracts in existence, entered into, or modified on or after 1 July 2019. Calculating the discount rate The Group initially measures the lease liability at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the Group’s weighted average incremental borrowing rare per portfolio of leases with reasonably similar characteristics. Generally, the Group uses its weighted average incremental borrowing rate as the discount rate. Year ended 30 June 2020 Group as a lessee Determining the lease term The Group has determined the lease term as the non- cancellable period of the lease, together with periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, and the periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. The lease term includes any rent- free periods provided to the lessee by the lessor. Short-term leases and leases of low value assets The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of property, plant and equipment that have a lease term of 12 months or less and leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Separation of lease components At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative standalone prices. However, for the leases of land and buildings in which it is a lessee, the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. Right-of-use assets The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentive received.