IGO Interactive Annual Report 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 JUNE 2020 Notes to the consolidated financial statements 30 June 2020 (continued) 14 Leases (continued) * In the previous financial year, leases were accounted for by applying the principles of AASB 117 Leases, which classified arrangements as either finance leases or operating leases. From 1 July 2019, the Group changed its accounting policy so that leases are recognised by applying the principles of AASB 16 Leases. Under the new standard, leases are recognised as right-of use assets with corresponding lease liabilities. Refer to note 31(a) for details of the impact on the Group on adoption of the standard. Additions to the right-of use assets during the year were $12,577,000. (b) Amounts recognised in the statement of profit or loss The statement of profit or loss shows the following amounts relating to leases: 2020 $'000 2019 $'000 Depreciation charge of right-of-use assets Buildings 1,534 - Mining plant and equipment 4,931 - 6,465 - Interest expense (included in borrowing and finance costs) 1,523 - Space The total cash outflow for leases for the financial year to 30 June 2020 was $7,199,000. (c) Recognition and measurement The Group leases office space and equipment. Rental contracts are typically made for fixed periods of 5 to 15 years, but may have extension options as described below. Contracts may contain both lease and non-lease components. The Group allocated the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Lease liabilities Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following 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, initially measured using the index or rate as at the commencement date; • amounts expected to be payable by the Group under residual value guarantees; • the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and • payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, an arm's length asset finance facility borrowing rate is used, being the rate that the individual lessee would have to pay to finance the asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. The weighted average borrowing rate used for the year was 4.1%. Subsequent to initial recognition, lease liabilities are carried at amortised cost. Lease payments are allocated between principal and finance costs. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. IGO Limited 27 Notes to the consolidated financial statements 30 June 2020 (continued) 14 Leases (continued) (c) Recognition and measurement (continued) Right-of-use assets Right-of-use assets are measured at cost and comprise the following: • the amount of the initial amount of lease liability; • any lease payments made at or before the commencement date, less any lease incentives received; • any initial direct costs; and • restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life. Short-term leases and leases of low value assets Payments associated with short-term leases of equipment and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Extension and termination options Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group's operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. (d) Key estimates and judgements Lease term The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the Group's operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and disruption to replace the asset. The Group reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances. Incremental borrowing rate Where the interest rate implicit in a lease cannot be readily determined, an incremental borrowing rate is estimated to discount future lease payments to measure the present value of the lease liability at the lease commencement date. Such a rate is based on what the Group estimates it would have to pay to finance an asset of a similar value to the right-of-use asset, with similar terms, security and economic environment. IGO Limited 28 96 — IGO ANNUAL REPORT 2020 IGO ANNUAL REPORT 2020— 97