Notes to the consolidated financial statements

The operating licence awarded by the Federal Government authorises and obliges the airport operator, Flughafen Zürich AG, to operate Zurich Airport until 2051. In addition to combining transport services by road, rail and air, Flughafen Zürich AG also operates Zurich Airport as a shopping, entertainment and services centre.

The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law. They have been prepared under the historical cost convention, with the exception of derivative financial instruments, assets of the Airport of Zurich Noise Fund that are classified as available for sale, associates and pension obligations.

The single-entity financial statements of the groupʼs subsidiaries, which have been prepared in accordance with uniform accounting policies, have been used as the basis for consolidation. The reporting date for all subsidiaries is 31 December.

The preparation of financial statements in accordance with IFRS requires the Management Board to make estimates and assumptions, as well as exercise its discretion, when applying the accounting policies. This may affect reported income, expenses, assets, liabilities and contingent liabilities at the time of preparation of the financial statements. In the event that such estimates and assumptions made in good faith by the Management Board at the time of preparation of the financial statements subsequently deviate from the actual circumstances, the estimates and assumptions originally made are adjusted prospectively in the financial year in which the circumstances changed.

Judgements made by the Management Board in its application of IFRS that have a significant effect on the consolidated financial statements, and estimates and assumptions with a significant risk of adjustment in the following financial year, are discussed in “II. Judgements and significant estimates and assumptions in the application of accounting policies” and in the following notes in Notes to the consolidated financial statements:

Changes in accounting policies

The company adopted the following amended International Financial Reporting Standards which are mandatory for the first time for the financial year beginning 1 January 2017:

The above-mentioned amendments did not have a significant impact on the financial position, results of operations or cash flows of Flughafen Zürich AG for financial year 2017.

Application of accounting policies to new transactions and events

In connection with the acquisition of a controlling interest in A-port Chile S.A. and the related concessions for the airports in Antofagasta and Iquique as well as the concession in connection with the future operation and upgrade of Hercílio Luz Airport in the Brazilian city of Florianópolis, the following accounting policy was applied for the first time:

IFRIC 12 Service Concession Arrangements

IFRIC 12 Service Concession Arrangements governs the accounting for rights created by contracts under which the public sector (the grantor) grants a private sector entity (the operator) the licence to provide public services such as the construction, operation and maintenance of infrastructure and the public sector retains certain rights to exercise control. The operator must recognise the right granted by the grantor as a financial asset to the extent that the operator obtains an unconditional right to receive a specified amount of consideration from the public sector entity (financial asset model). If the operator is granted a right to consideration that is contingent on the extent to which the infrastructure is used, the operator recognises an intangible asset (intangible asset model).

Introduction of new standards in 2018 and later

The new, revised and amended standards and interpretations issued by the end of 2017 and set out in the table below are not yet effective and were not applied early in these consolidated financial statements.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments, issued in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidelines on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets and new general hedge accounting requirements. It also carries forward the guidance on the recognition and derecognition of financial instruments from IAS 39. In some cases, the new requirements will lead to changes in classification and the new impairment requirements will lead to losses being recognised in profit or loss earlier. An analysis has revealed that application of IFRS 9 as of 1 January 2018 is not expected to have any significant effects on the companyʼs consolidated financial statements.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework in the form of a single, five-step model for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The company has chosen the modified retrospective application approach for initial application of the new standard, under which the standard is applied retrospectively at 1 January 2018 only to contracts that are not yet completed contracts at that reporting date. Any effect of the transition is recognised in equity at 1 January 2018 (without adjusting prior-year amounts). An analysis of agreements with customers has shown that the company does not have any significant agreements for which IFRS 15 would result in changes in revenue recognition. No material consequences are therefore expected in terms of revenue recognition.

IFRS 16 Leases

IFRS 16 Leases sets out the accounting and disclosure requirements for lessees and lessors. The new standard supersedes the existing IAS 17 Leases and the related interpretations. A detailed analysis of the effects will be carried out in the current financial year. However, the company does not expect the application of the new standard to have a significant impact on the consolidated financial statements.

The explanations above and the expected effects resulting from revisions and amendments to standards and interpretations, as set out in the table, reflect the current assessment of the Management Board.

The acquisition in mid-April 2017 of a controlling interest in A-port Chile S.A. based in Santiago de Chile extended the consolidated group in Latin America. Through its subsidiary A-port S.A. (formerly Zurich Airport Latin America S.A.), Flughafen Zürich AG had for several years held a 49% interest in this company, which primarily holds the concessions for the Chilean airports in Antofagasta and Iquique.

In connection with taking over the operation and upgrade of Hercílio Luz Airport in Florianópolis (Brazil), Flughafen Zürich AG also established the wholly-owned subsidiary Concessionária do Aeroporto Internacional de Florianópolis S.A.

SCOPE AND METHODS OF CONSOLIDATION

The consolidated financial statements comprise Flughafen Zürich AG and all companies in Switzerland and abroad that it directly or indirectly controls. Flughafen Zürich AG controls an entity if it is exposed or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control begins until the date on which control ceases. All assets and liabilities are therefore included in the consolidated financial statements together with all income and expenses in accordance with the principles of full consolidation. All unrealised gains and losses on intra-group transactions and all intra-group balances are eliminated on consolidation.

Business combinations are accounted for using the acquisition method at the date of acquisition. Consideration transferred in a business combination includes the fair value of the assets transferred, liabilities assumed or incurred and equity instruments issued by the group. Transaction costs incurred in connection with a business combination are recognised in the income statement. Goodwill arising from a business combination is recognised as an asset. Goodwill represents the excess of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of any previously held equity interest in the acquiree over the fair value of the assets acquired and liabilities assumed. Two choices exist regarding the measurement of non-controlling interests. Non-controlling interests are measured at their fair value or at their proportionate share of the recognised amount of the identifiable net assets. When the excess is negative, a bargain purchase gain is recognised immediately in the income statement, after first reassessing the fair value of the net assets acquired.

FOREIGN CURRENCY

For consolidation purposes, all assets and liabilities reported in the balance sheets of companies within the group are translated into Swiss francs (functional currency of Flughafen Zürich AG) at the closing rate. Income statements and cash flow statements are translated at the average exchange rate for the period. Foreign exchange differences arising on the translation of balance sheets and income statements are credited/charged directly to the translation reserve in equity. Transactions in foreign currency are translated into Swiss francs at the exchange rate in effect on the day of the transaction.

Foreign currency monetary items are translated at the exchange rate at the reporting date. Foreign exchange gains/losses that arise from the settlement or remeasurement of foreign currency items at the reporting date are recognised in the income statement.

Alternative key results

Earnings before interest, tax, depreciation and amortisation (EBITDA)

EBITDA comprises earnings before tax, the finance result, the share of profit/loss of associates, gains on the disposal of financial assets classified as available for sale, plus depreciation and amortisation.

Earnings before interest and tax (EBIT)

EBIT comprises earnings before tax, the finance result, the share of profit/loss of associates plus gains on the disposal of financial assets classified as available for sale.

Revenue recognition

Revenue is recognised by Flughafen Zürich AG when the service has been rendered, it is probable that the economic benefits will flow to the company and it can be measured reliably. In addition, the significant risks and rewards of ownership have to be transferred to the recipient of the service.

Revenue in the “Aviation” segment primarily comprises passenger and landing charges. Charges for providing assistance to passengers with reduced mobility are received by the “PRM” segment, while the “User fees” segment primarily receives fees for the use of the central infrastructure. Revenue in the “Air security” segment mainly includes security charges, and in the “Noise” segment it mainly contains noise charges. Revenue is recognised immediately on rendering the service in question. Landing charges are billed per landing according to the weight of the aircraft. Passenger charges, fees for the use of the baggage sorting and handling system and security charges are based on the number of departing passengers. Noise charges are based, in turn, on the number of departing passengers and on an emissions-based charge according to the aircraft type.

The main components in the “Non-regulated business” segment are revenue from the marketing and rental of the commercial infrastructure at the airport (retail, tax & duty free, food & beverage operations, advertising media, parking, rental and leasing agreements, and energy and utility cost allocation). The service is rendered as soon as the commercial space is made available and the revenue recognised accordingly. For fixed-rent tenancy agreements classified as operating leases, the rents are recognised on a straight-line basis over the term of the tenancy agreement. Conditional rental payments (e.g. from turnover-based tenancy agreements) are recognised on an accrual basis based on the turnover generated by the lessee, in which case a minimum rent may be applied. The company does not currently have any tenancy agreements classified as finance leases.

Leases as lessee

Finance leases

Lease agreements that substantially transfer all the risks and rewards of ownership to the company concerned are classified as finance leases. They are stated at the lower of fair value and present value of the minimum lease payments less accumulated depreciation and any impairment losses. Lease payments are allocated between an interest expense and a reduction of the outstanding liability. Leased assets are depreciated over the estimated useful life or over the term of the lease, whichever is shorter. Interest on finance leases and depreciation of the leased assets are charged to the income statement.

Operating leases

Income and expenses associated with operating leases are recognised in the income statement over the period of the lease.

Finance result

The finance result comprises interest payments on borrowings calculated using the effective interest method (excluding borrowing costs relating to buildings under construction), unwinding of the discount on non-current provisions, interest income, dividend income, foreign currency gains and losses, gains on/losses from the disposal of financial assets classified as available for sale, impairment losses on financial assets and gains on/losses from hedging instruments recognised in the income statement.

Interest income is recognised in the income statement using the effective interest method. Dividend income is recognised in the financial statements at the due date.

Borrowing costs arising during the construction stage for movables, buildings and engineering structures are capitalised up until the date the asset is taken into use or at the date of completion, if earlier.

Property, plant and equipment

Property, plant and equipment is stated at acquisition or construction cost, less accumulated depreciation and accumulated impairment losses. The construction cost of buildings includes direct costs for labour (third-party services and internal personnel), materials and overheads, plus the borrowing costs arising during the construction stage, which are capitalised up until the date the asset is taken into use or at the date of completion, if earlier. Borrowing costs and expenditure relating to significant assets under construction are capitalised.

Components of an item of property, plant and equipment with a different useful life are reported individually and depreciated separately. Expansion and replacement expenditure is capitalised only if it is probable that future economic benefits will flow to Flughafen Zürich AG. Maintenance and renovation expenditure is charged to the income statement when incurred.

The assets (with the exception of land, which is not depreciated) are depreciated using the straight-line method over the estimated useful life or over the term of the lease, whichever is shorter. The useful life for each category of property, plant and equipment is as follows:

Government subsidies and grants

Government subsidies and grants related to investments are recognised as income over the useful life of each asset and reported in the income statement as an adjustment to the depreciation of the related asset. All government subsidies take the form of “à fonds perdu” grants and do not have to be repaid.

Projects in progress

Projects in progress are stated at acquisition or production cost and include investments in projects that have not yet been completed. These mainly comprise assets under construction. Once a project has been completed, the related asset is transferred to the relevant categories of property, plant and equipment and segments. Assets that are already in use or are classified as “Projects in progress” are depreciated from the time they are brought into use. From the date the asset is taken into use or at the date of completion, if earlier, no further expenditure on the asset or related borrowing costs is capitalised.

Investment property

Investment property (in accordance with IAS 40) is property held for the long term to earn rentals or for capital appreciation. It is measured at initial recognition at its cost and subsequently at cost less straight-line depreciation and any impairment losses in accordance with IAS 36.

JOINT ARRANGEMENTS

A joint arrangement (in accordance with IFRS 11) is a contractual arrangement between two or more parties which gives those parties joint control of an activity. Each joint arrangement must be classified as either a joint operation or a joint venture. In a joint operation, the parties that have joint control have rights to the assets and obligations for the liabilities of the joint arrangement and account for them in relation to their interest. In a joint venture, the parties that have joint control merely have rights to the net assets of the joint arrangement (the investment is accounted for using the equity method).

Intangible assets

Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised using the straight-line method.

With the award of the operating licence, Flughafen Zürich AG was also granted a right of formal expropriation in respect of property owners exposed to aircraft noise. This right of formal expropriation was granted on condition that the airport operator bears the costs associated with compensation payments and is recognised as an intangible asset at the date when the probable total cost can be estimated based on final-instance court rulings, so that the cost can be reliably estimated in accordance with IAS 38.21. The timing of recognition may differ depending on the airport region. At the same time as an intangible asset is recognised at the present value of the expected future payments, an equal amount is recognised as a provision. Any future adjustments to the probable total cost already recognised as assets and liabilities will be reflected on both sides of the balance sheet. The intangible asset is amortised using the straight-line method over the remaining duration of the operating licence (i.e. until May 2051).

In the case of clearly defined projects, external and internal costs directly attributable to the development of computer software are capitalised if they will be exceeded by the future economic benefits. The useful life of software is three to five years.

Investments in airport operator projects

The concession arrangements for the operation of foreign airports fall within the scope of IFRIC 12 and are generally accounted for under the intangible asset model (IFRIC 12.17), as the company as operator receives the right to charge for usage as consideration for the obligation to pay concession fees and provide upgrade services. The obligations under the concession arrangements to pay fixed concession fees are recognised as financial liabilities. They are initially measured at the fair value of the liabilities using a discount rate appropriate to the risk. The rights to operate the airports that are received as consideration are recognised as intangible assets in the same amount and presented as investments in airport operator projects. The rights received as consideration for the upgrade services provided are recognised as an intangible asset on an accrual basis at the cost of construction. Under IFRIC 12.14, revenues and costs relating to upgrade services are generally recognised in accordance with IAS 11. The financial liabilities recognised are subsequently measured at amortised cost using the effective interest method. The rights recognised as assets are subsequently measured at cost less accumulated amortisation over the term of the concessions. In accordance with IFRIC 12.18, any minimum revenue guaranteed by the grantor is deducted from the intangible asset and accounted for as a financial asset.

Investments in associates

Associates are companies where the group is able to exercise significant influence, but not control, over the financial and operating policies (where the group holds between 20% and 50% of the voting rights). Associates are included in the consolidated financial statements by applying the equity method. Any difference between the cost of the investment and the fair value of the share of net assets acquired is determined at the time of acquisition and recognised as goodwill and included in the carrying amount of the investment. In subsequent reporting periods, the carrying amount is adjusted to recognise the share of Flughafen Zürich AG of any profit or loss and changes recognised in other comprehensive income of the investee and any dividends received.

Investments in associates where the group holds less than 20% of the voting rights, but where it nonetheless is able to exercise significant influence, are also included in the consolidated financial statements by applying the equity method.

Financial assets

Financial assets include securities of the Airport of Zurich Noise Fund classified as available-for-sale financial assets. They are measured initially at fair value plus directly attributable transaction costs. The securities are also subsequently measured at fair value, with the unrealised gains and losses recognised and presented in equity (in the fair value reserve, net); when the securities are sold or in the event of impairment, these gains and losses are transferred to the income statement.

Financial assets also include non-controlling interests not providing significant influence and loans that are measured at amortised cost, less impairment losses.

Derivative financial instruments

Derivative financial instruments are used exclusively for the purpose of hedging interest rate and currency risks, and are reported under other receivables or other current liabilities. They are carried at fair value in accordance with IAS 39. Changes in the fair value of derivative instruments which fulfil the requirements for cash flow hedges are booked directly to the hedging reserve, net. As soon as the hedged transaction occurs, the accumulated unrealised gains and losses are transferred to the income statement. For all other derivative instruments not qualifying for hedge accounting, changes in fair value are recognised in the income statement.

Inventories

Inventories mainly comprise operating supplies and consumables used for the maintenance and repair of property, plant and equipment and are stated at cost or, if lower, at net realisable value. The first-in, first-out method is applied when calculating the cost.

Receivables

Receivables are stated at amortised cost, which usually corresponds to their nominal value, less an impairment allowance. The impairment allowance comprises individual adjustments for specifically identified items for which there is objective evidence that the outstanding amount will not be recovered in full, and collective adjustments for groups of receivables with a similar risk profile. Collective impairment losses relate to losses that have been incurred but for which the precise amounts are not yet known. They are based on historical data on payment statistics for receivables. As soon as there is sufficient evidence that a receivable will not be recoverable, it is directly written off or offset against the corresponding allowance.

The recoverable amount of receivables is equivalent to the present value of the estimated future cash flows. Impairment losses on receivables are reversed if the amount of the impairment loss decreases and the decrease is related to an event that occurred in a period after the impairment loss was recognised.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, in postal accounts and at banks and short-term investments with a maturity of 90 days or less from the date of acquisition.

Non-current assets held for sale

A non-current asset or disposal group is classified as held for sale when its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This sale transaction to which management has committed should be expected to be completed within one year from the date of classification as held for sale.

Non-current assets or disposal groups held for sale are presented separately under current assets and liabilities. In doing so, the assets or disposal groups are measured at the lower of carrying amount and fair value less costs to sell. Any impairment losses arising on initial reclassification are recognised in profit or loss.

Impairment

The carrying amounts of non-current non-financial assets (excluding deferred taxes) are assessed at least once a year for indications of impairment. If there is any indication that an asset may be impaired, the recoverable amount of the asset is calculated (impairment test).

If the carrying amount of an asset or related cash generating unit exceeds its recoverable amount, an impairment loss is recognised in the income statement.

The recoverable amount is the higher of the fair value less costs to sell and value in use. To determine value in use, the estimated future cash flows are discounted. The discount rate is a pre-tax rate that reflects the risks associated with the corresponding asset. If an asset does not generate cash inflows that are largely independent of those from other assets, the recoverable amount is determined for the cash generating unit to which the asset belongs.

Impairment losses on other assets are reversed if indications exist that the impairment loss has decreased or no longer exists, and if estimates that were used for calculating the recoverable amount have changed.

The increased carrying amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years.

Equity

Share capital

Shares are classified as equity since they are non-redeemable and dividend payments are at the discretion of the company.

Treasury shares

The cost (purchase price and directly attributable transaction costs) of treasury shares is deducted from equity.

Dividends

Dividends are recognised as a liability as soon as they have been approved at the General Meeting of Shareholders.

Financial liabilities

Financial liabilities are initially recognised at fair value less transaction costs. The difference between the amount initially recognised and the redemption amount is amortised over the duration of the liability using the effective interest method.

Provisions

Provisions are recognised when the entity has a present obligation as a result of a past event that occurred prior to the reporting date, if an outflow of resources is probable and the amount of the outflow can be estimated reliably. If the effect is significant, provisions are reported in the balance sheet at their present value.

Provisions for legal and constructive obligations for sound insulation and resident protection measures are recognised on the basis of the Environmental Protection Act as soon as they can be estimated reliably.

Provisions for formal expropriations are recognised for compensation payments as soon as these have been reliably estimated on the basis of final-instance court rulings (see Intangible assets).

Employee benefits

For defined benefit plans, the benefit cost and the defined benefit obligation are determined on the basis of various economic and demographic assumptions using the projected unit credit method and taking into account the past years of insurance up until the measurement date. The assumptions required to be made by Flughafen Zürich AG include, among others, expectations about future salary increases, the long-term return on retirement savings accounts, employee turnover and life expectancy. The calculations are performed annually by independent actuaries. The plan assets are measured annually at fair value and deducted from the defined benefit obligation.

The defined benefit cost consists of three components:

Service cost comprises current service cost, past service cost and gains and losses on settlement. Gains and losses resulting from curtailments are regarded as past service cost. Employee contributions and contributions from third parties reduce service cost and are deducted from it if they are set out in the formal terms of the plan or arise from a constructive obligation.

The net interest expense is the amount calculated by multiplying the net defined benefit obligation (or asset) by the discount rate, both as at the beginning of the financial year, including any changes during the period as a result of contributions and benefit payments. Cash flows and changes during the year are factored in pro rata.

Remeasurement components comprise actuarial gains and losses resulting from changes in the present value of the defined benefit obligations due to changes in assumptions and experience adjustments, the return on plan assets less amounts included in net interest expense, and changes in unrecognised assets less effects included in net interest expense. Remeasurement components are recognised in other comprehensive income and cannot be recycled.

The amount recognised in the consolidated financial statements is the surplus or deficit of the defined benefit plans (net defined benefit obligation or asset). However, the asset recognised as a result of any surplus is limited to the present value of economic benefits to the group available in the form of reductions in future contributions.

Employer contributions to defined contribution plans are recognised in the income statement as personnel expenses when the employee earns the benefit entitlement. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. For other long-term employee benefits, the present value of the obligation is recognised at the end of the reporting period.

For other long-term employee benefits, the present value of the obligation is recognised at the end of the reporting period. Changes in the present value are recognised in the income statement as personnel expenses.

Share-based payment

Flughafen Zürich AG issues shares to its employees as part of its bonus and staff participation programme. The fair value of the shares is recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the vesting period.

Income taxes

Income taxes comprise current and deferred taxes. They are recognised in the income statement unless relating to transactions recognised in other comprehensive income or directly in equity. In these cases, taxes are also recognised in other comprehensive income or directly in equity.

Current taxes comprise the taxes expected to be payable on the taxable result, calculated using tax rates enacted or substantively enacted at the reporting date.

Deferred taxes are recognised for temporary differences between the carrying amount of assets and liabilities in the consolidated financial statements and their tax base using the balance sheet liability method. No deferred taxes are recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Measurement of deferred taxes takes into account the expected timing and manner of realisation or settlement of the assets and liabilities concerned using tax rates that are enacted or substantively enacted at the reporting date.

Deferred tax assets are only recognised if it is probable that the deductible temporary differences can be offset against future taxable profits.

Segment reporting

Reporting of operating segments is carried out in accordance with IFRS 8 in line with the internal reporting to the companyʼs chief operating decision-maker. The Board of Directors has been identified as chief operating decision-maker of Flughafen Zürich AG responsible for major decisions concerning the allocation of resources and the assessment of the operating segmentsʼ performance.

1.1 Legal uncertainties

Various domestic and foreign restrictions could mean that Flughafen Zürich AG will not be able to fully utilise its infrastructure and would need to finance additional investments. These restrictions include the following:

1.2 Decline in demand

Experience over the past few years has shown that the air transport sector is a growing but also volatile industry that is affected by external events such as economic crises, acts of terrorism or epidemics. Such events could temporarily cause a drop in demand at Zurich Airport. In addition, other external factors such as the political and macro-economic environment could have a negative impact on demand in both the aviation and non-aviation business at Zurich Airport.

1.3 Increasing safety and security requirements

Additional safety and security regulations may result in rising costs and reduced revenue or changes in capacity. While some of these higher costs could at least subsequently be offset or refinanced through higher charges, the possibility of other elements having a negative impact on earnings cannot be ruled out.

1.4 Interruptions to business due to operational events or natural hazards

The complex and tightly interconnected airport operations could be severely disrupted by operational events such as accidents or the failure of critical systems. Depending on the scale of the disruption, operations would have to be curtailed or even discontinued in order to maintain the safety of passengers and airport employees. The extensive airport infrastructure is especially exposed to natural hazards, in particular earthquakes and flooding following heavy precipitation. To minimise the risk, infrastructure and operations are designed to be robust and, where possible, cost-efficient property and business interruption insurance is taken out to cover them.

1.5 Hub carrier

Like any other hub airport, Flughafen Zürich AG depends to a considerable extent on the operational and financial development of its hub carrier Swiss (and the latterʼs parent, Lufthansa). The airline Swiss is the main customer of Flughafen Zürich AG. During the year under review, Swiss accounted for around 52% of the passenger volume. The airline plays a major role within the Lufthansa Group as far as profits are concerned, so the risk of the hub carrier failing for economic reasons can be considered minor at present. Capacity reductions can never be ruled out, however.

1.6 Reporting of noise-related costs in the financial statements

The reporting of noise-related costs in the financial statements is a complex matter. In particular the issue of formal expropriations involves significant assumptions and estimates concerning the capitalisation of such costs and the obligation to recognise appropriate provisions. This complexity is attributable to a large variety of relevant legal bases, unclear or pending legal practice and political debate.

The rulings by the Swiss Federal Supreme Court in the first half of 2008 on fundamental issues related to formal expropriations enabled Flughafen Zürich AG to reliably estimate the total cost of compensation for formal expropriations for the first time, in spite of the remaining uncertainties regarding the accuracy of this estimate. With further rulings on 8 June 2010 and 9 December 2011, the Swiss Federal Supreme Court definitively set the cut-off date for the foreseeability of an eastern approach as 1 January 1961 and ruled definitively on the method used to calculate a decline in the market value of investment property.

Based on these Federal Supreme Court rulings and other fundamental issues that have since been decided in a court of final instance, the company undertook a reappraisal of costs for formal expropriations at the end of 2010 and 2011, which in each case led to an adjustment to both the provision for formal expropriations and the intangible asset from the right of formal expropriation.

In the first half of 2016, the Swiss Federal Supreme Court handed down two rulings in test cases regarding claims for compensation due to eastern and southern approach routes. By answering important questions relating to how pending claims for compensation will be dealt with in a court of last instance, these rulings increased legal certainty significantly. These Swiss Federal Supreme Court rulings enabled Flughafen Zürich AG to undertake a reappraisal of the outstanding cost of compensation for formal expropriations. Based on the recalculation with estimated costs for formal expropriations amounting to CHF 385.0 million, the provision for formal expropriations was reduced by CHF 21.5 million as at 30 June 2016. At the same time, the intangible asset from the right of formal expropriation was reduced by the same amount.

As at the reporting date, the estimated costs for formal expropriations remained unchanged at CHF 385.0 million, of which CHF 63.9 million had already been paid out at that date. The outstanding costs of CHF 321.1 million (nominal amount) are stated at their present value of CHF 316.6 million in the consolidated financial statements for the period ended 31 December 2017.

With respect to sound insulation and resident protection measures, the Federal Office of Civil Aviation (FOCA) required Flughafen Zürich AG, in connection with its 2014 operating regulations application, to submit an extended sound insulation programme by the end of June 2015. Based on the permitted noise exposure levels specified by FOCA, and taking into account the still pending changes to the 2014 operating regulations, the company duly submitted its 2015 sound insulation programme by this deadline. At its meeting on 22 June 2015, the Board of Directors approved a further CHF 100 million of measures in this context in addition to the CHF 240 million previously estimated for sound insulation and resident protection.

As at the reporting date, the estimated costs for sound insulation and resident protection measures remained unchanged at CHF 340.0 million, of which CHF 236.5 million had already been paid out at that date. The outstanding costs of CHF 103.5 million (nominal amount) are stated at their present value of CHF 102.7 million in the consolidated financial statements for the period ended 31 December 2017.

Depending on future and final-instance legal judgements, including with respect to the southern approaches, noise-related liabilities may in future be subject to substantial adjustments, which would also require adjustments to the noise-related costs recognised as assets and liabilities in the balance sheet. At the present time, it is not possible to reliably estimate the total costs to capitalise as an intangible asset from the right of formal expropriation, the resulting amortisation or the corresponding provision.

Aircraft noise costs are refinanced through charges. The most important charge from a refinancing standpoint up until 1 February 2014 was the separate CHF 5.00 passenger noise charge. Owing to a directive on airport charges issued by FOCA on 14 November 2013, this passenger-related noise supplement was no longer collected as of 1 February 2014 as it can be assumed that the funds of the Airport of Zurich Noise Fund are sufficient to finance the costs currently estimated. Should actual future noise-related costs significantly exceed the estimate, this supplement would have to be levied again over the medium term in order to cover the costs. Aircraft noise charges are still levied.

Value of property, plant and equipment and intangible assets; reliability of estimate of capitalised noise-related costs

Flughafen Zürich AG owns property, plant and equipment and intangible assets with a total carrying amount of around CHF 3.0 billion. If there is any indication that an asset may be impaired, the recoverable amount of the asset is calculated (impairment test). At least once a year, a check is conducted to determine whether there are any such indications and an impairment test needs to be performed. The calculation is based on the estimated future free cash flows of Flughafen Zürich AG, and a variety of assumptions have to be made in order to estimate them. Actual cash flows may be negatively impacted by the risk factors described in the previous sections (in particular 1.1 Legal uncertainties and 1.6 Reporting of noise-related costs in the financial statements) (see note 8, Property, plant and equipment and note 10, Intangible assets).

The following table shows the reportable segments in the current financial year:

The following table shows the reportable segments in the previous year:

Internal reporting of operating segments to the chief operating decision-maker is carried out in accordance with the Ordinance on Airport Charges (FGV), more specifically with regard to the regulated charges and fees affected by the Ordinance. The following segments are presented for the regulated business and submitted to the chief operating decision-maker as the basis for his significant judgements and decisions:

In all, the company therefore has the following reportable segments:

→ Aviation

The “Aviation” segment comprises the original infrastructure and services related to flight operations. It incorporates all the core services provided to airlines and passengers by Flughafen Zürich AG in its capacity as operator of Zurich Airport. These services include the runway system, most apron zones (including control activities), passenger zones in the terminals, freight operations, passenger handling and services, and safety. The main sources of revenue for the “Aviation” segment are passenger and landing charges. Revenue from third parties is determined by passenger volumes, flight volumes and the trend with respect to aircraft take-off weights.

→ PRM

The “PRM” (People with Reduced Mobility) segment combines the infrastructure and services related to implementing the regulation regarding the provision of support for passengers with reduced mobility. Revenue consists exclusively of the PRM charge.

→ User fees

The “User fees” segment comprises the central infrastructure, in particular the check-in areas and facilities, baggage sorting and handling system, aircraft power supply system, handling apron areas and the related services and fees.

→ Air security

The “Air security” segment comprises the equipment and services that Flughafen Zürich AG is responsible for providing for air security (passenger and aircraft security measures). This includes all systems and their operation and maintenance designed to prevent actions of any kind that affect the security of commercial civil aviation, in particular facilities for checks on passengers, hand luggage, checked baggage and freight. The security charges levied per passenger are the main source of revenue for covering the costs of the “Air security” segment.

→ Access fees

The “Access fees” segment comprises the air security-related equipment and services that have to be provided in order to allow all persons other than passengers to access the airside areas. This includes all relevant systems and their operation and maintenance. It also includes airport policing duties such as surveillance patrols and other security-related duties. Revenue in the “Access fees” segment comes mainly from the fees for issuing airport badges.

→ Noise

All revenue and expenses associated with aircraft noise are reported separately in the “Noise” segment. A liquidity-based statement of noise-related data is presented in the notes to the consolidated financial statements (note 20, Airport of Zurich Noise Fund). This statement presents the accumulated surplus or shortfall as at the reporting date arising from noise charges determined on a costs-by-cause basis, less expenses for formal expropriations, sound insulation and resident protection measures, and operating costs.

→ Non-regulated business

The “Non-regulated business” segment encompasses all activities relating to the development, marketing and operation of the commercial infrastructure at Zurich Airport. This includes all retail and restaurant/catering operations at the airport, revenue from rented premises and supplementary costs (energy supply, etc.), parking charges plus a broad range of commercial services provided by Flughafen Zürich AG.

Principles of segment reporting

For reporting purposes, each profit centre has been allocated to a segment. Any internal supplies and services that have been provided to other segments have been booked as inter-segment revenue or offset against costs. For example, the “Supplementary costs” profit centre is allocated to Non-regulated business and proportionate costs are charged to the Regulated business segments on a “costs-by-cause” basis. Support functions are also allocated to non-regulated business and charged on accordingly.

Invested capital is allocated to the respective operating segments based, firstly, on the allocation of the individual assets in the fixed-asset ledger and, secondly, on the pro rata allocation of the remaining assets (buildings, engineering structures and net working capital) to the respective segments. Until projects in progress have been completed, they are allocated to the segment with the largest share of the project measured by value. The definitive allocation to segments takes place after the projects have been classified into the relevant asset categories.

The identified operating segments have not been aggregated.

Additional disclosures in accordance with the Swiss Ordinance on Airport Charges (FGV)

In accordance with Art. 34 FGV, 30% of the economic added value in the airside area of the airport not relevant to flight operations and the area of road vehicle parking is to be used in the form of a transfer payment to finance the costs of air traffic in the “Aviation” segment. Pursuant to this rule, in 2017 the sum of CHF 13.4 million (2016: CHF 16.3 million) was allocated to the “Aviation” segment and is recognised in the reported return on operating assets. Moreover, in accordance with Art. 45 FGV, the shortfall in the “Access fees” segment can be charged to the “Air security” segment.

Additional disclosures

Flughafen Zürich AG primarily provides services within Switzerland. In financial year 2017, external consulting services totalling CHF 6.6 million (2016: CHF 3.2 million) were provided in Brazil and Chile. Flughafen Zürich AGʼs revenue with Lufthansa Group in the reportable segments amounted to CHF 400.1 million in the past financial year (2016: CHF 391.2 million).

Staff participation programme

Flughafen Zürich AG gives those employees who have completed their first year of service a one-off gift in the form of one share free of charge. In the reporting period, 151 shares (2016: 302 shares) worth CHF 33,644 (2016: CHF 49,055) were handed out.

Bonus programme for members of the Management Board and other members of management

The total annual remuneration awarded to members of the Management Board and other members of management comprises a fixed salary and a variable performance component (bonus), which is based on the consolidated result and, depending on the function level, the degree of achievement of personal objectives. The criterion for measuring the consolidated result is earnings before interest and tax (EBIT) excluding noise-related factors, or the difference between targeted and achieved EBIT (excluding noise-related factors). The assessment of the degree of achievement of personal objectives is based on the annual management by objectives process. In both cases, the decision for a given year is taken or confirmed in the following financial year (grant date). Two thirds of the performance component is paid out in cash and one third in shares. For detailed information on the remuneration of the members of the Management Board, please refer to the separate Remuneration Report.

The bonus for financial year 2017 was estimated and accounted for on the basis of the data available as at the reporting date relating to the degree of achievement of the relevant consolidated result and personal objectives. The number of shares to be granted cannot be precisely calculated yet since the number depends on the share price at the grant date. If the shares had been granted as at year-end, a total of 5,208 shares would have been distributed.

Bonus programme for the Board of Directors

No bonus programme exists for members of the Board of Directors. Their remuneration comprises an annual lump sum plus payments for attending meetings (see the separate Remuneration Report).

Option programme

No option programme exists at Flughafen Zürich AG.

Capitalised expenditure of CHF 14.6 million (2016: CHF 13.5 million) primarily comprises fees for the companyʼs architects and engineers as well as for project managers representing the client.

In the reporting period, “Other income” consists mainly of a payment of CHF 4.8 million (2016: CHF 3.5 million) in connection with the liquidation of Swissair in debt restructuring proceedings. In the previous year, this item also included an additional purchase price payment of CHF 7.3 million for the land for THE CIRCLE, which fell due upon the initiation of the second phase of the project THE CIRCLE.

The expenses for construction projects as part of concession arrangements amounting to CHF 3.1 million (2016: CHF 0.0 million) are the result of investments made in infrastructure at the airports in Brazil and Chile. The corresponding counter-item can be found under note 2, Revenue.

In both the reporting period and the previous year, the balance of “Other expenses” mainly included losses on asset disposals.

The net finance result of Flughafen Zürich AG amounted to CHF –18.3 million in the reporting period (2016: CHF –17.4 million).

A debenture that matured in May 2017 was refinanced on much more favourable terms, saving CHF 2.4 million in interest year on year.

On the other hand, the finance result for the past financial year reflects additional expenses of around CHF 1.2 million due to the first-time consolidation of the subsidiaries in Latin America. Of this amount, CHF 0.4 million are cash items.

Whereas the unwinding of the discount on provisions for formal expropriations plus sound insulation and resident protection resulted in income of CHF 1.1 million in the previous year, an expense of CHF 1.4 million was recognised in the reporting period.

Income tax can be analysed as follows: