Notes to the financial statements

The 2019 financial statements of Flughafen Zürich AG, based in Kloten, have been prepared in accordance with the accounting provisions of the Swiss Code of Obligations.

The significant valuation principles that have been applied but are not prescribed by law are described below. These single-entity financial statements also serve for tax purposes and form the basis for the statutory business of the General Meeting of Shareholders.

As Flughafen Zürich AG prepares consolidated financial statements in accordance with accepted financial reporting standards (IFRSs), it has omitted to present disclosures on interest-bearing liabilities, disclosures on auditors’ fees, a cash flow statement and a management report in these financial statements in accordance with the statutory provisions.

As in the previous year, the average number of full-time equivalents was over 250 in the reporting period.

Costs for formal expropriations qualify as an intangible asset under the accounting provisions of the Swiss Code of Obligations. They are recognised as assets at the latest on the date on which the counterparty has attained an assertable claim. Amortisation of capitalised costs for formal expropriations is based at a minimum on the consolidated financial statements. Adequate provisions are recognised for current liabilities arising from sound insulation and resident protection measures. Any balance of revenue from noise charges after deduction of noise-related costs (compensation for formal expropriations, sound insulation and resident protection measures, operating costs, financing costs and amortisation) is transferred to the provision for aircraft noise (see note 10, Provision for aircraft noise).

With respect to formal expropriations, the reporting of noise-related costs in the financial statements is a complex matter due to a multitude of relevant legal bases, unclear or pending case law and political debate. Especially in the case of formal expropriations, this financial reporting requires significant assumptions and estimates concerning the capitalisation of such costs and the obligation to recognise appropriate provisions.

Flughafen Zürich AG has received a total of around 20,000 noise-related claims for compensation, of which around 6,300 were still pending at the end of 2019. Almost 800 of these cases are currently being examined by the Swiss Federal Assessments Commission.

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 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. In further rulings in 2010, the Swiss Federal Supreme Court definitively set the cut-off date for the foreseeability of an eastern approach as 1 January 1961 and, in 2011, it ruled definitively on the method used to calculate a decline in the market value of investment property. In 2016, the Swiss Federal Supreme Court handed down two rulings in test cases regarding claims for compensation relating to eastern and southern approach routes and, in 2018, it handed down two rulings in test cases regarding cooperative ownership. Based on these Swiss Federal Supreme Court rulings and other fundamental issues that have been decided, the company undertook a reappraisal of costs for formal expropriations at these dates, 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.

On 22 November 2019, the Swiss Federal Supreme Court handed down a ruling in test cases regarding the period of limitation on claims for compensation in Oberglatt. This Swiss Federal Supreme Court ruling and other fundamental issues that have been decided enabled Flughafen Zürich AG to undertake a reappraisal of the outstanding cost of compensation for formal expropriations as at 31 December 2019.

With respect to sound insulation and resident protection measures, Flughafen Zürich AG is required to implement sound insulation measures in the area where it claims exemptions from noise limits (emission limit). In this context, the Federal Office of Civil Aviation (FOCA) has initiated a night-time noise abatement procedure. The area with exemptions under the Sectoral Aviation Infrastructure Plan adopted by the Federal Council on 23 August 2017 is to be extended. In 2018, the Board of Directors approved further sound insulation measures in this context.

As at 31 December 2019, Flughafen Zürich AG has recognised an intangible asset from the right of formal expropriation of CHF 26.8 million (2018: CHF 19.9 million) and a provision for aircraft noise of CHF 473.4 million in total (2018: CHF 468.4 million) in the financial statements according to the provisions of the Swiss Code of Obligations.

Depending on future and final-instance legal judgements, especially 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 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 separate charges. As, based on current knowledge, the Airport of Zurich Noise Fund has sufficient assets to be able to finance the costs for formal expropriations as well as noise insulation and resident protection measures that can be estimated under the base case at the present time, the passenger-related noise supplement was suspended as of 1 February 2014. Aircraft noise charges based on flight movements and noise category continue to be levied.

Leases

In introducing IFRS 16 Leases for the consolidated financial statements, Flughafen Zürich AG decided to also adopt the new accounting policy applicable in this context for the financial statements in accordance with the accounting provisions of the Swiss Code of Obligations as of 1 January 2019.

Leases are accounted for by applying the concept of control. In doing so, a lease contract is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the leased item to Flughafen Zürich AG as lessee. All other leases are operating leases.

At the commencement date of a finance lease, the value of the leased item is recognised as a right-of-use asset and as a lease liability in the same amount. The right-of-use asset is depreciated and the lease liability amortised over the lease term. In the case of an operating lease, the lease payments are recognised directly in profit or loss at maturity.

The effects of applying the new lease accounting policy at 1 January 2019 are as follows:

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 from fixed-rent tenancy agreements is recognised on a straight-line basis over the term of the agreement. Conditional rental payments (including 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.

Inventories

Inventories mainly comprise operating supplies and consumables necessary 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.

Financial assets of Airport of Zurich Noise Fund

The financial assets of the Airport of Zurich Noise Fund comprise quoted securities held for the short or long term. They are initially recognised at cost (fair value plus directly attributable transaction costs). The securities are subsequently measured at amortised cost (bonds) or at fair value (other financial assets), with gains and losses recognised in profit or loss. A fluctuation reserve is not recognised.

Property, Plant anD Equipment

Property, plant and equipment is stated at acquisition or production cost less accumulated depreciation and impairment. With the exception of land which is not depreciated, items are depreciated over their estimated useful life using the straight-line method. If there are indications that they are impaired, the carrying amounts are reviewed and, if necessary, adjusted.

Intangible assets

Intangible assets are stated at cost less amortisation. They are amortised over their estimated useful life using the straight-line method. If there are indications that they are impaired, the carrying amounts are reviewed and, if necessary, adjusted.

Treasury Shares

At the date of acquisition, treasury shares are recognised at cost as a deduction from equity. In the event of their sale at a later date, the gain or loss is credited or charged directly to voluntary retained earnings.

In the reporting period, extraordinary income included a payment in connection with the liquidation of Swissair in debt restructuring proceedings. In both the reporting period and the previous year, extraordinary expenses comprised losses on asset disposals, losses on receivables and a share of the loss of the co-ownership structure THE CIRCLE.

Trade receivables from investments comprise amounts still due from Zurich Airport International AG for services rendered.

Prepayments and accrued income relating to investments comprise accruals for receivables not yet billed to Zurich Airport International AG for services rendered.

The equity interests stated are also the share of the voting power in the investees listed.

Zurich Airport International AG, the wholly-owned subsidiary responsible for advising, operating and/or owning airports and airport-related companies throughout the world, holds all the investees existing in this context (with the exception of those in Venezuela).

In 2010, Flughafen Zürich AG and its consortium partner Unique IDC turned to the International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C. in the matter of the airport expropriated in Venezuela (Isla de Margarita). This step is in compliance with the investment protection treaty between Venezuela, Switzerland and Chile. The ICSID reached its decision in November 2014, requiring the Bolivarian Republic of Venezuela to reimburse the consortium the costs incurred for the proceedings and project plus a compensation payment of around USD 19.5 million as well as interest incurred up until receipt of payment (around USD 24.7 million accrued as at 31 December 2019). Flughafen Zürich AG is entitled to 50% of the total amount of the payments. Prior to the deadline set for 18 March 2015, Venezuela appealed to the ICSID to set aside the tribunal’s decision on the grounds of an infringement of procedural rules. On 15 April 2019, the ICSID ad hoc committee rejected the application for annulment in full. This means that the tribunal’s decision is definitive and final. The value of this holding has been fully impaired.

On 5 February 2015, Flughafen Zürich AG and Swiss Life AG notarised the purchase agreement for the share of land for the real estate project THE CIRCLE and registered it for entry in the Land Register, thereby establishing the co-ownership structure between the two parties provided for in the financing agreements, in which Flughafen Zürich AG has a 51% interest and Swiss Life AG a 49% interest.

The co-ownership structure THE CIRCLE is responsible for the implementation and subsequent operation of the real estate project THE CIRCLE.

The cost of the right-of-use assets recognised and the accumulated depreciation are shown below:

The corresponding lease liabilities have the following maturity structure:

At the reporting date, other current liabilities to employee pension funds comprise outstanding liabilities to the BVK Employee Pension Fund of the Canton of Zurich.

External financing is subject to standard guarantees and covenants, which were complied with as at the reporting date. In addition, unused credit facilities at the reporting date amounted to a total of CHF 224.1 million.

For information on the reporting of noise-related data in the financial statements according to the Swiss Code of Obligations, see also Reporting of noise-related costs in the financial statements in the notes to the financial statements.

The share capital of Flughafen Zürich AG amounting to CHF 307,018,750 is composed of 30,701,875 fully paid-up registered shares with a par value of CHF 10.

At the reporting date, the capital contribution reserves amounted to CHF 117.0 million (2018: CHF 215.3 million).

In the reporting period, 8,290 registered shares were purchased at the market price (2018: 5,185 registered shares). Treasury shares are distributed to members of the Management Board and other members of management under the bonus programme. They are used primarily for this participation programme. In addition, 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.

A number of legal proceedings and claims against Flughafen Zürich AG in the context of its normal business activities are still pending. The company does not expect the amounts required to settle these lawsuits and claims to have a significantly negative impact on the financial statements and cash flow of Flughafen Zürich AG.

Depending on future and final-instance legal judgements, especially with respect to the southern approaches, in particular the new noise-related liabilities, but also the old ones, 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.

Flughafen Zürich AG and Swiss Life AG are jointly and severally liable in respect of third parties for the liabilities of the co-ownership structure THE CIRCLE and the ordinary partnership THE CIRCLE.

Unlike in the previous year, no hidden reserves were reversed in financial year 2019. The prior-year net reversal of CHF 57.6 million was due primarily to the different methods of reporting noise-related data in the consolidated financial statements in accordance with IFRSs and in these financial statements in accordance with the Code of Obligations (see also “Reporting of noise-related costs in the financial statements”).

As at the reporting date, the following shareholders or groups of shareholders held at least 5% of the voting rights:

As at the reporting date, members of the Board of Directors and related parties held the following number of shares:

As part of the performance-related remuneration awarded to members of the Management Board, 2,245 shares (2018: 1,921 shares) worth CHF 389,508 (2018: CHF 394,189) were distributed to members of the Management Board and 4,429 shares (2018: 3,560 shares) worth CHF 768,432 (2018: CHF 730,512) were distributed to other members of management.

As at the reporting date, members of the Management Board and related parties held the following number of shares:

In addition, 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, 138 shares (2018: 140 shares) worth CHF 24,356 (2018: CHF 28,506) were handed out in this context.

The Board of Directors authorised the 2019 financial statements according to the provisions of the Swiss Code of Obligations (CO) for issue on 5 March 2020. These also have to be approved by the General Meeting of Shareholders.

On 12 February 2020, Flughafen Zürich AG issued a 15-year debenture of CHF 400 million carrying a coupon of 0.20%. This will be used to refinance property purchases and as working capital.

The coronavirus, which is currently spreading, will have a negative effect on the earnings of Flughafen Zürich AG. It is not yet possible to estimate the financial impact any more closely.