NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements for the six months ended 30 June 2019 were prepared in accordance with International Accounting Standard 34 (IAS 34) Interim Financial Reporting. They do not contain all the information included in the consolidated financial statements for the year ended 31 December 2018 and should therefore be read in conjunction with the latter.

The company adopted the following new and amended International Financial Reporting Standards which are mandatory for the first time for financial year 2019 beginning on 1 January:

Except as outlined in the following, the application of the new and amended Standards does not have a significant impact on these interim consolidated financial statements. In all other respects, these interim consolidated financial statements were prepared in accordance with the accounting policies described in the consolidated financial statements for the year ended 31 December 2018.

IFRS 16 LEASES

This Standard replaces IAS 17 and sets out the principles for the recognition, measurement, presentation and disclosure of leases. Most importantly, IFRS 16 introduces a single lessee accounting model that requires the lessee to recognise in the balance sheet all assets and liabilities for almost all leases.

Carrying amounts and lease liabilities from leases that were classified as finance leases under IAS 17 were not changed. The IFRS 16 requirements were applied to these contracts at 1 January 2019. In addition, assets classified as finance leases are now described as “Right-of-use assets” in the statement of changes in property, plant and equipment (previously “Leased assets”).

Flughafen Zürich AG applied the modified retrospective approach to transition to IFRS 16 as of 1 January 2019 and the new principles in IFRS 16 had no impact on property, plant and equipment, financial liabilities or equity as at 1 January 2019.

Lease accounting policy

At inception of a contract, Flughafen Zürich AG assesses whether the contract is, or contains, a lease. In making this assessment, which requires a certain amount of judgement, it examines whether the contract relates to a specified asset, whether the company obtains substantially all of the economic benefits from use of the asset and whether the company has the right to direct the use of the leased asset.

Flughafen Zürich AG recognises the right-of-use asset and the lease liability at the commencement date of the lease. The initial measurement of the right-of-use asset is based on the present value of the lease payments, plus any initial direct costs and costs for the obligation to dismantle and remove the asset and restore the site, less any incentives received. The right-of-use asset is depreciated over the shorter of the lease term and the useful life of the underlying asset. The right-of-use asset is tested for impairment if there are indicators of impairment.

If the lease contains an extension or purchase option that the company believes it is reasonably certain to exercise, the costs related to the option are included in the lease payments. The right-of-use asset is recognised as property, plant and equipment and the lease liability as a current or non-current financial liability.

Flughafen Zürich AG has decided not to recognise the right-of-use asset and the lease liability if the lease term is twelve months or less or if the lease relates to IT equipment of low value (less than CHF 5,000). Payments for such leases are recognised on a straight-line basis over the term of the contract.

On 15 March 2019, in a public tender conducted by the Brazilian government, Flughafen Zürich AG was awarded concessions for the operation and expansion of Vitória and Macaé airports in the southeast of Brazil. The wholly-owned subsidiary Aeroportos do Sudeste do Brasil S.A. based in Vitória (Brazil) was established for this purpose (see note 15.1, Concessions for the operation of foreign airports).

Due to the nature of the civil aviation sector and based on statistics, traffic volumes (passenger volumes and number of flights) are usually higher in the second half of the year than in the first half.

PROVISION FOR FORMAL EXPROPRIATIONS

In the previous year, the Swiss Federal Supreme Court handed down two rulings in test cases regarding cooperative ownership. These rulings enabled Flughafen Zürich AG to undertake a reappraisal of the outstanding cost of compensation for formal expropriations. Based on the recalculation, the total cost expected in relation to formal expropriations decreased from CHF 385.0 million to CHF 350.0 million. This enabled the provision for formal expropriations to be reduced by CHF 34.5 million (nominal amount: CHF 35.0 million) in the previous year. At the same time, the intangible asset from the right of formal expropriation was reduced by the same amount.

As no further information that would have changed last yearʼs appraisal emerged in the first half of 2019, the total cost estimated in relation to formal expropriations remained unchanged at CHF 350.0 million, of which CHF 77.8 million had already been paid out at 30 June 2019 (see note 10, Provision for formal expropriations plus sound insulation and resident protection).

PROVISION FOR SOUND INSULATION AND RESIDENT PROTECTION

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) 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 was to be extended. In the previous year, a provision for further costs of CHF 60.0 million, with a present value of CHF 57.6 million, was recognised in this context in addition to the cost of CHF 340.0 million previously estimated for sound insulation and resident protection.

As no further information that would have changed last yearʼs appraisal emerged in the first half of 2019, the total cost estimated in relation to sound insulation and resident protection measures remained unchanged at CHF 400.0 million, of which CHF 251.9 million had already been paid out at 30 June 2019 (see note 10, Provision for formal expropriations plus sound insulation and resident protection).

The reportable segments for the prior-year period are as follows:

Presentation of revenue from contracts with customers (IFRS 15):

The expenses of CHF 45.1 million (prior-year period: CHF 8.8 million) for construction projects under concession arrangements are the result of investments in airport infrastructure in Brazil and Chile. The corresponding counter-item can be found under note 2, Revenue.

In the prior-year period, “Other expenses” included the CHF 57.6 million increase in the provision for sound insulation and resident protection measures that was recognised in profit or loss.

Projects in progress

In the first half of 2019, Flughafen Zürich AG invested a total of CHF 94.5 million in projects in progress (prior-year period: CHF 72.4 million). The biggest items comprise the following projects:

THE CIRCLE PROJECT

Based on the nature of the contractual arrangement, the co-ownership structure THE CIRCLE is classified as a joint operation in accordance with IFRS 11. The share of the rights to the assets and the share of the obligations for the liabilities of the co-ownership structure are therefore recognised and presented in the relevant line items in the consolidated financial statements of Flughafen Zürich AG (Flughafen Zürich AGʼs share: 51%).

The share of THE CIRCLE property under construction is classified as investment property in accordance with IAS 40. In this context, Flughafen Zürich AG has decided to apply the cost model. The land recognised in the amount of CHF 1.0 million represents the purchase cost of the share of the plot of land on which the project will be implemented. “Project and construction costs” in the amount of CHF 350.4 million (31 December 2018: CHF 306.1 million) include the share of the production costs capitalised to date less accumulated depreciation and impairment losses.

The fair value of THE CIRCLE was CHF 444.7 million at the reporting date (31 December 2018: CHF 373.3 million).

Investments in airport operator projects

The investments in airport operator projects in the amount of CHF 187.9 million (31 December 2018: CHF 125.6 million) consist of concession rights which, due to the application of IFRIC 12, comprise minimum concession payments recognised as assets and investments made. They relate to the expansion and operation of the Chilean airports in Antofagasta and Iquique (CHF 35.1 million; 31 December 2018: CHF 30.4 million), in which Flughafen Zürich AG holds a controlling interest via its subsidiary A-port Chile S.A., as well as the expansion and operation of the Brazilian airport in Florianópolis (CHF 152.8 million; 31 December 2018: CHF 95.2 million) through the subsidiary Concessionária do Aeroporto Internacional de Florianópolis S.A. The obligations of CHF 27.7 million (31 December 2018: CHF 26.1 million) relating to the corresponding concessions have been recognised as current or non-current liabilities (see note 9, Financial liabilities).

Provision for formal expropriations

As at 30 June 2019, the estimated costs for formal expropriations remained unchanged versus the last reporting date at CHF 350.0 million, of which CHF 77.8 million had so far been paid out. The outstanding costs of CHF 272.2 million (nominal amount) are stated at their present value of CHF 270.5 million in the interim consolidated financial statements for the period ended 30 June 2019. Due to another fall in interest rates, the interest rate used to adjust the present value of the future nominal payment flows was 0.10% (31 December 2018: 0.25%). It is currently expected that the payments can be completed by the end of 2025.

Provision for sound insulation and resident protection

As at 30 June 2019, the estimated costs for sound insulation and resident protection measures remained unchanged versus the last reporting date at CHF 400.0 million, of which CHF 251.9 million had so far been paid out. The outstanding costs of CHF 148.1 million (nominal amount) are stated at their present value of CHF 146.6 million in the interim consolidated financial statements for the period ended 30 June 2019. Due to another fall in interest rates, the interest rate used to adjust the present value of the future nominal payment flows was 0.10% (31 December 2018: 0.35%). It is currently expected that the payments can be completed by the end of 2030.

Summary of assets invested in the Airport of Zurich Noise Fund:

In accordance with IAS 12.47, deferred tax assets and liabilities are calculated at the rate that is expected to apply when the asset is realised or the liability settled. Flughafen Zürich AG currently anticipates an applicable tax rate of 20.4% (31 December 2018: 20.5%).

The balance of deferred taxes changed as follows:

Employee benefit obligations broke down as follows at the reporting date:

Net defined benefit obligations changed as follows in the first half of 2019:

The total changes in measurement recognised in other comprehensive income resulted both from the change in the discount rate and from asset performance in the first half of 2019. The discount rate declined from 0.8% as at 31 December 2018 to 0.3%, as a result of which the liability increased by around 8%. Asset performance, on the other hand, was around 4.5%. This was calculated on the basis of the benefit planʼs financial position.

FAIR VALUES

Due to their short-term nature, the carrying amounts of cash and cash equivalents, fixed-term deposits, trade receivables, other current receivables and current liabilities are a reasonable approximation of their fair values.

Financial assets in the Airport of Zurich Noise Fund: The fair value of the bonds corresponds to the market price of the securities at the reporting date (level 1). The fair value of the mixed investment fund is the unadjusted net asset value, as the units may be redeemed at that value as at the reporting date (level 2).

Financial liabilities: The fair value of the debentures corresponds to the market price at the reporting date (level 1).

Derivative financial instruments: The fair value of the cross-currency swap is determined using a fair value model (level 2). The key inputs are foreign exchange rates and interest rates observable in the market. Unobservable inputs are not significant to the measurement.

FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS

Financial instruments recognised or disclosed at fair value are categorised according to the following hierarchy, reflecting the significance of the inputs used to measure fair value:

Level 1 – Quoted market prices

The inputs used to measure the assets or liabilities are quoted, unadjusted market prices determined in active markets for identical assets or liabilities at the measurement date.

Level 2 – Measurement based on observable inputs

The assets or liabilities are measured on the basis of inputs (other than the quoted prices included within level 1) that are directly or indirectly observable for the asset or liability.

Level 3 – Measurement based on unobservable inputs

The inputs for these assets or liabilities are not observable.