TONGA AIRPORTS LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Contents 2-3 Directors' report........................................................................................................................................................................ Directors' statement................................................................................................................................................................... 4 Independent auditor's report....................................................................................................................................................... 5-6 7 Statement of comprehensive income............................................................................................................................................ 8 Statement of changes in equity.................................................................................................................................................... 9 Statement of financial position.................................................................................................................................................... 10 Statement of cash flows.............................................................................................................................................................. 11 - 30 Notes to the financial statements................................................................................................................................................. 31 Disclaimer on additional financial information............................................................................................................................... 32 Detailed income statement.......................................................................................................................................................... 33 Detailed income statement by cost centre..................................................................................................................................... 1 TONGA AIRPORTS LIMITED DIRECTORS' REPORT FOR THE YEAR ENDED 30 JUNE 2018 In accordance with a resolution of the Board of Directors, the Directors herewith submit the statement of financial position of Tonga Airports Limited ("the Company") as at 30 June 2018, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date and report as follows: Directors The Directors of the company in office during the year and up to the date of this report are: • Sione Ngongo Kioa - Chairman (appointed on 11 May 2018) • Sitiveni Halapua (appointed on 27 April 2018) • John Wycliffe Havea (appointed on 14 May 2018) • Fine Tohi (appointed on 11 May 2018) • Viliami Takau Jr Principal activities The principal activities of the Company during the financial year included provision of air navigation services, the operation and management of the Fua'amotu International Airport and other airports throughout Tonga. There was no significant change in business activity during the year. Results The operating profit for the year was TOP 1,362,324 (2017: TOP 2,622,993) after providing TOP 411,176 (2017: TOP 726,899) for income tax. Dividends The Directors declared no interim dividends for the financial year (2017: TOP 2,000,000). Reserves The Directors propose that no transfer be made to reserves except for transfers required by International Financial Reporting Standard. Bad and doubtful debts Prior to the completion of the Company's financial statements, the Directors took reasonable steps to ascertain that action had been taken in relation to writing off of bad debts and the provision for doubtful debts. In the opinion of Directors, adequate provision has been provided for doubtful debts. As at the date of this report, the Directors are not aware of any circumstances, which would render the amount written off for bad debts, or the provision for doubtful debts in the Company, inadequate to any substantial extent. Non current assets Prior to the completion of the financial statements of the Company, the Directors took reasonable steps to ascertain whether any non-current assets were unlikely to be realised in the ordinary course of business compared to their values as shown in the accounting records of the Company. Where necessary these assets have been written down or adequate provision has been made to bring the values of such assets to an amount that they might be expected to realise. As at the date of this report, the Directors are not aware of any circumstances, which would render the values attributed to non- current assets in the Company's financial statements misleading. Basis of accounting The directors believe the basis of the preparation of the financial statements is appropriate and that the Company will be able to continue in operation for at least twelve months from the date of this statement. Accordingly, the directors believe the classification and carrying amounts of assets and liabilities as stated in these financial statements to be appropriate. 2 TONGA AIRPORTS LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Notes 2018 2017 TOP TOP Continuing operations Revenue 2.1 11,596,453 12,137,573 Other income 2.2 1,850,093 1,850,093 Total revenue 13,446,546 13,987,666 Expenses Salaries and employee benefits 2.3 (3,537,164) (3,446,342) Depreciation and amortisation (4,275,988) (4,334,033) Other operating expenses 2.4 (3,859,894) (2,857,399) Profit before tax from continuing operations 1,773,500 3,349,892 Income tax expense 3 (a) (411,176) (726,899) Profit for the year from continuing operations 1,362,324 2,622,993 Other comprehensive income Other comprehensive income for the year - - Total comprehensive income for the year, net of tax 1,362,324 2,622,993 Earnings per share - basic, for profit for the year attributable to ordinary equity holders 16 0.04 0.07 The accompanying notes form an integral part of the statement of comprehensive income. 7 TONGA AIRPORTS LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 Note 2018 2017 TOP TOP Retained earnings Balance at the beginning of the year 719,148 96,155 Net comprehensive income for the year 1,362,324 2,622,993 Dividends paid (2,000,000) (2,000,000) Balance at the end of the year 81,472 719,148 Share capital Balance at the beginning of the year 36,543,226 36,543,226 Balance at the end of the year 14 36,543,226 36,543,226 Total equity 36,624,698 37,262,374 The accompanying notes form an integral part of this statement of changes in equity. 8 TONGA AIRPORTS LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 Note 2018 2017 TOP TOP Cash flows from operating activities Net profit before tax from continuing operations 1,773,500 3,349,892 Adjustment to reconcile profit before tax to net cash flows Non-cash adjustment: Depreciation and amortisation 4,275,988 4,334,033 Amortisation of deferred revenue (1,850,093) (1,850,093) Loss on disposal of property, plant and equipment - 17,920 Movement in provision for employee entitlements (46,542) 31,027 Movement in provision for land lease 3,249 3,249 Working capital adjustments: (Decrease)/decrease in trade receivables (185,715) 254,961 Decrease in other assets 281,978 254,706 Decrease/(increase) in inventories 5,776 (59,638) Increase/(decrease) in trade and other payables 206,345 (203,127) (Decrease) in income tax payable (851,554) (1,160,611) Net cash flows from operating activities 3,612,932 4,972,319 Cash flows (used in) investing activities Net investments in term deposits and bonds (88,604) (81,181) Proceeds from sale of property, plant and equipment - 2,349 Acquisition of property, plant and equipment (1,376,163) (1,338,141) Net cash flows (used in) investing activities (1,464,767) (1,416,973) Cash flows from financing activities Dividends paid to shareholder (2,000,000) (2,000,000) Net cash flows (used in) financing activities (2,000,000) (2,000,000) Net increase in cash held 148,165 1,555,346 Cash at beginning of year 4,371,905 2,816,559 Cash at end of year 4 (b) 4,520,070 4,371,905 The accompanying notes form an integral part of the statement of cash flows. 10 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 1. Corporate Information The financial statements of Tonga Airports Limited ('the company') for the year ended 30 June 2018 was authorised for issue in accordance with a resolution of the Directors dated 30th November 2018. Tonga Airports Limited is incorporated in the Kingdom of Tonga and all the shares of the company are owned by the Government of Tonga. The principal activities of the company are described in Note 23. 1.2 Basis of preparation of the Financial Statements These financial statements have been prepared under the convention of historical cost accounting and do not take into account changing money valued or current valuations of non-current assets unless stated otherwise. All amounts are stated in Tongan Pa'anga. Statement of compliance The financial statements of Tonga Airports Limited have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. 1.3 Summary of significant accounting policies a) Foreign currencies The company's financial statements are presented in Tongan Pa'anga, which is the company's functional currency. Transactions in foreign currencies are initially recorded by the company at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively). Any goodwill arising on acquisition of foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. b) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The company has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements, has pricing latitude and is also exposed to inventory and credit risks. The specific recognition criteria described below must also be met before revenue is recognised. Aeronautical services The company recognises revenue when the amount of revenue can be reliably measured; it is probable that future economic benefits will flow to the entity and when specific have been met for each of the company's activities. Sales revenue represents revenue earned from the provision of aeronautical services and is stated net of returns, trade allowances and Consumption Tax. Interest Interest Income on investment is recognised on accrual basis on time proportion. 11 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) b) Revenue recognition (continued) Grant income Grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset. When the company receives grants of non-monetary assets, the asset and the grant are recorded at nominal amounts and released to profit or loss over the expected useful life of the asset, based on the pattern of consumption of the benefits of the underlying asset by equal annual instalments. c) Taxes Current Income Tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the company operates and generates taxable income. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences, except: • When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except: • When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. 12 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) c) Taxes (continued) Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in OCI or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Consumption Tax Expenses and assets are recognised net of the amount of sales tax, except: • When the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable; and • When receivables and payables are stated with the amount of sales tax included. The net amount of Consumption tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. d) Property, plant and equipment Construction in progress, plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of plant and equipment are required to be replaced at intervals, the company depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in profit or loss as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows: Buildings and infrastructure 1% - 33% Motor vehicles 6% - 10% Office furniture and equipment 10% - 33% An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognised. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. e) Leases The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. 13 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) e) Leases (continued) Company as a lessee A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the company is classified as a finance lease. Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the statement of profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term. Company as a lessor Leases in which the company does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. f) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. g) Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss in the expense category that is consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. 14 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) h) Financial instruments - initial recognition and subsequent measurement (i) Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, AFS financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the company commits to purchase or sell the asset. The company's financial assets include cash and trade and other receivables. Subsequent measurement For purposes of subsequent measurement financial assets are classified in four categories: Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. The company has not designated any financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the statement of profit or loss. The company has not designated any financial assets upon initial recognition as at fair value through profit or loss. Loan and receivables This category is the most relevant to the company. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of profit or loss. The losses arising from impairment are recognised in the statement of profit or loss in finance costs for loans and in cost of sales or other operating expenses for receivables. This category generally applies to trade and other receivables. For more information on receivables, refer to Note 7. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the company has the positive intention and ability to hold them to maturity. After initial measurement, held to maturity investments are measured at amortised cost using the EIR, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance income in the statement of profit or loss. The losses arising from impairment are recognised in the statement of profit or loss as finance costs. The company had TOP 4,988,397 (2017: TOP 4,899,793) held-to-maturity investments for the years ended 30 June 2018 and 2017. 15 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) h) Financial instruments - initial recognition and subsequent measurement (continued) (i) Financial assets (continued) Available-for-sale investments Available-for-sale financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, AFS financial assets are subsequently measured at fair value with unrealised gains or losses recognised in OCI and credited in the AFS reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the statement of profit or loss in finance costs. Interest earned whilst holding AFS financial assets is reported as interest income using the EIR method. The company evaluates whether the ability and intention to sell its AFS financial assets in the near term is still appropriate. When, in rare circumstances, the company is unable to trade these financial assets due to inactive markets, the company may elect to reclassify these financial assets if the management has the ability and intention to hold the assets for foreseeable future or until maturity. For a financial asset reclassified from the AFS category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on the asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the statement of profit or loss. Derecognition A financial asset (or, where a part of a financial asset or part of a group of similar financial assets) is derecognised when: • The rights to receive cash flows from the asset have expired, or • The company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the company has transferred substantially all the risks and rewards of the asset, or (b) the company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the company continues to recognise the transferred asset to the extent of the company’s continuing involvement. In that case, the company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the company could be required to repay. 16 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) h) Financial instruments - initial recognition and subsequent measurement (continued) (ii) Impairment of financial assets Financial assets carried at amortised cost For financial assets carried at amortised cost, the company first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in the statement of profit or loss. Interest income (recorded as finance income in the statement of profit or loss) continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the statement of profit or loss. (iii) Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The company's financial liabilities include trade and other payables. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the company that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. The company has not designated any financial liabilities as at fair value through profit or loss. 17 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) h) Financial instruments - initial recognition and subsequent measurement (continued) (iii) Financial liabilities (continued) Loans and borrowings This is the category most relevant to the company. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings. Derecogniton A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. (iv) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. (v) Fair value of financial instruments The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 21. i) Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials - purchase cost ; Finished goods - cost of direct materials and labour and an appropriate portion of fixed and variable overheads but excluding borrowing costs; Initial cost of inventories includes the transfer of gains and losses on qualifying cash flow hedges, recognised in OCI, in respect of the purchases of raw materials. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. j) Impairment of non financial assets The company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the company estimates the asset’s recoverable amount. 18 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) j) Impairment of non financial assets (continued) An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. Impairment losses of continuing operations, including impairment on inventories, are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognised in OCI up to the amount of any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the company estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. k) Cash and short term deposits Cash and short-term deposits in the statement of financial position comprise cash at banks and on hand and short- term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts. l) Provisions Provisions are recognised when the company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the company expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. m) Employee entitlements Provisions are made for wages and salaries, incentive payments and annual leave estimated to be payable to employees at reporting date on the basis of statutory and contractual requirements. 19 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.3 Summary of significant accounting policies (continued) n) Trade and other payables Liabilities for trade creditors and other amounts are carried at cost (inclusive of Consumption Tax where applicable) which is the fair value of the consideration to be paid in the future for goods and services received whether or not billed to the company. Amounts payable that have been denominated in foreign currencies have been translated to local currency using the rates of exchange ruling at the end of the financial year. o) Comparative figures Comparative figures have been amended where necessary, for changes in presentation in the current year. p) Earnings per share Basic earnings per share is determined by dividing net profit after income tax attributable to shareholders of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. 1.4 Changes in accounting policies and disclosures New and amended standards and interpretations The Company applied for the first time certain amendments to the standards, which are effective for annual periods beginning on or after 1 January 2017. The Company has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. The nature and the impact of each amendment is described below: Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary difference related to unrealised losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. The Company applied amendments retrospectively. However, their application has no effect on the Company’s financial position and performance as the Company has no deductible temporary differences or assets that are in the scope of the amendments. 1.5 Significant accounting judgments, estimates and assumptions The preparation of the Company’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Other disclosures relating to the Group’s exposure to risks and uncertainties includes: • Capital management • Financial instruments risk management and policies • Sensitivity analyses disclosures Judgments In the process of applying the company's accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognised in the consolidated financial statements: Operating Lease Commitments The company has entered into commercial property leases on its investment property portfolio. The company has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a major part of the economic life of the commercial property and the fair value of the asset, that it retains all the significant risks and rewards of ownership of these properties and accounts for the contracts as operating leases. 20 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.5 Significant accounting judgments, estimates and assumptions (continued) Estimations and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the company. Such changes are reflected in the assumptions when they occur. Impairment of non financial assets Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the company is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill and other intangibles with indefinite useful lives recognised by the company. Provision for land lease A provision exists for land lease. The company commenced operations on 2 July 2007 as a corporatised entity enacted under the Public Enterprises Act taking over the provision of airport services previously managed by the Government of Tonga. The company is finalising with the Government for lease rentals prior to year 2013 for the properties acquired by the company as a corporatised entity. The company has accrued on an annual basis the estimated lease rental likely to be payable for the period 2008 to 2013 once the payment terms is clarified. The lease rentals for 2014 onwards is being paid by TAL. The directors believe that the lease rent liability at 30 June 2018 as adequately provided for in the financial statements as at that date and no significant changes to these estimates are anticipated. 1.6 Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements are disclosed below. The Company intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date and will not restate comparative information. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Company plans to adopt the new standard on the required effective date using the full retrospective method. 21 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 1.6 Standards issued but not yet effective (continued) IFRS 16 Leases IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. 22 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 2. Revenue and expense 2018 2017 Included in revenue are: 2.1 Revenue TOP TOP Aeronautical - international 9,317,673 9,999,372 Aeronautical - domestic 839,019 935,903 Non-aeronautical 1,439,761 1,202,298 11,596,453 12,137,573 2.2 Other income TOP TOP Amortisation of deferred income 1,850,093 1,850,093 Included in expenses are: 2.3 Salaries and employee benefits TOP TOP Salaries and wages 3,537,164 3,446,342 2.4 Other operating expenses TOP TOP Auditors fees 14,000 14,000 Board expenses 222,253 296,591 Doubtful debts 257,282 (30,467) Land lease 195,466 194,849 Loss on disposal of property, plant and equipment - 17,920 Repairs - infrastructure 205,136 118,735 Safety levy expenses 216,118 139,434 Other operating expenses 2,749,639 2,106,337 3,859,894 2,857,399 3. Income tax expense (a) A reconciliation between tax expense and the product of accounting profit multiplied by the tax rate for the year ended 30 June 2018 and 30 June 2017 is as follows: TOP TOP Accounting profit before income tax 1,773,500 3,349,892 At the Tonga rate of 25% (2017: 25%) 443,375 837,473 Over-provision in prior year (32,199) (110,574) Income tax attributable to operating profit 411,176 726,899 (b) Income statement TOP TOP Current income tax: Current income tax charge 500,475 837,473 Adjustments in respect of previous year (89,299) (110,574) Income tax expense 411,176 726,899 23 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 3. Income tax expense (continued) 2018 2017 (c) Deferred income tax at 30 June 2018 and 30 June 2017 relates to the following: Deferred income tax: TOP TOP Accelerated depreciation for tax purposes (673,967) (678,381) Provisions for employee entitlements 35,542 47,177 Provisions for doubtful debts 68,196 3,875 (570,229) (627,329) Reflected in the statement of financial position as follows: Deferred income tax asset 103,738 51,052 Deferred income tax liability (673,967) (678,381) Deferred income tax liability (net) (570,229) (627,329) 4. Cash and cash equivalents a) Cash and cash equivalents TOP TOP Cash at banks 3,950,479 3,834,086 Short term deposits - MBF Bank 567,641 536,269 Cash on hand 1,950 1,550 4,520,070 4,371,905 Cash at banks earns interest at floating rates based on daily bank deposit rates. b) For the purpose of statement of cash flows, cash and cash equivalents comprise the following at 30 June: TOP TOP Cash at banks 3,950,479 3,834,086 Short term deposits - MBF Bank 567,641 536,269 Cash on hand 1,950 1,550 4,520,070 4,371,905 5. Inventories TOP TOP Fuel 55,042 65,306 Canteen stock 4,488 - Total inventories at the lower of cost and net realisable value 59,530 65,306 6. Held to maturity assets Current TOP TOP Term deposit with Bank of South Pacific Limited 106,454 104,804 Term deposit with ANZ Bank 2,346,391 2,259,437 2,452,845 2,364,241 Non-current National Reserve Bank of Tonga Bonds 1,156,000 1,156,000 Term deposits with ANZ Bank 1,379,552 1,379,552 2,535,552 2,535,552 The year-end interest rate receivable on term deposits ranges from 1.75% - 6.5% (2017: 1.75% - 6.5%) per annum and the interest rate for bonds range from 2.5% - 3% (2017: 2.5% - 3%) per annum. 24 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 2018 2017 7. Trade receivables TOP TOP Trade receivables 1,739,026 1,550,142 Less provision for doubtful debts (18,670) (15,501) 1,720,356 1,534,641 Trade receivables are non interest bearing and are generally on 30-90 day terms. As at 30 June 2018, TOP 18,670 (2017: TOP 15,501) trade receivables were impaired for the company and were fully provided for. Movements in the provision for impairment of receivables were as follows: TOP TOP Opening balance 15,501 45,968 Arising during the year 3,169 - Utilised/reversed - (30,467) 18,670 15,501 At 30 June 2018 and 30 June 2017, the ageing analysis of trade receivables is as follows: Neither past due nor Past due but not impaired Considered Total impaired 30 days 60 days 90 days & over impaired TOP TOP TOP TOP TOP TOP 2018 1,739,026 1,328,442 215,479 71,523 104,912 18,670 2017 1,550,142 1,106,297 290,170 91,098 47,076 15,501 8. Other assets TOP TOP Refundable deposits and prepayments 2,401,946 2,362,463 Other receivables 387,393 407,165 Provision for doubtful debts (254,113) - Consumption tax receivable 101,736 149,312 2,636,962 2,918,940 9. Trade and other payables TOP TOP Trade payables 863,566 614,524 Other payables and accruals 270,326 210,437 1,133,892 824,961 Terms and conditions of the above financial liabilities are: - Trade payables and accruals are on commercial terms and conditions and are payable within 60 - 90 days. 10. Employee benefit liability TOP TOP Current Post employment benefits 19,105 19,105 Annual leave liability 142,166 188,708 161,271 207,813 The retirement fund maintained by the company was terminated in 2012 and the balance remaining is the unclaimed amounts payable to former employees. The movement in employee benefit liability over the year is as follows: TOP TOP Opening balance 188,708 157,681 Net movement during the year (46,542) 31,027 Closing balance 142,166 188,708 Employee benefits liability is recognised for employee entitlements in accordance with the policy noted in 1.3 (m). 25 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 11. Property, plant and equipment Office Land & Furniture & Motor Work in Building Equipment vehicles Infrastructure Progress Total Cost TOP TOP TOP TOP TOP TOP At 1 July 2016 10,946,773 5,218,369 4,020,519 61,428,577 1,355,406 82,969,644 Additions 322,477 408,285 266,602 173,673 167,104 1,338,141 Disposals - - (19,666) - (14,340) (34,006) Reclassifications 614,446 517,650 - - (1,132,096) - At 30 June 2017 11,883,696 6,144,304 4,267,455 61,602,250 376,074 84,273,779 Additions 442,241 405,873 342,331 53,739 234,565 1,478,749 Reclassifications 187,984 - - - (187,984) - At 30 June 2018 12,513,921 6,550,177 4,609,786 61,655,989 422,655 85,752,528 Depreciation and impairment At 1 July 2016 3,984,476 2,858,230 2,440,752 11,556,577 - 20,840,035 Depreciation charge for the year 583,471 562,342 338,842 2,849,378 - 4,334,033 Depreciation reversed - - (13,737) - - (13,737) At 30 June 2017 4,567,947 3,420,572 2,765,857 14,405,955 - 25,160,331 Depreciation charge for the year 605,849 590,329 308,356 2,771,454 - 4,275,988 At 30 June 2018 5,173,796 4,010,901 3,074,213 17,177,409 - 29,436,319 Net book value At 30 June 2018 7,340,125 2,539,276 1,535,573 44,478,580 422,655 56,316,209 At 30 June 2017 7,315,749 2,723,732 1,501,598 47,196,295 376,074 59,113,448 Assets under construction The Company receives as part of the Tonga Transport Sector Consolidation Project, financial support from the World Bank, through Tonga Aviation Investment Project ('TAIP'). As at 30 June 2018, TAIP had projects amounting to TOP 4,667,598 (2017: TOP 3,486,665), under construction and will be donated to the Company upon completion, subsequent to the end of the financial year. The initial gross amount was estimated at fair value by reference to the market price of these assets on the date on which control is obtained. 12. Provision 2018 2017 Land lease provision TOP TOP Opening balance 1,104,412 1,101,163 Arising during the year 194,350 194,350 Utilised/paid during the year (191,101) (191,101) Closing balance 1,107,661 1,104,412 Provision for land lease has been accounted for as per Note 1.3 (l) and Note 1.5. 13. Deferred income TOP TOP Opening balance 32,007,472 33,857,565 Amortisation for the year (1,850,093) (1,850,093) Closing balance 30,157,379 32,007,472 The deferred income is shown on the statement of financial position as follows:- Current 1,850,093 1,850,093 Non-current 28,307,286 30,157,379 30,157,379 32,007,472 The company receives as part of the Tonga Transport Sector Consolidation Project, financial support from the World Bank. The above transactions took place with respect to grant income received from the World Bank through Tonga Aviation Investment Project ('TAIP'). Grant income has been accounted for as per Note 1.3(b). 26 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 14. Share capital 2018 2017 Authorised TOP TOP Ordinary shares of TOP 1 each 100,000,000 100,000,000 Ordinary shares issued and fully paid TOP TOP 36,543,226 ordinary shares of TOP 1 each 36,543,226 36,543,226 - 15. Dividends paid and proposed TOP TOP Opening balance - - Arising during the year 2,000,000 2,000,000 Paid during the year (2,000,000) (2,000,000) Closing balance - - 16. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to the ordinary equity holders of the parent by the weight average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares outstanding during the year. The following reflect the income and share data used in the basic and diluted earnings per share computations: 2018 2017 TOP TOP Basic, for profit for the year attributable to ordinary equity holders 0.04 0.07 Net profit attributable to ordinary equity holders for basic and diluted earnings 1,362,324 2,622,993 Number of equity shares outstanding 36,543,226 36,543,226 There have been no other transactions involving ordinary shares between the reporting date and the date of completion of these financial statements. 17. Related party disclosures a) Controlling Entities Tonga Airports Limited is owned by the Government of Tonga. b) Transactions with related parties During the year the company entered into transactions with related parties in the ordinary course of business under normal commercial terms. Significant transactions during the year are as follows: Revenue from various Government Ministries TOP TOP VIP Lounge 17,565 27,913 Other Income 2,750 1,200 20,315 29,113 c) Compensation of key management personnel of the company TOP TOP Short-term employee benefits 704,510 454,666 d) Directors The Directors of the company in office during the year and up to the date of this report are: • Sione Ngongo Kioa - Chairman (appointed on 11 May 2018) • Sitiveni Halapua (appointed on 27 April 2018) • John Wycliffe Havea (appointed on 14 May 2018) • Fine Tohi (appointed on 11 May 2018) • Viliami Takau Jr 27 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 18. Contingent liabilities The company did not have any contingent liabilities at balance date (2017: nil) 19. Expenditure commitments a) Capital commitments At 30 June 2018, the company had capital commitments of TOP 46,000 (2017: nil). b) Operating lease commitments On 7 November 2013 the company entered into lease agreements with the Ministry of Infrastructure to lease its land for 50 years ending on 6 November 2063. Under the agreements, lease rental is payable at TOP 122,487 per annum for land situated at Fua'amotu, TOP 40,744 per annum for land situated at Toloa and TOP 17,169 per annum for land situated at Pelehake. On 20 June 2014 the company entered into lease agreement with Ministry of Infrastructure for land at Vava'u for 50 years ending on 19 June 2064. Under the lease agreement, lease rental is payable at TOP 10,701 per annum. On 21 July 2014 the company entered into lease agreement with His Majesty Tupou VI King of Tonga for land at Toloa for 50 years ending on 20 July 2064. Under the lease agreement, lease rental is payable at TOP 500 per annum. Future minimum rental payable under non-cancellable operating leases as at 30 June 2018 and 30 June 2017 are as follows: 2018 2017 TOP TOP Within one year 191,601 191,601 After one year but not more than five years 766,402 766,402 Later than five years 7,744,509 7,936,110 8,702,512 8,894,113 20. Financial risk management objectives and policies The company's principal financial liabilities, other than derivatives, comprise trade and other payables. The main purpose of these financial liabilities is to raise finance for the company's operations. The company has various financial assets such as trade receivables, loans to related parties, available-for-sale investments, related party receivables, and cash which arise directly from its operations. The main risks arising from the company's financial statements are market risk and credit risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below. Foreign currency risk The company has transactional currency exposures. Such exposures arises from sales by the company in currency other than Tongan Pa'anga and purchases of materials in foreign currency. Foreign currency risk is an inherent business risk as the Reserve Bank of Tonga and banks do not permit hedging. The following table demonstrates the sensitivity to a reasonable possible change in the USD exchange rate (2017: AUD and NZD exchange rate), with all other variables held constant, of the company's profit before tax. Effect on profit before tax Increase/decrease in NZD Rate TOP 2018 +1% (443) -1% 542 Effect on profit before tax Increase/decrease in USD Rate TOP 2018 +1% (9,326) -1% 11,398 2017 +1% (1,022) -1% 1,249 28 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 20. Financial risk management objectives and policies (continued) Credit risk It is the company policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the company's exposure to bad debts is not significant. The company trades with only recognised, credit worthy third parties. There are no significant concentrations of credit risk within the company. With respect to credit risk arising from other financial assets of the company which comprise of cash and cash equivalents, available-for-sale financial instruments, and loan notes, the company's exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these investments. Liquidity risk The company monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financials assets (e.g. accounts receivables, other financial assets) and projected cash flows from operations. The company's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans. The table below summaries the maturity profile of the company's financial liabilities at 30 June 2018 and 30 June 2017: Year ended 30 June 2018 On demand 1 to 12 1 to 5 years > 5 years Total months TOP TOP TOP TOP TOP Trade and other payables - 1,133,892 - - 1,133,892 - 1,133,892 - - 1,133,892 Year ended 30 June 2017 On demand 1 to 12 1 to 5 years > 5 years Total months TOP TOP TOP TOP TOP Trade and other payables - 824,961 - - 824,961 - 824,961 - - 824,961 Capital Management The primary objective of the company's capital management is to ensure that it maintains a strong credit rating and a healthy capital ratio in order to support its business and maximise shareholder value. The company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, polices or processes during the years 30 June 2018 and 30 June 2017. The company monitors capital using a gearing ratio which is net debt divided by total capital. The company includes within net debt, trade and other payables, less cash and cash equivalents. Capital includes equity shares attributable to equity holders of the parent less minority interests. 2018 2017 TOP TOP Trade and other payables 1,133,892 824,961 Less cash and cash equivalents (4,520,070) (4,371,905) Net debt (3,386,178) (3,546,944) Equity 36,624,698 37,262,374 Total capital 36,624,698 37,262,374 Capital and net debt 33,238,520 33,715,430 29 TONGA AIRPORTS LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 30 JUNE 2018 21. Financial instruments Fair values Set out below is a comparison by category of carrying amounts and fair values of all the company's financial instruments that are carried in the financial statements: Carrying amount Fair value 2018 2017 2018 2017 Financial assets TOP TOP TOP TOP Cash at bank and on hand 4,520,070 4,371,905 4,520,070 4,371,905 Held to maturity assets 4,988,397 4,899,793 4,988,397 4,988,397 9,508,467 9,271,698 9,508,467 9,360,302 Market values have been used to determine the fair value of available-for-sale financial assets. The fair values of borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates. The fair value of loan notes and other financial assets have been calculated using market interest rates. 22. Subsequent events There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors, to affect significantly the operations of the Company, the results of those operations or the state of affairs of the Company in the subsequent financial year. 23. Principal activities The principal activities of the Company during the financial year included provision of air navigation services, the operation and management of the Fua'amotu International Airport and other airports throughout Tonga. There was no significant change in business activity during the year. 24. Company details Company Incorporation The company was incorporated in Tonga under the Public Enterprises Act, 2002 and Tonga Companies Act, 1995. Company Operations The company's operations is located at Fua'amotu, Nukualofa, Tonga. Number of Employees As at reporting date, the holding company employed a total of 189 employees (2017: 191). 30 TONGA AIRPORTS LIMITED DISCLAIMER ON ADDITIONAL FINANCIAL INFORMATION FOR THE YEAR ENDED 30 JUNE 2018 The additional financial information, being the attached detailed Income Statement has been compiled by the management of Tonga Airports Limited. To the extent permitted by law, we do not accept liability for any loss or damage which any person, other than Tonga Airports Limited may suffer arising from any negligence on our part. No person should rely on the additional financial information without having an audit or review conducted. 31 TONGA AIRPORTS LIMITED DETAILED INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2018 2018 2017 TOP TOP Revenue Aeronautical - international 9,317,673 9,999,372 Aeronautical - domestic 839,019 935,903 Non-aeronautical 1,439,761 1,202,298 11,596,453 12,137,573 Add other income Amortisation of deferred income 1,850,093 1,850,093 Total income 13,446,546 13,987,666 Expenses Advertising and marketing 7,401 9,766 Auditor's remuneration 14,000 14,000 Bad debts 23,594 - Board expenses 222,253 296,591 Cleaning 249,475 277,967 Communications 101,969 98,407 Consultancy fees 39,521 40,299 Depreciation 4,275,988 4,334,033 Donation 8,000 12,526 Doubtful debts expense/(recovered) 257,282 (30,467) Fuel 428,875 239,423 General expenses 274,958 125,064 Insurance 237,752 239,963 Land lease 195,466 194,849 Legal expenses 8,320 3,348 License fees 33,344 36,077 Loss on disposal of property, plant and equipment - 17,920 Marketing expenses 297,149 - Operational supplies 772 477 Printing and stationery 60,646 54,091 Rental 2,217 2,559 Repairs - infrastructure 205,136 118,735 Repairs - office and equipment 56,639 60,248 Safety levy expenses 216,118 139,434 Salaries & wages 3,537,164 3,446,342 Training 103,000 163,546 Travelling 283,503 236,803 Uniforms 35,087 30,587 Utilities 403,606 409,629 Vehicle repairs 93,811 65,557 Total expenses 11,673,046 10,637,774 Net profit before tax 1,773,500 3,349,892 The Detailed Income Statement is to be read in conjunction with the disclaimer set out on page 31. 32 TONGA AIRPORTS LIMITED DETAILED INCOME STATEMENT BY COST CENTRE FOR THE YEAR ENDED 30 JUNE 2018 Fua'amotu Outer Island Airports International Niuafo'ou Niuatopu-tapu Airport Eua Airport Ha'apai Airport Airport Airport Vava'u Airport Consolidated TOP (000) TOP (000) TOP (000) TOP (000) TOP (000) TOP (000) TOP (000) Revenue Aeronautical income 9,444 36 136 1 4 537 10,158 Non-aeronautical income 1,189 4 7 2 2 235 1,439 10,633 40 143 3 6 772 11,597 Expenses Staff costs 2,913 30 122 29 40 404 3,538 Depreciation 1,879 24 67 7 42 347 2,366 Other operating costs 3,389 19 66 66 14 365 3,919 Total expenses 8,181 73 255 102 96 1,116 9,823 Net profit/(loss) before tax 2,452 (33) (112) (99) (90) (344) 1,774 The Detailed Income Statement by cost centre is to be read in conjunction with the disclaimer set out on page 31. 33