Page 209 - Annual Report 2020

20 Leases continued
Right-of-use assets are included within the underlying asset classes in Property, plant and equipment. Refer to note 11 ‘Property, plant and equipment’.
Amounts recorded in the income statement and the cash flow statement for the year were: Strategic Report
2020
US$M Included within
Income statement
Depreciation of right-of-use assets 656 Profit from operations
Short-term, low-value and variable lease costs (1) 675 Profit from operations
Interest on lease liabilities 90 Financial expenses
Cash flow statement
Principal lease payments 671 Cash flows from financing activities
Lease interest payments 90 Cash flows from operating activities Governance at BHP
(1) Relates to US$438 million of variable lease costs, US$211 million of short-term lease costs and US$26 million of low-value lease costs.
Recognition and measurement (following adoption of IFRS 16)
All leases with the exception of short-term (under 12 months) and The lease asset and liability associated with all index-linked freight
low-value leases are recognised on the balance sheet, as a right-of-use contracts, including continuous voyage charters (CVCs), are
asset and a corresponding interest bearing liability. Lease liabilities measured at each reporting date based on the prevailing freight
are initially measured at the present value of the future lease index (generally the Baltic C5 index).
payments from the lease commencement date and are subsequently Lease costs are recognised in the income statement over the lease
adjusted to reflect the interest on lease liabilities, lease payments term in the form of depreciation on the right-of-use asset and finance
and any remeasurements due to, for example, lease modifications charges representing the unwind of the discount on the lease liability,
or a change to future lease payments linked to an index or rate. Lease replacing certain operating lease expenses previously reported Remuneration Report
payments are discounted using the interest rate implicit in the lease, under IAS 17.
where this is readily determinable. Where the implicit interest rate is
not readily determinable, the interest payments are discounted at Where the Group is the operator of an unincorporated joint operation
the Group’s incremental borrowing rate, adjusted to reflect factors and all investors are parties to a lease, the Group recognises its
specific to the lease, including where relevant the currency, tenor proportionate share of the lease liability and associated right-of-use
and location of the lease. asset. In the event the Group is the sole signatory to a lease, and
Low-value and short-term leases continue to be expensed to the therefore has the sole legal obligation to make lease payments, the
lease liability is recognised in full. Where the associated right-of-use
income statement. Variable lease payments not dependent on an asset is sub-leased (under a finance sub-lease) to a joint operation,
index or rate are excluded from lease liabilities, and expensed to the for instance where it is dedicated to a single operation and the joint
income statement. operation has the right to direct the use of the asset, the Group Directors’ Report
Right-of-use assets are measured at cost, less any accumulated recognises its proportionate share of the right-of-use asset and
depreciation and impairment losses, and adjusted for any a net investment in the lease, representing amounts to be recovered
remeasurement of lease liabilities. The cost will initially correspond from the other parties to the joint operation. If the Group is not party
to the lease liability, adjusted for initial direct costs, lease payments to the lease contract but sub-leases the associated right-of-use asset,
made prior to lease commencement, capitalised provisions for it recognises its proportionate share of the right-of-use asset and
closure and rehabilitation and any lease incentives. a lease liability which is payable to the operator.

5
Key judgements and estimates
Judgements: Certain contractual arrangements not in the Estimates: Where the Group cannot readily determine the
form of a lease require the Group to apply significant judgement interest rate implicit in the lease, estimation is involved in the
in evaluating whether the Group controls the right to direct determination of the weighted average incremental borrowing
the use of assets and therefore whether the contract contains rate to measure lease liabilities. The incremental borrowing rate
a lease. Management considers all facts and circumstances in reflects the rates of interest a lessee would have to pay to borrow Financial Statements
determining whether the Group or the supplier has the rights over a similar term, with similar security, the funds necessary to
to direct how, and for what purpose, the underlying assets obtain an asset of similar value to the right-of-use asset in a similar
are used in certain mining contacts and other arrangements, economic environment. Under the Group’s portfolio approach
including outsourcing arrangements, shipping arrangements to debt management, the Group does not specifically borrow
and power purchase agreements. Judgement is used to assess for asset purchases. Therefore, the incremental borrowing rate
which decision-making rights mostly affect the benefits of use is estimated with reference to the Group’s corporate borrowing
of the assets for each arrangement. portfolio, adjusted to reflect the terms and conditions of the
In addition to containing a lease, the Group’s contractual lease (including the impact of currency, credit rating of subsidiary Additional information
entering into the lease and the term of the lease), at the inception
arrangements may include non-lease components. For example, of the lease arrangement or the time of lease modification.
certain mining services arrangements involve the provision of
additional services, including maintenance, drilling activities and The Group estimates stand-alone prices, where such prices
the supply of personnel. The Group has elected to separate these are not readily observable, in order to allocate the contractual
non-lease components from the lease components in measuring payments between lease and non-lease components.
lease liabilities. Judgement is required to identify the lease and
non-lease components. Shareholder information

BHP Annual Report 2020 207