Construction contracts disclosures

Construction contracts disclosures provides a start to think of what and how to report construction contracts under IFRS 15. And it is more than before. IFRS 15 includes additional qualitative and quantitative requirements on construction contracts disclosures which were not included within IAS 11.

Many of these disclosure requirements are narrative in nature. IFRS 15 refers to qualitative and quantitative disclosures, and the more significant disclosures introduced include the following.

  • An entity discloses information about its contracts with customers to help users understand the amount, timing and uncertainty of revenue and cash flows from contracts. This includes dis-aggregation of revenue (for example, by geography, market, contract type) to assist users in meeting their objective. In addition, reconciliations between opening and closing contract balances are required in respect of: Construction contracts disclosures
    • contract assets and contract liabilities; Construction contracts disclosures
    • revenue recognised in the reporting period that was included in the contract liability (i.e. billings in advance) balance at the beginning of the period; and
    • revenue recognised in the reporting period from performance obligations satisfied in previous periods.
  • An entity also provides an explanation of the significant changes in the contract asset (i.e. an entity’s right to consideration for assets transferred) and contract liability (i.e. an entity’s obligation to transfer goods or services for which consideration has been received or is receivable) positions during the period.
  • An entity discloses information about its performance obligations in contracts with customers, including a description of:Construction contracts disclosures
    • when the entity typically satisfies performance obligations;
    • significant payment terms;
    • the nature of the goods or services the entity has promised to transfer; Construction contracts disclosures
    • obligations for returns, refunds and other similar obligations; and
    • warranties and related obligations.
  • For contracts expected to be completed after one year from contract inception, the amount of the transaction price allocated to the performance obligations remaining at the end of the reporting period and an explanation of when the entity expects to recognise that amount as revenue.
  • Other disclosures to be included are as follows:
    • description of significant judgements in applying IFRS 15; Construction contracts disclosures
    • description of the methods used to recognise revenue over time and why these methods provide a faithful depiction of the transfer of goods and services;
    • information about the methods, inputs and assumptions used to determine and allocate the transaction price; and
    • description of the judgements made in determining the amount of cost incurred and the method used to determine the amortisation of these assets.

Excerpts from the Notes to the Consolidated Financial Statements 2018 of Royal VolkerWessels

Items from 2.2 Changes in significant accounting policies

The Group has adopted IFRS 15 and IFRS 9 as from 1 January 2018 Construction contracts disclosures

IFRS 15 Revenue from Contracts with Customers Construction contracts disclosures
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. There was no material impact on the Group’s statement of profit and loss, OCI and statement of cash flows for the year ended 31 December 2018.

The Group has adopted IFRS 15 using the modified retrospective method, with the effect of initially applying this standard recognised at the date of initial application (i.e. 1 January 2018). Accordingly, the information presented for FY 2017 has not been restated – i.e. it is presented, as previously reported, under IAS 18, IAS 11 and related interpretations. The details of the significant changes and quantitative impact of the changes are set out below. Construction contracts disclosures

Progress measurement (a, b) Construction contracts disclosures
VolkerWessels excludes certain costs in the measure of progress as these costs do not result in progress in transferring control of goods or services to the customers.

  1. VolkerWessels recognises those costs (e.g. costs for mobilisation and tender costs) as a separate asset if it expects to recover the costs. All costs up to the period in which the preferred bid stage is achieved are therefore recognised to the profit and loss account. This change has a limited impact on Group equity at 1 January 2018;
  2. costs that relate to significant inefficiencies (wasted materials, labour or other resources) have to be excluded from the progress measurement. For projects identified with significant inefficiencies, provisions for losses were already recognised within construction contracts. The proper reclassifications from construction contracts to contract liabilities and/or provisions for onerous contracts have been made. Construction contracts disclosures Construction contracts disclosures

Onerous construction contracts (c) Construction contracts disclosures
IAS 11 contained specific requirements on the costs an entity includes and does not include in identifying, recognising and measuring an onerous construction contract. In contrast, IFRS 15 does not include such requirements. Based on requests for clarification the IFRS Interpretations Committee decided to start a project to clarify the meaning of the term ‘unavoidable costs’ in the IAS 37 definition of an onerous contract. Construction contracts disclosures Construction contracts disclosures

This resulted in an exposure draft of proposed clarifications (ED/2018/2) with a comment period until 15 April 2019. Awaiting this clarification, VolkerWessels has taken the position that the unavoidable costs in measuring onerous construction contracts are in line with the IFRS 15 definition regarding costs to fulfill a contract.

Something else -   Collectability as a criterion to identify a contract with a customer

Presentation of contract assets and contract liabilities, including the provision for onerous contracts (d) VolkerWessels has changed the presentation of certain amounts in the balance sheet to align with the terminology of IFRS 15 and IAS 37: Construction contracts disclosures

  • construction contracts (due from customers, debit balance) are presented as contract asset; Construction contracts disclosures
  • construction contracts (due to customers, credit balance) are presented as contract liabilities; and Construction contracts disclosures
  • provisions for onerous contracts were previously presented as part of the construction contracts position and are now presented separately (in the line item ‘other provisions’).

The following table summarises the impact of adopting IFRS 15 for each individual line item on the Group’s statement of financial position as at 31 December 2018.

Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided. The adjustments are explained in more detail in the accounting principles for revenue recognition as explained in note 6. Construction contracts disclosures

Construction contracts disclosures

6 Revenue Construction contracts disclosures

The Group has recognised the following amounts relating to revenue in the statement of profit or loss: Construction contracts disclosures


6(a) Disaggregation of revenue from contracts with customers Construction contracts disclosures
The Group derives revenue from the transfer of goods and services in the following major activities. The table also includes a reconciliation of the disaggregated revenue with the Group’s six divisions, which are its reportable segments (see note 5). Construction contracts disclosures

Disaggregation of revenue from contracts with customers

6(b) Contract balances Construction contracts disclosures
The Group has recognised the following revenue related (contract) assets and liabilities: Construction contracts disclosures

The contract assets primarily relate to the Group’s rights to consideration for work completed but not billed at the reporting date. The Group receives payments from customers in line with a series of performance – related milestones and will previously have recognised a contract asset for any work performed. Any amount previously recognised as a contract asset is reclassified to trade receivables at the point at which it is invoiced to the customer. Construction contracts disclosures

The contract liabilities primarily arise if a particular milestone payment exceeds the revenue recognised to date under the cost–to–cost method.

There were no significant changes in the composition of the contract balances during the reporting period. Construction contracts disclosures

In 2018 revenue has been recognised for an amount of €420 million which was included in the contract liability at the beginning of the period. Construction contracts disclosures

The amount of revenue recognised in 2018 that related to performance obligations satisfied (or partially satisfied) in previous periods is €19 million. This mainly relates to outstanding variation orders for which agreement has been reached upon in 2018. Construction contracts disclosures

6(c) Transaction price allocated to the remaining performance obligations
The aggregate amount of the transaction price allocated to contracts with customers that are (partially or fully) unsatisfied as at 31 December 2018 is €8.9 billion, being the Group’s order book. Management expects that 56% of the transaction price allocated to the unsatisfied contracts as of 31 December 2018 will be recognised as revenue during the next reporting period (€5.0 billion). The remaining 44% (€3.9 billion) will be recognised merely in the two years thereafter.

6(d) Accounting policies and significant judgements Construction contracts disclosures
The Group recognises revenue from the following major resources:
I construction contracts; Construction contracts disclosures
II property development; Construction contracts disclosures
III service and maintenance; and Construction contracts disclosures
IV goods sold and other service rendered. Construction contracts disclosures

Revenue is measured based on the consideration to which the Group expects to be entitled in a contract with a customer. The Group recognises revenue when it transfers control of a product or service to a customer. Construction contracts disclosures

(I) Construction contracts Construction contracts disclosures
The Group constructs and sells residential properties, non-residential properties and infrastructure projects under long-term construction contracts with customers. Such contracts are entered into before construction begins. Revenue from construction contracts is therefore recognised over time because either: Construction contracts disclosures

  • the Group constructs an asset that the client controls, because it is constructed on the land of the customer; or
  • the Group is contractually restricted from redirecting the properties or infrastructures to another customer and as such does not have an alternative use to the Group and the Group has an enforceable right to payment for work performed to date.

Progress is measured on a cost-to-cost method based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs. The related costs are recognised in the income statement when they are incurred.

For certain contracts, which are still in the planning or design phase, the Group is not able to reasonably measure the outcome of the performance obligation(s).

This might be the case for projects with significant and ongoing design changes, for which the discussion with the customer about the compensation are not yet finalised. If the Group at least expects to recover the costs for the project, the Group recognises revenue in accordance with IFRS 15.45 to the extent of the costs incurred until the Group can reasonably measure the outcome of the performance obligation.

The Group becomes entitled to invoice customers for construction contracts based on achieving a series of performance-related milestones. When a particular milestone is achieved, the customer is sent an invoice for the related milestone payment. The Group accounts for a contract asset for any work performed, for which the Group is not yet entitled to invoice based on the milestones agreed. Any amount previously recognised as a contract asset is reclassified to trade receivables at the point at which it is invoiced to the customer.

Something else -   Construction Variable pricing

If the milestone payment exceeds the revenue recognised based on the progress to date, the Group recognises a contract liability for the difference. Advances received are also included in contract liabilities.

Variations in contract work, claims and incentive payments are included in contract revenue to the extent that it is highly probable that a reversal of revenue that is recognised will not occur when the uncertainty associated with the consideration is subsequently resolved.

In determining the amount to be recognised, the Group considers the contractual agreements and the laws and regulation applicable in the respective country. Construction contracts disclosures

The aforementioned uncertainties are highly influenced by the nature of the contract as well as the stage of the project. Construction contracts disclosures

Depending on the nature of contract, the potential uncertainty varies. In a ‘Design and Construct’ (DC) contract the Group assumes the design risk (as well as construction risk). In a ‘Design, Build, Finance, Maintain’ (DBFM) contract, the Group has an additional responsibility in respect of the financing and maintenance of the project.

In respect of the stage of a project, the Group is exposed to a larger amount of uncertainty for projects, which are still in the design stage, as the design may be subject to substantial changes in the process of transforming a provisional design into a final design. Depending of the entitlement of the Group to compensation for these design changes from the customer, this may result in changes in the estimated result of the project, both upward and downward.

At balance sheet date there is one contract where our share in the joint operation estimated contract revenue is in the range of € 150 to € 200 million for which a dispute on design changes and related negotiations with the client is ongoing. These design changes relate to changes in laws and regulations and a large number of variable considerations assigned by the client and other stakeholders, that are beyond our influence and contractual responsibility.

As the dispute is ongoing, it is impossible to estimate reliably the final scope of the performance obligation. The Group expects to recover the costs incurred in satisfying the performance obligation. The actual outcome can deviate significantly from the current accounting,given the uncertainty of the outcome of these negotiations.

Our business may involve complex and long-term construction projects, including long-term maintenance and operating contracts entered into on a fixed-price or lump-sum basis. To a large extent, the Group’s profitability depends on costs being accurately calculated and controlled, besides other factors such as the scope of the project being correctly determined during the tender and execution phases, and on projects being completed on time and not subject to any early termination.

The cost calculations made at the project portfolio-level are subject to a number of assumptions.

Therefore, if the estimate of the overall risks or calculations of the revenues or costs of one or more contracts prove inaccurate or circumstances change, lower profits may be achieved from, or greater losses may be incurred on such contracts than had been anticipated.

The Group has adopted a tailored process to contracting and risk management depending on the size and complexity of the project, and has an extensive tender procedure to ensure proper decisions are taken on selecting projects and risk management.

Additionally, the Group involves senior management, specialised contract managers, and specialised lawyers in the tendering phase to limit such risks. Clear project specifications, properly recorded agreements, (technical) project reviews and complete cost budgets, as well as legal assessment of contracts, contribute towards a reduction in contract risks.

Most of the contracts in the Group’s project portfolio are subject to specific completion schedule requirements. Failure to comply with such schedule requirements could result in the occurrence of penalties or deductions. In addition, errors in designs and/or calculations and failure to hedge all risks contractually can have a negative impact on the execution phase of a project. Moreover, any additions to the original scope of work from clients may require the Group to fund the costs until the scope is approved thus, engaging our working capital on a temporary basis.

The Group limits such risks by employing a project acquisition process that involves validation of the project price calculation and risk assessment. Further, the Group engages project teams on larger projects to focus in particular on quality, timely delivery, cost efficiency and reduction of failure costs. In addition, the Group has an increased focus on reporting risks and scope on projects, including the accuracy of cost and cash forecasting.

For the accounting policy for onerous contracts, see note 4 and 2.2.

The Group did not identify significant financing component in its construction contracts with customers.

(II) Property development
The Group develops and sells residential properties. Revenue is recognised when control over the property has been transferred to the customer. An enforceable right to payment does not arise until legal title has passed to the customer. Therefore, revenue is recognised at a point in time when the legal title has passed to the customer. The revenue is measured at the transaction price agreed under the contract. In most cases, the consideration is due when legal title has been transferred.

Something else -   Construction contract - How 2 best account for it in IFRS 15

If the customer is able to specify major structural elements of the design of property development before construction begins and/ or specify major structural changes once construction is in progress, revenue is recognised over time in accordance with the terms and the milestones set out in the contract.

In the Netherlands there are certain property development project in which land has been legally transferred to the customer. The performance of the Group therefore creates an asset that the customer controls and revenue is recognised over time in accordance with the terms and milestones set out in the contract.

Management considers that the aforementioned output methods are an appropriate measure of the progress towards complete satisfaction of the performance obligations under IFRS 15.

(III) Service and maintenance
Revenue in connection with service and maintenance comprises construction and/or upgrade activities as well as operating, maintenance and exploitation activities. Revenue from providing services and maintenance is recognised in the accounting period in which the services are rendered.

In case of fixed-price contracts, the customer pays the fixed amount based on a payment schedule. If the services rendered by the Group exceed the payment, a contract asset is recognised. If the payments exceed the services rendered, a contract liability is recognised. Advances received are also included in contract liabilities.

Customers are invoiced based on the terms and milestones as set out in the contracts with the customers and the consideration is payable when invoiced.

(IV) Goods sold and other services rendered
Revenue from the sale of goods is recognised when control of the goods has transferred to the customer, being the moment of delivery. A receivable is recognised by the Group when the goods are delivered to the customer as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required before payment is due.

Revenues generated through services rendered are recognised over time in line with the accounting principles as explained by (III) Service and maintenance.

34 Other provisions

Provisions for onerous contracts

The provision for onerous contracts mainly relates to construction contracts for which it is probable that the estimated costs to complete the project will exceed the estimated consideration to be received for completing the project. The amount of the provision is based on the total amount of the estimated project loss, less the loss recognised to date, based on the progress of the project.

The purpose of the provision for guarantees is to cover potential liabilities in respect of completed works within the guarantee periods.

The restructuring provision relates to expenditure in respect of changes to the operational structure that are deemed necessary in order to continue to respond to changing market demands.

A provision for restructuring is recognised only when the Group has approved a detailed and formal restructuring plan and the restructuring has commenced or been publicly announced.

The provision for environmental and remediation costs is meant to cover potential expenditure on environmental modifications.

The provisions for other risks are varied and are meant to cover potential liabilities arising from claims, legal cases, additional disability and sickness benefits, and old competition fines, etc.

The non-current part of the provisions has been discounted at a rate of 2% (2017: 2%).

Off-balance sheet assets and liabilities

In previous years the Group selectively sold residential property at a discount, sharing in any gain on resale. As the size and timing of the future gains on resale are uncertain, the respective entitlement qualifies as a contingent asset. Any future gains are recognised at the time of resale.

The Group has contingent assets in respect of current proceedings and disputes with clients. It is impossible to determine with sufficient certainty the amount and the timing of receipt of any economic benefits. Accordingly, these contingent assets are not recognised.

In the normal course of business the Group is involved in disputes, arbitrations and legal procedures. This can relate to contracts with customers on topics such as claims, design changes, variation orders, project delays and other variations, throughout the various stages of such contracts. But also in relation to discussions with governmental bodies or taxing authorities.

Some connections to disclosures – points of interest

Construction is the process of constructing a building or infrastructure. Construction differs from manufacturing in that manufacturing typically involves mass production of similar items without a designated purchaser, while construction typically takes place on location for a known client. Construction as an industry comprises six to nine percent of the gross domestic product of developed countries. Construction starts with planning, design, and financing; it continues until the project is built and ready for use.

Large-scale construction requires collaboration across multiple disciplines. A project manager normally manages the budget on the job, and a construction managerdesign engineerconstruction engineer or architect supervises it. Those involved with the design and execution must consider zoning requirements, environmental impact of the job, schedulingbudgetingconstruction-site safety, availability and transportation of building materials, logistics, inconvenience to the public caused by construction delays and bidding. Large construction projects are sometimes referred to as megaprojects.

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Construction contracts disclosures

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