IFRS 15, policies, judgements and estimates, claims, modifications, bid costs, construction and services contracts

Ferrovial S.A.  – Annual report – 31 December 2021

Industry: construction, transport Revenue recognition

In order to ensure that policy is standardized across all its different lines of business, Ferrovial has prepared a common revenue recognition policy adapted to IFRS 15 “revenue from contracts with customers”.

i) General revenue recognition criteria

The first step in the revenue recognition process involves identifying the relevant contracts and the performance obligations that they contain.

Generally speaking, the performance obligations in the Construction and Services activities carried out by Ferrovial are met over time, rather than at a specific moment, since the customer simultaneously receives and consumes the benefits offered by the company’s performance as the service is provided.

As regards the criterion for recognizing revenues over time (the method of measuring the progress of performance of an obligation), Ferrovial has established certain criteria that are consistently applied in respect of similar performance obligations.

In this regard, the Group has chosen the output method as its preferred method for measuring the value of assets or services for which control is transferred to the customer over time, which is applied whenever the progress of the work performed can be measured on the basis and over the course of the contract.

In contracts for the provision of different, highly interrelated goods or services required to produce a combined output, which often occurs in contracts for construction activities, the applicable output method is that of measurement of units produced (“surveys of performance” under “output methods”), in which the revenue recognized relates to the work units completed, based on the price assigned to each unit. In accordance with this method, the units produced under each contract are measured and the output for the month is recognized as revenue. The costs of carrying out works or service projects are recognized on an accrued basis, and the costs actually incurred in producing the units of output are recognized as an expense together with those which, because they might be incurred in the future, have to be allocated to the units produced to date (see Note v) relating to provisions for deferred expenses).

In routine or recurring service contracts (in which the services are substantially the same), such as maintenance and cleaning services, which are transferred with the same pattern of consumption over time and whose remuneration consists of a recurring fixed amount over the term of the contract (e.g. monthly or annual payment), in such a way that the customer receives and consumes the benefits of the services as the entity provides them, the method selected by the Group to recognize revenue is the “time elapsed output method”. Under this method, revenue is recognized on a straight-line basis over the term of the contract and costs are recognized on an accrual basis.

Only in those contracts that are not for routine or recurring services and for which the unitary price of the units to be performed cannot be determined, use of the stage of completion measured in terms of the “costs incurred” (input method) is permitted. Under this method, the company recognizes revenues based on the costs as they accrue, as a percentage of the total costs forecast for completion of the works, taking account of the expected profit margins for the whole project, according to the most recently updated budget. This method entails measuring the costs incurred as a result of the work completed to date as a proportion of the total costs forecast and recognizing revenues in proportion to the total revenues expected. As indicated above, this method only applies to those complex, lump-sum construction or services contracts in which it is not possible to break down the price and measure the units to complete.

Finally, as regards determining whether the company acts as a principal or agent, Ferrovial is the principal in both construction and service contracts if it provides goods and services directly to the customer and transfers control of them without involving intermediaries.

In the case of concession agreements in which Ferrovial both builds and operates the toll road, the construction company is the principal if it is ultimately responsible for fulfilling the commitment to execute the work in accordance with the concession agreement specifications and assumes the contractual obligations in the event of a claim or delay.

ii) Recognition of revenue from contract modifications, claims and disputes

Modifications are understood to mean changes to the scope of the work that are not provided for in the original contract and that could result in a change to the revenues attached to the contract in question. Changes to the initial contract require the customer’s technical and financial approval prior to the issue of billings and collection of the amounts relating to additional work.

The criterion applied by the Group is not to recognize any revenue from this additional work until the additional work has been approved by the client. In cases where the work has been approved but its measurement remains pending, the “variable consideration” requirement (as explained below) will apply. This entails recognizing revenue in an amount that will be most likely not to suffer any significant reversal. Any costs associated with the units completed or services rendered will be recognized at the time at which they are incurred, regardless of whether or not the modification has been approved.

A claim is a request seeking payment or compensation from the customer (for example, cases involving compensation, reimbursement of costs, legally mandatory inflation-linked review), subject to the submission of a direct application to the customer. The criterion followed by the Group with regard to claims is to apply the method mentioned above in relation to changes, when such claims are not covered by the contract, or to apply the variable consideration method, when they are covered by the contract but need to be quantified. A dispute is the result of an incident of noncompliance or rejection after a claim has been made to the customer under the terms of the contract, the result of which is pending in a procedure being pursued directly with the customer or in court or arbitration proceedings. In line with the criteria followed by the Group, in the event that the revenues relating to a dispute in which the enforceability of the amount being claimed are in doubt, these revenues will not be recognized and any recognized earlier will be cancelled, since the dispute shows that the customer has not given its approval for the completed work.

In the event that the customer questions the value of the work completed revenues will be recognized on the basis of the criteria applied in cases of “variable consideration”, as explained below.

Only in cases in which a legal report confirms that the rights forming the subject of the dispute are clearly enforceable and, therefore, at least the costs directly associated with the service relating to the dispute are recoverable, revenues may be recognized up to the maximum amount of the costs incurred.

(iii) Determination of the transaction price

The purpose of the entity is to allocate the price to each performance obligation (or distinct good/service) for an amount that represents the consideration to which the entity expects to be entitled in exchange for the transfer of goods or services committed to the customer.

In order to fulfil the allocation purpose, the transaction price of each performance obligation identified in the contract is allocated as a selling price that is separate in relative terms.

The best evidence of a separate selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers.

Variable consideration

If the consideration promised in a contract includes a variable amount, this amount is recognized only to the extent that it is highly probable that a significant reversal in the amount recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For example, it is stipulated that a bonus may only be recognized once a high percentage of completion of the contract has been reached.

Financing component

Generally speaking, in order to calculate the price of a performance obligation, an implicit financing component is calculated, in cases in which between the date on which the goods or services are delivered and the date on which the customer is expected to pay for the goods or services is greater than a year. This component is treated as financial income.

Where a performance obligation involves a period of less than one year between the date on which the company transfers goods that have been promised to the customer and the date on which the customer pays, the practical solution permitted under the regulations is applied to avoid adjusting the financial amount of the consideration.

In cases in which there is a contractual or legal right to charge late payment interest for a payment that is delayed with regard to the contractually agreed terms, this late payment interest is only recognized when it is highly probable that it will be effectively paid.

iv) Balance sheet items related to revenue recognition

Works completed pending certification/work certified in advance

Unlike revenue recognition, the amounts billed to the customer are based on achievement of the various milestones established in the contract and on acknowledgement thereof by the customer, through a contractual document referred to as a progress billing certificate. Thus, the amounts recognized as revenue for a given year do not necessarily coincide with the amounts billed to or certified by the customer.

In contracts in which the revenues recognized exceed the amount billed or certified, the difference is recognized in an asset account “Work completed pending certification” (since it is an asset under the contract) under “Trade receivables for sales and services”, while in contracts in which the revenues recognized are lower than the amount billed or certified, the difference is recognized in a liability account “Work certified in advance” (since it is a liability under the contract) under “Short-term trade and other payables”.

Bidding and mobilization costs

In addition to the balance sheet entries described above, the Group also recognizes assets connected with the cost of obtaining contracts (bidding costs) and the costs incurred in order to comply with contracts, or the start-up costs (mobilization costs) that relate directly to the main contract, provided that they are recoverable during the performance of the contract. These amounts are included in a different account on the assets side of the balance sheet, under “inventories” (Note 4.1).

Bidding costs are only capitalized when they are directly related to a contract, it is probable that they will be recovered in the future, and either the contract has been awarded or the company has been selected as preferred bidder.

The costs incurred, regardless of whether or not the contract is won, are recognized as an expense, unless they are explicitly recoverable from the customer in any case (whether or not the contract is won). They are amortized systematically as the goods and services connected with the asset are transferred to the customer.

Any costs that are necessary in order to implement a contract, mobilization costs, are capitalized whenever it is probable that they will be recoverable in the future and when they do not include costs that would normally be generated for the company if the contract had not been won. They are gradually recognized as an expense on the basis of the proportion of actual output to estimated output under each contract. Otherwise, the expenses are entered directly to profit or loss.

v) Provisions from customer contracts

The main provisions relating to customer contracts are provisions for deferred expenses and for budgeted losses.

  • Provisions for deferred expenses. These cover expenses that are expected to be generated at the end of a contract, such as the removal of construction machinery or dismantling costs, together with estimates of the repairs that will be required during the warranty period. These provisions are connected with an existing obligation set out in the contract, on the basis that the company will probably allocate resources to complying with the obligation, the amount of which can be reliably estimated. The provisions are allocated on the basis of the best possible estimates of total costs. They may be calculated as a percentage of the total revenues expected from the contract, if there is historical information from similar contracts.

As regards the warranty obligations included in this type of provision, these will not be treated as a separate performance obligation, unless the customer has the option of engaging the warranty separately, meaning that the obligation will be entered in accordance with IAS 37 on provisions.

  • Provisions for budgeted losses. These provisions are recognized as soon as it becomes obvious that the total costs expected to be incurred in a contract exceed total expected revenues. For the purposes of calculating this provision, where necessary, the criteria set out in paragraph 14 (b) of IAS 37 are applied. In this way, the estimate of the total contract budget will include the forecast revenues that are considered probable.

These criteria are different from those set out in IFRS 15, mentioned above in Note “revenue recognition”, under which the revenues are only recognized when considered highly probable.

Likewise, in the event that the total profit expected from a contract is lower than the amount recognized according to the rules set out above for revenue recognition, the difference is entered as a provision for negative margins.

vi) Specific criteria for revenue recognition by segment

Construction business

For construction contracts, as a general rule, single performance obligation will be identified owing to the high degree of integration and customization of the various goods and services to provide a combined output that is transferred to the customer over time.

As mentioned above, the Group has chosen the “measured work unit” (“output method”) as its preferred method. This is applied whenever the progress of the work can be measured as it is being carried out, and a price has been allocated to each work unit.

It is only with regard to contracts in which it is not possible to determine a unit price for the units to be completed that the input method known as “measure of progress based on costs incurred” may be applied.

Services business

In the case of the Services business, there is no single type of contract, given the wide diversity of services offered. In general, contracts include a range of different tasks and unit prices, in which revenues are taken to the income statement when the services are provided, based on time elapsed, i.e. when the customer simultaneously receives and consumes the benefits provided by the performance of the service as it is being provided. This happens, for example, with recurring or routine services such as facility management, street cleaning or waste collection services.

Certain contracts include different types of activities, subject to a scale of fixed unit tariffs for the provision of the services that are provided and that form part of the contract as a whole. In these contracts, the customer requests each service by submitting work orders, which are classified as independent performance obligations, and any associated revenues will be recognized on the basis of the specific requirements set out for approval in each contract.

In the case of complex, long-term contracts that include the provision of various services involving different performance obligations (construction, maintenance, operation, etc.), payment of which is made regularly and for which the price relating to the obligations in question is indicated in the contract or can be calculated, revenues are recognized for the recurring services on an elapsed time basis, using the progress achieved criterion for the more complex performance obligations in which it is not possible to allocate a price to each of the units completed.

Lastly, it should be noted that the revenue from certain contracts that fall within the scope of IFRIC 12 is recognized as described in Note

Toll roads business

The contracts included in this line of business are accounted for in accordance with IFRIC 12, which provides for the classification of the contract assets on the basis of the intangible asset model and the financial asset model (mixed models could also be applied) (Note

In the case of concession arrangements accounted for using the intangible asset model, the customer is the user of the infrastructure and, therefore, each use made of the infrastructure by users is considered a performance obligation, and the related revenue is recognized at a point in time. In the case of concession arrangements accounted for using the financial asset model, in which the customer is the concession grantor, revenue recognition depends on the various services provided (e.g. operation or maintenance), which will be accounted for as different performance obligations, to which market prices have to be allocated. In cases in which an isolated sale price cannot be directly identified, it is estimated on the basis of the best possible estimate, applying the margin expected for this business.

Airports business

Generally speaking, these are short-term services rendered to the customer (airlines or airport users), in which regulated revenues will be recognized at a specific moment. It should be noted that the revenue from certain contracts that fall within the scope of IFRIC 12 is recognized as described in Note

Energy distribution business

These are contracts with a series of services that are substantially the same and are transferred using the same standard model. The monthly tariff reflects the value of the services rendered. This type of contract will only have a performance obligation that is transferred over time, and revenues are recognized using the output method.

1.3.4. Accounting estimates and judgements (extract)

ii. The estimates relating to recognizing revenues from customer contracts (Note, particularly important being those relating to:

  • determining whether there are enforceable rights to recognize revenue;
  • determining whether the modification of a contract has been approved;
  • establishing whether the criteria have been met to recognize revenue as variable consideration;
  • recognizing revenues in relation to an amendment, claim or dispute;
  • establishing whether there are one or more performance obligations and the price to be allocated to each of them;
  • defining the method applicable to each performance obligation in order to recognize revenues on the basis of time, bearing in mind that, according to the accounting policy established by the company, the preferred method is the output method (analysis of work completed), based on either percentage completed or time elapsed, while the input method (measure of progress based on costs) is applied in cases in which the services rendered do not represent recurrent and routine services in which it is not possible to determine the unit price for the units to be completed;
  • in the case of contracts entered under the criterion of examination of work completed, measurement of the units completed and the price to be allocated to them;
  • in the case of contracts entered using the input method (measure of progress based on costs), defining the degree to which costs have been incurred and the margin expected to be obtained from the contract;
  • determining capitalization of bidding and mobilization costs;
  • assessment of whether to act as principal or agent;
  • estimates relating to the calculation of provisions for expected losses and deferred expenses.