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

Ferrovial S.A.  – Annual report – 31 December 2017

Industry: construction, transport

1.3.3.4 Revenue recognition

As indicated in Note 1.3.1 on the first-time application of IFRS 15, the Company changed its revenue recognition policies to adapt them to the provisions of this standard, which was applied early effective 1 January 2017. In order to ensure a uniform application across the various business areas, Ferrovial has developed a common policy. Set forth below are specific details of the methods applied as part of this policy, which affect mainly the Construction and Services businesses. Certain specific aspects affecting revenue recognition in each of the Group’s business segments are summarised in the last section.

i) General revenue recognition criterion

The first step for revenue recognition purposes is to identify the contracts and the performance obligations contained therein. The number of performance obligations that a contract has will depend on the type of contract and the activity, as indicated in reference to each of the Group’s business segments.

In general, the performance obligations in the Construction and Services businesses that Ferrovial engages in are satisfied over time and not at a specific point in time, since the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the service is performed.

With respect to the method for recognising revenue over time (i.e. the method for measuring progress towards complete satisfaction of a performance obligation), Ferrovial has established certain criteria that are applied consistently for similar performance obligations.

In this regard, the method chosen by the Group to measure the value of goods or services for which control is transferred to the customer over time is the output method; this method is applied provided that the progress of the work performed can be measured on the basis of the contract and during its performance.

In contracts to provide different highly interrelated goods or services in order to produce a combined output, which is habitually the case in contracts with a construction activity, the applicable output method is that of surveys of performance completed to date (or measured unit of work), according to which revenue is recognised corresponding to the units of work performed and on the basis of the price allocated thereto. Under this method, on a regular basis, the units of work completed under each contract are measured and the corresponding output is recognised as revenue. Costs of work or services projects performed are recognised on an accrual basis, and the costs actually incurred in completing the units performed are recognised as an expense, together with those which, even though they are expected to be incurred in the future, have to be allocated to the units of work completed to date.

Also, 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 recognise revenue is the time elapsed output method. Under this method, revenue is recognised on a straight-line basis over the term of the contract and costs are recognised on an accrual basis.

Lastly, 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 of the stage of completion measured in terms of the costs incurred (input method) is permitted. Under this method, the entity recognises revenue based on the proportion that costs incurred to date bear to the total costs expected to be incurred to complete the work, taking into account the expected margins of the whole project per the latest updated budget. This method involves measuring the proportion of the costs incurred in the work completed to date to the total costs envisaged, and recognising revenue in proportion to total expected revenue. Under this method, the proportion that contract costs incurred bear to the estimated total contract costs is used to determine the revenue to be recognised, by reference to the estimated margin for the entire term of the contract. As indicated above, this method is only applied to complex construction or service contracts with a fixed price (“lump sum”) in which it is not possible to break down the units produced and measure them.

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

Contract modifications are defined as changes in the scope of the work, other than changes envisaged in the original contract, that may result in a change in the revenue associated with that contract. Modifications to the initial contract require the customer’s technical and financial approval before billings can be issued and the amounts relating to the additional work can be collected. The Group does not recognise the revenue from such additional work until the customer’s approval has been obtained. In cases where the additional work has been approved but the corresponding change in price has not been determined, the requirement described below for variable consideration is applied: namely, to recognise revenue for an amount with respect to which it is highly probable that a significant reversal will not occur. The costs associated with these additional units or services performed are recognised when incurred, irrespective of whether or not the modification has been approved.

A claim is a request for payment or compensation from the customer (for example, for compensation, reimbursement of costs, or a legally compulsory inflation review) that is made directly to the customer. The method followed by the Group with respect to claims is to apply the method described above for modifications, when the claims are not covered by the contract, or the method used for variable consideration, when the claims are covered by the contract but need to be quantified.

A dispute is the result of a disconformity or rejection following a claim made to the customer under the contract, the resolution of which is dependent on a procedure conducted directly with the customer or a court or arbitration proceeding. Per the criteria followed by the Group, revenue relating to disputes in which the enforceability of the amount claimed is questioned is not recognised, and previously recognised revenue is derecognised, since the dispute demonstrates the absence of the customer’s approval of the work completed. If the customer only questions the price, revenue recognition is based on the criterion applied in cases of variable consideration discussed below.

Only in those cases in which there is a legal report confirming that the rights under dispute are clearly due and enforceable and that, therefore, at least the costs directly associated with the related service will be recovered, may revenue be recognised up to the limit of the amount of the costs incurred.

iii) Variable consideration

If the consideration promised in a contract includes a variable amount, this amount is recognised only to the extent that it is highly probable that a significant reversal in the amount recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

iv) Statement of financial position balances relating to revenue recognition

Amounts to be billed for work performed/amounts billed in advance for construction work

Unlike the method used to recognise contract revenue, 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, which takes the form of a contractual document called “certificate of completion” or “work order”. Thus, the amounts recognised as revenue for a given year do not necessarily coincide with the amounts billed to or certified by the customer. In the case of contracts in which the goods or services transferred to the customer exceed the related amount billed or certified, the difference is recognised (as a contract asset) in an asset account called “Amounts to be Billed for Work Performed” under “Trade Receivables for Sales and Services”, whereas in contracts in which the goods or services transferred are lower than the amount billed to or certified by the customer, the difference is recognised (as a contract liability) in a liability account called “Amounts Billed in Advance for Construction Work” under “Current Trade and Other Payables”.

Bid costs and mobilisation costs

In addition to the aforementioned statement of financial position balances, the Group also recognises assets relating to the costs of obtaining a contract (bid costs) and to the costs incurred to fulfil a contract or setup costs (mobilisation costs) that are directly related to the principal contract, provided they will be recovered through performance of the contract. These balances are presented in a separate account under “inventories” on the asset side of the consolidated statement of financial position (see Note 4.1).

Bid costs are only capitalised when they are directly related to a contract and it is probable that they will be recovered in the future and the contract has been awarded to the company or the company has been selected as the preferred bidder. Costs incurred that would have been incurred regardless of whether the contract was obtained are recognised as an expense, unless those costs are explicitly chargeable to the customer in any case (whether or not the contract is obtained). The capitalised costs are amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.

Costs required to set up the contract, mobilisation costs, are capitalised provided that it is probable that they will be recovered in the future and that they do not include expenses that would normally have been incurred by the company if the contract had not been obtained. They are gradually recognised as an expense on the basis of the proportion of actual output to estimated output under each contract. If the above conditions are not met, these costs are taken directly to profit or loss.

v) Provisions relating to contracts with customers

The main provisions relating to contracts with customers are provisions for deferred expenses and for budgeted losses

  • Provisions for deferred expenses. These provisions cover the expenses that will foreseeably arise on completion of a contract, such as those for the removal of construction machinery or dismantling costs, as well as the estimated repairs to be carried out within the guarantee period. These provisions relate to a present obligation stipulated in the contract that is based on the fact that in order to settle the obligation there will probably be an outflow of resources from the company the amount of which can be estimated reliably. Provisions are recognised on the basis of the best possible estimates of the total expenditure required to settle the obligations. They can be determined as a percentage of the total expected revenue from the contract if historical information on similar contracts is available.

The guarantee obligations included in this type of provisions are not considered to be a separate performance obligation unless the customer has the option of arranging the guarantee separately, and, accordingly, they are recognised as indicated in IAS 37 on provisions and contingent assets and liabilities.

  • Provisions for budgeted losses. These provisions are recognised as soon as it becomes evident that the total costs expected to be incurred in a contract exceed the total expected revenue from that contract. For the purpose of determining , if appropriate, the amount of the related provision, the criterion established in IAS 37.14 (b) is applied. Thus, the estimate of the total budget for the contract includes the expected revenue that is considered to be probable. This criterion is different from that established in IFRS 15, discussed above in Note 1.3.3.4, Revenue recognition, on the basis of which such revenue is only recognised to the extent that it is deemed to be highly probable. Also, if the total expected profit on a contract is less than that recognised under the aforementioned revenue recognition rules, the difference is recognised as a provision for losses.

vi) Financing component

In general, in order to calculate the price of a performance obligation, an implicit financing component is calculated, in those cases in which the period between when the entity transfers a promised good or service to a customer and when the customer will foreseeably pay for that good or service is more than one year. This component is accounted for as finance income.

With respect to performance obligations for which the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service is less than one year, the Group applies the practical expedient permitted by IFRS 15 and does not adjust the promised amount of consideration for the effects of a significant financing component.

In those cases in which there is a contractual or legal right to charge late-payment interest owing to the delay in collection with respect to the contractually established periods, such interest is only recognised when it is highly probable that it will actually be collected.

vii) Specific revenue recognition criteria by segment

Construction business

As a general rule, a single performance obligation is identified for construction contracts owing to the high degree of integration and customisation of the various goods and services to provide a combined output that is transferred to the customer over time.

As discussed above, the Group has chosen as its preference the measured unit of work method (output method), which is applied provided that the progress of the work completed can be measured during the performance of the contract and that a price can be allocated to each unit of work.

Only in those contracts for which the unitary price of the units to be performed cannot be determined is it permitted to use the input method (stage of completion measured in terms of costs incurred).

Services business

There is no single contract type in the case of the Services business due to the considerable diversity of the services rendered. In general, the contracts involve various tasks and unit prices and the related revenue is recognised in the consolidated statement of profit or loss as the services are provided, based on the time elapsed, i.e. when the customer simultaneously receives and consumes the benefits provided by the entity’s performance of the service as the entity performs. This occurs for example in routine or recurring services such as facility management, street cleaning or waste collection services.

Certain contracts include different types of activities that are subject to fixed unit price tables for the services provided and which form part of the contract as a whole. In such contracts the customer requests each of the services by means of a work order, which is considered to be a separate performance obligation, and the associated revenue is recognised depending on the specific requirements established in the contract for the approval of the service.

In the case of complex long-term contracts involving the provision of several services that constitute separate performance obligations (construction, maintenance, operation, etc.), payment for which is made on a periodic basis and in which the price for those performance obligations is indicated in the contract or can be determined, revenue is recognised using the time elapsed method for the recurring services, whereas the stage of completion method is used for those more complex performance obligations for which it is not possible to allocate a price to each of the units of work performed.

Lastly, it should be noted that the revenue from certain contracts that fall within the scope of IFRIC 12 is recognised as described in Note 1.3.3.2.

Toll Road business

The arrangements included in this line of business are accounted for in accordance with IFRIC 12, which provides for the classification of the assets assigned to such arrangements on the basis of the intangible asset model and the financial asset model (bifurcated arrangements can also exist) (see Note 1.3.3.2).

The new IFRS 15, Revenue from Contracts with Customers does not give rise to a change with respect to the revenue recognition method used to date. 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 recognised 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 those cases in which a stand-alone selling price is not directly observable, it is estimated on the basis of the best possible estimate, using the expected margin for that activity.

Airports business

In general, the services provided in this business are short-term services to customers (airline or airport users) for which regulated revenue is recognised at a point in time; therefore, there are no changes with respect to revenue recognition for this business. It should be noted that the revenue from certain contracts that fall within the scope of IFRIC 12 is recognised as described in Note 1.3.3.2.

Real estate business

The revenue from this business relates mainly to the sale of apartments, commercial premises and garage spaces, and is recognised when the buyer receives legal title to, and takes physical possession of, the asset. Each unit (apartment, etc.) is considered to be a separate performance obligation and the related revenue is recognised when the asset is legally and economically transferred to the buyer; this does not constitute any change in the revenue recognition method currently applied.

Energy distribution business

The contracts in this business involve a series of services that are substantially the same and have the same pattern of transfer to the customer. The monthly rate reflects the value of the services provided. Contracts of this kind have a single performance obligation that is satisfied over time and the related revenue is recognised by applying the output method.

1.3.4. Accounting estimates and judgements (extract)

i) Estimates taken into consideration for the purpose of recognising revenue from contracts with customers (see Note 1.3.3.4), including most notably those associated with:

  • determining whether enforceable rights exist, in order to recognise revenue;
  • determining whether a contract modification has been approved;
  • establishing whether the conditions for recognising revenue for variable consideration are met;
  • recognising revenue in relation to a claim or a dispute;
  • establishing whether the contract includes one or several performance obligations, and determining the price allocable to each of them;
  • defining for each performance obligation the applicable method for recognising revenue over time, taking into account that, based on the accounting policy established by the Company, the preferred method is the “survey of performance completed to date” output method (schedule of values or based on time elapsed), and the stage of completion measured in terms of the costs incurred input model is applied in those cases in which the services provided are not routine and recurring services and in which the unit price of the units of work to be performed cannot be determined;
  • in the case of contracts recognised using the survey of performance completed to date method, measuring the units completed and the price that can be allocated thereto;
  • in the case of contracts recognised using the “percentage of completion” input       method, defining the costs incurred relative to total contract costs, and the expected profit margin for the contract;
  • determining whether to capitalise bid costs and mobilisation costs;
  • making estimates relating to the calculation of the provision for expected losses and deferred expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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