Ferrovial S.A. – Annual report – 31 December 2022
Industry: construction, transport
1.3.3.4 Revenue recognition
Ferrovial has a common revenue recognition policy adapted to IFRS 15 “Revenue from contracts with customers” so as to ensure a consistent approach across all lines of business.
i) General revenue recognition approach
The first step in the revenue recognition process involves identifying the relevant contracts and the performance obligations that they contain.
In general, performance obligations in Construction activities carried out by Ferrovial are satisfied over time rather than at a point in time, since the customer simultaneously receives and consumes the benefits of the company’s work as the service is provided.
As regards the approach to recognizing revenue over time (a way of measuring the progress of a performance obligation), Ferrovial has established certain criteria that are applied consistently to similar performance obligations.
In this regard, the Group has chosen the output method as its preferred approach when measuring goods and services the control of which is transferred to the customer over time. This approach is applied whenever percentage of completion can be measured during the performance of the contract.
In contracts for goods and services that are different but closely interrelated when making a combined product, which often occurs under construction contracts, the applicable output method consists of measuring the work carried out or surveying performance completed to date, in which the revenue recognized reflects the work units executed and the unit price. Under this method, the units completed under each contract are measured and the relevant output is recognized as revenue.
Costs of works or services are recognized on an accrual basis, expensing amounts actually incurred to execute units and forecast future costs that must be allocated to the units completed to date (Note 1.3.3.4.IV on provisions for deferred expenses).
For recurring and routine services (involving substantially the same services) such as maintenance, showing the same pattern over time and remuneration consisting of a recurring fixed amount over the contract term (e.g., monthly or annual payments), such that the customer benefits from the services as they are provided, the Group opted for the time elapsed output method to recognize revenue. 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.
The costs-incurred input method may only be applied to contracts that are not for recurring and routine services and for which the unit price of the units to be executed cannot be determined. Under this method, the company recognizes revenue based on costs incurred as a percentage of the total costs forecast to complete the work, taking account of the expected profit margins for the whole project, based on 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 them as revenue in proportion to the total revenues expected.
As indicated above, this method only applies to complex, lump-sum construction or service contracts in which it is not possible to break down the price and the measurement of units to be completed.
Finally, as regards determining whether the company acts as a principal or agent in relation to its contractual performance obligations, 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 infrastructure, the construction company is the principal if it is ultimately responsible for fulfilling the contractual obligation to execute the work in accordance with the concession agreement specifications and therefore assumes the consequences in the event of a claim or delay. Revenues and results of those construction services are therefore recognized by the Construction Division. Conversely, the concession company acts as an agent in connection with the construction performance obligation and does not therefore recognize revenues or results in this regard.
ii) Recognition of revenue from contract modifications, claims and disputes
Modifications are understood to mean changes to the scope of the work provided for in the original contract and that could result in a change to the revenues under the contract in question. Changes to the initial contract require the customer’s technical and financial approval prior to progress billing and collection of amounts for the additional work.
The Group generally does not recognize any revenue from such additional work until it has been approved by the customer. When the work has been approved but has yet to be valued, the “variable consideration” requirement (as explained below) will apply. This entails recognizing revenue in an amount that is highly unlikely to be reversed.
Any costs associated with the units completed or services rendered will be recognized when they are incurred, regardless of whether or not the modification has been approved.
A claim is a request for payment or compensation to the customer (e.g., compensation events, reimbursement of costs, legally mandated inflation adjustment) subject to an application procedure directly to the customer. The general criterion followed by the Group is not to recognize revenue until the request has been approved by the customer. In the event that the work is approved but the valuation is pending, the requirement mentioned below for the case of “variable consideration” in accordance with IFRS 15 is applied, recording the amount for which it is highly probable that there will not be a significant reversal. This treatment is also applied in exceptional cases where no approval has been received from the customer, recording revenue provided there is a legal report justifying that the disputed rights are clearly enforceable, as well as a technical report supporting the technical basis of the request or claim in question and approval from the Division’s CFO.
A dispute is the result of non-compliance, or the rejection of a claim submitted to the customer under the contract, the resolution of which is pending a direct procedure with the customer or a court or arbitration proceeding.
In line with the Group’s approach, revenue related to a dispute in which the enforceability of the amount claimed is questioned is not recognized and any amount previously recognized is written off, since a dispute means that the customer has not approved the completed work.
In the event that the customer questions the value of the work completed, revenue will be recognized following the “variable consideration” approach explained below.
Only in cases in which a legal report confirms that the rights in dispute are clearly enforceable and, therefore, at least the costs directly associated with the disputed service will be recovered, may revenue be recognized up to the limit of the costs incurred.
iii) Determination of the transaction price
The transaction price must allocate a price to each performance obligation (or distinct good or service) in an amount that represents the consideration to which the entity expects to be entitled in exchange for the transfer of committed goods or services to the customer. To this end, the transaction price of each performance obligation identified in the contract is allocated as a separate selling price in relative terms.
The best evidence of a separate selling price is the observable price of a good or service when the company sells that good or service separately in similar circumstances and to similar customers.
Variable consideration
If the consideration committed in a contract includes a variable amount, it is recognized only to the extent that it is highly probable that there will be no significant reversal when the uncertainty associated with the variable consideration is 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
In general, when more than one-year elapses between the date on which the good or service is delivered and the date on which the customer is expected to make payment, an implicit financing component is included when calculating the price of a performance obligation. This component is treated as financial income.
Where a performance obligation relates to a period of less than one year between the date on which the company transfers a good and the date on which the customer makes payment, the practical expedient permitted by the accounting standard is applied to avoid adjusting the amount of the consideration.
In cases in which there is a contractual or legal right to charge late-payment interest based on the contractually agreed terms, the late-payment interest is only recognized when it is highly probable that it will be effectively received.
iv) Balance sheet items related to revenue recognition
Completed work pending certification/work certified in advance
Unlike revenue recognition, amounts billed to the customer are based on the various milestones reached under the contract and on acknowledgement thereof by the customer by means of a contractual document referred to as a progress billing certificate. Therefore, the amounts recognized as revenue for a given year do not necessarily match those billed to or certified by the customer.
For contracts in which the revenue recognized exceeds the amount billed or certified, the difference is recognized in an asset account named “Completed work pending certification” (as a contract asset) under “Trade receivables for sales and services”, while for contracts in which the revenue recognized is lower than the amount billed or certified, the difference is recognized in a liability account named “Work certified in advance” (as a contract liability) under “Short-term trade and other payables”.
Bidding and mobilization costs
In addition to the balance sheet items described above, the Group also recognizes assets reflecting costs of obtaining contracts (bidding costs), costs incurred fulfil contracts or start-up costs (mobilization costs) directly related to the main contract, provided they are recoverable during the performance of the contract. These balances are included in a separate asset account in 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 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 event (whether or not the contract is obtained). They are amortized systematically as the goods and services related to the asset are transferred to the customer.
Any costs that are necessary to start up a contract or mobilization costs are capitalized whenever it is probable that they will be recoverable in the future, excluding any expenses that would have been incurred if the contract had not been obtained. They expensed based on the proportion of actual output to estimated output under each contract. Otherwise, they are taken directly to the income statement.
v) Provisions for contracts with customers
The main provisions for customer contracts cover deferred expenses and budgeted losses.
- Provisions for deferred expenses. They cover expenses that are expected to be incurred at contract close-out, such as for the removal of construction machinery or decommissioning, as well as estimated repairs to be carried out during the warranty period. These provisions reflect an existing obligation stipulated in the contract on the basis of which the company is likely to allocate resources to satisfy the obligation, the amount of which can be reliably estimated. The provisions are based on the best possible estimates. They may be calculated as a percentage of the total revenues expected from the contract, if there is historical information for similar contracts.
Warranty obligations included in this type of provision are not treated as a separate performance obligation, unless the customer has the option of contracting the warranty separately, in which case it is recognized in accordance with IAS 37 on provisions.
- Provisions for budgeted losses. These provisions are recognized when it becomes apparent that the total costs expected to fulfil a contract exceed expected contract revenues. For the purpose of determining, where appropriate, the amount of the provision, budgeted contract revenue will include the forecast revenues that is considered probable, in line with IAS 37 (paragraph 14 (b)). As well as incremental costs and those directly related to the contract. General costs are not directly attributable to a contract and are therefore excluded from the calculation unless they are explicitly passed on to the counterparty in accordance with the contract, in line with paragraph 68 (a) of IAS 37.
This differs from the IFRS 15 approach described above in Note 1.3.3.4 “Revenue recognition”, according to which revenue is only recognized when considered highly probable.
Should total profit expected from a contract be lower than the amount recognized applying the above-mentioned revenue recognition approach, the difference is reflected as a loss provision.
vi) Segment-specific revenue recognition approach
Construction business
A single performance obligation is generally identified in construction contracts due to the high degree of integration and customization of the various goods and services forming a combined output that is transferred to the customer over time.
As mentioned previously, the Group has chosen the survey of performance output method as its preferred approach, which is applied provided that progress can be measured, and a price has been allocated to each work unit.
The input method may only be applied to contracts for which the unit price for the units to be completed cannot be determined.
Toll Roads business
The contracts included in this business area are accounted for in accordance with IFRIC 12, whereby contract assets are classified into two types: intangible assets and receivables (a mixed approach might also be applied) (Note 1.3.3.2).
In the case of contracts classified as intangible assets, the customer is the infrastructure user and therefore each use of the infrastructure by users is deemed a performance obligation and the revenue is recognized at a point in time. In the case of contracts accounted for using the financial asset model, in which the public administration is the customer, revenue recognition depends on the various services provided (e.g. operation or maintenance), which are recognized as separate performance obligations to which market prices must be allocated.
Where a separate selling price is not directly observable, the best possible estimate is employed, applying the forecast business margin.
Finally, regardless of whether the concession follows the intangible asset, financial asset or mixed asset model, as indicated above, in cases where the construction of the infrastructure is subcontracted to an external company, the concessionaire recognizes the infrastructure acquired for the price paid to the construction company, without recording in the Income Statement revenue for such construction services.
Airport’s business
Generally speaking, these are short-term services rendered to the customer (airlines or airport users), in which revenues will be recognized at a specific moment.
Energy transmission business
These contracts cover a number of services that are substantially the same and are transferred based on the same pattern. The monthly rate reflects the value of the services rendered. This type of contract includes a single performance obligation that is transferred over time for which revenues are recognized using the output method.
1.3.4. Accounting estimates and judgements (extract)
iii. Revenue from contracts with customers (Note 1.3.3.4), particularly as regards:
- determining whether there are enforceable rights to recognize revenue.
- establishing whether the requirements are met to recognize revenue as variable consideration;
- recognizing revenue in relation to a modification, claim or dispute;
- establishing whether there are one or more performance obligations and the price to be allocated in each case;
- defining the method applicable to each performance obligation so as 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 survey of performance completed output method or the time-elapsed output method, while the costs-incurred input method is applied in cases in which the services rendered do not represent recurring and routine services and it is not possible to determine the unit price of the units to be completed;
- in the case of contracts recognized based on a survey of performance completed to date, measuring the units completed and the price attributable in each case;
- in the case of contracts recognized using the costs-incurred input method, defining percentage-of-completion in cost terms and the contract’s forecast profit margin;
- capitalization of bidding and mobilization costs;
- assessment of whether the entity is acting as a principal or an agent in relation with specific performance obligations;
- amounts related to the calculation of provisions for expected losses and deferred expenses.
Accounts examples 