Vestas Wind Systems A/S – Annual report – 31 December 2018
7.3 Changes in accounting policies and disclosures (extract)
IFRS 15, Revenue from Contracts with Customers and Clarifications to IFRS 15
IFRS 15 has been implemented in Vestas’ consolidated financial statements for the financial year beginning on 1 January 2018, ref. note 1.2. Vestas has applied IFRS 15 using modified retrospective application, with the cumulative effect of initially applying the standard to be adjusted to the opening balance of retained earnings 2018. The transition impact and the opening equity has been impacted negatively by EUR 54m as at 1 January 2018.
Consequently, 2017 comparative figures are reported according to IAS 11/IAS 18 and are not restated to reflect the numbers according to IFRS 15. In the table below, 2018 numbers according to both IFRS 15 and IAS 11/IAS 18 are disclosed so as to provide comparability between 2017 and 2018 and to disclose the effect from the changed regulation.
Under IFRS 15 turnkey projects and service agreements are classified as contract assets/liabilities. Contract liabilities also comprise prepayments from customers for supply-only and supply-and-installation projects ordered but not yet delivered. Previously service agreements were classified as ‘Trade receivables’ and ‘Prepayments from customers’. Prepayments from supply-only and supply-and-installation projects were classified as ‘Prepayments from customers‘.
For supply-only and supply-and-installation projects cost to fulfil a contract are capitalised as contract costs in a separate line in the balance sheet. Previously these costs were capitalised as part of inventory.
Under IFRS 15, total revenue of a contract will remain unchanged compared to IAS 11/IAS 18; however, the timing of the revenue recognition will be deferred for supply-only and turnkey contracts. The details of the changes and quantitative impact of the changes are set out below.
Vestas continues to recognise revenue for supply-only projects at a point in time; however, under IFRS 15 revenue is deferred as control is deemed to be transferred to the customer upon delivery of the components in accordance with the agreed delivery plan, which is at a later stage compared to IAS 11/IAS 18.
Vestas continues to recognise revenue for turnkey projects over time applying the percentage-of-completion method; however, under IFRS 15 work performed as part of the percentage-of-completion method is assessed to be initiated at a later stage, which is deferring revenue.
Impact on financial statements
The following table summarise the initial impacts of adapting IFRS 15 in the consolidated financial statements. There is no impact on statement of comprehensive income and the impact on Vestas’ basic or diluted earnings per share for 2018 is not material.
IFRS 15 impact on income statement 1 January 2018 – 31 December 2018
The following table summarises the impact on balance sheet of adapting IFRS 15 in Vestas’ Consolidated financial statements.
The following table summarises the impact on statement of cash flows of adapting IFRS 15 in Vestas’ Consolidated financial statements. There is no impact on cash flow from investing activities or financing activities.
1. Result for the year (extract)
Vestas has applied IFRS 15 using the modified retrospective application, with the cumulative effect of initially applying the standard to be adjusted to the opening balance of retained earnings 2018, and therefore the comparative information has not been restated and continues to be reported under IAS 18 and IAS 11.
Vestas accounting policies
Revenue is measured based on the consideration specified in a contract with a customer. Vestas recognises revenue when it transfers control over a product or service to a customer.
In comparative periods, sale of individual wind turbines and wind power plants based on standard solutions (supply-only and supply-and-installation) was recognised in the income statement, provided that risk was transferred to the buyer. Revenue from contracts to deliver wind power plants with a high degree of customisation was recognised as the wind power plants were constructed based on the stage of completion of the individual contracts (turnkey projects). Service sales, comprising service and maintenance agreements as well as extended warranties regarding wind turbines and wind power plants sold, were recognised as revenue over the term of the agreement as the services were provided. Spare parts sales were recognised in the income statement provided that risk was transferred to the buyer.
Revenue recognition under IFRS 15
Revenue comprises sale of wind turbines and wind power plants, after-sales service, and sale of spare parts. The following is a description of the principal activities from which Vestas generates its revenue.
Revenue from the sale of individual wind turbines based on standard solutions is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Vestas recognises revenue at a point in time, when control is transferred to the customer, and the consideration agreed is expected to be received. Control is generally deemed to be transferred upon delivery of the components in accordance with the agreed delivery plan.
Revenue from sale of wind power plants based on standard solutions with alternative use is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Vestas recognises revenue when control of the fully operational turbine is transferred to the customer, and the consideration agreed is expected to be received. Control is deemed to be transferred at the point in time when the turbine is fully operational.
Revenue from contracts to deliver wind power plants with a high degree of customisation are recognised over time as the wind power plants are constructed based on the stage of completion of the individual contracts. Where the profit from a contract cannot be estimated reliably, revenue is only recognised equalling the cost incurred to the extent that it is probable that the costs will be recovered.
Revenue from service sales, comprising services and maintenances agreements as well as extended warranties regarding wind turbines and wind power plants sold, are recognised over the term of the agreement as the services are provided. Spare parts sales are recognised at a point in time when control has been transferred to the customer, and provided that consideration agreed is expected to be received.
The transaction price for sale of wind power plants, wind turbines normally includes a fixed consideration. The transaction price for service contracts includes a fixed consideration and often a variable consideration. The estimated amount of variable consideration will be included in the transaction price only to the extent that a significant reversal in revenue recognised is highly unlikely to occur when the uncertainty associated with the variable consideration is subsequently resolved.
All wind turbines- and wind power plants contracts include a standard warranty clause. For further details on warranty, ref. note 3.5 Provisions.
Key accounting estimates and judgements
Estimate regarding recognition of contract elements
Management performs significant accounting estimates in connection with determining the appropriate income recognition of contract elements. In certain situations, Supply-only projects contain elements that in nature are associated with a high degree of estimations regarding allocation of consideration under a contract to elements already delivered and elements to be delivered in the future.
Judgement regarding method for recognition of revenue from Supply-and-installation contracts
Management applies judgement when determining whether revenue from Supply-and-installations contracts shall be recognised at a point in time or over time.
Management has determined that Supply-and-installation projects based on standard solutions have an alternative use. Consequently, revenue of such contract is recognised at the point in time when the turbine is fully operational and control is transferred to the customer.
For certain projects, Vestas agrees to delivery of wind power plants based on non-standard solutions to the customer. Management assesses whether such non-standard solutions have an alternative use. The judgements made takes into consideration technology used, the degree of customisation, and remoteness of the wind power plant. Revenue from sale of non-standard solutions, which are judged to have no alternative use is recognised over time (percentage-of-completion) and form an insignificant part of revenue from Supply-and-installation contracts.
Estimates of stage of completion
Vestas applies the percentage-of-completion method in accounting for service contracts and certain wind power plants, in general projects with a high degree of customisation. The use of the percentage-of-completion method requires Management to determine the stage of completion by reference to the contract costs incurred for work performed to date in proportion to the estimated total contract costs (cost-to-cost method). Based on the estimated stage of completion, a respective portion of the
consideration is recognised.
Recognition of revenue and operational highlights
Disaggregation of revenue
In the following section, revenue is disaggregated by sale of projects and sale of service, by primary geographical market, major contract types and timing of revenue recognition.
1) Vestas has initially applied IFRS 15 using modified retrospective application. Under this method, the comparative information is not restated, ref. note 7.3.
Transaction price allocated to the remaining sales contracts (Order backlog)
The following table includes revenue expected to be recognised in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the financial year.
All consideration from contracts with customers is included in the amounts presented above.
At the end of 2018, the average remaining duration in service order backlog was approx. seven years, with a spread up to 33 years. For the Power solutions segment, projects are normally expected to be delivered within 1-3 years.
It should be emphasised that Vestas’ accounting policies only allow the recognition of revenue when the control has passed to the customer, either at a point in time or over time. Disruptions in production and challenges in relation to shipment of wind turbines and installation hereof, for example bad weather, lack of grid connections, and similar matters, may thus cause delays that could affect the timing of the satisfaction of the future performance obligations within the backlog.
Furthermore, it should be emphasised that the backlog is forward-looking in nature and the backlog is a subset of Vestas’ potential future revenue.
2.3 Contract balances
Vestas accounting policies
Contract assets/liabilities comprise agreements to deliver wind power plants based on non-standard solutions (supply-and-installation projects) and wind power plants with a high degree of customisation (turnkey projects), as well as services and maintenances agreements. Contract liabilities also comprise prepayments from customers for supply-only and supply-and-installation projects ordered but not yet delivered.
Vestas receives payments from customers based on a billing schedule, as established in its contracts. Contract assets relates to Vestas’ conditional right to consideration for Vestas’ completed performance under the contract. Accounts receivable are recognised when the right to consideration becomes unconditional. Contract liability relates to payments received in advance of performance under the contract. Contract liabilities are recognised as revenue as (or when) Vestas perform under the contract.
Contract assets/liabilities are measured at the selling price of the work performed based on the stage of completion less progress billing and expected losses.
The stage of completion is measured by the proportion that the costs on the contract incurred to date bear to the estimated total costs on the contract. Where it is probable that total costs will exceed total revenues from a contract, the expected loss is recognised immediately as a cost and an obligation.
The value of self-constructed components is recognised as contract assets/liabilities upon installation of the components to the specific wind power plant’s construction site.
If the selling price of the work performed exceeds progress billings and expected losses it is recognised as an asset. If interim billings and expected losses exceed the selling price it is recognised as a liability.
Costs relating to sales work and the pursuing of contracts are recognised in the income statement as incurred, if the costs are not incremental.
The following table provides information about contract assets and contract liabilities from contracts with customers.
1) Vestas has initially applied IFRS 15 using cumulative effect method. Under this method, the comparative information is not restated. In 2017, service contracts were classified as ‘Trade receivables‘ and ‘Prepayments from customers‘. Prepayments from supply-only and supply-and-installation projects were classified as ‘Prepayments from customers‘.
Vestas accounting policies
Costs incurred for supply-only and supply-and-installation projects in fulfilling the contracts with customers that are directly associated with the contract, comprising installation cost and transportation cost, are recognised as an asset (contract costs), if those costs are expected to be recoverable.
1) Vestas has initially applied IFRS 15 using cumulative effect method. Under this method, the comparative information is not restated. In 2017, asset recognised from costs to fulfill a contract was included in inventory as work in progress with EUR 237m. Ref. note 2.2.
Costs incurred in fulfilling contracts with customers are recoverable, as the costs are directly related to the contract.
Capitalised costs as a result of fulfilling sales contracts are recognised as part of production cost in the income statement, when related revenues are recognised. In 2018, EUR 549m was recognised.