IFRS 15 adopted, policies, estimates and judgements, certain disclosures, wind systems

Vestas Wind Systems A/S – Annual report – 31 December 2019

Industry: manufacturing

1.2 Revenue
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.

Revenue recognition
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.

Supply-only projects
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.

Supply-and-installation projects
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.

Turnkey projects
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.

Service sales
Revenue from service sales, comprising services and maintenance 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.

Transaction price
The transaction price for sale of wind turbines and wind power plants 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 plant contracts include a standard warranty clause. For further details on warranty, ref. note 3.6 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. Management has assessed that the project specific margin is a fair estimate of a reasonable margin used to allocate
consideration under a contract to the contract elements.

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.

The number of projects with no alternative use is increasing, including projects with customised towers. Vestas expects this to be significant from 2020.

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. This method is considered to best show the progression of the projects. 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

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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.

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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.

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All consideration from contracts with customers is included in the amounts presented above.

At the end of 2019, the average remaining duration in the service order backlog was approx. eight years (2018: seven years), with a range up to 30 years (2018: 30 years). For the Power solutions segment, projects are normally expected to be delivered within 1-3 years (2018: 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 order backlog is forward-looking in nature and 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 over time) and wind power plants with a high degree of customisation (turnkey projects), as well as service 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 the contracts and generally represents Vestas’ engagements. 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 performs 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 as the proportion at the costs on the contract incurred relatively 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 a provision.

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.

Contract balances
The following table provides information about contract assets and contract liabilities from contracts with customers.

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2.4 Contract costs
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.

Contract costs

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1) 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 2019, EUR 740m (2018: EUR 549m) was recognised.