IFRS 15 adopted, modified retrospective, policies, judgements, paras 110-128 certain disclosures, construction, support services

Balfour Beatty plc – Annual report – 31 December 2018

Industry: construction; support services

2 Principal accounting policies (extract)
2.1 Accounting standards (extract)
Adoption of new and revised standards (extract)
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018. The Group has adopted IFRS 15 retrospectively and has chosen to apply the cumulative effect approach. As a result, the Group has restated its opening equity position as at 1 January 2018 by a credit of £3m to reflect the impact of transitioning to IFRS 15. This adjustment primarily reflects the impact of unbundling a handful of contracts according to what the Group has assessed to be the performance obligations to be delivered to the customer.

In line with the requirements of the standard with regards to the transition option adopted, the Group has not restated its comparative information which continues to be reported under previous revenue standards, IAS 11 and IAS 18. To aid comparability, the Group has also presented its 2018 results under IAS 11 and IAS 18 which can be found in Note 40.

As a result of this new standard, the Group has also revised its accounting policies around revenue recognition (where applicable). Refer to Note 2.4.

2.4 Revenue recognition
The Group recognises revenue when it transfers control over a product or service to its customer. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Where consideration is not specified within the contract and is therefore subject to variability, the Group estimates the amount of consideration to be received from its customer. The consideration recognised is the amount which is highly probable not to result in
a significant reversal in future periods.

Where a modification to an existing contract occurs, the Group assesses the nature of the modification and whether it represents a separate performance obligation required to be satisfied by the Group or whether it is a modification to the existing performance obligation.

The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust its transaction price for the time value of money.

The Group’s activities are wide-ranging, and as such, depending on the nature of the product or service delivered and the timing of when control is passed onto the customer, the Group will account for revenue over time and at a point in time. Where revenue is measured over time, the Group uses the input method to measure progress of delivery.

Revenue is recognised as follows:

– revenue from construction and services activities is recognised over time and the Group uses the input method to measure progress of delivery
– revenue from manufacturing activities is recognised at a point in time when title has passed to the customer
– interest income is accrued on a time basis using the effective interest method by reference to the principal outstanding and the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount
– dividend income is recognised when the equity holder’s right to receive payment is established.

2.5 Construction and services contracts
When the outcome of individual contracts can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion at the reporting date. Costs are recognised as incurred and revenue is recognised on the basis of the proportion of total costs at the reporting date to the estimated total costs of the contract.

Estimates of the final out-turn on each contract may include cost contingencies to take account of the specific risks within each contract that have been identified during the early stages of the contract. The cost contingencies are reviewed on a regular basis throughout the contract life and are adjusted where appropriate. However, the nature of the risks on contracts are such that they often cannot be resolved until the end of the project and therefore may not reverse until the end of the project. The estimated final out-turns on contracts are continuously reviewed, and in certain limited cases, recoveries from insurers are assessed, and adjustments made where necessary.

No margin is recognised until the outcome of the contract can be estimated with reasonable certainty. Provision is made for all known or expected losses on individual contracts once such losses are foreseen.

Revenue in respect of variations to contracts and incentive payments is recognised when it is highly probable it will be agreed by the customer. Revenue in respect of claims is recognised only if it is highly probable not to reverse in future periods. Profit for the year includes the benefit of claims settled in the year to the extent not previously recognised on contracts completed in previous years.

2.7 Pre-contract bid costs and recoveries
Pre-contract costs are expensed as incurred until it is virtually certain that a contract will be awarded, from which time further pre-contract costs are recognised as an asset and charged as an expense over the period of the contract. Amounts recovered in respect of pre-contract costs that have been written off are recognised in full when they are received in cash.

For construction and services projects, the relevant contract is the construction or services contract respectively. With respect to PPP projects, an assessment is made as to which contractual element the pre-contract costs relate to, in order to determine the relevant period for amortisation. The relevant contract is that which gives rise to a financial or intangible asset, which is either the construction contract or the contract which transferred the asset to the project.

2.27 Judgements and key sources of estimation uncertainty (extract)
a) Revenue and margin recognition
The Group’s revenue recognition and margin recognition policies, which are set out in Notes 2.4 and 2.5, are central to how the Group values the work it has carried out in each financial year.

These policies require forecasts to be made of the outcomes of long-term construction services and support services contracts, which require both estimates and judgements to be made of both cost and income recognition on each contract. On the cost side, estimates of forecasts are made on the final out-turn of each contract in addition to potential costs to be incurred for any maintenance and defects liabilities. On the income side, estimates and judgements are made on variations to consideration which typically include variations due to changes in scope of work, recoveries of claim income from customers, and potential liquidated damages that may be levied by the customer. The Group’s estimates also include assessments of recoveries from insurers. Judgements and estimates are reviewed regularly throughout the contract life based on latest available information and adjustments are made where necessary.

In the construction portfolio there are a small number of long-term and complex projects where the Group has incorporated judgements over contractual entitlements. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow. These contracts are primarily within the Group’s major infrastructure business units in the UK, US and Gammon.

4 Revenue
4.1 Nature and services of goods
4.1.1 Construction Services
The Group’s Construction Services segment encompasses activities in relation to the physical construction of assets provided to public and private customers. Revenue generated in this segment is measured over time as control passes to the customer as the asset is constructed. Progress is measured by reference to the cost incurred on the contract to date compared to the contract’s end of job forecast (the input method). Payment terms are based on a schedule of value that is set out in the contract and fairly reflect the timing and performance of service delivery. Contracts with customers are typically accounted for as one performance obligation (PO).


4.1.2 Support Services
The Group’s work in this segment supports existing assets through maintaining, upgrading and managing services across utilities and infrastructure assets. Revenue generated in this segment is measured over time as control passes to the customer as and when services are provided. Progress is measured by reference to the cost incurred on the contract to date compared to the contract’s end of job forecast (the input method). Payments are structured as milestone payments set out in the respective contracts.


4.1.3 Infrastructure Investments
The Group invests directly in a variety of assets, predominantly consisting of infrastructure assets where there are opportunities to manage the asset upon completion of construction. The Group also invests in real estate type assets, in particular private residential and student accommodation assets. Revenue generated in this segment is from the provision of construction, maintenance and management services and also from the recognition of rental income. The Group’s strategy is to hold these assets until optimal values are achieved through disposal of mature assets.


4.2 Disaggregation of revenue
Following the implementation of IFRS 15 from 1 January 2018, the Group presents a disaggregation of its revenue according to the primary geographical markets in which the Group operates as well as the types of assets serviced by the Group. The nature of the various services provided by the Group is explained in Note 4.1. This disaggregation of revenue is also presented according to the Group’s reportable segments as described in Note 5.

The revenue disaggregation below represents the Group’s underlying revenue excluding the Group’s revenue generated by Rail Germany which is presented as non-underlying.


4.3 Transaction price allocated to the remaining performance obligations (excluding joint ventures and associates)


The total transaction price allocated to the remaining performance obligations represents the contracted revenue to be earnt by the Group for distinct goods and services which the Group has promised to deliver to its customers. These include promises which are partially satisfied at the period end or those which are unsatisfied but which the Group has committed to providing. In deriving this transaction price, any element of variable revenue is estimated at a value that is highly probable not to reverse in the future.

The transaction price above does not include any estimated revenue to be earned on framework contracts for which a firm order or instruction has not been received by the customer.

22 Contract balances
The timing of revenue recognition, billings and cash collection results in trade receivables (billed amounts), contract assets (unbilled amounts) and customer advances and deposits (contract liabilities) on the Group’s balance sheet. For services in which revenue is earned over time, amounts are billed in accordance with contractual terms, either at periodic intervals or upon achievement of contractual milestones. The timing of revenue recognition is measured in accordance with the progress of delivery on a contract which could either be in advance or in arrears of billing, resulting in either a contract asset or a contract liability.


2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised as an adjustment to opening equity (Notes 2.1 and 40).

The amount of revenue recognised in 2018 from performance obligations satisfied (or partially satisfied) in previous periods amounted to £45m.

40 Impact of the adoption of IFRS 15 Revenue from Contracts with Customers
40.1 Impact areas
Except for the adoption of IFRS 15, the Group has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018. As a result, the Group has changed its accounting policy for revenue recognition and the new policy is detailed in Notes 2.4 and 2.5.

The Group has applied IFRS 15 using the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of equity at 1 January 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 11 and IAS 18.  The details of the significant changes and the quantitative impact of the changes are set out below:

Adjustment 1: Relates to the recognition of the impact on transition to IFRS 15 at 1 January 2018 of a £3m credit to equity. The adjustment relates to the unbundling of certain contracts according to the Group’s assessment of each contract’s performance obligations to be delivered to its customers.

Adjustment 2: In addition to the impact on equity following transition to IFRS 15 at 1 January 2018, the Group’s consolidated balance sheet is impacted as a result of moving away from IAS 11 balance sheet captions to those prescribed by IFRS 15. The main reclassification adjustment is in relation to reclassifying amounts due to/from construction contract customers to contract assets or contract liabilities. In addition to this, provision balances which were previously presented within amounts due to/from construction contract customers for contracts that were ongoing at that time in line with the requirements of IAS 11 have now been presented within provisions as appropriate.

40.2 Impact on the financial statements on transition at 1 January 2018
The cumulative effect of the changes made to the Group’s consolidated balance sheet at 1 January 2018 for the adoption of IFRS 15 is as follows:


40.3 Impact of adopting IFRS 15 on the Group’s 2018 results
Impact on the Group’s consolidated income statement for the year ended 31 December 2018
The Group’s consolidated income statement for the year ended 31 December 2018 is impacted by Adjustment (1). At 31 December 2018, the Group would have recognised an additional loss of £1m if it had continued to apply IAS 11 and IAS 18 in 2018. There is no other impact on the Group’s consolidated income statement for the year as a result of applying previous revenue accounting standards.

Impact on the Group’s consolidated balance sheet at 31 December 2018
In addition to the impact arising from Adjustment 1, the Group’s consolidated balance sheet is also impacted by balance sheet reclassifications as a result of adopting balance sheet captions prescribed by IFRS 15 in place of IAS 11 requirements. The reclassification adjustments to convert the Group’s consolidated balance sheet at 31 December 2018 back to what it would have been if the Group had continued to apply previous revenue accounting standards is set out on page 190.