IFRS 15, expected effects of future adoption, para 35, no alternative use and enforceable right to payment for performance completed to date

Norsk Hydro ASA – Annual report – 31 December 2017

Industry: manufacturing

Note 3 – Changes in accounting principles and new pronouncements (extract)

IFRS 15 Revenue from Contracts with Customers

Hydro has decided to implement IFRS 15 retrospectively with the cumulative effect of initially applying this standard recognized directly to equity at implementation, i.e. January 1, 2018. IFRS 15 requires limited changes to identification of performance obligations and timing of recognition of revenue.

The most important change relates to revenue from custom-made products where contract clauses and/or specific designs results in a conclusion that the products have no alternative use for Hydro. Combined with contracts securing Hydro an unconditional right to payment for orders placed, revenue from such contracts are to be recognized over time according to the completion effort rather than at actual delivery of products to customers. As firm orders are placed and products produced close to delivery, the amount of revenue and related margin to be recognized earlier under IFRS 15 compared to previous standards are limited. Such contracts are mainly held in the newly acquired Extruded Solutions businesses. Review of contracts to confirm which of those that include an enforceable right to payment is still not completed. As of the end of 2017, unrecognized revenue that would be recognized earlier under IFRS 15 has been estimated to an amount of about NOK 1.3 billion, with a corresponding margin of about NOK 125 million, should we conclude that all contracts for customer specific products include an enforceable right to payment. The transitional effect will be recognized in the opening balance as of January 1, 2018, with no adjustment to comparable figures.

Another transaction type affected is the freight component included in sales of goods on incoterms CIF/CIP or similar terms. The freight component in these sales transactions were previously considered integral in the sale of goods, and recognized when risk and rewards of the goods were transferred to the customers. The freight component will, from January 1, 2018, be deemed a separate performance obligation, and recognized as the service is performed. As a result of limited goods under transportation as of year-end, the revenue recognized earlier under IAS 18 compared to IFRS 15 as of December 31, 2017 was less than NOK 10 million, and the amount of related margin was less than NOK 2 million including the impact from the joint venture Qatalum, accounted for under the equity method. As such, no transition effect for the freight component will be recognized as of January 1, 2018.

In addition, Hydro has one unit delivering equipment for casting, both to internal and external customers, where revenue has been recognized over time under IAS 11 Revenue from construction contracts. The revenue from the majority of such contracts is deemed to continue to be recognized over time, however, some contract types will be recognized at a point in time, when the customer receives control with the goods produced, under IFRS 15. Recognized revenue which under IFRS 15 should be recognized in a later period amounted to about NOK 11 million as of December 31, 2017. The corresponding margin amounted to NOK 3 million, which will be recognized in later periods under IFRS 15. The transitional effect will be recognized in the opening balance as of January 1, 2018, with no adjustment to comparable figures.

The transition effect related to implementing IFRS 15 is estimated to an increase in equity of NOK 95 million should we conclude that all contracts for customer specific products include an enforceable right to payment.

 

 

 

 

 

 

 

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