CIMIC Group Limited – Annual report – 31 December 2018
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (extract 1)
Basis of preparation (extract 1)
New and amended standards adopted by the Company (extract)
AASB 15: Revenue from Contracts with Customers
In the current year, the Group has applied AASB 15 Revenue from Contracts with Customers (as amended in April 2016) which has come into effect 1 January 2018. Details of the new requirements of AASB 15 as well as their impact on the Group’s consolidated financial statements are described below.
AASB 15 establishes a comprehensive framework for determining the timing and quantum of revenue recognised. It replaces existing guidance, including AASB 118 Revenue and AASB 111 Construction Contracts and related interpretations. The core principle of AASB 15 is that an entity shall recognise revenue when control of a good or service transfers to a customer.
CIMIC Group has operations across different industry sectors and geographical locations which are subject to different legal and contractual frameworks. Significant judgements and estimates are used in determining the impact of AASB 15, such as the assessment of the probability of customer approval of variations and acceptance of claims, estimation of project completion date and assumed levels of project productivity. In making this assessment we have considered, for applicable contracts, the individual status of legal proceedings, including arbitration and litigation.
The Group’s accounting policies for its revenue streams are disclosed in detail in Note 1: Summary of significant accounting policies – a) Revenue recognition.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (extract 2)
Impact on application (extract)
The Group has applied AASB 15 and AASB 9 retrospectively with the cumulative effect of initially applying the standards as an adjustment to the opening balance of equity and comparative figures are therefore not restated, however some comparative disclosure notes have been restated where appropriate. The opening equity adjustment due to the application of the new standards is analysed by financial statement line item below.
Impact on assets, liabilities and equity at 1 January 2018
(1) Revenue recognition
The contracted terms and the way in which the Group operates its construction and services contracts results in revenue predominantly being derived from projects containing one performance obligation. Construction and services revenue will continue to be recognised over time, however the new standard provides new requirements for variable consideration such as incentives, as well as accounting for claims and variations as contract modifications which all impart a higher threshold of probability for recognition. Revenue was previously recognised when it is probable that work performed will result in revenue whereas under the new standard, revenue is recognised when it is highly probable that a significant reversal of revenue will not occur.
Tender costs & contract costs
Under AASB 111 Construction Contracts, costs incurred during the tender process were capitalised within net contract debtors when it is deemed probable the contract will be won. Under the new standard, costs can only be capitalised if they are both expected to be recovered and either would not have been incurred if the contract had not been won or if they are intrinsic to the delivery of the project.
Adjustments under the new standards are subject to tax effect accounting and therefore the net deferred tax position has been impacted.
(2) The change in method from recognition of incurred losses to recognition of expected credit losses for impairment of financial assets under AASB 9 has led to an adjustment reducing non-current receivables by $487.4 million with regards to the noncurrent loan receivables from a joint venture, BIC Contracting LLC (BICC) (formerly HLG Contracting LLC). In determining the estimated expected credit loss on application of AASB 9, CIMIC engaged an independent advisory expert to obtain a credit rating and applied the relevant expected credit loss rate to the loan in line with rating agency published rates and methodology.
An additional $1.5 million expected credit loss has been recognised in relation to other non-current receivables.
(3) As BICC is accounted for as an equity method joint venture, the book carrying value of CIMIC’s investment in BICC reflects the Group’s share of BICC’s operating results, including BICC’s recognition of construction revenue. The adjustment reflects the consistent application of CIMIC Group revenue recognition criteria as outlined in (1) Revenue recognition. The higher recognition threshold and constraint criteria in the new standard has led to a reduction in the investment of $245.6 million. As BICC is a jointly controlled investment, CIMIC does not exert the same degree of control over BICC’s implementation project as it does over its own and therefore the impact is subject to a higher degree of estimation uncertainty.
Other equity investments under AASB 15 have also been adjusted through the same process reducing investments by $17.7 million.
(4) The total of adjustments (1) to (3) above have been recognised in opening equity. These have been recognised between retained earnings, foreign currency translation reserve, which is a result of the cumulative effect of foreign currency fluctuations, and those balances attributable to non-controlling interests.
There has been no material impact on cash flow or other financial statement items on transition.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (extract 3)
Accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and are believed to be reasonable under the circumstances. Revisions to estimates are recognised in the period in which the estimate is revised and in any future period affected.
Judgements made in the application of AASBs that could have a significant effect on the financial report and estimates with a risk of adjustment in the next year are as follows:
- Construction, services and mining contracting projects:
– determination of stage of completion;
– estimation of total contract costs;
– estimation of total contract revenue, including recognising revenue on contract variations and claims only to the extent it is highly probable that a significant reversal in the amount recognised will not occur in the future;
– estimation of project completion date; and
– assumed levels of project execution productivity.
- Estimation of allowance for expected credit losses on financial assets.
It is reasonably possible on the basis of existing knowledge that actual outcomes within the next financial year that are different from the estimates and assumptions in the areas listed above could require a material adjustment to the carrying value of contract assets, contract liabilities and amounts receivable from and payable to related parties. Refer to Note 8: Trade and other receivables, Note 16: Trade and other payables and Note 37: Related party disclosures.
- Lease classification;
- Asset disposals:
– Controlled entities and businesses: determination of loss of control and fair value of consideration; and
– Other assets: determination as to whether the significant risks and rewards of ownership have transferred;
- Estimation of the economic life of property, plant and equipment and intangibles;
- Asset impairment testing, including assumptions in value in use calculations;
- Assessment of the fair value of financial instruments; and
- Determination of the fair value arising from business combinations.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (extract 4)
a) Revenue recognition
Policies applied from 1 January 2018
The Group derives revenue from the long-term construction of major infrastructure projects, including roads, railways, tunnels, airports, buildings, social infrastructure, water, energy and resources facilities across Australia and Asia. Contracts entered into may be for the construction of one or several separate inter-linked pieces of large infrastructure. The construction of each individual piece of infrastructure is generally taken to be one performance obligation. Where contracts are entered for the building of several projects the total transaction price is allocated across each project based on stand-alone selling prices. The transaction price is normally fixed at the start of the project. It is normal practice for contracts to include bonus and penalty elements based on timely construction or other performance criteria known as variable consideration, discussed below.
The performance obligation is fulfilled over time and as such revenue is recognised over time. As work is performed on the assets being constructed they are controlled by the customer and have no alternative use to the CIMIC Group, with the Group having a right to payment for performance to date.
Generally, contracts identify various inter-linked activities required in the construction process. Revenue is recognised on the measured output of each process based on appraisals that are agreed with the customer on a regular basis.
Revenue earned is typically invoiced monthly or in some cases on achievement of milestones or to match major capital outlay. Invoices are paid on normal commercial terms, which may include the customer withholding a retention amount until finalisation of the construction. Certain construction projects entered into receive payment prior to work being performed in which case revenue is deferred on the balance sheet.
Mining and mineral processing revenue
The Group generates revenue from the provision of mining services, mineral processing from various mine sites, dry hire and plant sales within Australia, Asia, the Americas and Africa. Contracts often include multiple obligations for the processes required to enable mine site development, extraction, processing and remediation. These processes can include the design and construction of mine infrastructure, construction, operation and maintenance of processing facilities, topsoil stripping, drill and blast, excavation, processing, rehabilitation and mine closure. In addition, processes may be performed by the Group or by other contractors employed by the customer and as such are accounted for as separate obligations. The transaction price is allocated to each performance obligation based on the stand-alone selling price. The total transaction price may include a variable pricing element which is accounted for in accordance with the policy on variable consideration.
Performance obligations are fulfilled over time with revenue recognised in the accounting period in which the mining or mineral processes are rendered based on the amount of the expected transaction price allocated to each performance obligation as the customer continues to control the asset as it is enhanced.
Customers are typically invoiced on a monthly basis for an amount that is calculated on a schedule of rates that is aligned with the stand alone selling prices for each performance obligation. Payment is received following invoice on normal commercial terms.
The Group performs maintenance and other services for a variety of different industries. Contracts entered into can cover servicing of related assets which may involve various different processes. These processes and activities tend to be highly inter-related and the Group provides a significant service of integration for these assets under contract. Where this is the case, these are taken to be one performance obligation. The total transaction price is allocated across each service or performance obligation and, where linked, the construction of the relevant asset. The transaction price is allocated to each performance obligation based on contracted prices. The total transaction price may include variable consideration.
Performance obligations are fulfilled over time as the Group enhances assets which the customer controls, for which the Group does not have an alternative use and for which the Group has right to payment for performance to date. Revenue is recognised in the accounting period in which the services are rendered based on the amount of the expected transaction price allocated to each performance obligation. Customers are in general invoiced on a monthly basis for an amount that is calculated on either a schedule of rates or a cost plus basis that are aligned with the stand alone selling prices for each performance obligation. Payment is received following invoice on normal commercial terms.
It is common for contracts to include performance bonuses or penalties assessed against the timeliness or cost effectiveness of work completed or other performance related KPIs. Where consideration in respect of a contract is variable, the expected value of revenue is only recognised when the uncertainty associated with the variable consideration is subsequently resolved, known as “constraint” requirements. The Group assesses the constraint requirements on a periodic basis when estimating the variable consideration to be included in the transaction price. The estimate is based on all available information including historic performance. Where modifications in design or contract requirements are entered into, the transaction price is updated to reflect these. Where the price of the modification has not been confirmed, an estimate is made of the amount of revenue to recognise whilst also considering the constraint requirement.
Contract assets and liabilities
AASB 15 uses the terms ‘contract asset’ and ‘contract liability’ to describe what is commonly known as ‘accrued revenue’ and ‘deferred revenue’. Contract receivables represent receivables in respect of which the Group’s right to consideration is unconditional subject only to the passage of time. Contract receivables are non-derivative financial assets accounted for in accordance with the Group’s accounting policy for non-derivative financial assets set out in Note 1(e): Non-derivative financial
instruments. Contract assets represent the Group’s right to consideration for services provided to customers for which the Group’s right remains conditional on something other than the passage of time. Contract liabilities arise where payment is received prior to work being performed. Contract assets and contract liabilities are recognised and measured in accordance with this accounting
Contract fulfilment costs
Costs incurred prior to the commencement of a contract may arise due to mobilisation/site setup costs, feasibility studies, environmental impact studies and preliminary design activities as these are costs incurred to fulfil a contract. Where these costs are expected to be recovered, they are capitalised and amortised over the course of the contract consistent with the transfer of service to the customer. Where the costs, or a portion of these costs, are reimbursed by the customer, the amount received is recognised as deferred revenue and allocated to the performance obligations within the contract and recognised as revenue over the course of the contract.
The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer represents a financing component. As a consequence, the Group does not adjust any of the transaction prices for the time value of money.
Warranties and defect periods
Generally construction and services contracts include defect and warranty periods following completion of the project. These obligations are not deemed to be separate performance obligations and therefore estimated and included in the total costs of the contracts. Where required, amounts are recognised accordingly in line with AASB 137: Provisions, Contingent Liabilities and Contingent Assets.
Loss making contracts
A provision is made for the difference between the expected cost of fulfilling a contract and the expected unearned portion of the transaction price where the forecast costs are greater than the forecast revenue.
Property revenue is recognised when control over the property has been transferred to the customer. This is generally at the point when legal title has transferred to the customer as properties are not developed based on the specific needs of individual customers. The revenue is measured at the transaction price agreed under the contract.
Rental income is recognised on a straight line basis over the term of the operating lease.
Government grant income when recognised relates to incentives received by the Group as allowed under AASB 120: Accounting for Government grants and disclosure of Government assistance.
Interest revenue is recognised on an accruals basis, other than related party interest which is calculated using the effective interest rate method.
Dividend income is recognised when the dividend is declared.
8. TRADE AND OTHER RECEIVABLES
1 Comparative disclosure notes have been restated where appropriate as discussed in Note 1: Summary of significant accounting policies – basis of preparation.
2 Contract assets includes an amount equal to $1.15 billion (31 December 2017: $1.15 billion) relating to the Gorgon LNG Jetty and Marine Structures Project being undertaken by CPB Contractors Pty Ltd (CPB), a wholly owned subsidiary of CIMIC, together with its consortium partners, Saipem SA and Saipem Portugal Comercio Maritime LDA (Saipem and CPB together referred to as the Consortium) for Chevron Australia Pty Ltd (Chevron) (Gorgon Contract).
The position is:
- In November 2009 the Consortium was announced as the preferred contractor to construct the 2.1 kilometre Chevron Gorgon LNG Jetty and Marine Structures project on Barrow Island, 70 kilometres off the Pilbara coast of Western Australia.
- The scope of work consisted of the design, material supply, fabrication, construction and commissioning of the LNG Jetty. The scope also included supply, fabrication and construction of marine structures including a heavy lift facility, tug pens and navigation aids.
- The jetty comprised steel trusses approximately 70 metres long supported by concrete caissons leading to the loading platform approximately 4 kilometres from the shore.
- Initial acceptance of the jetty and marine structures took place on 15 August 2014.
- During the project, changes to scope and conditions led to the Consortium submitting Change Order Requests (CORs). The Consortium, Chevron and Chevron’s agent, entered into negotiations in relation to some of the CORs.
- On 9 February 2016 the Consortium formally issued a Notice of Dispute to Chevron in connection with the Gorgon Contract relating to the CORs. Following a period of prescribed negotiation, the parties have entered a private arbitration as prescribed by the Gorgon Contract (Chevron Arbitration).
- On 20 August 2016, in order to pursue further its entitlement under the contract, CIMIC Group commenced proceedings in the United States against Chevron Corporation and KBR Inc. The commencement of the proceedings has no effect on the contract process or CIMIC’s entitlement to the amounts under negotiation / claimed in the arbitration.
- Since December 2016, the Chevron Arbitration has continued in accordance with the contractual terms. The arbitrators have been appointed and have made orders for the conduct of the proceedings and it is anticipated that the hearings will be in 2019 with a determination thereafter.
In addition there is an arbitration procedure against Saipem pursuant to the Consortium Agreement seeking recovery of outstanding amounts. The Consortium Arbitration continues in accordance with the contractual processes; arbitrators have been appointed, orders for the conduct of the arbitration have been made, and it is anticipated that hearings will occur in 2020 with a determination thereafter.
3 The Group has trade and other receivables relating to BICC totalling US$454.9 million (31 December 2017: US$816.1 million) equivalent to $640.7 million (31 December 2017: $1,046.3 million) with an expected repayment date of 30 September 2021. Refer to Note 1: Summary of significant policies – basis of preparation on impact of ECL on the loan balance at 1 January 2018.
The repayment of the above loans is subject to certain restrictions as a result of the loans being subordinate to other external debt held by BICC, such as its syndicated loan facility. Repayment of these amounts can be subject to prior written consent from the financier, or where a permitted payment under the financing arrangement occurs.
4 The non-current tax asset of $34.3 million (31 December 2017: $5.1 million) represents the amount of income taxes recoverable from the payment of tax in excess of the amounts due to the relevant tax authority not expected to be received within twelve months after reporting date.
5 Contract assets are net of $675.0 million (31 December 2017: $675.0 million) revenue constraint on a portfolio basis.
Significant changes in contract assets and liabilities
Contract assets are balances due from customers under long term contracts as work is performed and therefore a contract asset is recognised over the period in which the performance obligation is fulfilled. This represents the entity’s right to consideration for the services transferred to date. Amounts are generally reclassified to contract receivables when these have been certified or invoiced to a customer.
There has been a significant change in contract assets in the period due to the initial application of AASB 15. Amounts were derecognised due to the higher threshold required under AASB 15. While the CIMIC Group continues to believe it probable the amounts will be received, the new threshold for recognition is stated as highly probable to be received. Refer to Note 1: Summary of significant accounting policies – basis of preparation, where the effects of the initial application of AASB 15 have been detailed.
Revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period was $910.8 million (31 December 2017: $921.3 million). Revenue recognised in the reporting period from performance obligations satisfied or partially satisfied in previous periods was $152.7 million (31 December 2017: $141.1 million). Partially satisfied performance obligations continue to incur revenue and costs in the period.
Remaining performance obligations (Work in hand)
Contracts which have remaining performance obligations as at 31 December 2018 are set out below. As permitted under the transitional provisions in AASB 15, the transaction price allocated to remaining performance obligations as of 31 December 2017 is not disclosed.
1 Includes $5,954 million of CIMIC’s share of work in hand from joint venture and associates equity accounted investments.
Contracts in the different sectors have different lengths. The average duration of contracts is given below, however some contracts will vary from these typical lengths. Revenue is typically earned over these varying timeframes, however more of the revenue noted above is expected to be earned in the short-term.
Construction 1-4 years
Mining and mineral processing 3-6 years
Services 4-10 years
39. NEW ACCOUNTING STANDARDS (extract)
AASB 15 Revenue
Had AASB 15 Revenue from Contracts with Customers not been applied and the financial statements were still produced under previous guidance, including AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations, the financial report for the year ended 31 December 2018 would have been impacted as follows:
- the consolidated statement of financial position as at 31 December 2018 would be impacted by adding back $953.3 million of transition adjustments to both net assets and equity. Refer to Note 1: Summary of significant accounting policies – basis of preparation for the impact on each balance sheet line item; and
- the impact on all line items reported in the consolidated statement of profit or loss and the consolidated statement of other comprehensive income for the 12 months to 31 December 2018 would not be material. Accordingly there would be no additional material impact on the consolidated statement of financial position as at 31 December 2018 after adding back the transition adjustments noted above.