IFRS 15, disclosure of effects of future adoption of new standard, construction and maintenance contracts

Wärtsilä Corporation – Annual report – 31 December 2017

Industry: manufacturing

Accounting principles for the consolidated financial statements (extract)

Adoption of new and updated IFRS standards (extract)

In 2018, the Group will adopt the following new and amended standards and interpretations issued by the IASB.

New IFRS 15 Revenue from Contracts with Customers (effective for financial periods beginning on or after 1 January 2018): IFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. It replaces existing revenue guidance, including IAS 18 Revenue, and IAS 11 Construction Contracts. IFRS 15 is based on the principle that revenue is recognized when control of a good or service transfers to a customer. When applying the new standard, the entity needs to assess whether the revenue will be recognised over time or at a point in time. The effect of variable considerations and the time value of money on transaction price need to be assessed. In addition, IFRS 15 requires quantitative and qualitative disclosures about the entity’s contracts with customers, performance obligations in the contracts and significant judgements to be made. The Group is adopting the new standard on the required effective date using the full retrospective method.

In product delivery, short-term service orders, and short-term projects the management expects to identify mostly one performance obligation in a contract under the new standard, and revenue is typically recognised at a point in time when transfer of control occurs.

In long-term service agreements, and long-term projects the management expects to recognise mostly one performance obligation in a contract, and revenue is recognised at a point in time. When applying IFRS 15, the revenue recognition method is changed in two business lines: long-term service and maintenance agreements, and gas solutions related construction contracts.

In long-term service and maintenance agreements the customer value is created over time during the contract period. The revenue recognition method changes from an output method (percentage of completion based on the proportion of the contracted services performed) to an input method (percentage of completion based on costs incurred). Due to the standard maintenance schedules, this typically delays the revenue recognition in a contract. In construction contracts related to gas solutions, the key value drivers are engineering, procurement, and project management, and the manufacturing is usually outsourced. The revenue recognition method changes from an output method (percentage of completion based on the progress measured by surveys of work performed) to an input method (percentage of completion based on costs incurred).

The two business lines together represent, depending on the year, approximately 10-15% of the group’s net sales. However, the impact on Group net sales is in large extend mitigated with wide portfolio of projects and agreements in different stages of lifetime. The combined restatement impact on equity on 1 January 2017 is EUR -10 million.

In project business the contracts usually have clauses for liquidated damages, which were previously accounted as provisions for cost when their probability was more likely than not to occur. Liquidated damages are treated as variable consideration in IFRS 15, and they are required to be estimated at contract inception. According to analyses, this will reduce the Group’s recognised revenue to some extent as the penalties accounted as costs are deducted from sales according to IFRS 15.