KONE Oyj – Annual report – 31 December 2017
Notes to the consolidated financial statements (extract)
New standards (extract)
The International Accounting Standards Board has issued three new standards, IFRS 15, Revenue from Contracts with Customers, IFRS 9, Financial Instruments and IFRS 16, Leases which are relevant to KONE. IFRS 15 and IFRS 9 are effective starting on January 1, 2018 and IFRS 16 on January 1, 2019.
IFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. Revenue is recognized when, or as, the customer obtains control of the goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, IFRS 15 requires quantitative and qualitative disclosures about the entity’s contracts with customers, performance obligations in the contracts and significant judgements made. KONE will adopt the new standard on the required effective date using the full retrospective method.
KONE has performed an analysis of IFRS 15, which is subject to changes arising from a finalization of the ongoing analysis. Based on the assessment the impact is limited to revenue recognition of new equipment and modernization contracts where the revenue recognition will occur over time measured based on percentage of completion method as the customer obtains the control of each asset i.e. separately identifiable performance obligation. A performance obligation is a distinct good or service within a contract that customer can benefit on stand-alone basis. For KONE’s new equipment and modernization contracts a performance obligation typically means delivery and installation of a single unit i.e. an elevator, escalator or other People Flow solution. The percentage of completion is defined as the proportion of individual performance obligation’s cost incurred to date from the total estimated costs for that particular performance obligation. The percentage of completion method requires accurate estimates of future revenues and costs over the full term of the contracts. These significant estimates form the basis for the amount of revenue to be recognized and include the latest updated total revenue, cost and risks adjusted by the typical estimation revisions for similar types of contracts. These estimates may materially change due to the stage of completion of the contract, changes in the contract scope, costs estimates and customer’s plans and other factors.
Application of new revenue recognition principles under IFRS15 will have a material impact on KONE’s consolidated financial statements. In practice, revenue is expected to be recognized earlier based on the progress also for those new equipment and modernization contracts which are not defined as long-term major projects recognized already under percentage of completion method. However, based on KONE’s assessment this will not have material impact on annual reported sales and operating income. From balance sheet perspective, the application of new principles will decrease inventories over 50% and related advances received and deferred income approximately by 30% while receivables are expected to be somewhat increased. Deferred tax assets and liabilities will change slightly. Also, reported new equipment and modernization order book is expected to reduce by approximately EUR 1 billion on initial application of percentage of completion method. As a result of the restatement retained earnings as of January 1, 2017 will increase approximately by 10%. The IFRS restated figures for 2017 will be published March 2018.