IFRS 15, revenue recognition policy, performance obligations, lift supply and installation, maintenance

KONE Oyj – Annual report – 31 December 2019

Industry: manufacturing

Notes to the consolidated financial statements (extract)
Accounting principles (extract)
Revenue recognition
Revenue from contracts with KONE’s customer is recognized at an amount that reflects the consideration to which KONE expects to be entitled in exchange for promised goods or services to a customer.

KONE recognizes revenue when or as it satisfies a performance obligation by transferring control on the promised goods or services (performance obligation) to a customer.

A performance obligation is a distinct good or service within a contract that a customer can benefit from on a 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, an escalator or other People Flow™ solutions. For KONE’s maintenance contracts, maintenance of a single unit is considered as a distinct performance obligation and for repairs business, typically a service order is a performance obligation for KONE.

In new equipment and modernization contracts, KONE transfers the control of a single unit to the customer over time and, therefore, satisfies the performance obligation and recognizes revenue over time.

The transfer of control occurs when KONE delivers the unit to a customer site as then the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, a unit constructed by KONE. Upon this milestone and onwards up to the project handover, revenue is recognized under the percentage of completion method using a cost-to-cost input method as based on KONE’s assessment it best depicts the transfer of control to the customer.  Percentage of completion is defined as the proportion of an 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, cost estimates and customer’s plans and other factors.

Revenues from the rendering of maintenance services and repairs are recognized when the services have been rendered or over the contract term when the work is being carried out. For maintenance services the performance obligation is satisfied over time because the customer simultaneously receives and consumes the benefits provided as KONE performs the services.

Most of KONE’s revenue is derived from fixed-price contracts and, therefore, the amount of revenue to be earned from each contract is determined by reference to those fixed prices. KONE customer contracts do not contain any significant financing components. In new equipment and modernization contracts payment terms are typically based on either performance according to specific contractual milestones or progress of work performed. In maintenance services contracts the customer generally pays based on a fixed payment schedule.

When customer contracts contain multiple performance obligations the transaction price is allocated to each performance obligation based on the standalone selling prices. Where these are not directly observable, they are estimated based on estimated costs plus margin approach.