IFRS 15, adopted, modified retrospective method, policies and certain disclosures, green energy, windpower

Ørsted A/S – Annual report – 31 December 2018

Industry: manufacturing

1.4 Implementation of new or changed accounting standards and interpretations (extract)
We regularly assess the impact of new IFRS standards and interpretations. We implement new IFRS standards and interpretations from their mandatory effective dates at the latest.

Effective from 1 January 2018, we have implemented the following new or changed standards (IAS and IFRS) and interpretations:
– IFRS 15 ‘Revenue from Contracts with Customers’ including amendments and clarifications. See separate section below.
– IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’.
– IFRIC 23 ‘Uncertainty over Income Tax Treatments’ (early adoption).

Besides the impact from IFRS 15, the adoption of the new and changed standards has not impacted the consolidated financial statements for 2018.

In the following section, you can read more about the impact on recognition and measurement from IFRS 15 ‘Revenue from Contracts with Customers’. The standard has an insignificant impact on profit (loss) for the year and diluted profit (loss) per share. The equity and the consolidated statement of cash flows are not affected.

Implementation of IFRS 15
On 1 January 2018, we implemented IFRS 15, ‘Revenue from Contracts with Customers’, which replaces IAS 11, IAS 18 and associated interpretations.

We have implemented IFRS 15 with retrospective effect. However, we use the relief from restating comparative figures (modified retrospective method).

The most important changes resulting from our implementation can be summarised as follows:
– The model for recognition of revenue is changed from having been based on the transfer of the risks and rewards of ownership of a product or service to being based on the transfer of control of the goods or services transferred to the customer.
– More detailed guidelines for how elements in a contract of sale are identified, and how the individual components will be recognised and measured.
– More detailed guidance for recognition of revenue over time.

Changes in our accounting policies resulting from IFRS 15
In the UK, we offer construction agreements for offshore transmission assets. When construction of the offshore transmission assets is completed, they are sold to an offshore transmission owner (OFTO) through a regulated sales process. The UK energy regulator ‘Office of Gas and Electricity Markets’ (Ofgem) manages the sales process, determines the final transfer value and appoints the buyer. Under IFRS 15, a customer relationship does not exist between Orsted and the final buyer when the construction of the offshore transmission assets commences. Therefore, we have deferred revenue recognition on offshore transmission assets from commencement of construction to the date of entering into a contract with a customer.

In other words, the recognition of revenue begins when we sell a share of the offshore transmission asset under construction to a partner and takes place upon such partner joining the project. We recognise the remaining part of the offshore transmission asset when we find that control has passed to the OFTO.

Impact on our consolidated financial statements from IFRS 15
In previous reporting periods, offshore transmission assets were recognised in step with the construction based on the completion degree of the asset (over time). Under IFRS 15, revenue from offshore transmission assets are recognised at a later point in time.

The change in policy does not affect the Group’s cash flows or results, but only the timing of when income and costs are recognised in the consolidated financial statements.

Historically, we have not had, and we do not expect to have, a significant contribution margin relating to the sale of offshore transmission assets to partners and OFTOs. The Group’s EBITDA, balance sheet total and equity will therefore remain unchanged in all material respects as a consequence of the changed accounting policies.

The implementation of the terminology in IFRS 15 had the following effects on the presentation of the construction contracts, receivables and other payables in the balance sheet:
– Construction of offshore transmission assets is classified as inventory.
– Construction agreements other than offshore transmission assets are presented as contract assets and liabilities.
– Construction agreements related to offshore transmission assets are presented as contract assets and liabilities.
– Receivables related to ongoing services or in other ways where the receivables are not unconditional are presented as contract assets.
– Other payables related to prepayments from heat customers are presented as contract liabilities.
– Other payables related to prepayments and deferred revenue as such are presented as contract liabilities.

In summary, the adjustments made to the amounts recognised in the balance sheet on he date of initial application (1 January 2018) are illustrated in the table to the left.

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1 Effect of change to timing of revenue recognition from transmission assets in profit (loss).
2 Effect of changed presentation of certain amounts in the balance sheet to reflect the terminology of IFRS 15.
Comparatives for the 2017 financial year are not restated as we have applied the modified retrospective method. The effects of change in accounting policy are identical for business performance profit (loss).

2.2 Revenue

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1 The elimination column includes elimination of the internal sale of ROCs between Offshore (included as government grants, see note 2.4 ‘Government grants’) and Customer Solutions. The ROCs are recognised as inventory in Customer Solutions before being sold to external customers, which creates a mismatch in the timing of the internal purchase and the external sale of the ROCs in Customer Solutions. The amount to be eliminated may exceed the amount of ROCs recognised in Offshore for the period.

The timing of transfer of goods or services to customers is categorised as follows:
‘At a point in time’ mainly comprises:
– sale of gas or power in the market, e.g. North Pool, TTF, NBP
– transmission assets for offshore wind farms.

‘Over time’ mainly comprises:
– construction agreements of offshore wind farms and transmission assets
– long-term contracts with customers to deliver gas, power or heat.

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We have implemented IFRS 15 after the modified retrospective method. Therefore, we have not restated comparative figures.

In 2017, we presented revenue from green certificates, mainly ROCs, as generation and sale of power. In 2018, revenue from green certificates is presented as government grants.

Revenue for the year (business performance) increased by 29% to DKK 76,946 million in 2018. The increase was mainly due to a high activity on construction of offshore wind farms for partners, higher revenue from wind farms in operation as well as higher gas and power prices.

Revenue for the year from the construction of offshore wind farms mainly related to the construction of the offshore wind farms Walney Extension, Borkum Riffgrund 2 and Hornsea 1 as well as the divestment of the Burbo Bank transmission asset and a partial divestment of the Hornsea 1 transmission asset as part of the 50% farm-down of Hornsea 1. Following the implementation of IFRS 15, revenue from construction of transmission assets are recognised at the time of divestment.

In 2018, revenue totalled DKK 75,520 million according to IFRS, of which DKK 70,736 million was revenue from the sale of goods, and DKK 4,784 million was revenue from the sale of services.

In 2017, revenue totalled DKK 59,709 million according to IFRS, of which DKK 52,347 million was revenue from the sale of goods, and DKK 7,362 million was revenue from the sale of services.

Unsatisfied long-term contracts
Our remaining performance obligations expected to be recognised in more than one year relate to the construction of wind farms and offshore transmission assets. The constructions are expected to be finalised within two years.

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The transaction price allocated to the remaining performance obligation (unsatisfied or partially satisfied) as at 31 December 2018.

In accordance with IFRS 15, the overview does not include revenue from contracts with customers to deliver power, gas and heat or our operation and maintenance agreements. For these types of goods and services, we recognise the revenue that correspond directly to the value transferred to the customer.

Key accounting estimates
Assumptions for the determination of the expected selling price and expected costs
We make estimates when determining the expected selling price of individual construction agreements.
These estimates are influenced by our assessment of:
– the completion degree of the individual offshore wind farms and offshore transmission assets
– total expected costs for the individual contract
– the value of incentive agreements under which we may be paid a bonus for early delivery or have to pay compensation for late delivery
– guarantee commitments undertaken
– share of total costs associated with transmission assets which are expected to be covered upon handover, etc.

Therefore, our determination of profit and the recognition of revenue and related contract assets are subject to significant uncertainty. We believe that our estimates are the most likely outcomes of future events.

Key accounting judgements
Assumptions for the recognition of revenue from the construction of offshore wind farms over time
We construct offshore wind farms with partners, where we construct our partner’s share of the wind farm. We assess each construction agreement at the time of conclusion of the agreement.

In our view, our partner assumes control of the offshore wind farm in step with the construction. This is supported by:
– the regular approval of part deliveries
– approval or rejection of significant variations to the construction
– the partner’s take-over of work from subcontractors, both concerning risk and legal title to the wind farm on an on-going basis
– milestone payments from the partner.

Revenue is therefore recognised over time during the construction of the offshore wind farms.

Accounting policies
Revenue is measured based on the consideration specified in a contract with a customer (transaction price) and excludes amounts collected on behalf of third parties, i.e. VAT. We recognise revenue when we transfer control over a product or service to a customer.

If a part of the transaction price is variable, i.e. bonus payments, incentive payments for unmissed deadlines, etc., the variable consideration is recognised in revenue when it is highly probable that the revenue will not be reversed in subsequent periods.

We adjust the transaction price for the time value of money if the payments exceed twelve months.

Sales agreements are divided into individually identifiable performance obligations. If a sales agreement includes several performance obligations, the sales agreement’s transaction price is allocated to each performance obligation’s stand-alone selling price.

In the comparative period, revenue was measured at the fair value of the consideration received or receivable. Revenue from the sale of goods was recognised when the significant risks and rewards of ownership had been transferred to the customer, recovery of the consideration was probable, the associated costs and possible return of goods could be estimated reliably, there was no continuing management involvement with the goods, and the amount of revenue could be measured reliably. Revenue from rendering of services was recognised in proportion to the stage of completion of the work performed at the reporting date.

Sale of gas
Timing of satisfaction of delivery obligations and significant estimates
Revenue is recognised when control of the gas is transferred to the buyer. Transfer of control occurs either when the gas is injected into the distribution system or physically delivered to the customer.

Significant terms of payment and associated estimates and judgements
Sales contracts for a fixed amount of gas at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts, we recognise revenue in the amount up to which we have a right to invoice.

Some long-term gas sales contracts include clauses which give the right to renegotiate the fixed sales prices. Expectations for the outcomes of renegotiations are not included in revenue before we know the outcome of the individual renegotiations.

In most cases, the consideration for the gas is due when the gas is injected into the distribution system or delivered to the customer. The delivery of gas is invoiced on a monthly basis, and the payment is due within 10-30 days.

Generation and sale of power
Types of goods and services
Revenue from generation and sale of power includes the sale of power produced at own wind farms and power plants, the sale of power sourced from other producers, and the sale of ancillary services.

Timing of satisfaction of delivery obligations, and significant estimates
Revenue is recognised when control of the goods is transferred to the buyer. Transfer of control occurs when the actual power is delivered to the customer, which for power generated by us occurs when it is produced.

Significant terms of payment and associated estimates and assessments
Revenue from ancillary services consist of fees for having power plants on standby in periods with a demand for power generation. Ancillary services are considered one performance obligation which is fulfilled over time when the power plants are on standby.

Sales contracts for a fixed amount of power at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts and for long-term agreements on selling power at a fixed price, we recognise revenue in the amount up to which we have a right to invoice.

In most cases, the consideration for the power is due when the actual power is delivered to the customer. The delivery of power is invoiced on a monthly basis, and the payment is due within 10-30 days.

Ancillary services are invoiced on a monthly basis, and consideration is payable when invoiced.

Revenue from construction of offshore wind farms
Types of goods and services
Revenue from construction of offshore wind farms includes development and construction.

The construction agreements cover the construction from design to delivery of an operational asset. The agreement consists of two performance obligations:
– Offshore wind farms.
– Offshore transmission assets, if applicable.

The construction agreements cover our partners’ shares of the construction of the wind farm and offshore transmission asset, if applicable.

If the contracts include multiple performance obligations, the transaction price will be allocated to each performance obligation based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on the expected cost-plus margin.

Timing of satisfaction of delivery obligations, and significant estimates
We recognise revenue from the construction agreements over time, using an input method to measure progress towards complete satisfaction of the performance obligation because the customer gains control of the offshore wind farm during the construction process. The input method reflects our ongoing transfer of control to the customer.

When the outcome of the performance obligation in the contract can be measured reasonably, the construction agreement is measured at the transaction price of the work performed less progress billings, based on the percentage of completion of the contract at balance sheet date and the total expected revenues from the individual contracts.

We estimate the degree of completion on the basis of an assessment of the work performed, normally calculated as the ratio between the costs incurred and the total costs expected related to the contract in question.

The transaction price is based on the total expected income from individual contracts. Estimates of revenues are based on the transaction price and the completion degree of the offshore wind farm or offshore transmission asset at the balance sheet date.

Estimates of revenues, costs and percentage of completion are revised if circumstances change. Any resulting increases or decreases in estimated revenue or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision come to our knowledge.

An expected loss is recognised when it is deemed probable that the total construction costs will exceed the total revenue from the individual contracts.

Significant terms of payment and associated estimates and assessments
The consideration for the construction of an offshore wind farm consists of a fixed fee and a relatively minor variable fee, depending on when the wind farm can be put into operation.

The consideration for an offshore transmission asset is a fixed fee.

After signing of the construction agreement, we carry out an assessment determining when the wind farm is expected to be completed and calculate the size of the variable payment on this basis. We only recognise the variable fee when it is highly probable that a subsequent reversal will not take place.

At each balance sheet date, an assessment is made of the size of the variable payment which can be included in the transaction price. Revenue is adjusted accordingly.

The customer pays the fixed consideration based on a payment schedule . The payment schedule is determined and based on the expected progress of the construction and transfer of control to the customer.

If the work which we have performed exceeds invoicing on account, a contract asset is recognised. If the payments exceed the work we have performed, a contract liability is recognised.

Generation and sale of heat
Timing of satisfaction of delivery obligations and significant estimates
Heat is sold under long-term heat contracts.

Revenue is recognised when control is transferred to the customer. Transfer of control occurs when the heat is physically delivered to the customer.

In connection with a biomass conversion of a CHP plant, the heat customer makes a prepayment to finance the majority of our CAPEX associated with the conversion. The prepayment is recognised as a contract liability. The contract liability is recognised as revenue in step with the transfer of heat to the customer.

Significant terms of payment and associated estimates and assessments
Payment for the sale of heat consists of fixed costs associated with operation and maintenance of a CHP plant plus fuel costs for the generation of heat and a financial return.

The delivery of heat is invoiced on a monthly basis, and the payment is due within 10-30 days.

Distribution and transmission
Timing of satisfaction of delivery obligations, and significant estimates
Revenue from the distribution and transmission of gas and power is recognised when the gas or power is delivered to the buyer, or when the capacity is made available.

Significant terms of payment and associated estimates and assessments
Revenue is calculated as the amount we are entitled to when the service is delivered to the customer and invoiced on a monthly basis, and consideration is payable when invoiced.

Other revenue
Types of goods and services
Other revenue primarily includes operations and maintenance agreements and other services.

Timing of satisfaction of delivery obligations and significant estimates
Revenue from providing services is recognised in the accounting period in which the services are rendered.

For fixed-priced contracts, revenue is recognised based on the actual service rendered at the end of the reporting period as a proportion of the total services to be rendered because the customer receives and uses the benefits simultaneously. This is determined based on the actual labour hours spent relative to the total labour hours expected.

Significant terms of payment and associated estimates and assessments
The consideration for operations and maintenance agreements consists of a fixed fee and a minor variable fee, e.g. bonuses or compensation for wind farm availability.

Availability bonuses will be recognised on an ongoing basis when it is highly probable that a subsequent reversal will not take place.

Fixed-price contracts are invoiced on a monthly basis, and consideration is payable when invoiced. Variable fee services are generally due after the services are rendered.

Warranty obligations
We typically have a five-year responsibility to remedy defects that exists at the relevant taking-over date when we construct offshore wind farms. These types of warranties are accounted for under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’. Reference is made to the accounting policy on warranty provisions in note 3.2 ‘Provisions and contingent assets and liabilities’.

4. Working capital (extract)
Our key working capital items consist of inventories, net contract assets, trade receivables and payables, tax equity liabilities and other payables, including prepayments from heat customers. Connection charges in our power distribution business has been classified as assets held for sale at 31 December 2018.

Working capital items vary with the seasonal variations in our generation and sales activities during the year. Our net contract assets relate primarily to construction of offshore wind farms for partners and vary within and across years, depending on the portfolio of offshore construction assets. They also depend on when we reach certain milestones and trigger payments from our partners.

Contract assets, net also include prepayment from heat customers in connection with our bioconversions and therefore vary depending on the progress of these projects. Construction of offshore transmission assets in the UK, which are recognised as inventories, will continue to tie up cash until they are divested. Tax equity liabilities also vary within and across years. This is due to the fact that we receive cash contributions from tax equity partners at the point in time when a US onshore wind farm enters into operation.

Trade payables relating to capital investments are not included in this section as they are presented as part of the cash flows from investing activities.

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The composition of our net working capital has changed relative to last year. In 2017, we recognised offshore transmission assets as construction agreements. Following the implementation of IFRS 15, we recognise offshore transmission assets as inventory. Furthermore, the introduction of tax equity elements in our Onshore business has impacted our working capital. Work in progress consists of inventories related to transmission assets, construction agreements and construction management agreements in connection with the construction of transmission assets and offshore wind farms for partners as well as related trade payables

4.2 Contract assets and liabilities

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As we have implemented IFRS 15 in accordance with the modified retrospective method, we have not restated comparative figures. Read more about the adoption of IFRS 15 and the effect on the changed presentation in note 1.4 ‘Implementation of new or changed accounting standards and interpretations’.

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The table shows how much of our revenue recognised in 2018 that relates to contract liabilities carried forward (as prepayments and deferred revenue), and how much that relates to performance obligations satisfied in a prior year (e.g. renegotiations or constraints on variable considerations that are not recognised until they are highly probable).

Contract asset and contract liabilities are primarily related to:
– the construction of offshore wind farms with partners, with each party usually owning 50% of the offshore wind farm
– prepayments from heat customers.

At the end of 2018, contracts assets and liabilities included our construction of our partners’ share of the Hornsea 1, Walney Extension and Borkum Riffgrund 2 offshore wind farms.

Non-current contract liabilities amounted to DKK 3,642 million compared to DKK 5,327 million as of 1 January 2018. The decrease was primarily related to a reclassification of grid connection charges and prepayments in our Danish power distribution, residential customer and city light businesses to assets held for sale at the end of 2018. Reference is made to note 3.6 ‘Assets classified as held for sale’.

Accounting policies
We recognise a contract asset when we perform a service or transfer goods in advance of receiving consideration, and the consideration is conditional.

When the consideration is unconditional, and the goods or services are delivered, we recognise a receivable. A right to consideration is unconditional if only the passage of time is required before the payment is due.

Contract assets are measured at the transaction price of the good or services which we have performed less invoicing on account.

We recognise a contract liability when the invoicing on account and expected losses exceed the transaction price of the goods or services transferred to our customer.

 

 

 

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