IFRS 15 adopted, revenue policies, judgements and estimates, joint ventures, construction contracts

Hochtief AG – Annual report – 31 December 2018

Industry: construction

Financial reporting standards applied for the first time in 2018 (extracts)

IFRS 15 Revenue from Contracts with Customers:

The HOCHTIEF Group applied IFRS 15 Revenue from Contracts with Customers for the first time in 2018. This standard establishes a comprehensive framework for determining the timing and amount of revenue recognized. It primarily replaces IAS 11 Construction Contracts and IAS 18 Revenue. The core principle of IFRS 15 is that an entity recognizes revenue when control of a good or service transfers to a customer.

IFRS 15 has been applied in the HOCHTIEF Group as of January 1, 2018 using the modified retrospective method. Under this method, the effects of applying the standard have been recognized in consolidated equity and the presentation of the comparison period remains unchanged. Significant judgments are used in determining the impact of IFRS 15, such as assessment of the probability a client will accept variations and claims, or estimation of progress and productivity in project execution. In making this assessment, the HOCHTIEF Group has considered, for applicable contracts, the individual status of legal proceedings, including litigation and arbitration. The significant effects of applying the standard were as follows:

The contractual terms and the way in which the HOCHTIEF Group operates its construction contracts are predominantly derived from projects containing one performance obligation. Contracted revenue will continue to be recognized over time. IFRS 15 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. Under IAS 11, revenue was recognized when it was probable that work performed would result in revenue, whereas under IFRS 15, revenue is recognized when it is highly probable that a significant reversal of revenue will not occur for such modifications. Where consideration in respect of a contract is variable, the expected value of revenue is recognized (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 them. Where the price of the modification has not been confirmed, an estimate is made of the amount of revenue to recognize whilst also considering the constraint requirement.

The HOCHTIEF Group accounts for ongoing construction contracts in receivables as contract assets if cumulative performance (contract cost and contract earnings) exceeds progress payments received. Separate contract liabilities are recognized for all construction contracts where progress payments received exceed cumulative performance. Part-performance already invoiced is presented in trade receivables. 

Service revenue arises from maintenance and other services in the infrastructure business, which may involve a range of services and processes. Services combined as a single performance obligation are closely related and performed over time. Related revenues therefore continue to be recognized over time in the HOCHTIEF Group. As with construction revenue, service revenues also involve incentives, variations, and claims that are subject to the same strict requirement of only recognizing revenue to the extent it is highly probable that there will be no significant cancellations.

Under IAS 11, costs incurred during the tender process were capitalized within trade receivables when it was deemed probable the contract would be won. Under the new standard, costs are capitalized only 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. 

Costs incurred prior to the commencement of a contract (contract fulfillment costs) may arise due to mobilization/site setup costs, feasibility studies, environmental impact studies, and preliminary design activities as these are costs incurred to fulfill a contract. Where these costs are expected to be recovered, they are capitalized and amortized over the duration of the contract consistent with the transfer of service to the customer. Where the costs, or a portion thereof, are reimbursed by the customer, the amount received is recognized as deferred revenue and allocated to the performance obligations within the contract and recognized as revenue over the course of the contract.

The HOCHTIEF 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 normally does not adjust any of the transaction prices for the time value of money.

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 are therefore estimated and included in the total costs of the contracts. Where required, amounts are recognized accordingly in line with IAS 37 under provisions.

Concerning 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.

The adjustment reflects the consistent application of HOCHTIEF Group revenue recognition criteria as outlined above. The higher recognition threshold and constraint criteria under IFRS 15 have led mainly to a reduction in the investment in BICC by EUR 160 million.

With regard to revenue recognition for fully consolidated companies, the increased revenue recognition requirements under IFRS 15 led to a reduction in equity by EUR 740 million (after tax) as of January 1, 2018.

In the case of equity-method joint ventures, the carrying amount of the investment in a joint venture reflects the Group’s share of equity including the revenue from construction contracts (IFRS 15) recognized by the joint venture and accounted for by the Group as its share of profit or loss. In this connection, equity was reduced by EUR 245 million (after tax) as of January 1, 2018.

Overall effects of first-time application of IFRS 9 and IFRS 15 (page 172)

Impact on Consolidated Balance Sheet

The impact of first-time application of IFRS 9 and IFRS 15 on assets, liabilities and equity in the HOCHTIEF Consolidated Balance Sheet as of January 1, 2018 is as follows:


The equity adjustments on first-time application of the two standards led to a reduction in equity by EUR 1,394 million as of January 1, 2018, with the impact on equity attributable to non-controlling interests amounting to EUR 270 million.

Adjustments under the two new standards must also take deferred taxes into account and, therefore, the net deferred tax position is also impacted by the adjustments discussed above, which are shown net of tax. Deferred tax assets increased by a net amount of EUR 95 million as of January 1, 2018.

Impact on cash flows

First-time application of IFRS 9 and IFRS 15 has no impact on the HOCHTIEF Group’s cash flows.

  1. New accounting pronouncements (extract)

IFRS 15 Revenue from Contracts with Customers

If the 2018 Group Report had been prepared in accordance with IAS 11 Construction Contracts and IAS 18 Revenues instead of in accordance with IFRS 15, this would have had the following impacts on the financial position and results of operations of the HOCHTIEF Group:

  • Equity would be EUR 984,387 thousand higher as of December 31, 2018 due to reversal of the restatements. For an analysis of the impact on the affected items in the Consolidated Balance Sheet, please see the table on page 172 of the Group Report 2018.
  • The impacts on all items in the Consolidated Statement of Earnings and Consolidated Statement of Comprehensive Income for the reporting period January 1, 2018 to December 31, 2018 would not have been material. Similarly, reversal of the aforementioned restatements for the reporting period would not have any further material impact on the Consolidated Balance Sheet as of December 31, 2018.
  1. Accounting policies (extracts)

Construction contracts are accounted for on the basis of percentage of completion. Cumulative performance to date, including the Group’s share of net profit, is generally recognized as sales on a pro rata basis over time according to the percentage completed. Project progress is determined using the method that provides the best measure of progress toward completion. The input or output methods may be used consistently for similar performance obligations and in similar circumstances. The HOCHTIEF Group mainly uses input methods (such as the cost-to-cost method for revenue recognition on a percentage of completion basis) especially to determine construction revenue. For other types of project (especially in the services business), output methods such as the units-of-delivery method are better suited as they provide a more precise estimate of project execution progress and of the associated costs. Projects are accounted for under contract assets and contract liabilities, as applicable. If cumulative performance (contract costs and contract earnings) exceeds progress payments in a given construction contract, the project is presented as a contract asset. Where the net amount after deduction of progress payments received is negative, the difference is recognized as a liability and presented under contract liabilities. Part-performance already invoiced is accounted for in trade receivables. Expected contract losses are accounted for on the basis of the identifiable risks and immediately included in full in contract earnings. Contract income is recognized in accordance with IFRS 15 as the income stipulated in the contract plus contract modifications, meaning any claims and variation orders. Contract assets are realized within one operating cycle at the HOCHTIEF Group. In accordance with IAS 1, they are therefore included in current assets even if the entire receivable is not expected to be realized in full within twelve months of the balance sheet date.

Judgments made by management in applying the accounting policies primarily relate to the following matters:

  • Construction and services

– determination of stage of completion;

– estimation of total contract costs;

– estimation of total contract revenue, including recognizing revenue on contract variations and claims only to the extent it is highly probable that a significant reversal in the amount recognized 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.
  • Leases must be assessed to determine whether the substantial risks and rewards of beneficial ownership transfer to the lessee.
  • Marketable securities may be grouped in different categories.
  • Application of the risk management strategy to hedges.
  • Assets earmarked for sale must be assessed to confirm that they are available for immediate sale and their sale is highly probable. If the result of this assessment is positive, those assets and any liabilities to be disposed of in the same transaction must be reported and accounted for as assets held for sale and liabilities associated with assets held for sale.

The decision made by the HOCHTIEF Group for general application in each instance is set out under Accounting Policies in these Notes.

Preparation of the IFRS Consolidated Financial Statements requires Group management to make estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses, and disclosures of contingencies, commitments, and other obligations. The main estimates and assumptions relate to the following:

  • Assessing projects on a percentage of completion basis, in particular with regard to accounting for contract modifications, the timing of profit recognition, and the amount of profit recognized.
  • Estimating the economic life of intangible assets, property, plant and equipment, and of investment properties.
  • The measurement of expected credit losses.
  • Accounting for provisions.
  • Testing goodwill and other assets for impairment.
  • Testing deferred tax assets for impairment.

All estimates and assumptions are based on current circumstances and appraisals. Forward-looking estimates and assumptions made as of the balance sheet date with a view to future business performance take account of circumstances prevailing on preparation of the Consolidated Financial Statements and future trends considered realistic for the global and industry environment. Actual amounts can vary from the estimated amounts due to changes in the operating environment that are at variance with the assumptions and lie beyond management control. If such changes occur, the assumptions and, if necessary, the carrying amounts of affected assets and liabilities are revised accordingly.