IFRS 15, IFRS 9, description of effects of future adoption, including JVs, with quantification, construction contracts

Hochtief AG – Annual report – 31 December 2017

Industry: construction

  1. New Accounting Pronouncements (extract)

The International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRS IC) have issued new accounting pronouncements in the form of standards and interpretations that affect the HOCHTIEF Consolidated Financial Statements but do not have to be applied for the 2017 year and in some cases have not yet been endorsed by the EU:

IFRS 9 Financial Instruments

The new standard on financial instruments is divided into several phases and was published by IASB in its final version in July 2014. The new standard notably introduces major changes relating to the classification and measurement of financial assets, with classification to be based on the type of business model as well as on contractual cash flows. In the same connection, impairment assessment is extended from an incurred loss model to an expected loss model. A new hedge accounting model is also introduced that aims to bring hedge accounting more closely into line with the risk management activities of the entity. The complete overhaul of IAS 39 with the publication of IFRS 9 results in additional disclosures. The standard is applicable for annual periods beginning on or after January 1, 2018. Initial application is retrospective, although transitional provisions apply. The standard was endorsed by the EU in November 2016.

Accordingly, the HOCHTIEF Group has undertaken an assessment of the impacts of the new standard on classification and measurement as well as on hedge accounting, and estimated the following impacts:

  • The HOCHTIEF Group does not expect the new standard to have a significant impact on the classification of its financial assets;
  • The HOCHTIEF Group does not hold any financial liabilities at fair value through profit and loss and as such there is no impact of the new standard on financial liabilities;
  • As a general rule, more hedge relationships may be eligible for hedge accounting. Existing hedge relationships would appear to qualify as continuing hedge relationships upon adoption of the new standard;
  • IFRS 9 will require extensive new disclosures, in particular surrounding hedge accounting, credit risk and expected credit losses;
  • The HOCHTIEF Group plans to adopt the temporary exemption from IFRS 9 for selected financial instruments (“overlay approach”);
  • Based on the HOCHTIEF Group’s analysis, an adjustment in reserves attributable to shareholders and to non-controlling interests will be recognized in the opening balance at January 1, 2018. The change in method from recognition of incurred losses to recognition of expected credit losses for impairment of financial assets might lead to a currently expected adjustment of equity in an amount of around EUR 400 million (after tax). This adjustment mainly relates to non-current loan receivables from HLG Contracting, having utilized external independent advice in determining the estimated expected credit loss when applying IFRS 9;
  • In addition to the above management is currently assessing whether any specific project finance obligations would require the recognition of expected credit losses;
  • Otherwise the increase in the loss allowance on financial assets is not expected to be significant.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a comprehensive framework for determining the timing and amount of revenue recognized. It replaces existing guidance, primarily including IAS 18 Revenue and IAS 11 Construction Contracts. The core principle of IFRS 15 is that an entity recognizes revenue when control of a good or service transfers to a customer. The standard will become mandatory for reporting periods beginning on or after January 1, 2018. It was endorsed by the EU in September 2016.

Significant judgments and estimates are used in determining the impact, such as assessment of the probability of customer approval of variations and acceptance of claims, estimation of project completion date, and assumed levels of project execution productivity. In making this assessment we have considered, for applicable contracts, the individual status of legal proceedings, including arbitration and litigation. The implementation project is ongoing and therefore all impacts are current estimates subject to finalization prior to final implementation.

Based on current analysis, the HOCHTIEF Group expects the following significant impacts on its financial statements from the first-time application of IFRS 15:

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. However, 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. Revenue is currently recognized when it is probable that work performed will result in revenue, whereas under the new standard, revenue is recognized when it is highly probable that a significant reversal of revenue will not occur for these modifications.

Service revenue arises from maintenance and other services supplied to infrastructure assets and facilities, which may involve a range of services and processes. Under IFRS 15, these are predominantly to be recognized over time with reference to inputs on satisfaction of performance obligations. The services that have been determined to be one performance obligation are highly inter-related and fulfilled over time. Revenue therefore continues to be recognized over time. As with construction revenue, incentives, variations and claims exist which are subject to the same higher threshold criteria of only recognizing revenue to the extent it is highly probable that a significant reversal of revenue will not happen.

Currently, under IAS 11, construction contracts costs incurred during the tender process are capitalized within net contract debtors when it is deemed probable the contract will be won. Under the new standard, costs can only be capitalized 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 a project. Other contract costs and fulfilment costs are not expected to be material.

With regard to revenue recognition for fully consolidated companies, the increased revenue recognition requirements under IFRS 15 would, on current estimates, necessitate adjustments to equity in the amount of around EUR 550 million (after tax).

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 recognized by the joint venture and accounted for by the Group as its share of profit or loss. While the joint ventures are not controlled entities, an analysis of the impact that might be expected has been performed due to the adoption of IFRS 15, based on the information currently available. In light of this analysis, an adjustment will be recognized to the book value of the joint ventures in the opening balance as of January 1, 2018. Equity is currently estimated to be reduced by an amount of around EUR 300 million (after tax). This includes an adjustment in an amount of around EUR 160 million (after tax) on HLG.

The HOCHTIEF Group does not expect that first-time application of IFRS 15 will result in further significant changes in its financial statements. This notably applies to the recognition of revenue from mining and mineral processing.


The HOCHTIEF Group plans to adopt IFRS 15 using the cumulative effect method as of January 1, 2018. As a result, under IFRS 15, there will be an adjustment to the opening balance of the HOCHTIEF Group’s equity.

Other impacts of IFRS 9 and IFRS 15

Tax impacts and equity adjustments

Adjustments under the two new standards are subject to tax effect accounting and, therefore, the net deferred tax position will also be impacted by the adjustments discussed above, which are shown net of tax. The current position outlined above will lead to a net increase in deferred tax assets of around EUR 150 million. The equity adjustments of first-time application of the two standards are expected to reduce equity by an amount of around EUR 1,250 million, with the impact on equity attributable to non-controlling interests amounting to around EUR 250 million.

Impact on cash flows and guidance

Adjustments arising on application of IFRS 9 and IFRS 15 are not expected to have an impact on the cash flows to be derived by the HOCHTIEF Group. Operational net profit guidance for 2018 takes into account the application of the new accounting standards.