IFRS 15 early adopted, half year report disclosures, judgements and estimates

Ferrovial S.A. – Half year report – 30 June 2017

Industry: construction, transport

Ferrovial S.A. – Half year report – 30 June 2017

  1. Summary of the main accounting policies (extract)

2.2 New standards and amendments applied in the six-month period ended 30 June 2017. First-time application of IFRS 15, Revenue from Contracts with Customers

Although the new standard is not mandatorily applicable until 1 January 2018, as stated in the consolidated financial statements for 2016, Ferrovial decided, making use of the option included in IFRS 15, to early apply the standard effective 1 January 2017. As a result of this decision, Ferrovial has changed its accounting policies and updated its internal processes and controls relating to revenue recognition.

IFRS 15 was applied retrospectively, recognising the cumulative effect of initially applying this standard as an adjustment to the opening balances for 2017 of the consolidated statement of financial position. Therefore, the comparative information for 2016 was not restated and continues to be presented in accordance with IAS 11 and IAS 18.

The impact, by line item, on the consolidated statement of financial position as at 1 January 2017 was as follows:

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The main impact of the application of this new standard was to reduce the equity attributable to shareholders by EUR -259 million, the main balancing entries being a reduction of EUR -239 million in the balance of trade and other receivables, basically amounts to be billed for work performed, an increase of EUR 90 million in operating provisions, a reduction of EUR -42 million in accounts payable (specifically in amounts billed in advance) and the tax effect of these adjustments, which was recognised for EUR 34 million in deferred taxes.

The main changes in accounting policies giving rise to these impacts relate mainly to the following three issues:

(i) Definition of distinct performance obligations in long-term services contracts and allocation of a price to each obligation.

These are mainly long-term contracts (more than ten years) in the Services Division in which Ferrovial carries out various different activities throughout the life of the infrastructure (Capex, Opex and Lifecycle). Under the previous standards, these contracts were regarded as having a single performance obligation, the outcome of which was recognised by reference to the overall revenue from the contract. Under the new standard, unlike the above-mentioned criterion, several performance obligations are recognised (IFRS 15.27), to which the prices established in the contract, provided they are deemed to be market prices, are allocated (IFRS 15.73-80). The effect of this new criterion is to delay the recognition of revenue, insofar as the expected margin on the performance obligations already satisfied will be lower than that forecast for the contract as a whole. The negative impact of this adjustment on equity attributable to the shareholders amounted to EUR -80 million.

(ii) Change in the method of recognising revenue from contract modifications and transactions subject to variable consideration.

In the case of revenue arising from contract modifications, IFRS 15 requires customer approval (IFRS 15.18), a stricter criterion than the probability requirement in the current standards (IAS 11.13 and IAS 18.18).

In the case of transactions subject to variable consideration, the new standard establishes that revenue from the transaction is recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved (IFRS 15.56-58). The transactions subject to variable consideration include most notably revenue from claims submitted to customers and contractual incentive payments, which were recognised using a probability criterion under the previous standard (IAS 11.14 and 15).

This change gave rise to a delay in revenue recognition as the new standard establishes stricter criteria. It also entailed updating the criteria relating to which revenue, coming from change orders and transactions subject to variable considerations, can be deemed to be revenue from a contract, for the purpose of establishing the benefits that might derive therefrom, in order to determine whether a contract should be classified as onerous and whether it is necessary to recognise a provision for future losses pursuant to IAS 37.

The negative impact on equity attributable to the shareholders in this connection amounted to EUR -155 million.

(iii) Establishment of a consistent revenue recognition method for contracts with similar characteristics.

The new standard requires a consistent revenue recognition method to be used for contracts and performance obligations with similar characteristics (IFRS 15.40). The Group has chosen the output method for measuring the value of goods or services for which control is transferred to the customer over time, provided that the progress of the work performed can be measured on the basis and over the course of the contract (IFRS 15.B17). In contracts to provide different highly interrelated goods or services in order to produce a combined output, which occurs habitually in contracts with a construction component, the applicable output method is that of measurement of units produced (“surveys of performance completed to date” output method). Also, in routine service contracts in which the goods or services are substantially the same and are transferred with the same pattern of consumption, in such a way that the customer receives and consumes the benefits of the goods or services as the entity provides them, the method selected by the Group to recognise revenue is the time elapsed (output method), whereas costs are recognised on an accrual basis. On the basis of the foregoing, the input method (based on resources consumed) will only be used when the progress of the work cannot be measured reliably by an output method. The use of this rule will give rise to a change of recognition method for certain contracts, and the negative impact on equity attributable to the shareholders will be EUR -24 million.

2.3 Accounting estimates and judgements.

In the interim condensed consolidated financial statements as at 30 June 2017 estimates were made to measure certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following:

  • Judgements to define the methods of accounting for investees.
  • The assessment of possible legal contingencies (see Note 10, Contingent assets and liabilities, obligations and investment commitments).
  • The estimates taken into consideration when recognising revenue from customers pursuant to the new IFRS 15 in construction and services activities, which include, inter alia:

– Criteria established for determining claimability from the customer: approval, compliance with contractual conditions or effective transfer of goods or services.

– The identification of performance obligations in each con-tract and the determination of the transaction price when the transaction price is not disclosed in the contract (if there is more than one performance obligation) or it is not directly observable.

– Determining prices when the consideration includes a variable amount; only revenue that it is highly probable will not reverse in the future is recognised.

– Measurement of revenue both in cases when the “output method” or the “input method” is applied, in construction and services contracts.

  • The estimates required to calculate provisions in the performance of construction and services contracts, the most noteworthy of which are provisions relating to estimated losses at the end of the contract (onerous contracts) or estimated expenses at the end of the contract.

The judgements and estimates described in the two preceding segments are made by the persons in charge of performing the construction work or services contracts, are subsequently reviewed at the various levels of the organisation, and are submitted to controls designed to ensure the consistency and reasonableness of the criteria applied.

  • Estimates regarding the valuation of derivatives and the expected flows associated with them in order to determine the existence of hedging relationships (see Note 8, Non-current financial assets and derivative financial instruments at fair value).
  • The assessment of possible impairment losses on certain assets (see Note 4.2, Goodwill and acquisitions, and Note 4.5, Investments in associates).
  • Business performance projections affecting the estimate of tax assets and their possible recoverability (see Note 4.10, Deferred taxes).
  • Estimates regarding the tax rate expected to be applicable to the total annual earnings with a view to calculating the income tax expense for the first six months of the year.
  • Estimates taking into account the future vehicle numbers on toll roads for the purpose of preparing financial information for toll roads pursuant to IFRIC 12 (see Note 4.4, Investments in infrastructure projects).
  • The assumptions used in the actuarial calculation of pension and other obligations to employees (see Note 4.9, Pension plan deficit).
  • The measurement of share options and share-based payment schemes.
  • The measurement of the fair value of assets and liabilities in new business acquisition transactions and the consequent calculation of goodwill.

Although these estimates were made using the best information avail-able at 30 June 2017 on the events analysed, events that take place in the future might make it necessary to change these estimates. Changes in accounting estimates would be applied prospectively in accordance with the requirements of IAS 8.

4.7 Provisions.

The provisions recognised by the consolidated Group are intended to cover the risks arising from its various operating activities. They are recognised using the best estimates of the existing risks and uncertainties and their possible evolution.

The changes in the six-month period ended 30 June 2017 in the long-term and short-term provisions disclosed separately under liabilities in the consolidated statement of financial position were as follows:

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As can be observed, the effect of application of the transition to IFRS 15, which is explained in Note 2.1, gave rise to an impact of EUR 90 million on provisions. As a result of this impact, EUR 44 million affected equity coming from an update of provision for future operating losses at December 2016, excluding from to the calculation of the estimated result those revenues arising from contract modifications or transactions subject to variable consideration, that do not meet the new requirements in the current standards (see Note 2.2 ii). The rest corresponds mainly to a reclassification be-tween work billed in advance and provisions, without impact on equity (see Notes 2.2 iii and 4.6).

Detail of changes excluding the effect of applications of the transition to IFRS 15, impact of the allocation of the purchase price of Broadspectrum, change in the scope of consolidation and exchange rates, are shown below (EUR 56 million):

  • Charges/reversals that had an impact on profit or loss with a net reversal (expense) of EUR (30) million, of which EUR 1 million impacted gross profit from operations as revenue (Note 7. Cash Flow) and EUR 31 million impacted other line items in the consolidated statement of profit or loss (mainly amortizations and results from impairment and disposals).

  • Use of provisions in the amount of EUR -86 million with no impact on gross profit from operations and had balance entries on working capital (Note 7).

4.6 Working capital.

This line item reflects changes in the asset items inventories and current trade and other receivables and the liability item current trade and other payables. The net balance of these items is called working capital (see Section 4 of the consolidated financial statements as at 31 December 2016).

The following table shows the changes in these items:

As can be observed, the effect of application of the transition to IFRS 15, which is explained in Note 2.1, gave rise to an impact of EUR 90 million on provisions. As a result of this impact, EUR 44 million affected equity coming from an update of provision for future operating losses at December 2016, excluding from to the calculation of the estimated result those revenues arising from contract modifications or transactions subject to variable consideration, that do not meet the new requirements in the current standards (see Note 2.2 ii). The rest corresponds mainly to a reclassification be-tween work billed in advance and provisions, without impact on equity (see Notes 2.2 iii and 4.6).

Detail of changes excluding the effect of applications of the transition to IFRS 15, impact of the allocation of the purchase price of Broadspectrum, change in the scope of consolidation and exchange rates, are shown below (EUR 56 million):

  • Charges/reversals that had an impact on profit or loss with a net reversal (expense) of EUR (30) million, of which EUR 1 million impacted gross profit from operations as revenue (Note 7. Cash Flow) and EUR 31 million impacted other line items in the consolidated statement of profit or loss (mainly amortizations and results from impairment and disposals).

  • Use of provisions in the amount of EUR -86 million with no impact on gross profit from operations and had balance entries on working capital (Note 7).

4.6 Working capital.

This line item reflects changes in the asset items inventories and current trade and other receivables and the liability item current trade and other payables. The net balance of these items is called working capital (see Section 4 of the consolidated financial statements as at 31 December 2016).

The following table shows the changes in these items:

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Main changes are related to Current trade and other receivables, with a total increase of 66 million that is the result of different increase and decrease movements:

  • The exchange rate effect reduced this line item by EUR 48 million, due mainly to the depreciation of the pound sterling and the Australian dollar against the euro, which was partially offset by the appreciation of the Polish zloty, as indicated in Note 4.1.
  • The early application of IFRS 15 (see Note 2.2, Summary of the main accounting policies) gave rise to a reduction of EUR 239 million in total trade and other receivables.
  • Changes in the scope of consolidation includes the balances relating to the inclusions in the scope of consolidation (mainly the Trans-Formers Group) amounting to EUR 7 million.
  • The “Other” column includes changes arising mainly from trading of the year, affected by seasonality since, as described in Note 12, in the main countries in which Ferrovial has operations, collections from the public sector are higher in the second half of the year than in the first. The main changes arising from this factor are in the following business activities: Construction Poland (EUR +139 million) and Services UK (EUR +162 million). In addition, it includes a movement of EUR 8 million in factoring arrangements (EUR 68 million as at 30 June 2017 com-pared to EUR 60 million as at 31 December 2016). These operations have been deducted from Balance Sheet since it was considered that they met the conditions stipulated in IAS 39.20 regarding the derecognition of financial assets. Finally, it also includes the movement of allowance for doubtful accounts that offset trade receivables for sales and services, where a reversal of EUR 4 million has been registered, with an impact in Gross profit from operations of the Construction business unit.

Relating the changes in the other line items, worthy of mention is the impact of IFRS15 application in amounts billed in advance for construction works, derived from a reclassification between this line and provisions amounting to EUR 46 million, with no equity impact, and that is the result of establishing a consistent revenue recognition method for contracts with similar characteristics (Note 2.2.(iii)).

Additionally, with respect to inventories, there is an increase of EUR 76 million under Other, of which EUR 41 million relate mainly to land purchases relating to the real estate activities in Poland.

 

 

 

 

 

 

 

 

 

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