Warranty provisions, IAS 37 disclosures, estimates

Vestas Wind Systems A/S – Annual report – 31 December 2020

Industry: manufacturing

3.6 Provisions

Vestas accounting policies

Provisions are recognised when as a consequence of a past event Vestas has a legal or constructive obligation and it is probable that there will be an outflow of Vestas’ financial resources to settle the obligation.

Provisions are measured at management’s best estimate of the costs required to settle the obligation. Discounting is applied where relevant.

Vestas accrues for the estimated cost of the warranty upon recognition of the sale of the product. The costs are estimated based on actual historical costs incurred and on estimated future costs related to current sales, and are updated periodically. Actual warranty costs are charged against the provision for warranty.

Restructuring costs are recognised as liabilities when a detailed, formal restructuring plan has been announced to those affected no later than the balance sheet date.

A provision for loss-making contracts is made where the expected benefits to Vestas from the contract are lower than the unavoidable costs of meeting obligations under the contract. Loss making construction contracts in progress are, however, recognised in construction contracts in progress.

Provision for legal disputes are recognised where a legal or constructive obligation has been incurred as a result of past events and it is possible that there will be an outflow of resources that can be reliably estimated. In this case, Vestas arrives at an estimate on the basis of an evaluation of the most likely outcome. Disputes for which no reliable estimate can be made are disclosed as contingent liabilities, ref. note 3.7.

Key accounting estimates

Provisions for warranties

The product warranties, which in the great majority of cases includes component defects and functional errors and agreed financial losses suffered by the customer in connection with unplanned suspension of operations, are usually granted for a two-year period from legal transfer of the wind turbine. In certain cases, a warranty of up to five years is provided. For the customer, the specific warranty period and the specific warranty terms are part of the basis of the individual contract.

Warranty provisions include only standard warranty, whereas services purchased in addition to the standard warranty are included in the service contracts.

In addition to the above, provisions are made for upgrades of wind turbines sold due to defects, etc. Such provisions will also include wind turbines sold in prior years, but where serial defects, etc. are identified later. Moreover, it should be emphasised that the complexity of some of the serial defects, etc. identified may lead to adjustments of previous estimates, upwards as well as downwards, in light of factual information about population size, costs of repair and the timing of such repairs.

It is estimated that 35-40 percent of the warranty provisions made for the year relate to adjustments of previous years’ estimates of provisions for defects, etc. Included in this, is the cost of upgrades of wind turbines sold in the previous year, commercial settlements and proactive upgrading as well as new information about the type faults in question.

Total warranty provisions of EUR 693m have been made in 2020 (2019: EUR 291m), corresponding to 4.7 percent (2019: 2.4 percent) of Vestas’ revenue. Warranty provision includes an extraordinary provision of EUR 175m relating to a repair and upgrade of blades already installed.

Management assesses the likely outcome of pending and future negotiations with sub-suppliers for compensation. Compensation from sub-suppliers may be recognised only when it is virtually certain that we will receive compensation from the sub-suppliers.

The carrying amount of warranty provisions was EUR 1,189m as at 31 December 2020 (2019: EUR 619m), including addition of EUR 203m from the acquisition of MHI Vestas Offshore Wind.

In line with accounting policies, potential product warranties are recognised as warranty provisions when revenue from the sale of wind turbines and wind power plants is recognised.

Product risks

Vestas invest significant resources in improving products and increasing their reliability to mitigate major warranty provisions. This work comprises design, production, installation, and continuous maintenance.

The goal of these initiatives is to reduce Vestas’ warranty costs, to secure customer returns, and increase the competitiveness of the products.

Other provisions consist of various types of provisions, including provisions for legal disputes and provisions for onerous service contracts.