Review of 2010 – USD version - Skanska

A financial asset or financial liability is recognized in the statement of financial position
when the Group becomes a party to the contractual provisions of the instrument.
Trade accounts receivable are recognized in the statement of financial position when
an invoice has been sent. A liability is recognized when the counterparty has performed
and there is a contractual obligation to pay, even if the invoice has not yet been received.
Trade accounts payable are recognized when an invoice has been received.
A financial asset is derecognized from the statement of financial position when the
contractual rights are realized or expire or the Group loses control of them. The same
applies to a portion of a financial asset. A financial liability is derecognized from the
statement of financial position when the contractual obligation is fulfilled or otherwise
extinguished. The same applies to a portion of a financial liability.
Acquisitions and divestments of financial assets are recognized on the transaction
date, which is the date that the Company undertakes to acquire or divest the asset.
Financial instruments are initially recognized at cost, equivalent to the instrument’s
fair value plus transaction costs, except instruments in the category “assets at fair value
through profit or loss,” which are recognized exclusive of transaction costs. Recognition
then occurs depending on how they are classified as described below.
Financial assets, including derivatives, are classified as “assets at fair value through
profit or loss,” “held-to-maturity investments,” “loans and receivables” and “availablefor-sale
assets.” An asset is classified among “available-for-sale assets” if the asset is
not a derivative and the asset has not been classified in any of the other categories.
Equity instruments with unlimited useful lives are classified either as “assets at fair value
through profit and loss” or “available-for-sale assets.”
“Assets at fair value through profit or loss,” and “available-for-sale assets” are measured
at fair value in the statement of financial position. Change in value of “assets at
fair value through profit or loss” is recognized in the income statement, while change in
value of “available-for-sale assets” is recognized under “Other comprehensive income.”
When the latter assets are divested, accumulated gains or losses are transferred to
the income statement, but impairment losses on “available-for-sale assets” as well as
changes in exchange rates, interest and dividends on instruments in this category are
recognized directly in the income statement. “Held-to-maturity investments” and “loans
and receivables” are measured at amortized cost. Impairment losses on “held-to-maturity
investments,” “loans and receivables” and “available-for-sale assets” occur when the
expected discounted cash flow from the financial asset is less than the carrying amount.
Financial liabilities including derivatives are classified as “liabilities at fair value
through profit or loss” and “other financial liabilities.”
“Liabilities at fair value through profit or loss” are measured at fair value in the statement
of financial position, with change of value recognized in the income statement.
“Other financial liabilities” are measured at amortized cost.
In reporting both financial assets and financial liabilities in Note 6, Skanska has chosen
to separately report “Hedge accounted derivatives,” which are included in “assets
(or liabilities) at fair value through profit or loss.”
Skanska uses currency derivatives and foreign currency loans to hedge against fluctuations
in exchange rates. Recognition of derivatives varies depending on whether hedge
accounting in compliance with IAS 39 is applied or not.
Unrealized gains and losses on currency derivatives related to hedging of operational
transaction exposure (cash flow hedging) are measured in market terms and recognized
at fair value in the statement of financial position. The entire change in value is
recognized directly in operating income, except in those cases that hedge accounting
is applied. In hedge accounting, unrealized gain or loss is recognized under “Other
comprehensive income.” When the hedged transaction occurs and is recognized in the
income statement, accumulated changes in value are transferred from other comprehensive
income to operating income.
Unrealized gains and losses on embedded currency derivatives in commercial contracts
are measured and recognized at fair value in the statement of financial position. Changes
in fair value are recognized in operating income.
Currency derivatives and foreign currency loans for hedging translation exposure are
carried at fair value in the statement of financial position. Because hedge accounting is
applied, exchange rate differences after taking into account tax effect are recognized
under “Other comprehensive income.” If an operation in a country that has a functional
currency other than USD is divested, accumulated exchange rate differences attributable
to that operation are transferred from other comprehensive income to the income
statement. The interest component and changes in the value of the interest component
of currency derivatives are recognized as financial income or expenses.
In Infrastructure Development projects, interest rate derivatives are used in order
to achieve fixed interest on long-term financing. Hedge accounting is applied to these
interest rate derivatives.
Skanska also uses interest rate derivatives to hedge against fluctuations in interest rates.
Hedge accounting in compliance with IAS 39 is not applied to these derivatives,
however.
Unrealized gains and losses on interest rate derivatives are recognized at fair value
in the statement of financial position. Changes in value excluding the current interest
coupon portion, which is recognized as interest income or an interest expense, are recognized
as financial income or expenses in the income statement.
IFRS 7, “Financial Instruments: Disclosures”
The Company provides disclosures that make it possible to evaluate the significance
of financial instruments for its financial position and performance. It also provides
disclosures that make it possible to evaluate the nature and extent of risks arising from
financial instruments to which the Company is exposed during the period and at the end
of the report period. These disclosures must also provide a basis for assessing how these
risks are managed by the Company. This standard supplements the principles for recognizing,
measuring and classifying financial assets and liabilities in IAS 32 and IAS 39.
The standard applies to all types of financial instruments, with the primary exception
of holdings in subsidiaries, associated companies and joint ventures as well as employers’
rights and obligations under post-employment benefit plans in compliance with IAS
19. The disclosures that are provided thus include accrued interest income, deposits and
receivables for properties divested. Accrued income from customers for contract work is
not a financial instrument.
The disclosures provided are supplemented by a reconciliation with other items in the
income statement and in the statement of financial position.
Disclosures in compliance with this accounting standard are presented in Note 6.
IAS 20, “Accounting for Government Grants and Disclosure of Government
Assistance”
“Government assistance” refers to action by government designed to provide an economic
benefit specific to one company or a range of companies that qualify under certain
criteria. Government grants are assistance by government in the form of transfers
of resources to a company in return for past or future compliance with certain conditions
relating to its operations.
Government grants are recognized in the statement of financial position as prepaid
income or reduction in the investment when there is reasonable assurance that the grants
will be received and that the Group will meet the conditions associated with the grant.
Order bookings and order backlog
In Construction assignments, an order booking refers to a written order confirmation
or signed contract, provided that financing has been arranged and construction is
expected to start within twelve months. If an order received earlier is canceled during a
later quarter, the cancellation is recognized as a negative item when reporting the order
bookings for the quarter when the cancellation occurs. Reported order bookings also
include orders from Residential Development and Commercial Property Development.
For services related to fixed-price work, the order booking is recorded when the contract
is signed, and for services related to cost-plus work, the order booking coincides with
revenue. For service contracts, a maximum of 24 months of future revenue is included.
In Residential Development and Commercial Property Development, no order bookings
are reported.
Order backlog refers to the difference between order bookings for a period and
accrued revenue (accrued project expenses plus accrued project income adjusted for
loss provisions) plus order backlog at the beginning of the period.
The order backlog in the accounts of acquired Group companies on the date of acquisition
is not reported as order bookings, but is included in order backlog amounts.
Market appraisal
Commercial Property Development
Note 22 states estimated market values for Skanska’s current-asset properties. For
completed properties that include commercial space and for development properties,
market values have been partly calculated in cooperation with external appraisers.
Residential Development
In appraising properties in Residential Development, estimates of market value have
taken into account the value that can be obtained within the customary sales cycle.
98 Notes, including accounting and valuation principles Skanska Review of 2010 – USD version