Review of 2010 – USD version - Skanska

Infrastructure Development
Skanska obtains an estimated market value for infrastructure projects by discounting
estimated future cash flows in the form of dividends and repayments of loans and equity
by a discount rate based on country, risk model and project phase for the various projects.
The discount rate chosen is applied to all future cash flows starting on the appraisal
date. The most recently updated financial model is used as a base. This financial model
describes all cash flows in the project and serves as the ultimate basis for financing,
which is carried out with full project risk and without guarantees from Skanska.
A market value is assigned only to projects that have reached financial close. All flows
are appraised − investments in the project (equity and subordinated debenture loans),
interest on repayments of subordinated loans as well as dividends to and from the project
company. Today all investments except New Karolinska Solna are denominated in
currencies other than Swedish kronor. This means there is also an exchange rate risk in
market values.
Market values have partly been calculated in cooperation with external appraisers.
Note
02
Key estimates and judgments
Key estimates and judgments
The Senior Executive Team has discussed with the Board of Directors and the Audit Committee
the developments, choices and disclosures related to the Group’s important accounting
principles and estimates, as well as the application of these principles and estimates.
Certain important accounting-related estimates that have been made when applying
the Group’s accounting principles are described below.
Goodwill impairment testing
In calculating the recoverable amount of cash-generating units for assessing any goodwill
impairment, a number of assumptions about future conditions and estimates of
parameters have been made. A presentation of these can be found in Note 18, “Goodwill.”
As understood from the description in this note, major changes in the prerequisites
for these assumptions and estimates might have a substantial effect on the value
of goodwill.
Pension assumptions
Skanska recognizes defined-benefit pension obligations according to the alternative
method in IAS 19, “Employee Benefits.” In this method, actuarial gains and losses are
recognized as an item under “Other comprehensive income.” The consequence is that
future changes in actuarial assumptions, both positive and negative, will have an immediate
effect on recognized equity and on interest-bearing pension liability.
Note 28, “Pensions,” describes the assumptions and prerequisites that provide the
basis for recognition of pension liability, including a sensitivity analysis.
Percentage of completion
Skanska applies the percentage of completion method, i.e. using a forecast of final project
results, income is recognized successively during the course of the project based on the
degree of completion. This requires that the size of project revenue and project expenses
can be reliably determined. The prerequisite for this is that the Group has efficient, coordinated
systems for cost estimating, forecasting and revenue/expense reporting. The
system also requires a consistent judgment (forecast) of the final outcome of the project,
including analysis of divergences compared to earlier assessment dates. This critical judgment
is performed at least once per quarter according to the “grandfather principle.”
Disputes
Management’s best judgment has been taken into account in reporting disputed
amounts, but the actual future outcome may diverge from this judgment. See Note
33, “Assets pledged, contingent liabilities and contingent assets,” and Note 29,
“Provisions.”
Investments in Infrastructure Development
Estimated market values are based on discounting of expected cash flows for each
respective investment. Estimated yield requirements on investments of this type have
been used as discount rates. Changes in expected cash flows, which in a number of cases
extend 20–30 years ahead in time, and/or changes in yield requirements, may materially
affect both estimated market values and carrying amounts for each investment.
Current-asset properties
The stated total market value is estimated on the basis of prevailing price levels in the
respective location of each property. Changes in the supply of similar properties as well
as changes in demand due to changes in targeted return may materially affect both estimated
fair values and carrying amounts for each property.
In Residential Development operations, the supply of capital and the price of capital
for financing home buyers’ investments are critical factors.
Prices of goods and services
In the Skanska Group’s operations, there are many different types of contractual mechanisms.
The degree of risk associated with the prices of goods and services varies greatly,
depending on the contract type.
Sharp increases in prices of materials may pose a risk, especially in long-term projects
with fixed-price obligations. Shortages of human resources as well as certain input
goods may also adversely affect operations. Delays in the design phase or changes in
design are other circumstances that may adversely affect projects.
Skanska Review of 2010 – USD version Notes, including accounting and valuation principles 99