Review of 2010 – USD version - Skanska

Note
01 Continued
IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations”
A discontinued operation is a portion of a company’s operations that represents a separate
line of business or a major operation in a geographic area and is part of a single
coordinated plan to dispose of a separate line of business or a major operation carried
out in a geographic area, or is a Group company acquired exclusively with a view to
resale.
Classification as a discontinued operation occurs upon divestment, or at an earlier
date when the operation meets the criteria to be classified as held for sale. A disposal
group that is to be shut down can also qualify as a discontinued operation if it meets the
above size criteria.
If a non-current asset or disposal group is to be classified as held for sale, the asset
(disposal group) must be available for sale in its present condition. It must also be highly
probable that the sale will occur. In order for a sale to be highly probable, a decision
must have been made at management level, and active efforts to locate a buyer and
complete the plan must have been initiated. The asset or disposal group must be actively
marketed at a price that is reasonable in relation to its fair value, and it must be probable
that the sale will occur within one year. Skanska also applies the principle that with
regard to a single non-current asset, its value must exceed EUR 20 M (corresponding to
USD 26.5 M).
Depreciation or amortization of a non-current asset is not made as long as it is classified
as held for sale.
Non-current assets classified as held for sale as well as disposal groups and liabilities
attributable to them are presented separately in the statement of financial position.
IAS 28, “Investments in Associates”
Reported as associated companies are companies in which the Skanska Group exercises
significant but not controlling influence, which is presumed to be the case when the
Group’s holding amounts to a minimum of 20 percent and a maximum of 50 percent of
the voting power. In addition, it is presumed that this ownership is one element of
a long-term connection and that the holding shall not be reported as a joint venture.
The equity method
From the date when Skanska obtains a significant influence, holdings in associated
companies are included in the consolidated financial statements according to the equity
method. Any difference upon acquisition between the cost of the holding and the
owner company’s share of net fair value of the associated company’s identifiable assets,
liabilities and contingent liabilities is recognized in compliance with IFRS 3. The equity
method implies that the carrying amount of the Group’s shares in associated companies
is equivalent to the Group’s proportion of their share capital as well as goodwill in the
consolidated accounts and any other remaining consolidated surpluses and deductions
of internal profits. The Group’s share of the associated company’s income after financial
items is recognized as “Income from joint ventures and associated companies” in the
income statement. Any depreciation/amortization and impairment losses on acquired
surpluses are taken into account. The Group’s proportion of the tax expense of an associated
company is included in “Taxes.” Dividends received from an associated company
reduce the carrying amount of the investment.
When the Group’s share of recognized losses in an associated company exceeds the
carrying amount of the holdings in the consolidated financial statements, the value
of the holding is reduced to zero. Settlement of losses also occurs against long-term
unsecured financial assets which, in substance, form part of Skanska’s net investment
in the associated company and are thus recognized as shares. Continued losses are not
recognized unless the Group has provided guarantees to cover losses arising in the associated
company.
Elimination of internal profits
When profits arise from transactions between the Group and an associated company,
the portion equivalent to the Group’s share of ownership is eliminated. If the carrying
amount of the Group’s holding in the associated company is below the elimination of
internal profit, the excess portion of the elimination is recognized among provisions. The
elimination of the internal profit is adjusted in later financial statements based on how
the asset is used or when it is divested. If a loss arises from a transaction between the
Group and an associated company, the loss is eliminated only if it does not correspond
to an impairment loss on the asset.
If a profit or loss has arisen in the associated company, the elimination affects the
income recognized under “Income from joint ventures and associated companies.”
The equity method is applied until the date when significant influence ceases.
Note 20 provides information about associated companies.
IAS 31, “Interests in Joint Ventures”
Companies operated jointly with other companies, and in which control is exercised
jointly according to agreement, are reported as joint ventures.
The equity method, which is described in the section on associated companies,
is applied when preparing the consolidated financial statements. The consolidated
income statement recognizes the Group’s share of the income in joint ventures after
financial items among “Income from joint ventures and associated companies.” Any
depreciation, amortization and impairment losses on acquired surpluses have been
taken into account. The Group’s share of the tax expense of a joint venture is included
in “Taxes.” Dividends received from a joint venture are subtracted from the carrying
amount of the investment.
In connection with infrastructure projects, the Group’s investment may include either
holdings in or subordinated loans to a joint venture. Both are treated in the accounts as
holdings.
Elimination of internal profits
Internal profits that have arisen from transactions between the Group and a joint venture
are eliminated based on the Group’s share of ownership. If the carrying amount
of the Group’s holding in a joint venture is below the elimination of internal profit, the
excess portion of the elimination is recognized among provisions. The elimination of the
internal profit is adjusted in later financial statements based on how the asset is used or
when it is divested. If a loss instead arises from a transaction between the Group and a
joint venture, the loss is eliminated only if it does not correspond to an impairment loss
on the asset. If a profit or loss has arisen in a joint venture, the elimination affects the
income recognized under “Income from joint ventures and associated companies.”
Note 20 provides information about joint ventures.
IAS 11, “Construction Contracts”
Project revenues are reported in compliance with IAS 11. This implies that the income
from a construction project is reported successively as the project accrues. The degree
of accrual is mainly determined on the basis of accumulated project expenses in relation
to estimated accumulated project expenses upon completion. If the outcome cannot
be estimated in a satisfactory way, revenue is reported as equivalent to accumulated
expenses on the closing day (zero recognition). Anticipated losses are immediately
reported as expenses.
Recognized as project revenue are the originally agreed contract amount as well as
additional work, claims for special compensation and incentive payments, but normally
only to the extent that these have been approved by the customer. All services that are
directly related to the construction project are covered by IAS 11. Other services are
covered by IAS 18. For projects related to construction of real estate, IFRIC 15 provides
guidance about in which cases IAS 11 or IAS 18 shall be applied.
If substantial non-interest-bearing advance payments have been received, the
advance payment is discounted and recognized as an interest-bearing liability. The difference
between a nominal amount and a discounted amount constitutes project revenue
and is recognized as revenue according to the percentage of completion method.
The upward adjustment in the present value of the advance payment in subsequent
financial statements is reported as an interest expense.
The difference between accrued project revenue and a not yet invoiced amount is
recognized as an asset (gross amount due from customers for contract work) according
to the percentage of completion method. Correspondingly, the difference between
an invoiced amount and not yet accrued project revenue is reported as a liability (gross
amount due to customers for contract work). Major machinery purchases that are
intended only for an individual project and significant start-up expenses are included
to the extent they can be attributed to future activities as claims on the customer and
are included in the asset or liability amount stated in this paragraph, however without
affecting accrued project revenue.
Tendering expenses are not capitalized but are charged against earnings on a
continuous basis. Tendering expenses that arose during the same quarter that the
order was received, and that are attributable to the project, may be treated as project
expenditures.
In the case of infrastructure projects, instead of the quarter when the order was
received, this applies to the quarter when the Group receives the status of preferred bidder.
Tendering expenses that were recognized in prior interim or annual financial statements
may not be recognized as project expenses in later financial statements.
Unrealized gains and losses on forward contracts related to hedging of operating
transaction exposure are included, to the degree of completion, in the reporting of
the respective project. If hedge accounting is not applicable, the liquidity effect when
Skanska Review of 2010 – USD version Notes, including accounting and valuation principles 93