ANNUAL REPORT 2006 - Skanska

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. As a result, the
Group’s carrying amount in the joint venture may be less than zero. 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, elimination occurs only if the loss does not correspond to
an impairment loss on the asset.
Note 20 provides information about joint ventures.
IAS 11, “Construction Contracts”
Project revenues are reported in compliance with IAS 11, “Construction Contracts.”
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 balance sheet date (zero
recognition). Anticipated losses are immediately reported as expenses. If the construction
project also includes liability to the customer for divestment of completed housing
units, the number of unsold units is taken into account when recognizing the
earnings of the construction project, by recognizing a profit that is proportional to
both the degree of accrual and the degree of sales. This means that if the degree of
accrual is 50 percent and the degree of sales likewise is 50 percent, 25 percent of
forecasted final profit is reported (forecasted loss is reported immediately as an
expense at 100 percent).
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, “Construction
Contracts.” Other services are covered by IAS 18, “Revenue.”
If substantial advance payments have been received, interest on the advance payment
is included in the reporting of each project.
The difference between accrued project revenue and a not yet invoiced amount is
recognized as an asset (claims on the customer as provided in the construction contract)
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 (liabilities to the customer as provided in the construction contract).
Major machinery purchases that are intended only for an individual project and significant
investments 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.
Generally speaking, tendering expenses are recognized on a continuous basis.
When an order is received, tendering expenses attributable to a project and that
arose no earlier than at the beginning of the quarter when the order was received,
may be reversed and treated as project expenditures. This implies that tendering
expenses that were recognized in prior interim or annual financial statements may
not be reversed in later financial statements. As for tendering expenses related to
infrastructure projects, these are also recognized on a continuous basis. Reversal may
occur beginning in the quarter when the Group receives the status of preferred bidder.
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.
A construction consortium that has been organized to perform a single construction
assignment is not an independent legal entity, since the participating co-owners
are also directly liable for its obligations. Skanska’s share of the construction assignment
is thus recognized as an independent operation.
Income on the sale of land in conjunction with residential projects is included in
the reporting of the entire project.
Most construction contracts contain clauses concerning warranty obligations on
the part of the contractor, with the contractor being obliged to remedy errors and
omissions discovered within a certain period after the property has been handed over
to the customer. Such obligations may also be required by law.
The main principle is that a provision for warranty obligations must be calculated
for each individual project. The provision is calculated for units with similar projects,
with the help of ratios that have historically provided a satisfactory provision for
these expenses.
IAS 18, “Revenue”
Revenue other than project revenue is recognized in compliance with IAS 18, “Revenue.”
For lease income, this means that the revenue is divided evenly over the period
of the lease. The total cost of benefits provided is recognized as a reduction in lease
income on a straight-line basis over the lease period. Compensation for services performed
that does not comprise project revenue is recognized as revenue based on the
degree of completion on the balance sheet date, which is normally determined as services
performed on the balance sheet date as a proportion of the total to be performed.
The difference that may then arise between services invoiced and services
performed is recognized in the balance sheet among “Other operating receivables”
(or “Other operating liabilities”). Deliveries of merchandise are reported as revenues
when the risks and rewards associated with ownership of the merchandise have been
transferred to the buyer. Divestment of completed current-asset properties that belong
to Commercial Development is normally reported as a revenue item during the
reporting period when a binding agreement on the sale is reached. However, if the
property being divested is not yet completed and the buyer will occupy it only after
completion, the gain is reported at the pace that the property is completed.
A dividend is recognized as revenue when the right to receive payment is judged to
be certain.
Income from the sale of financial investments is recognized when the significant
risks and rewards associated with ownership of the instruments have been transferred
to the buyer and the Group no longer controls the instruments.
Interest is recognized using an interest rate that provides a uniform return on the
asset in question, which is achieved by applying the effective interest method. Effective
interest is the interest rate at which the present value of all future payments is
equal to the carrying amount of the receivable.
Revenue is carried at the fair value of what is received or will be received. This
means that receivables arising at the time of divestments are regarded as having been
acquired at fair value (discounted present value of future incoming payments) if the
interest rate on the date of the purchase is below the market interest rate and the
difference is significant. For example, discounting of a receivable may occur in connection
with a property divestment if the purchase price receivable is not settled immediately.
This takes into account that any operating net until the property is transferred is
recognized as interest.
Revenue is recognized only if it is probable that the economic benefits will flow to
the Group. If uncertainty later arises with regard to the possibility of receiving payment
for an amount that has already been recognized as revenue, the amount for
which payment is no longer probable is instead recognized as an expense, instead of
as an adjustment of the revenue amount that was originally recognized.
IAS 17, “Leases”
The accounting standard distinguishes between finance and operating leases. A
finance lease is characterized by the fact that the economic risks and rewards incidental
to ownership of the asset have substantially been transferred to the lessee. If this
is not the case, the agreement is regarded as an operating lease.
Finance leases
Finance lease assets are recognized as an asset in the consolidated balance sheet. The
obligation to make future lease payments is recognized as a non-current or current
liability. Leased assets are depreciated during their respective useful life. When making
payments on a financial lease, the minimum lease payment is allocated between
interest expense and reduction of the outstanding liability. Interest expense is allocated
over the lease period in such a way that each reporting period is charged an
amount equivalent to a fixed interest rate for the liability recognized during each
respective period. Variable payments are recognized among expenses in the periods
when they arise.
Assets leased according to finance leases are not recognized as property, plant and
equipment, since the risks incidental to ownership have been transferred to the lessee.
Instead a financial receivable is recognized, related to future minimum lease payments.
Operating leases
As for operating leases, the lease payment is recognized as an expense over the lease
term on the basis of utilization, and taking into account the benefits that have been
provided or received when signing the lease.
The Commercial Development business stream carries out operating lease business.
Information on future minimum lease payments (rents) is provided in Note 40, which
also contains other information about leases.
Skanska Annual Report 2006 Notes, including accounting and valuation principles 73