Note 2 Important estimates and assessments

Executive Management has together with the Board of Directors discussed developments, selections and information regarding the Group’s important accounting principles and assessments, as well as the application of these principles.

Certain important accounting estimates made when applying the Group’s accounting principles are described below.

The sources of uncertainty in the assessments given below refer to uncertainties that entail a risk that the value of assets or liabilities may be significantly adjusted in the coming fiscal year.

Peab’s operative business is sensitive to changes in, among other things, volume and margins. The financial risks are connected to the business’ tied-up capital, capital needs, interest risk and currency risk. For more information about how the changes in important variables affect Group profit, see the sensitivity analysis.

Percentage of completion

Profit reported for contract projects in progress is calculated through a percentage of their completion based on the degree of completion of the project. This requires that project revenue and costs can be calculated in a reliable manner. A prerequisite is a well functioning system for calculation, forecasting and project monitoring. Forecasts of the final outcome of the projects are critical estimates crucial to accounting for the results of operations during the project. The forecasts of the projects are evaluated on a regular basis during each projects duration and if necessary adjusted. There is a risk that the final results of a project deviate from those that have been successively reported.

Impairment tests of goodwill

Group’s total goodwill amounts to SEK 1,759 million (1,719). When calculating cash generating units’ recoverable amount in order to assess the need to write-down goodwill, several estimations and assessments about the future have been made. These are presented in note 15. As is apparent in the description in note 15 changes beyond what can reasonably be expected during 2017 of the conditions for these estimations and assessments could have a significant effect on goodwill. This risk is however very low since the recoverable values are for the most part higher than the reported values in those cases where goodwill values are substantial.

Project and development property

Project and development property amounts to SEK 7,007 million (6,742). The booked value has been calculated as the lowest of the purchase price and the net sales price based on current price levels in the respective locations. Changes in supply and demand may alter reported values and write-downs may be required. Peab is using an internal model to test the value of Project and development property. As a compliment to this valuation external market-values are collected annually for some of the properties. For more information on Project and development property, see note 22.

Disputes

Peab’s business is largely project-related. There are a number of different contract forms and risk levels vary depending on the contract form. With any type of contract however ambiguities can arise concerning the terms which can lead to demarcation issues followed by a dispute with the customer.

The actual outcome in disputed amounts may deviate from those recorded according to the best estimate. For more information on disputes, see note 31.

Taxes

Changes in tax legislation and changed praxis with regard to the interpretation of tax laws can have a considerable impact on the size of recorded deferred taxes. For more information on taxes, see note 14.

Accounting principles

Tenant-owner projects in Sweden

Tenant-owner associations that Peab signs construction contracts with are autonomous and legal entities independent from Peab. Tenant-­owner associations are tools that members of the association can use to order, construct and manage a property and this is beneficial for the tenant-owners. Peab signs contracts regarding the sale of land and construction contracts with newly established tenant-owner associations as clients. The contracts are signed by the board in the tenant-­owner association at the start-up of construction. No member of the board in the tenant-owner association represents Peab. Tenant-owner associations can influence the design of the buildings about to be constructed. A new obligatory financial plan is drawn up if changes are made that significantly affect the financial prerequisites. The contract gives the tenant-owner association normal client rights in relation to Peab. Our overall assessment is that the contracts meet the definition of a construction contract according to IAS 11.

Real estate agents handle the sales of the tenant rights through direct contracts with the tenant-owner associations. The individual home purchasers sign sub-contracts with the tenant-owner associations.

During construction the association finances the land and construction with two building loans, one where the association takes out a mortgage for the final financing and one that Peab stands surety for regarding the home purchasers’ deposits.

The tenant-owner associations carry the entire value risk on the property.

In addition, Peab guarantees that it will acquire any apartments from the tenant-owner associations that remain unsold six months after the building is complete, which is a requirement from the certifiers, i.e. insurance companies and banks. This repurchase obligation is limited since tenant-owner associations do not sign construction contracts until most of the apartments are under contract with a home purchaser and, in our experience, generally do not represent high amounts. The few apartments bought by Peab are usually sold within a short period of time without any other costs than a few months of fees to the tenant-owner association. Reserves are made for possible estimated costs. Peab also guarantees for paid advances and down payments. For futher information regarding guarantees for advances and down payments see note 38. No other guarantees or obligations are given to the tenant-owner association than the normal guarantees in conventional construction contracts.

Accounting standards and interpretations

New or changed accounting standards and interpretations of existing standards can lead to changes that wherein certain transactions in the future are handled differently than according to current praxis.