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 those that entail a risk that the value of assets or liabilities may have to be significantly adjusted in the coming financial 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, please see the section Risks and risk management under 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 income 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 profit/loss recognition during the project. Project forecasts are evaluated on a regular basis as each project progresses and if necessary adjusted. There is a risk that the end profit/loss of a project deviates from that which has been reported successively.
Impairment tests of goodwill
Total Group goodwill amounts to SEK 1,820 million (1,759). When calculating cash generating units’ recoverable amount in order to assess the need to write-down goodwill several estimations and assessments about the future are made. They are presented in note 15. As is apparent in the description in note 15, changes beyond what can reasonably be expected during 2018 in these estimations and assessments could have a significant effect on goodwill. This risk, however, is 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 6,439 million (7,007). The reported 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 complement to this valuation external market values are annually reviewed for some of the properties. For more information on project and development property, see note 23.
Peab’s business is largely project-related. There are a number of different contract forms where risk levels vary depending on the type of contract. However, with any type of contract ambiguities can arise concerning the terms, which can lead to delimitation issues that create a dispute with the customer.
The construction contract for the production of the Mall of Scandinavia in Solna was signed at the end of 2011. Major changes in the project during production together with insufficient dialogue with our customer led to significantly higher costs. The original contract was for SEK 3.5 billion. The project was reviewed after the mall was inaugurated in November 2015 and then written down by SEK -800 million in the fourth quarter 2015. Negotiations with the customer have not yet reached a final agreement. Peab’s assessment of the financial situation is the same as what has previously been communicated.
The actual outcome in disputed amounts may deviate from those reported according to the best estimate. For more information on disputes, see note 32.
Changes in tax legislation and changing praxis in the interpretation of tax laws can have a considerable impact on the size of reported deferred taxes. For more information on taxes, see note 14.
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-owner homes 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 homes 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 homes are under contract with a home purchaser and, in our experience, generally do not represent high amounts. The few homes 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 estimated costs that may occur. Peab also provides guarantees for paid advances and down payments. For further information regarding guarantees for advances and down payments see note 39. 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 may entail handling certain transactions in the future differently from current practice. As of 1 January 2018 IFRS 15 replaces existing standards relating to income accounting. IFRS 9 Financial instruments replaces IAS 39, Financial instruments: Recognition and measurement as of 1 January 2018. The changes brought about by IFRS 15 and IFRS 9 are described in note 46.