Note 3 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 future financial years.

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/loss, see the section Risks and risk management under the Sensitivity Analysis.

Construction contracts recognized over time

Profit/loss recognized for construction projects in progress is calculated over time based on the degree of completion of the project. This requires that project revenue and expenses can be calculated in a reliable manner. A prerequisite is a well functioning system for calculation, forecasting and project monitoring. Forecasts regarding 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 final profit/loss of a project may deviate from the profit/loss recognized over time.

Impairment tests of goodwill

Total Group goodwill amounts to SEK 1,843 million (1,820). 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. They are presented in note 16. As is apparent in the description in note 16, changes beyond what can reasonably be expected during 2019 in these estimations and assessments could have a significant effect on goodwill. This risk, however, is very low since the recoverable values are to a large extent higher than the recognized values in those cases where goodwill values are substantial.

Project and development property

Project and development property amounts to SEK 9,685 million (7,612). The recognized 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 recognized 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 24.

Disputes

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 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 recognized according to the best estimate. For more information on disputes, see note 31.

Taxes

Changes in tax legislation and changed practice in the interpretation of tax laws can have a considerable impact on the size of recognized deferred taxes. For more information on taxes, see note 15.

Accounting principles

Revenue recognition of tenant-owned housing projects in Sweden

The standard IFRS 15 Revenue from contracts with customers is applicable on Peab’s recognition of revenue from the sales of land and construction contracts with tenant-owned associations. Peab has made the assessment that tenant-owned associations are customers according to IFRS 15 Revenue from contracts with customers, IFRS 15:6, and that the definition of a contract is met in the same standard, IFRS 15:9-16. In addition, the criteria in IFRS 15:17 concerning why the two contracts, one for land and one for construction, have been fused into one contract are also met. The fused contract contains a single performance obligation where land and construction performance constitute the input in the process of delivering a new, finished building. This single performance obligation is recognized over time according to IFRS 15:C35, i.e. “The company’s performance does not create an asset with an alternative use for the company and the company has the right to payment for the performance to date.”

The turnkey contracts that Peab signs with tenant-owned associations stipulate that the construction contract is regulated in accordance with the standard terms in ABT 06. The contract states that the contract amount is fixed (“Fixed price”) with the right to invoice corresponding to executed performance. The right to receive payment for executed work means that Peab, in a situa­tion where the customer (tenant-owned association) wishes to cancel the construction contract, has the right to compensation for executed work, i.e. incurred expenses and the margin stipulated by the contract.

Assessments behind why Swedish tenant-owned associations are not consolidated

Peab makes the assessment that the Swedish tenant-owned associations which are the counterparties to Peab in tenant-owned projects in Sweden should not normally be consolidated into Peab’s Group accounting. Standard IFRS 10 Consolidated financial statements, provides guidance in assessing whether or not Peab has controlling interest over a tenant-owned association. Controlling interest exists if all three of the following criteria are met:

  • Peab has power over the investment object (tenant-owned association),
  • Peab is exposed to, or has the rights to, variable returns from its involvement in the investee (tenant-owned association), and
  • Peab can use its power over the investee (tenant-owned association) to affect its returns.

Since the majority of all relevant activities are predetermined through the turnkey contracts signed between the tenant-owned association and Peab there is limited room for decision-making in relevant activities for both parties. Peab is not considered to have controlling interest over a tenant-owned association after an external board is appointed in the tenant-owned association. Below is a summary of the factors Peab’s assessment is based on.

Planning phase

Peab’s tenant-owned project is preceded by planning and the acquisition of land. These costs are activated in Peab’s balance sheet. When the necessary zoning plans have been received Peab initiates the formation of a tenant-owned association.

Tenant-owned association board

The board in tenant-owned associations consist of external and independent board members with adequate professional competence and experience from board work in tenant-owned associations and developer responsibility for construction projects. These board members are also often members of boards of tenant-owned associations that have not been initiated by Peab. No member of the tenant-owned association board repre­sen­ts Peab. After a tenant-owned association board has been appointed Peab cannot replace a board member. Remuneration to board members is paid for by the tenant-owned association.

The duty of the board of the tenant-owned association is to represent the members (i.e. the tenant-owners) when called for and to look after their interests, and their interests alone. The board has a strict responsibility and is subject to review by members at the first tenant-owned association meeting after the building has been completed, gone through a final inspection and been approved. This means that the board members must be able to show that they have acted in the best interests of the association’s members and not on behalf of Peab.

Board members usually have liability insurance. The tenant-owned association pays for the board members’ liability insurance.

Sales of homes through a real estate agent

Different external real estate agents are signed on through a three-party listing agreement between Peab, the tenant-owned association and the real estate agents. The signed real estate agents handle the marketing and sales of the tenant-owned apartments. Customers who wish to reserve a tenant-owned apartment and a share in the tenant-owned association sign a binding preliminary agreement according to the Tenant Act (1991:614) with the tenant-owned association. The preliminary agreement is binding for both the homebuyer and the tenant-owned association. The board of the tenant-owned association approves tenant-owners after having evaluated their financial capacity to conclude the purchase. It is through a purchase agreement that a homebuyer becomes a member of the tenant-owned association.

Contract between Peab and the tenant-owned association for the transfer of land and the construction work

Peab and the tenant-owned association sign a contract for the transfer of land and the construction work only when a considerable portion of the homes have been reserved through a binding preliminary agreement. The contract for the transfer of land and the construction work are based on offered terms from Peab with supplements for any modifications and additions that have been agreed on with the tenant-owned association. Consequently the project is no longer recognized on Peab’s balance sheet since the tenant-owned association is considered to be an external customer to Peab.

Financing the tenant-owned association

In order to acquire the land and pay for the construction work during construction the tenant-owned association finances the land and the construction work with a building loan from a bank. Because of its size and expertise Peab can be of great help to the association in procuring financing with favorable terms. Peab therefore requests offers from different banks. The board of the tenant-owned association decides which loan offers to accept and signs the contracts with the bank. The banks normally require a minimum level of sales in the form of signed preliminary agreements before they grant a loan. The construction contract specifically stipulates that Peab aid the tenant-owned association with the final financing procurement as well as handle administration of the tenant-owned association’s financing.

In order to limit the cost of mortgages tenant-owned associations take out mortgages for the amount that corresponds to what is needed for the final financing of the completed building and accompanying land. The other building loan, that Peab provides surety for, is for temporary financing corresponding to the homebuyers’ not yet paid contributed capital.

The costs the tenant-owned association incurs until the time the funds can be lifted from building loans are paid for by the association through credit terms where payment is not made until financing has been solved. These costs can be, for example, remuneration for the board members’ work in the tenant-owned association and fees to the real estate agent. In many cases Peab pays these costs for the tenant-owned association as an advance. The costs the tenant-owned association incurs before contract signing and financing through the building loans are relatively insignificant.

Interest on building loans is paid for by the tenant-owned association. In cases where it is paid by Peab it is an advance.

Tenant-owned association’s financial management and accounting

The construction contract includes management obligations for the administration of the associations’ economy and accounting where Peab takes on responsibility for administration as long as the tenant-owned association desires. Normally the tenant-owned association hires Peab for administration under construction and sometimes even after construction is completed. Sometimes Peab handles administration for other external customers and community associations that are not tenant-owned associations. The board of the tenant-owned association approves and attests all payments.

Obligations and customer rights

The construction contract provides the tenant-owned association the same customer rights from Peab that all other external construction contracts provide to counterparties that are not tenant-owned associations initiated by Peab. In order to create an attractive offer at an early stage of a housing project with limited risk Peab foremost offers fixed prices and, in addition, conventional obligations regarding the completed building’s occupancy level. In the construction contract with the tenant-owned association Peab promises to acquire the tenant-owned apartments not sold six months after the final inspection. The acquisition obligation is usually a requirement from the certifiers as well as insurance companies and banks that finance tenant-owned associations. These obligations are also made to customers that are not tenant-owned associations, in the form of guaranteed lowest levels of rented units or guaranteed operating net, which is common in the construction and real estate trades regarding real estate sales to commercial customers.

The risk Peab takes in obligations to acquire unsold apartments during a certain period is in reality limited since Peab and tenant-owned associations do not sign construction contracts until a large part of the homes have been reserved by homebuyers. Historically Peab’s costs due to unsold apartments are not material. The few apartments bought by Peab are normally sold within a short amount of time without any more costs than a few months fees to the tenant-owned association. On the average 0.7 percent of the total number of tenant-owned apartments in production between 2012 and 2018 were acquired. However, fluctuations in the market can lead to Peab having to repurchase a larger number than has previously been necessary.

Peab also issues a guarantee regarding advances and contributions paid by homebuyers. The guarantee ensures the tenant-owner’s right to repayment of amounts paid if the tenant-owner terminates the contract due to significantly higher fees during the first year after the general meeting where the project’s final costs are presented. After that the guarantee ceases to exist. The guarantee has never been invoked. For further information regarding advances and contribution guarantees see note 38.

Accounting standards and interpretations

New or changed accounting standards and interpretations of other existing standards can lead to changes that may entail handling certain transactions in the future differently from current practice. IFRS 16 Leases replace IAS 17 Leases as of 1 January 2019. The changes entailed by IFRS 16 are described in note 45.