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 1,836 million (1,843). 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 2020 in these estimations and assessments could have an 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 11,407 million (9,685), of which SEK 11,240 million refers to owned assets and SEK 167 million refers to leased assets. The recognized value for owned assets 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

Assessments behind why Swedish tenant-owned associations are not consolidated

The issue of consolidating tenant-owned associations or not comprises assessments of complex relationships in relation to principle-based and partially unclear accounting standards that make more than one interpretation possible. IFRS is prepared for this circumstance and therefore stipulates that information regarding material assessments is presented when applying IFRSs. Below is a summary of the factors that are the basis of Peab’s assessment.

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.

Peab is not considered to have controlling interest over a tenant-owned association after an external board is appointed in the tenant-owned association and a contract has been signed for the transfer of land and the construction work.

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. After a tenant-owned association board has been appointed Peab cannot replace a board member.

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.

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.

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 board of 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.

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.

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. 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. However, fluctuations in the market can lead to Peab having to repurchase a larger number than has previously been necessary.

Consolidating tenant-owned associations as of January 1, 2020

Peab and several other companies in the industry have been subject to a review by Finansinspektionen since 2019 on the issue of whether or not tenant-owned housing associations should be consolidated.

Swedish accounting oversight, in its various organizational forms, has in 17 years been reviewing the issue of whether or not tenant-owned housing associations should be recognized in the construction company. This underlines the complexity of the matter and the difficulty of in, based on existing principle-based accounting standards, arriving at one single possible application in the accounts.

On January 28, 2020 Peab received another reconciliation letter maintaining that it is Finansinspektionen’s opinion that tenant-owned housing associations must be consolidated. Peab has the right to respond before Finansinspektionen makes its final decision. Peab has concluded that Finansinspektionen does not share the company’s interpretation of IFRS 10 Consolidated financial statements regarding recognition of Swedish tenant-owned housing associations and that the interpretations of Finansinspektionen and Peab differ greatly. Peab does not believe there is any point in continued polemics and it is not in the interest of Peab’s stakeholders.

Peab has therefore decided to change accounting principles as of January 1, 2020, regardless of the decision from Finansinspektionen, and consolidate Swedish tenant-owned housing associations as of the fiscal year 2020 and translate the comparable year 2019. This means that income and expenses for projects will be recognized first when homebuyers take possession of the condominiums and that the assets and liabilities of the tenant-owned housing associations will be consolidated until that time. In Group operative reporting, such as segment reporting, our own developed housing projects in Sweden, Norway and Finland will be reported as external customers while the construction projects are underway with revenue recognized over time as the projects are successively completed. Peab believes this operative reporting best describes Peab’s housing business regarding both internal steering and risk profile, and it is also how the Board and executive management follow operations.

On March 25, 2020 Finansinspektionen informed the company that the matter would be put to rest since Peab would, as of January 1, 2020 change accounting principles.

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.