The merger of YIT and Lemminkäinen took effect on February 1, 2018. Going forward, YIT will report in accordance with IFRS principles in its Group reporting as well as its segment reporting.
Certain figures for the Housing Finland and CEE segment and the Housing Russia segment, such as their revenue and operating result, will also be reported under the percentage of completion (POC) principle in addition to IFRS reporting. According to the IFRS accounting principles, revenue from residential projects for consumer is recognised upon completion. Under the POC principle, revenue recognition is based on multiplying the percentage of completion by the percentage of sale. The Group has previously used POC reporting as its primary reporting principle and the Group’s previous financial targets, for example, were based on POC reporting.
YIT will publish pro forma financial information on the merged company for the financial year ended on December 31, 2017, taking the new segment structure and reporting practices into consideration, before the publication of the interim report for the first quarter of 2018.
YIT changed over to IFRS on January 1, 2005. Prior to the adoption of IFRS, YIT’s financial reporting was based on FAS, Finnish Accounting Standards.
New IFRS standards
IFRS 15 Revenue from contracts
The effective date of IFRS 15 Revenue from Contracts with Customers is a financial period beginning on or after 1 January 2018. IFRS 15 specifies how and when to recognise revenue from contracts with customers. The starting point of the standard is a contract with a customer, to which a five-step model should be applied. A key factor in revenue recognition is the transfer of control. Revenue is recognised either over time or at a point in time. Once effective, the new standard will replace current IAS 18 and IAS 11 standards and related interpretations.
On the basis of the impact analysis, the analysis of the opening balance sheet as at 1 January 2017 and the contract analysis of significant new customer contracts prepared during the financial period, the application of IFRS 15 will not have a material impact either to the amount or the timing of revenue recognition. There are no adjustments to the comparative financials due to the application of IFRS 15. The number of disclosures in the consolidated financial statements will increase.
The company has identified certain contract elements which will be treated differently compared to the current accounting method. The number of performance obligations accounted for separately will increase mainly in the Building construction, Finland segment where a contract with a customer may cover the construction of several separate buildings and the maintenance service in life-cycle projects. Dividing such contracts with customers in several performance obligations accounted for separately will not have a material impact either to the amount or the timing of revenue recognition at the transition date as the majority is already accounted for separately under the current accounting practice. In addition, the number of performance obligations increases if YIT commits to warranty periods that are longer than what has been defined in legislation or in general terms and conditions. In this case, the excess warranty period may be considered as a separate performance obligation and the transaction price allocated to it is recognised as revenue when the service is performed. YIT has offered a small number of warranty periods exceeding the general terms and conditions which are low in value. Therefore, based on management’s materiality assessment, they have not been accounted for as separate performance obligations. According to YIT’s current revenue recognition policies, the excess warranty period is not separated in revenue recognition.
Transaction prices are mainly variable in the contracts with customers of YIT. According to IFRS 15, the transaction price expected to be received from the customer, including variable amounts such as penalties and bonus payments based on performance, is determined at the contract inception and re-estimated at the end of each reporting period. Some or all the amount of the variable consideration estimated is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. Due to the application of IFRS 15, the revenue from the bonus payments included in the transaction price may be recognised somewhat earlier compared to the current accounting practice. According to current accounting practice, variable amounts are accounted for once they are reliably determined.
The criteria in IFRS 15 for revenue recognition over time is fulfilled in majority of contracts with customers of YIT. Therefore, as revenue from majority of contracts with customers is recognised over time under current accounting practice, there will be no significant changes to the timing of revenue recognition. The revenue from residential development projects in the Building construction, Finland segment is recognised at a point in time when the control is transferred to the customer, which is in line with the current accounting practice.
EFFECTIVE DATE AND TRANSITION METHOD
The company adopts the standard as of 1 January 2018 using a retrospective method and all available transition relief options. In accordance with the retrospective method, in the 2018 consolidated financial statements the company adjusts the disclosures for the comparative financial year to comply with IFRS 15.
Description of practical expedients:
- The company does not adjust completed contracts that begun and ended during the financial year 2017.
- Variable consideration for contracts that were completed by the end of the financial year 2017 were not adjusted for the comparative financial year.
- The company does not disclose the amount of the transaction price allocated to unsatisfied performance obligations for the comparative financial year, that is as at 31 December 2017, nor does it provide a more detailed description of satisfying the obligations.
- The company does not adjust contracts that are completed contracts at the beginning of the earliest period presented.
- The company does not restate contract modifications made before the beginning of the transition period; instead, the company can take into account their aggregate effect when determining the transaction price, unsatisfied and satisfied performance obligations and the allocation of the transaction price to the performance obligations.
Differences between POC and IFRS in revenue and profit recognition of a self-developed residential project
The IAS 23 standard defines the recording method of borrowing costs in long-term projects
IAS 23 Borrowing cost: Standard provides that borrowing costs directly attributable to certain qualified assets, for example construction project, shall be capitalized as part of the cost of that asset. Previously all borrowing costs were recognized as an expense immediately. Borrowing costs attributable to construction projects that have begun on January 1, 2009 or later, are capitalised in the balance sheet and are recognised to Profit and loss account when project revenue is recognised.
A project accounted for in accordance with IAS 23 has a negative cash flow in addition to which it must last for more than a year. Borrowing costs arising from the financing of the project are capitalised as part of current assets on the balance sheet until the completion of the project. These costs are recognised as income according to the principles of income recognition; for example, with regard to POC recognition, the proportion to be recognised as income is calculated by multiplying the percentage of completion of the project by percentage of sale.
IAS 19 Employee benefits
The Group adopted the new IAS 19 Employee benefits standard in January 1, 2013. Standard includes changes to accounting principles of defined benefit plans. The amendment eliminates the possibility to use the corridor approach and all the actuarial gains and losses are recognised immediately in the statement of other comprehensive income. The full net liability or net asset is recorded in the balance sheet. The expected interest income on assets is calculated using the same discount rate as calculating the present value of the defined benefit obligation. The changes in fair value of defined benefit pension are recorded in the statement of other comprehensive income where previously those were included in the personnel expenses in the income statement.