YIT Corporation’s management follows the development of the company’s business according to the percentage of completion based segment reporting method (POC). YIT also reports on its operations in accordance with IFRS guidelines, where the company applies, for example, the IFRIC 15 guidelines.
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.
YIT has applied the IFRIC 15 Agreements for the Construction of Real Estate IFRS interpretation from the start of the financial period begun on January 1, 2010. Due to the application of the interpretation, Group-level reporting and segment-level reporting differ.
The key difference is that residential development projects are only recognised in Group-level figures when the project has been completed, while in segment reporting they are recognised already as construction progresses.
The difference between the accounting policies is reported as an IFRIC 15 adjustment.
Key issues when estimating the IFRIC-adjustment
- The difference between IFRIC 15 and POC-based order backlogs
- Indication for the delay in IFRIC 15 recognition
- The timing of new residential start-ups
- Indication of completions based on average construction times
- One year on average in Finland, the Baltic countries, the Czech Republic and Slovakia
- Two years on average in Russia
- Completed apartments for sale potential for immediate revenue recognition
Impact on the recognition of own development construction projects
The IFRIC 15 interpretation contains guidelines on when the revenue generated by the construction of real estate must be recognised on the basis of the delivery of the building and when the percentage of completion method can be applied. In YIT, the interpretation has an impact on the recognition of own development projects involving residential and commercial real estate. The interpretation does not have any impact on construction contracting or building services.
In Group-level reports as of January 1, 2010, the revenue generated by YIT's own residential development projects is recognised when the project is complete i.e. when the residential units are ready to be handed over to the client. The share of income and expenses to be recognized is calculated by multiplying the percentage of completion by the percentage of sale. Under the old practice, the revenue recognition began when the construction work started using the percentage of completion method.
In the case of YIT’s commercial real estate development projects, the recognition practice will be evaluated on a case-by-case basis and in accordance with the terms and conditions of each contract. Sold projects are recognised either when the construction work has started or when the project is complete. The share of income and expenses to be recognised is calculated by multiplying the percentage of completion by the percentage of sale multiplied by the occupancy rate. YIT usually sells commercial real estate development projects to investors either prior to construction or during an early phase.
In Finland, YIT finances its projects by selling construction-stage contract receivables to financing companies. According to the new interpretation, sold residential units from own development projects will be recognised as revenue when the project is complete. As a result, all construction-stage contract receivables related to residential production and sold to financing companies must be reported as part of the interest-bearing liabilities on the balance sheet. Under the old practice, part of construction-stage contract receivables related to residential production was reported as off-balance sheet items.
Greater fluctuation between quarters
Under the new practice, the quarterly revenue and profits of YIT Group will now fluctuate more in accordance with the completion dates of development projects. The new revenue recognition practice also means that it will take more time for the Group's financial figures to reflect changes in production volumes. The adoption of the interpretation will not have any impact on the figures covering YIT's segments published by the Group as the information will continue to be calculated in accordance with prior accounting principles (percentage of completion).
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.