FINANCIAL STATEMENTS 58 Significant Accounting Judgements Contracting revenue and profit and loss recognition The Group uses the input method in determining the satisfaction of the performance obligation over a period of time in accounting for its construction contracts. Judgements made in the application of the accounting policies for contracting revenue and profit and loss recognition include: • the determination of the point in the progress toward complete satisfaction of the performance obligation; • the determination of when it is highly probable that revenue will not be reversed in the future for claims and variations; • estimation of total contract revenue and total contract costs, • assessment of the amount the client will pay for contract variations, and • estimation of project production rates and program through to completion. The construction contracts undertaken by the Group may require it to perform extra or change order work, and this can result in negotiations over the extent to which the work is outside the scope of the original contract or the price for the extra work. Given the complexity of many of the contracts undertaken by the Group, the knowledge and experience of the Group's project managers, engineers, and executive management is used in assessing the status of negotiations with the customer, the reliability with which the estimated recoverable amounts can be measured, the financial risks pertained to individual projects and the associated judgements and estimates employed. Cost and revenue estimates and judgements are reviewed and updated monthly, and more frequently as determined by events or circumstances. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately In addition, many contracts specify the completions schedule requirements and allow liquidated damages to be charged in the event of failure to achieve that schedule; on these contracts, this could result in the Group incurring liquidated damages. Material changes in one or more of these judgements and/ or estimates, whilst not anticipated, would significantly affect the profitability of individual contracts and the Group’s overall results. The impact of a change in judgements and/or estimates has and will be influenced by the size and complexity of individual contracts within the portfolio at any point in time. The Group will continue to focus on project execution and to reduce the financial impact of challenging contracts. The Group continuously reassesses the position recognised on all its recorded uncertified revenue. This process has included consideration for contractual claims which remain outstanding and will take some time to resolve thus the final outcome both in terms of quantum and timing remains a risk. The Group will continue to robustly pursue its commercial entitlements in relation to contractual claims. Amounts due from / (to) contract customers The Group estimates the risk associated with the amounts due from contract customers in order to classify these assets according to their maturity profile. Positions related to long outstanding contract positions have been judged in conjunction with legal advice and potential timeframes associated with legal action. Taxation The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised in the statement of financial position. Deferred tax assets, including those arising from unrecouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Deferred tax liabilities arising from temporary differences in investments, caused principally by retained earnings held in foreign tax jurisdictions, are recognised unless repatriation of retained earnings can be controlled and are not expected to occur in the foreseeable future. Assumptions about the generation of future taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These depend on estimates of future production and sales volumes, operating costs, restoration costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised in the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the statement of profit or loss. Deferred taxation Deferred taxation assets are recognised for all unused taxation losses to the extent that it is probable that taxable earnings will be available against which the losses can be utilised. Significant management judgement is Notes to the annual financial statements (continued) for the year ended 30 June 2021
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