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Key audit matter
How we addressed the key audit matter
RECOGNITION OF CONSTRUCTION CONTRACT REVENUE A substantial amount of the Group’s revenue relates to revenue from construction contracts. Where these contracts have a long-term duration, revenue and margin are recognised based on the stage of completion of individual contracts. This is calculated on the proportion of total costs incurred at the reporting date compared to the Group’s estimation of total costs of the contract. We focused on these types of contracts due to the high level of estimation involved, in particular relating to: • forecasting total cost to complete, including the estimation of cost contingencies for contracting risks; • revisions to total forecast costs for certain events or conditions that occur during the performance of the contract, or are expected to occur to complete the contract; and • the recognition of variations and claims, based on an assessment by the Group as to whether it is probable that the amount will be approved by the customer and therefore recovered. Refer to note 13 of the financial statements.
In obtaining sufficient appropriate audit evidence: • We evaluated the Group’s process regarding accounting for contract revenues. We tested controls such as: –– the preparation, review and authorisation of monthly project reports, which involves management assessing key contract KPIs; and –– the project reviews undertaken by the Group’s Project Management Office and management governance committee; • We used a risk assessment tool to select a sample of contracts for testing based on a number of quantitative and qualitative factors. These factors included contracts with significant deterioration of margin and/or completion dates, significant variations and claims, and factors which indicate a greater level of judgement was required by the Group when assessing the revenue recognition based on estimates developed for current and forecast contract performance. For the contracts selected, where relevant: –– we read the contract terms and conditions to evaluate whether the individual characteristics of each contract were reflected in the estimate; –– we undertook sites visits (to both contract sites and commercial offices) to understand the nature of risk elements of the contracts; –– we tested a sample of costs incurred to date through agreement to supporting documentation; –– we tested the estimated costs to complete by checking key forecast cost assumptions to underlying evidence such as subcontractor quotes, tender information, historical invoicing and employment records and agreements with subcontractors; –– we considered the Group’s ability to forecast margins on contracts by analysing the accuracy of previous margin forecasts to actual outcomes; –– we tested variations and claims, both within contract revenue and contract costs, to supporting documentation and by reference to underlying contracts; and –– for the most significant contracts by size and complexity we used our construction and real estate specialists to evaluate the overall appropriateness of forecast project outturn. Our construction and real estate specialists have significant international experience and credentials to advise on such projects. • we evaluated the Group’s legal and external experts’ reports received on contentious matters to identify conditions that may indicate the inappropriate recognition of variations, claims or liquidated or other damages. We checked the consistency of this to the inclusion or not of amounts in the estimates used for revenue recognition; • we evaluated contract performance in the period since year end to audit opinion date to confirm the Group’s year end judgements in respect of revenue recognition and forecast costs to complete; and • evaluated the associated disclosures in the financial statements.
102 Fletcher Building Limited Annual Report 2018
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