This study focuses on the revenue recognition disclosure quality of Dutch construction companies for a sample of both IFRS and Dutch GAAP applying companies. Attention is paid to the quality of the disclosures of significant judgements and estimates for IFRS issuers before and after the implementation of IFRS 15. Furthermore, a baseline measurement on the revenue recognition disclosures required by Dutch Accounting Standards (‘DAS’) 221 and 270 has been performed on the Dutch GAAP sample. We discuss also the forthcoming changes in these standards which will become effective for financial reporting years starting as per 1 January 2022. This study finds that overall the quality of disclosure of significant judgements and estimates related to the revenue recognition improved after the implementation of IFRS 15. Also, IFRS issuers provide relatively more useful disclosures than DAS issuers.

Revenue recognition, IFRS 15, DAS 221, DAS 270, construction companies

The outcome of this study can be relevant for, amongst others, issuers of financial statements and financial reporting standard setters. Insights, including best practices, are provided in the quality of revenue recognition disclosures for Dutch construction companies. Attention items are provided to issuers of financial statements and recommendations are formulated to standard setters.

As per 1 January 2018, the accounting principles of IFRS 15 Revenue from contracts with customers became effective. Almost three years later, in December 2020, the Dutch Accounting Standards Board (‘DASB’) issued the revised Dutch Accounting Standards (‘DAS’) 221 and DAS 270. These revised standards are effective for reporting years starting on or after 1 January 2022. The DASB explained the reasons for the amendments in an introductory section of a separately issued ‘DASB-statement’ (Statement 2020-151). The DASB found that there was a need in practice for further guidance regarding accounting for revenue under Dutch GAAP. As part of their analysis the DASB specifically considered the accounting principles of IFRS 15 but did deliberately not choose to fully adopt the principles of IFRS 15 due to the significant implementation costs and the target group of companies applying DAS. Nonetheless, many principles underlying the amendments of DAS 221/270 can be related to stipulations in IFRS 15. This is also clear from the examples in Appendix 1 of DAS 270 showing many similarities with the examples added to IFRS 15. However, the DASB emphasizes that IFRS 15 (including additional guidance for the application of IFRS 15) is not leading in the interpretations of the amendments in DAS 221/270. This means that if DAS 221/270 do not contain a specific principle for a certain situation, there is no requirement to automatically fall back on IFRS 15 including IFRIC interpretations and agenda decisions.

An important underlying conceptual basis for revenue recognition under DAS is the transfer of risks and rewards, in contrast to IFRS 15 which is based on the concept of the transfer of control. Under DAS the underlying concept of risks and rewards remains unchanged by the amendments and hence remains an important difference between IFRS and DAS. Furthermore, the DASB decided to maintain two separate standards for accounting for revenue. DAS 221 provides guidance for construction contracts with customers (DAS 221) and more generic guidance on revenue recognition can be found in DAS 270 (The Income Statement), especially section 1.

In this study attention is paid to the developments in quality of revenue recognition disclosures resulting from the introduction of IFRS 15 for IFRS issuers and implications for DAS issuers of the amendments of DAS 221 and DAS 270. A sample consisting of Dutch construction companies was used for this research. The reason for selecting a Dutch GAAP applying sample, despite the fact that revised DAS 221 and 270 are not effective yet for reporting year 2021, is that the revised standards have already been published in December 2020. Therewith this research provides a baseline measurement on the revenue recognition disclosures under the existing DAS. Further, it may be interesting to see whether the revisions in the standards are already taken into account in the preparation of financial statements over reporting year 2021, also considering the observation by the DASB that Dutch practice needed further guidance in this area. Moreover, it is important to note that early application of the revised standards is explicitly allowed by the DASB.

As has been observed in an earlier research regarding the introduction of IFRS 15 (van der Kuij-Groenberg and Pronk 2019), the construction industry is one of the sectors significantly impacted by the introduction of IFRS 15. Furthermore, construction companies frequently enter into complex contractual arrangements (e.g. contracts with multiple performance obligations and variable considerations) which require judgements in the application of the standard. These judgements in the application must be disclosed under IFRS 15. We assess the quality of these disclosure and evaluate whether improvements can be identified in the disclosure of significant judgements applied in the revenue recognition accounting before and after the introduction of IFRS 15. Subsequently, for the Dutch GAAP applying sample we analyzed the disclosure quality and accounting policies adopted under the existing (2021) DAS and we provide an outlook on the expected impact of several changes by the revised (2022) standards. Furthermore we give some reflections on the disclosure requirements under the revised standards.

This study contributes to earlier studies on IFRS 15 published in this journal (Pronk and Roozen 2018; van der Kuij-Groenberg and Pronk 2019; Van Duuren and ter Hoeven 2020) in several manners. This study provides insights in the expected impact of revisions of DAS 221 on Dutch GAAP applying construction companies. Furthermore a ‘post-implementation review’2 has been performed on disclosures of significant judgements and estimates in the revenue recognition accounting for IFRS financial statements. The outcomes of the empirical study are translated in recommendations for, amongst others, standard setters, issuers of financial statements and their auditors.

The article is structured as follows; section 2 covers the developments in the revenue recognition accounting standards under DAS and IFRS; in section 3 the sample is described and descriptive analyses are performed; in section 4 an empirical research on disclosures of significant judgements under IFRS and DAS is performed. Section 5 focuses on presentation requirements and the expected implication of the amendments in DAS 221 and DAS 270.

Concluding remarks and recommendations are provided in section 6.

The sample of this study consists of Dutch companies within the construction industry6 making use of either IFRS or Dutch GAAP. The sample was determined based on public information derived from the Dutch Chamber of Commerce. We have applied selection criteria which are intended to arrive at a population of construction companies in the Netherlands for which the provisions in either IFRS 15 or DAS 221 are of particular relevance. The applied selection criteria entail: companies need to have a relevant portion of revenue generated over time7; and companies need to have a relevant portion of their activities within the construction industry. In determining our final sample we rated companies from largest to smallest (based on total revenue). From the initial population of 100 companies, 16 companies for which no 2021 annual report was available on 1 August 2022 were omitted. Furthermore, we removed:

• 40 companies which had a group relationship with other companies in the sample;
• 16 companies which did not have a relevant portion of revenue recognized over time or no relevant activity within the construction industry.

Finally, we arrived at a population of 20 Dutch GAAP financial statements and 8 IFRS financial statements. Our final sample has been included in Appendix 1.

As explained in our introduction, this study – amongst others – investigates the quality of disclosure on significant judgements and estimates regarding the revenue recognition accounting before and after the introduction of IFRS 15. In order to achieve this, the sample includes the latest available IFRS financial statements (year 2021) and the last but one IFRS annual report before IFRS 15 became effective (year 2016). The effective date of IFRS 15 is the start of the reporting year 2018. We have not chosen 2017 as benchmark reporting year due to formal or informal (already applying some principles of IFRS 15 without formally adopting the entire standard) early adoption of IFRS 15 in reporting year 2017.

Table 1 and Table 2 depict the descriptive statistics of the financial statements included in our sample.

Not surprisingly, the non-listed Dutch GAAP companies are on average significantly smaller than the IFRS based companies in terms of revenue and balance sheet total. However, despite the smaller size all Dutch GAAP companies fall definitely in the scope of the large entity (‘grote rechtspersonen’) accounting regime and have to comply with applicable Dutch GAAP for large entities.

With the introduction of the revised standard 221 two more important changes in the presentation of construction contracts will become effective. These entail changes in presentation in both the balance sheet and the profit or loss statement.

According to the existing standard 221, the DASB recommends to present separately the net debit position and net credit position of construction contracts in the balance sheet.17 The accounting principles however also allow companies to present a net total position of their construction contracts in their balance sheet and only further disclose their net debit position and their net credit position in the notes to the financial statements.18 As part of this research, we first analyzed the current application of the option provided by DAS 221 to present credit and debit positions of construction contracts net in the balance sheet. Table 8 presents the use of this option. The table shows that merely all (19 out of 20) companies did not separately present debit and credit positions of construction contracts in their balance sheet despite the recommendation of the DASB. The most evident explanation for this outcome is that the presentation of a net balance generally results in better financial performance metrics such as solvency ratio’s. The only company (Nijs & Zonen Holding B.V.) that separated debit and credit positions of construction contracts in the balance sheet is an early adopter of DAS 221. A notable finding is that with two companies that applied the option provided by the existing DAS 221.410 (i.e. net presentation of construction contracts in the balance sheet) no information on net debit and net credit construction contract position could be derived from the disclosures.

In analyzing the adherence to the disclosures on construction contracts we further observed disparity in the information included in the notes of the Dutch GAAP population relating to information provided regarding project provisions included in the construction contracts balance. Table 9 depicts a summary of this observation. The table shows that 45% of the companies provide specific (and quantified) information how project provisions affect the construction contracts balance. The remainder 55% of the companies did not provide this information.

Under the existing presentation and disclosure requirements companies are required to present project provisions as part of the construction contracts in the balance sheet.19 A separate disclosure of the amounts of project provisions included in the construction contracts is however not explicitly requested.

Interestingly under the revised standard20 more clarity is provided on disclosure requirements of variable consideration (contingent assets and liabilities) under reference to DAS 252, however the presentation requirements of DAS 221 remain applicable. Companies are therefore under both the existing and revised standard not required to separately disclose their project provisions. In contrast, IFRS 15 specifically requires companies to assess whether a contract with a customer is onerous through the application of IAS 37 Provisions. For the IFRS applying sample we observed all companies separated the projects’ provisions as a separate category as part of the provisions note. In our view we consider a separate disclosure of the amount (and nature of) a project provision (or related contingent assets/liabilities) to be a best practice following the disclosure requirements of DAS 252 Provisions.

As mentioned earlier, one of the main changes of the revised standard 221 is that companies are no longer allowed to net all construction contracts and present the total netted amount as an asset or liability. The revised standards no longer accept the presentation as a debit amount or credit amount at the portfolio level but requires the presentation as a debit or credit balance to be assessed at the contractual level. In practice this means that merely all construction companies will have to present a separate line item under the assets (accumulating all construction contracts with a debit balance) and a separate line item under the liabilities (accumulating all construction contracts with a credit balance). Consequently this is expected to have a significant impact on balance sheet figures including financial performance metrics. In this study we further investigated the estimated impact on solvency metrics (i.e. equity-ratio and debt-to-equity ratio) which is a frequently used financial performance metric by companies. In summary, the revision in presentation requirements is expected to result in profound deterioration of the solvency positions of companies due to the separate recognition of contract assets and liabilities in the balance sheet. In particular, this may be relevant for companies restricted to covenants on their loans which might require that the company at least discusses the consequences of this accounting policy change with the lender. Table 10 summarizes the expected impact of the revised presentation requirements on equity-ratio and debt-to-equity ratio. The equity-ratio is expected to deteriorate 8% percent-point and the debt-to-equity is expected to increase from ratio 1.24 to ratio 1.64.

An example of the practical implications of the changes in the presentation requirements of DAS 221 can be found in the 2021 financial statements of Nijs & Zonen Holding B.V. The company early adopted the revisions and explicit reference is made in their disclosures on the impact of the revised presentation requirements on their solvency metrics and the communications they have had with their loan providers. Specifically the company disclosed that agreements were made with their lender to revise solvency metrics in their financing agreements. The disclosure of Nijs & Zonen Holding B.V. (Figure 7) is considered a best practice and a model disclosure for companies on how changes in solvency metrics affect financing agreements.

Figure 7. 

Nijs & Zonen Holding B.V. 2021, p. 6 (for translation: see Appendix 2).

Although no public information is available on details of financing arrangements by companies it is expected that companies widely have ‘frozen GAAP’ provisions22 in their loan agreements. This presumption is consistent with earlier observations about Dutch companies during the introduction of IFRS 16 (Backhuijs et al. 2020). We emphasize that also the use of ‘Frozen GAAP’ terms may in future result in practical challenges because financial information based on outdated accounting standards needs to be prepared for covenant testing purposes. This may be particularly challenging for companies more significantly impacted by the revisions of standard 221 (e.g. due to identification of multiple performance obligations or additional guidance on variable considerations). Hence, this is an area which needs to be closely monitored by companies.

Next to the revisions in balance sheet presentation, also revisions were made with regard to the presentation in the profit or loss statement. Under the existing standard 221 companies are permitted to present revenue under a separate line item ‘Change in work in progress and construction contracts’ as long as the project is not completed and companies presenting the profit and loss statement by category (rather than by function). Under the revised standard this presentation is no longer permitted and companies are required to present their revenue as ‘net turnover’. Table 11 depicts the use of the current option to present revenue as change in work in progress and construction contracts. Approximately 40% of the population currently applies this option and hence will have to change their presentation.

In this study the quality of revenue recognition disclosures is investigated for a sample of construction companies applying IFRS standards. Additionally, attention is paid to the upcoming amendments of DAS 221/270. The results indicate overall that the quality of revenue recognition disclosures has (slightly) improved since the introduction of IFRS 15. Companies more often provide detailed information on significant judgements and estimates applied in the application of IFRS 15. We observe companies tend to be conservative in providing project specific information, however several best practices were identified in this field.

The study focused on disclosure of significant judgements and estimates in the application of the revenue recognition standard (either under DAS or IFRS) as this is considered to be eminently important in the accounting for revenue. Results show that construction companies reporting under IFRS disclose (much) more relevant information, likely because of the prominence given to the disclosure of estimates and judgements in IFRS 15. Interestingly the revised standard 221 does not require these disclosures. Furthermore, we believe the revised standards result in ambiguity on what information should be disclosed, specifically for construction contracts within the scope of DAS 221. Irrespective to DAS 270, the revised standard 221 does not mandate specific disclosures on newly introduced concepts such as performance obligations and variable considerations. Comparing the disclosure requirements of DAS 221 to the requirements of IFRS 15, we observe a significant discrepancy. Although we do not advocate perfect alignment with the IFRS 15 disclosure requirements, we do believe the standard can be improved by mandating disclosures on the most profound estimates and judgements impacting the nature, amount, timing and uncertainty related to the recognition of revenue such as the identification of performance obligations, method of attribution of revenue to the reporting period and estimating variable considerations. This can be partly effectuated through references to the revised disclosures in standard 270 and/or references to standard 252.

With this research we attempt to encourage standard setters to critically evaluate the disclosure requirements of the revised standards 221/270 (as part of a post-implementation review) and we encourage preparers to provide entity-specific disclosures particularly respective to significant judgements and estimates applied in the revenue recognition accounting. Also, we stimulate Dutch GAAP companies to provide detailed information on the transition impact of the revised standards in the 2022 financial statements.

Furthermore, this study addressed the expected impact of the changes in the presentation requirements of DAS 221 and DAS 270. Companies with external financing arrangements are expected to be most profoundly affected by these changes, both when agreements are made with and without ‘frozen GAAP’ provisions. We stress the importance of timely action on this topic.

For future research it will be interesting to examine the impact of the revisions of DAS 221/270 in the 2022 financial statements, including both the transitional impact (i.e. impact on equity, financial metrics and financing arrangements) as continuous impact on overall disclosure quality and informativeness of financial statements with regard to the recognition of revenue.

Figure 1:

‘The revisions in DAS 221, applicable as from 2022, have been early adopted in the 2021 financial statements. The revisions stipulate that debit and credit positions of individual projects as part of the balance sheet account construction contracts may no longer be netted, but are required to be separated as net debit and net credit positions in the balance sheet. The balance sheet effect as per 31 December 2021 amounts to €20.421.676 and €21.741.096 as per 31 December 2020. This results in an increase in the total balance sheet amount from € 78.8 million to € 99.0 million and hence a decrease in the solvency from 37.0% to 29.4% for the financial year 2021. The comparative figures for 2021 have been adjusted accordingly, which resulted in an increase of the total balance sheet amount from € 106.2 million to € 127.9 million and hence a decrease in the solvency ratio from 32.4% to 26.9%. To clarify the impact of the revisions on the solvency, both the solvency percentage with and without the application of the revised standard are disclosed.’

Figure 7:

‘With effect from financial year 2022, the presentation of the work in progress account balance changed. Until financial year 2021 it is permitted to present a net work in progress balance sheet position (netting of debit and credit positions). This way of presenting has always been applied by De Nijs. As from 2022 this presentation is no longer allowed. This policy change is included in the Dutch Accounting Standards (DAS 221). As a result of this revised standard the total balance sheet amount will increase and hence the solvency ratio will decline. We are aware of this effect and we have informed our financial partners (banks, insurers, guarantors). As the 2021 financial figures will be included in the 2022 financial statements as comparative figures, we have chosen to early adopt the revisions for the 2021 annual report. Based on an analysis (effect on total balance sheet) we have adjusted our solvency targets from 30% to 25%. Our financial partners are informed about this adjustment. The revised percentage is included in our financing arrangements with the Rabobank. We have early adopted the revised standard for the 2021 financial year to clarify the impact of the revisions on the solvency, both the solvency ratio with and without the application of the revised standard are disclosed. The comparative figures for 2020 have been adjusted accordingly’.