Duro Felguera S A : Consolidated Annual Accounts 2020

Description

The Group engages mainly in the provision of engineering and/or manufacturing services for the supply of facilities through EPC projects in the industrial, energy, minerals handling, logistics and environmental sectors, together with the provision of maintenance and erection services, and follows the general policy of recognising the revenue from, and profit or loss on, each contract by reference to the estimated stage of completion thereof, calculated on the basis of the costs incurred in the contract as a percentage of the total budgeted costs. Revenue recognised by reference to stage of completion in 2020 amounted to EUR 131.1 million, with an amount of EUR 71.7 million receivable at year-end, of which EUR 22.6 million correspond to amounts to be billed for work performed, with amounts billed in advance for construction work totalling EUR 50.9 million.

Determination of the stage of completion necessarily involves a high degree of complexity and judgement by management in relation to, inter alia, the estimated total costs to be incurred in each project, the measurement of the work completed in the period (both the allocation of the cost associated with materials and subcontracted work to the project and engineering, manufacturing and erection hours) and the accounting for contract modifications, all of which fall within the framework of the criteria established in IFRS 15, Revenue from Contracts with Customers.

Accordingly, the situation described was considered to be a key matter in our audit.

Procedures applied in the audit

Our audit procedures included obtaining an understanding of the Group's revenue recognition policies and the processes directly related to the periodic reviews of the contracts carried out by those responsible for each area and supervised by Group management and, specifically, the corresponding follow-up reports that include the costs incurred, the estimate of costs to be incurred, the estimated percentage of completion, the assessment of the margin and the possible penalties and obligations provided for in the contracts.

Also, our audit procedures included, among others, an itemised in-depth analysis of a selection of projects, in which we recalculated the stage of completion and evaluated the reasonableness of the hypotheses and assumptions used in determining the revenue for the year, as well as the identification of the contract price and performance obligations, the review of the consistency of the estimates made in the previous year with the actual data of the projects in the current year, considering the impact of covid-19, and the evaluation of the reasonableness of the costs yet to be incurred. To perform these procedures, we held meetings with the Group's technical staff and obtained the support of internal specialists in relation to certain issues.

Lastly, we reviewed the disclosures provided in the accompanying consolidated financial statements in relation to these matters. Specifically, Notes 12, 22 and 23 contain relevant information on revenue recognition and on amounts yet to be billed or amounts billed in advance.

As indicated in Notes 35 and 40, as a consequence of its activity, the Group is involved in various arbitration and court proceedings for a significant amount, mainly with customers and suppliers, or it has ongoing negotiations on the termination of contracts, the evolution of which could lead to lawsuits. The aforementioned processes are characterised by the existence of cross claims between the parties. Of these proceedings, at 31 December 2020 there were accounts receivable associated with the resolution of arbitration proceedings amounting to EUR 16 million, net of provisions (see Note 12), escrow accounts amounting to EUR 16 million (see Note 11) and unrecognised contingent assets subject to claims and provisions recognised to cover claims amounting to EUR 70 million (see Note 25). Additionally, the Group has an ownership interest in a jointly controlled entity involved in an arbitration proceeding with a customer (see Note 10).

In relation to the aforementioned proceedings, Group management assesses whether impairment losses should be recognised, and whether the claims should be considered to be contingent liabilities or whether they require the recognition of provisions, and the quantification thereof.

These circumstances constitute a key matter in our audit, since they require Group management to make significant judgements, in particular as to whether it is probable that there will be a future outflow of resources and whether the amount of the obligation can be estimated reliably. These judgements are formed by Group management based mainly on the opinions of its external legal counsel engaged for this purpose.

Our audit procedures included, among others, obtaining an understanding of the arbitration and court proceedings in which the Group is involved and their evolution during the year, as well as an analysis of the judgements of management made on the basis of the opinion of its external and internal legal counsel. For this purpose we sent confirmation letters and obtained responses from the lawyers and legal advisers with whom the Group works to analyse the current situation of the proceedings and check their risk assessment, based on the "remote", "possible" or "probable" risk classification required by the applicable accounting regulations, and in our analysis we placed particular emphasis on the matters relating to the most significant court proceedings in progress and the other assumptions considered for the calculation of the provisions. Also, we evaluated the information disclosed by the Group in relation to these proceedings in Notes 35 and 40 to the accompanying consolidated financial statements, in accordance with the applicable regulations, and evaluated whether it was consistent with the evidence obtained during the performance of our tests, taking into account the existing uncertainty regarding the outcome of these proceedings.

Notes 10, 12, 25, 35 and 40 contain the information on provisions and the disclosures on contingent liabilities related to arbitration and court proceedings and negotiations in progress.