3. Critical accounting judgements and key sources of estimation uncertainties

The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts are based on factors which inherently are associated with uncertainties and actual results may therefore differ materially. The most significant judgments and estimates are summarised below.

3.1 Revenue recognition

The Group’s revenue recognition policies require management to make judgments and estimates, particularly for revenue that is recognised over time. Such revenue is generally recognised using the cost-to-cost method (i.e. an input method), which requires a forecast to be made of the profit margin on the performance obligation upon its completion and the costs yet to incur. The stage of completion is then determined by comparing actual costs incurred to date to total costs to complete the performance obligation. The Group has coordinated systems for cost estimations, forecasting and revenue and costs reporting.

Making forecasts of the profit margin upon completion of the performance obligation involves judgments and estimates on costs as well as revenue. On the cost side, estimates are to be made for costs to be incurred to complete the performance obligation as well as costs for maintenance and defect liabilities. On the revenue side estimates are to be made with respect to the amount of variable consideration and judgments are required to determine whether such variable consideration should be constrained. Variable consideration includes fees for changes in scope of work (‘variation orders’), variation orders for which the related fee is under discussion (“unapproved variation orders”) or under a legal procedure (“claims”) as well as performance bonuses and/or penalties (‘liquidated damages’). Estimates of variable consideration are to be constrained to an amount that is not highly probable of a significant reversal. The Group quantifies highly probable as a probability of 75% or more.

Variable consideration is generally included in total revenue (i.e. not constrained) when:

• the amount is already covered by a client payment;

• the Group has a formal approval from the client on the respective amount or fee proposed by the Group;

• the Group has a written instruction or approval on a change in the scope of work from the client and

• the related amounts of compensation are contractually agreed based on specific contract rates or based on costs or plus a normal profit margin;

• the additional amounts are covered by a written settlement offers from the client.

In exceptional circumstances, variable consideration may also be included in total revenue when none of the above criteria are met and/or when there is a dispute with the client. In such circumstances, the highly probable criterion is generally substantiated by an advice or opinion of a lawyer.

3.2 Income taxes

The Group is subject to income taxes in numerous jurisdictions. Judgement and estimates are required in determining the provision for income taxes, particularly in determining the carrying amount of deferred tax assets and the amount of liabilities for (potential) uncertain tax positions.

The Group decreases its tax assets or increases its liabilities for anticipated tax audit issues based on estimates of whether less tax will be received respectively additional taxes will be due. Such decrease or increase is based on the technical merits of the underlying position.

Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax assets and liabilities in the period in which such determination is made. Deferred tax assets are recognised for tax losses carry- forwards, temporary differences and tax credits, to the extent that realisation of the related tax benefit through future taxable profits is probable. This requires an estimation of the amount of future taxable profits, for which a forecast window of five years is generally applied, and judgments to assess the probability of actually achieving the forecasted levels.

3.3 Impairment of goodwill

Goodwill is tested for impairment annually. The recoverable amounts of cash-generating units are determined based on value-in-use calculations. These calculations are determined using discounted cash flow projections and require estimates in connection with the future development of revenues, profit before tax margins and the determination of appropriate discount rates. An impairment loss is recognised if the carrying amount of an asset of CGU exceeds its recoverable amount. Sensitivity analyses in respect of key assumptions are disclosed in note 16.

3.4 Impairment of land and building rights

Land and building rights are generally acquired at a premium on their value in current condition. The premium is paid as future intentions (i.e. development) represent a considerable value increase. The ultimate value of land and building rights upon development depends on a number of factors such as the number of buildings and their expected sales prices. In case the Group is not able to proceed development, e.g. upon adverse decision of a governmental body, the respective land and building rights is generally subject to an impairment.

The valuation of land and building rights, to test their respective carrying amount for impairments, is based on a net realisable value model. The net realisable value model is generally supported by a valuation of an external valuator (by rotation) to benchmark.

3.5 Pension obligations

The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost for pensions include the discount rate, expected salary growth rates and expected indexation of pensions. Any changes in these assumptions will impact the carrying amount of pension obligations.

The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds (AA) that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension obligation. Other key assumptions are based on current market conditions and envisaged developments. Sensitivity analyses in respect of these assumptions are disclosed in note 25.