4.4 DISCLOSURES ON CONTRACTS WITH CUSTOMERS IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AND OTHER DISCLOSURES RELATING TO IFRS 15

Statement of financial position balances relating to contracts with customers

As indicated in Note 1.3.3.4, Revenue recognition (IFRS 15), in those contracts in which performance obligations are measured over time, the difference between the revenue recognised for services rendered and the amounts actually billed to the customer is analysed systematically on a contract-by-contract basis. If the amount billed is lower than the revenue recognised, the difference is recognised as an asset under “Trade Receivables for Sales and Services – Amounts to Be Billed for Work Performed” (see Note 4.2), whereas if the amount of revenue recognised is lower than the amount billed, a liability is recognised under “Current Trade and Other Payables – Amounts Billed in Advance for Construction Work” (see Note 4.3).

Also, in certain construction or services contracts advances are agreed upon that are paid by the customer when work commences on the contract, the balance of which is offset against the various progress billings as the contract work is performed. These balances are recognised under "Trade Payables" on the liability side of the consolidated statement of financial position (see Note 4.3-a).

In contrast to the advances, in certain contracts the customer retains a portion of the price to be paid in each progress billing to guarantee the fulfilment of certain obligations under the contract. These retentions are not reimbursed until the contract is definitively settled. These balances are recognised under "Trade Receivables for Sales and Services" on the asset side of the consolidated statement of financial position (see Note 4.2).

Unlike “Amounts to Be Billed for Work Performed” and “Amounts Billed in Advance for Construction Work”, the “advances” and “retentions” are balances that will have an impact on future cash flows, since in the case of the “advances” a lower amount will be collected in the future as the advances are discounted from the progress billings, whereas the “retentions” will give rise to higher collections in the future, since the customer will reimburse the related amounts as and when the contract work is settled.

The detail of the amounts recognised in this connection at 31 December 2017 and 2016 is as follows:

As can be observed, the main change in 2017 corresponds to the first-time application adjustment relating to IFRS 15, which entailed a EUR 259 million reduction in “Amounts to Be Billed for Work Performed” and an EUR 18 million increase in “Amounts Billed in Advance for Construction Work” (see Note 1.3.1-a).

Excluding the adjustment relating to IFRS 15, the other changes in 2017 correspond mainly to the increase “Advances” and “Amounts Billed in Advance for Construction Work” (see Note 4.3) and the changes in “Amounts to Be Billed for Work Performed” (see Note 4.2).

Substantially all of the balance of amounts to be billed for work performed at 31 December 2017 corresponds to figures relating to revenue from the principal contract entered into with the customer since the Group generally only recognises revenue that is due and payable, i.e. the revenue that has been approved by the customer. “Claims” only includes those cases in which it is considered highly probable that the related revenue will not reverse in the future.

As mentioned in Note 1.3.3.1, there are various methods for calculating revenue based on the nature of the contract. In general, performance obligations in the Construction and Services businesses are satisfied over time and, accordingly, in the case of those contracts to which the output method is applied, and since the amounts relating to contract modifications and claims are not material, the balance recognised corresponds mainly to the amounts to be billed for work performed under the principal contract resulting from the mismatch between the date the work is performed and the date the customer is billed.

In the case of those contracts that are not for routine or recurring work for which the unitary price of the units to be performed cannot be determined and the stage of completion measured in terms of the costs incurred is used, in addition to the difference between the work performed and the progress billings, the balance may also relate to the difference between the actual profit margin on the contract and the expected profit margin at the end of the contract at the current stage of performance. The balance of “Amounts to be Billed for Work Performed” of this type of contract amounts to EUR 175 million (EUR 56 million relating to construction contracts and EUR 119 million relating to services contracts) of the total of EUR 713 million at 31 December 2017.

With respect to “Amounts Billed in Advance for Construction Work”, the balance recognised at the beginning of the year included in the foregoing table includes revenue of EUR 407 million, of which EUR 292 million relate to construction contracts and EUR 115 million to services contracts.

Other disclosures relating to IFRS 15:

Revenue from contracts with customers:

EUR 11,872 million of total revenue recognised in 2017 (see Note 2.1, Operating income) relate to revenue from contracts with customers, which represents 97% of revenue recognised.

Revenue not yet recognised relating to performance obligations not satisfied at the end of 2017 corresponds to what is usually known as backlog (see definition in the Alternative Performance Measures section in the Management report). This figure is broken down by business area in the following table and includes an estimate of the years in which the backlog is expected to be recognised in “Revenue".

The total numbers of contracts in the Construction and Services businesses are approximately 1,000 and 1,650 respectively.

Additionally, EUR 63 million of performance obligations of construction contracts executed in previous years (EUR 42 million and EUR 21 million relating to the Construction and Services businesses), were recognised as income, of which EUR 4 million were recognised as amounts billed in advance for construction work at the beginning of the year.

Other quantitative and qualitative disclosures

The disclosures relating to the description of when performance obligations are satisfied in the various contracts, the existence of a significant financing component, how the variable consideration is recognised, including the conditions that must be satisfied to recognise the revenue in this connection, and the concept of guarantees are included in Note 1.3.3.4. Also, the main judgements and estimates used to recognise revenue are disclosed in Note 1.3.4.

As to assets relating to bid costs and to mobilisation costs corresponding to contracts with customers, the balances recognised in the consolidated statements of financial position as at 31 December 2017 are disclosed in Note 4.1, Inventories.