Valmet delivers process automation, machinery, equipment and services for the pulp, paper and energy industries. On the capital business side, the Group’s revenue arises from projects, the scope of which ranges from delivery of complete mill facilities on a turn-key basis to single section machine rebuilds. Service revenue comprises short-term and long-term maintenance contracts, smaller improvement and modifications, rebuilds, as well as sale of spare parts and consumables.
Revenues from short-term service contracts are recognized once the service has been rendered, while revenues from spare part and consumables deliveries are recognized upon transfer of significant risks and rewards associated with the goods to the customer. Revenues from long-term service contracts are recognized on a percentage of completion basis using the cost-to-cost method.
Sales and anticipated profits under engineering and construction contracts are recorded on a percentage of completion (POC) basis. The stage of completion is determined either by employing the milestone or the cost-to-cost method. Under the milestone method, revenue is recognized based on predetermined milestones that are estimated to reflect realized value add (contract value of the work performed to date). Estimated contract profits are recorded in profit and loss in proportion to recorded sales. Under the cost-to-cost method, the amount of revenue is recognized based on costs incurred as at each reporting date relative to total estimated costs. In the cost-to-cost method, sales and profits are recorded after considering the ratio of accumulated costs to estimated total costs to complete each contract.
Starting January 1, 2018 Valmet will adopt IFRS15, Revenue from contracts with customers. In the expectation of adopting the new standard governing revenue recognition, Valmet management has decided to no longer use the milestone method as the preferred method for measuring progress in contracts where revenue is recognized in proportion to the stage of completion of contract activity. As of January 1, 2017 the cost-to-cost method is used as Valmet’s primary method for measuring progress of contract activity. Management estimates that for some contracts this change will defer revenue recognition in the beginning of the project.
Critical accounting estimates and judgements
Valmet delivers turnkey projects to its customers, where the signing of a sales contract and therefore, receipt of a firm commitment on the order and the final acceptance of a delivery by the customer, may take place in different financial periods. In accordance with its accounting principles, Valmet applies the percentage of completion method (‘POC method’) for recognizing revenue on such long-term delivery contracts. A projected loss on a customer contract is recognized through profit and loss, when it becomes known. The estimated revenue, the costs and profit, together with the planned delivery schedule of the projects are subject to regular revisions as the contract progresses to completion. Impact on profit arising from revision of estimates is charged through profit and loss in the period in which the facts that give rise to the revision become known. Although Valmet has significant experience using the POC method, the total costs estimated to be incurred on projects may change over time due to changes in the underlying project cost structures, which may ultimately affect the revenue recognized. Therefore, the POC method is not applied for recognizing sales commitments where the final outcome of the project and related cost structure cannot be pre-established reliably. Total net sales recognized under the percentage of completion method amounted to 50 percent of net sales in 2016.
Typical contract and project durations