6.30 Management estimates and judgements
The accounting information in the financial statements is partly based on estimates and assumptions. The Group makes these estimates and makes assumptions about future developments, based on factors such as experience and expectations about future events that may reasonably be expected to occur given the current state of affairs. These estimates and assumptions are continually reassessed.
Revisions of estimates and assumptions, or differences between estimates and assumptions and actual outcomes, may lead to material adjustments to the carrying amounts of assets and liabilities.
Supplementary to the estimates already described in the accounting policies (section 5) and the explanatory notes (6.1 to 6.29), the key elements of estimation uncertainty are explained below.
The current economic climate is characterised by much uncertainty and is a result of high inflation, increased interest rates, geopolitical risks and the remaining consequences of the pandemic.
In the past year, purchase costs in the construction sector have risen across the board and the availability of materials and labour has been under pressure. Energy and partly-finished goods in particular are substantially more expensive than in the previous year. The Group is, therefore, not accepting large-scale or long-term work without arrangements on indexation. In 2022, the Group succeeded in passing on higher purchase prices largely through arrangements on indexation to the selling prices of our products and services.
Since the Group had a net cash position during the year, higher interest rates had a positive effect on net interest income and expense.
Impairment test for goodwill
Higher interest rates lead to an increase in the discount rate (WACC) used in the annual impairment test for goodwill (see note 6.12 Intangible assets). Given the considerable margin between the carrying amount and the value in use of the relevant cash-generating units, there is only a very limited risk of a future write-down as a result of further interest rate increases.
The effects of macro-economic developments are being constantly monitored by the Executive Board. The prospects for the Group in the years ahead are good, given the orders on the books (which are of a good quality and have a limited risk profile) and the leeway afforded by the financing facilities among other factors.
Nitrogen problem (PAS)
The nitrogen problem had only a limited effect on the Group’s financial results in 2022. It created delays in tenders for large infrastructure projects. The delays in carrying out our projects are currently limited. The possible effects of delays in issuing permits are monitored constantly. The prospects for the Group in the years ahead are good, given the orders on the books (which are of a good quality and have a limited risk profile) and the leeway afforded by the financing facilities among other factors.
Climate change brings both risks and opportunities for the Group. These may have consequences for the medium-term forecasts that underlie the measurement of assets.
Appendix 11.6.10 to the annual report lists the opportunities and risks related to climate change. This shows that the opportunities are greater than the risks. The Group does not see any reason to adjust its medium-term projections downwards.
The considerations for each asset class are as follows (in the order they appear in the Consolidated statement of financial position):
Property, plant and equipment
There is a limited likelihood of a write-down because of climate-related risks. Property, plant and equipment comprises relatively new material that meets environmental standards and capital expenditure on a timber frame manufacturing facility (Industrial-scale building). There is also older material with a relatively low carrying amount. It may be that the older material can be used less in due course. This is the case, for example, for older lorries with excessive greenhouse gas emissions. There is a plan to replace this material with cleaner equipment. There is a second-hand market for the older material (at least for the time being) in particular in developing and underdeveloped countries such that the current residual values can often still be realised. In addition, older material that cannot, for example, be used in town centres may still be used outside them.
There is a limited impact of climate-related risks on the measurement because of the short-term nature of the leases.
As the opportunities are greater than the risks (see appendix 11.6.10 to the annual report) for all Heijmans segments (including the Building & Technology and Infra cash-generating units to which the intangible assets are allocated), climate-related risks do not lead to a greater risk of a write-down.
Joint ventures and associates
These mainly concern joint ventures and associates holding land positions. All land positions are in the Netherlands. There is continuing high demand for housing and consequently also for land on which to build them. In the very long term there is a risk that land could become unusable because of flooding. The Group is confident that, as a prosperous country, the Netherlands will take measures against this and there is still enough time to do this. There is a limited likelihood of a write-down of joint ventures and associates holding land because of the impact of climate-related risks.
Joint ventures and associates includes the 50% holding in AsfaltNu. It is not expected that the demand for roads will decline over the long term. There is no more environmentally friendly alternative for asphalt currently available. The requirements on greenhouse gas emissions and other hazardous materials are expected to increase and so in due course it may no longer be possible to use existing asphalt manufacturing plants without further capital expenditure in cleaner solutions. There is a medium likelihood of a write-down of the holding in AsfaltNu because of the impact of climate-related risks.
Loans granted to joint ventures
Loans granted to joint ventures mainly concerns loans to joint ventures holding land positions. As explained above, there is a limited likelihood of a write-down of those participating interests as a result of climate-related risks and so the risk to loans to those participating interests is also limited.
Deferred tax assets
There is a modest likelihood of a write-down because of the impact of climate-related risks in view of the short realisation period.
Strategic land positions
All land positions are in the Netherlands. There is continuing high demand for housing and consequently also for land on which to build them. In the very long term there is a risk that land could become unusable because of flooding. The Group is confident that, as a prosperous country, the Netherlands will take measures against this and there is still enough time to do this. There is a limited likelihood of a write-down of joint ventures and associates holding land because of the impact of climate-related risks.
Other inventories mainly concerns residential property in preparation and under construction. There is a modest likelihood of a write-down because of the impact of climate-related risks in view of the short realisation period.
Work in progress assets
There is a modest likelihood of a write-down because of the impact of climate-related risks in view of the short realisation. Specific climate-related targets have been agreed with the principal for certain projects. In some cases these are difficult to achieve because of the limited supply of low-emission materials and this may incur penalties. Where necessary, these have already been discounted in the measurement.
Trade and other receivables
By definition, there is a modest likelihood of a write-down because of the impact of climate-related risks in view of the very short realisation period.
Measurement of projects
For more information on the key assumptions used in the measurement of projects, see note 6.17, Work in progress.
A higher estimation uncertainty applies in the case of the Wintrack II project. These contracts, with an agreed price of €250 million, concerned the construction of pylons on two new high-voltage transmission lines, Eemshaven-Vierverlaten and Borssele-Rilland, to be carried out by the Heijmans Europoles B.V. consortium. In early September 2018, the client, TenneT, dissolved (‘ontbonden’) or alternatively terminated (‘opgezegd’) the agreements. The various parties have filed considerable claims and counterclaims with regard to the agreed price.
On 3 May 2021, the Arbitration Board ruled that TenneT lawfully had dissolved the contracts out of court. In accordance with the ruling, in 2021 Heijmans for prudence formed a provision of €34 million charged to the result for 2021.
The final ruling on 7 April 2022 brought the proceedings in the first instance to a close. As announced in 2021, Heijmans Europoles B.V. lodged an appeal against the ruling of 3 May 2021, in which the arbitrators ruled that TenneT had lawfully dissolved the Wintrack contracts out of court. The appeal was postponed at the time pending the final ruling.
The final ruling of 7 April 2022 was based on the interlocutory ruling issued on 3 May 2021, in the sense that the question of whether the contracts had been lawfully dissolved out of court was not raised again. In their ruling of 7 April 2022, the arbitrators determined - in brief - that TenneT must still pay Heijmans Europoles B.V. a portion of the unpaid work and that Heijmans Europoles B.V. was not required to repay any instalments. The arbitrators rejected the advance payment of compensation claimed by TenneT.
The appeal proceedings are now continuing. The arbitrators’ ruling to the effect that TenneT lawfully dissolved the contracts out of court will be raised again. The remainder of the case could still take several years. The arbitrators have stipulated that the appeal must first be completed before any damages can be determined in a damages assessment procedure.
On the basis of the ruling of 7 April 2022, Heijmans released an amount of €19 million from the aforementioned provision and included this in the results for 2022, and a provision of €15 million remains at 31 December 2022. The portion of the unpaid work for which TenneT paid Heijmans Europoles B.V. as a result of the judgment of 7 April 2022 had a limited impact on the results for 2022. Otherwise, Heijmans has not recognised the claims of Heijmans Europoles B.V. against TenneT. If, ultimately, the ruling is adverse, and after completion of the appeal and the pending damages assessment procedure, this could lead to a considerable outflow of resources (in addition to the €15 million already set aside).
The consortium, supported by in-house and external lawyers, has lodged an appeal against the ruling and remains confident of a favourable outcome.
Note 6.22 discloses the conditions attached to the financing in greater detail. An important condition involves satisfying the banking covenant ratios, specifically the interest cover ratio, the leverage ratio and the solvency ratio. Proper management of project risks (see above) is crucial to meeting the ratios. The same applies to the achievement of the 2023 business plan and longer-term projection.
The key actuarial assumptions for the calculation of the pension obligations are outlined in note 6.23. There is an increased risk that the Group will be required to make additional contributions to the insured schemes that follow the indexation of the Pension Fund for the Construction Industry (Bouwnijverheid). These additional contributions are expected to be some €12 million in 2023 since the Pension Fund for the Construction Industry has decided to index the pensions by 15.44% given its improved funding ratio. It is possible that further contributions will be required in the years after 2023.
Deferred tax assets
For more information on the key assumptions used in the measurement of deferred tax assets, refer to note 6.15 ‘Deferred tax assets and liabilities’.
Strategic land holdings
For more information on the key assumptions used in the measurement of the strategic land holdings, refer to note 6.16 ‘Inventories’.
For the main principles used in the annual determination of the recoverable amount of intangible assets, see note 6.12 ‘Intangible assets’.