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Investor Presentaiton

AUDITOR'S REPORT We have also addressed the risk of management override of internal controls. This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud. Key Audit Matter Revenue recognition of new equipment and modernization sales and related accruals The accounting principles and disclosures about revenue recognition of new equipment and modernization sales and related accruals are included in notes 1 and 2.1. In accordance with its accounting principles KONE applies the percentage of completion (POC) method for recognizing revenue over time from new equipment and modernization contracts. The percentage of completion is based on the cost-to-cost method. In year 2021, approximately 68 % percent of the KONE's sales of 10,5 billion euro were recognized under the PoC method. The recognition of revenue by applying PoC method and the estimation of the outcome of projects require significant management judgement in estimating the cost-to-complete. We assessed the risk to mainly relate to the stage of completion of projects, which were incomplete at 31 December 2021. The Group makes several types of accruals related to risks associated with revenue recognition by applying PoC method. These accruals require high level of management judgment. Based on above, revenue recognition based on PoC method, including related accruals, was a key audit matter. Revenue recognition based on PoC method was also a significant risk of material misstatement referred to in EU Regulation No 537/2014, point (c) of Article 10(2). Valuation of accounts receivable The accounting principles and disclosures relating to accounts receivable are included in notes 1 and 3.2. Valuation of accounts receivable was a key audit matter due to the significance of the account balance and because valuation requires management to make significant judgments especially due to prolonged COVID-19 pandemic related considerations. Valuation of accounts receivable requires management to evaluate the probability of the recoverability of receivables and to record an impairment loss for doubtful accounts over the portion for which payment is unlikely. As of balance sheet date 31 December 2021, the carrying value of accounts receivable amounted to 2 421,4 million euros. The carrying value of account receivable shown in the balance sheet as of 31 December 2021 is a result of gross receivables deducted by reserve of expected credit losses which is based on management's judgment and amounting to 284,4 million euros as of 31 December 2021. How our audit addressed the Key Audit Matter Our audit procedures to address the risk of material misstatement in respect of the revenue recognition from new equipment and modernization projects and related provisions, included, among others: • • . • • • Assessment of the Group's accounting policies over revenue recognition over time and recognition of project related accruals; Gaining an understanding of the revenue recognition process including related accruals; Inspecting on a sample basis the project documentation such as contracts and other written communication; Testing on a sample basis the percentage of completion and accrual calculations and the inputs of estimates in the calculations, as well as comparing the estimates to actuals; Analytical procedures; Evaluation of financial development and current status by о analyzing the changes in assumptions relating to estimated revenues, costs, and related accruals and receipts of project payments, and discussions with different levels of the organization including project level and financial organization; and Performing inquiries with management with regards to any significant events or legal matters that could affect the project estimates and provisions; Assessing the Group's disclosures in respect of revenue recognition and related accruals. We performed, among others, the following audit procedures: • we evaluated the valuation methods applied on valuation of accounts receivable as well as performed quarterly analyses of overdue and undue gross receivable balance development and corresponding movement in expected credit loss reserve during the year. we sent receivable balance confirmation requests to counterparties and compared trade receivable balances to subsequent cash receipts. we analysed management's estimates of expected credit losses of the most significant aged and overdue receivables considering historical payment patterns as well as recent communications with the counterparties and dunning procedures. we considered the appropriateness of the Group's disclosures in respect of trade receivables. 102 KONE ANNUAL REVIEW 2021
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