The Group makes estimates, judgements and assumptions concerning the future. These estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances.

Key sources of estimation uncertainty

Revenue and profit recognition

The consolidated entity undertakes a number of long term construction and service contracts. Accounting for these contracts requires a number of assumptions and estimates to be made in relation to the stage of completion and expected outcome of the contract.

The majority of the Group’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts. For contracts with multiple performance obligations, the Group allocates the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

The Group has an Estimate at Completion (EAC) process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements and other contract requirements.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and costs at completion is complex, subject to variables and requires significant judgment. It is common for some of our long term contracts to contain performance fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate transaction price to the extent it is probable that a significant reversal of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is resolved. Our estimate of variable consideration and determination to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Contract modifications are routine in the performance of the Group’s contracts. Contracts are sometimes modified to account for changes in contract specifications or requirements. In most instances, contract

modifications are for goods or services that are not distinct and are accounted for as part of the existing contract.

The Group recognises revenue predominantly over time as the Group performs because of the continuous transfer of control to the customer, using costs incurred to date relative to total estimates costs at completion (EAC) to measure progress towards satisfying our performance obligations. Incurred costs represent work performed which corresponds with and best depicts the transfer of control to the customer. Contract costs include labour, material and subcontractor costs and overhead.

AWD Program

Forecasts of costs to complete the construction of the three AWDs are undertaken quarterly as part of the contractual requirements of ABTIA. As at June 2014, management’s forecasts of costs to complete the three AWDs indicated that it was probable that total costs related to the contract will exceed total contract revenues which would cause ASC to incur a loss pursuant to ABTIA. As at 30 June 2020, the expected loss has been reviewed in the current period based on management’s most recent forecast and accounting standard AASB 15 Revenue from Contracts with Customers.

The provision for the loss is based on estimates which will be revised as the contract proceeds. If the future estimates or outcome of the long term construction contract differs from earlier estimates this will impact future period financial results. For example, if there was a material change to the estimate of future production hours, compensation for design change, lengthening of the expected construction schedule or other funds are allocated to the project there could be a material impact on the financial outcome of the contract and accordingly the estimated loss or profit of the project would change. Any future changes to estimates of contract revenue or contract costs resulting in a change to the estimated loss or profit of the project will be accounted for as a change in accounting estimate and recognised in the period those changes occur.

OPV Program

Forecasts of costs to complete the construction of the two OPVs are undertaken as part of a formal quarterly process. As at 30 June 2020, management’s forecasts of costs to complete the two OPVs indicated that it was probable that total costs related to the contract will exceed total contract revenues, including any expected Contract Change Proposals received from the customer, and that the contract is therefore loss making.

In accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and AASB 15 Revenue from Contracts with Customers, the Group has recognised an initial provision for loss on the OPV contract of $10.7m as at 30 June 2020.

The provision for the loss is based on estimates which will be revised as the contract proceeds. If the future estimates or outcome of the long term construction contract differs from earlier estimates this will impact future period financial results. For example, if there was a material change to the estimate of future production hours, compensation for design change, lengthening of the expected construction schedule or other funds are allocated to the project there could be a material impact on the financial outcome of the contract and accordingly the estimated loss or profit of the project would change. Any future changes to estimates of contract revenue or contract costs resulting in a change to the estimated loss or profit of the project will be accounted for as a change in accounting estimate and recognised in the period those changes occur.

Leases

The Group determines whether a contract is, or contains, a lease at the commencement date. This is done by assessing whether the contract contains an identified asset, has the right to obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and has the right to direct how and for what purpose the asset is used throughout the period of use.

In determining the lease term, management uses its judgement to determine whether or not an option would be reasonably certain to be exercised. Management considers all facts and circumstances including their past practice and any cost that will be incurred to change the asset if an option to extend is not taken to help determine the lease term. Extension options are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The present value of the lease payment is discounted using the Group’s incremental borrowing rate. This rate represents the rate of interest of the Group’s overdraft facility which would be the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds to obtain an asset of a similar value to the right of use asset in a similar economic environment.

Net pension assets / liabilities

The present value of a defined benefit contribution plan depends on a number of factors that are determined on an actuarial basis using a number of assumptions (including discount rates, future salary increases and expected rate of return).