IFRS 15 policies, revenue recognised over time as no alternative use, judgements, certain disclosures including fulfilment assets

UDG Healthcare plc – Annual report – 30 September 2020

Industry: healthcare

1. Significant Accounting Policies (extract)

Revenue Recognition

Revenue is recognised for identified contracts with customers. The Group’s revenue is derived from providing expert outsourcing services to healthcare companies through contract packaging services in the Sharp division, commercial and clinical outsourced services in Ashfield, and advisory and communications services in Ashfield. Revenue comprises the fair value of the consideration receivable for goods and services sold to third party customers in the ordinary course of business. It excludes sales-based taxes and is net of allowances for volume-based rebates and early settlement discounts.

It is the Group’s policy and customary business practice to receive a valid order from the customer in which each parties’ rights and payment terms are established. The Group assesses revenue contracts to determine the transaction price and performance obligations to be delivered to customers under contract. The Group considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. Where the contracts include multiple performance obligations, the transaction price is allocated to each performance obligation based on the stand-alone selling price. The Group’s contracts with customers generally include a single performance obligation and do not contain multiple performance obligations or bundled pricing arrangements.

If the consideration in a revenue contract includes a variable amount (including volume rebates), the Group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. Accumulated experience is used to estimate and provide for discounts and rebates, using the most likely amount estimation method for contracts with a single-volume threshold and the expected value method for contracts with more than one volume threshold. Revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. In some of the Group’s revenue contracts, the Group receives short-term advances from its customers. Using the practical expedient in IFRS 15, the Group does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised good or service to the customer and when the customer pays for that good or service will be one year or less.

The Group recognises revenue as the amount of the transaction price expected to be received for goods and services supplied at a point in time or over time as the contractual performance obligations are satisfied and control passes to the customer. Revenue is recognised when a customer obtains control of a good or service and therefore has the ability to direct the use and obtain the benefits from the good or service. Revenue is recognised over time where (i) there is a continuous transfer of control to the customer; or (ii) there is no alternative use for any asset created and there is an enforceable right to payment for performance completed to date. Other revenue contracts are recognised at a point in time when control of the good or service transfers to the customer.

Where the contractual performance obligations are satisfied over time and revenue is recognised over time, the Group recognises revenue by reference to the estimated stage of completion of the performance obligations. The primary method of estimating stage of completion of over time revenue contracts is the input method of cost incurred to date over the estimated total cost to complete the revenue contract. Estimates of revenues, costs and stage of completion during the performance of a contract are revised where circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known. Where performance obligations are satisfied at a point in time, revenue is recognised when the risks and rewards of ownership have transferred to the customer. This is at the point where the product is delivered to the customer and there are no unfulfilled obligations that could affect the customer’s acceptance of the product.

In certain of the Group’s contracts where another party is involved in providing goods or services to its customer, the Group determines whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. The Group is a principal and records revenue on a gross basis if it controls the promised goods or services before transferring them to the customer. In circumstances where the Group’s role is only to arrange for another entity to provide the goods or services, then the Group is an agent and revenue is recognised at the net amount that it retains for its agency services. The Group has generally concluded that it is the principal in its revenue arrangements, except for the agency services disclosed in Note 3.

The disclosures of significant accounting judgements, estimates and assumptions relating to revenue from contracts with customers are provided in Note 2.

Contract Fulfilment Assets

For certain contracts, the Group incurs costs necessary to fulfil obligations under a contract after it is obtained but before transferring goods or services to the customer. Costs to fulfil a contract are recognised on the Group Balance Sheet where the costs relate directly to a contract, generate or enhance Group resources that will be used in satisfying future performance obligations, and the costs are expected to be recovered. Contract fulfilment assets are amortised to cost of sales on a systematic basis, consistent with the pattern of transfer of the goods or services to which the asset relates.

2. Significant Accounting Estimates and Judgements (extract)

Revenue Recognition (Note 3)

Revenue is recognised over time where (i) there is a continuous transfer of control to the customer; or (ii) there is no alternative use for any asset created and there is an enforceable right to payment for performance completed to date. Determining the stage of completion of contracts to recognise revenue involves estimation techniques, particularly where the contract duration spans accounting periods. The Group estimates stage of completion for fixed price contracts using stage of completion input methods of cost incurred to date as a proportion of the expected overall cost and effort to complete the performance obligations. The amount of in-progress and unbilled revenue as at 30 September is represented by the contract assets (accrued income) disclosed in Note 3. The weighted average estimated stage of completion of revenue contracts represented by contract assets and a sensitivity analysis of changes in weighted average stage of completion are outlined in Note 3.

3. Revenue

Revenue recognised over time is recognised as services are rendered. Other revenue contracts are recognised at a point in time when control of the good or service transfers to the customer, primarily upon delivery to the customer. A disaggregation of revenue recognised from contracts with customers by service offering, timing of transfer of goods and services and geographical region is outlined below.

Revenue recognised under contracts where the Group was determined to be acting as an agent in the transactions during the year amounted to:

A contract asset (accrued income) is the right to consideration in exchange for goods or services transferred to the customer. Where the Group transfers services to a customer over time before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration to date under the contract. Contract assets are presented within trade and other receivables (Note 17) on the Group Balance Sheet and are expected to be realised in less than one year. Contract assets have decreased during the year due to a combination of timing of billings and the impact of Covid-19 in Ashfield.

The weighted average stage of completion of contract assets for contracts where revenue is recognised over time and a sensitivity of contract assets for the estimation of stage of completion is outlined below.

A contract liability (deferred income) is the obligation to transfer goods or services to a customer for which the Group has received consideration from the customer. Where the customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract. Contract liabilities are presented within trade and other payables (Note 26) on the Group Balance Sheet.

Of the contract liability balance as at 1 October 2019, $64,789,000 has been recognised as revenue in the current year (2019: $55,904,000). The Group expects that long term contract liabilities will be recognised as revenue over an average period of five years (2019: four years).

Assets Recognised from Costs to Fulfil a Contract

Contract fulfilment assets arise primarily from contracts in Sharp for customer specific production facility installation or modification on Sharp’s premises, and typically include costs for engineering, commissioning, qualification and validation. Contract fulfilment assets are amortised on a straight-line basis over the term of the specific contracts they relate to, consistent with the pattern of recognising the associated revenue. The amortisation cost is recorded within cost of sales. The movement in contract fulfilment assets in the year was: