Hunting PLC – Annual report – 31 December 2018
Industry: oil and gas
- Principal Accounting Policies (extract)
(i) Revenue from Contracts with Customers
- Revenue from contracts with customers is measured as the fair value of the consideration received or receivable for the provision of goods and services in the ordinary course of business, net of trade discounts, volume rebates, and sales taxes.
- Revenue is recognised when control of the promised goods or services is transferred to the customer. Consequently revenue for the sale of a product is recognised either:
- wholly at a single point in time when the entity has completed its performance obligation, which is most commonly indicated by delivery of the products; or
- piecemeal over time during the period that control incrementally transfers to the customer while the good is being manufactured or the service is being performed.
- Hunting’s activities that require revenue recognition over time comprise:
- Work undertaken to enhance customer-owned products – most commonly the lathing of a thread onto the ends of customer-owned plain-end pipe.
- The manufacture of goods that are specifically designed for and restricted to the use of a particular customer, such as the manufacture of bespoke specialised circuitry and housing, and for which Hunting is entitled to a measure of recompense that reflects the fair value of the stage of production prior to their completion.
- The provision of services in which the customer obtains the benefit while the service is being performed – most commonly the storage and management services of customer-owned pipe.
- Hunting’s activities that require revenue recognition at a point in time comprise:
- The sale of goods that are not specifically designed for use by one particular customer. Products include tubulars acquired by Hunting as plain-end pipe on which lathing work has been applied and which is resold as threaded pipe.
- The manufacture of goods that are specifically designed for one particular customer but for which Hunting is not entitled to a measure of recompense that reflects the fair value of the stage of production prior to completion.
(ii) Rental Revenue
- Rental revenue is measured as the fair value of the consideration received or receivable for the provision of rental equipment in the ordinary course of business, net of trade discounts and sales taxes.
- Revenue from the rental of plant and equipment is recognised as the income is earned.
The Group has recognised the following amounts relating to revenue in the income statement, with revenue disaggregated by geographical markets. The table also includes a reconciliation of the disaggregated revenue with the revenue for the Group’s seven operating segments.
There is no material difference in the timing of revenue recognition between contracts with customers at a point in time and contracts with customers over time, as the majority of Hunting’s performance obligations are relatively short. Invoices for products are issued when the product is delivered and invoices for services are issued either on completion of the service or, at a minimum, monthly for services covering more than one month.
- Trade and Other Receivables
Trade receivables of $185.0m (2017 – $152.8m), accrued revenue of $7.9m (2017 – $6.2m) and the loan note of $1.2m (2017 – $1.3m) are financial assets measured at amortised cost. Interest income on the loan note is included within other finance income in note 9. The amount is immaterial in 2018 and 2017. Interest charged on the loan is based on three-month LIBOR plus 2.75%.
Other receivables generally arise from transactions outside the usual operating activities of the Group and comprise receivables from associates of $0.4m (2017 – $0.5m), receivable on liquidation of associate of $nil (2017 – $1.3m), tax receivables (VAT, GST, franchise taxes, and sales and use taxes) of $4.1m (2017 – $3.8m), derivative financial assets $0.7m (2017 – $nil) and other receivables of $1.4m (2017 – $1.8m). Receivables from associates, the receivable on liquidation of an associate and other receivables are financial assets measured at amortised cost. Derivative financial assets of $0.5m (2017 – $nil) are held for trading measured at fair value through profit or loss and derivative financial assets of $0.2m (2017 – $nil) are designated in a hedge measured at fair value.
The Group does not hold any collateral as security and no assets have been acquired through the exercise of any collateral previously held. In accordance with the amendments made to the Group’s core committed bank facility in July 2016, security has been granted over certain trade receivables and other receivables in the UK, US and Canada, which have a gross value of $153.6m (2017 – $125.4m). For the receivables pledged as security, their carrying value approximates their fair value.
Impairment of Trade and Other Receivables
The Group has chosen to apply lifetime expected credit losses (“ECLs”) to trade receivables, accrued revenue, contract assets and lease receivables, both short term and long term, upon their initial recognition. Each entity within the Group uses provision matrices for recognising ECLs on its receivables, which are based on actual credit loss experience over the past two years, at a minimum. Receivables are appropriately grouped by geographical region, product type or type of customer, and separate calculations produced, if historical or forecast credit loss experience shows significantly different loss patterns for different customer segments. Actual credit loss experience is then adjusted to reflect differences in economic conditions over the period the historical data was collected, current economic conditions, forward-looking information and the Group’s view of economic conditions over the expected lives of the receivables.
The Group assesses, on a forward-looking basis, the ECLs at each balance sheet date associated with its loan note that is carried at amortised cost. The impairment methodology applied, following the adoption of the general model under IFRS 9, will depend on whether there has been a significant increase in credit risk. To assess whether there has been a significant increase in credit risk, the risk of default occurring on the loan as at 31 December 2018 is compared with the risk of default occurring as at the date of initial recognition, being 31 March 2015. Indications of a significant increase in credit risk include events that have a negative impact on the estimated future cash flows and if any payments under the terms of the debt are more than 30 days overdue. Macroeconomic information is also considered, including the current state of the tanker shipping market. The terms of the loan note were revised during 2017. There have been no breaches of the revised terms during 2018. Therefore, the Group does not consider there to have been a significant increase in credit risk.
During the year, the movements on the provision for impairment were as follows:
Default on a financial asset is usually considered to have occurred when any contractual payments under the terms of the debt are more than 90 days overdue and no further deliveries are made or services provided to that customer unless there is a valid reason to do so.
Receivables are written off when there is no reasonable expectation of recovery. Indicators that receivables are generally not recoverable include the failure of the debtor to engage in a repayment plan, failure to make contractual payments for a period greater than 180 days past due and the debtor being placed in administration. Where receivables have been written off, the entity will continue to try and recover the outstanding receivable. Impairment losses on receivables are presented net of unused provisions released to the income statement within operating expenses.
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s wide and unrelated customer base. The Group’s maximum exposure to any single trade debtor does not exceed $9.8m. The maximum exposure to credit risk is the carrying amount of each class of financial assets mentioned above. The carrying value of each class of receivable approximates their fair value as described in note 26.
- Trade and Other Payables
Trade payables of $62.3m (2017 – $47.3m), accruals of $61.3m (2017 – $51.4m) and other payables of $4.3m (2017 – $3.0m) are financial liabilities measured at amortised cost. Other payables also include derivative financial liabilities of $0.1m (2017 – $0.4m) held for trading measured at fair value through profit or loss, derivative financial liabilities designated in a fair value hedge measured at fair value of $nil (2017 – $0.5m) and derivative financial liabilities designated in a cash flow hedge measured at fair value of $nil (2017 – $0.1m).
- Contract Assets and Liabilities
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
There was an impairment write-down of $0.9m recognised in relation to receivables arising on the Group’s contracts with customers, foreign exchange gains of $0.1m, $2.4m of the provision was utilised in the year against receivables written off and $0.3m reversal of an impairment write-down in relation to receivables arising on contracts with customers.
(a) Significant Changes in Contract Assets and Contract Liabilities
Contract assets have increased from $6.8m in 2017 to $11.8m due to increased levels of bespoke customer work-in-progress in Hunting Dearborn. Contract liabilities represent deposits received on contracts relating to the purchase of pipe in the Asia Pacific businesses, prior to Hunting placing an order with the steel mills, and have decreased from $9.1m in 2017 to $5.5m due to a change in the mix of orders at the year-end, whereby customers were not required to pay a deposit when placing an order.
(b) Revenue Recognised in Relation to Contract Liabilities
The following table shows how much of the revenue recognised in the current reporting period relates to carried-forward contract liabilities and how much relates to performance obligations that were satisfied in a prior year.
(c) Unsatisfied Performance Obligations
The aggregate amount of the transaction price allocated to partially or fully unsatisfied performance obligations as at the year-end on confirmed purchase orders received prior to the year-end is $250.2m. It is expected that 97% or $243.0m will be recognised as revenue in the 2019 financial year and the remaining 3% or $7.2m in future years.
As permitted under the transitional provisions of IFRS 15, the transaction price allocated to unsatisfied performance obligations as of 31 December 2017 is not disclosed.