Chemring Group plc – Annual report – 31 October 2017
- ADOPTION OF IFRS 15
The Group has adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) for its 2017 financial year. The majority of the Group’s transactions are unaffected by IFRS 15, however when IFRS 15 is applied to a small number of customer contracts this leads to a difference in the timing of recognising revenue. As permitted by the standard, the Group has taken advantage of the modified transitional provisions and as such the 2016 results remain as previously reported. Under the modified approach the cumulative approach of initially applying the standard is recognised at 1 November 2016 with no restatement of prior periods.
An adjustment to brought forward retained earnings of £10.2m has been recognised in the Consolidated Statement of Changes in Equity, representing the reversal of certain revenue that met the criteria for revenue recognition under previously applicable accounting standards but does not do so under IFRS 15. This also reduced receivables and payables but increased inventory as at 1 November 2016.
The impact of adoption in the year to 31 October 2017 can be seen below and arises from revenue recognised in prior years which would instead have been deferred to the current year under IFRS 15.
In addition, a number of transactions, with a broadly equivalent operating profit impact, will now be recognised in 2018 that could have previously been recognised in 2017. This timing difference is expected to recur at each reporting period end, albeit at a different quantum.
The adoption of IFRS 15 had the effect of increasing revenue by £0.2m and operating profit by £0.5m in Countermeasures, increasing revenue by £2.8m and operating profit by £1.5m in Sensors, and increasing revenue by £13.3m and operating profit by £2.9m in Energetics.
The affected contracts are a combination of contracts for the provision of products. The significant risks and rewards of ownership had transferred but there remained an element of control, typically an undertaking to arrange elements of shipping on behalf of the customer, and hence the timing of revenue recognition is later under IFRS 15.
- GROUP ACCOUNTING POLICIES (extract)
Revenue is measured at the fair value of the consideration which is expected to be received in exchange for the goods and services provided, net of applicable taxes.
Sale of goods
Revenue from the sale of goods is recognised when all of the following conditions are satisfied:
- the Group has identified a sales contract with a customer;
- the performance obligations within this contract has been identified;
- the transactions price has been determined;
- this transaction price has been allocated to the performance obligations in the contract; and
- revenue is recognised as or when each performance obligation is satisfied.
Performance obligations are satisfied when the customer gains control of promised goods or services from the contract.
Rendering of services
Revenue from a contract to provide services, including customer funded research and development, is recognised by reference to the stage of completion of the contract. Stage of completion is typically estimated by either completion of relevant milestones or proportion of contract costs incurred for work performed to date, as appropriate.
- CRITICAL ACCOUNTING JUDGEMENTS AND SOURCES OF ESTIMATION UNCERTAINTY (extract)
Critical accounting judgements
During the year the Group adopted IFRS 15 Revenue from Contracts with Customers. The standard recognises revenue on the basis of the satisfaction of performance obligations. The identification of these obligations requires management judgement, particularly with respect to milestone contracts that contain multiple obligations. Revenue of £9.9m (2016: £10.3m) was recognised in the current year in respect of such milestone contracts.
Additionally, management has to consider whether performance obligations should be recognised at a single point in time, which is generally the case for the sale of products by the Group, or over a period of time, which is more common for certain service contracts.
In making its judgement about obligations that are satisfied at a point in time, management has to consider at what point control has passed to the customer, allowing revenue to be recognised. This is typically determined through a consideration of customer acceptance testing, contract terms and delivery arrangements.
For obligations that are recognised over time, a separate judgement must be made as to the most appropriate measure of progress. This is often on a straight-line basis over the life of the contract, though an alternative measure of progress may be more appropriate where the work is not evenly spread over the life of the contract.
FINANCIAL REVIEW (extract)
The Group has adopted IFRS 15 for its 2017 financial year and the Board believes that this represents a move to a more prudent basis of revenue recognition. The majority of the Group’s transactions are unaffected by IFRS 15, however when IFRS 15 is applied to a small number of customer contracts this leads to a difference in the timing of recognising revenue. As permitted by the standard, the Group has adopted the modified transitional provisions and as such the 2016 results remain as previously reported. For further details see note 33.
The net effect of the adoption of IFRS 15 on the Group results for 2017 was broadly neutral. The impact of adoption in 2017 has been to increase revenue by £16.3m and increase underlying operating profit by £4.9m arising from transactions recognised in prior periods which would have subsequently been recognised in the current period under IFRS 15. Similarly a number of transactions, with a broadly equivalent operating profit impact, will be recognised in 2018 that could have previously been recognised in 2017. This timing difference is expected to recur at each reporting period end, albeit at a different quantum.