Bombardier Inc. – Quarterly report – 31 March 2018
- CHANGES IN ACCOUNTING POLICIES (extract)
In May 2014, the IASB released IFRS 15, Revenue from contracts with customers, which supersedes IAS 11, Construction Contracts, and IAS 18, Revenue as well as other related interpretations. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized when, or as, the customer obtains control of the goods or services.
The majority of long-term manufacturing and service contracts at Transportation previously accounted for under the percentage-of-completion method meet the requirements for revenue recognition over time and therefore will continue to apply the percentage-of-completion method. The principal differences identified in respect of the Corporation’s accounting for long-term contracts at Transportation relate to the treatment of customer options for additional trains and the recognition of variable consideration such as price escalation clauses.
Under IAS 11, estimated revenues at completion included anticipated customer options for additional trains if it was probable that the customer will exercise the options and the amount can be measured reliably. Under IFRS 15, customer options are only included in the transaction price of the contract when they become legally enforceable as a result of the customer exercising its right to purchase the additional trains. This change results in the deferral of revenue and margin until the customer exercises their option.
Under IAS 11, variable considerations such as price escalation clauses were included in estimated revenues at completion when the amount is considered probable and can be reliably measured. IFRS 15 introduces the concept of a constraint on the recognition of variable consideration whereby amounts can only be included in the transaction price to the extent it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The introduction of this constraint results in the transaction price recognizing the effect of price escalation for certain indices at a later point in time.
For the aerospace segments, revenues from the sale of aircraft continue to be recognized when the aircraft have been delivered.
IFRS 15 indicates IAS 37, Provisions, Contingent liabilities and Contingent Assets, should be applied to onerous contracts but contains no other requirements as to their measurement. On adoption of IFRS 15, all loss provisions for contracts with customers follow the same policy for the definition of unavoidable costs of fulfilling the contract. In line with one of the two approaches identified as reasonable by the IFRS Interpretations Committee in its June 13, 2017 tentative agenda decision, the Corporation defines unavoidable costs as the costs that the Corporation cannot avoid because it has the contract (for example, this would include an allocation of overhead costs if those costs are incurred for activities required to complete the contract). This approach was used for long-term contracts, and has been applied to other contracts in the aerospace segments increasing the amount of onerous contract provisions and thereby lower subsequent inventory net realizable value charges.
The Corporation accounts for a significant financing component on orders where timing of cash receipts and revenue recognition differ substantially. Most of the Corporation’s contracts do not have a significant financing component. However, there are several orders in the Business Aircraft segment where advances were received well before expected delivery and therefore a financing component has been accounted for separately. The result is that interest expense is accrued during the advance period and the transaction price will be increased by a corresponding amount.
Under IFRS 15 revenues earned by the Aerostructures and Engineering Services on the inter-segment contract for the C Series program will be recognized at a point in time (delivery) as opposed to the current policy whereby it is recognized over-time (long-term contract accounting). Although this impacts the timing of revenues and profit recognition for the Aerostructures and Engineering Services segment, since it is inter-segment there is no impact on the consolidated results of the Corporation.
While these changes impact the timing of revenue and margin recognition, and result in a reduction of equity at transition, there is no change to cash flows. Furthermore, there is no change in profitability over the life of the contracts.
IFRS 15 was adopted effective January 1, 2018 and the changes have been accounted for retroactively in accordance with the transition rules of IFRS 15.
Impact of adopting IFRS 15 changes in accounting policies
The following tables summarize the Corporation’s retroactive restatements to its consolidated financial statements resulting from the adoption of IFRS 15, Revenue from contracts with customers, including the impact of reclassification.
The impacts on the consolidated statements of comprehensive income and on the consolidated equity position, net of income taxes, are as follows:
The impacts on the consolidated statements of income are as follows, for:
In addition to changes impacting net income (loss), contract penalties were reclassified from cost of sales to revenues.
The impacts on the consolidated statements of financial position are as follows, as at:
In addition to changes impacting equity, there were certain reclassifications made. Contract related balances were reclassified from inventories, advances and progress billings in excess of long-term contract inventories, advances on aerospace programs, other assets and other liabilities to contract assets and contract liabilities. Refer to Note 12 – Contract balances for more details. Furthermore, the onerous contract provisions related to long-term contracts in Transportation were reclassified from inventories to provisions. Refer to Note 16 – Provisions for more details on onerous contracts.
There was no impact on cash flows from operating activities, investing activities and financing activities as a result of adopting IFRS 15.
As a result of the above mentioned adjustments and reclassifications, certain disclosures that are required in annual financial statements in accordance with IFRS 15, which were not included in the Corporation’s most recent annual consolidated financial statements, have been included in these interim consolidated financial statements. Refer to Note 26 – Additional annual disclosures for more details.
- CONTRACT BALANCES
Contract assets were as follows, as at:
Contract liabilities were as follows, as at:
In connection with certain long-term contracts, Transportation enters into arrangements whereby amounts are received from third-party advance providers in exchange for the rights to customer payments. There is no recourse to Transportation if the customer defaults on its payment obligations assigned to the third-party advance provider. Amounts received under these arrangements are included as advances and progress billings in reduction of long-term contracts (production contracts) in contract assets and amounted to €539 million ($664 million) as at March 31, 2018 (€434 million ($520 million) as at December 31, 2017 and €471 million ($496 million) as at January 1, 2017). The third-party advance providers could request repayment of these amounts if Transportation fails to perform its contractual obligations under the related long-term contract.
Changes in provisions were as follows, for the three-month periods ended March 31:
(1) Mainly comprised of claims and litigations.
(2) Restated, refer to Note 2 for the impact of changes in accounting policies.
(3) Opening balances are before the assets held for sale reclassification. See Note 19 – Assets held for sale for more details on the CSALP assets and liabilities reclassification.
(4) See Note 7 – Special items for more details on additions related to restructuring charges.
(5) See Note 19 – Assets held for sale for more details on the CSALP assets and liabilities reclassification.
- ADDITIONAL ANNUAL DISCLOSURES
As a result of the adjustments discussed in Note 2 – Changes in accounting policies, certain disclosures that are required in annual financial statements in accordance with IFRS 15, which were not included in the Corporation’s most recent annual consolidated financial statements, have been included in these interim consolidated financial statements.
Certain information and disclosures normally included in annual consolidated financial statements prepared in accordance with IFRS were omitted or condensed where such information is not considered material to the understanding of the Corporation’s interim financial information.