Bombardier Inc. – Annual report – 31 December 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (extract)
For the fiscal years ended December 31, 2018 and 2017
(Tabular figures are in millions of U.S. dollars, unless otherwise indicated)
3. 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 that 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 Aerostructures and Engineering Services on the contract for the A220 program with CSALP are recognized at delivery. Although this impacts the timing of revenues and profit recognition for the Aerostructures and Engineering Services segment there is no impact on the consolidated results of the Corporation for prior periods since CSALP was consolidated.
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 18 – Contract balances for more details.
Furthermore, since IFRS 15 indicates IAS 37, Provisions, Contingent liabilities and Contingent Assets should be applied to onerous contracts, the onerous contract provisions related to long-term contracts in Transportation are no longer netted against contract related balances and instead were reclassified from inventories to provisions. These reclassifications between contract related balances and provisions in the statement of financial position had no impact on results of operations, equity or cash flows. Refer to Note 18 – Contract balances and Note 27 – Provisions for more details.
There was no impact on cash flows from operating activities, investing activities and financing activities as a result of adopting IFRS 15.
5. USE OF ESTIMATES AND JUDGMENT (extract)
Long-term contracts – Transportation conducts most of its business under long-term manufacturing and service contracts and the aerospace segments have some long-term maintenance service contracts, as well as design and development contracts for third parties. Revenues and margins from long-term contracts relating to the designing, engineering or manufacturing of specially designed products (including rail vehicles, vehicle overhaul and signalling contracts) and service contracts are recognized over time. The long-term nature of these contracts requires estimates of total contract costs and the transaction price. The measure of progress toward complete satisfaction of the performance obligation is generally determined by comparing the actual costs incurred to the total costs anticipated for the entire contract, excluding costs that are not representative of the measure of performance.
The contract transaction price includes adjustments for change orders, claims, performance incentives, price escalation clauses and other contract terms that provide for the adjustment of prices to the extent they represent enforceable rights for the Corporation. Variable consideration such as assumptions for price escalation clauses
and performance incentives is only 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.
Contract costs include material, direct labour, manufacturing overhead and other costs, such as warranty and freight. Estimated contract costs at completion incorporate forecasts for material usage and costs, including escalation clauses, labour hours and costs, foreign exchange rates (including the effect of hedges) and labour productivity. These costs are influenced by the nature and complexity of the work to be performed, as well as the impact of change orders and potential delays in delivery. Cost estimates are based mainly on historical performance trends, economic trends, collective agreements and contracts signed with suppliers. Management applies judgment to determine the probability that the Corporation will incur additional costs from delays or other penalties, and such costs, if probable, are included in estimated costs at completion, unless there is an adjustment to the transaction price in which case it is recorded as a reduction of estimated revenues at completion.
Recognized revenues and margins are subject to revisions as contracts progress towards completion. Management conducts quarterly reviews of estimated costs and revenues to completion on a contract-by-contract basis, including a review of escalation assumptions. In addition, a detailed annual review is performed on a contract-by-contract basis as part of the budget and strategic plan process. The effect of any revision may be significant and is recorded by way of a cumulative catch-up adjustment in the period in which the estimates are revised.
A 1% increase in the estimated future costs to complete all ongoing long-term contracts would have decreased Transportation’s gross margin for fiscal year 2018 by approximately $91 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (extract)
Long-term contracts – Revenues from long-term contracts related to designing, engineering or manufacturing specifically designed products (including rail vehicles, vehicles overhaul and signalling contracts) and service contracts are generally recognized over time. The measure of progress toward complete satisfaction of the
performance obligation is generally determined by comparing the actual costs incurred to the total costs anticipated for the entire contract, excluding costs that are not representative of the measure of performance. The contract transaction price is adjusted for change orders, claims, performance incentives and other contract terms
that provide for the adjustment of prices to the extent they represent enforceable rights for the Corporation. Variable consideration such as assumptions for price escalation clauses and performance incentives is only included in the transaction price to the extent that 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. 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 goods or services. If a contract review indicates the expected costs to fulfill the contract exceed the expected economic benefits expected to be received under it, the entire expected loss on the contract is recognized as an onerous contract provision with the corresponding expense recorded in cost of sales. The expected benefits to be received are generally limited to the revenues from the associated contract.
Options for additional assets are treated as contract modifications when exercised. Modifications of the Corporation’s long term contracts in Transportation are generally accounted as part of the existing contract to the extent the remaining goods and services are considered to form part of a single performance obligation that is partially satisfied at the date of contract modification. The effect that the contract modification has on the transaction price and the existing progress toward satisfaction of the single performance obligation is recognized as an adjustment to revenue at the date of the contract modification on a cumulative catch-up basis.
Aerospace programs – Revenues from the sale of new aircraft are considered a single performance obligation and are recognized at delivery, which is the point in time when the customer has obtained control of the aircraft and the Corporation has satisfied its performance obligation. All costs incurred or to be incurred in connection with the sale, including warranty costs and sales incentives, are charged to cost of sales or as a deduction from revenues at the time revenue is recognized.
For the bill-and-hold arrangements in respect of new aircraft revenue is recognized when the customer has obtained control of the aircraft and the customer has requested the arrangement, the aircraft is separately identified as belonging to the customer, the aircraft is ready for physical transfer to the customer and the Corporation does not have the ability to use the product or direct it to another customer.
Other – Revenues from the sale of pre-owned aircraft and spare parts are recognized at the point in time when the customer has obtained control of the promised asset and the Corporation has satisfied the performance obligation. Aftermarket services are generally recorded over time.
Revenues earned by Aerostructures and Engineering Services on its contract with CSALP for the A220 program as well as its contracts with Bombardier Business Aircraft and Commercial Aircraft segments is recognized at delivery.
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 certain 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.
Contract related balances comprise of contract assets and contract liabilities presented separately in the consolidated statements of financial position.
Contract assets – Are recognized when goods or services are transferred to customers before consideration is received or before the Corporation has an unconditional right to payment for performance completed to date. Contract assets are subsequently transferred to receivables when the right of payment becomes unconditional. Contract assets comprise cost incurred and recorded margins in excess of advances and progress billings on long-term production and service contracts.
Contract liabilities – Are recognized when amounts are received from customers in advance of transfer of goods or services. Contract liabilities are subsequently recognized in revenue as or when the Corporation performs under contracts. Contract liabilities comprise advances on aerospace programs, advances and progress billings in excess of long-term contract cost incurred and recorded margin, and other deferred revenues related to operation and maintenance of systems.
A net position of contract asset or contract liability is determined for each contract. The cash flows in respect of advances and progress billings, including amounts received from third party advance providers, are classified as cash flows from operating activities.
10. FINANCING EXPENSE AND FINANCING INCOME
Financing expense and financing income were as follows, for fiscal years:
(1) Restated, refer to Note 3 for the impact of changes in accounting policies.
(2) Net losses (gains) on certain financial instruments classified as FVTP&L, including losses (gains) arising from changes in interest rates.
(3) Represents the loss related to the sale of long-term contract receivables in Transportation. See Note 9 – Special items for more details.
(4) Represents adjustments to transaction prices for certain orders with a significant financing component due to a significant delay between timing of cash receipt and revenue recognition.
(5) Represents a change in the estimates used to determine the provision related to tax litigation. See Note 9 – Special items for more details.
(6) Represents the loss related to the redemption of the $600-million Senior Notes due 2019 for fiscal year 2017, which was recorded as a special item.
(7) Of which $431 million representing the interest expense calculated using the effective interest rate method for financial liabilities classified as amortized cost, respectively for fiscal year 2018 ($453 million for fiscal year 2017).
(8) Includes $1 million of dividend income from equity investments classified as FVOCI for fiscal year 2018.
(9) Of which $32 million representing the interest income calculated using the effective interest rate method for financial assets classified as amortized cost and FVOCI, respectively for fiscal year 2018 ($7 million for fiscal year 2017).
Borrowing costs capitalized to PP&E and intangible assets totalled $247 million for fiscal year 2018, using an average capitalization rate of 6.65% ($183 million and 6.16% for fiscal year 2017). Capitalized borrowing costs are deducted from the related interest expense (i.e. interest on long-term debt or accretion on other financial liabilities, if any).
18. CONTRACT BALANCES
Contract assets were as follows, as at:
(1) Restated, refer to Note 3 – Changes in accounting policies for more details.
Under certain contracts, title to contract balances is vested to the customer as the work is performed, in accordance with contractual arrangements and industry practice. In addition, in the normal course of business, the Corporation provides performance bonds, bank guarantees and other forms of guarantees to customers, mainly in Transportation, as security for advances received from customers pending performance under certain contracts. In accordance with industry practice, the Corporation remains liable to the purchasers for the usual contractor’s obligations relating to contract completion in accordance with predetermined specifications, timely delivery and product performance.
Advances and progress billings received on long-term contracts in progress were $8,895 million as at December 31, 2018 ($8,194 million as at December 31, 2017 and $6,932 million as at January 1, 2017). Revenues include revenues from Transportation long-term contracts, which amounted to $7,388 million for fiscal year 2018 ($6,867 million for fiscal year 2017).
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 €624 million ($714 million) as at December 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 such as delivery delays beyond a specified date.
Revenues recognized were as follows for fiscal years:
(1) Includes changes in transaction price such as penalties and escalation.
Impairment losses recognized were as follows for fiscal years:
The following table presents the aggregate amount of the revenues expected to be realized in the future from partially or fully unsatisfied performance obligations as at December 31, 2018 as we perform under contracts at delivery or recognized over time. The amounts disclosed below represent the value of firm orders only. Such orders may be subject to future modifications that might impact the amount and/or timing of revenue recognition. The amounts disclosed below do not include constrained variable consideration, unexercised options or letters of intent.
Revenues expected to be recognized in:
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions of U.S. dollars)