Meggitt PLC – Half year report – 30 June 2018
- Restatement of prior period comparatives
This note explains the impact on the condensed consolidated financial statements of the adoption of IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’ which became effective for the financial period beginning 1 January 2018 and of IFRS 16 ‘Leases’ which the Group has early adopted. As a result of changes required to the Group’s accounting policies arising from adoption of these standards, prior period comparatives have been restated.
In addition, the Group has finalised the fair values of assets and liabilities of Elite Aerospace, Inc. (‘Elite’) which was acquired on 28 March 2017. IFRS 3 requires fair value adjustments to be recorded with effect from the date of acquisition and consequently have resulted in a restatement of previously reported results.
The following tables show the impact of these changes on each line item affected. Line items which are not impacted by the restatement have been aggregated within the relevant sub-totals. The impact of each new standard is also explained in more detail within the footnotes that follow the tables.
Impact of IFRS 15
In accordance with the transition provisions in IFRS 15, the standard has been adopted retrospectively with restatements made to prior period comparatives. A summary of the principal areas of IFRS 15 that have impacted the Group are shown in the tables below and footnotes that follow.
a) Programme participation costs – Free of charge/deeply discounted manufactured parts
Programme participation costs consist of incentives given to Original Equipment Manufacturers in connection with their selection of the Group’s products for installation onto new aircraft where the Group has obtained principal supplier status. Where these incentives comprise the supply of initial manufactured parts on a free of charge or deeply discounted basis, amounts are recognised within costs of sales as incurred. Under the Group’s previous accounting policy, amounts were recognised as an intangible asset and amortised over their useful lives to cost of sales over periods typically up to 15 years.
b) Programme participation costs – Cash payments
Where programme participation costs are in the form of cash payments, the treatment depends on the contractual relationship between the Group and the third party to whom the payment is made. Where the payment is made to a third party under a revenue contract (as defined by IFRS 15), or the award of future IFRS 15 revenue contracts on the programme from the same party is highly probable, payments are recognised as a contract asset and amortised, as a deduction from revenue, over the periods expected to benefit from those contracts. This situation most frequently arises where the payment is made to the same party to whom OE and/or aftermarket parts are sold. Other payments are recognised as an intangible asset and amortised as a charge to cost of sales. Under the Group’s previous accounting policy, all programme participation cash payments were recognised as intangible assets and amortised as a charge to cost of sales.
c) Customer funding towards development costs
Where a customer contributes to the Group’s development costs and those costs meet the criteria under IAS 38 to be recognised as an intangible asset, the funding is recognised as a contract liability and is amortised, as an increase to revenue, over the periods expected to benefit from future revenue from the customer over the life of the programme. Under the Group’s previous accounting policy, customer funding was netted off amounts recognised as development costs and accordingly reduced the subsequent amortisation charged to net operating costs.
A number of other revenue timing differences, none of which is individually significant, arose from the adoption of IFRS 15:
i. Revenue recognised over time
The Group recognises revenue under power by the hour and cost per brake landing type contracts over time using costs incurred as the measure of contract completion. Under the Group’s previous accounting policy, revenue was recognised based on the number of aircraft flying hours or the number of aircraft landings.
Where the Group builds a product with no alternative use and has an enforceable right to payment from the customer for costs incurred, plus a reasonable margin, throughout the life of the contract then revenue is recognised over time using costs incurred as the measure of contract completion. Under the Group’s previous accounting policy, the majority of contracts that meet this requirement were accounted for in a similar way using contract accounting, although the method of measuring progress has, in some cases, changed. For instance, funded research and development contracts were previously recognised as revenue over time using customer agreed milestones achieved as a measure of contract completion. Additionally a small number of contracts for which contract accounting was previously applied no longer meet the IFRS 15 criteria to be recognised over time, particularly certain contracts in the Heatric business, and are now recognised at a point in time, usually when the goods are delivered to the customer. Conversely, certain military contracts for which revenue was previously recognised as goods were delivered to the customer meet the IFRS 15 over time criteria and accordingly revenue is recognised as costs are incurred.
ii. Revenue recognised at a point in time
The timing of revenue on the substantial majority of the Group’s contracts, previously recognised at a point in time, has not been significantly affected by IFRS 15, with revenue continuing to be recognised as goods are delivered to the customer and at the price agreed with the customer for those goods. A minority of contracts required changes to the timing of revenue recognition to reflect IFRS 15 guidance on areas such as whether multiple deliveries and services provided to a customer should be accounted for individually, variable consideration and material rights.
Certain balances representing amounts recoverable on contracts, previously included within trade and other receivables, and deferred income and advance payments received from customers, previously included within trade and other payables, have been reclassified to contract assets and contract liabilities as appropriate.
Impact of IFRS 16
The Group has early adopted IFRS 16 using the full retrospective approach on transition. Under IFRS 16, except for certain short term leases and leases of low-value assets, a liability is recognised at lease inception equal to the present value of payments due under the lease. The lease liability is subsequently measured using the effective interest rate method, with interest charged to finance costs. At lease inception, a right of use asset is also recognised equal to the lease liability, adjusted to reflect any lease incentives paid to or received from the lessor, asset restoration and other direct costs. The right of use asset is depreciated over the shorter of the life of the asset or the lease term to either costs of sales or net operating costs.
Under the Group’s previous accounting policy, the majority of the Group’s leases were accounted for as operating leases with rentals charged to cost of sales or net operating costs on a straight line basis over the lease term, with no element of the rentals charged to finance costs. No asset or lease liability was recognised on the Group’s balance sheet for these leases.
Impact of IFRS 9
Under IFRS 9, where financial liabilities are subsequently measured at fair value, any element of the fair value gain or loss arising attributable to changes in credit risk is recognised in other comprehensive income. Under the Group’s previous accounting policy, such amounts were recognised within net operating costs.