IFRS 15, policies, judgements and estimates, contracts, effects of adoption, aircraft manufacturer

Airbus SE – Annual report – 31 December 2018

Industry: aircraft manufacturing

2. Significant Accounting Policies (extract)
Revenue recognition — Revenue is recognised when the Company transfers control of the promised goods or services to the customer. The Company measures revenue, for the consideration to which the Company is expected to be entitled in exchange for transferring promised goods or services. Variable considerations are included in the transaction price when it is highly probable that there will be no significant reversal of the revenue in the future. The Company identifies the various performance obligations of the contract and allocates the transaction price to these performance obligations. Advances and pre-delivery payments (contract liabilities) are normal and not considered a significant financing component as they are intended to protect the Company from the customer failing to complete its obligations under the contract.

Revenue from the sale of commercial aircraft is recognised at a point in time (i.e. at the delivery of the aircraft). The Company estimates the amount of price concession as a reduction of both revenue and cost of sales.

Revenue from the sale of military aircraft, space systems and services — When control of produced goods or rendered services is transferred over time to the customer, revenue is recognised over time, i.e. under the percentage of completion method (“PoC” method).

The Company transfers control over time when:
– it produces a good with no alternative use and the Company has an irrevocable right to payment (including a reasonable margin) for the work completed to date, in the event of contract termination at the convenience of customers (e.g. Tiger contract, A400M development performance obligation); or
– it creates a good which is controlled by the customer as the good is created or enhanced (e.g. Eurofighter contracts, some border security contracts); or
– the customer simultaneously receives and consumes the benefits provided by the Company (e.g. maintenance contracts).

For the application of the over time method (PoC method), the measurement of progress towards complete satisfaction of a performance obligation is based on inputs (i.e. cost incurred).

When none of the criteria stated above have been met, revenue is recognised at a point in time. Revenue has been recognised at the delivery of aircraft under IFRS 15 from the sale of military transport aircraft, from the A400M launch contract and most of NH90 serial helicopters’ contracts.

Provisions for onerous contracts — The Company records provisions for onerous contracts when it becomes probable that the total contract costs will exceed total contract revenue. Before a provision for onerous contracts is recorded, the related assets under construction are measured at their net realisable value and written-off if necessary. Onerous contracts are identified by monitoring the progress of the contract together with the underlying programme status. An estimate of the related contract costs is made, which requires significant and complex assumptions, judgements and estimates related to achieving certain performance standards as well as estimates involving warranty costs (see “— Note 3: Key Estimates and Judgements”, “— Note 10: Revenue and Gross Margin” and “— Note 22: Provisions, Contingent Assets and Contingent Liabilities”).

3. Key Estimates and Judgements (extract)
Revenue recognition for performance obligations transferred over time — The PoC method is used to recognise revenue for performance obligations transferred over time. This method places considerable importance on accurate estimates at completion as well as on the extent of progress towards completion. For the determination of the progress of the performance obligations, significant estimates include total contract costs, remaining costs to completion, total contract revenue, contract risks and other judgements. The management of the operating Divisions continually review all estimates involved in such performance obligations and adjusts them as necessary (see “— Note 20: Contract Assets, Contract Liabilities and Trade Receivables, and Trade Liabilities”).

New, Revised or Amended IFRS Standards and Interpretations Applied from 1 January 2018 (extract)
IFRS 15 “Revenue from Contracts with Customers”
In May 2014, the IASB issued IFRS 15 which establishes a single comprehensive framework for determining when to recognise revenue and how much revenue to recognise. IFRS 15 replaced the former revenue recognition standards IAS 18 “Revenue” and IAS 11 “Construction Contracts” and related interpretations. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of control of the promised goods or services (performance obligations) in an amount that reflects the consideration to which that entity is entitled.

The Company adopted the new standard on 1 January 2018, using the full retrospective transition method. Accordingly, the Company restated the comparative 2017 results included in the 2018 IFRS Consolidated Financial Statements. The opening equity was restated as of 1 January 2017.

The Company has elected the practical expedients for completed contracts and contract modifications. As a result, the Company has not restated completed contracts which began and ended within 2017 or which were completed at the beginning of 1 January 2017. The Company used transaction prices at the date contracts were completed rather than estimating variable consideration amounts in the comparative reporting periods. The Company has reflected the aggregate effect of all of the modifications that occur before 1 January 2017 in identifying the performance obligations, determining and allocating the transaction price.

The application of those practical expedients allows an efficient implementation of the standard especially on complex transactions (e.g. contractual amendments on military contracts) and a provision of relevant information under IFRS 15.

The Company has used the practical expedient applicable to the disclosure on the amount of the transaction price allocated to the remaining performance obligations (i.e. backlog) and an explanation of when it expects to recognise the amount as revenue without any comparative information.

The Company revised its accounting policies relative to revenue recognition, to implement IFRS 15 as described in “— Note 2: Significant Accounting Policies”. The most significant changes result from the following:
– Several performance obligations are identified instead of recognising a single contract margin under IAS 11 (e.g. A400M, NH90 contracts). In some cases, the over time method (PoC method) revenue recognition criteria are not fulfilled under IFRS 15. In particular, for A350 launch contracts, A400M series production and certain NH90 contracts, revenue and production costs relative to the manufacture of aircraft are recognised at a point in time (e.g. upon delivery of the aircraft to the customer).
– Under IFRS 15, measurement of the revenue takes into account variable consideration constraints in order to achieve high likelihood that a significant reversal of the recognised revenue will not occur in the future. The constraint in assessing revenue at completion for some contracts (A400M) generates a decrease in recognised revenue.
– For the application of the over time method (PoC method), the Company measures its progress towards complete satisfaction of performance obligations based on inputs (i.e. cost incurred) rather than on outputs (i.e. milestones achieved). For the Company’s current long-term construction contracts, progresses were usually measured based on milestones achieved (e.g. Tiger programme, satellites, orbital infrastructures). Under IFRS 15, the Company measures progress of work performed using a cost-to-cost approach, whenever control of the work performed transfers to the customer over time.

IFRS 15 also impacts the presentation of the revenue from the sales of engines. Under IAS 18, the Company recognised revenue based on the amount of its contracts with its customers, unless it had confirmation of the amount of the price concession. In contrast, IFRS 15 requires the Company to estimate the amount of price concession in all cases and to treat the price concession as a reduction of revenue and cost of sales. Under IFRS 15, revenue and cost of sales decrease by the amount of the estimated concession granted by the Company’s engine supplier to their customers.

In addition to these changes, IFRS 15 introduced a new class of assets and liabilities “contract assets” and “contract liabilities”:
– A contract asset represents the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditioned by something other than the passage of time (e.g. revenue recognised from the application of the PoC method before the Company has a right to invoice. Prior to the implementation of IFRS 15, unbilled revenue was reported within “trade receivables”).
– A contract liability represents the Company’s obligation to transfer goods or services to a customer for which the customer has paid a consideration (e.g. contract liabilities mainly include the customer advance payments received which were reported prior to the implementation of IFRS 15 within “other liabilities”).

For any individual contract, either a contract asset or a contract liability is presented on a net basis.

The distinction between non-current and current presentation remains unchanged.

The following tables summarise the impacts on the comparative information resulting from the change in revenue recognition principles:



(1) Including reclassification between contract assets, current and non-current contract liabilities compared to previously reported in the 2018 interim financial statements.