Rolls-Royce PLC shares have fallen by 3% following the company reporting that its profits for last year would have been £900m lower if it had adopted IFRS 15, the accounting standard on revenue recognition
The aero-engine manufacturer moved its revenues forward from its long-term service contracts to compensate for its contracts being unprofitable in the early stages. Following the introduction of IFRS 15 Rolls-Royce will no longer be able to recognise future revenue.
The group will adopt the new standard in 2018. The 2017 reported results, which will be initially prepared and reported under existing standards, will be restated in the 2018 results to reflect the changes introduced in the new standard.
From 2018-2022 the profits from Rolls-Royce’s civil aerospace business are expected to be lower than forecasted originally.
David Smith, chief financial officer, Rolls-Royce PLC said: ‘The new standard provides a number of benefits to the business. As it brings profit performance for original equipment (OE) more in line with cash generation, it will put a sharper focus on improving productivity across our manufacturing activities.
‘At the same time, the change to aftermarket accounting, particularly in Civil Aerospace, reinforces our focus on cash flows, as we look to improve further our strong reputation for customer service by maximising engine availability while minimising cost.’
The International Accounting Standard Board’s (IASB) amendments to IFRS 15 Revenue from Contracts with Customers, the new revenue recognition standard was finalised in April 2016 and will affect all companies reporting under International Financial Reporting Standards (IFRS) starting in 2018.
