International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured
based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.
Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs including pension and
any other postretirement benefit (PRB) expense under U.S. government Cost Accounting Standards (CAS). ...
We have a companywide standard and disciplined quarterly Estimate at Completion (EAC) process in which
management reviews the progress and execution of our performance obligations. As part of this process, management
reviews information including, but not limited to, any outstanding key contract matters, progress towards completion
and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues
and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the
schedule (e.g. the number and type of milestone events), technical requirements (e.g. a newly-developed product
versus a mature product) and other contract requirements. Management must make assumptions and estimates
regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g. to estimate increases in wages and prices for materials
and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our
customer and overhead cost rates, among other variables. These estimates also include the estimated cost of satisfying
our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial
participation (ICIP) agreements, required under certain contracts. These obligations may or may not be distinct
depending on their nature.
Revenue
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Based on this analysis, any quarterly adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program
performance, and may result in an increase in operating income during the performance of individual performance
obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities.
Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and
prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these
estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to complex aerospace or
defense equipment or related services, or product maintenance or separately priced extended warranty, a provision for the entire loss on the performance obligation is recognized in the period the loss is recorded.
Net EAC adjustments had the following impact on our operating results:
(In millions, except per share amounts)
2017
2016 2015
Operating income
$ 442
$ 418
$ 392
Income from continuing operations attributable to Raytheon Company
287
283 255
Diluted EPS from continuing operations attributable to Raytheon Company
$ 0.98
$ 0.95
$ 0.84
In addition, net revenue recognized from our performance obligations satisfied in previous periods was $520 million,
$509 million and $404 million in 2017, 2016 and 2015, respectively. This primarily relates to EAC adjustments that
impacted revenue.
11.4.2.B
Determining the transaction price and the amounts allocated to
performance obligations
Entities often exercise significant judgement when estimating the transaction prices of
their contracts, especially when those estimates involve variable consideration.
Furthermore, significant judgement may be required when allocating the transaction
price, including estimating stand-alone selling prices; for example, it is likely that
entities will need to exercise judgement when determining whether a customer option
gives rise to a material right (see 5.6 above) and in estimating the stand-alone selling
price for those material rights.
Given the importance placed on revenue by financial statement users, the standard requires
entities to disclose qualitative information about the methods, inputs and assumptions used
in their annual financial statements for all of the following: [IFRS 15.126, BC355]
• determining the transaction price – includes, but is not limited to, estimating
variable consideration, adjusting the consideration for the effects of the time value
of money and measuring non-cash consideration;
• assessing whether an estimate of variable consideration is constrained;
• allocating the transaction price – includes estimating stand-alone selling prices of
promised goods or services and allocating discounts and variable consideration to
a specific part of the contract (if applicable); and
• measuring obligations for returns, refunds and other similar obligations.
Disclosing information about the methods, inputs and assumptions they use to
determine and allocate the transaction price is a change in practice for some entities.
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Entities with diverse contracts need to ensure they have the processes and procedures
in place to capture all of the different methods, inputs and assumptions used.
In Extract 28.11 at 11.4.1.C above, Ford Motor Company explains the need to estimate
variable consideration in relation to returns. It also describes how it allocates a portion of the
transaction price to warranties that are performance obligations. In Extract 28.16 at 11.4.2.A
above, Raytheon Company provides qualitative information about estimating the transaction
price and estimating stand-alone selling prices when allocating the transaction price.
Since fee arrangements often include contingencies (e.g. No Win-No Fee
arrangements), Slater and Gordon Limited estimated variable consideration when
determining the transaction price as presented in Extract 28.17. Therefore, it discloses
information about the method (i.e. most likely amount approach), inputs and
assumptions (i.e. management’s assessment and the probability of success of each case).
Furthermore, Slater and Gordon Limited discloses information about the assessment of
whether a significant financing component exists. The entity concludes that contracts
generally comprise only one performance obligation. As such, Slater and Gordon
Limited does not disclose information about the allocation of the transaction price.<
br />
Extract 28.17: Slater and Gordon Limited (2017)
Notes to the Financial Statements for the Year Ended 30 June 2017 [Extract]
Note 3: Financial Performance [Extract]
3.1 Revenue from Contracts with Customers [Extract]
3.1.1 Accounting Policies [Extract]
Provision of Legal Services – General Law Legal Services
The Group also earns revenue from provision of general legal services, incorporating project litigation. Revenue for
general legal services is recognised over time in the accounting period when services are rendered.
Fee arrangements from general legal services include fixed fee arrangements, unconditional fee for service
arrangements (“time and materials”), and variable or contingent fee arrangements (including No Win – No Fee
arrangements for services including project litigation, and some consumer and commercial litigation).
For fixed fee arrangements, revenue is recognised based on the stage of completion with reference to the actual services
provided as a proportion of the total services expected to be provided under the contract. The stage of completion is
tracked on a contract by contract basis using a milestone based approach, which was explained above.
In fee for service contracts, revenue is recognised up to the amount of fees that the Group is entitled to invoice for
services performed to date based on contracted rates.
The Group estimates fees for variable or conditional service fee arrangements using a most likely amount approach on a contract by contract basis. Management makes a detailed assessment of the amount of revenue expected to be received and the probability of success of each case. Variable consideration is included in revenue only to the extent that it is highly probable that the amount will not be subject to significant reversal when the uncertainty is resolved (generally when a matter is concluded).
Certain project litigation matters are undertaken on a partially funded basis. The Group has arrangements with third party funders to provide a portion of the fees receivable on a matter over time as services are performed. In such arrangements, the funded portion of fees is billed regularly over time and is not contingent on the successful outcome of the litigation.
The remaining portion of fees is variable consideration which is conditional on the successful resolution of the litigation.
The variable consideration is included in revenue as services are performed only to the extent that it is highly probable that the amount will not be subject to significant reversal when the uncertainty is resolved.
As in the case of personal injury claims, estimates of revenues, costs or extent of progress toward completion are
revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in
profit or loss in the period in which the circumstances that give rise to the revision become known by management.
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The Group has determined that no significant financing component exists in respect of the general law services revenue
streams. This has been determined on fee for service and fixed fee arrangements as the period between when the entity
transfers a promised good or service to a customer and when the customer pays for that good or service will be one
year or less. For No Win – No Fee arrangements this has been determined because a significant amount of the
consideration promised by the customer is variable subject to the occurrence or non-occurrence of a future event that
is not substantially within the control of the customer or the Group.
A receivable in relation to these services is recognised when a bill has been invoiced, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
11.4.3
Assets recognised from the costs to obtain or fulfil a contract
As discussed at 10.3 above, the standard specifies the accounting for costs an entity
incurs to obtain and fulfil a contract to provide goods or services to customers.
IFRS 15 requires entities to disclose information about the assets recognised to help
users understand the types of costs recognised as assets and how those assets are
subsequently amortised or impaired. These disclosure requirements are:
[IFRS 15.127-128]
• A description of:
(a) the judgements made in determining the amount of the costs incurred to
obtain or fulfil a contract with a customer; and
(b) the method it uses to determine the amortisation for each reporting period;
• the closing balances of assets recognised from the costs incurred to obtain or fulfil
a contract with a customer, by main category of asset (for example, costs to obtain
contracts with customers, pre-contract costs and setup costs); and
• the amount of amortisation and any impairment losses recognised in the
reporting period.
Entities are required to disclose the judgements made in determining the amount of
costs that were incurred to obtain or fulfil contracts with customers that meet the
criteria for capitalisation, as well as the method the entity uses to amortise the assets
recognised. For example, for costs to obtain a contract, an entity that capitalises
commission costs upon the signing of each contract needs to describe the judgements
used to determine the commission costs that qualified as costs incurred to obtain
a contract with a customer, as well as the determination of the amortisation period. See
the discussion at 10.3.3.F above on the presentation requirements for contract cost
assets and the related amortisation and impairment.
In Extract 28.11 at 11.4.1.C above, Ford Motor Company discloses information in
relation to the contract cost asset along with information about the related type of
revenue contracts. In Extract 28.18, Capita plc discloses its accounting policy on assets
recognised from costs to fulfil and costs to obtain a contract in Note 2 on ‘summary of
significant accounting policies’ in its 2017 annual financial statements. This is followed
by a description of how it determines the amortisation period and assesses the assets
for impairment. In Note 18, Capita plc provides quantitative disclosures of ‘contract
fulfilment assets’, separately disclosing the closing balance, the amount that was
utilised (i.e. amortisation expense) and the amount of impairment losses for each
reporting period.
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Extract 28.18: Capita plc (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [Extract]
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Extract]
(e) Revenue [Extract]
Contract fulfilment assets
Contract fulfilment costs are divided into: (i) costs that give rise to an asset; and (ii) costs that are expensed as incurred.
When determining the appropriate accounting treatment for such costs, the Group firstly considers any other applicable
standards. If those other standards preclude capitalisation of a particular cost, then an asset is not recognised under IFRS 15.
If other standards are not applicable to contract fulfilment costs, the Group applies the following criteria which, if met, result in capitalisation: (i) the costs directly relate to a contract or to a specifically identifiable anticipated contract; (ii) the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy)
performance obligations in the future; and (iii) the costs are expected to be recovered. The assessment of this criteria
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p; requires the application of judgement, in particular when considering if costs generate or enhance resources to be used
to satisfy future performance obligations and whether costs are expected to be recoverable.
The Group regularly incurs costs to deliver its outsourcing services in a more efficient way (often referred to as
‘transformation’ costs). These costs may include process mapping and design, system development, project management,
hardware (generally in scope of the Group’s accounting policy for property, plant and equipment), software licence costs
(generally in scope of the Group’s accounting policy for intangible assets), recruitment costs and training.
Group’s accounting policy for property, plant and equipment), software licence costs (generally in scope of the Group’s
accounting policy for intangible assets), recruitment costs and training.
Capitalisation of costs to obtain a contract
The incremental costs of obtaining a contract with a customer are recognised as an asset if the Group expects to recover
them. The Group incurs costs such as bid costs, legal fees to draft a contract and sales commissions when it enters into
a new contract.
Judgement is applied by the Group when determining what costs qualify to be capitalised in particular when considering
whether these costs are incremental and whether these are expected to be recoverable. For example, the Group considers
which type of sales commissions are incremental to the cost of obtaining specific contracts and the point in time when
the costs will be capitalised.
The Group has determined that the following costs may be capitalised as contract assets: (i) legal fees to draft a contract (once the Group has been selected as a preferred supplier for a bid); and (ii) sales commissions that are directly related to winning a specific contract.
Costs incurred prior to selection as preferred supplier are not capitalised but are expensed as incurred.
Utilisation, derecognition and impairment of contract fulfilment assets and capitalised costs to obtain a contract
The Group utilises contract fulfilment assets and capitalised costs to obtain a contract to cost of sales over the expected contract period using a systematic basis that mirrors the pattern in which the Group transfers control of the service to