The consolidated financial statements of BAE Systems plc have been prepared on a going concern basis as discussed in the Directors’ Report on page 70, and in accordance with EU-endorsed International Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. They have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and other relevant financial assets and financial liabilities (including derivative instruments).
Transactions in foreign currencies are translated at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date. These exchange differences are recognised in the income statement.
Principal accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out in the relevant notes. These policies have been applied consistently to all the years presented, unless otherwise stated.
Certain of the Group’s principal accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements. The directors believe that the consolidated financial statements reflect appropriate judgements and estimates, and provide a true and fair view of the Group’s financial performance and position. The critical accounting policies are listed below and explained in more detail in the relevant notes to the Group accounts.
Critical accounting policy Description Notes
Revenue and profit recognition
– The recognition of revenue and profit on
long-term contracts. The majority of long-term contracts are accounted for under IAS 11, Construction Contracts. Revenue on long-term contracts is recognised when performance milestones have been completed.
The ultimate profitability of long-term contracts is estimated based on estimates of revenue and costs, including allowances for technical and other risks, which are reliant on the knowledge and experience of the Group’s project managers, engineers, and finance and commercial professionals. Material changes in these estimates could affect the profitability of individual contracts.
Revenue and cost estimates are reviewed and updated at least quarterly, and more frequently as determined by events or circumstances.
Profit is recognised progressively as risks have been mitigated or retired.
1
Valuation of retirement benefit obligations – The determination of assumptions
underpinning the valuation of retirement benefit obligations for defined benefit pension schemes; and
– the determination of the share of the pension deficit allocated to the Group’s equity accounted investments and other participating employers.
Pension scheme accounting valuations are prepared by independent actuaries. For each of the actuarial assumptions used to measure the Group’s pension scheme liabilities, there is a range of possible values and management exercises judgement in deciding the point within that range that most appropriately reflects the Group’s circumstances. Small changes in these assumptions can have a significant impact on the size of the deficit.
The Group has allocated a share of the pension deficit to its equity accounted investments and other participating employers using a consistent allocation method intended to reflect a reasonable approximation of their share of the deficit.
23
Carrying value of intangible assets – The valuation of acquired intangible
assets; and
– the determination of assumptions underpinning goodwill impairment testing.
Acquired intangible assets, excluding goodwill, are valued in line with internationally used models, which require the use of estimates that may differ from actual outcomes. These assets are amortised over their estimated useful lives. Future results are impacted by the amortisation periods adopted and, potentially, any differences between estimated and actual circumstances related to individual intangible assets.
Goodwill is not amortised, but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review calculations require the use of estimates related to the future profitability and cash-generating ability of the acquired businesses and the pre-tax discount rate used in discounting these projected cash flows.
11
Changes in accounting policies
With effect from 1 January 2013, the Group has adopted the following amendment to an existing standard and new standard: – International Accounting Standard (IAS) 19 (revised 2011), Employee Benefits, replaces interest cost on gross pension liabilities and
expected return on gross pension assets with a finance cost on the net pension deficit calculated using the rate currently used to discount defined benefit pension liabilities. The discount rate is lower than the expected return on plan assets, increasing finance costs recognised in the income statement and correspondingly reducing remeasurements recognised in other comprehensive income. In addition, certain costs associated with the administration of the Group’s pension schemes are now reported within operating costs rather than finance costs. The net pension deficit is not affected by these changes.
Preparation (continued)
These changes have been applied retrospectively to the comparative financial information for 2012 and have had the following impact on the financial statements compared with the previous version of IAS 19:
2013
£m 2012£m
Operating costs (34) (39)
Share of results of equity accounted investments (2) (2)
Operating profit (36) (41)
Finance costs (166) (132)
Profit before taxation (202) (173)
Taxation expense 61 53
Net decrease in profit for the year (141) (120)
Remeasurements on defined benefit pension schemes 203 174
Tax on items that will not be reclassified to the income statement (62) (54)
Total comprehensive income for the year – –
Earnings per share
Basic earnings per share (4.4)p (3.7)p
Diluted earnings per share (4.3)p (3.7)p
Underlying earnings1 per share
Underlying earnings1 per share (0.2)p (0.4)p
The reduction in underlying earnings1 per share mainly reflects the reclassification of certain costs associated with the administration of the Group’s pension schemes from finance movements on pensions, which are excluded from underlying earnings1, to underlying EBITA2. In addition, during 2013, longevity swap arrangements were entered into by the trustees of certain UK schemes (see page 163). Under the revised IAS 19, these swaps are required to be valued in accordance with IFRS 13, Fair Value Measurement. The valuation under the previous version of IAS 19 would have reduced total comprehensive income for the year by £177m.
1 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items (see note 8).
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
– IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement disclosure requirements for use across other standards within IFRSs. IFRS 13 does not extend the use of fair value accounting and has not impacted the fair value measurements carried out by the Group other than in relation to longevity swaps as above. IFRS 13 requires specific disclosures on fair values, which are provided in the relevant notes to the Group accounts. A number of new EU-endorsed standards and amendments to existing standards, which are listed below, are effective for periods beginning on or after 1 January 2014 and have not been applied in preparing these consolidated financial statements. With the exception of new disclosure requirements, none of these are expected to have an impact on the consolidated financial statements of the Group and as such they have not been early adopted.
New standards and amendments to existing standards beginning on or afterEffective for periods
IFRS 10, Consolidated Financial Statements 1 January 2014
IFRS 11, Joint Arrangements 1 January 2014
IFRS 12, Disclosure of Interests in Other Entities 1 January 2014
IAS 27, Separate Financial Statements (revised 2011) 1 January 2014
IAS 28, Investments in Associates and Joint Ventures (revised 2011) 1 January 2014
There are no other IFRSs or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Group. Consolidation
The financial statements of the Group consolidate the results of the Company and its subsidiary entities, and include its share of its joint ventures’ results accounted for under the equity method, all of which are prepared to 31 December.
A subsidiary is an entity controlled by the Group. Control is the power to govern the operating and financial policies of an entity so as to obtain benefits from its activities.
The results of subsidiaries are included in the income statement from the date of acquisition.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
Joint ventures are accounted for under the equity method where the consolidated income statement includes the Group’s share of their profits and losses, and the consolidated balance sheet includes its share of their net assets within equity accounted investments. The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance sheet date. The income statements of such entities are translated at average rates of exchange during the year. All resulting exchange differences are recognised directly in a separate component of equity.
Translation differences that arose before the transition date to IFRS (1 January 2004) are presented in equity, but not as a separate component. When a foreign operation is sold, the cumulative exchange differences recognised in equity since 1 January 2004 are recognised in the income statement as part of the profit or loss on sale.
FIN AN C IA L S TA TE ME N TS FINANCIAL STATEMENTS
BAE SyStEmS AnnuAl RepoRt 2013 127
Group accounts
Preparation
The consolidated financial statements of BAE Systems plc have been prepared on a going concern basis as discussed in the Directors’ Report on page 70, and in accordance with EU-endorsed International Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. They have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and other relevant financial assets and financial liabilities (including derivative instruments).
Transactions in foreign currencies are translated at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date. These exchange differences are recognised in the income statement.
Principal accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out in the relevant notes. These policies have been applied consistently to all the years presented, unless otherwise stated.
Certain of the Group’s principal accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements. The directors believe that the consolidated financial statements reflect appropriate judgements and estimates, and provide a true and fair view of the Group’s financial performance and position. The critical accounting policies are listed below and explained in more detail in the relevant notes to the Group accounts.
Critical accounting policy Description Notes
Revenue and profit recognition
– The recognition of revenue and profit on
long-term contracts. The majority of long-term contracts are accounted for under IAS 11, Construction Contracts. Revenue on long-term contracts is recognised when performance milestones have been completed.
The ultimate profitability of long-term contracts is estimated based on estimates of revenue and costs, including allowances for technical and other risks, which are reliant on the knowledge and experience of the Group’s project managers, engineers, and finance and commercial professionals. Material changes in these estimates could affect the profitability of individual contracts.
Revenue and cost estimates are reviewed and updated at least quarterly, and more frequently as determined by events or circumstances.
Profit is recognised progressively as risks have been mitigated or retired.
1
Valuation of retirement benefit obligations – The determination of assumptions
underpinning the valuation of retirement benefit obligations for defined benefit pension schemes; and
– the determination of the share of the pension deficit allocated to the Group’s equity accounted investments and other participating employers.
Pension scheme accounting valuations are prepared by independent actuaries. For each of the actuarial assumptions used to measure the Group’s pension scheme liabilities, there is a range of possible values and management exercises judgement in deciding the point within that range that most appropriately reflects the Group’s circumstances. Small changes in these assumptions can have a significant impact on the size of the deficit.
The Group has allocated a share of the pension deficit to its equity accounted investments and other participating employers using a consistent allocation method intended to reflect a reasonable approximation of their share of the deficit.
23
Carrying value of intangible assets – The valuation of acquired intangible
assets; and
– the determination of assumptions underpinning goodwill impairment testing.
Acquired intangible assets, excluding goodwill, are valued in line with internationally used models, which require the use of estimates that may differ from actual outcomes. These assets are amortised over their estimated useful lives. Future results are impacted by the amortisation periods adopted and, potentially, any differences between estimated and actual circumstances related to individual intangible assets.
Goodwill is not amortised, but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review calculations require the use of estimates related to the future profitability and cash-generating ability of the acquired businesses and the pre-tax discount rate used in discounting these projected cash flows.
11
Changes in accounting policies
With effect from 1 January 2013, the Group has adopted the following amendment to an existing standard and new standard: – International Accounting Standard (IAS) 19 (revised 2011), Employee Benefits, replaces interest cost on gross pension liabilities and
expected return on gross pension assets with a finance cost on the net pension deficit calculated using the rate currently used to discount defined benefit pension liabilities. The discount rate is lower than the expected return on plan assets, increasing finance costs recognised in the income statement and correspondingly reducing remeasurements recognised in other comprehensive income. In addition, certain costs associated with the administration of the Group’s pension schemes are now reported within operating costs rather than finance costs. The net pension deficit is not affected by these changes.
Preparation (continued)
These changes have been applied retrospectively to the comparative financial information for 2012 and have had the following impact on the financial statements compared with the previous version of IAS 19:
2013
£m 2012£m
Operating costs (34) (39)
Share of results of equity accounted investments (2) (2)
Operating profit (36) (41)
Finance costs (166) (132)
Profit before taxation (202) (173)
Taxation expense 61 53
Net decrease in profit for the year (141) (120)
Remeasurements on defined benefit pension schemes 203 174
Tax on items that will not be reclassified to the income statement (62) (54)
Total comprehensive income for the year – –
Earnings per share
Basic earnings per share (4.4)p (3.7)p
Diluted earnings per share (4.3)p (3.7)p
Underlying earnings1 per share
Underlying earnings1 per share (0.2)p (0.4)p
The reduction in underlying earnings1 per share mainly reflects the reclassification of certain costs associated with the administration of the Group’s pension schemes from finance movements on pensions, which are excluded from underlying earnings1, to underlying EBITA2. In addition, during 2013, longevity swap arrangements were entered into by the trustees of certain UK schemes (see page 163). Under the revised IAS 19, these swaps are required to be valued in accordance with IFRS 13, Fair Value Measurement. The valuation under the previous version of IAS 19 would have reduced total comprehensive income for the year by £177m.
1 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items (see note 8).
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
– IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement disclosure requirements for use across other standards within IFRSs. IFRS 13 does not extend the use of fair value accounting and has not impacted the fair value measurements carried out by the Group other than in relation to longevity swaps as above. IFRS 13 requires specific disclosures on fair values, which are provided in the relevant notes to the Group accounts. A number of new EU-endorsed standards and amendments to existing standards, which are listed below, are effective for periods beginning on or after 1 January 2014 and have not been applied in preparing these consolidated financial statements. With the exception of new disclosure requirements, none of these are expected to have an impact on the consolidated financial statements of the Group and as such they have not been early adopted.
New standards and amendments to existing standards beginning on or afterEffective for periods
IFRS 10, Consolidated Financial Statements 1 January 2014
IFRS 11, Joint Arrangements 1 January 2014
IFRS 12, Disclosure of Interests in Other Entities 1 January 2014
IAS 27, Separate Financial Statements (revised 2011) 1 January 2014
IAS 28, Investments in Associates and Joint Ventures (revised 2011) 1 January 2014
There are no other IFRSs or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Group. Consolidation
The financial statements of the Group consolidate the results of the Company and its subsidiary entities, and include its share of its joint ventures’ results accounted for under the equity method, all of which are prepared to 31 December.
A subsidiary is an entity controlled by the Group. Control is the power to govern the operating and financial policies of an entity so as to obtain benefits from its activities.
The results of subsidiaries are included in the income statement from the date of acquisition.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
Joint ventures are accounted for under the equity method where the consolidated income statement includes the Group’s share of their profits and losses, and the consolidated balance sheet includes its share of their net assets within equity accounted investments. The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance sheet date. The income statements of such entities are translated at average rates of exchange during the year. All resulting exchange differences are recognised directly in a separate component of equity.
Translation differences that arose before the transition date to IFRS (1 January 2004) are presented in equity, but not as a separate component. When a foreign operation is sold, the cumulative exchange differences recognised in equity since 1 January 2004 are