By Nina Trentmann
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 20, 2017).
Finance managers at Rolls-Royce Holdings PLC two years ago
predicted a plunge in the aircraft engine maker's 2018 revenue and
profit.
Starting Jan. 1, 2018, Rolls-Royce will no longer be able to put
money from maintenance contracts on its books years before it
begins to do the work. The company must wait to record that revenue
until the actual service is provided, said John Dawson, director of
investor relations. This is typically years after the company sells
the engines at a loss.
The change is the result of a new accounting standard that will
force businesses in more than 100 countries to rejigger how they
recognize revenue. It is similar to a rule U.S. public companies
will have to follow as of Dec. 15.
The new rules come as Rolls-Royce's order book is growing.
Customers have placed around 500 orders for large engines that
include Rolls-Royce's "TotalCare" maintenance program for next
year, up from 450 this year and around 320 in 2016. When executives
at Rolls-Royce recalculated some of the company's 2015 results
using the new accounting rules, both revenue and profit were GBP900
million ($1.18 billion) lower than reported.
Rolls-Royce started updating investors, analysts and other
stakeholders about potential changes to its financials about a year
and a half ago, earlier than most other companies. "We have been
proactive in handling this," said Mr. Dawson.
The new rules will supersede virtually all existing revenue
recognition requirements under International Financial Reporting
Standards. A similar change is under way with U.S. Generally
Accepted Accounting Principles. Under both standards, companies
will be required to provide more detailed information about their
contracts and accounting judgments, some of which they haven't
gathered before.
Some sectors, such as telecommunications, media and
pharmaceuticals, are expected to be affected more than others. So
far, 29% of FTSE 100 companies still haven't disclosed an impact
assessment, according to a September report by KPMG LLP.
"The impact will vary, depending on the individual company,
their sector and their business model," said Nick Chandler, a
partner at KPMG. The new revenue standard "requires a far deeper
understanding of companies' contracts than previous rules. It's a
huge exercise," Mr. Chandler said.
According to the KPMG study, only a small number of firms -- 9%
-- expect the new rules to have a material effect. Still, all
listed companies filing results under international financial
reporting standards must publicly disclose that they have assessed
the impact.
Deutsche Telekom AG is one company that expects a material
change to its financials. The German telecommunications company's
2018 opening balance sheet will reflect a one-time increase of EUR3
to EUR4 billion ($3.5 billion to $4.7 billion) in retained
earnings.
Going forward, the company is expected to post lower revenue in
its mobile-service business but higher revenue in its hardware
business starting from the first quarter.
The company also will have to provide more details about how it
subsidizes the cost of a mobile phone with revenue from contracts
sold alongside the device, said Guillaume Maisondieu, head of group
accounting.
Deutsche Telekom has had around 50 people working on
implementing the new standard for the past two years, Mr.
Maisondieu said. That compares with several hundred employees are
involved with preparing the company's financial statements.
The company plans to host webinars and calls to educate
investors and other stakeholders about the accounting changes early
next year, Mr. Maisondieu said.
By contrast, competitor Vodafone Group PLC has only indicated
that the rules will apply to its results for the financial year
commencing April 1, 2018. "We will have something to talk about
later this year," said a spokesman of the British
telecommunications firm.
Analysts say companies' impact assessments of accounting rules
help them adjust their forecasts.
"In terms of my models, there were many material changes to the
numbers in the profit and loss account" for Rolls-Royce, said Sandy
Morris, an analyst at Jefferies LLC who covers the company. Mr.
Morris said the company's disclosures and information sessions
"were extremely helpful."
But not every company is so forthcoming. There have been limited
instances of companies sharing "insightful" information, said
Vincent Papa, director of financial reporting at the CFA Institute,
the global association of investment professionals. "Many companies
seem to be crawling to the starting line," he said.
The last opportunity for companies to disclose the potential
impact of the new rules is in their financial results for the
period ending Dec. 31, said KPMG's Mr. Chandler. These are usually
filed six to eight weeks after companies close their books.
Germany's SAP SE has indicated the new accounting standard won't
be material for its revenue. Still, some components of the balance
sheet at SAP could look different next year, said finance chief
Luka Mucic. "The transition to the new standard requires a
considerable amount of work," he said.
(END) Dow Jones Newswires
November 20, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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