Rolls-Royce set to take £900m hit to profits

PROFITS at Midlands-based Rolls-Royce will be £900m lower last year under accounting rules about to come into force, the company will tell shareholders today.

At a Capital Markets Day to be held today, chief executive Warren East will update investors on the potential impact of incoming rules on when revenues should be recognised.

The Derby company has previously brought forward earnings from contracts for it engines to negate the impact of most being sold at break even or a loss.

However, the International Accounting Standards Board (IASB) says that from 2018 companies must recognise revenue from a contract when the company provides the goods or services.

This will have a big impact on Rolls-Royce which could mean waiting five or six years for an engine to need a service after it has been sold.

Analysts expect Rolls-Royce shareholders will be told the impact of the rule changes on last year’s profit of £1.4bn could be more than halved.

The new standard will be adopted 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.

Commenting on IFRS 15, David Smith, chief financial officer at Rolls-Royce – and former chief executive of Jaguar Land Rover, said: “The new standard provides a number of benefits to the business. As it brings profit performance for 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.”

He added: “As set out in November last year, we are committed to improving disclosure and transparency and will continue to work with our different stakeholders to ensure they understand the detail of these accounting changes. We remain committed to a robust financial policy, focused on maintaining a strong investment-grade credit rating.”

Commenting on current trading, Warren East, chief executive, said: “We have made steady progress in 2016 to date, delivering a ramp up in large engine production and implementing the first stage of our transformation programme. At the same time we have managed well mixed markets for our Marine and Power Systems businesses. Overall, we remain comfortable that our expectations for profit and free cash flow remain achievable.”