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Annual Report and Accounts 2014
The specific methods used to recognise the different forms of revenue earned
by the Group are set out below:
i. Sale of goods
Revenue from the sale of goods is recognised in the income statement net
of returns, trade discounts and volume rebates when the significant risks
and rewards of ownership have been transferred to the buyer and reliable
measurement is possible. No revenue is recognised where recovery of the
consideration is not probable or there are significant uncertainties regarding
associated costs, or the possible return of goods.
Transfers of risks and rewards vary depending on the nature of the products
sold and the individual terms of the contract of sale. Sales made under
internationally accepted trade terms, Incoterms 2010, are recognised as
revenue when the Group has completed the primary duties required to transfer
risks as defined by the International Chamber of Commerce Official Rules for
the Interpretation of Trade Terms. Sales made outside Incoterms 2010 are
generally recognised on delivery to the customer.
ii. Rendering of services
As noted above, because revenue from the rendering of services is usually
insignificant in relation to the total contract value and is generally provided
on a short-term or one-off basis, revenue is usually recognised when the
service is complete.
Where this is not the case, revenue from services rendered is recognised in
proportion to the stage of completion of the service at the balance sheet date.
The stage of completion is assessed by reference to the contractual agreement
with each separate customer and the costs incurred on the contract to date
in comparison to the total forecast costs of the contract. Revenue recognition
commences only when the outcome of the contract can be reliably measured.
Installation fees are similarly recognised by reference to the stage of completion
on the installation unless they are incidental to the sale of the goods, in which
case they are recognised when the goods are sold.
When a transaction combines a supply of goods with the provision of a
significant service, revenue from the provision of the service is recognised
separately from the revenue from the sale of goods by reference to the stage
of completion of the service unless the service is essential to the functionality
of the goods supplied, in which case the whole transaction is treated as a
construction contract. Revenue from a service that is incidental to the supply of
goods is recognised at the same time as the revenue from the supply of goods.
iii. Construction contracts
As noted above, customer contracts usually contain discrete elements
separately transferring risks and rewards to the customer. However, where
such discrete elements are not in place, revenue from significant contracts is
recognised in proportion to the stage of completion of the contract by reference
to the specific contract terms and the costs incurred on the contract to date in
comparison to the total forecast costs of the contract.
Variations in contract work, claims and incentive payments are included in
revenue from construction contracts when certain criteria are met. Variations
are included when the customer has agreed to the variation or acknowledged
liability for the variation in principle. Claims are included when negotiations
with the customer have reached an advanced stage such that the customer is
certain to accept the claim. Incentive payments are included when a contract
is sufficiently advanced that it is probable that the performance standards
triggering the incentive will be achieved.
Profit attributable to contract activity is recognised if the final outcome of such
contracts can be reliably assessed. On all contracts, full provision is made for
any losses in the year in which they are first foreseen.
D. Exceptional items
Exceptional items are disclosed separately on the face of the income statement
and added back in arriving at adjusted earnings, where the quantum, the
one-off nature or volatility of these items would otherwise distort the underlying
trading performance.
The following items of income and expense are considered to be exceptional
in these financial statements:
• gains and losses (including fair value adjustments) on derivative financial
instruments;
• restructuring costs, which comprise significant costs associated with the
closure of activities or factories and the cost of significant reductions in
workforce due to excess capacity or the reorganisation of facilities. Non-
significant restructuring costs are not disclosed as exceptional items;
• special pension events, which comprise settlement gains relating to the
Group’s defined benefit schemes;
• impairment losses recorded against goodwill, intangible assets and other
operating assets;
• the amortisation of acquired intangible fixed assets;
• gains on disposals of subsidiaries; and
• costs associated with acquisitions and disposals, which principally represent:
- costs payable to the legal and financial advisors assisting with the origination
and completion of the transactions;
- contingent consideration payments which (because they might be forfeited
in some of the instances in which the vendors’ post-acquisition employment
contracts may be terminated) are required by IFRS3 (revised) to be treated
as remuneration.
The tax impact of the above items is also shown within exceptional items.
E. Financial income and expense
Financial income comprises interest receivable on funds invested, income
from investments and gains on hedging instruments that are recognised in the
income statement. Interest income is recognised in the income statement as it
accrues, taking into account the effective yield on the asset. Dividend income is
recognised in the income statement on the date that the dividend is declared.
Financial expense comprises interest payable on borrowings calculated using
the effective interest rate method, the interest related element of derivatives and
losses on financial instruments that are recognised in the income statement.
The interest expense component of finance lease payments is recognised in
the income statement using the effective interest rate method.
Net finance expense relating to defined benefit pension schemes represents
the assumed interest on the difference between employee benefit plan liabilities
and the employee benefit plan assets.
Borrowing costs directly attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale are capitalised as part of the cost of the
respective assets. All other borrowing costs are expensed in the period they
occur. Borrowing costs consist of interest and other costs that an entity incurs
in connection with the borrowing of funds.
F. Income tax
Current tax payable/receivable represents the expected tax payable/receivable
on the taxable income for the year, using tax rates enacted or substantively
enacted at the balance sheet date and taking into account any adjustments
in respect of prior years.
Deferred tax is provided, using the balance sheet method, on temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is
not recognised for the following temporary differences: the initial recognition of
goodwill, the initial recognition of assets or liabilities in a transaction that is not a
business combination and that affects neither accounting nor taxable profit, and
differences relating to investments in subsidiaries to the extent that the timing
of the reversal of the differences can be controlled and it is probable that the
differences will not reverse in the foreseeable future. Deferred tax is measured
at the tax rates that are expected to apply when the temporary differences
reverse, based on the tax laws that have been enacted or substantively
enacted by the balance sheet date.
