Strategic Financial Accounting: IFRS 15 Impact on BAE Systems plc

This report provides a detailed analysis of the impact of IFRS 15 on the financial statement preparation of BAE Systems plc, a major British multinational aerospace and defense company. The report reviews IFRS 15 and its predecessor, IAS 18, highlighting the significant changes in revenue recognition policies, particularly the shift from recognizing revenue at a point in time to recognizing it over time based on the satisfaction of performance obligations. It examines the impact on BAE Systems' revenue and profit recognition, balance sheet items, and reported results. The report also discusses the impact of the new standards on stakeholders, emphasizing the importance of improved financial reporting for better decision-making. A critical analysis assesses the benefits of IFRS 15, such as improved financial disclosures and reduced international differences, while the conclusion summarizes the benefits and challenges associated with implementing the new standard. The report uses BAE Systems' financial statements to illustrate the practical implications of IFRS 15, including the adoption of the standard and its implications on the annual report, and includes references to academic journals to support the analysis.

Strategic accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Review of IFRS 15 and its predecessor..................................................................................3
Impact on BAE Systems plc...................................................................................................4
Impact of users with the new standards..................................................................................5
Critical analysis......................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX......................................................................................................................................9

INTRODUCTION
IFRS is the financial reporting standard which is used for the purpose of making the
financial statements more transparent and comparable across the globe. It is issued by the
International Accounting Standards Board (IASB) which states the way in which the company
must present and report its accounts and transactions which helps in making the financial
statements more consistent and reliable. This essay provides a detailed analysis of the impact of
IFRS 15 on the financial statement preparation of the BAE Systems plc and its users, which is
the largest British multinational aerospace company which is headquartered in London, UK.
MAIN BODY
Review of IFRS 15 and its predecessor
The IFRS 15 is an international standard which provides more detailed and prescriptive
requirements which were earlier not included in the previous IFRS standards. This standard will
bring significant changes in respect to the revenue recognition policies which includes
substantial judgement in key areas (Oyedokun, 2016). In comparison to the other previous
standards such as IAS 18 which provides the separate revenue recognition in respect to goods
and services and this creates a point of distinction which has been removed in IFRS 15. this new
standard focuses on the determination of the performance based obligations and also
differentiates these obligations as satisfied “at a point in time” and those satisfied “over time”
which is determined in a way in which control over products and services is transferred to the
customers. This new standard states that the revenue should be recognized over time in respect to
certain deliverables which are accounted for under IAS 18 as goods such as manufacturing
contracts whereas other deliverables will be accounted for in IAS 18 as services, for instance
some construction contracts.
Other relevant changes that it includes are:
 The scope of IFRS 15 is being enlarged which includes costs in relation to the contracts
and also differentiating the cost of getting and fulfilling a contract. It also provides
guidance in respect to when it is right to capitalize the cost (Haggenmüller, 2019).
 In case of IAS 11, it provides specific and mandatory needs for accounting for
construction contracts which are accounted for as per the principles of IFRS 15.

 The recognition of the revenue in terms of interest and dividend has not been included in
the scope of IFRS 15. These revenues are now taken into account in the IFRS 9 and in
case entities which has not yet adopted IFRS 9 can account it under IAS 39.
 The non-monetary exchanges in between the business entities have been excluded from
the IFRS 15 in respect to sales to customers. This exclusion is differs from the guidance
as under IAS 18 in which exchanges are not considered as transactions which generates
revenue.
Thus, the disclosures which are to be required under IFRS 15 is much more extensive in
comparison to the previous ones such as IAS 11 and IAS 18. Along with that an additional
disclosure is also required to be disclosed in the company's interim financial reports which will
be prepared as per the IAS 34.
Impact on BAE Systems plc
Revenue recognition
The company has determined that the performance obligations in most of its contracts is
satisfying the requirements of IFRS 15 in case of recognition “over time” rather than “at a point
in time”. For getting qualified for the recognition over time, the organization is required not to
create assets with alternative usage and also it must have right to payment in respect to
performance accomplished to date (Alotibi, 2018). The IFRS 15 will not have an impact over the
contracts in respect to the provision of services which are being accounted for which is
completely based on the stage of completion. If the criteria are not met then the revenue will be
recognized “at the point in time” and the control is transferred to the customers.
Profit recognition
On the majority of the contracts, the profit will be determined with respect to the reliable
estimates based on the contracts revenue and cost after taking into account all the allowances for
technical and the risk related to performance. The profit will not be recognized till the reliable
estimate of the result in find out (Kivioja, 2018). On adoption of IFRS 15, the revenue from
contracts will be recognized on this basis only. Under this standard, the development and the
production element of contract will present an individual performance obligations. The
development activities would be having low margin in comparison to production activity and
thus, under IFRS 15, the lower profits will be allocated to development while more to production
activity.

Balance sheet
Based on IAS 11, the fulfilment cost which is being incurred on the organizations
contracts will be carried forward in the balance sheet of the company until the related revenue is
being recognized on accomplishing the milestones. As per this standard, it is not appropriate to
consider or recognize the work in progress as an asset of the company in its balance sheet in case
when revenue is being recognized over time (Sharma and Singh, 2017). Thus, the contract in
work in progress has been replaced with contract receivable which represents the accrued
revenue. Based on the cost incurred including the profits. The inventories will also involves
fulfilment cost which is being incurred in advance delivery of the contracts with the customers
which determines the fulfilment requirement for point in time revenue recognition. Along the
product produced for stock purpose without any contract cover.
Impact on reported results
The organization has adopted IFRS 15 and its implication can be seen in the annual
statement provided in Appendix (Annual Report. 2018).
Impact of users with the new standards
The adoption of IFRS 15 will have a huge impact on the stakeholders of the company. It
gives more importance to the stakeholders by way of providing more relevant and accurate
information. The success of the company is based on establishing a good relation with its
stakeholders which requires proper support from them. This is designed to provide more
improved financial reports which can be used globally. The main aim is to establish principles to
the reports of business organization in order to provide valuable information to its users of
financial reports in respect to the nature, timings and the uncertainty associated with the revenues
and the cash flows arising from the contracts (Vardia and Parmar, 2019). The implementation of
IFRS 15 will affect the revenue, profitability and cost recognition of BAE Systems plc. This
affect the financial position and performance of the business and this will have a direct impact
over the stakeholders of the company in terms of return they are expecting. Thus, it makes
essential for the managers of BAE Systems plc to formulate and implement the processes which
works on satisfying the interest of the stakeholders. The company is required to maintain the
balance between the stakeholders interest and expectations that converge to the organization.
This new standard has no major impact on the BAE Systems plc as it already has
complied with some of the criteria which is being required in the IFRS 15. Thus, less changes are

required to be undertaken by the BAE Systems plc but then too before implementing any
changes and the impact of it on the financial statements of the company it is essential to discuss
the same with the stakeholders of the company in order to ensure their support for the company
in implementing the change along with managing the impact of it on its financial position. The
disclosure of IFRS 15 is having clearer objectives and will provide a clearer and improved
disclosure of the revenue of the organization which will assist the organization in taking better
and improved business decisions.
Critical analysis
The main objective of the Board is to improve the disclosure of its financial transactions
in order to improve the presentation of the relevant reports of the organization in a meaningful
manner to the investors. The implementation of it is might be little easy for the company but
managing it and the impact of it on the stakeholders of the company is also required to be taken
into consideration. The Board is required to consider the opinions of the stakeholders and the
standards as well. In other words, it is very essential for the organization in managing a proper
balance with the regulatory requirements as well as expectations of the stakeholders (Olawale,
And et.al, 2017). Even though, much of the efforts is required to be implemented by the
organization for exercising control over the revenue and other items in line, it will provide
assistance in proper disclosure by disaggregating the revenue into the useful categories such as
type of goods and services, geographical locations etc. It also provides information more
accurate, timely and comprehensively as per the internal standard. It would be more
understandable for the stakeholders without any additional resources. It will help reduce the risk
for the new investors while trading, as professional investors cannot take the benefit of simple to
understand financial statements.
For achieving this objective, the board members of BAE Systems plc is required to
conduct many meetings with its stakeholders with respect to the disclosures and making them
understand the same. Also, the due to standardization and harmonization the investors are no
longer required to pay for processing and making adjustment to the financial reports in order to
understand it and therefore, removing the fees of analyst. Implementation of this Standard will
assist in reducing the international differences and thus, removing the cross-border acquisitions
by the company's investors. Thus, it can be said that because of the higher information and
quality level, it reduces both the risk to the investors in terms of buying and owning shares along

with risk to less knowledgeable and less informed investors caused because of lack of
understandability, it consequently leads to the reduction in the firms cost of equity capital. This
will add other benefits as well in terms of increase in the share price of the BAE Systems plc and
on the other hand, making new investment by firms more attractive. Thus, it will help in
effectively achieving the desired goals and objectives of the organization in a far better manner.
CONCLUSION
It can be summarized from the above that the adoption of IFRS 15 in the business
organization like BAE Systems plc would be beneficial for it in effective and proper
management of its financial transactions. It might to challenging in the beginning because of its
complex process which required proper exercising and formulating the plan. The most
significant advantage of it is global revenue recognition and the comparability associated with it.
It has improved the global investment and borrowing in order to enable higher efficiency. It will
bring consistency in the financial reporting as it provides just one framework which provides
more comparable financial base. IFRS 15 requires forecasts to be made which makes stronger
revenue and effective cash flow budgeting. The implementation of it in the organization will
require BAE Systems plc to introduce certain changes in the reporting of its financial transaction
under categories of revenue. It is very beneficial for the company and its stakeholders as it
provides detailed information about the contracts undertaken in terms of being completed or in
progress. IFRS 15 also helps in mitigating or reducing the risk for the investors of the company.
The previous standards were very much complex as there were many standards for each
different aspects but the IFRS 15 is one standard which meets the requirement of all in respect to
the revenue recognition of contracts. Therefore, it can be concluded that even though the process
is little complex and requires lots of time and efforts to implement it in the organization
successfully, but the benefits deriving from it is much more than it, which makes it important to
implement it within the organization and comply with all the regulatory requirements.

REFERENCES
Books and Journals
Oyedokun, G., 2016. Revenue Recognition Paradox: A Review of IAS 18 and IFRS
15. Available at SSRN 2912250.
Haggenmüller, S., 2019. Revenue Recognition under IFRS 15: A Critical Evaluation of
Predefined Purposes and Implications for Improvement (Doctoral dissertation,
University of Gloucestershire).
Alotibi, N., 2018. INTERNATIONAL FINANCIAL REPORTING STANDARD (IFRS) 15
REVENUE FROM CONTRACTS WITH CUSTOMER. Journal of Internet Banking
and Commerce. 23(3). pp.1-9.
Kivioja, T., 2018. THE IMPACT OF IFRS 15 ON ANALYSTS’FORECAST ACCURACY.
Sharma, S. and Singh, G., 2017. Impact of IFRS on the Financial Reporting Practices of Selected
Countries: Review and Analysis. International Journal of Economic
Perspectives. 11(2).
Olawale, O. I. And et.al, 2017. ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARD AND EARNINGS MANAGEMENT PRACTICES IN
NIGERIAN LISTED INSURANCE FIRMS. KASU Journal of Accounting Research
and Practice. 6(2).
Vardia, S. and Parmar, S. L., 2019. Exploring Stakeholders' Perception About IFRS: An
Empirical Study. IUP Journal of Accounting Research & Audit Practices. 18(1).
Online
Annual Report. 2018. [Online]. Available
Through:<https://investors.baesystems.com/~/media/Files/B/Bae-Systems-Investor-
Relations-V3/PDFs/results-and-reports/results/2018/annual-report-2018.pdf>.

APPENDIX