Consolidated financial statements - Rolls-Royce

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Financial statements
Notes to the consolidated financial statements
1 Accounting policies (continued)
Forecasts and discount rates
The carrying values of a number of items on the balance sheet are dependent on the estimates of future cash flows arising from the Group’s operations,
in particular:
• The assessment as to whether there are any indications of impairment of development, participation, certification and recoverable engine costs
recognised as intangible assets is dependent on forecasts of cash flows generated by the relevant assets (carrying values at December 31, 2011
£1,442m, December 31, 2010 £1,472m).
• The financial liabilities arising from financial risk and revenue sharing partnerships are valued at each reporting date using the amortised cost
method (carrying values at December 31, 2011 £230m, December 31, 2010 £266m). This involves calculating the present value of the forecast cash
flows of the arrangement using the internal rate of return at the inception of the arrangement as the discount rate.
• The realisation of the deferred tax assets (carrying values at December 31, 2011 £368m, December 31, 2010 £451m) recognised is dependent on the
generation of sufficient future taxable profits. The Group recognises deferred tax assets where it is more likely than not that the benefit will be realised.
Assessment of long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods. In assessing the allocation of revenues and costs to individual accounting
periods, and the consequential assets and liabilities, the Group estimates the total revenues and costs forecast to arise in respect of the contract and the
stage of completion based on an appropriate measure of performance as described in the revenue recognition accounting policy below.
Post-retirement benefits
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19. The accounting valuation, which
was based on assumptions determined with independent actuarial advice, resulted in a net deficit of £397m before deferred taxation being recognised
on the balance sheet at December 31, 2011 (December 31, 2010 £856m). The size of the net deficit is sensitive to the market value of the assets held by the
schemes and to actuarial assumptions, which include price inflation, pension and salary increases, the discount rate used in assessing actuarial liabilities,
mortality and other demographic assumptions and the levels of contributions. Further details are included in note 19.
Provisions
As described in the accounting policy below, the Group measures provisions (carrying value at December 31, 2011 £502m, December 31, 2010 £544m) at
the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date. These estimates are made, taking account of
information available and different possible outcomes.
Taxation
The tax payable on profits is determined based on tax laws and regulations that apply in each of the numerous jurisdictions in which the Group operates.
Where the precise impact of these laws and regulations is unclear then reasonable estimates may be used to determine the tax charge included in the
financial statements.
Basis of consolidation
The Group financial statements include the financial statements of the Company and all of its subsidiary undertakings made up to December 31, together
with the Group’s share of the results of joint ventures and associates up to December 31.
A subsidiary is an entity controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and
operating policies of the entity so as to derive benefits from its activities.
A joint venture is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more other venturers
under a contractual arrangement. An associate is an entity, being neither a subsidiary nor a joint venture, in which the Group holds a long-term interest
and where the Group has a significant influence. The results of joint ventures and associates are accounted for using the equity method of accounting.
Any subsidiary undertakings, joint ventures or associates sold or acquired during the year are included up to, or from, the dates of change of control.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the profit or loss arising
on transactions with joint ventures and associates to the extent of the Group’s interest in the entity.
Rolls-Royce Holdings plc Annual report 2011