BAE-annual-report-2014

Financial statements
NOTES TO THE GROUP ACCOUNTS
1. SEGMENTAL ANALYSIS
Revenue and profit recognition
Sales include the Group’s share of sales of equity accounted investments. Revenue represents sales made by the Company and its
subsidiary undertakings, excluding the Group’s share of sales of equity accounted investments.
Long-term contracts
The majority of the Group’s long-term contract arrangements are accounted for under IAS 11, Construction Contracts. Sales are
recognised when the Group has obtained the right to consideration in exchange for its performance. This is usually when title passes
or a separately identifiable phase (milestone) of a contract or development has been completed.
No profit is recognised on contracts until the outcome of the contract can be reliably estimated. Profit is calculated by reference to
reliable estimates of contract revenue and forecast costs after making suitable allowances for technical and other risks related to
performance milestones yet to be achieved. Profit is recognised progressively as risks have been mitigated or retired.
When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense.
Goods sold and services rendered
Revenue is measured at the fair value of the consideration received or receivable, net of returns, rebates and other similar allowances.
Revenue from the sale of goods not under a long-term contract is recognised in the income statement when the significant risks and
rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, there is no continuing management
involvement with the goods, and the amount of revenue and costs can be measured reliably. Profit is recognised at the time of sale.
Revenue from the provision of services not under a long-term contract is recognised in the income statement in proportion to the stage
of completion of the contract at the reporting date. The stage of completion is measured on the basis of direct expenses incurred as a
percentage of total expenses to be incurred for material contracts and labour hours delivered as a percentage of total labour hours to
be delivered for time contracts.
Sales and profits on intercompany trading are determined on an arm’s length basis.
Research and development
The Group undertakes research and development activities either on its own behalf or on behalf of customers.
Where the research and development activity is performed on behalf of customers, the revenue arising is recognised in the income
statement in accordance with the Group’s revenue recognition policy.
Key Performance Indicator – Underlying EBITA
Management uses an underlying profit measure to monitor the year-on-year profitability of the Group, which is defined as earnings
before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
This definition is referred to as underlying EBITA. Underlying EBITA is the measure of profit on which segmental performance is
monitored by management. As such, underlying EBITA is disclosed on page 110 on a segmental basis and reconciled to the reporting
segment result and operating profit in the consolidated financial statements.
Non-recurring items
Non-recurring items are defined as items that are relevant to an understanding of the Group’s performance with reference to their
materiality and nature. As part of a planned reorganisation of the Group’s portfolio of interests in a number of industrial companies in
Saudi Arabia and an enhancement of its existing relationship with Riyadh Wings Aviation Academy LLC (Riyadh Wings), BAE Systems has
acquired an additional 59% shareholding in Saudi Development and Training Company (SDT) from Riyadh Wings and expects to complete
the disposal of its 85.7% shareholding in Aircraft Accessories and Components Company (AACC) during 2015, subject to the satisfaction
of certain regulatory approvals. Accordingly, AACC is presented as held for sale at 31 December 2014. Upon classification of AACC as
held for sale, the carrying value of the business was in excess of the expected proceeds of the proposed disposal and, therefore, a
charge of £47m has been taken in 2014. Upon acquisition of the additional shareholding in SDT and control of the company, the Group
has recognised a £47m fair value gain on its existing 40% shareholding. The Group considers the combined impact of these two
transactions in Saudi Arabia to meet its definition of non-recurring items, being profit/loss on business transactions, and, therefore,
they have been presented within non-recurring items in the Group’s income statement.
Reporting segments
The Group has six reporting segments which align with the Group’s strategic direction:
– Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical
sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data links,
persistent surveillance capabilities, and hybrid electric drive systems;
– Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business,
and covers the Group’s cyber, secure government, and commercial and financial security activities;
– Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden
and South Africa, and the US-based services and sustainment activities, including ship repair and munitions services;
– Platforms & Services (UK) comprises the Group’s UK-based air, maritime, combat vehicle, munitions and shared services activities;
– Platforms & Services (International) comprises the Group’s businesses in Saudi Arabia, Australia and Oman, together with its 37.5%
interest in the pan-European MBDA joint venture; and
– HQ comprises the Group’s business in India and head office activities, together with a 49% interest in Air Astana.
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BAE Systems
Annual Report 2014