BAE-annual-report-2014

Strategic Report
FINANCIAL
REVIEW
CONTINUED
CRITICAL ACCOUNTING POLICIES
Certain of the Group’s principal accounting policies are considered
by the directors to be critical because of the level of complexity,
judgement or estimation involved in their application and their
impact on the consolidated financial statements:
Revenue and profit recognition
Sales £16.6bn (year ended 31 December 2014)
See note 1 to the Group accounts
Carrying value of intangible assets
Intangible assets £10.0bn (at 31 December 2014)
See note 9 to the Group accounts
Valuation of retirement benefit obligations
Group’s share of IAS 19
deficit, net
P102 For more information
£5.4bn (at 31 December 2014)
See note 21 to the Group accounts
TREASURY
The Group’s treasury activities are overseen by the Treasury Review
Management Committee (TRMC). Two executive directors are members
of the TRMC, including the Group Finance Director who chairs the
Committee. The TRMC also has representatives with legal and tax
expertise. The Group operates a centralised treasury department
that is accountable to the TRMC for managing treasury activities in
accordance with the treasury policies approved by the Board.
Objectives/policies
Net debt
Maintain a balance between the continuity, flexibility and cost of
debt funding through the use of borrowings from a range of markets
with a range of maturities, currencies and interest rates, reflecting
the Group’s risk profile.
– Material borrowings are arranged by the central treasury
department and funds raised are lent onward to operating
subsidiaries as required.
Interest rates
Manage the exposure to interest rate fluctuations on borrowings
through varying the proportion of fixed rate debt relative to floating
rate debt with derivative instruments, including interest rate and
cross-currency swaps.
– A minimum of 50% and a maximum of 90% of gross debt is
maintained at fixed interest rates.
Liquidity
Maintain adequate undrawn committed borrowing facilities.
– An undrawn committed Revolving Credit Facility of £2bn
contracted to December 2018 and £1.8bn contracted from
December 2018 to December 2019 is available to meet expected
general corporate funding requirements.
Monitor and control counterparty credit risk and credit limit utilisation.
– The Group adopts a conservative approach to the investment of
its surplus cash. It is deposited with financial institutions with the
strongest credit ratings for short periods.
Currency
Reduce the Group’s exposure to transactional volatility in earnings
and cash flows from movements in foreign currency exchange rates.
– All material firm transactional exposures are hedged.
– The Group does not hedge the translation effect of exchange rate
movements on the income statements or balance sheets of
foreign subsidiaries and equity accounted investments it regards
as long-term investments.
TAX
Objectives
The Group’s tax strategy is to:
– ensure compliance with all applicable tax laws and regulations;
and
– manage the Group’s tax expense in a way that is consistent with
its values and its legal obligations in all relevant jurisdictions.
Policies
The Group seeks to build constructive working relationships with
tax authorities, following a policy of open disclosure in order to
achieve early agreement and certainty in relation to its tax affairs.
Whilst the Group aims to maximise the tax efficiency of its business
transactions, it does not use structures in its tax planning that are
against the spirit of the law and actively considers the implications
of any planning for the Group’s wider corporate reputation. Arm’s
length principles are applied in the pricing of all intra-group
transactions of goods and services in accordance with Organisation
for Economic Co-operation and Development guidelines. Where
appropriate, the Group engages with governments to help shape
proposed legislation and tax policy. The Group endorses the
statement of tax principles issued by the Confederation of British
Industry in May 2013 (www.cbi.org.uk/media/2051390/
statement_of_principles.pdf).
BAE Systems operates internationally and is subject to tax in
many different jurisdictions. The Group employs professional tax
managers and takes appropriate advice from reputable
professional firms. The Group is routinely subject to tax audits and
reviews which can take a considerable period of time to conclude.
Provision is made for known issues based on interpretation of
country-specific legislation and the likely outcome of negotiations
or litigation. The assessment and management of tax risks are
regularly reviewed by the Group’s Audit Committee.
P114 Note 6 to the Group accounts
CAPITAL
Objectives
Maintain the Group’s investment grade credit rating and ensure
operating flexibility, whilst: meeting its pension obligations;
pursuing organic investment opportunities; paying dividends in line
with the Group’s policy of long-term sustainable cover of around two
times underlying earnings; making accelerated returns of capital to
shareholders when the balance sheet allows; and investing in
value-enhancing acquisitions, where market conditions are right
and where they deliver on the Group’s strategy.
Policies
The Group funds its operations through a mixture of equity funding
and debt financing, including bank and capital market borrowings.
The capital structure of the Group reflects the judgement of the
directors of an appropriate balance of funding required. Three credit
rating agencies publish credit ratings for the Group:
Agency Rating Outlook Category
Moody’s Investors Service Baa2 Stable Investment grade
Standard & Poor’s Ratings Services BBB+ Stable Investment grade
Fitch Ratings BBB+ Stable Investment grade
P143 Note 23 to the Group accounts
P150 Note 28 to the Group accounts
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BAE Systems
Annual Report 2014