QinetiQ Annual Report 2017

108
108
Financial
Financial statements
statements QinetiQ
QinetiQ Group
Group
plc
plc
Annual
Annual
Report
Report
and
and
Accounts
Accounts
2017
2017
www.qinetiq.com
Notes to the financial statements continued
1. Significant accounting policies continued
Intangible assets
Intangible assets arising from business combinations are recognised at fair value and are amortised over their expected useful lives, typically between one
and sixteen years. Internally generated intangible assets are recorded at cost, including labour, directly attributable costs and any third-party expenses.
The ‘multi-period excess earnings’ method and the ‘relief-from-royalty’ method are both used for fair valuing intangible assets arising from acquisitions. The multiperiod
excess earnings method considers the present value of net cash flows expected to be generated by customer relationships, by excluding any cash flows
related to contributory assets. The relief-from-royalty method considers the discounted estimated royalty payments that are expected to be avoided as a result
of the patents or trademarks being owned.
Purchased intangible assets are recognised at cost less amortisation. Intangible assets are amortised over their respective useful lives on a straight-line basis
as follows:
Intellectual property rights
Customer relationships
Development costs
Other
2–8 years
1–16 years
1–4 years
1–9 years
Property, plant and equipment
Property, plant and equipment are stated at cost less depreciation. Freehold land is not depreciated. Other tangible non-current assets are depreciated
on a straight-line basis over their useful economic lives to their estimated residual value as follows:
Freehold buildings
Leasehold land and buildings
Plant and machinery
Fixtures and fittings
Computers
Motor vehicles
20–25 years
Shorter of useful economic life and the period of the lease
3–10 years
5–10 years
3–5 years
3–5 years
Assets under construction are included in property, plant and equipment on the basis of expenditure incurred at the balance sheet date. In the case of assets
constructed by the Group, the value includes the cost of own work completed, including directly attributable costs and interest.
The useful lives, depreciation methods and residual values applied to property, plant and equipment are reviewed annually and, if appropriate, adjusted accordingly.
Impairment of goodwill and tangible, intangible and held for sale assets
At each reporting date the Group assesses whether there is an indication that an asset may be impaired. If the carrying amount of any asset exceeds its
recoverable amount an impairment loss is recognised immediately in the income statement. In addition, goodwill is tested for impairment annually irrespective
of any indication of impairment. If the carrying amount exceeds the recoverable amount, the respective asset or the assets in the cash-generating unit (CGU) are
written down to their recoverable amounts. The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell and its value in use. The value
in use is the present value of the future cash flows expected to be derived from an asset or CGU calculated using an appropriate pre-tax discount rate. Impairment
losses are expensed to the income statement.
Investments in debt and equity securities
Investments held by the Group are classified as either a current asset or as a non-current asset and those classified as available-for-sale are stated at fair value,
with any resultant gain or loss, other than impairment losses, being recognised directly in equity. When these investments are derecognised, the cumulative gain
or loss previously recognised directly in equity is recognised in the income statement.
The fair value of quoted financial instruments is their bid price at the balance sheet date. The fair value of unquoted equity investments is based on the price
of the most recent investment by the Group or a third party, if available, or derived from the present value of forecast future cash flows.
Inventories
Inventory and work-in-progress are stated at the lower of cost and net realisable value. Work-in-progress and manufactured finished goods are valued at production
cost. Production cost includes direct production costs and an appropriate proportion of production overheads. A provision is established when the net realisable
value of any inventory item is lower than its cost. A ‘market comparison’ technique is used to fair value inventories acquired through a business combination. The
fair value is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable
profit margin based on the effort required to complete and sell the inventories.
Bid costs
Costs incurred in bidding for work are normally expensed as incurred. In the case of large multi-year government contracts the bidding process typically involves a
competitive bid process to determine a preferred bidder and then a further period to reach financial close with the customer. In these cases, the costs incurred after
announcement of the Group achieving preferred bidder status are deferred to the balance sheet within work-in-progress. From the point financial close is reached,
the costs are amortised over the life of the contract. If an opportunity for which the Group was awarded preferred bidder status fails to reach financial close, the
costs deferred to that point are expensed in the income statement immediately, when it becomes likely that financial close will not be achieved.
Trade and other receivables
Trade and other receivables are stated net of provisions for doubtful debts. Amounts recoverable on contracts are included in trade and other receivables
and represent revenue recognised in excess of amounts invoiced. Payments received on account are included in trade and other payables and represent
amounts invoiced in excess of revenue recognised. Other receivables will also include insurance recoveries where we are virtually certain of recovery.