Oct. 26, 2015, © Leeham Co.: Is the end of program accounting, the staple of The Boeing Co. profit and loss reporting, on its way out?
It is in Europe, where it is called contract accounting, the end of its use is required by January 1, 2018. (LNC’s Bjorn Fehrm has talked about contract accounting in the past.) Companies have the option to eliminate it in 2017.
The fundamentals between contract and program accounting are similar: defer costs of the goods or services, and recognize profits sooner.
Europe’s International Financial Reporting Standards (IFRS) 15 says this has to stop.
Agency Partners of London, on a September 11 research note, focuses on Rolls-Royce and its linkage of engine sales with long-term service (LTS) contracts to report profits that otherwise would be elusive for engine sales only.
The analyst group estimates RR EBIT (Earnings Before Interest and Taxes) would be reduced by more than 20%. RR is currently delivering engines at about a 10% negative margin, and has the LTS contracts linked to make up the losses and future profits on the Maintenance, Repair and Overhaul (MRO) deals.
This approach has been common in commercial aviation for decades, and engine OEMs have increasingly sought to make service agreements a solid profit center.
Complying with IFRS 15 also means the RR (and other companies) will require restating prior year results.
For RR, which had been under financial pressure for many years, compliance will be a mixed bag. The balance sheet and profit-loss figures will take a hit, but, Agency Partners note, showing losses will enable management to better make the case to employees about wage cuts and give-backs.
“…[R]eported profits kept on rising, hence it was hard to make the case that RR had a problem that needed addressing. RR has said more recently that it welcomes the change, which converges reported profits with cash flow, as it better reflects economic reality,” Agency Partners writes.
A New York analyst told me last week he believes Boeing will have to comply with the new standard because it does business in Europe. Internet information indicates that this is true for any Boeing subsidiaries based in Europe, but it’s not clear to me (based on what I found) that The Boeing Co. will have to dump program accounting by January 1, 2018. According to a Q&A on IFRS, US companies don’t have to follow IFRS; the US accounting standard, GAAP, is more detailed.
Boeing has disclosed its Boeing Commercial Airplanes P&L for year under unit cost accounting rather than program accounting; it’s in the financial filings and it’s on the website.