Accounting impacts IFRS 15 Revenue from Contracts with Customers - - PowerPoint PPT Presentation

Accounting impacts IFRS 15 Revenue from Contracts with Customers

21st January, 2019 Confidential

2

Today’s agenda

• Key headlines
• Accounting judgements under IFRS 15
• Revenue under IFRS 15
• Costs under IFRS 15
• Impacts: 2017, 2018 and 2019 and beyond
• Reporting at prelims

3

Key headlines

The standard governs how and when an entity should recognise revenue There is no impact on:

• Our Retail business
• Cash and contract value

Only change is to revenue reporting for Ocado Solutions, as a division with long-term contracts

• As we are just starting to report revenue for international solutions, we have decided to adopt early
• For each customer contract Ocado must now

○ Identify the performance obligations within the contract ○ Only recognise revenue as and when the obligations are satisfied Result: Impact to 2018 Revenue and EBITDA is a reduction of £12-15m

4

Accounting judgements under IFRS 15

1. Performance obligations within the contract

• A typical Ocado Solutions contract has a single performance obligation: “To enable the client to access

the OSP end-to-end online grocery platform from go-live date, with an agreed physical capacity for the use of its retail brands.”

• Note: a contractual obligation is not a performance obligation

2. Total transaction value of the contract and allocation across each obligation

• All fees allocated to the single performance obligation

3. Duration of the contract

• Need to make a judgement of customer life (as contracts typically have no end date)
• Current judgements on customer life are:

○ Morrisons Dordon - 25 years (as defined contract length) ○ Standard CFC - 10 years ○ Standard Store Pick (standalone) - 5 years

5

Revenue under IFRS 15

Recognise revenue as and when the obligations are satisfied:

• All cash fees recognised from commencement of operation to estimated end of customer life

Result: recognised from when CFC goes live, over time (straight line) as value to the customer remains the same every day Pre IFRS 15 We expected to recognise based upon:

• contractual terms and the services performed
• the life of the assets
• the substance of the arrangements and nature of solution being developed

Result: there was sufficient revenue to cover the P&L costs ahead of opening CFCs: ‘earnings neutral’

6

Costs under IFRS 15

Current Solutions cost accounting:

• Some P&L costs incurred prior to launch (proportion of project costs per CFC)
• Increased investment in platform and support team (in admin costs)

Result: Additional costs in 2019 for Solutions, as previously highlighted Under IFRS 15

• Current accounting for capitalisation of cost unchanged
• New standard allows for specific sales bonuses to be capitalised, but this is not material for us

Result: no material change

7

2017 impact

All Ocado Solutions contracts impacted but:

• No revenue reported for Sobeys, ICA and Kroger
• Restatement for Bon Preu and Groupe Casino immaterial
• Only significant restatement for Morrisons

Revenue £m EBITDA £m Solutions FY17* 117.7 2.5 IFRS 15 Adjustment (9.3) (9.3) Restated FY17 108.4 (6.8)

* 53 weeks

8

2018 impact

• Consensus assumes revenue on old standards, so there is a material change for 2018
• Impact £12-15m on both Revenue and EBITDA, all in Solutions
• Impact will be disclosed in CFO report

9

Ongoing impacts: 2019 and beyond

Dependent on number of CFC deals signed Consideration of a typical CFC assuming 10 year life:

• Signing on and upfront fees 10-20% of first 10 years of expected cash fees
• Now no revenue recognised in years 1 and 2
• This revenue is now spread over remaining 8 years
• Cashflows remain unchanged

○ for Andover sized CFC, peak cumulative negative outflow remains at c.£30m 2019 impact

• 5 CFCs underway currently
• 2019 Solutions OSP revenues estimated at £40m lower

10

Reporting at Prelims

• No change to Retail or Other segments
• For Solutions, we will report under IFRS 15 with an impact for 2018 disclosed in CFO report
• Balance sheet restatements and restated 1H 2018 will also be provided
• Ongoing we also disclose annual OSP cash fees for Solutions
• We plan to give separate guidance for:

○ Retail Revenue ○ Solutions OSP Revenue and Costs

11

Q&A