This case study evaluates the financial accounting practices of Rolls-Royce and BAE Systems, focusing on their accounting policies, consolidation and goodwill, and revenue recognition. It highlights differences in their approaches to accounting for intangible assets and revenue recognition, particularly in the context of long-term contracts and goodwill impairment. The report concludes that while both companies adhere to applicable standards, Rolls-Royce provides more detailed disclosures in its reporting compared to BAE Systems.

1. Financial Accounting ( Case
Study)
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2. Table of Contents
• Accounting Policies
•Critical Evaluation of Accounting Policies
•Consolidation and goodwill
•Revenue Recognition
•Conclusion

3. Accounting Policies
•Accounting policies are the principal and procedures which are
adopted by the company for preparation of financial statements.
•These are consistently followed by the company so that a true
and fair position can be presented by the company.
Consolidation and Goodwill
•IAS 38 deals with accounting of intangible assets which are not
dealt under other specific standard.
•The attributes for meeting the definition of intangible asset in
accordance with this standard are: Indentifiability; control and
future economic benefit.

4. Revenue Recognition
IAS 18 deals with recognition of revenue. The details
regarding turnover should be provided by the companies only
when the operations are being done in accordance with
contractual terms. In accordance with IAS 18 companies
should recognise revenue when:
•The ownership has been transferred in full and economic risk
and benefits lies with the buyer.
•The revenue or gain must be measurable.
•Cost of supplying services or goods is measurable.
•Certain probability of receiving cash/ revenue exists.

5. Critical Evaluation of Accounting Policies
Consolidation and goodwill
•Consolidated Financial statements of Roll-Royce consists financial
statements of company as well as its subsidiary along with Group’s share
result of associates and joint venture made up till 31st December.
•In case the subsidiaries are immaterial than the same are carried at cost
and consolidated when they become material.. No such policy is
followed in case of BAE system.
•Joint operations are accounted on the basis of proportionate accounting
in case of Rolls Royce; on the other hand BAE system complies with
equity method for joint ventures.
• Both the companies eliminate intra group transactions and any
unrealised expense or income arising from intra-group transactions while
preparing consolidated financial statements.

6. Goodwill
•Rolls Royce has excluded the effects of acquisition accounting in
accordance with IFRS 3 so that the business can be measured on an
equivalent basis.
• Goodwill is recognised by the company in accordance with
previous accepted accounting policies and no retrospective
adjustments have been made in the books of accounts for
complying with the adopted IFRS.
• In year 2015 75 £m goodwill has been impaired which is relating
to marine business; the same amount is impaired by BAE system
and it is relating to US Intelligence and Security System which
reflects lower growth assumptions.
•BAE system applies its own analytical tool for assessing scenario-
specific model changes which includes changes in discount rates
and expected cash flows. No such tool is applied in case of Rolls
Royce.

7. Revenue Recognition
•BAE system complies with provisions of IAS11, for accounting
revenue relating to long term contract. Revenue and estimates relating
to cost are reviewed and amended quarterly and more frequently if
required by circumstances.
• Profit is accounted on progressive basis as risk have been mitigated
or retired. The revenue on long term contracts is recognized only
when all the performance milestones have been achieved.
•In Rolls Royce revenue is generally recognised when there is a
significant transfer of risks and rewards of ownership of the goods to
the ultimate customer.
•The application of new standard is expected to have a significant
impact on the Civil Aerospace business for accounting policies of
revenue recognition.

8. Conclusion
In the end it can be concluded that both the companies have
complied by their applicable standards for accounting of goodwill
and revenue recognitions. In the annual reports of Roll-Royce
separate accounting is observed for all its subsidiaries and joint
ventures, which has eased the analyzing of statement. However
there is no such system was observed in the accounts of BAE.
Since the presentation of policies and their description in the notes
to accounts has been better elucidated in the annual reports of
BAE, the conclusion can be better drawn on the basis of
information provided.

9. REFERENCES
Books and Journal
Bloom, M. (2013). Double accounting for goodwill: A problem
redefined. Routledge.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill
Education Australia.
Hoskin, R.E., Fizzell, M.R. & Cherry, D.C. (2014). Financial
Accounting: a user perspective. Wiley Global Education.
Johansson, S.E., Hjelström, T. & Hellman, N. (2016). Accounting for
goodwill under IFRS: A critical analysis. Journal of International
Accounting, Auditing and Taxation. 27. Pp.13-25.
Qasim, A., Haddad, A.E. & AbuGhazaleh, N.M. (2013). Goodwill
accounting in the United Kingdom: The effect of international financial
reporting standards.

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