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Rolls-Royce - Accounting shake up

Rolls-Royce’s trading statement confirms that the near-term outlook remains mixed, and 2016 full year expectations are unchanged. The group has also confirmed the impact of a switch to a different accounting method, IFRS 15, from 2018 onwards.

The shares rose slightly on the news.

George Salmon, Equity Analyst at Hargreaves Lansdown:

"Five profit warnings in the 20 months up to November 2015 means Rolls-Royce shareholders have had anything but a smooth ride recently. Over this time, the group’s credibility took a pasting and its accounting policies were widely criticised.

For example, Rolls previously accounted for aftermarket revenues, the maintenance and service work done after the engines are initially sold, upfront. But when customers started to retire old planes rather than have existing ones serviced, much of that cash never materialised.

The new accounting policies mean that last year’s profits will be restated, and adjusted down by £900m. However, that doesn’t affect what is actually coming in to the group’s coffers, only when it’s accounted for. The new system should mean greater clarity moving forward.

Operationally, the group is undergoing some major restructures. Investors will hope that it emerges as a leaner and more transparent company. However, the road ahead could be a long one, and as Rolls-Royce has found, it is best not to count any chickens before they have hatched."