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COMPANY NUMBER 01003142
ROLLS-ROYCE PLC
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
Contents Rolls-Royce plc Annual Report 2021
CONTENTS
Company Information 1
Strategic Report
Group at a glance
2
Chief Executive’s review
4
Purpose, vision and strategy
6
Business environment
9
Business model
10
Key Performance Indicators
12
Financial review
14
Business review
22
Principal risks
30
Section 172 and stakeholder engagement
35
Directors’ Report
Directors
39
Directors’ indemnities
39
Dividends
39
Corporate governance
39
Employment of disabled persons
40
Employee engagement
40
Financial instruments and risk management
40
Post balance sheet events
40
Related party transactions
40
Disclosures in the Strategic Report
40
Disclosures in the Rolls-Royce Holdings plc Annual Report
40
Management report
40
Going concern and viability statements
41
Responsibility statements
43
Financial Statements
Consolidated Financial Statements
45
Notes to the Consolidated Financial Statements
52
Company Financial Statements
115
Notes to the Company Financial Statements
117
Subsidiaries, Joint Ventures and Associates
142
Independent Auditor’s Report
149
Other Financial Information
160
Alternative Performance Measures
162
Glossary
164
Company Information Rolls-Royce plc Annual Report 2021
1
COMPANY INFORMATION
Registered office Kings Place
90 York Way
London
N1 9FX
Independent Auditors PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place
London
WC2N 6RH
Strategic Report Rolls-Royce plc Annual Report 2021
2
STRATEGIC REPORT
The Directors present their Strategic Report on the Rolls-Royce plc Group (the Group), together with the audited financial statements for the
year ended 31 December 2021.
Group at a glance
Pioneers of Power
Rolls-Royce pioneers cutting-edge technologies that deliver clean, safe and competitive solutions to meet our planet’s vital power needs. Our
purpose is to pioneer the power that matters to connect, power and protect society.
FREE CASH FLOW
1,2,3
STATUTORY CASH FLOW
UNDERLYING REVENUE
1,2,3
STATUTORY REVENUE
1,2
£(1,484)m
2020
: £
(
4,2
52
)
m
£(775)m
20
20
: £(
986
)m
£10,947m
20
20
: £1
1,
430
m
£11,218m
20
20
: £
11,4
91
m
UNDERLYING OPERATING
PROFIT/(LOSS)
1,2,3
STATUTORY OPERATING
PROFIT/(LOSS)
1,2
£414m
2020: £(
2,008
)m
£513m
2020: £(
1,972
)m
NET
DEBT
4
LIQUIDITY
5
UNDERLYING PROFIT/(LOSS)
BEFORE TAX
1,2,3
STATUTORY LOSS BEFORE
TAX
1,2
£(5,157)m
2020: £(3,576)m
£7.1bn
2020: £9.0bn
£36m
2020: £(3,993)m
£(294)m
2020: £(2,799)m
See note 2 on page 72 for a reconciliation between underlying and reported results.
Underlying revenue by business in 2021
Civil Aerospace
41%
Defence
31%
Power Systems 25%
New Markets and Other businesses
3%
ORDER BACKLOG GROSS R&D EXPENDITURE
3,6
COUNTRIES WITH
ROLLS-ROYCE PRESENCE
EMPLOYEES
(MONTHLY AVERAGE)
£50.6bn £1.2bn 49 44,000
1
2021 figures represent the results of continuing operations.
2
2020 figures have been restated, where relevant, to show ITP Aero as a discontinued business in line with 2021 reporting.
3
A reconciliation of Alternative Performance Measures to their statutory equivalent is provided on page 162 to 163.
4
Net debt (including lease liabilities) is defined on page 49.
5
Liquidity is defined as net funds plus any undrawn facilities, as listed on page 41.
6
See note 3 on page 74 for a reconciliation of gross R&D expenditure to total R&D expenditure.
Use of underlying performance measures in the Annual Report
All figures in the narrative of the Strategic Report are underlying from continuing businesses unless otherwise stated. We believe this is the most
appropriate basis to measure our in-year performance as this reflects the substance of trading activity, including the impact of the Group’s foreign
exchange forward contracts, which lock in transactions at predetermined exchange rates. In addition, underlying results exclude the accounting
impact of business acquisitions and disposals, certain impairment charges and exceptional items. A full definition of underlying and the
reconciliation to the statutory figures can be found on page 162 and 163. All references to organic change are at a constant translational currency
and exclude M&A.
Strategic Report Rolls-Royce plc Annual Report 2021
3
Group at a glance continued
Our businesses in 2021
CIVIL AEROSPACE
DEFENCE
POWER SYSTEMS
NEW MARKETS
Civil Aerospace is a major
manufacturer of aero engines
for the large commercial
aircraft, regional jets and
business aviation markets. The
business uses its engineering
expertise,
in-depth knowledge and
capabilities to provide through-
life support solutions for its
customers.
Defence is a market leader
in aero engines for military
transport and patrol aircraft
with strong positions in combat
and
trainer applications. It has
significant scale in naval and
also designs, supplies and
supports the nuclear
propulsion plant for
all of the UK Royal Navy’s
nuclear submarines.
Power Systems, with its product
and solutions brand, mtu, is a
world-leading provider of
integrated solutions for onsite
power and propulsion,
developing sustainable,
climate-friendly solutions to
meet
the needs of its customers.
New Markets are early-stage
businesses, with high growth
potential, focused on
addressing the opportunities
being created
by the transition to net zero.
The businesses leverage our
existing,
in-depth engineering expertise
and capabilities to develop new
sustainable products for future
markets.
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX
Large Engines: 72%
Business Aviation: 21%
Regional: 4%
V2500: 3%
Transport: 32%
Combat 24%
Submarines: 19%
Naval: 11%
Other: 14%
Marine: 33%
Industrial: 25%
Power Generation: 33%
Defence: 9%
Rolls-Royce SMR: 23%
Rolls-Royce Electrical: 77%
UNDERLYING REVENUE
7,8
UNDERLYING REVENUE
8
UNDERLYING REVENUE
8
UNDERLYING REVENUE
8
£4,536m
2020: £5,068m
£3,368m
2020: £3,355m
£2,749m
2020: £2,735m
£2m
2020: £5m
UNDERLYING OPERATING
(LOSS)
7,8
UNDERLYING OPERATING
PROFIT
8
UNDERLYING OPERATING
PROFIT
8
UNDERLYING OPERATING
LOSS
8
£(172)m
2020: £(2,535)m
See page 22
£457m
2020: £461m
See page 24
£242m
2020: £188m
See page 26
£(70)m
2019: £(45)m
See page 28
7
The underlying results for Civil Aerospace have been restated to reflect the transfer of the Hucknall site with associated fabrications activities from Civil Aerospace to ITP Aero during 2021.
8
The underlying results of Civil Aerospace, Defence and Power Systems for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and
new Electrical power solutions activities as New Markets and UK Civil Nuclear as Other businesses.
Strategic Report Rolls-Royce plc Annual Report 2021
4
Chief Executive’s review
Generating positive momentum
We improved our financial performance, delivered our near-term commitments, won new business opportunities and took important strategic
steps forward during the year. While challenges remain, we can look with increasing confidence to the future and the significant commercial
opportunity presented by the transition to net zero.
We have improved our financial and operational performance, continued to deliver on our commitments and created a better balanced business
capable of sustainable growth. We have achieved the benefits of our restructuring programme a year ahead of schedule, positioning Civil
Aerospace to capitalise on increasing international travel. In Defence, we have seen growth driven by strong demand in all our markets and in
Power Systems we achieved record order intake in the last quarter. The positive momentum we are generating gives us confidence as we look to
the future. We have also made significant progress with our new businesses in electrical power and small modular reactors, both of which have
the potential to create very significant long-term value. We are continuing to make disciplined investments to develop new and existing
technologies, which will enable us to seize the significant commercial opportunity presented by the global energy transition driving sustainable
returns.
During the year, we continued to invest prudently in the new technologies, products and services our customers will need for their future success
and saw our more recent investments deliver new growth opportunities. We attracted new customers, secured our place on new aerospace
platforms and pushed our existing products into new markets. Our Defence business continued to perform well with strong demand for OE and
services driving growth in all our end markets: combat, transport, submarines and naval (see page 24) and we won a strategically important
contract with the US Air Force.
In Power Systems, the effects of COVID-19 on our end markets lessened over the course of the year and we recorded a strong increase in order
intake in the second half, especially in power generation with orders for data centres and infrastructure projects. The transition to net zero power
is a significant opportunity for us in Power Systems with mission critical power for data centres, power for construction and infrastructure, and
marine solutions leading the demand for net zero carbon solutions (see page 26).
Notwithstanding our crucial focus in Civil Aerospace on completing the restructuring, we secured new customers and our place on new aircraft
platforms in the widebody and business jet markets (see page 22). Within our New Markets reporting segment, which we have introduced to
provide greater clarity for stakeholders on our early-stage businesses with high growth potential, Rolls-Royce Electrical saw pre-orders
announced for a key urban air mobility customer, a new platform partner unveiled and passed a number of significant development milestones,
including securing the world all-electric aircraft speed record (see page 28). Five years after our programme to develop a small modular nuclear
reactor business was created, we established as a special purpose vehicle during 2021. We have attracted not just UK Government funding but
capital from external investors (see page 28). We will now proceed through the regulatory process and identify sites for the factories, which will
manufacture the modules that will enable the on-site assembly of SMR power plants, as well as focusing on securing our first orders.
There remain challenges and risks around the pace of growth in the global civil aviation market and there is additional uncertainty caused by
rising inflation and ongoing global supply chain disruption, especially in areas such as semi-conductors which are becoming ubiquitous in modern
technology solutions. The potential for further variants of the COVID-19 virus to create future disruption also cannot be discounted. Recovery
from the pandemic is unlikely to be a simple linear trajectory but we are a different business going into 2022 than we were when the pandemic
hit.
Improved financial performance
The progress made in 2021, particularly on our restructuring programme in Civil Aerospace, resulted in a return to underlying operating profit
from continuing operations. This was bolstered by continued resistent performance in Defence and strong growth in Power Systems, as it
benefited from recovering end markets. Group underlying revenue, meanwhile, reflected a more balanced contribution from the business units
compared with the prior year and was obviously impacted by lower widebody engine deliveries as a result of reduced demand for new aircraft
from our airline customers. Free cash outflow was substantially improved on the prior year helped by robust progress on cost reduction, stronger
operating performance including higher flying hour receipts in Civil Aerospace and reduced capital expenditure.
Across the Group, we seized new opportunities throughout the year. We were very proud to secure the contract with the US Air Force to power
its fleet of 76 iconic B-52 aircraft. This was a tremendous success and the result of intense effort and hard work by the team in Defence. In the
UK, the Ministry of Defence announced our role in the next generation of nuclear-powered submarines, which will replace the Astute class in the
future. Towards the end of the year, we agreed to work with Japan’s IHI Corporation to develop and deliver a future fighter engine demonstrator.
Using our unparalleled expertise in the generation of energy from nuclear sources at small-scale, we also began exploring the potential of space,
signing an innovative contract during 2021 with the UK Space Agency for a study into future nuclear power options for space exploration.
Power Systems is at the vanguard of the drive to net zero as customers look to transition from traditional diesel-powered engines, and as a result
much of our activity in 2021 was centred around new sustainable power solutions (see page 5). We are also increasing our sales of complete
system solutions, including gensets, battery storage systems and automation, generating even closer customer relationships. In Civil Aerospace,
despite the impact of the pandemic, we were able to continue to build on the success of our existing technology portfolio. The Pearl 10X became
the third member of our family of Pearl business jet engines, after being chosen by Dassault, to exclusively power its new flagship aircraft, the
Falcon 10X. This was a particularly significant achievement as it is the first time that Dassault has chosen our engines to power a member of its
business jet fleet. During the year, another key new business jet engine, the Pearl 700 for Gulfstream’s new G700 aircraft, successfully passed a
number of important test milestones on its way to certification and entry into service in 2022. In the widebody market, our Trent XWB – the world’s
most efficient large aero engine in service today – will now be powering the new Airbus A350F fleet of freighters, with Singapore Airlines agreeing,
during the year, to take seven of the new aircraft. The introduction of the Airbus A350F into the growing freighter market represents a significant
opportunity for us. Finally, we welcomed new widebody customers including Vietnamese airline Vietjet Aviation for the Trent 700, a further
example of our success in the market for aircraft transitions, and German airline Condor Flugdienst for the Trent 7000.
Strategic Report Rolls-Royce plc Annual Report 2021
5
Chief Executive’s review continued
Delivering on our commitments
I said in last year’s Annual Report that unprecedented times had called for unprecedented action and we have delivered on the commitments that
we made in order to secure the funding for the decisive action we needed to take. The restructuring programme we launched in 2020 has now
largely been completed. The investment we made before the pandemic to improve productivity and efficiency has enabled us to act at pace and
realise the benefits of the restructuring ahead of schedule. We have met our £1.3bn run-rate savings target a year ahead of schedule and delivered
on our Group restructuring commitment with the removal of more than 9,000 roles from continuing operations. Our focus now is on ensuring
the benefits are sustained. Our restructuring programme has fundamentally changed the way we work in our Civil Aerospace business, reducing
the size of the business by around a third and creating a more productive, more efficient business poised for future growth. We are also delivering
on our commitment to raise around £2bn of proceeds from disposals, with four agreements announced. Three have already completed: two in
2021 and the other one since the start of 2022. The final and largest of the disposals, ITP Aero, is progressing well and we expect completion in
the first half of 2022. Disposal proceeds, together with underlying free cash flow generation from the Group, will be used to reduce net debt, in
line with our ambition to return to an investment grade credit profile in the medium term.
Investing to create long-term growth and sustainable value
Technology is the lifeblood of our business and we must ensure that we create, through prudent investment, the technologies that our customers
are going to need for the future. Our continued prioritisation of targeted investment, even in the most challenging of years, has driven commercial
wins in 2021, and we are increasingly pivoting our activity towards supporting our mission to lead the transition to net zero. We pioneer the power
that matters, power which is central to the successful functioning of the modern world. To combat the climate crisis, we know that power must be
made compatible with net zero carbon emissions. Our technology and engineering expertise gives us a critical role in enabling the transition to
a low carbon global economy. We are focused on producing the technology breakthroughs society needs to decarbonise the global economy
and capture the economic opportunity this transition represents.
During 2021, we laid out our technology pathway to net zero and committed to ensuring our new products will be compatible with net zero
operation by 2030, and all our products compatible by 2050. We aim to meet our net zero ambitions in part by working towards enabling our
products to be used in a way which is compatible with net zero emissions. We have already made considerable progress on the testing of
sustainable fuels and the development of new products and engine architectures, which will further increase fuel efficiency and help improve the
economics of new forms of energy storage. During 2021, we set out clear short-term targets, connected to senior management remuneration, to
make all the commercial aero engines we produce, and our most popular reciprocating engines in Power Systems, compatible with sustainable
fuels by 2023 and to work with our armed forces customers to achieve the same goal for the Rolls-Royce engines they use. We are actively testing
100% Sustainable Aviation Fuels (SAF) in our Trent engines right now, while Power Systems is developing engines, and upgrade kits for existing
products, for new fuels such as hydrogen, methanol, and synthetic e-diesel.
At the same time, we are pioneering new breakthrough technologies that can enable our customers to achieve net zero. Our Power Systems
portfolio has already expanded into microgrids and battery storage and during the year we added hydrogen fuel cells for the climate-neutral
generation of emergency power for the data centre market, an area where we are already among the world’s top three suppliers. We are
increasingly bringing our technologies together to provide complete solutions such as for the German Port of Duisburg where we are creating a
first-of-a-kind microgrid that combines renewable power, battery storage, fuel cells and hydrogen combustion engines to meet the clean energy
needs of a new container terminal. Such a combined solution has potential applications for our Defence customers as they look to decarbonise
their estates, which make up a significant proportion of government-owned emissions.
Our innovation is also taking us into exciting new areas, with novel technologies opening up new markets and significant growth opportunities:
from all-electric Urban Air Mobility (UAM) and regional aviation to hybrid-electric systems. Perhaps one of the most high-profile technology
milestones we passed during the year on our journey to net zero was the success of the Spirit of Innovation, which secured the record for the
world’s fastest all-electric aircraft. It was powered on its record-breaking runs by the most power-dense propulsion battery pack ever assembled
in aerospace. The advanced battery and propulsion technology developed for this programme has exciting applications for the emerging
advanced air mobility market. Our customers in this field are already announcing orders with Vertical Aerospace claiming the largest conditional
pre-order book in the electric vertical take-off and landing (eVTOL) industry during the year. Towards the end of 2021, we also announced our
involvement with Eve, the UAM business created by Embraer. Our innovation with SMRs, meanwhile, has seen us develop existing technology to
enter new markets and sectors where we can offer technological solutions that can provide further growth opportunities.
Executive leadership
During the year, I was pleased to be joined by Panos Kakoullis as our new Chief Financial Officer. He is already having a significant positive impact
on our Finance function and has clearly laid out his near-term priorities (see page 14). During the year, Paul Stein announced his intention to step
down as Chief Technology Officer (CTO) though he will remain as Chairman of Rolls-Royce SMR; Harry Holt took the decision to leave his role as
Chief People Officer (CPO) to take up a post with one of our partners in the UAM market; and Ben Story, Strategic Marketing Director, decided
to leave us to pursue new opportunities. I would like to extend the thanks of all of us at Rolls-Royce to the three of them for their hard work and
dedication. From the start of 2022, I am delighted to have been joined on the Executive Team (ET) by Grazia Vittadini as CTO. She has extensive
expertise, from her career at Airbus, in the emerging and disruptive technologies that will help us on our journey to net zero. Sarah Armstrong,
who led the restructuring in Civil Aerospace as People Officer, has joined the ET as CPO. Finally, Rob Watson, who has been instrumental in
creating Rolls-Royce Electrical, has joined the ET as President - Electrical.
2022 outlook and longer-term prospects
As I said earlier, the positive momentum we are generating, along with the growth we can see in our end markets, gives us confidence that we will
see further improvement in our performance in 2022 (see page 14). Looking further ahead, our technology and engineering expertise gives us a
critical role in enabling the transition to a low carbon global economy. For us, this is a societal imperative as well as one of the greatest commercial
and technological opportunities of our time although not without risk. The early-stage businesses, with high growth potential, within our New
Markets segment are focused on addressing exactly these opportunities. They are leveraging our existing, in-depth engineering expertise and
capabilities to develop new sustainable products. The desire to be part of the solution to climate change is strong throughout Rolls-Royce. The
ambition, ingenuity and skill of our people will be instrumental to our success and I would like to thank all of them for their hard work during 2021.
There are few companies better placed than us to pioneer the vital solutions we need to create a net zero carbon future. Success in this endeavour
will also play a key role in the creation of a more sustainable – in all senses of the word – and prosperous Rolls-Royce.
Strategic Report Rolls-Royce plc Annual Report 2021
6
Purpose, vision and strategy
Our purpose (below) guides our near-term areas of focus (below) and strategic priorities (see page 8), which are informed by our business
environment (see page 9). Our strategy is delivered by our people, enabled by our business model (see page 10), enacted by our business units
(see pages 22 to 29) and measured through our Key Performance Indicators (see page 12). Our strategy is underpinned by strong governance
(see page 39) and leadership which manages risk (see page 30) and uncertainty and creates value for all our stakeholders (see Financial Review,
page 14 and Stakeholder Engagement, page 35).
Our purpose, vision and mission
We pioneer the power that matters. Power that has an impact and is central to the successful functioning of the modern world. As a broad-based
power and propulsion provider, we operate in some of the most complex, critical systems at the heart of global society.
Purpose
We pioneer the power that matters. Power that is vital to the success of
our customers and which drives the functioning of the modern world.
We harness the potential of cutting-edge technologies to create safe,
cleaner and more efficient power and propulsion solutions. We push the
boundaries of what is possible as pioneers.
We operate in some of the most complex and critical parts of the global
economy, from transport and energy to the built environment. Our
products and services enable our customers to connect people,
societies, cultures and economies together; they meet the growing need
for power generation across multiple industries; and enable
governments to equip their armed forces with the power required to
protect their citizens.
Vision
We create industrial technologies using expertise built over many years,
that puts us in a leadership position. We combine distinct engineering
disciplines to deliver highly complex power and propulsion solutions in
the air, at sea and on land, building long-term relationships with our
customers through service packages. The thread linking the Group
together is the technical and engineering expertise needed to create
power for very challenging applications. We share this expertise across
the Group and create value through deployment in our multiple markets
as required by customer demand.
Mission
Global economic growth and rising prosperity are expected to lead to
increased demand for travel, trade and energy. As demand for power
rises, so are calls from customers for that power to be more compatible
with combatting climate change. We believe there are significant
business growth opportunities to come from Rolls-Royce playing a
leading role in the transition to net zero. At the same time, climate
change poses a potentially significant risk to our business to which we
must respond with the appropriate governance, risk management, strategic resilience and metrics. We are well positioned to capture the
structural growth opportunity presented by the global energy transition and we are excited to be playing a leading role in enabling our customers
make the move to net zero.
Our values and behaviours
Trust: We strive to outperform the expectation of key stakeholders. We have to earn trust every day and always remember it is easy to lose.
Integrity: We live up to all of our ethical principles and we demonstrate this by being true to ourselves and showing honesty and good judgement
in all we do.
Safety: We put health and safety first. We care about the health and safety of our people and our products.
Embrace Agility: We explore different ways of doing things, we respond quickly and adapt to challenges.
Be Bold: We believe in ourselves, push boundaries and speak up.
Pursue Collaboration: We find strength in working together, both inside and outside of our business, and value the diversity of people and
perspectives.
Seek Simplicity: We keep it simple and remove complexity, in how we communicate and the way we work.
Near-term areas of focus
The unprecedented times caused by the COVID-19 pandemic, particularly in the civil aviation market, called for unprecedented action in 2020 as
we secured our future through the launch of the largest restructuring in our history, a fund raising and a disposals programme. Since then, we
have made significant progress on the path to recovery, by focusing upon the elements within our control. We are emerging as a better-quality
business, due largely to the restructuring in Civil Aerospace, and a more balanced one as Defence has remained resilient and Power Systems sees
a strong recovery in demand, primarily for sustainable solutions. Our overall strategic direction is unchanged as we capitalise on the opportunities
presented by our long-term customer relationships and installed product base; grow our capabilities in sustainable power; harness new digital
technologies and create new business opportunities. Many of these individual elements, such as the drive for sustainable power, are now
fundamental to our future direction. Our journey to creating a better quality and more balanced business, however, is far from over. As we look
at the near term, there are three areas upon which we will focus.
Strategic Report Rolls-Royce plc Annual Report 2021
7
Purpose, vision and strategy continued
Delivering on our commitments
We made clear commitments alongside the fund raising in late 2020,
which we must deliver and which will assist us in rebuilding our
balance sheet and achieving our mid-term ambition of returning to an
investment grade credit rating. Very significant progress has been
made on the restructuring (see page 23), assisting us in meeting our
pledge to turn cash flow positive sometime during the second half of
2021. We must protect the savings that have been made and ensure
value and cost consciousness remain a central tenet of the whole
business as we look to future growth. During the year, we also
announced a series of agreements as a result of our programme to
raise around £2bn from disposals and we aim for completion in the
first half of 2022.
Maximise value from existing capabilities
We are the beneficiaries of years – in some cases decades – of hard
work to build up our market share, especially in Civil Aerospace, and
now our focus is on optimising the returns from these positions. The
current restructuring is a key enabler of this optimisation. We are also
moving beyond a period of unprecedented investment in new Civil
Aerospace engine programmes, with four new widebody engines and
three new business jets launched in the last decade, to a period in
which we must realise the benefits of that effort and investment. This
means we must remain focused on our services strategy, increasing
the opportunity to generate value from the installed product base,
and supporting our products by innovating to extend their service life. Extending the life of our products in service also means enabling our
customers to use them in a way that is compatible with net zero. We can pull the technology levers in our control through testing our existing
products with new lower carbon and net zero fuels and creating upgrade kits, where necessary, to assist adoption.
Across all our business units, the underlying driver of services revenues will continue to be the size of our installed product base – that is the
number of assets in the market. This provides resilience against Original Equipment (OE) sales volatility and allows us to continuously increase
the scope of our aftermarket reach and to maximise value from the whole system life of our solutions. Some areas of the business, such as Power
Systems, are at an earlier stage in this process than others, notably Civil Aerospace.
Seizing opportunities for growth
There are opportunities for growth, both within our existing businesses and from new areas which are emerging. In our Defence business, for
instance, governments around the world are exploring approaches to reduce the carbon footprint of their armed forces, which means demand
for newer, more efficient, powerplants and for sustainable fuels. Our airline and business jet customers are keen to address the same issues, as
are our customers in the multiple sectors addressed by Power Systems. The context in which we are creating one of the world’s leading industrial
technology companies is that of a world which is taking on the challenge of achieving net zero by 2050. It represents a significant commercial
opportunity for Rolls-Royce as some of our core applications are hard to decarbonise and require deep domain knowledge, which reduces the
potential for the emergence of disruptive new entrants. The sectors in which we operate sit at the heart of modern society. As other parts of the
global economy decarbonise, they will contribute a more significant proportion of remaining emissions. As a result, our innovation in sectors
where reducing emissions is tough, has a fundamental role to play in enabling and even accelerating the overall global transition to a net zero
carbon future.
Strategic Report Rolls-Royce plc Annual Report 2021
8
Purpose, vision and strategy continued
Our strategic priorities
Our purpose, vision and mission provide an overall framework within which our strategic focus for the next several years sits. To complete the
picture, we have a priorities framework which provides our people with clear guidance on our in-year priorities across five areas.
Secure a sustainable future
Our priorities framework is used by our business units in the setting of individual in-year targets. Our overall theme for 2022 is to secure a
sustainable future for our business, not just in terms of making progress on our continued journey towards net zero but making significant strides
towards meeting our ambition of creating a better quality and more balanced business. The five priority areas expand beyond what each part of
the business needs to achieve in order to meet our in-year financial targets (see page 14).
STRATEGY
All our people have clear line of sight not just to the strategic priorities of their team but to their business unit and the Group as a whole. Leaders
are charged with helping individual employees understand the role they play in meeting our strategy. As we play our part in enabling the transition
to net zero we have also tied part of our senior management remuneration to meeting our sustainability targets introduced in 2021.
CUSTOMERS (links to KPI G)
Our customers are vital to our success and we must ensure we continually strive to provide the best possible service by delivering the value and
quality we promise, at the time we promise, for the price we promise. Increasingly, our customers are requiring us to develop more sustainable
solutions. We track customer engagement and success across the business, including for our internal support functions.
EFFICIENCY (links to KPIs C, F)
To ensure that we can maintain and improve our competitiveness, fund future growth and meet our promises to investors we must ensure we
continue to champion efficiency across our whole business. For instance, we must retain the benefits of the restructuring programme as civil
aviation recovers and returns to growth. We track cost metrics across the business and take effective action swiftly.
PEOPLE (links to KPI H)
Our people and culture are vital to our long-term success and we have a platform for engagement tracking which operates across the Group,
allowing individual businesses to create action plans and set targets which roll-up to an overall score against which a proportion of senior
management remuneration is set annually.
FINANCIAL (links to KPIs A, B, C, D, E, F
We must deliver on the financial commitments that we have made. We must continue our journey to rebuild strength in our balance sheet by
meeting our financial goals, including driving positive net cash flow and increased profitability. This will play a vital role in assisting us in our
ambition to return to an investment grade credit profile (see page 14).
KEY PERFORMANCE INDICATORS
Financial Performance Indicators
Non
-
financial Performance Indicators
A
–
Order backlog
G
–
Customer metric
B
–
Underlying revenue
H
–
Employee engagement
C
–
Underlying operating profit/(loss)
D
–
Capital expenditure as a proportion of underlying revenue
See Key Performance Indicators pages
1
2
and
13
.
E
–
Self
-
funded R&D as a proportion of underlying
revenue
F
–
Free cash flow
from continuing operations
Strategic Report Rolls-Royce plc Annual Report 2021
9
Business environment
Climate change
We recognise that human behaviour is increasing the levels of
greenhouse gas in the atmosphere and accelerating global climate
change. This is one of the world’s greatest and most urgent challenges
and has the potential to undermine every nation’s ability to achieve
sustainable development. Many of the countries we operate in, as well
as a number of our customers, have made commitments to
significantly reduce or reach net zero carbon emissions by the middle
of the century. For example, our Defence customer, the RAF, our
airline customers through IATA, and our Power Systems customers in
the marine sector represented by the International Maritime
Organization have published far-reaching commitments.
Transitioning the essential, but difficult to decarbonise industries in
which we operate to net zero is a tremendous challenge, but also
provides business opportunities for bringing cutting-edge
technologies to market.
Our response
To us, being sustainable means understanding the impact our
business has on the world around us, and the impact climate has on
our Group. We use this understanding to inform our purpose,
strategy, and the decisions we make. Reducing the carbon impacts of
our product portfolio and accelerating the decarbonisation of the
sectors in which we operate is the most significant contribution Rolls-
Royce can make to a more sustainable future; it is our mission to lead
the transition to net zero. To that end, we are increasing our
investment in lower carbon and net zero technologies. There are
already tangible results of our efforts in advancing the efficiency of
our existing portfolio, making new and existing products compatible
with net zero operation, and pioneering new technologies in electric
flight, SMRs, fuel cells, and microgrids.
Digitalisation
The digital revolution has already transformed ways of living, working,
and entire industries. As a consequence of the COVID-19 pandemic,
investment in digitalisation and the adoption of digital technologies
has increased. This trend has been evident in industries like
entertainment, where digital players have been able to outpace
traditional rivals; and is increasingly reaching industries that have
remained largely immune to digital disruption until recently. In our
end markets, the US Department of Defense (DoD) for example, has
more than doubled its budget for cyber in the last ten years, large
players in the aviation industry are increasingly offering digital
services, and the Internet of Things (IoT) platforms have been
established to enable energy management and automation for power
generation and consumption. Vast amounts of data are being
generated by the over ten billion IoT connected devices globally
today – forecast to reach over 30 billion by 2025. To draw insights,
big data analytics and artificial intelligence are increasingly used,
which require tremendous amounts of processing – now increasingly
done via cloud computing services. As these technologies converge
and become increasingly accessible and affordable, further
innovation and disruption is sure to occur in all industries, including
our own.
Our response
Having pioneered engine health monitoring for aircraft engines over
25 years ago, we have a heritage in data innovation. Pursuing our Civil
Aerospace IntelligentEngine vision, we continue to utilise digital twins
to maximise aircraft availability; and increasingly for product
innovation, advanced manufacturing and for enabling the journey to
electric flight. Our TwinAlytics digital services allow Defence
customers securely to gather and analyse data and simplify decision-
making processes; we are also extending our digital capabilities as
part of the Tempest programme. In Power Systems, we operate the
mtu Go platform, which enables users to quickly analyse system data,
determine important action steps and plan them efficiently. Through
our R2 Data Labs team, which focuses on data innovation within Rolls-
Royce, we have been able to deliver over 60,000 hours of learning
on digital and AI to our employees, connected to hundreds of
companies through our ecosystem, and were able to complete
transformative digital projects in a wide range of areas. Finally, we are
positioning Rolls-Royce as a thought leader in the space of AI ethics,
having published and refined The Alethia Framework that guides
developers, executives and boards through ethical considerations
surrounding artificial intelligence.
Population and economic growth
As the global population is set to increase to over 9.7 billion people
by 2050 (a rise of more than 20% from 2020) and global gross
domestic product is set to roughly double by that time, investment in
clean power will also increase significantly. This will be particularly
evident in the markets served by Power Systems, including power
generation, commercial marine and industrial applications. Demand
for Defence products is determined by national defence budgets –
these are closely linked to economic growth and are expected to
increase at low single digit rates in real terms each year. Further, as
more people reach middle- and higher-income levels, it is expected
that revenue passenger kilometres will increase; by some estimates
more than double by 2050, a key driver for the growth of our Civil
Aerospace business.
Our response
Addressing diverse end markets through our Defence and Power
Systems businesses has helped us be more resilient to the short-term
shocks caused by COVID-19. At the same time, we are positioning
ourselves for growth by directly addressing key growth markets that
will particularly benefit from increased population and economic
activity, for example, by establishing dedicated business units for
China and for sustainable power solutions within Power Systems.
Through Rolls-Royce SMR, we seek to bring to scale a low-carbon
source of power and have obtained significant government and
partner funding. In pioneering electric flight, we see the potential for
us to disrupt in the commuter aircraft and urban air mobility markets
– both of which will increasingly become relevant in a more urban and
densely populated world.
Strategic Report Rolls-Royce plc Annual Report 2021
10
Business model
We believe we have a sustainable business model which will create value for all our stakeholders over the long term.
Our cross-cutting capability and assets that support our strategy
Brand and heritage
Our brand has global appeal; is enduring; engages a wide range of stakeholders; and is a powerful tool for attracting customers, partners and
talent.
People and culture
We are powered by our people. We create an environment where all of our people can be at their best. We work hard to release their full
potential.
Innovation and technology
Delivering highly complex systems solutions has enabled us to build a significant breadth of disciplines; while the nature of our products means
we have acquired extraordinary depth.
Partnerships
We build meaningful relationships with partners across the value chain.
Global network and infrastructure
Our geographic footprint ensures we are able to serve customers where they need us.
Digitalisation
We use digital tools and skills across our business to enable growth without a commensurate increase in costs.
Business excellence
We drive a culture of continuous improvement.
Our competitive advantage comes from:
Cutting edge technologies
Our technologies ensure that our customers have the vital power that meets their emerging needs in an increasingly sustainable manner.
Systems solutions
We integrate individual enabling technologies into complete systems and power solutions, providing customers with the ability to work with a
single partner.
System life
Our products have significant aftermarket requirements during their lengthy operating lives and we provide complete through-life support.
1. Anticipate the needs of our customers
Our focus on building complete power solutions provides the basis for strong customer relationships. Increasingly, our customers are requiring us to
develop more sustainable solutions as they look to make the transition to net zero. Our aftermarket model of through-life support further deepens our
connection with customers.
2. Develop cutting-edge technologies
Our products rely upon cutting-edge technologies, which are generated from intellectual property developed over decades and often in
collaboration with our long-term partners.
3. Design solutions
We harness the potential of digital technologies and design thinking to create solutions that generate the greatest value from our cutting-edge
technologies.
4. Develop world-class production capability
We use our production expertise and network of partners to harness new manufacturing techniques and technologies.
Strategic Report Rolls-Royce plc Annual Report 2021
11
Business model continued
5. Grow installed original equipment base
Increasing our installed product base generates both in-year growth and the potential for our business to capture long-term service revenue.
6. Capture through-life value of in-service products
We believe our substantial installed product base provides a large, captive, visible, and long-term revenue, profit, and cash flow stream.
7. Generate stakeholder value
Our activities worldwide generate value for a wide range of stakeholders.
PRINCIPAL RISKS
a
–
Safety
h
–
Financial shock
b
–
Strategic transformation
i
–
Market shock
c
–
Business continuity
j
–
Political risk
d
–
Climate change
k
–
Talent and capability
e
–
Competitive environment
f
–
Compliance
See Principal Risks page
30
.
g – Cyber threat
Value creation for our stakeholders
Customers
We develop product solutions that improve the competitiveness of our customers and assist them in their journey to net zero (see Business
Review page 22). Gross R&D expenditure: £1.2bn
Investors
We aim to generate attractive returns for investors over the long-term. 2021 total shareholder return: 10.45%.
Employees
To help our people be at their best, we enable them to learn and develop in a style and at a pace that suits them, at every point in their career
(see Non-financial KPIs page 13). Investment in learning and development (hours): 263,840.
Partners
We create partnerships based on collaboration where each partner benefits from the relationship. Spend with external suppliers: £7.9bn.
Communities
We improve the communities that we impact locally, nationally and globally. Hours of employee time volunteered: 26,427.
See Stakeholder Engagement, page 35.
Strategic Report Rolls-Royce plc Annual Report 2021
12
Key Performance Indicators
Financial Performance Indicators
1,2,3
ORDER BACKLOG (£BN)
UNDERLYING REVENUE (£M)
UNDERLYING OPERATING
PROFIT
/(LOSS)
(£M)
2021: 50.6
2020: 52.9
2019: 60.9
2018: 63.1
2017: 55.0
How we define it
Total value of firm orders placed by customers
for delivery of products and services where
there is no right to cancel. This KPI is the same
as the statutory measure for order backlog.
See note 2 on page 71 for more information.
Why it is important
Order backlog provides visibility of future
business activity.
Link to remuneration
Customer orders drive future revenue growth
which in turn, enables profit and cash flow
growth. Profit and free cash flow performance
are key financial metrics in Rolls-Royce
incentive plan, accounting for 75% of the
metrics in 2021.
2021: 10,947
2020: 11,430
2019: 15,450
2018: 15,067
2017: 13,671
How we define it
Revenue generated from operations at the
average exchange rate achieved on
effective settled derivative contracts in the
period that the cash flow occurs. See note 2
on page 69 for more information.
Why it is important
Underlying revenue provides a measure of
business growth and activity.
Link to remuneration
Underlying revenue growth maximises the
opportunity to improve profit and free cash
flow performance in the year, both of which
are key financial metrics in the Rolls-Royce
incentive plan.
2021: 414
2020: (2,008)
2019: 808
2018: 616
2017: 306
How we define it
Operating profit generated from operations at
the average exchange rate achieved on
effective settled derivative contracts in the
period that the cash flow occurs. It excludes
exceptional and one-off items. See note 2 on
page 69 for more information.
Why it is important
Underlying operating profit indicates how the
effect of growing revenue and control of our
costs delivers value for our shareholders.
Link to remuneration
Profit is a key financial performance measures
for our Rolls-Royce incentive plan.
CAPITAL EXPENDITURE AS A PROPORTION
OF UNDERLYING REVENUE (%)
SELF-FUNDED R&D AS A PROPORTION OF
UNDERLYING REVENUE (%)
FREE CASH FLOW FROM CONTINUING
OPERATIONS (£M)
2021: 2.8
2020: 4.8
2019: 5.0
2018: 6.0
2017: 5.3
How we define it
Cash purchases of PPE in the year for
continuing operations relative to underlying
revenue.
Why it is important
This measure demonstrates the balance
between essential investments in
infrastructure and delivering short-term
shareholder returns.
Link to remuneration
Disciplined allocation of capital expenditure
optimises in-year profit and cash flow
performance without compromising longer-
term growth. Long-term metrics in the Rolls-
Royce incentive plan in 2022 and 2023 reward
strong financial performance.
2021: 7.4
2020: 7.6
2019: 7.2
2018: 7.6
2017: 7.6
How we define it
In-year self-funded cash expenditure on
R&D before any capitalisation or
amortisation relative to underlying revenue.
Why it is important
This measure demonstrates the balance
between long-term strategic investments
and delivering short-term shareholder
returns.
Link to remuneration
Disciplined control and allocation of R&D
expenditure optimises in-year profit and
cash flow performance without
compromising long-term growth through
innovation. There is a balance of long-term
metrics which reward strong financial
performance and also relative returns to our
shareholders through Total Shareholder
Return in the 2023 Rolls-Royce incentive
plan.
2021: (1,484)
2020: (4,252)
2019: 865
2018: 568
2017: 262
How we define it
Free cash flow is the change in cash and cash
equivalents excluding: transactions with
ordinary shareholders; amounts spent or
received on activity related to business
acquisitions or disposals; financial penalties
paid; exceptional restructuring payments;
proceeds from increase in loans; and
repayment of loans. Cash flow is our statutory
equivalent, see note 27 on page 113.
Why it is important
Free cash flow is a key metric used to
measure the performance of our business and
how effectively we are creating value for our
shareholders. It enables the business to fund
growth, reduce debt and make shareholder
payments.
Link to remuneration
Free cash flow is a financial metric in the
Rolls-Royce incentive plan.
1
Following the adoption of IFRS 15 Revenue from Contracts with Customers in 2018, the 2017 figures were restated.
2
The adoption of IFRS 16 Leases in 2019 had no material impact on our financial KPIs, see page 12 for more information.
3
2021 figures represent the results of continuing operations. 2020 figures have been restated, where relevant, to show ITP Aero as a discontinued operation in line with 2021 reporting. 2017,
2018 and 2019 figures have not been restated.
Strategic Report Rolls-Royce plc Annual Report 2021
13
Key Performance Indicators continued
Non-financial Performance Indicators
CUSTOMER METRIC (%)
EMPLOYEE ENGAGEMENT (SCORED 1
-
5)
4
SUSTAINABILITY
Civil Aerospace - 2021: 79 2020: 73.7
Defence – 2021: 39 2020: 0
Power Systems – 2021: 40 2020: 41.5
How we define it
In 2019, we introduced a new balanced
scorecard of metrics for each business. The
scorecard includes on-time delivery, aircraft
on ground and engine availability amongst
other indicators. The focus for 2021 has been
on the individual business performance
against the scorecards.
Why it is important
Customer satisfaction demonstrates whether
we are meeting our commitments to our
customers across our businesses. This, in turn,
drives our cash and profitability.
Link to remuneration
The customer metric accounts for 15% of the
individual
business incentive outturns.
2021: 3.73
2020: 3.68
2019: 3.53
How we define it
In 2019, we introduced a new survey, Gallup
Q12. Responses are scored on a scale of one
to five. The employee engagement score
averages the responses to all 12 questions in
the survey.
Why is it important
Our people are crucial to delivering future
business success. This is an objective way to
assess how engaged our employees are with
the business and its leaders.
Link to remuneration
Employee engagement performance against
our target accounts for 10% of our incentive
plan.
In 2021, sustainability was 5% of the Rolls-
Royce incentive plan. Going forward, we
expect sustainability to become a more
prominent metric in our incentive plans.
4
External assurance over the employee engagement score is provided by Bureau Veritas.
See Reconciliation of Alternative Performance Measures (APMs) to their Statutory Equivalent on page 162 for additional commentary on our
financial KPIs.
Strategic Report Rolls-Royce plc Annual Report 2021
14
Financial review
We have focused on the elements within our control to deliver on our commitments and improve our financial performance. As a result, we are
building a better and more balanced business.
We can be proud of our performance in 2021. We have focused on the elements within our control, delivered on our commitments and driven
improving cash flow and profits. We have also invested prudently in the products and programmes that are key to the transition of our markets
to net zero carbon emissions by 2050.
I joined Rolls-Royce in May 2021, attracted by the opportunity to make a difference and to be a part of a company that is right at the heart of the
energy transition with the technology and engineering excellence to transform the way we provide the power the world needs. I am excited by
the journey ahead and encouraged by what we have achieved so far, while remaining very focused on the challenges ahead.
Delivering our commitments
As a result of the actions we have taken, we are a better quality and more balanced business. We have strong order books and revenue growth
in Power Systems and Defence and a structurally lower cost base in Civil Aerospace. As a result, we are more able to withstand macro uncertainties
and we are well positioned to benefit from the return to pre-pandemic levels of activity.
Our fundamental restructuring programme to remove over 9,000 roles from continuing operations has largely been completed, reducing our
Civil Aerospace headcount by around a third. This rapid action delivered more than £1.3bn of run-rate cost savings by the end of 2021, one year
earlier than our 2022 target. These are sustainable cost savings that are supported by better ways of working as well as automation and
digitalisation to keep cost increases proportionately low when activity levels rise.
A strong balance sheet and liquidity position are important. We ended 2021 with £7.1bn of liquidity with no debt maturities due before 2024. We
repaid €750m maturing bond and the £300m Covid Corporate Financing Facility (CCFF) commercial paper in the first half of the year and
extended the duration of the unused £1.0bn loan facility to 2024.
In line with our 2020 commitment to rebuild our balance sheet, we have announced disposals to generate around £2bn of proceeds and retained
cash that will be used to strengthen our financial position. The two of these disposals completed in 2021 and one more completed early in 2022.
The final agreed disposal, ITP Aero, is expected to complete in 2022. We remain focused on reducing our net debt and aim to return to an
investment grade credit profile in the medium-term.
Improving financial performance
We generated £414m of underlying operating profit from continuing operations in 2021, recovering from a loss in the prior year as the benefits
of our actions to restructure the business along with growth in Power Systems and Defence helped to deliver a substantial improvement in our
financial performance.
Our 2021 free cash outflow from continuing operations of £1.5bn was significantly better than the £2bn outflow guided at the start of the year,
despite a slower than expected recovery in international travel. This was driven by fast delivery of cost and efficiency savings and also the benefit
from the delayed timing of around £300m concession payments. The sequential £2.8bn improvement in 2021 was a huge step forward and we are
aiming to continue in 2022 with guidance to deliver a modestly positive free cash flow outcome.
Our end markets improved in 2021, helping to drive better performance and order intake across the Group. In Civil Aerospace, business aviation
flying hours returned to pre-COVID-19 levels of activity while large engine flying hours saw a gradual recovery. This drove increased cash receipts
on our long-term service agreements. In Power Systems, our order intake increased significantly reflecting recovery in our industrial and power
generation markets in addition to continued resilience in both yachts and governmental demand. Defence, which was resilient throughout the
pandemic, continued to perform well and contributed significantly to Group profitability and cash flow.
Investing to drive growth and deliver sustainable value
Balancing the opportunity to invest with the need to strengthen our balance sheet is critical to our long-term vision as a leading industrial
technology company.
In 2021, we spent £1.2bn on research and development, £366m of which was paid for by funding from third parties. We are an innovative company
with deep and broad engineering and technology capability. Our continued prioritisation of targeted investment, even in the most challenging
years, drove commercial success in 2021 including commercial wins of our Pearl engine on new airframes, the B-52 engine replacement contract,
a first-of-a-kind hydrogen micro-grid, a world speed record for all-electric flight and entry into the UK GDA for our SMRs.
Our technology and engineering expertise gives us a critical role in enabling the transition to a low carbon global economy. The creation of our
New Markets segment, bringing together Rolls-Royce Electrical and Rolls-Royce SMR, reflects the strategic importance and future financial
potential of these businesses and increases the visibility of the early-stage investment we are making to create long term value from high potential
opportunities for sustainable growth.
Our financial priorities
In the near term, I have three clear priorities for Finance. Firstly, to ensure we deliver on our promises. We will strengthen our balance sheet by
completing our programme of disposals. We will finish the actions related to our restructuring with the closure of the final sites and associated
role reductions and stay focused on sustaining the productivity improvements, keeping cost increases proportionately low as activity levels rise.
Secondly, to simplify our reporting. We want to make our financial communications easier to understand. We intend to simplify our reporting,
break down the complexity and focus on the key value drivers and targets in a more balanced and straightforward way. Thirdly, to invest wisely
for the future. We are at an exciting point in our journey with the opportunity to lead our markets in our transition to net zero. Choosing the right
investments and balancing the development of new solutions with investment in our established businesses is critical to generating good returns
today and in the longer term.
Strategic Report Rolls-Royce plc Annual Report 2021
15
Financial review continued
2022 Outlook
We are well positioned for the anticipated growth in our end markets as the impact of the COVID-19 pandemic eases. This, along with continued
good contribution from Defence, gives us confidence that we will see positive momentum in our financial performance in 2022 despite the
challenges and risks around the pace of market recovery, global supply chain disruption and rising inflation. We expect low-to-mid-single digit
revenue growth and we expect our operating profit margin to be broadly unchanged as underlying operational improvement is balanced with
increased engineering spend to develop sustainable growth opportunities. We expect to generate modestly positive free cash flow in 2022,
seasonally weighted towards the second half of the year.
Our framework for capital allocation and investment
It is key that we optimise our investments in order to deliver our strategy
most effectively, maximise our returns and achieve our net zero
commitments. In 2021, our approach to analysing investment cases was
updated to place a greater focus on sustainability as well as other ESG
considerations. We use an investment appraisal process that considers all
Group-wide investment cases against a balanced set of criteria. This has
been designed to ensure we both develop as well as adopt the most
appealing investment choices which best deliver against our commitments
and goals.
The approval process for investments fits within our overall governance
framework. All projects must demonstrate alignment with the criteria
identified. Smaller scale projects are approved at the business level.
Above a defined threshold, approval is sought through the Investment
Review Committee, a sub-committee of the ET, chaired by the Chief
Financial Officer. The Board has approval rights over our largest
investments.
Our levels of investment will be prudently managed, enabling us to deliver
on our strategy whilst generating improved levels of free cash flow. This
will enable us to reduce net debt and return to an investment grade credit
profile in the medium term. We remain restricted on making shareholder
payments until 2023, after which we will revisit our shareholder payment
policy as cash flow further improves and our balance sheet strengthens.
Strategic Report Rolls-Royce plc Annual Report 2021
16
Financial review continued
Defining our Alternative Performance Measures (APMs)
Business performance is reviewed and managed on an underlying basis. These APMs reflect the economic substance of trading in the year,
including the impact of the Group’s foreign exchange activities.
The tables below summarise the adjustments between reported and underlying results for cash flow, revenue, and operating profit.
For more information on the reconciliation of APMs to their statutory equivalent, including the definition of APMs, please see pages 162 to 163.
Free cash flow
£m
2021
2020
Statutory cash flow
(775)
(986)
Net cash flow from changes in short
-
term investments, borrowings & lease liabilities
(658)
(1,636)
Movement in net funds from cash flows
(1,433)
(2,622)
Exclude: Capital element of lease payments
(374)
(284)
Movement on balances with parent company
4
(1,887)
Business acquisitions & disposals
(49)
119
Penalties paid on agreements with investigating bodies
156
135
Restructuring exceptional cash flow
231
323
Other underlying adjustments
24
34
Free
cash flow
(1,441)
(4,182)
Di
scontinued operations free cash flow
(43)
(70)
Free cash flow from continuing operations
(1,484)
(4,252)
Operating p
rofit/(loss) from continuing operations
£m
Notes
2021
2020
Statutory operating profit/(loss)
513
(1,972)
Derivative & FX adjustment
2
40
(1,003)
Programme exceptional charges
2
(105)
(620)
Restructuring exceptional charges
2
(45)
470
Acquisition accounting & M&A
2
50
85
Impairments and asset
write
-
offs
2
(9)
1,336
Pension past
-
service credit
2
(47)
(308)
Other underlying adjustments
2
17
4
Underlying operating
p
rofit
/(loss)
414
(2,008)
Revenue from continuing operations
£m
Notes
2021
2020
Statutory revenue
11,218
11,491
Derivative & FX adjustments
2
(271)
(61)
Underlying revenue
10,947
11,430
Strategic Report Rolls-Royce plc Annual Report 2021
17
Financial review continued
Group statutory results
Statutory Income Statement
£
million
2021
Restated
1
2020
Change
Revenue
11,
218
11,491
(
273
)
Gross
profit/(loss)
2,136
(187)
(2,
323
)
Operating profit/(loss)
513
(1,972)
(2,
485
)
Gain/(loss) on disposal
/acquisition
of businesses
56
(14)
70
Net f
inancing costs
(863)
(
813
)
(
50
)
Loss before taxation
(
294
)
(2,779)
2,505
Taxation
418
(
302
)
720
Profit/(loss) for the year from continuing operations
124
(3,101)
3,225
1
The underlying results for Civil Aerospace for 31 December 2020 have been restated to reflect the changes to activity during 2021 due to the transfer of the Hucknall site and associated
fabrications activities to ITP Aero.
Statutory revenue of £11.2bn was 2% lower compared with 2020 driven by a decline in Civil Aerospace revenue, due to lower OE deliveries and
shop visit volumes. Revenue included a £214m positive LTSA catch-up in Civil Aerospace compared with a £(1.1)bn negative revenue catch-up in
the prior year. Defence benefitted from increased spare parts and spare engine sales. Power Systems revenues were driven by our more resilient
end markets, with increased demand for Services from our defence and industrial customers.
Gross profit returned to profit of £2.1bn compared with a prior year loss of £(187)m reflecting growth and cost discipline as well as substantial cost
savings and productivity gains delivered by the restructuring programme. Gross profit also included a £105m provision reversal in relation to the
Trent 1000 engine programme (2020: £620m) and a £256m positive LTSA catch-up in 2021. The prior year comparative included £(1.8)bn of net
charges relating to negative LTSA catch-ups, impairments and write-offs.
Operating profit improved significantly to £513m from a prior year £(2.0)bn loss. Research & Development costs were £(778)m down 35% from
2020 as a consequence of one-off impairments in the prior year. Commercial & Administrative costs of £(890)m were 15% higher than the prior
year (2020: £(771)m), which benefitted from a one-off pension credit partly offset by a restructuring provision.
Loss before taxation of £(294)m included £(538)m net fair value losses on derivative contracts, £(245)m net interest payable and a net £56m profit
from disposals.
Profit from continuing operations of £124m included a tax credit of £418m, (2020: tax charge £302m), which mostly related to movements in
deferred tax balances due to the impact of the UK tax rate change from 19% to 25%, effective from April 2023. The tax charge in 2020 was mostly
driven by the derecognition of some of the deferred tax asset on UK losses previously recognised, partly offset by a credit relating to the change
in the UK tax rate from 17% to 19%.
Statutory Balance Sheet
£ million
Statutory
2021
Adjusted
2020
Held for
sale
1
Statutory
2020
Change
Excl. HfS
1
Intangible assets
4,041
4,191
954
5,145
(150)
Property, plant and equipment
3,917
4,103
412
4,515
(186)
Right
-
of
-
use assets
1,203
1,390
15
1,405
(187)
Joint ventures and associates
404
386
8
394
18
Cont
r
act assets and liabilities
(8,836)
(8,945)
23
(8,922)
109
Working capital
2
1,
791
794
106
900
99
7
Provisions
(1,582)
(1,907)
(38)
(1,945)
325
Net debt
3
(5,110)
(3,556)
(71)
(3,627)
(1,554)
Net financial assets and liabilities
3
(3,0
09
)
(3,0
49
)
(34)
(3,
083
)
4
0
Net post
-
retirement scheme deficits
(225)
(673)
‒
(673)
448
Taxation
1,787
1,240
55
1,295
547
Held for sale
1,305
1,490
(1,430)
60
4
(185)
Other net assets and liabilities
36
19
‒
19
17
Net liabilities
(4,
278
)
(4,5
17
)
‒
(4,875)
239
Other items
US$ hedge book (US$bn)
22
25
Civil LTSA asset
915
726
Civil LTSA liability
(7,129)
(6,841)
Civil net LTSA liability
(6,214)
(6,115)
1
2020 figures have been adjusted to reflect ITP Aero being classified as a disposal group held for sale since 30 June 2021; the Group's investment in Airtanker Holdings Limited being classified
as a non-current asset held for sale since 13 September 2021; and certain tangible assets related to the Group's site rationalisation activities being classified as held for sale at 31 December
2021.
2
Net working capital includes inventory, trade receivables and payables and similar assets and liabilities.
3
Net debt includes £37m (2020: £251m) of the fair value of derivatives included in fair value hedges and the element of fair value relating to exchange differences on the underlying principal
of derivatives in cash flow hedges. Net debt has been adjusted to exclude net debt held for sale.
4
Relates to Bergen Engines AS and the Civil Nuclear Installation & Control business which were classified as disposal groups held for sale at 31 December 2020. Both disposals were completed
in 2021.
Strategic Report Rolls-Royce plc Annual Report 2021
18
Financial review continued
Key drivers of balance sheet movements, adjusted for assets held for sale, were:
Intangible assets: Net decrease of £(150)m included additions of £223m primarily related to programme development in Civil Aerospace and Power
Systems, and investment in the development of software applications across the business. There was an adverse foreign exchange impact of
£(146)m and amortisation for the year was £(281)m.
Property, plant and equipment: Net decrease of £(186)m included additions of £299m, more than offset by £(439)m of depreciation and a foreign
exchange impact of £(63)m. Additions were £254m lower than prior year as a result of focus on prioritisation of business critical infrastructure
projects and focus on reducing capital intensity.
Right-of-use assets: Net reduction of £(187)m was driven by £(272)m depreciation charged in the year partly offset by additions of £82m.
Contract assets and liabilities: The £109m movement in net liability balance was mainly driven by the utilisation of deposits, foreign exchange
movements and invoiced LTSA receipts in Civil Aerospace exceeding revenue recognised in the year, partly offset by £214m LTSA catch-ups.
Working capital: The £1,791m net current asset position was £997m higher than prior year, due to a £0.7bn reduction in payables driven mostly
by Civil Aerospace, including a £0.5bn reduction in concessions payable as payments significantly exceeded new concessions accrued in the
year, alongside a modest reduction in trade payables due to the timing and volume of supplier payments. We also made the final financial penalty
payment of £156m related to agreements reached in January 2017. Inventory increased by £0.2bn, mostly in Power Systems and Defence, to
support 2022 sales.
Provisions: The £325m decrease primarily reflected the utilisation and reversal of restructuring provisions of £212m as the restructuring
programme nears completion, utilisation of Trent 1000 provision of £199m, partly offset by £82m of contract loss provision net of reversals.
Net debt: Increased from £(3.6)bn to £(5.1)bn primarily driven by free cash outflow of £(1.5)bn.
Net post-retirement scheme deficits: £448m movement driven by an increase in the UK scheme surplus reflecting company contributions and
actuarial gains and a decrease in the overseas schemes deficit mainly attributable to actuarial gains and foreign exchange.
Taxation: The net tax asset increased by £547m, most of which (£344m) related to remeasurement of the opening UK deferred tax balances due
to the UK tax rate change from 19% to 25% effective from April 2023. In addition, there was an increase in the deferred tax asset on unrealised
losses on derivatives (£96m) and certain other UK deferred tax assets (£126m) reflecting tax relief that will be taken in the future, based on profit
forecasts.
Strategic Report Rolls-Royce plc Annual Report 2021
19
Financial review continued
Group underlying results
Underlying Income Statement
£ million
2021
Restated
1
2020
Change
Organic
change
2
M&A
3
FX
Underlying revenue
10,947
11,430
(483)
(214)
19
(288)
Underlying OE revenue
4,911
5,626
(715)
(598)
19
(136)
Underlying services revenue
6,036
5,804
232
384
‒
(152)
Underlying gross profit/(loss)
1,996
(613)
2,609
2,672
6
(69)
Gross margin %
18.2%
(5.4)%
23.6%pt
23.8%pt
Commercial and administration costs
(899)
(866)
(33)
(45)
(8)
20
Research and development costs
(774)
(708)
(66)
(79)
(1)
14
Joint
ventures and associates
91
179
(88)
(82)
(1)
(5)
Underlying operating (loss)/profit
414
(2,008)
2,422
2,466
(4)
(40)
Underlying operating margin
%
3.8%
(17.6)%
21.4%pt
21.8%pt
Financing costs
(378)
(1,985)
1,607
1,605
‒
2
Underlying
profit/(loss) before taxation
36
(3,993)
4,029
4,071
(4)
(38)
Taxation
(26)
(46)
20
15
‒
5
Profit/loss for the period
10
(4,039)
4,049
4,086
(4)
(33)
1
2020 figures have been adjusted to reflect ITP Aero being classified as a disposal group held for sale since 30 June 2021; the Group's investment in Airtanker Holdings Limited being classified
as a non-current asset held for sale since 13 September 2021; and certain tangible assets related to the Group's site rationalisation activities being classified as held for sale at 31 December
2021.
2
Organic change at constant translational currency (constant currency) applying full year 2020 average rates to 2021, excluding M&A. All commentary is provided on an organic basis unless
otherwise stated.
3
M&A includes 2020 Power Systems acquisitions comprising of Kinolt Group S.A and Servowatch Systems Limited (SSL).
Underlying revenue of £10.9bn reflected a more balanced contribution from our business units. Services revenue increased 7% while OE fell 11%.
Services revenue included a £214m Civil Aerospace LTSA revenue catch-ups compared with £(1.1)bn in the prior year.
Underlying gross profit of £2.0bn reflected the benefit of cost reductions and a £256m Civil Aerospace LTSA catch-up. The prior year loss of
£(613)m included £(1.3)bn of one-off COVID-19 related charges, mainly relating to negative Civil Aerospace LTSA catch-ups.
Underlying operating profit was £414m, with a return to profit reflecting the higher gross profit in the year partly offset by lower contribution
from JVs and associates.
Underlying profit before taxation of £36m reflected net financing costs of £(378)m with higher charges relating to interest bearing debt compared
with the prior year. In 2020, a £(1.7)bn one-off underlying finance charge was taken to close out over hedged positions on the USD hedge book.
Underlying profit for the year of £10m included a tax charge of £(26)m (2020: £(46)m). The tax charge reflects the tax arising on overseas profits
and increases in other deferred tax assets. Deferred tax has not been recognised on current year UK tax losses. The tax charge in 2020 included
the impact of derecognising some of the deferred tax asset previously recognised on UK tax losses.
Strategic Report Rolls-Royce plc Annual Report 2021
20
Financial review continued
Group Funds Flow Statement
1
£
m
illion
202
1
20
20
Change
Underlying operating profit/(loss)
414
(2,008)
2,422
Operating loss from discontinued operations
(43)
(109)
66
Depreciation, amortisation and impairment
971
1
,048
(77)
Lease payments (capital plus interest)
(403)
(379)
(24)
Expenditure on intangible assets
(185)
(316)
131
Capital expenditure (PPE)
(311)
(579)
268
Change in inventory
(169)
588
(75
7)
Movement in receivables/payables/contract balances (excluding Civil LTSA)
(
640
)
(2,11
3
)
1,47
3
Civil
Aerospace net LTSA balance change
66
479
(413)
Movement on provisions
(136)
(195)
59
Cash flows on settlement of excess derivative contracts
(452)
(202)
(250)
Net interest and fees on undrawn facilities
(259)
(172)
(87)
Cash flows on financial
instruments net of realised losses included in operating profit
(85)
(105)
20
Other
68
(4
8
)
11
6
Trading cash flow
(1,164)
(4,11
1
)
2,947
Of which relates to continuing operations
(1,211)
(4,198)
2,987
Contributions to defined benefit pensions (in
excess of)/less than that of underlying operating profit charge
(92)
160
(252)
Taxation paid
(185)
(231)
46
Group free cash flow
(1,441)
(4,182)
2,74
1
Of which relates to continuing operations
(1,484)
(4,252)
2,768
Disposals and
acquisitions
49
(119)
168
Movement on balances with parent company
(4)
1,887
(1,891)
Exceptional Group restructuring
(231)
(323)
92
Payment of financial penalties
(156)
(135)
(21)
Other underlying adjustments
(24)
(34)
10
Movements in net funds
from cash flows (excluding lease liabilities)
(1,807)
(2,9
06
)
1,
099
Capital element of lease repayments
374
284
90
Movements in net funds from cash flows
(1,433)
(2,6
22
)
1,18
9
Movement in short
-
term investments
(8)
6
(14)
Net cash flow from
changes in borrowings and lease liabilities
666
1,630
(964)
Statutory cash flow (775)
(986)
211
1
The derivation of the summary funds flow statement from the statutory cash flow statement is included on page 48.
Key changes in the funds flow items are described below:
Expenditure on intangible assets: Expenditure of £(185)m included £(104)m capitalised Research & Development (2020: £(232)m), which was lower
than prior year reflecting the mix of spend across Civil Aerospace engine programmes.
Capital expenditure: Investment of £(311)m was £268m lower than prior year as a result of continued focus on prioritisation of business critical
infrastructure projects and focus on reducing capital intensity in Civil Aerospace in line with the cost reduction programme.
Increase in inventory: The £169m increase in the year was primarily driven by planned inventory build in Defence and Power Systems to meet
expected sales volumes, and the impact of global supply chain disruption on Power Systems.
Movement in receivables/payables/contract balances (excluding Civil LTSA): The movement of £(640)m was primarily driven by Civil Aerospace
and included a significant volume of concession payments during the year as well as a reduction in trade payables driven by timing and volume
of supplier payments. In addition, deposits were utilised in Civil and Defence as we continued to execute on customer contracts.
Movement in underlying Civil Aerospace net LTSA creditor: In 2021, there was a £66m increase in the net LTSA balance as invoiced flying hour
receipts exceeded revenues recognised. This reflected an improvement in invoiced flying hour receipts as air traffic recovered during the year
offset by higher revenues due to materially improved LTSA catch-ups compared to the prior year.
Movement on provisions: The £(136)m movement primarily reflected a decrease in the Trent 1000 provision driven by provision utilisation,
including customer disruption costs settled and remediation shop visit costs.
Cash flows on settlement of excess derivative contracts: Relates to the cash settlement costs in the year for the offsetting foreign exchange
contracts that were entered into to reduce the size of the US Dollar hedge book in 2020. The cash settlement costs of £1.7bn occur across 2020-
2026, of which £1.0bn remains to be paid in future years.
Fees and interest: The net payment of £(259)m in the year was higher than the prior year, reflecting £(197)m of net interest paid (2020: £(75)m).
Contributions to defined benefit pensions: In 2021, cash contributions were £92m higher than the pensions charge in the income statement (2020:
£160m lower) reflecting payment deferrals from 2020 into the first quarter of 2021.
Taxation: Net cash tax payments in 2021 were £(185)m (2020: £(231)m). The decrease is mainly due to timing, with additional payments arising in
2020.
Disposals and acquisitions: The £49m inflow related to proceeds associated with disposal activity partly offset by the costs incurred on acquisition
and disposal activity.
Exceptional restructuring: Payments of £(231)m related to the restructuring programme and associated initiatives.
Strategic Report Rolls-Royce plc Annual Report 2021
21
Financial review continued
Payment of financial penalties: The final payment of £(156)m relating to the deferred prosecution agreement (DPA) in the UK was made in January
2021.
Other underlying adjustments: Outflow of £(24)m includes timing of cash flows on a prior period disposal where we retain the responsibility for
collecting cash before passing it on to the acquirer, along with other smaller items.
Net cash flow from changes in borrowings and lease liabilities: During the year, we drew down on a £2.0bn loan which is supported by an 80%
guarantee from UK Export Finance. £300m of commercial paper under the Covid Corporate Financing Facility and €750m (£639m) loan notes
were repaid in line with repayment terms.
Strategic Report Rolls-Royce plc Annual Report 2021
22
Business review
Civil Aerospace
Civil Aerospace is a major manufacturer of aero engines for the large commercial aircraft, regional jets and business aviation markets. The business
uses its engineering expertise, in-depth knowledge and capabilities to provide through-life support solutions for its customers.
UNDERLYING REVENUE
1,2
UNDERLYING OPERATING (LOSS)
1,2
ORDER BACKLOG
£4,536m
2020: £5,068m
£(172)m
2020:
£
(
2,535
)
m
£41.1bn
20
20
: £42.4bn
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX BY SECTOR
OE: 36%
Services: 64%
Large Engines: 72%
Business Aviation: 21%
Regional: 4%
V2500: 3%
1
The underlying results for Civil Aerospace have been restated to reflect the transfer of the Hucknall site with associated fabrications activities from Civil Aerospace to ITP Aero during 2021.
2
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions activities as New
Markets and UK Civil Nuclear as Other businesses.
2021 market overview
The market for Civil Aerospace in 2021 continued to be impacted by the ongoing COVID-19 pandemic. Widespread border restrictions and short
notice changes discouraged travel for both business and leisure. International travel recovery was gradual and uneven, particularly for countries
with lower vaccination rates. Business aviation and domestic travel recovered more quickly, with both exceeding 2019 levels during the first half
of 2021, reflecting the underlying desire to travel and connect where restrictions allow. According to industry forecasters, global international
passenger traffic is expected to reach 2019 levels in late 2024.
Orders for new widebody passenger aircraft remained at very low levels. Original Equipment (OE) deliveries were low across the industry, with
reduced build rates, as aircraft deliveries were rescheduled. Orders for new business aviation aircraft were strong as new airframes helped to
further stimulate good underlying demand.
Financial performance
£ million
2021
Organic
Change
1
FX
2020
2,3
Change %
Organic
Change
1
Underlying revenue
4,536
(491)
(41)
5,068
(10)%
(10)%
Underlying OE revenue
1,612
(654)
(12)
2,278
(29)%
(29)%
Underlying services revenue
2,924
163
(29)
2,790
5%
6%
Underlying gross profit/(loss)
474
2,477
(16)
(1,987)
‒
‒
Gross margin %
10.4%
(39.2)%
49.7%pt
49.9%pt
Commercial and administrative
costs
(297)
11
2
(310)
(4)%
(4)%
Research and development costs
(434)
(35)
8
(407)
7%
9%
Joint ventures and associates
85
(82)
(2)
169
(50)%
(49)%
Underlying operating loss
(172)
2,371
(8)
(2,535)
(93)%
(94)%
Underlying operating margin %
(3.8)%
(50.0)%
46.2%pt
46.4%pt
2021
2020
Change
Trading cash flow
(1,670)
(4,510)
2,840
Key operational metrics:
2021
2020
Change
Large engine deliveries
195
264
(69)
Business jet engine deliveries
114
184
(70)
Total engine deliveries
309
448
(139)
Large engine LTSA flying hours
(million)
7.4
6.6
0.8
Large engine LTSA major refurbs
208
272
(64)
Large engine LTSA check & repairs
402
559
(157)
Total large engine LTSA shop visits
610
831
(221)
1
Organic change at constant translational currency (constant currency) applying full year 2020 average rates to 2021, excluding M&A. All commentary is provided on an organic basis unless
otherwise stated.
2
The underlying results for Civil Aerospace for 31 December 2020 have been restated to reflect the changes to activity during 2021 due to the transfer of the Hucknall site and associated
fabrications activities to ITP Aero.
3
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions as New Markets and
UK Civil Nuclear as Other businesses.
– Underlying revenue of £4.5bn, down 10% on the prior year. OE revenue of £1.6bn was down 29% reflecting the reduction in engine deliveries.
Services revenue of £2.9bn was up 6% on the prior year and included £214m positive LTSA catch-ups (2020: £(1.1)bn), partly offset by lower
shop visit volumes and reduced contribution from the V2500 engine programme.
– Underlying gross profit of £474m improved from a £(2.0)bn loss in 2020, driven by strong operating cost performance resulting from
restructuring savings as well as positive LTSA catch-ups of £256m. The prior year loss included £(1.3)bn of one-off charges and £(0.6)bn
relating to USD purchases and under recovery of fixed costs.
– Underlying operating loss of £(172)m was significantly better than the prior year. This improvement reflected the increase in gross profit partly
offset by the higher R&D charge and lower contribution from JVs and associates.
– Trading cash outflow was £(1.7)bn, a substantial improvement on 2020 reflecting higher EFH receipts, lower operating costs, capex and
working capital as well as the non-repeat of £(1.0)bn from invoice factoring cessation in 2020. Working capital cash flow included large engine
OE concession payments that reduced the concession liability by £474m (2020: £219m increase).
Strategic Report Rolls-Royce plc Annual Report 2021
23
Business review continued
Operating and strategic overview
In Civil Aerospace, we have a large installed product base of more than 5,700 large engines and around 9,700 business aviation and regional
engines. Around two thirds of these are covered by LTSAs, providing long-term embedded value for the Group. We also have a large order book
with more than 1,500 new large engines due to be delivered over the next few years, representing 52% market share and supporting our fleet
growth expectations in the medium-term.
Our priority for Civil Aerospace is to maximise value from existing capabilities and position the business for the transition to net zero.
In 2021, we largely completed the role reductions associated with our fundamental restructuring programme, reducing the size of our Civil
Aerospace workforce by around a third since the start of 2020. We also reduced our global operational footprint by around a third with the
closure of sites in Crosspointe in the USA, and Singapore and significant consolidation activities in sites such as Barnoldswick, Inchinnan and
Hucknall in the UK. These actions, and work to simplify our operating model, improved productivity in both our OE and aftermarket processes.
We have worked closely with all customers to support them during the COVID-19 pandemic and to protect their engine and aircraft availability.
We are also reducing shop visit costs by re-using more parts, repairing more parts and by implementing new engine overhaul technologies. For
our newer large engine programmes we are focused on improving time on wing by releasing life extensions and rolling out technical modifications.
Throughout this work we are using ever more digital technology to give us new customer, engine and service insights. These actions are focused
on improving cash generation and margins from our LTSA contracts while delivering a better experience for our customers.
Our 2021 operational performance was driven by delivery of cost reductions, significantly increased productivity and efficiency, and the gradual
recovery of our EFH. We delivered fewer new large engines than the prior year as delivery schedules were adjusted in response to the impact of
COVID-19 on the industry. Deliveries of business aviation engines were down on the prior year due to the transition to newer engine programmes
in the fleet, with the Pearl engine fleet building share from a low base. Build time per engine reduced as we implemented productivity
improvements and benefited from the footprint optimisation. Large engine LTSA flying hours were 7.4m in the year, up 11% on the prior year
driven by over 57% year-on-year improvement in the second half.
We are also seizing new opportunities for growth. In 2021, our Pearl family of business jet engines achieved new successes, with the Pearl 10X
chosen by Dassault for its brand-new flagship aircraft, the Falcon 10X, and the Pearl 700 selected by Gulfstream to power its latest ultra-long-
range jet, the G800. The introduction of the Airbus A350 freighter created a great opportunity for the Trent XWB engine in a market that has
long been dominated by the Boeing 777.
Our strategy for zero focuses on improving engine efficiency, enabling the use of SAFs and being at the forefront of developing innovative
propulsion technologies. In 2021, we started to build an UltraFan engine which will demonstrate increases in efficiency of up to 25% compared
with early Trent engines. We have tested our engines for use with 100% SAF and we aim to demonstrate that all Trent engines are 100% SAF
compatible by 2023. We also worked with Airbus on a world-first in-flight study into the benefits of 100% SAF. We are an active member of the
UK’s Fly Zero initiative and a prime proponent of research to understand the entire hydrogen landscape. We are also focused on reducing our
own emissions and those of our supply chain.
Outlook
Industry forecasters expect a continuation of the gradual improvement in international travel in 2022 with an acceleration in flying hours as
COVID-19-related border restrictions are lifted. We will remain focused on actions within our control, keeping costs low and maintaining the
recent productivity gains as shop visits increase. This, along with an expected increase in spare engine sales, would support modest revenue
growth and improved profitability in 2022, as well as a substantial improvement in trading cash flow.
Strategic Report Rolls-Royce plc Annual Report 2021
24
Business review continued
Defence
Defence is a market leader in aero engines for military transport and patrol aircraft with strong positions in combat and trainer applications. It
has significant scale in naval and also designs, supplies and supports the nuclear propulsion plant for all of the UK Royal Navy’s nuclear
submarines.
UNDERLYING REVENUE
1
UNDERLYING OPERATING
PROFIT
1
ORDER BACKLOG
£3,368m
2020:
£3,355m
£457m
2020: £461m
£6.5bn
2020: £7.5bn
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX BY SECTOR
OE: 42%
Services: 58%
Transport : 32%
Combat: 24%
Submarines: 19%
Naval : 11%
Other: 14%
1
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions activities as New
Markets and UK Civil Nuclear as Other business.
2021 market overview
Our Defence business provides governments with the power to protect, enabling them to preserve peace, and underpin economic and social
stability. In 2021 Rolls-Royce products have powered critical military assets that have deterred threats and saved lives, including in major
humanitarian operations, around the world. We operate in a tightly regulated and controlled industry with key suppliers, like Rolls-Royce, chosen
by governments for long-term partnerships to develop, manufacture and maintain their countries’ defences.
The market for Defence in 2021 remained robust, and our business performance was strong despite the COVID-19 pandemic. Defence spending
in the US and the UK, our largest end markets, is mostly driven by economic expansion and growing at low single digit compound rates. Budgets
are increasingly focused on technology-led solutions that enhance capability. Sustainability is growing in importance in the defence market as
governments identify militaries as their biggest opportunity to reduce their carbon emissions. We are well positioned to meet this need, harnessing
our Group-wide capabilities in highly efficient gas turbines, nuclear and electrical capability and enabling the use of synthetic fuels in our
applications.
In addition to our home markets in the US, UK and Germany, we export to customers in the Middle East, Korea, Japan, Canada, India and elsewhere.
Export products are tightly regulated and subject to strategic export control (military and dual-use items). To serve these markets our home
market governments assess export licensing criteria that include international obligations and applicable sanctions; respect for human rights and
international humanitarian law; preservation of internal and global peace and security; as well as other geo-political criteria. We respect the
capability and authority granted to elected government officials to determine whether to do business with other nations’ governments and abide
by their decisions. In addition, we work closely with government and trade associations and raise awareness and advise on the need for
mechanisms to promote responsible arms trade including significant support of the UN Arms Trade Treaty.
Financial performance
£ million 2021
Organic
Change
1
FX 2020
2
Change
Organic
Change
1
Underlying revenue 3,368 155 (142)
3,355
‒
5%
Underlying OE revenue
1,411
42
(59)
1,428
(1)%
3%
Underlying services revenue 1,957 113 (83)
1,927 2%
6%
Underlying gross profit
721
63
(26)
684
5%
9%
Gross margin % 21.4%
20.4%
1.0%pt
0.9%pt
Commercial and administrative costs
(161)
(19)
4
(146)
10%
13%
Research and development costs (105)
(24)
5 (86)
22%
28%
Joint ventures and associates 2 (7)
‒
9
‒ ‒
Underlying operating profit
457
13
(17)
461
(1)%
3%
Underlying operating margin % 13.6%
13.7%
(0.1)%pt
(0.2)%pt
2021
2020
2
Change
Trading cash flow 377 298 79
1
Organic change at constant translational currency (constant currency) applying full year 2020 average rates to 2021, excluding M&A. All commentary is provided on an organic basis unless
otherwise stated.
2
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions as New Markets and
UK Civil Nuclear as Other businesses
– Order intake was £2.3bn with a book-to-bill of 0.7x. Our order book is strong following several years’ of high intake with a five year average
book-to-bill of 1.1x and 85% order cover for 2022. In 2021 we secured a key award with the US DoD for the replacement engine programme
for the B-52 aircraft, with an initial value of $0.5bn and total OE programme value of $2.6bn.
– Underlying revenue increased by 5% to £3.4bn, with services revenue up 6% and OE revenue up 3%. Sales benefitted from strong sales of
parts in our export markets in Asia and Middle East.
Strategic Report Rolls-Royce plc Annual Report 2021
25
Business review continued
– Underlying gross profit of £721m was 9% higher than the prior year and the gross margin expanded 0.9%pt to 21.4%. This was driven by a
positive mix towards higher margin spare parts and spare engine sales.
– Underlying operating profit was £457m, an increase of 3% compared with 2020. This profit growth occurred despite a 28% increase in R&D
spend to support the UK Future Combat programme and targeted investment in growth opportunities in North America to support continued
long-term product development.
– Trading cash flow was £377m, representing a cash conversion of over 80%. The prior year trading cash flow included adverse impact from
the timing of cash deposit receipts.
Operational and strategic review
With over 16,000 Defence engines in service, we are a leading provider of military aircraft engines and aero-derivative gas turbines for naval use,
and the sole provider of powerplants for the UK’s nuclear submarine fleet. We do not provide or manufacture weapons.
In 2021, we were chosen by the US Air Force as the new provider of power for its fleet of 76 eight-engine B-52 aircraft. The testing and development
phase of the award, valued at around $500m, commenced in 2022 with the total OE contract valued at $2.6bn over the next 16 years to 2038. In
the UK, the Ministry of Defence announced our continuation as the sole supplier of propulsion systems for its next generation of nuclear-powered
submarines, which will replace the Astute class in the future. The UK Government also signed an agreement with its Japanese counterpart to
develop and deliver a future combat aircraft engine demonstrator. This builds on Team Tempest, the UK-led next-generation fighter programme
we are a member of, in which the MoD has committed £2bn of initial investment spending.
Protecting people around the world is central to our mission in Defence. In 2021, our engines that power the C-130J, A400M and Voyager transport
aircraft aided the critical humanitarian effort in Afghanistan, evacuating thousands of people from Kabul.
Disciplined investment in long-term sustainable growth opportunities shape our Defence business for decades to come. We are maximising the
value from our existing capabilities by using digital technology and data analytics to unlock further potential from services and managing our
costs to maintain margin as older products are phased out over time. We will also support out Defence customers in achieving net zero by showing
compatibility with SAF in all products by 2023, subject to customer engagement. We are seizing strategic growth opportunities and research into
novel applications for our technologies such as hypersonic, small engines, directed energy, and power in space.
In 2022, the US DoD is due to select its Future Long-Range Assault Aircraft (FLRAA) solution. A win for the V-280 Valor, on which we are partnered
with Bell Textron, would secure a new vertical lift market for us totalling over 5,000 engines with production through the coming decades.
Our strong position in the US is supported by our world-class facilities in Indianapolis. In 2021, we concluded a multi-year revitalisation programme
at our Indianapolis facility, creating a high-tech, revolutionary advanced manufacturing campus. The new facilities feature advanced
manufacturing equipment, including digital engineering and robotics capabilities on a smaller but more efficient footprint. In addition, we made
significant investment in several other Defence sites and have partnered with Purdue University in Indiana, US to establish an industry leading
hypersonic test facility. In the UK, we will be reducing our carbon footprint by installing a microgrid at our main Defence facility in Bristol in 2022.
Outlook
We expect continued modest revenue growth in 2022 with a strong order book cover securing near term activity in all our end markets. Our
increased investment will support growth in programmes related to future projects and recent awards, as well as product development to help
the transition to net zero. We do expect a return to more usual levels of spare engines and spare parts sales in 2022.
Strategic Report Rolls-Royce plc Annual Report 2021
26
Business review continued
Power Systems
Power Systems, with its product and solutions brand, mtu, is a world-leading provider of integrated solutions for onsite power and propulsion,
developing sustainable, climate-friendly solutions to meet the needs of its customers.
UNDERLYING REVENUE
1
UNDERLYING OPERATING
PROFIT
1
ORDER BACKLOG
£2,749m
2020:
£2,735m
£242m
2020:
£188m
£2.8bn
2020:
£2.4bn
UNDERLYING REVENUE MIX
UNDERLYING REVENUE MIX BY SECTOR
OE: 63%
Services: 37%
Marine: 33%
Industrial: 25%
Power Generation: 33%
Defence:
9%
1
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical activities as New Markets and UK Civil
Nuclear as Other businesses.
2021 market overview
The effects of COVID-19 on our end markets lessened over the course of 2021 as vaccination programmes were rolled-out and pandemic-related
risks were balanced with economic needs. Governmental demand in land defence and marine end markets continued to be resilient. Across the
different applications, we had a strong increase in order intake in the second half of 2021 and recorded order intake in the fourth quarter.
Along with many manufacturing businesses, global supply chain disruption impacted the availability of some parts and components in the second
half of 2021. Challenges are likely to persist into 2022 until additional capacity has been created.
Financial performance
£ million
2021
Organic
Change
1
M&A
2
FX
2020
3
Change
Organic
Change
4
Underlying revenue
2,749
89
19
(94)
2,735
1%
3%
Underlying OE revenue
1,744
(2)
19
(60)
1,787
(2)%
‒
Underlying services revenue
1,005
91
‒
(34)
948
6%
10%
Underlying gross profit
778
120
6
(26)
678
15%
18%
Gross margin %
28.3%
24.8%
3.5%pt
3.6%pt
Commercial and administrative costs
(383)
(57)
(8)
13
(331)
16%
18%
Research and development costs
(157)
(1)
(1)
5
(160)
(2)%
1%
Joint ventures and associates
4
5
(1)
(1)
1
‒
‒
Underlying operating profit
242
67
(4)
(9)
188
29%
37%
Underlying
operating margin %
8.8%
6.9%
1.9%pt
2.2%pt
2021
2020
3
Change
Trading cash flow 219
162
57
1
2020 figures have been adjusted to reflect ITP Aero being classified as a disposal group held for sale since 30 June 2021; the Group's investment in Airtanker Holdings Limited being classified
as a non-current asset held for sale since 13 September 2021; and certain tangible assets related to the Group's site rationalisation activities being classified as held for sale at 31 December
2021.
2
M&A includes 2020 Power Systems acquisitions comprising of Kinolt Group S.A and Servowatch Systems Limited (SSL).
3
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions as New Markets and
UK Civil Nuclear as Other businesses.
– Order intake of £3.3bn was 24% higher than the prior year, with record order intake in the fourth quarter and a book-to-bill ratio of 1.2x in
the year. Order growth was strongest in marine, defence and power generation end markets. The customer interest in net zero carbon
solutions is accelerating and our investment in decarbonising our solutions is critical to our future growth.
– Underlying revenue of £2.7bn was up 3%. Aftermarket services grew 10% as product utilisation increased in our end markets, and OE was
broadly flat. Sales were strongest in industrial and power generation end markets, partly offset by lower activity in China.
– Underlying gross profit grew by 18% to £778m and gross margin increased by 3.6%pt. This included an increase in higher-margin aftermarket
spare parts as well as improved utilisation in our manufacturing facilities and lower warranty costs.
– Underlying operating profit was £242m, up 37%. Operating margin of 8.8% was 2.2%pts higher than the prior year, reflecting the positive mix
of activity and increased volumes. The increase in commercial and administrative costs reflected an increase in employee costs, partly due to
the non-repeat of government support received in the prior year.
– Trading cash flow was £219m (2020: £162m), representing a cash conversion of about 90%.
Operational and strategic review
In Power Systems, we focused on expanding our position as an industry leader in mission critical power and propulsion solutions in our end
markets. To achieve this, we are maximising the value from existing capabilities by transitioning from supplying standalone products to fully
integrated systems, as well as increasing our penetration in countries with high-growth economies. We are also seizing strategic growth
opportunities by developing the solutions our customers need to support them in their transition to alternative power with net zero carbon
emissions.
Strategic Report Rolls-Royce plc Annual Report 2021
27
Business review continued
We have a large installed product base with over 150,000 engines and around 40,000 active customers worldwide, generating revenues from
both OE and aftermarket services. Our established portfolio of products consists of a range of high-speed reciprocating diesel and gas engines
delivered with a complete system solution or as a standalone engine. We have been increasing sales of complete system solutions, including
gensets, battery storage systems and automation to achieve greater value capture and closer customer relationships and have been exploring
opportunities to provide ‘energy as a service’. Our agreement with Sustainable Development Capital LLP (SDCL) to jointly work on energy-as-a-
service is an example of how we are helping to accelerate the transition to more sustainable power.
In 2021, customer demand was particularly strong for data centres with an increase in orders for power generation solutions. In particular, our
mtu branded standby power generation solution was key to an order for one of the largest hyperscale data centre customers, leading to expansion
of our global footprint and market share. Governmental orders were also strong, including large orders for both land defence and marine solutions
in the year. In marine we established a framework agreement with a leading luxury yacht building company to pioneer the adoption of our hybrid
solutions and fully integrated bridge, bringing together our complete propulsion and ship management system.
Our main objective is the transition to net zero power, which is a huge opportunity, and we are rising to the challenge. Our end markets are
transitioning at different speeds. The three markets at the forefront of change are: mission critical power for data centres, power for infrastructure
(including the transition of our own operating sites to clean energy), and marine solutions. To support the transition we are investing in new
technology to replace internal combustion engines and further develop them to run on sustainable fuels such as green hydrogen and green
methanol, and ensuring all our current engines are compatible with carbon-neutral e-diesel. These actions support our commitment to achieve a
35% cut in lifetime emission, compared with 2019, of new sold products by 2030 and for all our products to be compatible with net zero operations
by 2050.
Milestone achievements in 2021 included our partnership with cell-centric, a Daimler Truck and Volvo joint venture to develop hydrogen powered
fuel cells for energy supply, mainly for data centres with is targeting pilot installations by 2023 and full launch by mid-decade. A major step
towards a carbon-neutral future in the infrastructure sector is the first-of-a-kind microgrid for the Port of Duisburg in Germany, which will combine
fuel cells and hydrogen combustion engines to meet the clean energy needs of this new container terminal. In addition, we are adapting our mtu
Series 500 and Series 4000 gas engines to run on hydrogen. Our gas engines for use in gensets can already run on a 10% hydrogen blend, by
2022 this will be increased to 25% and from 2023 conversion kits will be available for 100% hydrogen operation.
Throughout the year we have been monitoring and mitigating the global supply chain disruption reported across many manufacturing sectors in
the second half of 2021 shortage of a relatively small number of components slowed our production rate resulting in a modest increase in inventory
and some delayed revenue recognition.
Outlook
Looking ahead to 2022, we see continued strong demand growth from our customers supported by global economic growth and the transition
to lower carbon solutions. We expect good revenue growth in 2022 helped by the strong order intake, partly offset by the current global supply
chain constraints. Higher activity levels will drive improved profitability partly offset by increased Research & Development investment as we
pursue net zero growth opportunities. Cash conversion is expected to be lower in 2022 as we focus on inventory and supply chain management
to mitigate the impact of industry-wide disruption.
Strategic Report Rolls-Royce plc Annual Report 2021
28
Business review continued
New Markets
New Markets are early-stage businesses, with high growth potential, focused on addressing the opportunities being created by the transition to
net zero. The businesses leverage our existing, in-depth engineering expertise and capabilities to develop new sustainable products for new
markets.
UNDERLYING REVENUE
1
UNDERLYING OPERATING LOSS
1
EMPLOYEES
(FTE AT YEAR END)
£2m
2020:
£5m
£(70)m
2020:
£
(
45
)
m
>570
VALUE R&D SPEND £68M
Rolls-Royce SMR: 23%
Rolls
-
Royce Electrical:
77%
1
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new electrical power solutions as New Markets.
2021 market overview
Our technology and engineering expertise gives us a critical role in enabling the transition to a low carbon global economy. We are focused on
producing the technology breakthroughs society needs to decarbonise three critical areas of the global economy – transport, power, and the
built environment – and capture the economic opportunity this transition represents. We are making our existing products compatible with net
zero and pioneering new technologies that can meet accelerating demand for net zero power, as well as identifying additional applications for
our current portfolio of technologies in new markets.
Nuclear power is central to producing the sustainable zero carbon power the world needs, both on grid and as a standalone power source. Our
small modular reactors (SMRs) enable this power to be generated in a broader array of locations around the world, with a faster construction time
and lower financing costs compared with the conventional nuclear power stations that exist today. Off grid end markets for small nuclear power
stations include hydrogen and synthetic fuel production, data centres, desalination plants and electrolyser factories.
Electrification will contribute to decarbonisation of aviation and electrical technologies and capabilities can also be leveraged for civil, defence
and marine applications. Smaller, all-electric aircraft will enable more efficient, quieter and zero-emission air mobility, while hybrid-electric
systems increase range and enable more stainable solutions for larger regional aircraft. The emerging market of advanced air mobility, which
includes electrical vertical take-off (eVTOL) aircraft as well more conventional electric commuter aircraft, is aiming to enable a new way of using
air mobility on urban and regional routes.
The potential new market opportunities are significant. Our New Markets businesses, Rolls-Royce Electrical and Rolls-Royce SMR, are well
positioned to address these opportunities.
Financial performance
£ million
2021
Organic
Change
1
FX
2020
2
Change
Organic
Change
1
Underlying revenue
2
(2)
(1)
5
(60)%
(40)%
Underlying OE revenue
‒
(2)
(1)
3
(100)%
(67)%
Underlying services revenue
2
‒
‒
2
‒
‒
Underlying gross profit
1
(1)
‒
2
(50)%
(50)%
Gross margin %
50.0%
40.0%
10.0%pt
(6.7)%pt
Commercial and administrative costs
(3)
(2)
‒
(1)
200%
200%
Research and development costs
(68)
(24)
2
(46)
48%
52%
Underlying operating loss
(70)
(27)
2
(45)
56%
60%
2021
2020
2
Change
Trading cash flow (56)
(55)
(1)
1
2020 figures have been adjusted to reflect ITP Aero being classified as a disposal group held for sale since 30 June 2021; the Group's investment in Airtanker Holdings Limited being classified
as a non-current asset held for sale since 13 September 2021; and certain tangible assets related to the Group's site rationalisation activities being classified as held for sale at 31 December
2021.
2
The underlying results for 31 December 2020 have been restated to reclassify the results of the Group’s small modular reactor (SMR) and new Electrical power solutions as New Markets.
– Underlying revenue of £2m came from Rolls-Royce Electrical sales relating to marine engineering services and propulsion systems. Both
Rolls-Royce Electrical and Rolls-Royce SMR are early-stage businesses in their investment phase, with significant future revenue generating
potential in the 2030s.
– Underlying operating loss of £(70)m increased from the prior year comparative as we increased the pace of investment in both Rolls-Royce
SMR and Rolls-Royce Electrical. The increased investment is critical to the development of the products that will drive our net zero growth
in the future and is in line with our plans. R&D costs of £(68)m included £(16)m on the design development to ready our SMRs to enter the UK
GDA process and £(52)m on electrical propulsion technology.
– Trading cash flow of £(56)m was lower than operating losses mainly due to the receipt of funding for the SMR programme.
Strategic Report Rolls-Royce plc Annual Report 2021
29
Business review continued
Operational and strategic review
Our investment in SMRs and electrical propulsion create net zero solutions and seize the opportunities in new end markets, as we aim to maximise
the future market potential for our technological and industrial solutions and products.
Rolls-Royce SMR takes our existing technology and experience in nuclear power, established over 60 years of powering the UK’s fleet of nuclear-
powered submarines, and applies this to the demand for affordable clean energy on and off grid. Rolls-Royce Electrical applies new technology and
innovation to deliver all-electric and hybrid-electric power and propulsion. Both these businesses are supported by our extensive experience and
long track record of delivering advanced technology in highly regulated markets.
Rolls-Royce Electrical achieved a number of key milestones in 2021:
– Spirit of Innovation became the world’s fastest all-electric aircraft with a world speed record of 345.4 mph;
– we joined together with Tecnam and Widerøe to deliver the Tecnam P-Volt, an all-electric passenger aircraft for the commuter market, ready
for revenue service in 2026;
– Vertical Aerospace, in which we have a minority investment, took $5.4bn pre-orders for VX4, their urban air mobility vehicle powered by a
Rolls-Royce Electrical system;
– we announced our intention to take a minority position in Embraer spin-out Eve Urban Air Mobility Solutions (EVE) as they move to deliver
eVTOL aircraft to a global market;
– we launched an £80m investment into energy storage systems that will enable aircraft to undertake zero emissions flights of over 100 miles
on a single charge; and
– our power generation system (PGS1) for regional aircraft achieved more than 1 MW of power in 2021 on our newly renovated Testbed 108 in
Bristol.
Rolls-Royce SMR was established as a special purpose vehicle in 2021, five years after the programme began. As a result of a successful equity raise,
in which £230m was agreed in exchange for approximately 30% of the company to be received in tranches over the coming years, as well as £210m
UK Research and Innovation (UKRI) grant funding and additional investment from Rolls-Royce, the programme has £490m of investment to help fund
phase two of its development plan. Rolls-Royce SMR will now proceed rapidly with a range of parallel delivery activities, including entry to the UK
GDA process and identifying sites for the factories which will manufacture the modules that enable on-site assembly of the power plants.
The development of SMRs is a core part of the UK Government’s 10-point plan for a green industrial revolution. A Rolls-Royce SMR power station will
have the capacity to generate 470MW of low carbon energy on a site around one tenth of the size of a conventional nuclear station. Costs will be
competitive with sources of renewable energy and will not be subject to the intermittency challenges associated with other low carbon technologies.
Outlook
Our financial performance in 2022 will show a significant increase in Research & Development costs as we invest to develop our products and
grow our businesses in these exciting new markets. Cash outflow is expected to be approximately £100m better than the underlying operating
loss in 2022, mainly due to the phased receipt of secured third party equity investment in Rolls-Royce SMR.
Strategic Report Rolls-Royce plc Annual Report 2021
30
Principal risks
Our risk management system
The Company follows the procedures established by the Rolls-Royce Holdings plc Board (the RRH Board) to manage risk and oversee the risk
management system (RMS). The RRH Board has also established procedures to determine the nature and extent of the principal and emerging
risks the Group is willing to take in order to optimise its commercial opportunities and achieve its long-term strategic objectives.
The ET, led by the Chief Executive, reviews the Group’s internal financial controls which form a subset of the broader set of controls. Financial
reporting controls are identified and subject to periodic review by the Group’s internal control team. The RRH Audit Committee, on behalf of the
RRH Board, performs an annual review of the RMS and its effectiveness. During the year, the ET and RRH Board completed an assessment of both
our principal and emerging risks.
Our RMS is designed to identify and manage, rather than eliminate, the risk of failure to achieve business objectives and to provide reasonable,
but not absolute, assurance against material misstatement or loss.
How we manage risk
Risks are identified by individuals across all businesses and functions and at many layers of the organisation by considering what could stop us
achieving our strategic, operational or compliance objectives or impact the sustainability of our business model.
Risk owners assess the risk’s likelihood and impact, taking into account current mitigating control activities, identifying where additional activities
may be needed to bring the risk within our risk appetite.
Risk owners consider the effectiveness of current mitigating control activities in their assessment, supported by different assurance providers
including internal audit. These considerations are recorded using a variety of systems and tools depending on the risk area. In managing the
identified risks, judgement is necessary to evaluate the risks facing the Group in achieving its objectives, determine the risks that are considered
acceptable, determine the likelihood of those risks materialising, assess the Group’s ability to reduce the impact of risks that do materialise and
ensure the costs of operating particular controls are proportionate to the benefit provided.
Risk owners bring the results of their assessment, current risk status and action plans to business, function and other management review forums
as often as is required depending on the nature of the risk, for support, challenge and oversight. These forums include the monthly ET and regular
RRH Board and its Committees’ meetings.
At least once a year the ET conducts a review of the effectiveness of RMS, and where required, identifies areas for improvement. For key
compliance and safety risks, the Group has a set of mandatory policies and training which set out the expectations on employees and the controls
in place. Every employee is required, annually, to complete training and confirm that they will comply with the mandatory policies. The
consequences of non-compliance are addressed via performance management systems that are linked to remuneration.
During the year, we continued to embed the lessons learned from COVID-19, in particular a focus on improving the quality of our risk assessments
and management activities in relation to our restructuring programmes and investment review processes. We will build on this work next year
with a focus on improving our internal control environment for financial and non-financial controls, continuing to strengthen our second line
assurance of key controls and focused actions to improve the effectiveness of our RMS.
Principal risks
Our principal risks are identified and managed in the same way as other risks. Principal risks are owned by at least one member of the ET and
subject to a review at an ET meeting at least once each year, before a review by the RRH Board or one of its Committees.
We have reviewed our principal risks over the course of the year and have updated them to reflect changes to the external environment and our
strategy.
Changes in our principal risk levels
Last year we concluded that the risk levels for several of our principal risks had increased as a result of the direct impact of COVID-19 and changes
to our ways of working. This year we have concluded that many of those risks remain at that heightened level with the exception of those set out
below.
Increased risk: Business continuity
The global supply chain disruption described as impacting in particular our Power Systems business in 2021, (see page 26) will continue to have
an impact in 2022. Additionally, as described above, physical climate change risks are considered as part of business continuity which captures
the acute risks to our supply chain and operational facilities that may arise because of climate change. As climate change causes global
temperatures to rise, the physical risks to our business from climate change will increase, with disruptions likely to be more frequent and severe
if global temperature rise is not limited to 1.5
0
C.
Increased risk: Climate change
Climate change risks are managed and assessed in the same way as all other risks. The transition risks may include extensive policy, legal,
technological, and market changes and physical risks could include direct damage to assets and supply chain disruption. These risks are captured
as part of this principal risk, with opportunities included as part of our strategic transformation principal risk. Physical risks are considered as
part of business continuity which captures the acute risks to our supply chain and operational facilities that may arise because of climate change.
The focus and scrutiny of all stakeholders including investors, governments, organisations and consumers on the potential impact, likelihood and
timing of climate change has increased in the last year. We believe we have a critical role to play in leading the decarbonisation of complex power
applications and our strategic transformation risk sets out the importance to the Group of capturing these opportunities.
Strategic Report Rolls-Royce plc Annual Report 2021
31
Principal risks continued
Risks include demand for our existing products and services reducing at a quicker rate than demand for new net zero carbon sources increases.
In addition, the global nature of our supply chain and customer base means that operational disruptions may become more common. Carbon
taxes may increase. A failure to decarbonise could result in products’ in-service life being reduced (e.g. through early retirement), our equity and
debt becoming less attractive to investors, or our R&D projects becoming less attractive to third-party partners, increasing our cost of capital.
Our transition to net zero and TCFD reporting (included in the Sustainability section on page 43 of the RRH Annual Report 2021) sets out further
considerations, scenarios and the most material transitional and physical risk factors for the Group.
In light of these changes, we have concluded that the level of our principal climate change risk as described in the table below has increased.
New and retired risks: Restructuring retired and strategic transformation introduced
As set out in the Chief Executive’s Review (see page 4) and the Financial Review (see page 14), we have made good progress against our 2021 and
2022 restructuring targets, with our disposal programme expected to be completed in 2022 and cost savings delivering their expected benefits.
As we look forward, it is therefore appropriate to retire the near-term restructuring risk and introduce a new risk focused on achieving our longer-
term objectives, as we realign our strategy to take advantage of the many opportunities we see, particularly as we look to lead the transition to
net zero carbon and meet our strategic targets designed to pivot climate change from an existential threat to an opportunity to refocus and grow.
Other specific risks
Human capital: our approach to human capital risks forms part of care promise, and human trafficking and slavery.
Our current principal risks, together with how we manage them, how we assure them (by activities and functions other than internal audit), how
the RRH Board and its Committees provide oversight and how the risk levels have changed over the course of the year, are set out in the table
on pages 32 to 34.
Emerging risks
We continue to review additional emerging risks that could significantly impact or challenge our current strategy and business model and these
were considered by the RRH Board in February 2022. Any emerging risks identified have been recorded in our RMS and are being managed and
monitored alongside our existing risks. Our approach this year looked at Political, Economic, Social, Technological, Legal and Environmental
factors (PESTLE) to identify emerging risks and was complemented by a review of the technology risks lead by the Chief Technology Officer and
shared with the RRH Science & Technology Committee.
Strategic Report Rolls-Royce plc Annual Report 2021
32
Principal risks
How we manage principal risks
RISK CONTROLS
ASSURANCE
ACTIVITIES
AND
PROVIDERS
OVERSIGHT
FORUM CHANGE
Safety
Failure to:
i) meet the expectations of our customers to
provide safe products; or
ii) create a place to work which minimises
the risk of harm to our people, those who
work with us, and the environment, would
adversely affect our reputation and long-
term sustainability.
Product
 Our product safety management system
includes activities designed to reduce our
safety risks as far as is reasonably
practicable and to meet or exceed relevant
company, legal, regulatory and industry
requirements.
 We verify and approve product design.
 We test adherence to quality standards
during manufacturing.
 We validate conformance to specification
for our own products and those of our
suppliers.
 We mandate safety awareness training.
 We use engine health monitoring to
provide early warning of product issues.
 We take out relevant and appropriate
insurance.
Product
Product safety
assurance
team
Technical
product life
cycle audits
RRH Safety,
Ethics &
Sustainability
Committee
Product
safety boards
Static
People
 Our HSE management system includes
activities designed to reduce our safety
risks as far as is reasonably practicable and
to meet or exceed relevant company, legal,
regulatory and industry requirements.
 We reinforce our journey to Zero Harm.
 We use our crisis management framework.
Safety case
interventions
HSE audit
team
RRH Safety,
Ethics &
Sustainability
Committee
Strategic transformation
We see significant opportunities in leading
the transition to net zero by pioneering the
power that matters. Our strategy is to focus
on delivering our plans for existing and
nascent businesses and to focus on
exploiting opportunities to grow into new
net zero areas, both organically and
inorganically.
Failure to execute this plan will prevent us
from achieving our longer-term ambitions.
 Regular market assessments.
— Financial modelling, scenario planning
and sensitivity analysis.
— Allocating capital in accordance with
our strategic objectives.
Strategy and
business
performance
reviews
RRH Board
New risk
Business continuity
The major disruption of the Group’s
operations, which results in our failure to
meet agreed customer commitments and
damages our prospects of winning future
orders. Disruption could be caused by a
range of events, for example: extreme
weather or natural hazards (for example
earthquakes, floods) which could increase
in severity or frequency given the impact of
climate change; political events; financial
insolvency of a critical supplier; scarcity of
materials; loss of data; fire; or infectious
disease. The consequences of these events
could have an adverse impact on our
people, our internal facilities or our external
supply chain.
 We invest in capacity, equipment and
facilities, dual sources of supply and in
researching alternative materials.
 We provide supplier finance in partnership
with banks to enable our suppliers to
access funds at low interest rates.
 We hold safety stock.
 We plan and practice IT disaster recovery,
business continuity and crisis management
exercises.
 We undertake supplier diligence.
 We take out relevant and appropriate
insurance.
Investment
reviews
Supplier
strategy and
sourcing
reviews
Group
security and
resilience
team
RRH Audit
Committee
Increased
Strategic Report Rolls-Royce plc Annual Report 2021
33
Principal risks continued
RISK
CONTROLS
ASSURANCE
ACTIVITIES
AND
PROVIDERS
OVERSIGHT
FORUM
CHANGE
Climate change
We recognise the urgency of the climate
challenge and have committed to net zero
carbon by 2050. The principal risk to
meeting these commitments is the need to
transition our products and services to a
lower carbon economy. Failure to transition
from carbon intensive products and
services at pace could impact our ability to
win future business; achieve operating
results; attract and retain talent; secure
access to funding; realise future growth
opportunities; or force government
intervention to limit emissions.
 We invest in i) reducing carbon impact of
existing products; and ii) zero carbon
technologies to replace our existing
products.
 We balance our portfolio of products,
customers, and revenue streams to reduce
our dependence on any one product,
customer, or carbon emitting fuel source.
 We acknowledge and communicate our role
in the problem and the solution, and the
actions we are taking to enact a credible
plan of action in line with societal
expectations.
Strategic
reviews
Technology
reviews
Investment
reviews
Group
sustainability
team
RRH Board
and its
Committees
Increased
Competitive environment
Existing competitors: the presence of
competitors in the majority of our markets
means that the Group is susceptible to
significant price pressure for original
equipment or services. Our main
competitors have access to significant
government funding programmes as well as
the ability to invest heavily in technology
and industrial capability.
Existing products: failure to achieve cost
reduction, contracted technical
specification, product (or component) life
or falling significantly short of customer
expectations, would have potentially
significant adverse financial and
reputational consequences, including the
risk of impairment of the carrying value of
the Group’s intangible assets and the
impact of potential litigation.
New programmes: failure to deliver a new
project or product on time, within budget,
to technical specification or falling
significantly short of customer expectations
would have potentially significant adverse
financial and reputational consequences.
Disruptive technologies (or new entrants
with alternative business models): could
reduce our ability to sustainably win future
business, achieve operating results and
realise future growth opportunities.
 We review product life cycles.
 We make investment choices to improve the
quality, delivery and durability of our
existing products and services and to
develop new technologies and service
offering to differentiate us competitively.
 We protect our intellectual property (e.g.
through patents).
 We monitor our performance against plans.
 We scan the horizon for emerging
technology and other competitive threats,
including through patent searches.
Strategic
reviews
Technology
reviews
Investment
reviews
RRH Board
RRH Science
& Technology
Committee
Static
Compliance
Non-compliance by the Group with
legislation or other regulatory
requirements in the heavily regulated
environment in which we operate (for
example, export controls; data privacy; use
of controlled chemicals and substances;
anti-bribery and corruption; and tax and
customs legislation). This could affect our
ability to conduct business in certain
jurisdictions and would potentially expose
the Group to: reputational damage;
financial penalties; debarment from
government contracts for a period of time;
and suspension of export privileges
(including export credit financing), each of
which could have a material adverse effect.
 We continuously develop and communicate
a comprehensive suite of mandatory
policies and processes throughout the
Group.
 We undertake third party due diligence.
 We encourage, facilitate, and investigate
speak up cases.
 We investigate potential regulatory matters.
 Our financial control framework activities
are designed to reduce financial reporting
risks.
 We classify data to meet internal and
external requirements and standards.
Compliance
teams
RRH Safety,
Ethics &
Sustainability
Committee
Static
Strategic Report Rolls-Royce plc Annual Report 2021
34
Principal risks continued
RISK
CONTROLS
ASSURANCE
ACTIVITIES
AND
PROVIDERS
OVERSIGHT
FORUM
CHANGE
Cyber threat
An attempt to cause harm to the Group, its
customers, suppliers and partners through
the unauthorised access, manipulation,
corruption, or destruction of data, systems,
or products through cyberspace.
 We deploy web gateways, filtering, firewalls,
intrusion, advanced persistent threat
detectors, and integrated reporting.
 We train our employees on cyber threats
including phishing.
 We test software.
 We use our crisis management framework.
Group cyber
security team
and security
operations
centre
RRH data
security
committee
Static
Financial shock
The Group is exposed to a number of
financial risks, some of which are of a
macroeconomic nature (for example,
foreign currency, oil price, interest rates)
and some of which are more specific to the
Group (for example, liquidity and credit
risks).
Significant extraneous market events could
also materially damage the Group’s
competitiveness and/or creditworthiness
and our ability to access funding. This
would affect operational results or the
outcomes of financial transactions.
 Our financial control framework activities
are designed to reduce financial reporting
risks.
 Group strategic planning process.
 We incorporate trends, demand and other
dependencies in our financial forecasts.
 We analyse currency and credit exposures
and include in sourcing and funding
decisions.
 We develop, review, and communicate
treasury policies that are designed to hedge
residual risks using financial derivatives
(covering foreign exchange, interest rates
and commodity price risk).
 We raise finance through debt and equity
programmes.
 We hedge with reference to volatility in
external financial markets.
Strategic
reviews
Finance risk
committee
RRH Audit
Committee
Static
Market shock
The Group is exposed to a number of
market risks, some of which are of a
macroeconomic nature (e.g. economic
growth rates) and some of which are more
specific to the Group (for example,
reduction in air travel or defence spending,
or disruption to other customer
operations). A large proportion of our
business is reliant on the civil aviation
industry, which is cyclical in nature.
Demand for our products and services
could be adversely affected by factors
such as: recession, current and predicted
air travel, fuel prices and age and
replacement rates of our in-service
products.
 We monitor trends, market demand, and
future market forecasts and make investment
choices to maximise the related
opportunities.
 We incorporate trends, demand and other
dependencies in our financial forecasts.
 We balance our portfolio with the sale of
original equipment and aftermarket services,
providing a broad product range and
addressing diverse markets that have
differing business cycles.
 We executive our short, medium and longer-
term plans.
Strategy reviews
Technology
reviews
RRH Board
Static
Political risk
Geopolitical factors that lead to an
unfavourable business climate and
significant tensions between major trading
parties or blocs which could impact the
Group’s operations. Examples include:
changes in key political relationships;
explicit trade protectionism, differing tax
or regulatory regimes, potential for conflict
or broader political issues; and heightened
political tensions.
 We develop Group and country strategies
and consider associated dependencies.
 We review the external environment for
political implications and dependencies.
 We include diversification considerations in
our investment and procurement choices.
Strategy reviews
Technology
reviews
Supplier
sourcing and
strategy reviews
Government
relations teams
RRH Board
Static
Talent and capability
Inability to identify, attract, retain and
apply the critical capabilities and skills
needed in appropriate numbers to
effectively organise, deploy and incentivise
our people would threaten the delivery of
our
strategies.
 We undertake succession planning and
monitor the talent pipeline.
 We survey employee opinion.
 We develop, implement, and review
strategic resourcing plans.
People
leadership team
RRH
Nominations
&
Governance
Committee
Static
Strategic Report Rolls-Royce plc Annual Report 2021
35
Section 172 and stakeholder engagement
Our Directors are briefed on their Companies Act 2006 duties during their induction. Our section 172 (s172) statement below sets out how the
Directors have discharged their s172 duty. The Directors recognise the responsibility to all our different but interrelated stakeholder groups and
wider society. We recognise that effective engagement with a broad range of our stakeholders is essential for the long-term success of the
business and we aim to create value for our stakeholders every day by maintaining levels of business conduct that are aligned to our values and
our purpose.
The likely consequences of any decision in the long-term
During the year the Directors considered the Group’s strategic direction, which is set out on page 8, to enable the Group to lead the transition
to net zero. The long-term success of our business depends on the effects of our business activities on wider society. See our SMR case study on
page 36.
The interests of the Company’s employees
The Directors recognise that the success of our business depends on attracting, retaining and motivating talented people. The Directors consider
and assess the implications of decisions on our people, where relevant and feasible. The Directors seek to ensure that the Company remains a
responsible employer, including with respect to pay and benefits, health and safety issues and the workplace environment.
The need to foster the Company’s business relationships with suppliers, customers, and others
Delivering our strategy requires a strong, mutual and beneficial relationship with suppliers, customers, governments and joint venture partners.
The Directors receive updates on engagement across the Group. An example of supplier engagement can be found in the case study on page 37.
The impact of the Company’s operations on the community and the environment
This aspect is inherent in our strategic priorities. The Directors receive information through Group-level reviews on various topics to help it make
decisions relating to net zero ambitions and proposals to divest or invest, such as the SMR programme. Further information on the divestments
made during the year to meet our 2020 commitments, can be found on page 110.
The desirability of the Company maintaining a reputation for high standards of business conduct
The Directors periodically review and approve our ethics and compliance frameworks. Our Code of Conduct, supplier code and modern slavery
statements ensure high standards are approved. This, in conjunction with the Directors being informed and monitoring compliance with
governance standards, helps to ensure that Board-level decisions and the actions of our subsidiaries promote high standards of business conduct.
The need to act fairly between members of the Company
After weighing up all relevant factors, the Directors consider which course of action best enables delivery of our strategy through the long-term,
taking into consideration the effect on the Group’s stakeholders.
Examples of engagement with our key stakeholder groups
People
The Directors recognise that it is through our people that we fulfil our potential, achieve our vision and execute our strategy. The RRH Board’s
Employee Champions, Irene Dorner, Beverly Goulet (for our North American colleagues) and Lee Hsien Yang (for our Asia-Pacific colleagues),
ensure the voice of our people is heard in the boardroom. The Employee Champions, supported by an employee stakeholder engagement group,
provide regular feedback to the Board on topics of interest and/or concern. This provides a valuable link between our people and the Directors.
We believe that these methods of engagement with our people are effective in building and maintaining trust and communication whilst providing
our people with a forum to influence change in relation to matters that affect them.
During 2021, Irene visited, virtually, the Solihull Control Systems site, which provided an insight into activities undertaken throughout COVID-19.
Irene was also able to meet a diverse group of employees through an open discussion/listening session. D&I was a theme throughout the year
with two virtual meetings taking place and all three Champions involved to bring together employees to discuss topics they had identified they
would like to raise with the Employee Champions. On International Women’s Day, Irene opened a week of activities via an online event, where she
also answered employee questions. In September, Irene discussed issues with the Board regarding the flexible working arrangements in Derby
and returning to work that had been raised by employees with her.
In May, two Meet the Board virtual events took place, led by Beverly, on the topic of sustainability. Employees were able to ask their questions of
the RRH Board and this was filmed and shared with all employees on the internal intranet. In September, the RRH Board, together with the
Company’s Directors, met in person with representatives from the UK employee resource groups (ERGs) to discuss issues of importance to them
and their members. Also in September, the RRH Board participated in several engagement activities in both Derby and Bristol, including meetings
with the business leadership teams, tours of the manufacturing and service operations and discussions on product safety. In November, Beverly
participated in a meeting of the finance continuing education committee, chaired by the Group’s tax director.
Customers
The Directors recognise that the quality of the Group’s customer relationships is based on mutual trust as well as our engineering expertise. We
recognise that as we recover from the impact of the COVID-19 pandemic, we must retain and strengthen our focus on playing a leading role in
the transition to a net zero carbon global economy by creating the sustainable power that our customers require.
The Directors regularly receive operational updates, including customer metrics and feedback, from each of the businesses and were kept
updated on the Group’s plans for COP26 in Glasgow.
Strategic Report Rolls-Royce plc Annual Report 2021
36
Section 172 and stakeholder engagement continued
Suppliers and partners
The Group’s global supply chain is a vital contribution to its performance, with significant investment in resources to ensure the complex global
supply chain is resilient and efficient.
The interests of both our suppliers and partners are considered as part of the Director’s discussions on manufacturing strategy and when
reviewing specific projects. Our ET who work collaboratively with our suppliers and partners to continue to improve operational performance
through various means.
Communities
The Directors recognise the importance of our communities and understands that everything we do can have an impact on our local and global
communities.
The ET received updates during 2021 on the status of the STEM education programmes, with new technologies supporting the transition to net
carbon zero. The ACCEL programme, accelerating the electrification of flight, provides engaging material for STEM events and programmes, and
we are exploring options to develop more educational materials around sustainable transport and energy including SMRs. Global charitable
contributions totalled £6.1m in 2021. These charitable contributions and social sponsorships support our community investment and education
outreach programmes globally.
Governing bodies and regulators
The Directors recognise the importance of governments and regulators as stakeholders. Not only are governments across the world customers
but they also support the Group’s investment in infrastructure and technology. See page 10 for our business model.
The Directors are updated on the Group’s engagement with the tax authorities and the related regulatory landscape is discussed by the Directors.
In addition, meetings with ministers and senior officials are held as relevant throughout the year. The General Counsel provides regular updates
to the Directors on compliance with regulators as well as receiving updates on the continuing dialogue and co-operation with prosecutors,
regulators, and government agencies.
The UK Prime Minister and Secretary of State for Defence visited our Defence Bristol site, UK, in October, during which they engaged with several
of our people.
Case studies
Small modular reactor programme (SMR)
During the year, the Directors were regularly updated on the status of the SMR programme. The decision to support the SMR programme is
strongly aligned with our net zero ambition and strategy. See page 6 for further information on our strategy.
Key events
2021:
– Equity raise process ongoing across the financial community.
September 2021:
– Grant funding negotiations completed successfully with UK Government.
November 2021:
– Director approval on the final deal terms relating to the SMR business.
– Signing of Grant Funding Award with UK Government and incoming joint venture shareholders – special purpose vehicle (SPV) established.
People
– Transferred 160 employees through the TUPE process to the SPV, Rolls-Royce SMR.
– Colleagues provided with regular SMR CEO briefings, town halls and video messages to give progress updates on the establishment of the
SPV.
– People and places working group was established to understand colleague needs through the transition process.
Governing bodies and regulators
– Global government engagement to promote the SMR business and better understand the developing policy landscape at a civil service level
and through ministerial engagement.
– Entry into the UK Generic Design Assessment regulatory process.
Customers
– Rolls-Royce and Rolls-Royce SMR management engaged with overseas governments, embassies and across UK Government to highlight the
benefits of the SMR programme.
– Entry into a detailed pre-feasibility study with a host government that led to follow-up meetings between government ministries and Rolls-
Royce leadership.
– Engaged with signed MOUs or submitted RFIs to potential customers globally.
Investors
– Successfully established an SPV by securing third-party investment alongside Rolls-Royce and UK Government grant funding. This process
was enabled and supported by the ET.
– Rolls-Royce SMR is now engaged with capital markets on fleet deployment, building on the recognition of the need for deployable SMR
nuclear, following COP26 and the need to meet global net zero challenges.
Strategic Report Rolls-Royce plc Annual Report 2021
37
Section 172 and stakeholder engagement continued
Civil Aerospace supply chain engagement
An estimated 75% of components that go into making a Civil Aerospace widebody aircraft engine come from an external supply chain made up
of 700 live suppliers with an annual spend of £1.6bn during 2021 (2020: £1.9bn). As such, the Directors and ET clearly recognise the importance
of our supply chain to the successful delivery of engines to our customers, and that the success of our business is intertwined with that of our
suppliers. As a result, they have made engagement with our suppliers a priority in 2021, with some examples outlined below.
‘Zero defects’ supplier expo
Rolls-Royce hosted two supplier expos built around our drive for zero defects, highlighting how quality remains of critical importance across the
supply chain.
February 2021 – two-day broadcast
– 3,000 attendees including key customers, senior leaders and Rolls-Royce people.
– Broadcast to the global supply chain which focused on our collective drive to zero escapes, the target of zero concessions by 2024 and how
we can rebuild from the COVID-19 pandemic whilst enhancing the focus on quality.
September 2021 – Chief Executive talk and live Q&A
– Our Chief Executive addressed the whole supply chain regarding business performance and priorities. In addition, the Chief Executive shared
his personal perspective on why quality and sustainability are critical to the Group’s future.
– Leading suppliers shared examples of their zero defects journey and best practices to inspire further advancements across the supply chain.
High Performing Supplier Group (HPSG)
– HPSG contains 24 globally diverse suppliers across the value chain that lead the way in delivering consistently high performance.
– HPSG was established to increase collaboration and engagement with these suppliers to explore opportunities for growth and to work
together on potential strategic initiatives.
– In 2021, we awarded £2.2bn of business to members of the HPSG.
– In October 2021, we held a discussion with our Chief Executive and Chief Financial Officer to give visibility and insight into our business
performance and strategic direction and address supplier questions.
Strategic supplier engagement – Schaeffler
– One of our HPSG members, Schaeffler, a German bearings manufacturer, was awarded the Supplier Best Practice award in 2021 as recognition
for leading the way with its zero defects programme, which underpins high-quality performance.
– Our relationship with Schaeffler strengthens through Chief Executive to chief executive engagement, which has been key in aligning senior-
level engagement as we developed a new strategic partnership and collaborations around technology and innovative high performance
manufacturing methods that reduce production lead times, tackle product cost challenges, and reduce supply chain risk.
– Collaborative efforts also led to the advancement of repair and refurbishment capabilities for bearings that reduce the demand for spare
parts by around 90%. This supports our sustainability goals through increasing the circular economy of bearings within aero-engines and
reducing the need to utilise virgin material to be used to make spare parts.
Net zero and COP26
During 2021, the Directors regularly received updates on the status of the Group’s net zero report. The Directors were kept updated on the
Group’s plans for COP26 in Glasgow, UK which formed part of the demonstration of the Group’s commitment to a net zero strategy and the
creation of a policy environment for our climate change technologies.
Global consistency and collaboration in climate policy are critical to our ability to deliver our decarbonisation strategy. Therefore, engagement
and collaboration across all parts of our value chain, and in particular with national governments, policy makers and trade associations, is a crucial
part of our pathway to net zero.
As an important milestone on the global journey to net zero, COP26 was a strategic opportunity to engage with these stakeholders and encourage
a technology-led approach to setting ambitious national climate commitments.
Key events
June 2021:
– Publication of the Rolls-Royce net zero report.
September 2021:
– Net zero and future technologies showcase in London joined by UK Government officials and representatives along with Directors.
October/November 2021:
– Rolls-Royce stand in the green zone at COP26 and summit-wide profile of Rolls-Royce’s net zero objectives alongside UK Government
stakeholders, including the announcement of the Rolls-Royce / Qatar Foundation Climate Tech partnership. These generated international
attention for the Group’s net zero ambition.
Governing bodies and industry groups
– Direct engagement with UK Government on our net zero strategy through a range of briefing activities and events, including site visits to see
our developing technology and investments, for example the Spirit of Innovation all-electric aircraft.
– Broad policy engagement through speaking opportunities at net zero events at COP26 that had a global reach through online streaming and
social media.
– Consultation with UK Government on content and materials for use in the official UN facing ‘Blue Zone’ at COP26.
– Advocating at COP26 events organised by the UK Department for International Trade, the European Commission, We Mean Business Coalition
and UN High Level Climate Champions through the Marrakesh partnership.
Strategic Report Rolls-Royce plc Annual Report 2021
38
Section 172 and stakeholder engagement continued
– Engagement with industry groups to collaborate on sector wide solutions to achieving net zero including: the UK Government organised jet
zero council; the international coalition for aviation, air transport action group; the international civil aviation organisation; and the European
mechanical engineering industry association, VDMA.
People and communities
– Employee engagement through a series of COP26 related internal communications including a ‘live at COP26’ interview with the senior
leadership team including the Chief Executive and Chief Technology Officer.
– Public outreach through our stand in the public facing ‘Green Zone’ at COP26 focused on showcasing the Group’s net zero technology
portfolio.
– Engagement with 16- to 35-year-olds as a partner for the Global Youth Engineering Climate Conference.
Customers and investors
– Signed up to a strategic partnership with Qatar Foundation to invest, develop and scale up global hub for climate technology in the UK and
Qatar generating high-skilled jobs.
– Announced the establishment of Rolls-Royce SMR.
Strategic Report approved by the Board on 24 February 2022 and signed on its behalf by:
.........................................
Panos Kakoullis
Director
Directors’ Report Rolls-Royce plc Annual Report 2021
39
DIRECTORS’ REPORT
The Directors present their Directors’ Report on the Rolls-Royce plc Group (the Group), together with the audited financial statements for the
year ended 31 December 2021.
Directors
The Directors who held office during the year and up to the date of signing the Financial Statements were as follows:
Current Directors
Warren East CBE, Chief Executive
Appointed 3 May 2021:
Panos Kakoullis, Chief Financial Officer
Former Directors
Stepped down 19 March 2021:
Stephen Daintith, Chief Financial Officer
Stepped down 3 May 2021:
Sir Ian Davis, Chairman
Lewis Booth CBE, Non-Executive Director
Sir Frank Chapman, Non-Executive Director
George Culmer, Non-Executive Director
Irene Dorner, Non-Executive Director
Beverly Goulet, Non-Executive Director
Lee Hsien Yang, Non-Executive Director
Nick Luff, Non-Executive Director
Sir Kevin Smith, Senior Independent Director
Jasmin Staiblin, Non-Executive Director
Dame Angela Strank,
Non
-
Executive D
irector
Directors’ indemnities
The Directors have the benefit of an indemnity provision contained in the Articles. In addition, the Directors have been granted a qualifying third-
party indemnity provision which was in force throughout the financial year and remains in force. Also, throughout the year, the Company
purchased and maintained Directors’ and Officers’ liability insurance in respect of the Company and its subsidiaries and for their directors and
officers.
Dividends
The Directors do not recommend the payment of a dividend (2020: £nil).
Corporate governance
The Directors are responsible for the direction, management, performance and long-term sustainable success of the Company. The Board of RRH
sets the group’s strategy and objectives and oversees and monitors internal controls, risk management, principal risks and governance. It has
established certain principal committees to assist in fulfilling its oversight responsibilities, providing dedicated focus on particular areas. RRH is
subject to the principles and provisions of the UK Corporate Governance Code 2018 (the ‘Code’).
The Company operates in compliance with the group’s policies (including the diversity policy), procedures and governance framework. Details of
RRH’s compliance with the Code and the group’s policies, procedures and governance framework are set out in the RRH Annual Report 2021.
Risk management and internal control
The RRH Audit Committee oversees the Group’s financial reporting, focusing on accounting policies, judgements and estimates; disclosures;
compliance with regulations; and whether the Annual Report is fair, balanced and understandable.
The RRH Audit Committee monitor the effectiveness of the Group’s risk management and internal control environment and review concerns of
financial fraud.
In addition, the RRH Audit Committee provides oversight in respect of the scope, resources, results, and effectiveness of internal audit. It is
responsible for the relationship with, and the effectiveness of, the external auditors as well as approving their terms of engagement and fees.
Financial reporting
The Group has complex long-term contract accounting and every year the RRH Audit Committee spends much of its time reviewing the accounting
policies and judgements implicit in the Group’s financial results. In 2021, in addition to its scheduled workload, the RRH Audit Committee continued
to focus on the assumptions in respect of the recovery of civil aviation from the impacts of COVID-19, in particular the implications of changes in
Civil Aerospace engine flying hours (EFHs), and all areas impacted by this. It also reviewed the accounting judgements associated with the targeted
disposals being made to meet the Group’s stated commitments. In addition, during 2021, the RRH Audit Committee considered the impact of the
Group’s climate strategy on the assumptions and scenarios used by management.
The Directors have ensured that the disclosures in respect of all key areas of judgement are appropriate and balanced. They have continued to
provide additional information with regard to the sensitivity of the estimates to changes in key assumptions which are summarised in note 1 of the
Consolidated Financial Statements on page 45.
Risk management and the internal control environment
The ET focused on the effectiveness of risk mitigation, understanding our appetite for taking many of the risks as described on page 30, including
in respect of business continuity activities following consideration of the lessons learned through COVID-19. The ET will continue to focus on risk
mitigation effectiveness and appetite in 2022, embedding these more firmly as part of our routine processes and decision making, including in
relation to strategic planning.
Directors’ Report Rolls-Royce plc Annual Report 2021
40
Corporate governance continued
The ET also satisfied itself that the processes for identifying and managing risks are appropriate and that all principal risks and mitigating actions
had been subject, during the year, to a detailed review. Based on this and on its other activities, including consideration of the work of internal
and external audit and attendance at the RRH Audit Committee by business and functional risk owners, the RRH Audit Committee reported to the
RRH Board that a robust assessment of the principal risks facing RRH and the Group had been undertaken. Details of our principal risks are set
out on pages 30 to 34.
Internal financial control
The RRH Audit Committee specifically reviews the Group’s internal financial controls. During 2020, it reviewed the results of self-attestation and
testing performed by the internal control and internal audit teams to confirm the effective operation of key financial controls across the Group.
It monitored progress against the 2021 financial controls programme to strengthen the financial reporting and compliance controls, with a
particular focus on foreign exchange reporting and IT access. It confirmed completion of key activities identified as a result. It also considered
the external auditor’s observations on the financial control environment.
Effectiveness of risk management and internal control systems
The RRH Audit Committee conducted a review of the effectiveness of the Group’s risk management and internal control systems, including those
relating to the financial reporting process. Where opportunities for improvement were identified, action plans have been put in place and progress
is monitored by the RRH Audit Committee.
Employment of disabled persons
We give full and fair consideration to all employment applications from people with disabilities. If an employee becomes disabled whilst working
for us we take steps to support their continued working including, wherever possible, making adjustments to ways of working. All employees can
take advantage of our learning programmes, often available online, and promotion opportunities are open to all employees regardless of any
disabilities.
Employee engagement
Employee engagement continues to be a priority and is a key measure in our incentive plans. We believe that positive engagement is the result
of excellent leadership and a working environment where everyone can be at their best. Our approach remains a mix of locally-driven and Group-
wide global engagement. We provide a variety of channels to communicate and engage our employees and their representatives including
employee newsletters, magazines and team briefings, as well as our digital communication channels, such as Yammer. Our ET has continued to
hold regular ‘YamJams’ this year where all employees can direct questions to our leaders who will provide a response live, or as a follow up, posted
on Yammer. We also work closely with elected employee representatives through well-established frameworks, including our European Works
Council. Our incentive schemes and share programmes are made available to all our people.
This year, we ran our fourth Q12 employee engagement survey since partnering with Gallup in 2019. This simple survey provides our measure of
engagement and a tool for our managers to implement local improvements. We also focused on providing more data and tools to our leaders to
enable them to plan and lead their teams effectively. We achieved an increased participation of 76% and a Group grand mean score of 3.73 out
of 5.00. This increase of +0.05 since 2020 and +0.21 since 2019, shows we remain on target to achieve top quartile scores by the end of 2023.
Financial instruments and risk management
Details of financial instruments and risk management are set out in note 19 to the Consolidated Financial Statements.
Post balance sheet events
Details of important events affecting the Group which have occurred since the end of the financial year are set out in note 1 to the Consolidated
Financial Statements.
Related party transactions
Details of related party transactions are set out in note 25 to the Consolidated Financial Statements.
Disclosures in the Strategic Report
The Board has taken advantage of section 414C(11) of the Act to include disclosures in the Strategic Report including:
– the future development, performance and position of the Group;
– research and development activities; and
– engagement with suppliers, customers and others.
Disclosures in the Rolls-Royce Holdings plc Annual Report
The following disclosures are provided in the Company’s parent entity annual report:
– greenhouse gas emissions (page 212 of RRH Annual Report 2021); and
– political donations (page 219 of RRH Annual Report 2021).
Management report
The Strategic Report and the Directors’ Report together are the management report for the purposes of Rule 4.1.8R of the DTRs.
Directors’ Report Rolls-Royce plc Annual Report 2021
41
Going concern and viability statements
Going concern
Overview
The Group operates an annual planning process. The Group’s plans, and risks to their achievement are reviewed by the Rolls-Royce plc Board
and, once approved are used as the basis for monitoring the Group’s performance, incentivising employees, and providing external guidance to
shareholders.
The processes for identifying and managing risk are described on pages 30 to 34. As described on these pages, the risk management process,
and the going concern and viability statements, are designed to provide reasonable but not absolute assurance.
The Directors have undertaken a comprehensive going concern review over an 18-month period to August 2023, considering the forecast cash
flows and the available liquidity of the Group over that 18-month period, taking into account the Group’s principal risks and uncertainties.
Impact of COVID-19
The COVID-19 pandemic continues to have an impact on the Group, primarily within Civil Aerospace, due to continued travel restrictions and
varied quarantine requirements imposed by governments across the globe. The speed of vaccination programmes, efficacy of vaccines and
differing governmental testing and quarantine requirements means that uncertainty remains in the short term over the timing of recovery of
demand, in particular in relation to the civil aviation industry. This has been considered by the Directors in assessing the adoption of the going
concern basis in the Consolidated Financial Statements. Recognising the challenges of reliably estimating and forecasting the timing of recovery
of demand, the Group has modelled two forecasts in its assessment of going concern which have been considered by the Directors, along with a
likelihood assessment of these forecasts, being:
– base case, which reflects the Directors current expectations of future trading; and
– severe but plausible downside forecast, which envisages a ‘stress’ or ‘downside’ situation.
Since the start of the pandemic, the Group has taken action to reduce cash expenditure and maintain liquidity. The Group raised £7.3bn of
additional funding during 2020 through a combination of equity and debt. In March 2021, the Group secured a further £1bn term-loan facility,
80% of which is guaranteed by UK Export Finance (UKEF), repayable in March 2026, and in August 2021 extended its £1bn undrawn bank loan
facility from a maturity date of 15 October 2022 to a maturity date of 15 January 2024.
A major restructuring programme was launched in 2020 to reshape and resize the Group to deliver forecast annualised savings of at least £1.3bn
by the end of 2022, with a plan to remove at least 9,000 roles across the Group. At 31 December 2021, over 9,000 roles had been removed from
continuing operations and annualised savings exceeded the £1.3bn target 12 months ahead of schedule.
Impact of climate change
The Directors believe there are significant business growth opportunities to come from the Group playing a leading role in the transition to net
zero, whilst at the same time climate change poses potentially significant risks to the Group. Whilst it is unlikely that physical and transition risks
will arise during the 18-month period being assessed for going concern, both physical and transition risks have been considered as part of the
Group’s risk assessment. The investment required to achieve net zero scope 1 + 2 GHG emissions, together with that required to ensure our new
products will be compatible with net zero operation by 2030, has been included in the Group’s forecasts, including those periods used in the
assessment of going concern. Over the next 18 months, 64% of the Group’s R&D investment will be directed to the delivery of our decarbonisation
strategy.
Liquidity and borrowings
At 31 December 2021, the Group had liquidity of £7.1bn, including cash and cash equivalents of £2.6bn and undrawn facilities of £4.5bn.
The Group’s committed borrowing facilities at 31 December 2021 and 31 August 2023 are set out below. None of the facilities are subject to any
financial covenants or rating triggers which could accelerate repayment.
£m 31 Dec 2021 31 Aug
2023
Issued Bond Notes
1
3,995
3,995
Other loans 63
‒
UKEF £2bn loan (drawn)
2
and UKEF £1bn loan (undrawn)
3
3,000 3
,000
Revolving Credit Facility (undrawn)
4
2,500
2,500
Bank Loan Facility (undrawn)
5
1,000
1,000
Total committed borrowing facilities 10,558 10,
495
1 The value of Issued Bond Notes reflects the impact of derivatives on repayments of the principal amount of debt. The bonds mature by May 2028.
2
The £2,000m UKEF loan matures in August 2025.
3
The £1,000m UKEF loan matures in March 2026 (currently undrawn).
4
The £2,500m Revolving Credit Facility matures in April 2025 (currently undrawn).
5
The £1,000m bank loan facility matures in January 2024 (currently undrawn).
Taking into account the maturity of borrowing facilities, the Group has committed facilities of at least £10.5bn available throughout the period to
31 August 2023.
Forecasts
The Group has modelled a base case, reflecting a best estimate of future trading. The base case forecast assumes the continuation of a steady
recovery in customer confidence in the aftermath of the COVID-19 pandemic. Vaccination programmes continue to be rolled out but the efficacy
of vaccines over different variants and differing governmental testing and quarantine requirements means that the recovery of demand is
hindered in the short term, in particular in relation to the civil aviation industry.
In August 2020, the Group announced it would deliver proceeds of around £2bn from planned disposals. Some of these disposals were completed
by 24 February 2022. For the remaining planned disposals, as these are due to complete within the 18-month period being considered, the
proceeds have been included in the base case forecast, together with a corresponding decrease in debt facilities.
Directors’ Report Rolls-Royce plc Annual Report 2021
42
Going concern and viability statements continued
The downside forecast assumes Civil widebody EFHs remain at average Q4 2021 levels over the 18-month period to August 2023, with recovery
subdued due to ongoing infection rates and a continuation of new variants of the virus, resulting in ongoing caution in opening borders to
international travel and no upward trend in EFH until September 2023, resulting in a much slower recovery in demand compared with the base
case. The downside forecast also reflects risks in relation to load reduction through our factories, and possible supply chain challenges.
Conclusion
After reviewing the current liquidity position, the cash flow forecasts modelled under both the base case and downside, the Directors consider
that the Group has sufficient liquidity to continue in operational existence for a period of at least 18 months from the date of this report and are
therefore satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the financial statements.
Viability statement
The viability assessment considers liquidity over a longer period than the going concern assessment. Our downside scenario uses the same
assumptions as the going concern statement and in 2024 to 2026 assumes a slower recovery back to 2019 level than assumed in our base case.
Consistent with previous years, we have assessed our viability over a five-year period which is in line with our five-year forecasting process. We
continue to believe that this is the most appropriate time period to consider as, inevitably, the degree of certainty reduces over any longer period.
In making the assessment, we have used the same base case, the same severe but plausible downside scenario and have then extended our
assessment over five years. We have created severe but plausible scenarios that estimate the potential impact of our principal risks arising over
the assessment period (descriptions of our principal risks and the controls in place to mitigate them can be found on pages 30 to 34). We have
selected those principal risks that could have the most material impact to liquidity in the next five years in a severe but plausible scenario. In
addition to the downside (market shock) scenario, the risks chosen and scenarios used are as follows: business continuity, the loss of a key element
of our supply chain resulting in an inability to fulfil civil widebody orders for 12 months. Compliance, a compliance breach resulting in fines
(greater than those agreed as part of our DPA) and loss of new business with governments and state-owned companies. Political risk, a trade war
between major trading blocs resulting in supply chain disruption and a loss of sales into impacted markets for six months. Climate change, the
impact of climate change increasing our costs, reducing sales volumes and disrupting our supply chains (this scenario is discussed in more detail
in our TCFD section (included in the Sustainability section on page 43 of the RRH Annual Report 2021)); and safety, a significant Civil Aerospace
product safety event resulting in additional costs, penalties and lower service revenues.
The cash flow impacts of these scenarios were overlaid on the five-year forecast to assess how the Group’s liquidity would be affected.
The scenarios assume an appropriate management response to the specific event which could be undertaken and also consider specific activities
to improve liquidity such as raising additional funds, reducing expenditure and divesting parts of our business.
Reverse stress testing has also been performed to assess the severity of scenarios that would have to occur to exceed liquidity headroom, the
assumptions used in these stress tests were not considered plausible.
On the basis described above, the Board confirms that it has a reasonable expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the next five years. In making this statement, the Directors have made the following key assumptions:
– the Group is able to refinance maturing debt facilities and draw-down existing available facilities as required. Debt maturities over the
assessment period are as follows:
– The £1,000m Bank Loan Facility maturing 2024
– The €550m Bond maturing in 2024
– The £2,500m Revolving Credit Facility maturing in 2025
– The $1,000m Bond maturing in 2025
– The £2,000m UKEF loan (currently drawn) maturing in 2025
– The £1,000m UKEF loan (currently undrawn) maturing in 2026
– The €750m Bond maturing in 2026
– The £375m Bond maturing in 2026
– the Group has access to global debt markets and expects to be able to refinance these debt facilities on commercially acceptable terms;
– the Group’s medium and long-term financing plans are designed to allow for periods of adverse conditions in world capital markets but not a
prolonged period (e.g. 12 months) where debt markets were effectively closed to the Group;
– that implausible scenarios do not occur. Implausible scenarios include either multiple risks impacting at the same time or where management
actions do not mitigate an individual risk to the degree assumed; and
– that in the event of one or more risks occurring (which has a particularly severe effect on the Group) all potential actions (such as but not
limited to restricting capital and other expenditure to only committed and essential levels, reducing or eliminating discretionary spend,
reinstating pay deferrals, raising additional funds through debt or equity raises, executing disposals and undertaking further restructuring)
would be taken on a timely basis.
The Group believes it has the early warning mechanisms to identify the need for such actions and, as demonstrated by our decisive actions over
the course of the pandemic, has the ability to implement them on a timely basis if necessary.
Directors’ Report Rolls-Royce plc Annual Report 2021
43
Responsibility statements
Statement of Directors’ responsibilities in respect of the Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the
Group Financial Statements in accordance with UK-adopted international accounting standards and the Company Financial Statements in
accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 Reduced
Disclosure Framework, and applicable law).
Under company law, Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state
of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing the Financial Statements, the Directors
are required to:
– select suitable accounting policies and then apply them consistently;
– state whether applicable UK-adopted international accounting standards have been followed for the Group Financial Statements and United
Kingdom Accounting Standards, comprising FRS 101 have been followed for the Company Financial Statements, subject to any material
departures disclosed and explained in the Financial Statements;
– make judgements and accounting estimates that are reasonable and prudent; and
– prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue
in business.
The Directors are responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that
the Financial Statements and the Directors’ Remuneration Report comply with the Companies Act 2006.The Directors are responsible for the
maintenance and integrity of the parent company’s website. Legislation in the United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ confirmations
The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s and Company’s position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the Directors’ Report confirm that, to the best of their knowledge:
– the Group Financial Statements, which have been prepared in accordance with UK-adopted international accounting standards, give a true
and fair view of the assets, liabilities, financial position and profit of the Group;
– the Company Financial Statements, which have been prepared in accordance with United Kingdom Accounting Standards, comprising FRS
101, give a true and fair view of the assets, liabilities and financial position of the Company; and
– the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company,
together with a description of the principal risks and uncertainties that it faces.
In the case of each Director in office at the date the Directors’ Report is approved:
– so far as the Director is aware, there is no relevant audit information of which the Group’s and Company’s auditors are unaware; and
– they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information
and to establish that the Group’s and Company’s auditors are aware of that information.
Directors’ Report approved by the Board on 24 February 2022 and signed on its behalf by:
.........................................
Panos Kakoullis
Director
Financial Statements Rolls-Royce plc Annual Report 2021
44
Consolidated Financial Statements
Company Financial Statements
Primary statements Primary statements
Consolidated income statement 45 Company balance sheet 115
Consolidated statement of comprehensive income 46 Company statement of comprehensive income 116
Consolidated balance sheet 47 Company statement of changes in equity 116
Consolidated cash flow statement 48
Consolidated statement of changes in equity 51
Notes to the Consolidated Financial Statements Notes to the Company Financial Statements
1 Accounting policies 52 1 Accounting policies 117
2 Segmental analysis 66 2 Emoluments of Directors 125
3 Research and development 74 3 Intangible assets 126
4 Net financing 75 4 Property, plant and equipment 127
5 Taxation 76 5 Right-of-use assets 128
6 Auditors’ remuneration 80 6 Investments 128
7 Employee information 81 7 Inventories 129
8 Intangible assets 82 8 Trade receivables and other assets 129
9 Property, plant and equipment 84 9 Contract assets and liabilities 130
10 Right-of-use assets 85 10 Cash and cash equivalents 130
11 Investments 86 11 Other financial assets and liabilities 131
12 Inventories 88 12 Borrowings and lease liabilities 132
13 Trade receivables and other assets 88 13 Leases 133
14 Contract assets and liabilities 89 14 Trade payables and other liabilities 133
15 Cash and cash equivalents 90 15 Provisions for liabilities and charges 134
16 Borrowings and lease liabilities 90 16 Deferred taxation 136
17 Leases 91 17 Post-retirement benefits 137
18 Trade payables and other liabilities 92 18 Share capital 140
19 Financial instruments 93 19 Share-based payments 140
20 Provisions for liabilities and charges 102 20 Contingent liabilities 141
21 Post-retirement benefits 103 21 Related party transactions 141
22 Share capital 108 22 Parent and ultimate parent company 141
23 Share-based payments 108
24 Contingent liabilities 109
25 Related party transactions 109 Subsidiaries 142
26 Disposals, assets held for sale and discontinued
operations
110 Joint ventures and Associates 147
27 Derivation of summary funds flow statement 113
Financial statements Rolls-Royce plc Annual Report 2021
45
CONSOLIDATED IN COME STATEMENT
For the year ended 31 December 2021
2021 Restated
1
2020
Notes
£m
£m
Continuing operations
Revenue
2
11,218
11,491
Cost of sales
2
(9,082)
(11,678)
Gross
profit/(l
oss
)
2
2,136
(187)
Commercial and administrative costs
2
(890)
(771)
Research and development costs
2,
3
(778)
(1,204)
Share of results of joint ventures and associates
1
1
45
190
Operating
profit/(l
oss
)
513
(1,972)
G
ain
/(loss)
arising on acquisition and disposal of businesses
2
6
56
(14)
Profit/(l
oss
)
before financing and taxation
569
(1,986)
Financing income
4
229
61
Financing costs
3
4
(1,092)
(874)
Net financing costs
(863)
(813)
Loss
before taxation
(294) (2,799)
Taxation
5
418
(302)
Profit/(l
oss
)
for the year
from continuing operations
124
(3,101)
Discontinued operations
Profit
/(loss)
for the year from
ordinary activities
2
6
36
(
68
)
Costs of disposal of discontinued operations
2
6
(39)
–
Loss
for the year from discontinued operations
(3)
(
68
)
P
rofit
/(l
oss
)
for the year
121
(3,169)
Attributable to:
Ordinary
shareholders
120
(3,170)
Non
-
controlling interests
(NCI)
1
1
P
rofit
/(loss)
for the year
121
(3,169)
Other comprehensive
income/(
expense
)
41
(265)
Total comprehensive
income/(
expense
)
for the year
162
(3,434)
1
The comparative figures have been restated to reflect ITP Aero being classified as a discontinued operation. The respective notes to the financial statements have also been restated on this
basis. Further detail can be found in note 26.
2
Cost of sales includes a charge for expected credit losses of £124m (2020: £119m). Further details can be found in note 13.
3
Included within financing costs are fair value changes on derivative contracts. Further details can be found in notes 2, 4 and 19.
Financial statements Rolls-Royce plc Annual Report 2021
46
CONSOLIDATED STATEMENT OF COMPREHENSIVE IN COME
For the year ended 31 December 2021
2021
2020
Notes
£m
£m
Profit/(loss) for the year
121
(3,169)
Other comprehensive
income/(
expense
)
(OCI)
Actuarial movements on post
-
retirement schemes
2
1
254
(590)
Revaluation to fair value of other investments
1
1
(2)
–
Share of OCI of joint ventures and associates
1
1
1
(1)
Related tax
movements
5
(79)
195
Items that will not be reclassified to profit or loss
174
(396)
Foreign exchange translation differences on foreign operations
(178)
121
Foreign exchange translation differences reclassified to income statement on
disposal of businesses
2
6
(1)
6
Movement on fair values debited to cash flow hedge reserve
(32) (16)
Reclassified to income statement from cash flow hedge reserve
39
26
Share of OCI of joint ventures and associates
1
1
44
(4)
Related tax
movements
5
(5)
(2)
Items that
will
be reclassified to profit or loss
(133)
131
Total other comprehensive
income/(
expense
)
41
(265)
Total comprehensive income/(
expense
) for the year
162
(3,434)
Attributable to:
Ordinary shareholders
161
(3,435)
Non
-
controlling interests
(NCI)
1
1
Total comprehensive
income/(
expense
)
for the year
162
(3,434)
Total comprehensive income/(expense) for the year attributable to ordinary shareholders arises from:
Continuing operations
278
(3,457)
Discontinued operations
(117)
22
Total comprehensive income/(
expense
) for the year
161
(3,435)
Financial statements Rolls-Royce plc Annual Report 2021
47
CONSOLIDATED BALA NCE SHEET
As at 31 December 2021
2021
2020
Notes
£m
£m
ASSETS
Intangible assets
8
4,041
5,145
Property, plant and equipment
9
3,917
4,515
Right
-
of
-
use assets
10
1,203
1,405
Investments
–
joint ventures and associates
11
404
394
Investments
–
other
1
1
36
19
Other financial assets
19
361
687
Deferred tax assets
5
2,249
1,826
Post
-
retirement scheme
surpluses
2
1
1,148
907
Non
-
current assets
13,359
14,898
Inventories
1
2
3,666
3,690
Trade receivables and other assets
1
3
5,717
5,786
Contract assets
1
4
1,473
1,510
Taxation recoverable
90
117
Other financial assets
19
46
107
Short
-
term investments
19
8
–
Cash and cash equivalents
1
5
2,621
3,452
Current assets
13,621
14,662
Assets held for sale
2
6
2,028
288
TOTAL ASSETS
29,008
29,848
LIABILITIES
Borrowings and lease liabilities
1
6
(279)
(1,272)
Other financial liabilities
19
(
664
)
(580)
Trade payables and other liabilities
1
8
(6,017)
(6,654)
Contract liabilities
1
4
(3,599)
(4,187)
Current tax liabilities
(101)
(154)
Provisions for liabilities and charges
2
0
(
475
)
(826)
Current liabilities
(11,135)
(13,673)
Borrowings and lease liabilities
1
6
(7,497)
(6,058)
Other financial liabilities
19
(
2,715
)
(3,046)
Trade payables and other liabilities
1
8
(1,575)
(1,922)
Contract liabilities
1
4
(6,710)
(6,245)
Deferred tax liabilities
5
(451)
(494)
Provisions for liabilities and charges
2
0
(1,107)
(1,119)
Post
-
retirement scheme deficits
21
(1,373)
(1,580)
Non
-
current liabilities
(21,428)
(20,464)
Liabilities associated with assets held
for sale
2
6
(723)
(228)
TOTAL LIABILITIES
(33,286)
(34,365)
NET LIABILITIES
(4,278)
(4,517)
EQUITY
Called
-
up share capital
2
2
338
338
Share premium account
631
631
Cash flow hedging reserve
(45)
(94)
Merger
reserve
650
650
Translation reserve
342
524
Accumulated losses
(6,220)
(6,588)
Equity attributable to ordinary shareholders
(4,304)
(4,539)
Non
-
controlling interests
(NCI)
26
22
TOTAL EQUITY
(4,278)
(4,517)
The Financial Statements on pages 45 to 114 were approved by the Board on 24 February 2022 and signed on its behalf by:
Warren East Panos Kakoullis
Chief Executive Chief Financial Officer
Financial statements Rolls-Royce plc Annual Report 2021
48
CONSOLIDATED CASH FLOW STA TEMENT
For the year ended 31 December 2021
2021
2020
Notes
£m
£m
Operating profit/(loss)
from continuing operations
513
(1,972)
Operating loss
from discontinued operations
26
(43)
(109)
Operating profit/(loss)
1
470
(2,081)
P
rofit on disposal of property, plant and equipment
9
37
Share of results of joint ventures and
associates
1
1
(45)
(191)
Dividends received from joint ventures and associates
1
1
27
60
Amortisation and impairment of intangible assets
8
290
902
Depreciation and impairment of property, plant and equipment
462
821
Depreciation and
impairment of right
-
of
-
use assets
10
257
732
Adjustment of amounts payable under residual value guarantees within lease liabilities
2
(
4
)
(102)
Impairment of and other movements on investments
11
7
24
Decrease
in provisions
(394) (801)
(I
n
crease
)/decrease
in inventories
(169)
588
Movement
in trade receivables/payables and other assets/liabilities
(
506
)
(2,653)
Movement
in contract assets/liabilities
(
134
)
259
Financial p
enalties paid
3
(156)
(135)
Cash flows
on other financial assets and liabilities held for operating purposes
(85)
(126)
Interest
received
9
13
Net defined benefit post
-
retirement cost
/(credit)
recognised in loss before financing
2
1
23
(68)
Cash funding of defined benefit
post
-
retirement schemes
2
1
(162)
(80)
Share
-
based payments
2
3
28
25
Net cash outflow from operating activities before taxation
(73) (2,776)
Taxation paid
(185)
(231)
Net cash outflow from operating activities
(258) (3,007)
Cash flows from investing activities
M
ovement in
other
investments
1
1
(26)
(5)
Additions of intangible assets
(231)
(365)
Disposals of intangible assets
8
5
18
Purchases of property, plant and equipment
(328)
(585)
Disposals
of property, plant and equipment
61
23
Acquisition of businesses
–
(106)
Disposal of businesses
2
6
99
23
Movement in investments in joint ventures and associates and other
movements on investments
1
1
–
(19)
Movement
in short
-
term investments
(8)
6
Net cash outflow
from investing activities
(428)
(1,010)
Cash flows from financing activities
Repayment of loans
4
(965)
(2,884)
Proceeds from increase in loans
4
2,005
4,774
Capital element of lease payments
(374)
(284)
Net cash flow from
increase
in borrowings and leases
666
1,606
Interest paid
(206)
(88)
Interest element of lease payments
(63)
(74)
Fees
paid on undrawn facilities
(62)
(97)
Cash flows on settlement of excess derivative contracts
5
4
(452)
(202)
Transactions with
non
-
controlling interests
(
NCI
)
6
30
–
NCI on formation of subsidiary
3
–
Dividends to NCI
(1)
(1)
Movement on balances with parent company
(4)
1,887
Net cash
(outflow)
/inflow
from financing activities
(89) 3,031
Change in cash and cash equivalents
(775)
(986)
Cash and cash equivalents at 1 January
3,496
4,426
Exchange
(losses)
/gains
on cash and cash equivalents
(82)
56
Cash and cash equivalents at 31 December
7
2,639
3,496
1
During the year, the Group has received £11m (2020: £47m) from the British Government as part of the UK furlough scheme. This has been recognised within operating profit/loss.
2
Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been
remeasured. To the extent that the value of this remeasurement exceeds the value of the right-of-use asset, the reduction in the lease liability is credited to cost of sales.
3
Relates to penalties paid on agreements with investigating bodies.
4
Repayment of loans includes repayment of £300m commercial paper under the Covid Corporate Financing Facility (CCFF) and €750m (£639m) loan notes in line with repayment terms.
Proceeds from increase in loans includes the drawdown of £2,000m loan (supported by an 80% guarantee from UK Export Finance). Further detail is provided in note 16.
5
During the year, the Group incurred a cash outflow of £452m as a result of settling foreign exchange contracts that were originally in place to sell $3,184m receipts. Further detail is provided
in note 4.
6
Relates to NCI investment received in the year, in respect of Rolls-Royce SMR Limited. Following the formation of Rolls-Royce SMR Limited during the year, and in line with the shareholder
agreements, £30m investment was received by Rolls-Royce SMR Limited.
7
The Group considers overdrafts (repayable on demand) and cash held for sale to be an integral part of its cash management activities and these are included in cash and cash equivalents for
the purposes of the cash flow statement.
In deriving the consolidated cash flow statement, movement in balance sheet items have been adjusted for non-cash items. The cash flow in the
year includes the sale of goods and services to joint ventures and associates – see note 25.
Financial statements Rolls-Royce plc Annual Report 2021
49
CONSOLIDATED CASH FLOW STA TEMENT CONTI NUED
For the year ended 31 December 2021
2021
2020
£m
£m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents
(775)
(986)
Cash flow
from
increase
in borrowings and leases
(666)
(1,606)
Less: settlement of related
derivatives included in fair value of swaps below
6
50
Cash flow from increase
/(decrease
)
in short
-
term investments
8
(6)
Change in net
debt
resulting from cash flows
(1,427)
(2,548)
New leases and other non
-
cash adjustments to lease
liabilities in the year
(86)
(38)
Exchange
(losses)
/gains
on net
debt
(51)
143
Fair value adjustments
170
(126)
Debt
disposed of
on
disposal
of business
/(assumed on acquisition of business)
8
(24)
Reclassifications
19
11
Movement on net
debt excluding the fair value of swaps
(1,367)
(2,582)
Net debt at 1 January
excluding the fair value of swaps
(3,827)
(1,245)
Net debt
at 31 December excluding the fair value of swaps
(5,194)
(3,827)
Fair value of swaps
hedging fixed rate borrowings
37
251
Net
debt
at 31 December
(5,157)
(3,576)
Financial statements Rolls-Royce plc Annual Report 2021
50
CONSOLIDATED CASH FLOW STA TEMENT CONTI NUED
For the year ended 31 December 2021
The movement in net debt (defined by the Group as including the items shown below) is as follows:
At 1
January
Funds flow
Net funds on
acquisition/
disposal
Exchange
differences
Fair value
adjustments
Reclassi-
fications
1
Other
movements
At 31
December
£m £m £m £m £m £m £m £m
2021
Cash at bank and in hand
940
(87)
–
(20)
–
(38)
–
795
Money market funds
669
(620)
–
–
–
–
–
49
Short
-
term deposits
1,843
–
–
(66)
–
–
–
1,777
Cash and cash
equivalents (per balance
sheet)
3,452
(707)
–
(86)
–
(38)
–
2,621
Cash and cash
equivalents included
within assets held for sale
51
(68)
–
4
–
38
–
2
5
Overdrafts
(7)
–
–
–
–
–
–
(7)
Cash and cash
equivalents
(per cash flow statement)
3,496
(775)
–
(82)
–
–
–
2,639
Short
-
term investments
–
8
–
–
–
–
–
8
Other current borrowings
(1,006)
950
–
1
35
18
–
(2)
Non
-
current borrowings
(4,274)
(2,002)
–
38
136
88
(9)
(6,023)
Borrowings included
within liabilities held for
sale
–
18
–
1
(1)
(77)
–
(59)
Lease liabilities
(2,043)
370
–
(9)
–
15
(77)
(1,744)
Lease liabilities included
within liabilities held for
sale
–
4
8
–
–
(25)
–
(13)
Financial liabilities
(7,323)
(660)
8
31
170
19
(86)
(7,841)
Net debt excluding the
fair value
of
swaps
(3,827)
(1,427)
8
(51)
170
19
(86)
(5,194)
Fair value swaps hedging
fixed rate
borrowings
2
251
(6)
–
(35)
(173)
–
–
37
Net debt
3
(3,576)
(1,433)
8
(86)
(3)
19
(86)
(5,157)
2020
Cash at bank and in hand
816
172
–
3
–
(51)
–
940
Money market funds
1,095
(426)
–
–
–
–
–
669
Short
-
term deposits
2,523
(733)
–
53
–
–
–
1,843
Cash and cash
equivalents (per balance
sheet)
4,434
(987)
–
56
–
(51)
–
3,452
Cash and cash
equivalents included
within assets held for sale
–
–
–
–
–
51
–
51
Overdrafts
(8)
1
–
–
–
–
–
(7)
Cash and cash
equivalents (per cash flow
statement)
4,426
(986)
–
56
–
–
–
3,496
Short
-
term investments
6
(6)
–
–
–
–
–
-
Other current borrowings
(427)
134
(24)
(1)
–
(686)
(2)
(1,006)
Non
-
current borrowings
(2,896)
(1,974)
–
38
(126)
686
(2)
(4,274)
Lease liabilities
(2,354)
284
–
50
–
11
(34)
(2,043)
Financial liabilities
(5,677)
(1,556)
(24)
87
(126)
11
(38)
(7,323)
Net debt excluding fair
value swaps
(1,245)
(2,548)
(24)
143
(126)
11
(38)
(3,827)
Fair value swaps hedging
fixed rate borrowings
2
243
(50)
–
(42)
114
(14)
–
251
Net debt
3
(1,002)
(2,598)
(24)
101
(12)
(3)
(38)
(3,576)
1
Reclassifications include the transfer of ITP Aero to held for sale and fees of £29m paid in previous periods for the £2,000m loan (supported by an 80% guarantee from UK Export Finance)
that have been reclassified to borrowings on the draw down of the facility during the current period.
2
Fair value of swaps hedging fixed rate borrowings reflects the impact of derivatives on repayments of the principal amount of debt. Net debt therefore includes the fair value of derivatives
included in fair value hedges (2021: £114m, 2020: £293m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges (2021:
£(77)m and 2020: £(42)m).
3
As at 31 December 2021, net debt excluding lease liabilities was £(3,400)m (2020: £(1,533)m).
Financial statements Rolls-Royce plc Annual Report 2021
51
CONSOLIDATED STATEMENT OF CHA NGES IN EQUITY
For the year ended 31 December 2021
The following describes the nature and purpose of each reserve within equity:
Share capital – The nominal value of ordinary shares of 20p each in issue.
Share premium – Proceeds received in excess of the nominal value of ordinary shares issued, less the costs of issue.
Cash flow hedging reserve – Cumulative gains and losses on hedging instruments deemed effective in cash flow hedges.
Merger reserve – The premium on issuing shares to acquire a business where merger relief in accordance with the Companies Act 2006 applies.
Translation reserve – Gains and losses arising on retranslating the net assets of overseas operations into sterling.
Accumulated losses – All other net gains and losses and transactions with owners not recognised elsewhere and ordinary shares held for the purpose of share-based
payment plans.
Non-controlling interests – The share of net assets or liabilities of subsidiaries held by third parties.
Attributable to ordinary shareholders
Share
capital
Share
premium
Cash
flow
hedging
reserve
Merger
reserve
Translation
reserve
Accum-
ulated
losses
Total
Non-
controlling
interests
(NCI)
Total
equity
Notes
£m
£m
£m
£m
£m
£m
At 1 January
2021
338
631
(94)
650
524
(6,588)
(4,539)
22
(4,517)
Profit
for the year
–
–
–
–
–
120
120
1
121
Foreign exchange translation
differences on foreign operations
–
–
–
–
(178)
–
(178)
–
(178)
Reclassified to income statement
on disposal of businesses
26
–
–
–
–
(1)
–
(1)
–
(1)
Movement on post-retirement
schemes
21
–
–
–
–
–
254
254
–
254
Movement on fair values debited
to cash flow hedge reserve
–
–
(
32
)
–
–
–
(
32
)
–
(
32
)
Reclassified to income statement
from cash flow hedge reserve
–
–
39
–
–
–
39
–
39
Revaluation to fair value of other
investments
11
–
–
–
–
–
(2)
(2)
–
(2)
OCI of joint ventures and
associates
11
–
–
44
–
–
1
45
–
45
Related tax movements
5
–
–
(2)
–
(3)
(79)
(84)
–
(84)
Total comprehensive income for
the year
–
–
49
–
(182)
294
161
1
162
Share-based payments – direct to
equity
1
–
–
–
–
–
28
28
–
28
Dividends to NCI
–
–
–
–
–
–
–
(1)
(1)
Transactions with NCI
2
–
–
–
–
–
2 9
29
1
30
NCI on
formation
of subsidiary
–
–
–
–
–
–
–
3
3
Related tax movements
5
–
–
–
–
–
1 7
17
–
17
Other changes in equity in the
year
–
–
–
–
–
74
74
3
77
At 31 December
2021
338
631
(45)
650
342
(6,220) (4,304)
26
(4,278)
At 1 January
2020
338
631
(96)
650
397
(3,056)
(1,136)
22
(1,114)
Loss for the year
–
–
–
–
–
(3,170)
(3,170)
1
(3,169)
Foreign exchange translation
differences on foreign operations
–
–
–
–
121
–
121
–
121
Reclassified to income statement
on disposal of
businesses
–
–
–
–
6
–
6
–
6
Movement on post-retirement
schemes
21
–
–
–
–
–
(590)
(590)
–
(590)
Movement on fair values debited
to cash flow hedge reserve
–
–
(16)
–
–
–
(16)
–
(16)
Reclassified to income statement
from cash flow hedge reserve
–
–
26
–
–
–
26
–
26
OCI of joint ventures and
associates
11
–
–
(4)
–
–
(1)
(5)
–
(5)
Related tax movements 5
–
–
(4)
–
–
197
193
–
193
Total comprehensive expense for
the year
–
–
2
–
127
(3,56 4)
(3,435)
1
(3,434)
Share-based payments – direct to
equity
1
–
–
–
–
–
27
27
-
27
Transactions with NCI
–
–
–
–
–
–
–
(1)
(1)
Related tax movements 5
–
–
–
–
–
5
5
–
5
Other changes in equity in the
year
–
–
–
–
–
32
32
(1)
31
At 31 December
2020
338
631
(94)
650
524
(6,588)
(4,539)
22
(4,517)
1
Share-based payments - direct to equity is the share-based payment charge for the year less actual cost of vesting excluding those vesting from own shares and cash received on share-based
schemes vesting.
2
Relates to NCI investment received in the year in respect of Rolls-Royce SMR Limited. Further detail can be found on page 48.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
52
NOTES TO THE C ONSOLIDA TED FINA NCIAL STATEMEN TS
1 Accounting policies
The Company
Rolls-Royce plc (the ‘Company’) is a public company limited by shares incorporated under the Companies Act 2006 and domiciled in England in
the United Kingdom. The Consolidated Financial Statements of the Company for the year ended 31 December 2021 consist of the audited
consolidation of the Financial Statements of the Company and its subsidiaries (together referred to as the Group) together with the Group’s
interest in jointly controlled and associated entities.
Basis of preparation and statement of compliance
The Company has elected to prepare its individual Company Financial Statements under FRS 101 Reduced Disclosure Framework. They are set
out on pages 115 to 141 with the associated accounting policies from page 117.
The Consolidated Financial Statements have been prepared in accordance with UK adopted International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee (IFRS IC) applicable to companies reporting under UK adopted IFRS.
The Consolidated Financial Statements have been prepared on a going concern basis as described on page 41. The historical cost basis has been
used except where IFRS require the revaluation of financial instruments to fair value and certain other assets and liabilities on an alternative basis,
most significantly post-retirement scheme obligations are valued on the basis required by IAS 19 Employee Benefits.
The Consolidated Financial Statements are presented in sterling which is the Company’s functional currency.
The preparation of Consolidated Financial Statements requires management to make judgements and estimates that affect the reported amounts
of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the
reporting period. Actual future outcomes could differ from those estimates.
Going concern
The Directors have undertaken a comprehensive going concern review over an 18-month period to August 2023, as part of the RRH Group,
considering the forecast cash flows of the Group and the liquidity headroom available over the corresponding period, taking into account the
Group’s principal risks and uncertainties. The Directors have considered the impact that the COVID-19 pandemic continues to have on the Group
and the uncertainty that remains in the short term over the timing of recovery of demand, in particular in relation to the civil aviation industry.
The Group has modelled two forecasts in its assessment of going concern which have been considered by the Directors, along with a likelihood
assessment of these forecasts, being:
– base case, which reflects the Directors current expectations of future trading; and
– severe but plausible downside forecast, which envisages a ‘stress’ or ‘downside’ situation.
In addition, the Directors believe there are significant business growth opportunities to come from the Group playing a leading role in the
transition to net zero, whilst at the same time climate change poses potentially significant risks to the Group. Although it is unlikely that physical
and transition risks will arise during the 18-month period being assessed for going concern, both physical and transition risks have been
considered as part of the Group’s risk assessment.
Further details are given in the Going Concern Statement on pages 41 to 42. After due consideration, the Directors consider that the Group has
sufficient liquidity to continue in operational existence for a period of at least 18 months from the date of this report and are therefore satisfied
that it is appropriate to adopt the going concern basis of accounting in preparing the Financial Statements.
Climate change
In preparing the Consolidated Financial Statements the Directors have considered the potential impact of climate change, particularly in the
context of the disclosures included in the Strategic Report this year and the stated decarbonisation commitments. Based on the Taskforce for
Climate-related Financial Disclosures (TCFD) recommendations, the Group assesses the potential impact of climate-related risks which cover both
transition risks and physical risks. The transition risks may include extensive policy, legal, technological, and market changes and physical risks
could include direct damage to assets and supply chain disruption.
The Group has set decarbonisation commitments and identified longer-term considerations in response to the climate challenge and is engaging
proactively with external stakeholders to advocate for the conditions that society needs to achieve its net zero target. The Group’s main short-
and longer-term priorities include the following:
– achieving net zero greenhouse gas (GHG) emissions by 2030 from all energy purchased and consumed in the operation of the buildings,
facilities and manufacturing processes (with the exception of product testing and development). This will be met through continued investment
in onsite renewable energy installations; the procurement of renewable energy; and continued investment in energy efficiency improvements
to reduce the Group's overall energy demands and operating costs. The investment required to meet these scope 1 and 2 emission
improvements is included in the forecasts that support these Financial Statements. The Group expects the Bristol, UK, manufacturing site to
be its first site to achieve net zero carbon operations during 2022.
– pioneering breakthrough new technologies, including investment in hybrid electric solutions in Power Systems, continued development of
the more efficient UltraFan aero engine, testing of sustainable aviation fuels, small modular reactors (SMRs) and hybrid and fully electric
propulsion. New products will be compatible with net zero operation by 2030 and all products will be compatible with net zero operation by
2050. In the year, R&D costs of £(68)m within New Markets included design development to ready the SMRs to enter the UK GDA process and
investment in electrical propulsion technology. Further investment required to deliver these technologies is included in the forecasts that
support the Financial Statements.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
53
1 Accounting policies continued
Climate change (continued)
Climate change scenarios have been prepared to assess the viability of our business strategy, decarbonisation plans and approach to managing
climate-related risk. There is inherent uncertainty over the assumptions used within these and how they will impact the Group’s business
operations, cash flows and profit projections. The Directors assess the assumptions on a regular basis to ensure that they are consistent with its
risk management activities and the commitments made to investors and other stakeholders.
Assumptions used within the Financial Statements in relation to areas such as revenue recognition for long-term contracts, impairment reviews
of non-current assets and the carrying amount of deferred tax assets consider the findings from the climate scenarios prepared. Key variables
include carbon prices based on the IEA Net Zero scenario, which assumes an increase from $47 per tonne of carbon in 2022 to $250 per tonne
in 2050, commodity price trends derived from the climate scenarios set out by the Intergovernmental Panel on Climate Change (IPCC RCP1.9),
temperature rises from the (IPCC SSP1-19) scenario, and GDP information from the Oxford Economics Net Zero model.
As details of what specific future intervention measures will be taken by governments are not yet available, carbon pricing has been used to
quantify the potential impact of future policy changes on the Group. To ensure revenue recognition or the carrying value of assets is not
overstated it has cautiously been assumed that the impact of carbon pricing predominantly falls on the cost base of its domestic facilities and
external supply chain, rather than directly on customers or consumers. The Group will be able to mitigate an element of the financial impact as it
reduces the scope 1 and 2 emissions from its buildings, facilities and manufacturing processes and this is expected to decline. However, no account
has been made of expected mitigations from decarbonisation in the external supply chain (who the Group is working with, whilst acknowledging
in its financial modelling that this is complex and will therefore take some time). The financial modelling performed recognises the extent to which
the Group’s current supplier contracts offer protection from cost increases in the short- to medium-term where pricing is fixed or subject to
capped escalation clauses. The Group has made a cautious assessment of whether higher costs would be passed on to customers in the short-
and medium-term that considers the markets operated in and the pricing mechanisms in place. For example, in Civil Aerospace it is recognised
that escalation caps within a number of its LTSA contracts would be triggered, meaning additional costs could remain within the business under
current commercial arrangements until the end of existing contract periods.
When determining the amount of cumulative revenue recognised on long-term contracts, and the obligation in relation to onerous contracts, the
assumptions above have been used to reflect the climate uncertainties. This has resulted in a revenue catch-up of £(17)m and an increase in
contract loss provisions of £(20)m in the year from increased costs over the term of the current contracts of around 1%. A sensitivity is presented
within the key sources of estimation uncertainty (page 64) to disclose the impact of a further 1% cost increase that might arise from further
unmitigated increases in carbon and/or commodity pricing.
Impairment testing of non-current assets including goodwill, programme assets and deferred tax assets has considered the above risks as well as
assessing how the Group’s 1.5°C scenario may change the demand for products over the medium- and longer-term. To assess the carrying value
of assets where there is more potential for impairment, the Directors have modelled downside risks specific to those products. This included
consideration of lower OE volumes or a shorter in-service life that generates lower aftermarket volumes, together with higher costs in Civil
Aerospace. Power Systems is a shorter-cycle business with scope to re-assess contractual terms to reflect the cost of carbon. Whilst the Defence
programmes cover a longer period, the nature of the largest customers and the typical contractual arrangements mean that the Group expect
future contracts to reflect the cost of carbon. Further information is provided in notes 5 and 8.
Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the unused tax losses and
deductible temporary difference can be utilised. In addition to the weighted downside forecast (see note 5), the climate related estimates and
assumptions above have also been considered when assessing the recoverability of the deferred tax assets. Recognising the longer term over
which these assets will be recovered, the Group has also considered the impact on OE and aftermarket sales if new, more efficient Civil aircraft
or new engine options enter the market earlier than assumed in its most likely estimates. Under this scenario some older products would see a
reduction in profits but additional opportunities exist for newer products such as the Trent XWB. Whilst carbon pricing illustrates pressure on
costs, decarbonisation and new supplier and customer contracts offer the opportunity to receive value for more efficient and sustainable
products. Further details are included in note 5 together with sensitivity analysis in the key sources of estimation uncertainty section below.
The climate related estimates and assumptions that have been considered to be key areas of judgement or sources of estimation uncertainty for
the year ended 31 December 2021 are those relating to the recoverable amount of non-current assets including goodwill, capitalised development
costs, recovery of deferred tax assets, recognition and measurement of provisions and recognition of revenue on long term contracts. These
items are included within the key areas of judgement and key sources of estimation uncertainty summarised on page 54 and explained in detail
throughout the significant accounting policies.
Items that may be impacted by climate-related risks, but which are not considered to be key areas of judgements or sources of estimation
uncertainty in the current financial year are outlined below:
Useful lives of assets — The useful lives of assets could be reduced by climate-related matters, for example as a result of physical risks, obso-
lescence or legal restrictions. The change in useful lives would have a direct impact on the amount of depreciation or amortisation recognised
each year from the date of reassessment. The Directors’ review of useful lives has taken into consideration the impacts of the Group’s decar-
bonisation commitments and has not had a material impact on the results for the year.
Inventory valuation — Climate-related matters may affect the value of inventories as they could become obsolete as a result of a decline in selling
prices or a reduction in demand. After consideration of the typical stock-turns of the inventory in relation to the rate of change in the market the
Directors consider that inventory is appropriately valued.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
54
1 Accounting policies continued
Climate change (continued)
Recoverability of trade receivables and contract assets — The impact of climate-related matters could have an impact on the Group’s customers in
the future, especially those customers in the Civil Aerospace business. No material climate related issues have arisen during the year that have
impacted our assessment of the recoverability of receivables. The Group's ECL provision uses credit ratings which inherently will include the
market's assessment of the climate change impact on credit risk of the counter parties. Given the maturity time of trade receivables and the
majority of contract assets, climate change is unlikely to have a material increase on counter party credit risk in that time.
Share-based payments — Executive leadership remuneration packages will be impacted and measured against a new sustainability metric from the
2023 financial year. This could impact the future amount and timing of the recognition of the share-based payment expense in the income
statement once these metrics are included within the performance condition criteria of the share-based payment plans. This change has had no
impact on the 2021 financial statements.
Defined benefit pension plans — Climate-related risks could affect the financial position of defined benefit pension plans. As a result, this could
have implications on the expected return on plan assets and measurement of defined benefit liabilities in future years.
Presentation of underlying results
The Group measures financial performance on an underlying basis and discloses this information as an alternative performance measure. This is
consistent with the way that financial performance is measured by management and reported to the Board in accordance with IFRS 8 Operating
Segments. The Group believes this is the most appropriate basis to measure the in-year performance as underlying results reflect the substance
of trading activity, including the impact of the Group’s foreign exchange forward contracts, which economically hedge net foreign currency cash
flows at predetermined exchange rates. In addition, underlying results exclude the accounting impact of business acquisitions and disposals,
impairment charges where the reasons are outside of normal operating activities, exceptional items, and certain other items which are market
driven and outside of the control of management. Further details are given in note 2. A reconciliation of alternative performance measures to the
statutory equivalent is provided on pages 162 and 163.
Revision to IFRS applicable in 2021
In April 2021, the IFRS IC published its final agenda decision on Configuration and Customisation costs in a Cloud Computing Arrangement. The
agenda decision considers how a customer accounts for configuration or customisation costs where an intangible asset is not recognised in a
cloud computing arrangement. The agenda decision does not have a material impact on the Group in respect of the current period or prior
periods.
No new standards and interpretations issued by the IASB had a significant impact on the Consolidated Financial Statements.
Key areas of judgement and sources of estimation uncertainty
The determination of the Group’s accounting policies requires judgement. The subsequent application of these policies requires estimates and
the actual outcome may differ from that calculated. The key judgements and key sources of estimation uncertainty at the balance sheet date, that
have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year, are summarised
below. Further details, together with sensitivities for key sources of estimation uncertainty where appropriate and practicable, are included within
the significant accounting policies section of this note.
Area Key judgements Key sources of estimation uncertainty Page
Revenue
recognition and
contract assets and
liabilities
Whether Civil Aerospace Original Equipment (OE) and
aftermarket contracts should be combined.
How performance on long-term aftermarket contracts
should be measured.
Whether any costs should be treated as wastage.
Whether sales of spare engines to joint ventures are
at fair value.
When revenue should be recognised in relation to
spare engine sales to related entities.
Estimates of future revenue and costs of long-
term contractual arrangements including the
impact of climate change.
56
Risk and revenue
sharing
arrangements
Determination of the nature of entry fees received. 58
Taxation
Estimates necessary to assess whether it is
probable that sufficient suitable taxable profits
will arise in the UK to utilise the deferred tax
assets.
58
Discontinued
operations and
assets held for sale
Whether the ITP Aero business and associated
consolidation adjustments meet the criteria to be
classified as held for sale and a discontinued
operation.
59
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
55
1 Accounting policies continued
Area
Key judgements Key sources of estimation uncertainty Page
Research and
development
Determination of the point in time where costs
incurred on an internal programme development
meet the criteria for capitalisation or ceasing
capitalisation.
Determination of the basis for amortising capitalised
development costs.
61
Leases
Determination of the lease term. Estimates of the payments required to meet
residual value guarantees at the end of engine
leases.
62
Impairment of non-
current assets
Determination of cash-generating units for assessing
impairment of goodwill.
Estimates of cash flow forecasts to support the
carrying value of intangible assets (including
programme-related assets).
62
Provisions
Whether any costs should be treated as wastage. Estimates of the time to resolve the technical
issues on the Trent 1000, including the
development of the modified high pressure
turbine (HPT) blade and estimates of the
expenditure required to settle the obligation
relating to Trent 1000 claims and to settle Trent
1000 long-term contracts assessed as onerous.
Estimates of the future revenues and costs to fulfil
onerous contracts.
63
Post-retirement
benefits
Estimates of the assumptions for valuing the
defined benefit obligation.
64
Significant accounting policies
The Group’s significant accounting policies are set out below. These accounting policies have been applied consistently to all periods presented
in these Consolidated Financial Statements.
Basis of consolidation
The Consolidated Financial Statements include the Company Financial Statements and its subsidiary undertakings together with the Group’s share
of the results in joint arrangements and associates made up to 31 December.
A subsidiary is an entity controlled by the Company. Control exists when the Company has power over an entity, exposure to variable returns
from its involvement with an entity and the ability to use its power over an entity so as to affect the Company’s returns. Subsidiaries are
consolidated in accordance with IFRS 10 Consolidated Financial Statements.
A joint arrangement is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more other
investors under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. Joint ventures are accounted for
using the equity method of accounting and joint operations are accounted for using proportionate accounting.
An associate is an entity that is neither a subsidiary nor a joint arrangement, in which the Group holds a long-term interest and where the Group
has a significant influence. The results of associates are accounted for using the equity method of accounting.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the profit or loss
arising on transactions with joint arrangements and associates to the extent of the Group’s interest in the entity. Transactions with non-controlling
interests are recorded directly in equity.
Any subsidiary undertaking, joint arrangement or associate sold or acquired during the year are included up to, or from, the date of change of
control. Details of transactions in the year are set out in note 26.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
56
1 Accounting policies continued
Revenue recognition and contract assets and liabilities
Revenue recognised comprises sales to the Group’s customers after discounts and amounts payable to customers. Revenue excludes value added
taxes. The transaction price of a contract is typically clearly stated within the contract, although the absolute amount may be dependent on
escalation indices and long-term contracts require the key estimates highlighted below. Refund liabilities where sales are made with a right of
return are not typical in the Group’s contracts. Where they do exist, and consideration has been received, a portion based on an assessment of
the expected refund liability is recognised within other payables. The Group has elected to use the practical expedient not to adjust revenue for
the effect of financing components where the expectation is that the period between the transfer of goods and services to customers and the
receipt of payment is less than a year.
Sales of standard OE, spare parts and time and material overhaul services are generally recognised on transfer of control to the customer. This is
generally on delivery to the customer unless the specific contractual terms indicate a different point. The Directors consider whether there is a
need to constrain the amount of revenue to be recognised on delivery based on the contractual position and any relevant facts, however, this is
not typically required.
Sales of OE and services that are specifically designed for the contract (most significantly in the Defence business) are recognised by reference
to the progress towards completion of the performance obligation, using the cost method described in the key judgements, provided the outcome
of contracts can be assessed with reasonable certainty.
The Group generates a significant portion of its revenue on aftermarket arrangements arising from the installed OE fleet. As a consequence, in
particular in the Civil Aerospace large engine business, the Group will often agree contractual prices for OE deliveries that take into account the
anticipated aftermarket arrangements. Sometimes this may result in losses being incurred on OE. As described in the key judgements, these
contracts are not combined. The consideration in the OE contract is therefore allocated to OE performance obligations and the consideration in
the aftermarket contract to aftermarket performance obligations.
Key areas of the accounting policy are:
– Future variable revenue from long-term contracts is constrained to take account of the risk of non-recovery of resulting contract balances
from reduced utilisation e.g. engine flying hours, based on historical forecasting experience and the risk of aircraft being parked by the
customer.
– A significant amount of revenue and cost related to long-term contract accounting is denominated in currencies other than that of the
relevant Group undertaking, most significantly US dollar transactions in sterling and euro denominated undertakings. These are translated at
estimated long-term exchange rates.
– The assessment of stage of completion is generally measured for each contract. However, in certain cases, such as for CorporateCare
agreements where there are many contracts covering aftermarket services each for a small number of engines, the Group accounts for a
portfolio of contracts together as the effect on the Consolidated Financial Statements would not differ materially from applying the standard
to the individual contracts in the portfolio. When accounting for a portfolio of long-term service arrangements the Group uses estimates and
assumptions that reflect the size and composition of the portfolio.
– A contract asset/liability is recognised where payment is received in arrears/advance of the revenue recognised in meeting performance
obligations.
– Where material, wastage costs (see key judgements below) are recorded as an exceptional non-underlying expense.
If the expected costs to fulfil a contract exceed the expected revenue, a contract loss provision is recognised for the excess costs.
The Group pays participation fees to airframe manufacturers, its customers for OE, on certain programmes. Amounts paid are initially treated as
contract assets and subsequently charged as a reduction to the OE revenue when the engines are transferred to the customer.
The Group has elected to use the practical expedient to expense as incurred any incremental costs of obtaining or fulfilling a contract if the
amortisation period of an asset created would have been one year or less. Where costs to obtain a contract are recognised in the balance sheet,
they are amortised over the performance of the related contract (two to ten years).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
57
1 Accounting policies continued
Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined
In the Civil Aerospace business, OE contracts for the sale of engines to be installed on new aircraft are with the airframers, while the contracts to
provide spare engines and aftermarket goods and services are with the aircraft operators, although there may be interdependencies between them.
IFRS 15 Revenue from Contracts with Customers includes guidance on the combination of contracts, in particular that contracts with unrelated parties
should not be combined. Notwithstanding the interdependencies, the Directors consider that the engine contract should be considered separately
from the aftermarket contract. In making this judgement, they also took account of industry practice.
Key judgement – How performance on long-term aftermarket contracts should be measured
The Group generates a significant proportion of its revenue from aftermarket arrangements. These aftermarket contracts, such as TotalCare and
CorporateCare agreements in the Civil Aerospace business, cover a range of services and generally have contractual terms covering more than one
year. Under these contracts, the Group’s primary obligation is to maintain customers’ engines in an operational condition and this is achieved by
undertaking various activities, such as maintenance, repair and overhaul, and engine monitoring over the period of the contract. Revenue on these
contracts is recognised over the period of the contract and the basis for measuring progress is a matter of judgement. The Directors consider that the
stage of completion of the contract is best measured by using the actual costs incurred to date compared to the estimated costs to complete the
performance obligations, as this reflects the extent of completion of the activities to be performed.
Key judgement – Whether any costs should be treated as wastage
In rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a contract where the level of cost was not
reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected to arise where there has been
a series of abnormal events which give rise to a significant level of cost of a nature that the Group would not expect to incur and hence is not
reflected in the contract price. Examples include technical issues that: require resolution to meet regulatory requirements; have a wide-ranging
impact across a product type; and cause significant operational disruption to customers. Similarly, in these rare circumstances, significant
disruption costs to support customers resulting from the actual performance of a delivered good or service may be treated as a wastage cost.
Provision is made for any costs identified as wastage when the obligation to incur them arises – see note 20.
Key judgement – Whether sales of spare engines to joint ventures are at fair value
The Civil Aerospace business maintains a pool of spare engines to support its customers. Some of these engines are sold to, and held by, joint venture
companies. The assessment of whether the sales price reflects fair value is a key judgement. The Group considers that based upon the terms and
conditions of the sales, and by comparison to the sales price of spare engines to other third parties, the sales made to joint ventures reflect the fair
value of the goods sold. See note 25 for value of sales to joint ventures during the year.
Key judgement – When revenue should be recognised in relation to spare engine sales to related entities
The Group recognises revenue when a performance obligation is settled. A judgement has been made on whether the Group relinquishes control of
these spare engines at the point of legal sale, as the customer, in some instances, is contracted to provide some future spare engine capacity to the
Group to support its installed fleet. The customer in the engine sale has responsibility for generating revenue from the engines and exposure to periods
of non-utilisation; exposure to risk of damage or loss, risk from residual value movements, and will determine if and when profits will be made from
disposal. The spare engines that will be made available to the Group in the future do not consist of identified assets and the provider retains a substantive
right to substitute the asset through the Group’s period of use. It is therefore appropriate to recognise revenue from the sale of the spare engines at the
point that title transfers.
Key estimate – Estimates of future revenue and costs on long-term contractual arrangements
The Group has long-term contracts that fall into different accounting periods and which can extend over significant periods (generally up to 25 years)
the most significant of these are long-term service arrangements (LTSAs) in the Civil Aerospace business with an average remaining term of around
ten years. The estimated revenue and costs are inherently imprecise and significant estimates are required to assess: engine flying hours (EFHs), time-
on-wing and other operating parameters; the pattern of future maintenance activity and the costs to be incurred; lifecycle cost improvements over
the term of the contracts; and escalation of revenue and costs. The impact of climate change on EFH and costs is also considered when making these
estimates. Industry and customer data on expected levels of utilisation is included in the forecasts used. Across the length of the current Civil LTSA
contracts, allowance has been made for around a 1% projected cost increase resulting from carbon pricing and commodity price changes.
The sensitivities below demonstrate how changes in assumptions (including as a result of climate change) could impact the level of revenue
recognised were assumptions to change. The Directors believe that the estimates used to prepare the financial statements take account of the
inherent uncertainties, constraining the expected level of revenue as appropriate.
The ongoing COVID-19 pandemic continues to result in uncertainty over the recovery of demand across the civil aviation industry. Further details have
been included in the going concern disclosure on page 41. Estimates of future LTSA revenue within Civil Aerospace are based upon future EFH
forecasts, influenced by assumptions over the recovery of the civil aviation industry. Finally, many of the revenues and costs are denominated in
currencies other than that of the relevant Group undertaking. These are translated at an estimated long-term exchange rate, based on historical trends
and economic forecasts.
During the year, changes to the estimate in relation to the Civil LTSA contracts resulted in favourable catch-up adjustments to revenue of
£214m.
Based upon the stage of completion of all widebody LTSA contracts within Civil Aerospace as at 31 December 2021, the following reasonably possible
changes in estimates would result in catch-up adjustments being recognised in the period in which the estimates change (at underlying rates):
– A change in forecast EFHs of 1% over the remaining term of the contracts would impact LTSA income and to a lesser extent costs, resulting
in an in-year impact catch-up adjustment of around £6m to £9m. This would be expected to be seen as a catch-up change in revenue or,
to the extent it impacts onerous contracts, within cost of sales.
– A 1% increase or decrease in our pricing to customers over the life of the contracts would lead to a revenue catch-up adjustment in the
next 12 months of around £100m.
– A 1% increase or decrease in shop visit costs over the life of the contracts would reduce the stage of completion and lead to a revenue
catch-up adjustment in the next 12 months of around £25m.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
58
1 Accounting policies continued
Risk and revenue sharing arrangements (RRSAs)
Cash entry fees received are initially deferred on the balance sheet within trade payables and other liabilities. They are then recognised as a
reduction in cost of sales incurred. Individual programme amounts are allocated pro rata to the estimated number of units to be produced.
Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.
The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales when OE
sales are recognised or as LTSA costs are incurred.
The Group also has arrangements with third parties who invest in a programme and receive a return based on its performance, but do not
undertake development work or supply parts. Such arrangements (financial RRSAs) are financial instruments as defined by IAS 32 Financial
Instruments: Presentation and are accounted for using the amortised cost method.
Key judgement – Determination of the nature of entry fees received
RRSAs with key suppliers (workshare partners) are a feature of the civil aviation industry business. Under these contractual arrangements, the
key commercial objectives are that: (i) during the development phase the workshare partner shares in the risks of developing an engine by
performing its own development work, providing development parts and paying a non-refundable cash entry fee; and (ii) during the production
phase it supplies components in return for a share of the programme cash flows as a ‘life of type’ supplier (i.e. as long as the engine remains in
service).
The non-refundable cash entry fee is judged by the Group to be a contribution towards the development expenditure incurred. These receipts
are deferred on the balance sheet and recognised against the cost of sales over the estimated number of units to be delivered on a similar
basis to the amortisation of development costs – see 61.
Royalty payments
Where a government or similar body has previously acquired an interest in the intellectual property of a programme, royalty payments are
matched to the related sales.
Government grants
Government grants received are varied in nature and are recognised in the income statement so as to match them with the related expenses that
they are intended to compensate. Where grants are received in advance of the related expenses, they are initially recognised as liabilities within
trade payables and other liabilities and released to match the related expenditure. Non-monetary grants are recognised at fair value.
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are
attributable to the acquisition, construction or production of a qualifying asset, such costs are capitalised as part of the specific asset.
Taxation
The tax charge/credit on the profit or loss for the year comprises current and deferred tax:
– Current tax is the expected tax payable for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
– Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the amounts used for tax purposes and is calculated using the enacted or
substantively enacted rates that are expected to apply when the asset or liability is settled. In the UK, the deferred tax liability on the pension
scheme surplus is recognised consistently with the basis for recognising the surplus i.e. at the rate applicable to refunds from a trust.
Tax is charged or credited to the income statement or OCI as appropriate, except when it relates to items credited or charged directly to equity
in which case the tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint arrangements, except
where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in
the foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition of goodwill or for
temporary differences arising from the initial recognition of assets and liabilities in a transaction that is not a business combination and that
affects neither accounting nor taxable profit.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can
be utilised. Further details on the Group’s tax position can be found on page 160.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
59
1 Accounting policies continued
Taxation (continued)
Key estimate – Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise the
deferred tax assets
Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the deductible
temporary difference can be utilised. Further details are included in note 5.
In addition to taking into account a severe but plausible downside forecast (see below), the climate-related estimates and assumptions (set out
on pages 52 to 54) above have also been considered when assessing the recoverability of the deferred tax assets. Recognising the longer term
over which these assets will be recovered the Group has also considered the impact on OE and aftermarket sales if new more efficient civil
aircraft or new engine options enter the market earlier than assumed in our most likely estimates. Under this scenario some older products
would see a reduction in profits, but additional opportunities exist for our newer products such as the Trent XWB.
While carbon and commodity pricing may put pressure on costs, decarbonisation and new supplier and customer contracts offer the
opportunity to receive value for more efficient and sustainable products.
The ongoing COVID-19 pandemic continues to result in uncertainty over the recovery of demand across the civil aviation industry. As explained
in note 5, a 25% probability of there being a severe but plausible downside forecast in relation to the civil aviation industry has been taken
into account in the assessment of the recovery of the UK deferred tax assets.
The estimates take account of the inherent uncertainties constraining the expected level of profit as appropriate. Changes in these estimates
will affect future profits and therefore the recoverability of deferred tax assets. The following sensitivities have been modelled to demonstrate
the impact of changes in assumptions on the recoverability of deferred tax assets.
– A 5% change in margin in the main Civil Aerospace widebody programmes.
– A 5% change in the number of shop visits driven by EFHs.
– Assumed future cost increases from climate change expected to flow through to customers at 100%, are restricted to 90% pass through.
All of these could be driven by a number of factors including the impact of climate change and changes to carbon and commodity pricing.
A 5% change in margin or shop visits would result in an increase/decrease in the deferred tax asset of around £150m.
If only 90% of assumed future cost increases are passed on to customers, this would result in a decrease in the deferred tax asset of around
£40m, and if carbon prices were to double, this would be £110m.
Foreign currency translation
Transactions denominated in currencies other than the functional currency of the transacting Group undertaking are translated into the
functional currency at the average monthly exchange rate when the transaction occurs. Monetary assets and liabilities denominated in foreign
currencies are translated into the relevant functional currency at the rate prevailing at the year end. Exchange differences arising on foreign
exchange transactions and the retranslation of monetary assets and liabilities into functional currencies at the rate prevailing at the year end are
included in profit/(loss) before taxation.
The trading results of Group undertakings are translated into sterling at the average exchange rates for the year. The assets and liabilities of
overseas undertakings, including goodwill and fair value adjustments arising on acquisition, are translated at the exchange rates prevailing at the
year end. Exchange adjustments arising from the retranslation of the opening net assets, and from the translation of the profits or losses at
average rates, are recognised in OCI.
Discontinued operations
A discontinued operation is defined in IFRS 5 Non-current assets held for sale and discontinued operations as a component of an entity that has
been disposed of or is classified as held for sale, represents a separate major line of business or geographical area of operations, is part of a
single co-ordinated plan to dispose of such a line of business or is a subsidiary acquired exclusively with a view to resale. The results of
discontinued operations are required to be presented separately in the income statement with the comparative period restated to show results
attributable to continuing operations.
Assets and businesses are classified as held for sale when their carrying amounts will be recovered through sale rather than through continuing
use.
Key judgement – Whether the ITP Aero business and associated consolidation adjustments meet the criteria to be classified as a held for sale
and a discontinued operation
In identifying the assets and liabilities that form part of the disposal group held for sale in relation to the ITP Aero business, the Group has
considered whether the associated consolidation adjustments meet the criteria to be classified within the disposal group. The consolidation
adjustments allocated to the disposal group are those that relate to the carrying value of the disposal group's assets and liabilities. Further
detail can be found in note 26.
Financial instruments – Classification and measurement
Financial assets primarily include trade receivables, cash and cash equivalents, short-term investments, derivatives (foreign exchange, commodity
and interest rate contracts), and unlisted investments.
– Trade receivables are classified either as held to collect and measured at amortised cost, or as held to collect and sell and measured at fair
value, with movements in fair value recognised through other comprehensive income (FVOCI). The Group may sell trade receivables due from
certain customers before the due date. Any trade receivables from such customers that are not sold at the reporting date are classified as
‘held to collect and sell’.
– Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds, short-term deposits) and
short-term investments are subject to low market risk. Cash balances, short-term deposits and short-term investments are measured at
amortised cost. Money market funds are measured at fair value, with movements in fair value recognised in the income statement as a profit
or loss (FVPL).
– Derivatives and unlisted investments are measured at FVPL. During the year, the Company elected to measure its listed investment at FVOCI.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
60
1 Accounting policies continued
Financial instruments – Classification and measurement (continued)
Financial liabilities primarily consist of trade payables, borrowings, derivatives and financial RRSAs.
– Derivatives are classified and measured at FVPL.
– All other financial liabilities are classified and measured at amortised cost.
Financial instruments – Impairment of financial assets and contract assets
IFRS 9 Financial Instruments sets out the basis for the accounting of expected credit losses (ECLs) on financial assets and contract assets resulting
from transactions within the scope of IFRS 15 Revenue from Contracts with Customers. The Group has adopted the simplified approach to provide
for ECLs, measuring the loss allowance at a probability weighted amount that considers reasonable and supportable information about past
events, current conditions and forecasts of future economic conditions of customers. These are incorporated in the simplified model adopted by
using credit ratings which are publicly available, or through internal risk assessments derived using the customer’s latest available financial
information. The ECLs are updated at each reporting date to reflect changes in credit risk since initial recognition. ECLs are calculated for all
financial assets in scope, regardless of whether or not they are overdue.
Financial instruments – Hedge accounting
Forward foreign exchange contracts and commodity swaps (derivative financial instruments) are held to manage the cash flow exposures of
forecast transactions denominated in foreign currencies or in commodities respectively. Derivative financial instruments qualify for hedge
accounting when: (i) there is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and
strategy for undertaking the hedge at the inception of the hedge; and (ii) the hedge is expected to be effective.
In general, the Group has chosen to not apply hedge accounting in respect of these exposures. Prior to its acquisition in 2017, ITP Aero adopted
hedge accounting for its equivalent exposures. It has continued to do so, although the value of the derivatives is not significant relative to those
held by the rest of the Group and are now classified as held for sale.
The Group economically hedges the fair value and cash flow exposures of its borrowings. Cross-currency interest rate swaps are held to manage
the fair value or cash flow exposures of borrowings denominated in foreign currencies and are designated as fair value hedges or cash flow
hedges as appropriate. Interest rate swaps are held to manage the interest rate exposures of fixed and floating rate borrowings and may be
designated as fair value hedges or cash flow hedges as appropriate. If the swaps are not designated as fair value or cash flow hedges, the economic
effect is included in the underlying results – see note 2.
Changes in the fair values of derivatives that are designated as fair value hedges are recognised directly in the income statement. The fair value
changes of effective cash flow hedge derivatives are recognised in OCI and subsequently recycled in the income statement in the same period
or periods during which the hedged cash flows affect profit or loss. Any ineffectiveness in the hedging relationship is included in the income
statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting. At that time, for cash flow hedges and, if the forecast transaction remains probable, any cumulative gain or loss on the hedging
instrument recognised in SOCIE is retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss is recycled to the income statement.
Financial instruments – Replacement of benchmark interest rates
In August 2020, Phase 2 of IBOR reform was published, effective from 1 January 2021. The amendments address issues that arise from the
implementation of the reforms including the replacement of one benchmark with an alternative one. The Phase 2 amendments provide additional
temporary reliefs from applying specific IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments hedge
accounting requirements to hedging relationships directly affected by IBOR reform.
During 2021, the Group carried out an IBOR reform transition project to assess and implement changes to systems, processes, risk and valuation
models, as well as managing related tax and accounting implications. The Group’s risk exposure that is directly affected by the interest rate
benchmark reform is its portfolio of long-term borrowings of £6.1bn and a number of its foreign exchange contracts. The borrowings are hedged,
using interest rate swaps and cross-currency interest rate swaps, for changes in fair value and cash flows attributable to the relevant benchmark
interest rate. The Group has made amendments to the contractual terms of IBOR-referenced floating-rate debt, swaps and foreign exchange
contracts, and updated the relevant hedge designations.
A number of the Group’s lease liabilities are based on a LIBOR index. These are predominantly referencing USD LIBOR which is not expected to
cease until 2023, hence the change in relation to these contracts has not impacted the 2021 financial statements. These contracts will be amended
in due course.
Business combinations and goodwill
Goodwill recognised represents the excess of the fair value of the purchase consideration over the fair value to the Group of the net of the
identifiable assets acquired and the liabilities assumed. On transition to IFRS on 1 January 2004, business combinations were not retrospectively
adjusted to comply with UK-adopted international accounting standards and goodwill was recognised based on the carrying value under the
previous accounting policies. Goodwill in respect of the acquisition of a subsidiary is recognised as an intangible asset. Goodwill arising on the
acquisition of joint arrangements and associates is included in the carrying value of the investment.
Customer relationships
The fair value of customer relationships recognised as a result of a business combination relate to the acquired company’s established rela-
tionships with its existing customers that result in repeat purchases and customer loyalty. Amortisation is charged on a straight-line basis over its
useful economic life, up to a maximum of 15 years.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
61
1 Accounting policies continued
Certification costs
Costs incurred in respect of meeting regulatory certification requirements for new Civil Aerospace aero-engine/aircraft combinations including
payments made to airframe manufacturers for this are recognised as intangible assets to the extent that they can be recovered out of future sales.
They are charged to the income statement over the programme life. Individual programme assets are allocated pro rata to the estimated number
of units to be produced. Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.
Research and development
Expenditure incurred on research and development is distinguished as relating either to a research phase or to a development phase. All research
phase expenditure is charged to the income statement. Development expenditure is recognised as an internally generated intangible asset
(programme asset) only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits.
More specifically, development costs are capitalised from the point at which the following conditions have been met:
– the technical feasibility of completing the programme and the intention and ability (availability of technical, financial and other resources) to
complete the programme asset and use or sell it;
– the probability that future economic benefits will flow from the programme asset; and
– the ability to measure reliably the expenditure attributable to the programme asset during its development.
Capitalisation continues until the point at which the programme asset meets its originally contracted technical specification (defined internally as
the point at which the asset is capable of operating in the manner intended by management).
Subsequent expenditure is capitalised where it enhances the functionality of the programme asset and demonstrably generates an enhanced
economic benefit to the Group. All other subsequent expenditure on programme assets is expensed as incurred.
Individual programme assets are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is
delivered and then charged on a 15-year straight-line basis. In accordance with IAS 38 Intangible Assets, the basis on which programme assets
are amortised is assessed annually.
Key judgement – Determination of the point in time where costs incurred on an internal programme development meet the criteria for
capitalisation
The Group incurs significant research and development expenditure in respect of various development programmes. Determining when capitalisation
should commence and cease is a critical judgement, as is the determination of when subsequent expenditure on the programme assets should be
capitalised. During the year, £104m of development expenditure was capitalised.
Within the Group, there is an established Product Introduction and Lifecycle Management process (PILM) in place. Within this process, the technical
feasibility, the commercial viability and financial assessment of the programme is assessed at certain milestones. When these are met, development
expenditure is capitalised. Prior to this, expenditure is expensed as incurred.
The Group continues to invest in new technologies as a result of the Group’s decarbonisation commitments. As these are new technologies, there is a
higher level of uncertainty over potential outcomes and therefore, this could impact the level of expenditure that is capitalised or recognised in the
income statement in future years.
Subsequent expenditure after entry into service which enhances the performance of the engine and the economic benefits to the Group is capitalised.
This expenditure is referred to as enhanced performance and is governed by the PILM process referred to above. All other development costs are
expensed as incurred.
Key judgement – Determination of the basis for amortising capitalised development costs
The economic benefits of the development costs are primarily those cash inflows arising from long-term service agreements, which are expected to
be relatively consistent for each engine within a programme. Amortisation of development costs is recognised on a straight-line basis over the estimated
period of operation of the engine by its initial operator.
Software
Software that is not specific to an item of property, plant and equipment is classified as an intangible asset, recognised at its acquisition cost and
amortised on a straight-line basis over its useful economic life, up to a maximum of five years. The cost of internally developed software includes
direct labour and an appropriate proportion of overheads.
Other intangible assets
These principally include intangible assets arising on acquisition of businesses, such as technology, patents and licences which are amortised on
a straight-line basis over a maximum of 15 years and trademarks which are not amortised.
Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any provision for impairment in value. The cost
of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads and, where appropriate,
interest.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over
their estimated useful lives. No depreciation is recorded on assets in the course of construction. Estimated useful lives are reassessed annually
and are as follows:
– Land and buildings, as advised by the Group’s professional advisers:
– freehold buildings – five to 50 years (average 25 years); and
– no depreciation is provided on freehold land.
– Plant and equipment – two to 25 years (average 11 years).
– Aircraft and engines – five to 20 years (average 16 years).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
62
1 Accounting policies continued
Leases
Assets and liabilities arising from a lease are initially measured on a present value basis.
Lease liabilities include the net present value of the following lease payments:
– fixed payments less any lease incentive receivable;
– variable lease payments that are based on an index or a rate;
– amounts expected to be payable by the Group under residual value guarantees;
– the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
– payments of penalties for termination of the lease, if the lease term reflects the Group exercising that option.
Where leases commenced after the initial IFRS 16 Leases transition date, the lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to
borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Where
appropriate, lease liabilities are revalued at each reporting date using the spot exchange rate.
Right-of-use assets are measured at cost comprising the following:
– the amount of the initial measurement of lease liability or a revaluation of the liability;
– any lease payments made at or before the commencement date less any lease incentives received;
– any initial direct costs; and
– restoration costs.
Each right-of-use asset is depreciated over the shorter of its useful economic life and the lease term on a straight-line basis unless the lease is
expected to transfer ownership of the underlying asset to the Group, in which case the asset is depreciated to the end of the useful life of the
asset.
Short-term leases are leases with a lease term of 12 months or less. Payments associated with short-term leases and low-value leases are recognised
on a straight-line basis as an expense in the income statement.
Key judgement – Determination of lease term
In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or
not exercise a termination option. Extension options (or periods after termination) are only included in the lease term if the lease is reasonably certain
to be extended (or not terminated). Certain land and building leases have renewal options with renewal dates for the most significant property leases
evenly spread between 2022–2028 and in 2041. The Group reviews its judgements on lease terms annually, including the operational significance of
the site, especially where utilised for manufacturing activities.
Key estimates – Estimates of the payments required to meet residual value guarantees at the end of engine leases
Engine leases in the Civil Aerospace segment often include clauses that require the engines to be returned to the lessor with specific levels of useable
life remaining or cash payments to the lessor. The costs of meeting these requirements are included in the lease payments. The amounts payable are
calculated based upon an estimate of the utilisation of the engines over the lease term, whether the engine is restored to the required condition by
performing an overhaul at our own cost or through the payments of amounts specified in the contract and any new contractual arrangements arising
when the current lease contracts end. Amounts due can vary depending on the level of utilisation of the engines, overhaul activity prior to the end of
the contract, and decisions taken on whether ongoing access to the assets is required at the end of the lease term. During the year, adjustments to
return conditions at the end of leases resulted in a credit of £4m to the income statement. The lease liability at 31 December 2021 included £412m
relating to the cost of meeting these residual value guarantees in the Civil Aerospace business. Up to £76m is payable in the next 12 months, £75m is
due over the following four years and the remaining balance after five years.
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash flows
that are independent of other assets, impairment is considered for the cash-generating unit (CGU) to which the asset belongs. Goodwill, indefinite
life intangible assets and intangible assets not yet available for use are tested for impairment annually. Other intangible assets (including
programme-related intangible assets), property, plant and equipment and investments are assessed for any indications of impairment annually. If
any indication of impairment is identified, an impairment test is performed to estimate the recoverable amount.
If the recoverable amount of an asset (or CGU) is estimated to be below the carrying value, the carrying value is reduced to the recoverable
amount and the impairment loss is recognised as an expense. The recoverable amount is the higher of value in use or fair value less costs to
dispose if this is readily available. The value in use is the present value of future cash flows using a pre-tax discount rate that reflects the time
value of money and the risk specific to the asset. The relevant local statutory tax rates have been applied in calculating post-tax to pre-tax discount
rates.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
63
1 Accounting policies continued
Impairment of non-current assets (continued)
Key judgement – Determination of cash-generating units for assessing impairment of goodwill
The Group conducts impairment reviews at the CGU level. As permitted by IAS 36 Impairment of Assets, impairment reviews for goodwill are
performed at the groups of CGUs level, representing the lowest level at which the Group monitors goodwill for internal management purposes
and no higher than the Group’s operating segments. The main CGUs for which goodwill impairment reviews have been performed are Rolls-
Royce Deutschland Ltd & Co KG and at an aggregated Rolls-Royce Power Systems AG level.
Key estimate – Estimates of cash flow forecasts to support the carrying value of intangible assets (including programme related intangible
assets)
The assessment of the recoverable value of development expenditure, certification costs, and customer relationships recognised as intangible
assets (31 December 2021: £2,274m, 2020: £3,220m) is dependent on estimates of cash flows generated by the relevant programme, the discount
rate used to calculate a present value and assumptions on foreign exchange rates. The estimates of cash flows generated by a programme
comprise: future market share; product performance related estimates (including EFHs and time-on-wing); pricing and cost for uncontracted
business; assumptions over the recovery from COVID-19 of the industries in which we operate; and climate-related matters including
assessment of future contractual terms with suppliers and customers in relation to the cost of carbon (with details set out in notes 1 and 8).
A weaker than expected recovery from the impacts of COVID-19 or a reduction in OE volumes, for example due to reduced customer demand
and an increase in costs as a result of climate change, could result in a deterioration in future cash flow forecasts.
– The Group has considered whether a 10% reduction in OE quantities or a 5% deterioration in EFHs (and hence future cash flows) on the
business aviation programme assets that have previously been subject to impairment would lead to an additional impairment and concluded
that it would not.
– For programmes that have not previously been impaired, but where there is existing headroom that could be significantly reduced over
the next 12 months, the Group has considered whether an increase in costs of up to 10% would lead to an additional impairment and
concluded that it would not.
Inventories
Inventories are valued on a first-in, first-out basis, at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and those direct and indirect overheads, including depreciation of property, plant and equipment, that have been
incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling prices less all
estimated costs of completion and costs to be incurred in marketing, selling and distribution. All inventories are classified as current as it is
expected that they will be used in the Group’s operating cycle, regardless of whether this is expected to be within 12 months of the balance sheet
date.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds and short-term deposits with a maturity of three
months or less on inception. The Group considers overdrafts (repayable on demand) to be an integral part of its cash management activities and
these are included in cash and cash equivalents for the purposes of the cash flow statement. Where the Group operates pooled banking
arrangements across multiple accounts, these are presented on a net basis when it has both a legal right and intention to settle the balances on
a net basis.
The Group offers a supply chain financing (SCF) programme in partnership with banks to enable suppliers, including joint ventures, who are on
our standard 75 day or more payment terms to receive their payment sooner. The election to utilise the programme is the sole decision of the
supplier. As the Group continues to have a contractual obligation to pay its suppliers under commercial terms which are unaffected by any
utilisation of the programme, and it does not retain any ongoing involvement in the SCF, the related payables are retained on the Group’s balance
sheet and classified as trade payables. Further details are disclosed in note 18.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required
to settle that obligation. Provisions are discounted to present value where the effect is material.
The principal provisions are recognised as follows:
– Trent 1000 in-service issues when wastage costs are identified as described on page 57;
– contract losses based on an assessment of whether the direct costs to fulfil a contract are greater than the expected revenue;
– warranties and guarantees based on an assessment of future claims with reference to past experience and recognised at the earlier of when
the underlying products and services are sold and when the likelihood of a future cost is identified; and
– restructuring when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has
created a valid expectation to those affected.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
64
1 Accounting policies continued
Provisions (continued)
Key judgement – Whether any costs should be treated as wastage
As described further on page 57, in rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a contract
where the level of cost was not reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected
to arise where there has been a series of abnormal events which give rise to a significant level of cost of a nature that the Group would not expect to
incur and hence is not reflected in the contract price. Provision is made for any costs identified as wastage when the obligation to incur them arises.
Specifically for the Trent 1000 wastage costs, provision has been made as the Group is an owner of an engine Type Certificate under which it has a
present obligation to develop appropriate design changes to address certain engine conditions that have been noted in issued Airworthiness
Directives. The Group is also required to ensure engine operators can continue to safely operate engines within the terms of their LTSAs, and this
requires the engines to be compliant with the requirements of those issued Airworthiness Directives. These requirements cannot be met without the
Group incurring significant costs in the form of replacement parts and customer claims. Given the significant activities of the Group in designing and
overhauling aero engines it is very experienced in making the required estimates in relation to the number and timing of shop visits, parts costs,
overhaul labour costs and customer claims.
Key estimate – Estimates of the time to resolve the technical issues on the Trent 1000, including the development of the modified HPT blade
and estimates of the expenditure required to settle the obligation relating to Trent 1000 claims and to settle Trent 1000 long-term contracts
assessed as onerous
The Group has provisions for Trent 1000 exceptional costs at 31 December 2021 of £157m (2020: £321m). These represent the Directors’ best estimate
of the expenditure required to settle the obligations at the balance sheet date. These estimates take account of information available and different
possible outcomes.
The Group considers that at 31 December 2021 the Trent 1000 contract loss provisions and the Trent 1000 exceptional cost provision are most sensitive
to changes in estimates. A 12-month delay in the availability of the modified HPT blade could lead to around a £60-100m increase in the Trent 1000
exceptional costs provision.
Key estimates – Estimates of the future revenues and costs to fulfil onerous contracts
The Group has provisions for onerous contracts at 31 December 2021 of £845m (2020: £808m).
An increase in Civil Aerospace widebody estimates of LTSA costs of 1% over the remaining term of the contracts could lead to around a £100-120m
increase in the provision for contract losses across all programmes.
Post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19 Employee Benefits.
For defined benefit plans, obligations are measured at discounted present value, using a discount rate derived from high-quality corporate bonds
denominated in the currency of the plan, whilst plan assets are recorded at fair value. Surpluses in schemes are recognised as assets only if they
represent economic benefits available to the Group in the future. Actuarial gains and losses are recognised immediately in OCI. The service and
financing costs of such plans are recognised separately in the income statement:
– current service costs are spread systematically over the lives of employees;
– past-service costs and settlements are recognised immediately; and
– financing costs are recognised in the periods in which they arise.
UK pension obligations include the estimated impact of the obligation to equalise defined benefit pensions and transfer values for men and women
– see note 21.
Payments to defined contribution schemes are charged as an expense as they fall due.
Key estimate – Estimates of the assumptions for valuing the defined benefit obligation
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19 Employee Benefits. The
valuations, which are based on assumptions determined with independent actuarial advice, resulted in a net deficit of £225m before deferred taxation
being recognised on the balance sheet at 31 December 2021 (2020: deficit of £686m). The size of the net surplus/deficit is sensitive to the actuarial
assumptions, which include the discount rate, price inflation, pension and salary increases, longevity and, in the UK, the number of plan members who
take the option to transfer their pension to a lump sum on retirement or who choose to take the Bridging Pension Option. Following consultation, the
UK scheme closed to future accrual on 31 December 2020 and following conclusion on the final protections agreed in the year to 31 December 2021,
the Group has trued up the estimate recognised at 31 December 2020.
A reduction in the discount rate of 0.25% from 1.90% could lead to an increase in the defined benefit obligations of the RR UK Pension Fund of
approximately £460m. This would be expected to be broadly offset by changes in the value of scheme assets, as the scheme’s investment policies are
designed to mitigate this risk.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from 23.2 years (male aged 45) would increase the defined benefit obligations
of the RR UK Pension Fund by approximately £365m.
It is assumed that 50% of employed deferred and 40% of deferred (2020: 40%) of members of the RR UK Pension Fund will transfer out of the fund on
retirement. The change in this assumption is a result of actual experience. An increase of 5% in this assumption would increase the defined benefit
obligation by £30m.
Further details and sensitivities are included in note 21.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
65
1 Accounting policies continued
Share-based payments
The Group provides share-based payment arrangements to certain employees. These are principally equity-settled arrangements and are
measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value is expensed on a straight-
line basis over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of shares or options that will
vest, except where additional shares vest as a result of the total shareholder return (TSR) performance condition in the long-term incentive plan
(LTIP), where no adjustment is required as allowance for this is included in the initial fair value.
Cash-settled share options (grants in the International ShareSave plan) are measured at fair value at the balance sheet date. The Group recognises
a liability at the balance sheet date based on these fair values, taking into account the estimated number of options that will actually vest and the
relative completion of the vesting period. Changes in the value of this liability are recognised in the income statement for the year.
The cost of shares of Rolls-Royce Holdings plc held by the Group for the purpose of fulfilling obligations in respect of employee share plans is
deducted from equity in the consolidated balance sheet. See note 23 for a further description of the share-based payment plans.
Customer financing support
In connection with the sale of its products the Group will, on occasion, provide financing support for its customers. These arrangements fall into
two categories: credit-based guarantees and asset-value guarantees. Credit-based guarantees are disclosed as commitments or contingent
liabilities dependent on whether aircraft have been delivered or not. The Group considers asset-value guarantees to be non-financial liabilities
and provides for amounts required. As described on page 103, the Directors consider the likelihood of crystallisation in assessing whether
provision is required for any contingent liabilities.
The Group’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers and a broad
product portfolio and are reported on a discounted basis.
Revisions to IFRS not applicable in 2021
Standards and interpretations issued by the IASB are only applicable if endorsed by the UK. Other than IFRS 17 Insurance Contracts and
Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets – Onerous Contracts described below, the Group does not
consider that any standards, amendments or interpretations issued by the IASB, but not yet applicable will have a significant impact on the
Consolidated Financial Statements.
The Group is not expecting to adopt the amendment to IFRS 16 Leases, effective in 2022, which provides a practical expedient to not treat COVID-
19 rent concessions as lease modifications. The Group did not adopt the equivalent practical expedient during 2021.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Amendments to IAS 37 for Onerous Contracts – Cost of Fulfilling a Contract is effective from 1 January 2022. It clarifies the meaning of ‘costs to
fulfil a contract’, explaining that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract (for example,
direct labour and materials) and an allocation of other costs that relate directly to fulfilling contracts (for example, an allocation of the depreciation
charge for an item of PPE used to fulfil the contract). The Group has assessed the impact of this amendment on its contracts (of which the most
significant onerous contracts are in Civil Aerospace) and the inclusion of additional allocated costs is expected to increase the total contract loss
provision by £0.7bn to £0.8bn. As required by the transition arrangements in relation to the amendment, there will be a corresponding impact to
2022 opening retained earnings.
IFRS 17 Insurance Contracts
IFRS 17 is effective from 1 January 2023. The new Standard establishes the principles for the recognition, measurement, presentation and
disclosure of insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information
that faithfully represents those contracts.
The Group has performed an assessment to establish where an impact is expected and at this time the Group believes that the impact is restricted
to its captive insurance company. The process of assessing the financial impact on the Consolidated Financial Statements will continue during
2022.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal proceedings and reflected these in the 2021 results as appropriate.
In addition, the Group completed the sale of its 23.1% shareholding in AirTanker Holdings Limited to Equitix Investment Management Limited on
9 February 2022. Further details are included in Note 26.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
66
2 Segmental analysis
The analysis by business segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments whose operating
results are regularly reviewed by the Board (which acts as the Chief Operating Decision Maker as defined by IFRS 8). The Group’s four divisions
are set out below.
Civil Aerospace development, manufacture, marketing and sales of commercial aero engines and aftermarket services
Defence development, manufacture, marketing and sales of military aero engines, naval engines, submarine nuclear power plants and
aftermarket services
Power Systems development, manufacture, marketing and sales of integrated solutions for onsite power and propulsion
New Markets development, manufacture and sales of small modular reactor (SMR) and new electrical power solutions
For the year ended 31 December 2020, Civil Aerospace, Defence, Power Systems and ITP Aero were identified as core businesses, with other
smaller businesses identified as non-core businesses. From 1 January 2021, the identification of core and non-core businesses has ceased with
non-core businesses now included within the category of ‘Other businesses’. The figures in the segmental analysis are shown in total to include
the Group's four divisions and Other businesses.
Other businesses include the trading results of the Bergen Engines AS business until the date of disposal on 31 December 2021, the results of the
Civil Nuclear Instrumentation & Control business until the date of disposal on 5 November 2021, the results of the North America Civil Nuclear
business until the date of disposal on 31 January 2020 and the results of the Knowledge Management System business until the date of disposal
on 3 February 2020. The trading results of the UK Civil Nuclear business have also been included in Other businesses. The segmental analysis for
2020 has been restated to reflect the 2021 definition of Other businesses.
During the year to 31 December 2021, activity previously managed as part of the Civil Aerospace segment has been transferred to ITP Aero. The
activity transferred from Civil Aerospace to ITP Aero relates to the change in ownership of the Hucknall site with associated fabrications activities.
This transfers the production of fabrications, combustors and fan outlet guide vanes manufactured in Hucknall from Civil Aerospace to ITP Aero.
To ensure comparability, the segmental analysis for 2020 has been restated to reflect this transfer. ITP has been classified as a disposal group
held for sale and discontinued operations since 30 June 2021 and as such, the operating segment is no longer regularly reviewed by the Board
as a basis for making decisions about the allocation of resources to the business or to assess its performance. In line with IFRS 8, ITP Aero is no
longer considered to meet the definition of an operating segment and the segmental analysis for 2020 has been restated to reflect the 2021
assessment of operating segments.
During the year to 31 December 2021, the Group assessed whether its new markets activities met the criteria of an operating segment in
accordance with IFRS 8. As the Group increases its investment in these important new technologies, the result of these activities have been
combined and presented as an additional segment reflecting the differing characteristics and risk profile of these businesses, in line with how
performance is reviewed by the Board. These results were previously included within Civil Aerospace, Defence, Power Systems and Corporate
and Inter-segment. The segmental analysis for 2020 has been restated to reflect the 2021 assessment of operating segments.
Underlying results
The Group presents the financial performance of the businesses in accordance with IFRS 8 and consistently with the basis on which performance
is communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on
effective settled derivative contracts in the period that the cash flow occurs. The impact of the revaluation of monetary assets and liabilities using
the exchange rate that is expected to be achieved by the use of the effective hedge book is recorded within underlying cost of sales. Underlying
financing excludes the impact of revaluing monetary assets and liabilities to period end exchange rates. Transactions between segments are
presented on the same basis as underlying results and eliminated on consolidation. Unrealised fair value gains/(losses) on foreign exchange
contracts, which are recognised as they arise in the statutory results, are excluded from underlying results. To the extent that the previously
forecast transactions are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange
contracts is recorded immediately in the underlying results.
Amounts receivable/(payable) on interest rate swaps which are not designated as hedge relationships for accounting purposes are reclassified
from fair value movement on a statutory basis to interest receivable/(payable) on an underlying basis, as if they were in an effective hedge
relationship.
In the first half of the year, the Group was a net purchaser of USD, with the consequence that the achieved exchange rate GBP:USD of 1.39 on
settled contracts was similar to the average spot rate in the period. In the second half of 2021, the Group was a net seller of USD, at an achieved
exchange rate GBP:USD of 1.59.
Estimates of future USD cash flows have been determined using the Group's base-case forecast. These USD cash flows have been used to establish
the extent of future USD hedge requirements. In 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-
2026, resulting in an underlying charge of £1.7bn being recognised within underlying finance costs and the associated cash settlement costs
occurring over the period 2020-2026. In the year to 31 December 2021, the Group took the opportunity to further reduce the size of the USD
hedge book by an additional $2bn by settling the mark-to market at £1m cost. The derivatives relating to this underlying charge have been
subsequently excluded from the hedge book, and therefore are also excluded from the calculation of the average exchange rate achieved in the
current and future periods. This charge was reversed in arriving at statutory performance on the basis that the cumulative fair value changes on
these derivative contracts are recognised as they arise.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
67
2 Segmental analysis continued
In the year to 31 December 2021, cash settlement costs of £452m were incurred (2020: £202m).
Underlying performance excludes the following:
– the effect of acquisition accounting and business disposals;
– impairment of goodwill, other non-current and current assets where the reasons for the impairment are outside of normal operating activities;
– exceptional items; and
– certain other items which are market driven and outside of the control of management.
Acquisition accounting, business disposals and impairment
We exclude these from underlying results so that the current year and comparative results are directly comparable.
Exceptional items
Items are classified as exceptional where the Directors believe that presentation of the results in this way is useful in providing an understanding
of the Group’s financial performance. Exceptional items are identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors consider quantitative as well as qualitative factors such as the
frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes,
costs of restructuring programmes and one-time past service charges and credits on post-retirement schemes.
Subsequent changes in exceptional items recognised in a prior period will also be recognised as exceptional. All other changes will be recognised
within underlying performance.
Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.
Other items
The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as a
reconciling difference between underlying performance and statutory performance.
Penalties paid on agreements with investigating bodies are considered to be one-off in nature and are therefore excluded from underlying
performance.
The tax effects of the adjustments above are excluded from the underlying tax charge. In addition, changes in tax rates or changes in the amount
of recoverable deferred tax or advance corporation tax recognised are also excluded.
See page 72 for the reconciliation between underlying performance and reported performance.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
68
2 Segmental analysis continued
The following analysis sets out the results of the Group’s businesses on the basis described above and also includes a reconciliation of the
underlying results to those reported in the consolidated income statement.
Civil
Aerospace
1 , 2
£m
Defence
2
£m
Power
Systems
2
£m
New
Markets
2
£m
Other
businesses
£m
Corporate
and Inter-
segment
2
£m
Total
Underlying
£m
Year ended 31 December
2021
Underlying revenue from sale of original
equipment
1,612
1,411
1,744
–
155
(11)
4,911
Underlying revenue from sale of aftermarket
services
2,924
1,957
1,005
2
148
–
6,036
Total
underlying revenue
4,536
3,368
2,749
2
303
(11)
10,947
Gross profit/(loss)
474
721
778
1
32
(10)
1,996
Commercial and administrative costs
(297)
(161)
(383)
(3)
(20)
(35)
(899)
Research and development costs
(434)
(105)
(157)
(68)
(10)
–
(774)
Share of results of joint ventures and associates
85
2
4
–
–
–
91
Underlying operating (loss)/profit
(172)
457
242
(70)
2
(45)
414
Year ended 31 December 2020
Underlying revenue from sale of original
equipment
2,278
1,428
1,787
3
136
(6)
5,626
Underlying revenue from sale of aftermarket
services
2,790
1,927
948
2
137
–
5,804
Total underlying revenue
5,068
3,355
2,735
5
273
(6)
11,430
Gross
(loss)/profit
(1,987)
684
678
2
15
(5)
(613)
Commercial and administrative costs
(310)
(146)
(331)
(1)
(26)
(52)
(866)
Research and development costs
(407)
(86)
(160)
(46)
(9)
–
(708)
Share of results of joint ventures and associates
169
9
1
–
–
–
179
Underlying operating (loss)/profit
(2,535)
461
188
(45)
(20)
(57)
(2,008)
1
The underlying results for Civil Aerospace for 31 December 2020 have been restated to reflect the changes to activity during 2021 due to the transfer of the Hucknall site and associated fabrications
activities to ITP Aero.
2
The underlying results of Civil Aerospace, Defence, Power Systems and Corporate and Inter-segment activities for 31 December 2020 have been restated to reclassify the results of the Group’s SMR and
electrical activities as New Markets.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
69
2 Segmental analysis continued
Reconciliation to statutory results
Total
underlying
£m
Underlying
adjustments and
adjustments to
foreign
exchange
£m
Group
statutory
results
£m
Year ended 31 December 2021
Continuing operations
Revenue from sale of original equipment
4,911
152
5,063
Revenue from aftermarket services 6,036 119 6,155
Total revenue 10,947 271 11,218
Gross profit 1,996 140 2,136
Commercial and administrative costs
(899)
9
(890)
Research and development costs (774)
(4)
(778)
Share of results of joint venture and associates 91 (46)
45
Operating profit 414 99 513
Gain arising on acquisition and disposal of businesses – 56 56
Profit
before financing and taxation
414
155
569
Net financing (378)
(485)
(863)
Profit/(loss) before taxation 36 (330)
(294)
Taxation
(26)
444
418
Profit for the year from continuing operations
10
114
124
Discontinued operations
1
51 (54)
(3)
Profit for the year 61 60 121
Attributable to:
Ordinary shareholders
60
60
120
Non-controlling interests 1 – 1
Year ended 31 December 2020
Continuing operations
Revenue from sale of original equipment
5,626
(68)
5,558
Revenue from aftermarket services 5,804 129 5,933
Total revenue 11,430 61 11,491
Gross (loss)/profit (613)
426 (187)
Commercial and administrative costs
(866)
95
(771)
Research and development costs (708)
(496)
(1,204)
Share of results of joint venture and associates 179 11 190
Operating (loss)/profit (2,008)
36
(1,972)
Gain arising on disposal of businesses – (14)
(14)
(Loss)/profit before financing and taxation (2,008)
22
(1,986)
Net financing
(1,985)
1,172
(813)
(Loss)/profit before taxation (3,993)
1,194 (2,799)
Taxation
(46)
(256)
(302)
(Loss)/profit for the
year from continuing operations
(4,039)
938
(3,101)
Discontinued operations
1
42 (110)
(68)
(Loss)/profit for the year (3,997)
828 (3,169)
Attributable to:
Ordinary shareholders (3,998)
828 (3,170)
Non-controlling interests 1 – 1
1
Discontinued operations relate to the results of ITP Aero and are presented net of intercompany trading eliminations and related consolidation adjustments.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
70
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition
Civil
Aerospace
1 , 2
£m
Defence
2
£m
Power
Systems
2
£m
New
Markets
2
£m
Other
businesses
£m
Corporate
and Inter-
segment
2
£m
Total
Underlying
£m
Year ended 31 December
2021
Original equipment recognised at a point in time
1,612
604
1,720
–
142
(11)
4,067
Original equipment recognised over time
–
807
24
–
13
–
844
Aftermarket services recognised at a point in
time
629
825
871
2
148
–
2,475
Aftermarket services recognised over time
2,223
1,132
134
–
–
–
3,489
Total underlying customer contract revenue
3
4,464
3,368
2,749
2
303
(11)
10,875
Other underlying revenue
72
–
–
–
–
–
72
Total underlying revenue
4,536
3,368
2,749
2
303
(11)
10,947
Year ended 31 December 2020
Original equipment recognised at a point in time
2,278
522
1,769
3
120
(6)
4,686
Original
equipment recognised over time
–
905
17
–
16
–
938
Aftermarket services recognised at a point in
time
1,168
794
824
2
136
–
2,924
Aftermarket services recognised over time
1,398
1,132
124
–
1
–
2,655
Total underlying customer contract revenue
3
4,844
3,353
2,734
5
273
(6)
11,203
Other underlying revenue
224
2
1
–
–
–
227
Total underlying revenue
5,068
3,355
2,735
5
273
(6)
11,430
1
The underlying results for Civil Aerospace for 31 December 2020 have been restated to reflect the changes to activity during 2021 due to the transfer of the Hucknall site and associated fabrications
activities to ITP Aero.
2
The underlying results of Civil Aerospace, Defence, Power Systems and Corporate and Inter-segment activities for 31 December 2020 have been restated to reclassify the results of the Group’s SMR and
electrical activities as New Markets.
3
Includes £159m, of which £214m relates to Civil LTSA contracts (2020: £(1,048)m, of which £(1,061)m relates to Civil LTSA contracts) of revenue recognised in the year relating to performance
obligations satisfied in previous years.
Total underlying
£m
Underlying
adjustments and
adjustments to
foreign exchange
£m
Group
statutory
results
£m
Year ended 31 December
2021
Original equipment recognised at a point in time
4,067
152
4,219
Original equipment recognised over time
844
–
844
Aftermarket services recognised at a point in time
2,
4
75
38
2,
513
Aftermarket services
recognised over time
3,
489
75
3,
564
Total customer contract revenue
10,
875
265
11,
140
Other revenue
72
6
78
Total revenue
1
10,
947
271
11,
218
Year ended 31 December 2020
Original equipment recognised at a point in time
4,
686
(63)
4,
623
Original equipment recognised over time
9
38
(6)
9
32
Aftermarket services recognised at a point in time
2,9
2
4
53
2,97
7
Aftermarket services recognised over time
2,6
55
110
2,
765
Total customer contract revenue
11,
203
94
11,
297
Other revenue
227
(33)
194
Total revenue
1
11,
430
61
11,
491
1
During the year to 31 December 2021, revenue recognised within Civil Aerospace, Defence and Power Systems of £1,634m (2020: £1,701m) was received from a single customer.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
71
2 Segmental analysis continued
Analysis by geographical destination
The Group’s revenue by destination of the ultimate operator is as follows:
2021
Restated
2020
£m
£m
United Kingdom
1,49
7
1,
132
Germany
737
8
07
Switzerland
164
2
58
Spain
106
28
1
France
332
2
2
4
Italy
187
1
85
Russia
170
102
Norway
146
11
0
Rest of Europe
610
7
30
Europe
3,
949
3,829
United
States
3,
525
3,
647
Canada
235
292
North America
3,
760
3,939
South America
170
1
28
Central America
76
6
4
Saudi Arabia
271
353
Rest of Middle East
364
546
Middle East
635
899
China
1,
245
1,0
58
Singapore
105
3
66
Japan
23
3
3
50
South Korea
137
13
0
India
140
7
7
Rest of Asia
359
1
01
Asia
2,
219
2,0
82
Africa
213
2
57
Australasia
196
2
91
Other
–
2
11,
218
11,4
91
Order backlog
Contracted consideration, translated at the estimated long-term exchange rates, that is expected to be recognised as revenue when performance
obligations are satisfied in the future (referred to as order backlog) is as follows:
2021
Restated
2020
Within
five years
£bn
After
five
years
£bn
Total
1
£bn
Within
five
years
£bn
After
five
years
£bn
Total
1
£bn
Civil Aerospace
20.3
20.8
41.1
17.6
24.8
42.4
Defence
6.2
0.3
6.5
7.1
0.4
7.5
Power Systems
2.6
0.2
2.8
2.2
0.2
2.4
Other
businesses
0.2
–
0.2
0.6
–
0.6
29.3
21.3
50.6
27.5
25.4
52.9
1
There is no order backlog attributable to New Markets.
The parties to these contracts have approved the contract and our customers do not have a unilateral enforceable right to terminate the contract
without compensation. The Group excludes Civil Aerospace OE orders (for deliveries beyond the next 7-12 months) that our customers have
placed where they retain a right to cancel. Our expectation based on historical experience is that these orders will be fulfilled. Within the 0-5
years category, contracted revenue in: Defence will largely be recognised in the next three years and Power Systems will be recognised over the
next two years as it is a short cycle business.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
72
2 Segmental analysis continued
2021
2020
Revenue
£m
Profit/(loss)
before
financing
£m
Net
financing
£m
Taxation
11
£m
Revenue
£m
Profit/(loss)
before
financing
£m
Net
financing
£m
Taxation
11
£m
Underlying performance
10,9
4
7
4
14
(378)
(26)
11,430
(2,008)
(1,985)
(46)
Impact of settled derivative contracts on
trading transactions
1
A
27
1
(34)
62
3
3
61
995
(324)
(39)
Unrealised fair value changes to derivative
contracts held for trading
2
A
–
(
6
)
(618)
110
–
8
(85)
(182)
Unrealised net (gains)/losses on closing
future over-hedged position
3
A
–
–
(8)
–
–
–
1,503
(106)
Realised net (gains)/losses on closing over-
hedged position
3
A
–
–
(6)
–
–
–
202
(38)
Unrealised fair value change to derivative
contracts held for financing
4
A
–
–
79
(20)
–
–
(86)
–
Exceptional programme credits/(charges)
5
B
–
105
–
(
1
)
–
620
(36)
–
Exceptional restructuring credit/(charge)
6
B
–
45
–
1
–
(470)
–
32
Impairments
7
C
–
9
–
–
–
(1,244)
–
258
Other write-offs
C
–
–
–
–
–
(92)
–
25
Effect of acquisitions accounting
8
C
–
(50)
–
12
–
(85)
–
23
Pension past-service credit
9
B
–
47
–
(13)
–
308
–
(108)
Other
D
–
(17)
6
(
37
)
–
(4)
(2)
(7)
Included in operating profit/(loss)
27
1
99
(485)
85
61
36
1,172
(142)
Gains/(loss) arising on the acquisitions and
disposals of businesses
10
C
–
56
–
2
–
(14)
–
3
Impact of tax rate change
–
–
–
327
–
–
–
159
Re-recognition/(de-recognition) of
deferred tax assets
–
–
–
30
–
–
–
(276)
Total underlying adjustments
27
1
155
(485)
444
61
22
1,172
(256)
Statutory performance per consolidated
income statement
11,
2
18
5
69
(863)
418
11,491
(1,986)
(813)
(302)
A – FX, B – Exceptional, C – M&A and impairment, D – Other
1
The impact of measuring revenues and costs and the impact of valuation of assets and liabilities using the period end exchange rate rather than the achieved rate or the exchange rate that is
expected to be achieved by the use of the hedge book increased reported revenues by £271m (2020: increased by £61m) and reduced profit before financing and taxation by £34m (2020
restated: reduced loss by £995m). Underlying financing excludes the impact of revaluing monetary assets and liabilities at the period end exchange rate.
2
The underlying results exclude the fair value changes on derivative contracts held for trading. These fair value changes are subsequently recognised in the underlying results when the
contracts are settled.
3
In 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting in an underlying charge of £1.7bn at 31 December 2020. In 2021, this estimate
was updated to reflect the actual cash cost and resulted in a £15m gain to underlying finance costs in the year to 31 December 2021. In the year to 31 December 2021, the Group took the
opportunity to further reduce the size of the USD hedge book by an additional $2bn resulting in a £1m charge to underlying finance costs. Further detail is provided in note 4.
4
Includes the losses on hedge ineffectiveness in the year of £1m (2020: losses £11m) and net fair value gains of £80m (2020: losses of £75m) on any interest rate swaps not designated into
hedging relationships for accounting purposes.
5
During the year to 31 December 2021, the estimated Trent 1000 abnormal wastage costs reduced by £105m following a reassessment of costs and an associated reduction in expected contract
losses. See note 20 for further details.
6
During the year to 31 December 2021, the Group recorded an exceptional restructuring credit of £45m (2020 restated: charge of £470m) which included a £138m provision release offset by
£93m (2020: £116m) associated with initiatives to enable the restructuring which have been charged directly to the income statement. Further details are provided in note 20.
7
The Group has assessed the carrying value of its assets. Further details are provided in notes 8, 9 and 10.
8
The effect of acquisition accounting includes the amortisation of intangible assets arising on previous acquisitions.
9
A past service credit £47m comprises of: £7m has been recorded following the final details on the additional transitional protections agreed during the period; £4m as a result of transferring
employment of 236 employees in anticipation of a business disposal; £4m from the updated scope of the fundamental restructuring programmes following a higher than expected rate of
natural attrition; and £32m from remeasurement of the US defined benefit liability to remove spousal benefits not included in the plan benefits.
10
Gains/(losses) arising on the acquisitions and disposals of businesses are set out in note 26.
11
Appropriate rates of tax have been applied to adjustments made to profit/(loss) before tax in the table above. Adjustments which impact the UK tax loss have an effective tax rate of zero. See
note 5 for more details. The total underlying adjustments in 2021 are a credit of £444m (2020: tax charge of £256m). The overall tax credit in 2021 includes £327m which arises on the re-
measurement of UK deferred tax balances following the change in the UK tax rate from 19% to 25% and £30m re-recognition of deferred tax assets previously not recognised. The £159m tax
credit in 2020 relates to the re-measurement of the UK deferred tax balances from 17% to 19%. In 2020 there is a tax charge of £276m relating to the derecognition of some of the deferred
tax asset on UK losses previously recognised.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
73
2 Segmental analysis continued
Balance sheet analysis
Civil
Aerospace
1, 2
£m
Defence
2
£m
Power
Systems
2
£m
New
Markets
2
£m
Total
reportable
segments
£m
Year ended 31 December 2021
Segment assets 15,846 2,766 3,531 90 22,233
Interests in joint ventures and associates 378 9 16 – 403
Segment liabilities (20,734)
(2,629)
(1,495)
(33)
(24,891)
Net (liabilities)/assets (4,510)
146 2,052 57 (2,255)
Investment in intangible assets, property, plant and equipment,
right
-
of
-
use assets and joint ventures and associates
323
97
187
15
622
Depreciation, amortisation and impairment 660 117 177 4 958
Year ended 31 December 2020
Segment assets 16,622 3,083 3,471 65 23,241
Interests in joint ventures and associates 363 19 11 – 393
Segment liabilities (22,317)
(3,072)
(1,346)
(17)
(26,752)
Net (liabilities)/assets (5,332)
30 2,136 48 (3,118)
Investment in intangible assets, property, plant and equipment,
right
-
of
-
use assets and joint ventures and
associates
774
121
179
3
1,077
Depreciation, amortisation and impairment 1,914 125 266 5 2,310
1
The financial position for Civil Aerospace for 31 December 2020 has been restated to reflect the changes to activity during 2021 as described on page 66.
2
The financial positions of Civil Aerospace, Defence, Power Systems, and Corporate and Inter-segment activities for 31 December 2020 have been restated to reclassify the results of the Group’s SMR and
electrical activities as New Markets.
Reconciliation to the balance sheet
2021
2020
£m
£m
Total r
eportable segment assets
excluding held for sale
22,
233
23,241
Other businesses
14
21
Corporate and
I
nter
-
segment
(1,921)
(2,781)
Interests in joint ventures and associates
403
393
ITP Aero prior to classification as held for sale
–
2,091
Assets held for
sale
1
2,028
288
Cash and cash equivalents and short
-
term investments
2,629
3,4
5
2
Fair value of swaps hedging fixed rate borrowings
135
293
Deferred and income tax assets
2,339
1,943
Post
-
retirement scheme surpluses
1,148
907
Total
assets
29,0
08
29,848
Total r
eportable segment liabilities
excluding held for sale
(24,8
91
)
(26,751)
Other
businesses
(11)
(10)
Corporate and
I
nter
-
segment
2,13
8
3,26
1
ITP Aero prior to classification as held for sale
–
(1,036)
Liabilities associated with assets held for sale
1
(723)
(228)
Borrowings and lease liabilities
(7,776)
(7,330)
Fair value of swaps hedging fixed rate borrowings
(98)
(42)
Deferred and income tax liabilities
(552)
(648)
Post
-
retirement scheme deficits
(1,373)
(1,580)
Total liabilities
(33,
286
)
(34,36
4
)
Net liabilities
(4,
278
)
(4,51
6
)
1
As at 31 December 2021, assets and liabilities relating to ITP Aero, the investment in Airtanker Holdings and other non-current assets related to the Group’s site rationalisation activities are classified as held
for sale. At 31 December 2020, Bergen Engines AS and Civil Nuclear Instrumentation and Control were classified as held for sale. For further details see note 26.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
74
2 Segmental analysis continued
The carrying amounts of the Group’s non-current assets including investments but excluding financial instruments, deferred tax assets and post-
employment benefit surpluses, by the geographical area in which the assets are located, are as follows:
2021
2020
£m
£m
United Kingdom
5,489
5,823
Germany
2,086
2,269
Spain
38
1,267
United
States
1,282
1,380
Other
706
739
9,601
11,478
3 Research and development
2021
Restated
2020
£m £m
Gross research and development costs
(1,179)
(1,225)
Contributions and fees
1
366
353
Expenditure in the year
(813)
(872)
Capitalised as intangible assets
105
228
Amortisation and impairment of capitalised costs
2
(70)
(560)
Net cost recognised in the income statement
(778)
(1,204)
Underlying adjustments relating to effects of acquisition accounting, impairment and foreign exchange
3
4
496
Net underlying cost recognised in the income statement
(774)
(708)
1
Includes government funding.
2
See note 8 for analysis of amortisation and impairment. During the year, amortisation of £5m has been incurred within the disposal group recognised as a discontinued operation.
3
During the year, no impairment of research and development was recorded. In the comparative year to 31 December 2020 (restated), impairment charges of £464m were recorded, relating to
the financial and operational impact of COVID-19.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
75
4 Net financing
2021
Restated
2020
Per
consolidated
income
statement
£m
Underlying
financing
1
£m
Per
consolidated
income
statement
£m
Underlying
financing
1
£m
Interest receivable 7 7 21 21
Net fair value gains on non
-
hedge accounted interest rate swaps
2
80
–
–
–
Financial RRSAs – foreign exchange differences and changes in
forecast payments
–
–
12
–
Net fair value gains on commodity contracts
63
–
–
–
Financing on post
-
retirement scheme surpluses
17
–
28
–
Net foreign exchange gains
62
–
–
–
Realised net gains on closing over-hedged position
3
–
6
–
–
Unrealised net gains on closing over
-
hedged position
3
–
8
–
–
Financing income
229
21
61
21
Interest payable
(252)
(262)
(178)
(175)
Net fair value losses on foreign
currency contracts
(681)
–
(23)
–
Net fair value losses on non
-
hedge accounted interest rate swaps
2
–
–
(75)
–
Unrealised net losses on closing future over
-
hedged position
–
–
–
(1,503)
Realised net losses on closing over
-
hedge position
–
–
–
(202)
Financial RRSAs ‒ foreign exchange differences and changes in
forecast payments
(7)
–
(20)
–
Financial charge relating to financial RRSAs
–
–
(3)
(8)
Net fair value losses on
commodity contracts
–
–
(62)
–
Financing on post
-
retirement scheme deficits
(20)
–
(29)
–
Net foreign exchange losses – – (324)
–
Fees paid on undrawn facilities
(62)
(62)
(97)
(97)
Other financing charges
(70)
(75)
(63)
(21)
Financing costs
(1,092)
(399)
(874)
(2,006)
Net financing costs
(863)
(378)
(813)
(1,985)
Analysed as:
Net interest payable
(245)
(255)
(157)
(154)
Net fair value (losses)
/gains
on derivative contracts
(538)
14
(160)
(1,705)
Net post-retirement scheme financing
(3)
–
(1)
–
Net foreign exchange
g
ains
/(losses)
62
–
(324)
–
Net other financing
(139)
(137)
(171)
(126)
Net financing costs
(863)
(378)
(813)
(1,985)
1
See note 2 for definition of underlying results.
2
The consolidated income statement shows the net fair value gain/(loss) on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing
reclassifies the fair value movements on these interest rates swaps from fair value movement to net interest payable.
3
In 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting in an underlying charge of £1,689m at 31 December 2020. In 2021, this estimate
was updated to reflect the actual cash settlement cost of £1,674m and resulted in a £15m gain to underlying finance costs in the year to 31 December 2021. In the year to 31 December 2021, the
Group took the opportunity to further reduce the size of the USD hedge book by an additional $2bn resulting in a £1m charge to underlying finance costs. The cash settlement costs of $1,674m
will occur over the period 2020-2026, £186m was incurred in 2020 and £452m was incurred in the year to 31 December 2021. The Group estimates that future cash outflows of £326m will be
incurred in 2022 and £710m spread over 2023 to 2026.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
76
5 Taxation
(Credited)/charged in the income statement
UK Overseas Total
2021
£m
Restated
2020
£m
2021
£m
Restated
2020
£m
2021
£m
Restated
2020
£m
Current tax charge for the year
17
12
151
1
62
168
1
74
Adjustments in respect of prior years
2
–
12
(27)
14
(27)
Current tax
19
12
163
1
35
182
1
47
Deferred tax (credit)
/charge
for the year
(173)
17
8
(59)
(3
27
)
(232)
(1
4
9)
Adjustments in respect of prior years
(15)
(12)
(26)
42
(41)
30
Derecognition of deferred tax
–
433
–
–
–
433
Deferred tax credit resulting from increase
in
UK
tax rate
s
(327)
(1
59
)
–
–
(327)
(1
59
)
Deferred tax
(515)
4
40
(85)
(
285
)
(600)
1
55
(C
redited)
/charged
in
the income statement
(496)
45
2
78
(1
50
)
(418)
3
02
Other tax (charges)/credits
OCI Equity
Items that will not be
reclassified
Items that may be reclassified
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Deferred tax:
Movement in post
-
retirement schemes
(79)
195
–
–
–
–
Cash flow hedge
–
–
(2)
(4)
–
–
Net investment hedge
–
–
(3)
2
–
–
Share
-
based payments
–
direct to equity
–
–
–
–
17
5
Other
tax
(charges)
/
credits
(79)
195
(5)
(2)
17
5
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
77
5 Taxation continued
Tax reconciliation on continuing operations
2021
Restated
2020
£m
£m
Loss before taxation
(29
4
)
(2,
799
)
Less share of results of joint ventures and associates (note
1
1
)
(22)
(132)
Loss before taxation
from continuing operations
excluding joint ventures and associates
(
316
)
(2,
931
)
Nominal tax credit at UK corporation tax rate
19%
(
2020
: 19%)
(
60
)
(557)
UK tax rate differential
1
(
33
)
33
Overseas rate differences
2
26
(59)
Impairments
–
21
R&D credits
(10)
(10)
Exempt gain on disposal of businesses
3
(15)
–
Other permanent differences
1
3
9
Benefit to deferred tax from previously unrecognised tax losses and temporary differences
(
47
)
–
Tax losses
and other temporary differences not
recognised in deferred tax
4
6
2
588
Derecognition of deferred tax
5
–
433
Adjustments in respect of prior years
(27)
3
Increase in deferred taxes resulting from a change in the UK tax rate
6
(327)
(159)
(418)
302
Underlying items (note
2)
26
46
Non
-
underlying items
(444)
256
(418)
302
Tax on discontinued operations
2021
Restated
2020
£m
£m
Tax credit on loss before taxation from discontinued operations
(34)
(43)
1
The UK tax rate differential arises on the difference between the deferred tax rate and the UK current corporation tax rate.
2
Overseas rate differences mainly relate to tax on profits or losses in countries such as the US and Germany which have higher tax rates than the UK. In 2020 the impact is negative because of
the loss in Germany relating to the impairment of the business aviation programme intangible assets.
3
The exempt gain mainly relates to the disposal of the Civil Nuclear Instrumentation and Control business.
4
Tax losses and other temporary differences not recognised mainly relate to the UK.
5
Derecognition of deferred tax assets in 2020 relates to foreign exchange and commodity financial assets and liabilities and UK losses.
6
UK deferred tax was previously measured at 19%. The Spring Budget 2021 announced that the UK corporate tax rate will increase to 25% from 1 April 2023. The UK deferred tax balances have
therefore been re-measured at 25%. The 2020 rate change relates to the Spring Budget 2020 announcement that the UK tax rate would remain at 19% rather than reducing to 17%.
Deferred taxation assets and liabilities
2021
Restated
2020
£m
£m
At 1 January
1,332
1,269
Amount credited
/(
charged
)
to income statement
636
(107)
Amount
(
charged
)
/credited
to other comprehensive income
(82)
197
Amount charged
to cash flow hedge reserve
(2)
(4)
Amount credite
d
to equity
17
5
On acquisition
/disposal
of businesses
1
(4)
(20)
Transferred to assets held for sale
2
(85)
(4)
Exchange differences
(14)
(4)
At 31 December
1,798
1,332
Deferred tax assets
2,249
1,826
Deferred tax liabilities
(451)
(494)
1,798
1,332
1
The 2021 deferred tax relates to the disposal of Bergen Engines AS and the Civil Nuclear Instrumentation & Control business. The 2020 deferred tax relates to the acquisitions of Qinous GmBH
and Kinolt Group S.A.
2
The 2021 deferred tax transferred to assets held for sale relates to ITP Aero. The 2020 deferred tax transferred to assets held for sale relates to Bergen Engines AS and the Civil Nuclear
Instrumentation and Control business.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
78
5 Taxation continued
The analysis of the deferred tax position is as follows:
At 1
January
£m
Recognised
in income
statement
£m
Recognised
in OCI
£m
Recognised
in equity
£m
Disposals
and
acquisition
related
activity
£m
Transferred
to held for
sale
£m
Exchange
differences
£m
At 31
December
£m
2021
Intangible assets
(567)
(102)
–
–
–
188
17
(464)
Property, plant and equipment
34
145
–
–
–
23
(9)
193
Other temporary differences
343
185
(12)
–
(4)
(49)
8
471
Net contract liabilities
56
17
–
–
–
–
–
73
Pensions and other post-
retirement scheme benefits
(8)
(47)
(79)
–
–
–
(6)
(140)
Foreign exchange and
commodity financial assets and
liabilities
187
165
7
–
–
1
2
362
Losses
850
254
–
17
–
(33)
(3)
1,085
R&D credit
274
20
–
–
–
(215)
(23)
56
Advance corporation tax
163
(1)
–
–
–
–
–
162
1,332
636
(84)
17
(4)
(85)
(14)
1,798
Recognised in:
Continuing operations
600
Discontinued operations
36
2020
Intangible assets
(726)
160
–
–
(20)
–
19
(567)
Property, plant and equipment
(138)
153
–
–
(2)
–
21
34
Other temporary differences
374
48
5
(1)
6
(4)
(85)
343
Net contract liabilities
55
1
–
–
–
–
–
56
Pensions and other post-
retirement scheme benefits
(154)
(48)
195
–
–
–
(1)
(8)
Foreign exchange and
commodity financial assets and
liabilities
425
(251)
(7)
–
(6)
–
26
187
Losses
1,017
(178)
–
6
2
–
3
850
R&D credit
253
8
–
–
–
–
13
274
Advance corporation tax
163
–
–
–
–
–
–
163
1,269
(107)
193
5
(20)
(4)
(4)
1,332
Recognised in:
Continuing operations
(155)
Discontinued operations
48
Unrecognised deferred tax assets
2021
2020
£m
£m
Advance corporation tax
19
19
UK losses
1,56
3
1,181
Foreign exchange and commodity
financial assets and liabilities
392
369
Losses and other unrecognised deferred tax assets
73
68
Deferred tax not recognised on unused tax losses and other items on the basis that future
economic benefit is uncertain
2,04
7
1,637
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
79
5 Taxation continued
Gross amount and expiry of losses and other deductible temporary differences for which no deferred tax asset has been recognised:
2021
Total gross
losses and
deductible
temporary
differences
£m
UK losses
£m
Foreign
exchange and
commodity
financial
assets and
liabilities
£m
Other losses
£m
Other
deductible
temporary
differences
£m
Expiry within 5 years
4
–
–
4
–
Expiry within 6 to 30 years
282
–
–
282
–
No expiry
7,9
92
6,2
51
1,567
66
108
8,2
78
6,2
51
1,567
352
108
2020
Total gross
losses and
deductible
temporary
differences
£m
UK losses
£m
Foreign
exchange and
commodity
financial
assets and
liabilities
£m
Other losses
£m
Other
deductible
temporary
differences
£m
Expiry within 5 years
26
–
–
26
–
Expiry
within 6 to 30 years
281
–
–
281
–
No expiry
8,381
6,214
1,940
44
183
8,688
6,214
1,940
351
183
In addition to the gross balances shown above, advance corporation tax of £19m (2020: £19m) has not been recognised. Advance corporation tax
has no expiry.
Deferred tax assets of £2,249m include £1,054m (2020: £801m) relating to UK tax losses and £162m (2020: £163m) relating to advance corporation
tax (ACT), both arising in Rolls-Royce plc. These assets have been recognised based on the expectation that the business will generate taxable
profits and tax liabilities in the future against which the losses and ACT can be utilised.
Most of the tax losses relate to the Civil Aerospace widebody business which makes initial losses through the investment period of a programme
and then makes a profit through its contracts for services. The programme lifecycles are typically in excess of 30 years with more of the widebody
engine programmes forecast at the upper end of that range. In the past few years there have been four new engines that have entered into
service (Trent 1000–TEN, Trent 7000, Trent XWB-84 and Trent XWB-97).
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can
be utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset
and using latest UK forecasts, which are mainly driven by the Civil Aerospace widebody business, to assess the level of future taxable profits.
The recoverability of deferred tax assets relating to tax losses and ACT has been assessed in 2021 on the following basis:
– using the most recent UK profit forecasts which are consistent with past experience and external sources on market conditions. These
forecasts cover the next five years; and
– the long-term forecast profit profile of certain of the major widebody engine programmes which is typically in excess of 30 years from initial
investment to retirement of the fleet, including the aftermarket revenues earned from airline customers;
– taking into account forecast reductions in the usage of older aircraft, and including new business in certain areas; and
– taking into account a 25% probability of the severe but plausible downside forecast materialising in relation to the civil aviation industry; and
– the long-term forecast profit and cost profile of the other parts of the business.
The assessment takes into account UK tax laws that, in broad terms, restrict the offset of the carried forward tax losses to 50% of current year
profits. In addition, management’s assumptions relating to the amounts and timing of future taxable profits take into account the impact of COVID-
19 and climate change on existing widebody engine programmes. Based on this assessment, the Group has recognised a deferred tax asset of
£1,054m relating to losses and £162m relating to ACT. This reflects the conclusions that:
– It is probable that the business will generate taxable income and tax liabilities in the future against which these losses and the ACT can be
utilised.
– Based on current forecasts and using various scenarios these losses and the ACT will be used in full within the expected widebody engine
programme lifecycles.
– The Group has not recognised any deferred tax assets in respect of 2021 UK tax losses.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
80
5 Taxation continued
An explanation of the potential impact of climate change on forecast profits and sensitivity analysis can be found in note 1.
The Group has also reassessed the recovery of other deferred tax assets in Rolls-Royce plc, including those arising on unrealised losses on
derivative contracts, resulting in a net increase of £154m of which £58m relates to the increase in the UK corporation tax rate (see below). Any
future changes in tax law or the structure of the Group could have a significant effect on the use of losses, ACT and other deferred tax assets,
including the period over which they can be used. In view of this and the significant judgement involved the Board continuously reassesses this
area.
The other significant deferred tax assets in respect of tax losses and other deductible temporary differences continue to arise in Rolls-Royce
Deutschland Ltd & Co KG, where the main business is business aviation. The total net deferred tax asset is £254m (2020: £252m), which has been
recognised in full as it is considered probable that the business will generate taxable income in the future against which these assets can be
utilised.
The Spring Budget 2021 announced that the UK corporation tax rate will increase from 19% to 25% from 1 April 2023. The new law was substantively
enacted on 24 May 2021. The prior year UK deferred tax assets and liabilities were calculated at 19%, as this was the enacted rate at the 2020
balance sheet date. As the 25% rate has been substantively enacted before 31 December 2021, the UK deferred tax assets and liabilities have been
re-measured at 25%.
The resulting credits and charges have been recognised in the income statement except to the extent that they relate to items previously credited
or charged to equity. Accordingly, in 2021, £327m has been credited to the income statement and £17m has been credited directly to equity.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not
been recognised, aggregate to £957m (2020: £907m). No deferred tax liability has been recognised on the potential withholding tax due on the
remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will not be given
in the foreseeable future.
6 Auditors’ remuneration
2021
2020
£m
£m
Fees payable to the Company’s auditors and its associates for the audit of the Parent company and
consolidated financial statements
5.
8
4.9
Fees payable to the Company’s auditor and its associates for the audit of the Company’s subsidiaries
pursuant to legislation
5.
7
5.3
Total fees payable for audit services
11.
5
10.2
Fees payable to the Company’s auditor and its associates for other services:
Audit related assurance services
1
1.7
1.6
Other assurance services
2
0.2
0.5
Total fees payable to the Company’s auditor and its associates
3
13.
4
12.3
Fees payable in respect of the Group’s pension schemes:
Audit
0.1
0.1
1
This includes £0.7m (2020: £1.0m) for the review of the half-year report, £0.8m (2020: £0.6m) in respect of the audit of grant claims and £0.2m (2020: nil) for a non-statutory audit of Bergen
Engines.
2
This includes £0.1m in respect levies payable to BEIS (Department of Business, Energy and Industrial Strategy) (2020: £0.5m in respect of the bond issuance).
3
Audit fees for overseas entities are reported at the average exchange rate for the year.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
81
7 Employee information
2021
2020
Number
Number
United Kingdom
19,700
22,000
Germany
9,500
9,800
United
States
5,000
5,400
Spain
2,700
3,000
Italy
900
800
Singapore
900
1
,
100
Nordics
700
7
00
Canada
700
800
India
600
1,000
France
600
700
Rest of world
2,700
2,900
Monthly average number of employees
44,000
48,200
Civil
Aerospace
1
17,900
23,300
Defence
1
11,100
10,
5
00
Power Systems
1
9,100
8,900
New Markets
1
400
300
Other businesses
2
1,400
1,600
Corporate
1, 3
100
100
Monthly average number of employees excluding discontinued operations
40,000
4
3
,700
ITP Aero (classified as discontinued operation)
1
4,000
4
,500
Monthly average number of
employees
44,000
48,200
2021
2020
Continuing
operations
Discontinued
operations
Total
Continuing
operations
Discontinued
operations
Total
£m
£m
£m
£m
£m
£m
Wages, salaries and benefits
2,
392
15
4
2,
546
2,404
164
2,568
Social security costs
343
36
379
392
41
433
Share-based payments (note 23)
28
–
28
25
–
25
Pensions and other post-retirement scheme benefits (note
2
1
)
250
3
253
92
5
97
Group employment costs
4
3,013
193
3,206
2,913
210
3,123
1
Comparative information has been restated to reflect changes in segmental analysis. See note 2 for more detail.
2
Other businesses are set out in note 2 on page 66.
3
Corporate consists of employees who do not provide a shared service to the segments. Where corporate functions provide such a service, employees have been allocated to the segments on
an appropriate basis.
4
Remuneration of key management personnel is shown in note 25.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
82
8 Intangible assets
Goodwill
£m
Certification
costs
£m
Development
expenditure
£m
Customer
relationships
£m
Software
4
£m
Other
£m
Total
£m
Cost
At 1 January 2020
1,024
962
3,294
1,303
967
803
8,353
Additions
–
3
232
–
89
40
364
Acquisitions of businesses
57
–
3
41
–
36
137
Transferred to assets held for sale
1
(3)
–
(33)
–
(12)
(4)
(52)
Disposals
–
(1)
–
–
(93)
(2)
(96)
Reclassifications
2
4
(4)
(8)
–
1
5
(6)
1
Exchange differences
30
3
76
59
2
26
196
At 31 December 2020
1,112
963
3,564
1,403
968
893
8,903
Additions
–
1
104
–
83
35
223
Transferred to assets held for sale
1
–
(6)
(179)
(868)
(15)
(59)
(1,127)
Disposals
(4)
(22)
–
–
(51)
(2)
(79)
Reclassifications
2
–
–
–
–
(2)
8
6
Exchange differences
(48)
(3)
(96)
(60)
(5)
(42)
(254)
At 31 December
2021
1,060
933
3,393
475
978
833
7,672
Accumulated amortisation and impairment
At 1 January 2020
30
392
1,201
354
605
329
2,911
Charge for the year
3
–
21
106
82
81
33
323
Impairment
8
17
481
31
5
37
579
Transferred to assets held for sale
1
–
–
(20)
–
(12)
(4)
(36)
Disposals
–
(1)
–
–
(75)
(2)
(78)
Reclassifications
2
–
–
(2)
–
2
–
–
Exchange difference
s
–
–
37
11
1
10
59
At 31 December 2020
38
429
1,803
478
607
403
3,758
Charge for the year
3
–
21
75
59
97
29
281
Impairment
–
–
–
–
1
8
9
Transferred to assets held for sale
1
–
(4)
(51)
(176)
(10)
–
(241)
Disposals
(4)
(21)
–
–
(48)
(1)
(74)
Reclassifications
2
–
–
(1)
–
6
1
6
Exchange difference
s
–
–
(66)
(19)
(3)
(20)
(108)
At 31 December
2021
34
425
1,760
342
650
420
3,631
Net book value
At 31 December
2021
1,026
508
1,633
133
328
413
4,041
At 31 December 2020
1,074
534
1,761
925
361
490
5,145
1
ITP Aero has been classified as a disposal group held for sale since 30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified held for sale at
31 December 2020 and have been sold during the year – see note 26.
2
Includes reclassifications within intangible assets or from property, plant and equipment when available for use.
3
Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development costs.
3
Includes £115m (2020: £110m) of software under course of construction which is not amortised.
At 31 December 2021, the Group had expenditure commitments for software of £49m (2020: £34m).
Goodwill
In accordance with the requirements of IAS 36 Impairment of Assets, goodwill is allocated to the Group’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as follows:
Primary
reporting
segment
2021
£m
2020
£m
Rolls
-
Royce Power Systems AG
Power Systems
760
792
Rolls
-
Royce Deutschland Ltd & Co KG
Civil Aerospace
229
245
Other
Various
37
37
1,026
1,074
Goodwill has been tested for impairment during 2021 on the following basis:
– The carrying values of goodwill have been assessed by reference to value in use. These have been estimated using cash flows from the most
recent forecasts prepared by the Directors, which are consistent with past experience and external sources of information on market
conditions. These forecasts generally cover the next five years. Growth rates for the period not covered by the forecasts are based on growth
rates of 2% which reflect the products, industries and countries in which the relevant CGU or group of CGUs operate.
– The key forecast assumptions for the impairment tests are the discount rate and the cash flow projections, in particular the programme
assumptions (such as sales volumes and product costs), the impact of foreign exchange rates on the relationship between selling prices and
costs, and growth rates. Impairment tests are performed using prevailing exchange rates.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
83
8 Intangible assets continued
– The Group believes there are significant business growth opportunities to come from Rolls-Royce playing a leading role in the transition to
net zero, whilst at the same time climate change poses potentially significant risks. The assumptions used by the Directors are based on past
experience and external sources of information. The main areas that have been considered are demand for engines and their in-service lives,
utilisation of the products whilst in service, and the impact of market and regulatory change. The investment required to ensure our new
products will be compatible with net zero operation by 2030, and to achieve net zero scope 1 and 2 GHG emissions is reflected in the forecasts
used.
A 1.5
o
C Paris-aligned sensitivity, based on IEA and Oxford Economics forecasts, has been considered which assumes that Governments adopt
strict product and behavioural standards, high carbon pricing and strategic investments in low carbon alternatives, with markets willing to pay
for low carbon solutions. The sensitivity has considered the likelihood of demand changes for our products based on their relative fuel efficiency
in the marketplace and the probability of alternatives being introduced earlier than currently expected. The sensitivity also reflects a broad range
of potential costs imposed by policy or regulatory interventions (through carbon pricing). This sensitivity does not indicate the need for an
impairment charge. Further detail can be found in note 1.
The principal value in use assumptions for goodwill balances considered to be individually significant are:
Rolls-Royce Power Systems AG
– Trading assumptions (e.g. volume of equipment deliveries, pricing achieved and cost escalation) that are based on current and known future
programmes, estimates of market share and long-term economic forecasts;
– Plausible downside scenario included with a 20% weighting;
– Cash flows beyond the five-year forecasts that are assumed to grow at 2.0% (2020: 2.0%); and
– Pre-tax discount rate of 10.7% (2020: 11.7%).
The Directors do not consider that any reasonably possible changes in the key assumptions (including taking consideration of the climate risks
above) would cause the value in use of the goodwill to fall below its carrying value.
Rolls-Royce Deutschland Ltd & Co KG
– Trading assumptions (e.g. volume of engine deliveries, flying hours of installed fleet, including assumptions on the recovery of the civil aviation
industry, and cost escalation) that are based on current and known future programmes, estimates of market share and long-term economic
forecasts;
– Plausible downside scenario included with a 25% weighting;
– Cash flows beyond the five-year forecasts that are assumed to grow at 2.0% (2020: 2.0%); and
– Pre-tax discount rate of 11.9% (2020: 11.9%).
The Directors do not consider that any reasonably possible changes in the key assumptions (including taking consideration of the climate risks
above) would cause the value in use of the goodwill to fall below its carrying value.
Other cash generating units
Goodwill balances across the Group that are not considered to be individually significant were also tested for impairment, resulting in no
impairment charge (2020: £8m) being recognised in 2021.
The carrying amounts and the residual life of the material intangible assets (excluding goodwill) for the Group are as follows:
Residual life
Net book value
2021
2020
£m
£m
Trent programme intangible assets
1
7
-
15 years
1,787
1,770
Business
aviation
programme intangible assets
2
15 years
237
256
Customer relationship assets on acquisition of ITP Aero
3
Typically 13
-
35 years
–
651
Intangible assets from acquisition of Power Systems
4
491
531
2,515
3,208
1
Included within the Trent programmes are the Trent 1000, Trent 7000 and Trent XWB.
2
Included within business aviation are the Pearl 700 and Pearl 15.
3
ITP Aero has been classified as a disposal group held for sale since 30 June 2021.
4
Includes £108m (2020: £115m) in respect of a brand intangible asset which is not amortised. Remaining assets are amortised over a range of 2–10 years.
The carrying amount of goodwill or intangible assets allocated across multiple CGUs is not significant in comparison with the Group’s total carrying
amount of goodwill or intangible assets with indefinite useful lives.
Other intangible assets (including programme intangible assets) have been reviewed for impairment in accordance with IAS 36 Impairment of
Assets. Assessments have considered potential triggers of impairment such as external factors including climate change (as set out in the goodwill
section above), significant changes with an adverse effect on a programme and by analysing latest management forecasts against those prepared
in 2020 to identify any deterioration in performance. Where a trigger event has been identified, an impairment test has been carried out. Where
an impairment was required the test was performed on the following basis:
– The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent
forecasts prepared by the Directors, which are consistent with past experience and external sources of information on market conditions over
the lives of the respective programmes.
– The key assumptions underlying cash flow projections are based on estimates of product performance related estimates, future market share
and pricing and cost for uncontracted business. Climate risks are considered when making these estimates consistent with the assumptions
above. The uncertainty over the recovery from COVID-19 has been modelled by including downside forecasts at an appropriate weighting
taking into account the business segment being considered.
There have been no individually material impairment charges or reversals recognised in the year.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
84
9 Property, plant and equipment
Land and
buildings
£m
Plant and
equipment
£m
Aircraft and
engines
£m
In course of
construction
£m
Total
£m
Cost
At 1 January
2020
2,020
5,497
876
401
8,794
Additions
14
145
162
232
553
Acquisition of
businesses
9
7
–
1
17
Transferred to assets held for sale
1
(32)
(77)
–
(9)
(118)
Disposal of businesses
–
(19)
–
–
(19)
Disposals/write
-
offs
(52)
(264)
(19)
(24)
(359)
Reclassifications
2
25
1
17
3
(150)
(5)
Exchange differences
10
36
3
–
49
At 31
December 2020
1,994
5,442
1,025
451
8,912
Additions
19
120
6
154
299
Transferred to assets held for sale
1
(200)
(305)
(22)
(8)
(535)
Disposals/write
-
offs
(
59
)
(2
6
4)
(11)
(23)
(
357
)
Reclassifications
2
144
75
53
(271)
1
Exchange differences
(33)
(82)
(5)
(3)
(123)
At 31 December
2021
1,
865
4,986
1,046
300
8,
197
Accumulated depreciation
At 1 January
2020
590
3,167
223
11
3,991
Charge for the year
3
71
362
56
–
489
Impairment
71
137
97
27
332
Transferred to assets held for sale
1
(29)
(74)
–
(8)
(111)
Disposal of businesses
–
(19)
–
–
(19)
Disposals/write
-
offs
(33)
(248)
(2)
(13)
(296)
Reclassifications
2
10
(1)
–
(9)
–
Exchange differences
(1)
12
–
–
11
At 31 December 2020
679
3,336
374
8
4,397
Charge for the year
3
70
312
57
–
439
Impairment
4
1
18
–
–
19
Transferred to assets held for sale
1
(74)
(127)
(5)
–
(206)
Disposals/write
-
offs
(
48
)
(
254
)
(1)
–
(
303
)
Reclassifications
2
(7)
11
(10)
–
(6)
Exchange differences
(7)
(52)
(1)
–
(60)
At 31 December
2021
614
3,
244
414
8
4,
280
Net book value
At 31 December
2021
1,251
1,742
632
292
3,917
At 31 December 2020
1,3
1
5
2,106
651
443
4,515
1
ITP Aero has been classified as a disposal group held for sale since 30 June 2021. In addition, property, plant and equipment related to the Group's site rationalisation activities have been
classified as held for sale at 31 December 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified held for sale at 31 December 2020 – see note 26.
2
Includes reclassifications of assets under construction to the relevant classification in property, plant and equipment right-of-use assets and intangible assets when available for use.
3
Depreciation is charged to cost of sales and commercial and administrative costs or included in the cost of inventory as appropriate.
4
The carrying values of property, plant and equipment have been assessed during the period in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed
for impairment together with other assets used in individual programmes– see assumptions in note 8. Land and buildings are generally used across multiple programmes and are considered
based on future expectations of the use of the site, which includes any implications from climate related risks as explained in note 8. As a result of this assessment, there are no individually
material impairment charges or reversals in the year.
Property, plant and equipment includes:
2021
£m
2020
£m
Assets held for use in operating leases
Cost
80
8
824
Depreciation
(31
1
)
(277)
Net book value
497
547
Capital expenditure commitments
121
145
Cost of fully
depreciated assets
2,00
1
1,853
The Group’s share of equity accounted entities’ capital commitments is £22m (2020: £8m).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
85
10 Right-of-use assets
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and
engines
£m
Total
£m
Cost
At 1 January 2020
504
128
1,767
2,399
Additions/modifications of leases
(27)
33
129
135
Acquisition of businesses
–
1
–
1
Transferred to assets held for sale
1
(13)
(3)
–
(16)
Disposals
(18)
(10)
(67)
(95)
Exchange
differences
1
1
4
6
At 31 December 2020
447
150
1,833
2,430
Additions/modifications of leases
37
15
30
82
Transferred to assets held for sale
1
(16)
(2)
–
(18)
Disposals
(8)
(16)
(66)
(90)
Reclassifications
–
–
(8)
(8)
Exchange
differences
(4)
(4)
(4)
(12)
At 31 December
2021
456
143
1,785
2,384
Accumulated depreciation
and impairment
At 1 January 2020
55
29
306
390
Charge for the year
56
35
255
346
Impairment
66
9
311
386
Transferred to assets held for sale
1
(5)
(2)
–
(7)
Disposals
(10)
(10)
(67)
(87)
Exchange differences
(3)
(1)
1
(3)
At 31 December 2020
159
60
806
1,025
Charge for the year
43
30
199
272
Impairment
2
(2)
(6)
(7)
(15)
Transferred to assets held for sale
1
(4)
(1)
–
(5)
Disposals
(8)
(16)
(66)
(90)
Reclassifications
–
–
(1)
(1)
Exchange differences
(2)
(1)
(2)
(5)
At 31 December
2021
186
66
929
1,181
Net book value
At 31 December
2021
270
77
856
1,203
At
31 December
202
0
288
90
1,027
1,405
Right
-
of
-
use assets held for use in operating leases where the Group is the lessor
Cost
2
1
1,785
1,788
Depreciation
(1)
(1)
(929)
(931)
Net book value at 31 December
2021
1
–
856
857
Cost
2
1
1,833
1,836
Depreciation
(1)
(1)
(806)
(808)
Net book value at 31 December 2020
1
–
1,027
1,028
1
ITP Aero has been classified as a disposal group held for sale since 30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified held for sale at
31 December 2020 and have been sold during the year – see note 26.
2
The carrying values of right-of-use assets have been assessed during the period in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed for impairment
together with other assets used in individual programmes– see assumptions in note 8. Land and buildings are generally used across multiple programmes and are considered based on future
expectations of the use of the site (which includes any implications from climate related risks as explained in note 8). As a result of this assessment, an impairment reversal of £8m has been
recognised through non-underlying profit. The reversal relates to an element of the non-underlying impairments recorded in 2020 in Civil Aerospace for site rationalisation where there has
been a subsequent change in strategy to continue production on that site.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
86
11 Investments
Composition of the Group
The entities contributing to the Group’s financial results are listed on pages 142 to 148.
Where the Group does not own 100% of the shares of a Group undertaking, there are a number of arrangements with the other shareholder(s)
that give the Group the option or potential obligation to acquire the third parties’ shares. These arrangements have been assessed and are not
considered to have a significant value, individually or in aggregate.
The Group does not have any material non-wholly owned subsidiaries.
Equity accounted
Other
1
Joint
ventures
£m
Associates
£m
Total
£m
£m
At 1 January 2020
402
–
402
14
Additions
19
–
19
5
Disposals
2
(6)
–
(6)
–
Impairment
3
(24)
–
(24)
–
Share of retained profit
4
130
1
131
–
Reclassification of deferred profit to deferred income
5
(96)
–
(96)
–
Transfer to subsidiary
2
(4)
–
(4)
–
Exchange differences
(23)
–
(23)
–
Share of OCI
(5)
–
(5)
–
At 1 January
2021
393
1
394
19
Additions
6
2
1
3
27
Disposals
–
–
–
(1)
Impairment
3
(2)
–
(2)
(5)
Share of retained profit/(loss)
4
19
(1)
18
–
Reclassification of deferred profit to deferred income
5
(24)
–
(24)
–
Transfer to assets held for sale
7
(35)
–
(35)
–
Repayment of loans
(3)
–
(3)
–
Revaluation of investments accounted for at FVOCI
–
–
–
(2)
Exchange differences
8
–
8
(2)
Share of OCI
8
45
–
45
–
At 31 December
2021
403
1
404
36
1
Other investments includes unlisted investments of £29m and listed investments of £7m.
2
On 15 January 2020, the Group completed the acquisition of Qinous GmbH (increasing its shareholding from 24% to 100%). On the 6 July 2020, the Group completed the disposal of its 18%
shareholding in Exostar LLC.
3
During the year, the Group recognised an impairment of £7m (2020: nil) through non-underlying and nil (2020: £24m) charged to the income statement through underlying.
4
See table below.
5
The Group's share of unrealised profit on sales to joint ventures is eliminated against the carrying value of the investment in the entity. Any excess amount, once the carrying value is reduced
to nil, is recorded as deferred income.
6
During the year, additions to other investments of £27m include the following significant transactions. On 17 December 2021, the Group acquired a 1% investment in Vertical Aerospace for
consideration of £9m. The Group has elected to value this investment at fair value through other comprehensive income. On 18 May 2020, the Group increased its shareholding in Reaction
Engines Limited from 2% to 10.1% for £20m (£4m of which was paid during 2020) which was payable (and the associated shares acquired) in instalments. During the year, the Group paid the
remaining instalments of £16m for the Reaction Engines acquisition.
7
The Group's investment in Airtanker Holdings Limited has been classified as a non-current asset held for sale since 13 September 2021. Further detail can be found in note 26.
8
Up to 13 September 2021 when Airtanker Holdings Limited was transferred to held for sale, the Group recognised share of OCI relating to cash flow hedges of £43m.
Reconciliation of share of retained profit to the income statement and cash flow statement:
2021
£m
2020
£m
Share of results of joint ventures and
associates
22
132
Adjustments for intercompany trading
1
23
58
Share of results of joint ventures and associates to the Group
45
190
Dividends paid by joint ventures and associates to the Group (cash flow statement)
(27)
(60)
Share of retained profit attributable to continuing operations
18
130
Share of
results of
retained profit attributable to discontinued operations
–
1
Share of retained profit above
18
131
1
During the year, the Group sold spare engines to Rolls-Royce & Partners Finance, a joint venture and subsidiary of Alpha Partners Leasing Limited. The Group’s share of the profit on these
sales is deferred and released to match the depreciation of the engines in the joint venture’s financial statements. In 2021 and 2020, profit deferred on the sale of engines was lower than the
release of that deferred in prior years.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
87
11 Investments continued
The following joint ventures are considered to be individually material to the Group:
Principal location
Activity
Ownership interest
Alpha Partners Leasing Limited (APL)
UK
Aero
-
engine leasing
50.0%
Hong Kong Aero Engine Services Limited (HAESL)
Hong Kong
Aero
-
engine repair and overhaul
50.0%
Singapore Aero Engine Services Pte Limited (SAESL)
Singapore
Aero
-
engine repair and overhaul
50.0%
Summarised financial information of the Group’s individually material joint ventures is as follows:
APL
HAESL
SAESL
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Revenue
278
330
1,605
1,995
1,057
1,178
(Loss)/profit and total comprehensive
(expense)/
income for the year
(16)
44
51
71
20
32
Dividends paid during the year
–
–
(46)
(62)
–
(14)
(Loss)/profit for the year included the
following:
Depreciation and amortisation
(165)
(165)
(14)
(15)
(20)
(21)
Interest expense
(65)
(83)
(1)
(2)
(3)
(5)
Income tax expense
(77)
(35)
(10)
(13)
–
(4)
Current assets
314
172
533
461
676
256
Non
-
current assets
2,978
3,191
90
102
151
164
Current liabilities
(
287
)
(201)
(343)
(287)
(554)
(156)
Non
-
current liabilities
(2,
401
)
(2,551)
(73)
(78)
(65)
(74)
Net assets
604
611
207
198
208
190
Included in the above:
Cash and cash
equivalents
239
64
30
29
105
47
Current financial liabilities
1
(217)
(143)
–
(22)
–
–
Non
-
current financial liabilities
1
(2,048)
(2,245)
(67)
(66)
(
65
)
(73)
Reconciliation to the carrying amount recognised in the
Consolidated Financial Statements
Ownership interest
50.0%
50.0%
50.0%
50.0%
50.0%
50.0%
Group share of net assets above
302
306
104
99
104
95
Goodwill
–
–
34
34
7
8
77
Adjustments for intercompany trading
(302)
(306)
(1)
(3)
–
–
Included in the balance sheet
–
–
137
130
18
2
172
1
Excluding trade payables and other liabilities.
The summarised aggregated results of the Group’s share of equity accounted investments is as follows:
Individually
material joint
ventures
(above)
Other joint
ventures
2
Associates
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Assets:
Non-current assets 1,610 1,729
20
5
734
–
–
1,
81
5
2,463
Current assets 762 444
316
514
1
1
1,079
959
Liabilities:
1
Current liabilities (592)
(322)
(
232
)
(303)
– –
(
824
)
(625)
Non-current liabilities (1,270)
(1,351)
(
84
)
(758)
– –
(1,
354
)
(2,109)
Group adjustment for goodwill 112 111
–
17 – –
112
128
Adjustment for intercompany
trading
(303)
(309)
(121)
(113)
– –
(424)
(422)
319 302
84
91
1
1
404
394
1
Liabilities include borrowings of:
(1,198)
(1,263)
(534)
(548)
–
–
(1,732)
(1,811)
2
The aggregate value of the Group's share of profit/(loss) and total comprehensive income of individually immaterial joint ventures is £39m (2020: £58m).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
88
12 Inventories
2021
£m
2020
£m
Raw materials
376
417
Work in progress
1,135
1,139
Finished goods
2,146
2,111
Payments on account
9
23
3,666
3,690
Inventories stated at net realisable value
215
305
Amount of inventory write
-
down
92
95
Reversal of inventory write
-
down
26
16
13 Trade receivables and other assets
Current Non-current Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Trade receivables
1
2,140
2,479
52
–
2,192
2,479
Receivables due on RRSAs
7
02
603
67
82
769
685
Amounts owed by joint ventures and
associates
598
486
1
16
599
502
Amounts owed by parent undertaking
335
331
–
–
335
331
Costs to obtain contracts with customers
2
13
12
41
50
54
62
Other taxation and social security
receivable
197
225
8
6
205
231
Other receivables
3
593
639
20
20
613
659
Prepayments
572
412
378
425
950
837
5,
150
5,18
7
567
599
5,
717
5,786
Trade receivables and other assets are analysed as follows:
Financial instruments (
note
19
):
Trade receivable and similar items
3,801
3,915
Other non
-
derivative financial assets
704
740
Non
-
financial instruments
1,
212
1,131
5,
717
5,786
1
Non-current trade receivables relate to amounts not expected to be received in the next 12 months from customers on payment plans.
2
These are amortised over the term of the related contract, resulting in amortisation of £9m (2020: £10m) in the year. There were no impairment losses.
3
Other receivables includes unbilled recoveries relating to overhaul activity.
During the year to 31 December 2021, the Group reassessed which trade receivables are held to collect or sell. The Group’s intent is to no longer
utilise invoice discounting and consequently, balances are generally not classified as held to collect or sell. A small amount of invoice discounting
has continued within Power Systems at the request and cost of the customer.
The expected credit losses for trade receivables and other assets have increased by £7m to £259m (31 December 2020: £252m). This movement is
mainly driven by the Civil Aerospace business of £7m, of which £10m relates to specific customers and £(3)m relates to updates to the recoverability
of other receivables.
The Group has adopted the simplified approach to provide for expected credit losses, measuring the loss allowance at a probability weighted
amount incorporated by using credit ratings which are publicly available, or through internal risk assessments derived using the customer’s latest
available financial information. The assumptions and inputs used for the estimation of the expected credit losses are shown in the table below:
2021
2020
Trade
receivables
and other
financial
assets
£m
Loss
allowance
£m
Average
expected
credit loss
rate
%
Trade
receivables
and other
financial
assets
£m
Loss
allowance
£m
Average
expected
credit loss
rate
%
Investment grade
1,
426
(
27
)
2
%
1,940
(33)
2%
Non
-
investment grade
14
7
(2)
1%
149
(7)
5%
Without credit rating
3,
191
(2
30
)
7%
2,816
(212)
8%
4,76
4
(259)
5%
4,905
(252)
5%
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
89
13 Trade receivables and other assets continued
The movements of the Group’s expected credit losses provision are as follows:
2021
£m
2020
£m
At 1 January
(252)
(138)
Increases in loss allowance recognised in the income statement during the year
(124)
(119)
Loss allowance utilised
46
5
Releases of loss allowance previously provided
46
13
Transferred to assets held for sale
2
–
Exchange differences
23
(13)
At 31 December
(259)
(252)
14 Contract assets and liabilities
Current Non-current
1
Total
2
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Contract assets
Contract assets with customers
586
416
641
660
1,
227
1,076
Participation fee contract assets
27
48
219
386
246
434
613
464
860
1,046
1,
473
1,510
1
Contract assets and contract liabilities have been presented on the face of the balance sheet in line with the operating cycle of the business. Contract liabilities are further split according to
when the related performance obligation is expected to be satisfied and therefore when revenue is estimated to be recognised in the income statement. Further disclosure of contract assets
is provided in the table above, which shows within current the element of consideration that will become unconditional in the next year.
2
Contract assets are classified as non-financial instruments.
Contract assets with customers includes £915m (2020: £726m) of Civil Aerospace LTSA assets, with most of the remaining balance relating to
Defence. The main driver of the increase in the Group’s balance is revenue recognised in Civil Aerospace in the year as performance obligations
have been completed exceeding amounts received, partly reduced by £10m relating to performance obligations satisfied in previous years,
together with foreign exchange movements. No impairment losses in relation to these contract assets (2020: none) have arisen during the year
to 31 December 2021.
Participation fee contract assets have reduced by £188m (2020: reduced by £165m) due to ITP Aero being reclassified as a disposal group held
for sale which had an impact of £147m, amortisation exceeding additions by £23m and foreign exchange on consolidation of overseas entities of
£18m.
The absolute value of expected credit losses for contract assets has increased by £1m to £15m (2020: £14m).
Current
Non-current
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Contract liabilities
3,599
4,187
6,710
6,245
10,309
10,432
Contract assets are analysed as follows:
Financial instruments (note
19)
264
186
Non
-
financial instruments
10,045
10,246
10,309
10,432
During the year £2,713m (31 December 2020: £2,792m) of the opening contract liability was recognised as revenue.
Contract liabilities have decreased by £123m. The main driver of the change in the Group balance is as a result of ITP Aero contract liabilities
(2020: £173m) being reclassified as held for sale. The remaining movement includes an increase in Civil Aerospace of £165m offset by a £99m
decrease in Defence.
The Civil Aerospace movement consists of an increase in relation to LTSA liabilities of £288m to £7,129m (2020: £6,841m). LTSA revenue billed has
been ahead of revenue recognised in the year and together with foreign exchange movements resulted in an increase in the LTSA liabilities by
£512m, offset by £224m of revenue recognised relating to performance obligations satisfied in previous years, which were principally driven by
price escalation in business aviation and the impact of specific customer negotiations. This is partially offset by the utilisation of deposits received
in previous years as engines and aftermarket services were delivered in 2021.
The movement in Defence is from utilisation of prior year deposits and recognition of deferred income as revenue as performance obligations
have been satisfied.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
90
15 Cash and cash equivalents
2021
£m
2020
£m
Cash at bank and in hand
795
940
Money
-
market funds
49
669
Short
-
term deposits
1,777
1,843
Cash and cash equivalents per the balance sheet
2,621
3,452
Cash and cash equivalents
included within assets held for
sale
(note 26)
25
51
Overdrafts (
note 1
6
)
(7)
(7)
Cash and cash equivalents per cash flow statement (page
48
)
2,639
3,496
Cash and cash equivalents at 31 December 2021 includes £89m (2020: £143m) that is not available for general use by the Group. This balance
includes £40m which is held in an account that is exclusively for the general use of Rolls-Royce Submarines Limited. This cash is not available for
use by other entities within the Group. The remaining balance relates to cash held in non-wholly owned subsidiaries and joint arrangements.
Balances are presented on a net basis when the Group has both a legal right of offset and the intention to either settle on a net basis or realise
the asset and settle the liability simultaneously.
16 Borrowings and lease liabilities
Current
Non
–
current
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Unsecured
Overdrafts
7
7
–
–
7
7
Bank loans
1
2
9
1,975
10
1,977
19
Commercial paper
2
–
300
–
–
–
300
2.125% Notes 2021 €750m
3
–
680
–
–
–
680
0.875% Notes 2024
€550m
4
–
–
471
511
471
511
3.625% Notes 2025 $1,000m
4
–
–
781
800
781
800
3.375% Notes 2026 £375m
5
–
–
394
420
394
420
4.625% Notes 2026 €750m
6
–
–
624
667
624
667
5.75% Notes 2027 $1,000m
6
–
–
735
724
735
724
5.75% Notes 2027 £545m –
–
540
539
540
539
1.625% Notes 2028
€550m
4
–
–
493
545
493
545
Other loans
7
–
17
10
58
10
75
Total
unsecured
9
1,013
6,023
4,274
6,032
5,287
Lease liability
–
Land and buildings
46
44
365
392
411
436
Lease liability – Aircraft and engines 198
185
1,053
1,320
1,251
1,505
Lease liability
–
Plant and equipment
26
30
56
72
82
102
Total lease liabilities 270
259
1,474
1,784
1,744
2,043
Total borrowings and lease liabilities 279
1,272
7,497
6,058
7,776
7,330
All outstanding items described as notes above are listed on the London Stock Exchange.
1
On the 15 June 2021, the Group drew down the £2,000m loan maturing in 2025 (supported by an 80% guarantee from UK Export Finance).
2
On 17 March 2021, the Group repaid commercial paper of £300m issued as part of the COVID Corporate Financing Facility (CCFF), a fund operated by the Bank of England on behalf of HM
Treasury.
3
These notes were the subject of cross-currency interest rate swap agreements under which the Group had undertaken to pay ﬂoating rates of GBP interest, which form a fair value hedge. On
the 18 June 2021, the Group repaid €750m (£639m) loan notes in line with repayment terms.
4
These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay ﬂoating rates of GBP interest, which form a fair value hedge. They
are also subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.
5
These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay ﬂoating rates of interest, which form a fair value hedge. They are also subject to
interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.
6
These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay fixed rates of GBP interest, which form a cash flow hedge.
7
During the year, the Group reclassified borrowings and lease liabilities relating to ITP Aero as liabilities associated with assets held for sale.
During the year, the Group entered into a new £1,000m facility maturing in 2026 (supported by an 80% guarantee from UK Export Finance and
available to draw until March 2025). This facility was undrawn at 31 December 2021.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
91
17 Leases
Leases as lessee
The net book value of lease right-of-use assets at 31 December 2021 was £1,203m (2020: £1,405m), with a lease liability of £1,744m (2020: £2,043m), per
notes 10 and 16 respectively. Leases that have not yet commenced to which the Group is committed have a future liability of £55m and consist of
mainly engines, plant and equipment, properties and cars. The consolidated income statement shows the following amounts relating to leases:
2
021
2020
£m £m
Land and buildings depreciation and impairment
1
(41)
(122)
Plant and equipment depreciation
2
(2
4
)
(44)
Aircraft and engine
s
depreciation
and impairment
3
(192)
(566)
Total depreciation and impairment charge for
right
-
of
-
use assets
(25
7
)
(732)
Adjustment of amounts payable under residual value guarantees within lease liabilities
3, 4
4
102
Expense relating to short
-
term leases of 12 months or less recognised as an expense on a straight
-
line basis
2
(16)
(18)
Expense relating to variable lease payments not included in lease liabilities
3, 5
(2)
(1)
Total operating costs
(27
1
)
(649)
Interest expense
6
(63)
(74)
Total lease expense
(33
4
)
(723)
Income from sub
-
leasing right
-
of
-
use assets
35
97
Total
amount recognised in income statement
(
299
)
(626)
1
Included in cost of sales and commercial and administration costs depending on the nature and use of the right-of-use asset.
2
Included in cost of sales, commercial and administration costs, or research and development depending on the nature and use of the right-of-use asset.
3
Included in cost of sales.
4
Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been
remeasured. To the extent the value of this remeasurement exceeds the value of the right-of use asset, the reduction in the lease liability is credited to cost of sales.
5
Variable lease payments primarily arise on a small number of contracts where engine lease payments are solely dependent upon utilisation rather than a periodic charge.
6
Included in financing costs.
The total cash outflow for leases in 2021 was £448m (2020: £377m). Of this £430m related to leases reflected in the lease liability, £16m to short-
term leases where lease payments are expensed on a straight-line basis and £2m for variable lease payments where obligations are only due when
the right-of-use assets are used. The timing difference between the income statement charge and cash flow relates to costs incurred at the end
of leases for residual value guarantees that are recognised within depreciation over the term of the lease, the most significant amounts relate to
engine leases.
Leases as lessor
The Group acts as lessor for engines to Civil Aerospace customers when they require engines to support their fleets. Lease agreements with the
lessees provide protection over our assets. Usage in excess of specified limits and damage to the engine while on lease are covered by variable
lease payment structures. Lessee bankruptcy risk is managed through the Cape Town Convention on International Interests in Mobile Equipment
(including a specific protocol relating to aircraft equipment), an international treaty that creates common standards for the registration of lease
contracts and establishes various legal remedies for default in financing agreements, including repossession and the effect of particular states'
bankruptcy laws. Engines are only leased once we confirm that appropriate insurance documentation is established that covers the engine assets
to pre-agreed amounts. All such contracts where we are lessor are operating leases. The Group also leases out a small number of properties, or
parts of properties, where there is excess capacity under operating leases.
2021
2020
£m
£m
Operating lease income
–
credited within revenue from aftermarket services
1, 2
80
1
94
1
Includes variable lease payments received of £71m (2020: £179m) that do not depend on an index or a rate.
2
Items of property, plant and equipment subject to an operating lease are disclosed in note 9.
Non-cancellable future operating lease rentals (undiscounted) are receivable as follows:
2021
2020
£m
£m
Within one year
9
13
Between one and two years
7
12
Between two and three years
7
10
Between three and four years
7
6
Between four and five years
7
6
After five years
21
21
58
68
In a limited number of circumstances the Group sublets property that are treated as a finance lease when the arrangement transfers substantially
all the risks and rewards of ownership of the asset. At 31 December 2021, the total undiscounted lease payments receivable is £19m (2020: £22m)
on annual lease income of £2m (2020: £3m). The discounted finance lease receivable at 31 December 2021 is £17m (2020: £19m). There was nil
(2020: nil) finance income recognised during the year.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
92
18 Trade payables and other liabilities
Current
Non-current
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Trade payables
1,272
1,418
–
–
1,272
1,418
Payables due on RRSAs
739
697
–
–
739
697
Amounts owed to joint ventures and associates
486
583
–
–
486
583
Customer concession credits
1,106
1,536
399
514
1,505
2,050
Warranty credits
201
173
161
196
362
369
Accruals
1,361
1,322
192
117
1,553
1,439
Deferred receipts from RRSA workshare partners
23
17
484
507
507
524
Government grants
1
28
16
39
66
67
82
Other taxation and social security
40
127
–
7
40
134
Other payables
2
761
765
300
515
1,061
1,280
6,017
6,654
1,575
1,922
7,592
8,576
Trade payables and other liabilities are analysed
as follows:
Financial instruments (note 19):
Trade payables and similar items
4,045
4,128
Other non-derivative financial liabilities
2,403
3,021
Non-financial instruments
1,144
1,427
7,592
8,576
1
During the year, £13m, including £1m in discontinued operations, (2020: £10m) of government grants were released to the income statement.
2
Other payables includes parts purchase obligations, payroll liabilities, HM UK Government levies and payables associated with business disposals.
The Group’s payment terms with suppliers vary on the products and services being sourced, the competitive global markets the Group operates
in and other commercial aspects of suppliers’ relationships. Industry average payment terms vary between 90-120 days. The Group offer reduced
payment terms for smaller suppliers, so that they are paid in 30 days. In line with civil aviation industry practice, the Group offer a supply chain
financing (SCF) programme in partnership with banks to enable suppliers who are on standard 75-day payment terms to receive their payments
sooner. The SCF programme is available to suppliers at their discretion and does not change rights and obligations with suppliers nor the timing
of payment of suppliers. At 31 December 2021 suppliers had drawn £540m under the SCF scheme (2020: £582m).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
93
19 Financial instruments
Carrying values and fair values of financial instruments
1
In the event of counterparty default relating to derivative financial assets and liabilities, offsetting would apply and financial assets and liabilities held with the same counterparty would net
off. If this occurred with every counterparty, total financial assets would be £nil (2020: £43m) and liabilities £2,913m (2020: £2,749m).
2
Cash and cash equivalents for 2020 have been re-presented to exclude cash held for sale.
Assets
Liabilities
Total
Notes
Basis for
determining
fair value
Fair value
through profit
or loss
£m
Fair value
through
OCI
£m
Amortised
cost
£m
Fair value
through
profit or
loss
£m
Other
£m
£m
2021
Other non-current asset
investments
1
1
A
36
–
–
–
–
36
Trade receivables and similar
items
1
3
B/C
–
17
3,784
–
–
3,801
Other non-derivative financial
assets
1
3
B
–
–
704
–
–
704
Other assets
D
28
–
–
–
–
28
Derivative financial assets
1
C
379
–
–
–
–
379
Short
-
term investments
B
–
–
8
–
–
8
Cash and cash equivalents
1
5
B
49
–
2,
572
–
–
2,
621
Borrowings
1
6
E/F
–
–
–
–
(6,032)
(6,032)
Lease liabilities
1
6
G
–
–
–
–
(1,744)
(1,744)
Derivative financial liabilities
1
C
–
–
–
(3,292)
–
(3,292)
Financial RRSAs
H
–
–
–
–
(12)
(12)
Other liabilities
H
–
–
–
–
(75)
(75)
Trade payables and similar
items
1
8
B
–
–
–
–
(4,045)
(4,045)
Other non-derivative financial
liabilities
1
8
B
–
–
–
–
(2,403)
(2,403)
Contract liabilities
1
4
B
–
–
–
–
(264)
(264)
492
17
7,0
68
(3,292)
(14,575)
(10,
290
)
2020
Other non-current asset
investments
1
1
A
19
–
–
–
–
19
Trade receivables and similar
items
1
3
B/C
–
938
2,975
–
–
3,913
Other non-derivative financial
assets
1
3
B
–
–
740
–
–
740
Other assets
D
28
–
–
–
–
28
Derivative financial assets
1
C
766
–
–
–
–
766
Cash and cash equivalents
2
1
5
B
669
–
2,
7
83
–
–
3,
452
Borrowings
1
6
E/F
–
–
–
–
(5,287)
(5,287)
Lease liabilities
1
6
G
–
–
–
–
(2,043)
(2,043)
Derivative financial liabilities
1
C
–
–
–
(3,472)
–
(3,472)
Financial RRSAs
H
–
–
–
–
(81)
(81)
Other liabilities
H
–
–
–
–
(73)
(73)
Trade payables and similar
items
1
8
B
–
–
–
–
(4,128)
(4,128)
Other non-derivative financial
liabilities
1
8
B
–
–
–
–
(3,021)
(3,021)
Contract liabilities
1
4
B
–
–
–
–
(186)
(186)
1,482
938
6,
498
(3,472)
(14,819)
(9,3
73
)
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
94
19 Financial instruments continued
Fair values equate to book values for both 2021 and 2020, with the following exceptions:
2021
2020
Basis for
determining fair
value
Book
value
£m
Fair value
£m
Book
value
£m
Fair
value
£m
Borrowings
E
(4,038)
(4,106)
(4,886)
(4,814)
Borrowings
F
(1,994)
(2,122)
(401)
(403)
Financial RRSAs
H
(12)
(13)
(81)
(89)
The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing
parties in an arms-length transaction. Fair values have been determined with reference to available market information at the balance sheet date,
using the methodologies described below. There have been no transfers during the year from or to Level 3 valuation.
A These primarily comprise unconsolidated companies where fair value approximates to the book value.
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six
months. Money market funds are valued using level 1 methodology.
C Fair values of derivative financial assets and liabilities and trade receivables held to collect or sell are estimated by discounting expected future contractual cash ﬂows using prevailing interest
rate curves. For commodity derivatives forward commodity prices are used to determine expected future cash flows. Amounts denominated in foreign currencies are valued at the exchange
rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value, derived from observable market prices (Level 2 as defined by IFRS 13 Fair
Value Measurement).
D Other assets are included on the balance sheet at fair value, derived from observable market prices or latest forecast (Level 2/Level 3 as defined by IFRS 13). At 31 December 2021, Level 3
assets totalled £16m (2020: £15m).
E Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of borrowings is
estimated using quoted prices. (Level 1 as defined by IFRS 13).
F Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of borrowings is
estimated by discounting contractual future cash flows. (Level 2 as defined by IFRS 13).
G The fair value of lease liabilities are estimated by discounting future contractual cash flows using either the interest rate implicit in the lease or the Group’s incremental cost of borrowing
(Level 2 as defined by IFRS 13).
H The fair value of RRSAs and other liabilities are estimated by discounting expected future cash flows. The contractual cash flows are based on future trading activity, which is estimated based
on latest forecasts (Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy:
Level 1 — quoted prices for similar instruments;
Level 2 — directly observable market inputs other than Level 1 inputs; and
Level 3 — inputs not based on observable market data.
Carrying value of other financial assets and liabilities
Derivatives
Foreign
exchange
contracts
£m
Commodity
contracts
£m
Interest rate
contracts
1
£m
Total
derivatives
£m
Financial
RRSAs
£m
Other
£m
Total
£m
2021
Non
-
current assets
159
11
176
346
–
15
361
Current assets
12
21
–
33
–
13
46
Assets
171
32
176
379
–
28
407
Current liabilities
(
629
)
–
–
(
629
)
(7)
(28)
(
664
)
Non
-
current liabilities
(
2,581
)
–
(82)
(
2,663
)
(5)
(47)
(
2,715
)
Liabilities
(3,210)
–
(82)
(3,292)
(12)
(75)
(3,379)
(3,039)
32
94
(2,913)
(12)
(47)
(2,972)
2020
Non
-
current assets
396
18
258
672
–
15
687
Current assets
45
7
42
94
–
13
107
Assets
441
25
300
766
–
28
794
Current liabilities
(522)
(17)
(11)
(550)
(5)
(25)
(580)
Non
-
current liabilities
(2,790)
(19)
(113)
(2,922)
(76)
(48)
(3,046)
Liabilities
(3,312)
(36)
(124)
(3,472)
(81)
(73)
(3,626)
(2,871)
(11)
176
(2,706)
(81)
(45)
(2,832)
1
Includes the foreign exchange impact of cross-currency interest rate swaps.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
95
19 Financial instruments continued
Derivative financial instruments
The Group uses various ﬁnancial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity swaps
to manage its exposure to movements in the price of commodities (jet fuel and base metals). To hedge the currency risk associated with a
borrowing denominated in a foreign currency, the Group has currency derivatives designated as part of fair value or cash flow hedges. The Group
uses interest rate swaps and forward rate agreements to manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and liabilities were as follows:
Foreign exchange
instruments
Commodity
instruments
Interest rate
instruments –
hedge
accounted
2
Interest rate
instruments –
non-hedge
accounte
d
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
At 1 January
(2,871)
(3,104)
(11)
12
233
229
(57)
14
(2,706)
(2,849)
Movements in fair value hedges
–
–
–
–
(143)
139
–
–
(143)
139
Movement
s
in cash flow hedges
(13)
18
4
6
(2)
(60)
–
–
(11)
(36)
Movements in other derivative
contracts
1
(681)
(23)
63
(62)
–
–
80
(75)
(538)
(160)
Contracts settled
538
238
(9)
33
(31)
(75)
14
4
512
200
Reclassification to held for sale
(12)
–
(15)
–
–
–
–
–
(27)
–
At 31 De
cember
(3,039)
(2,871)
32
(11)
57
233
37
(57)
(2,913)
(2,706)
1
Included in net financing.
2
Includes the foreign exchange impact of cross-currency interest rate swaps.
Financial risk and revenue sharing arrangements (RRSAs) and other financial assets and liabilities
The Group has financial liabilities arising from financial RRSAs. These financial liabilities are valued at each reporting date using the amortised
cost method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the
inception of the arrangements as the discount rate.
Movements in the carrying values were as follows:
Financial RRSAs
Other — assets
Other — liabilities
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
At 1 January
(81)
(110)
15
16
(73)
(72)
Exchange adjustments included in OCI
4
(6)
–
–
4
(2)
Additions
–
–
–
–
(9)
(17)
Financing charge
1
–
(3)
–
–
(1)
(13)
Excluded from underlying profit:
Changes in forecast payments
1
(7)
(3)
–
–
–
–
Cash
paid
3
39
–
(1)
3
18
Other
–
–
–
–
1
13
Reclassification
to held for sale
69
2
–
–
–
–
At
31 December
(12)
(81)
15
15
(75)
(73)
1
Included in financing.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
96
19 Financial instruments continued
Effect of hedging instruments on the financial position and performance
To manage the risk of changes in the fair values of fixed rate borrowings (the hedged items) the Group has entered into fixed-to-floating interest
rate swaps (the hedging instruments) which for accounting purposes are designated as fair value hedges. The impact of fair value hedges on the
financial position and performance of the Group is as follows:
Hedged item
1
Hedging instrument
2
Nominal
£m
FV
adjustment
in the
period
£m
FV
adjustment
since
inception
£m
Carrying
amount
£m
Nominal
£m
Carrying
amount
asset
£m
Carrying
amount
liability
£m
FV
movement
in the
period
£m
Hedge
ineffectiveness
in the period
3
£m
Weighted
average
FX
rate
Weighted
average
interest
rate
4
At 31
December
2021
Sterling
(375)
27
(19)
(394)
375
19
–
(27)
–
1.00
SONIA
+0.893
US Dollar
(658)
19
(125)
(781)
658
116
–
(20)
(1)
1.52
SONIA
+1.4658
Euro
(968)
91
1
(965)
968
–
(21)
(90)
1
1.91
SONIA
+0.9185
At 31
December
2020
Sterling
(375)
(10)
(46)
(420)
375
46
–
10
–
1.00
GBP
LIBOR
+0.893
US Dollar
(658)
(18)
(144)
(800)
658
136
–
14
(4)
1.52
GBP
LIBOR
+1.4658
Euro
(1,607)
(97)
(131)
(1,735)
1,607
111
–
90
(7)
1.15
GBP
LIBOR
+0.8301
1
Hedged items are included in borrowings in the balance sheet.
2
Hedging instruments are included in other financial assets or liabilities in the balance sheet.
3
Hedge ineffectiveness is included in net financing in the income statement.
4
In anticipation of the cessation of GBP LIBOR at the end of 2021, the Group confirmed its adherence to the ISDA 2020 IBOR Fallbacks Protocol. Therefore the interest rate applicable to these
swaps has been updated to Fallback Rate (SONIA plus credit adjustment spread) as defined in supplement 70 to the 2006 ISDA definitions which will be applied from 2022 onwards.
To manage the foreign exchange rate risk in cash flows on fixed rate non-GBP borrowings (the hedged items) the Group has entered into fixed-
to-fixed cross-currency interest rate swaps (the hedging instruments) to hedge the cashflows into GBP, which for accounting purposes are
designated as cash flow hedges. The impact of cash flow hedges on the financial position and performance of the Group is as follows:
Hedged item
Hedging instrument
1
Cash flow hedge reserve
Nominal
£m
FV
movement in
the period
£m
Nominal
£m
Carrying
amount
liability
£m
FV
movement
in the
period
£m
Hedge
ineffectiveness
in the period
£m
Weighted
average
FX
rate
Weighted
average
interest
rate
Amount
recognised
in OCI
£m
Recycled
to net
financing
£m
Closing
cash flow
hedge
reserve
£m
At 31
December
2021
US Dolla
r
(772)
(35)
772
(20)
35
–
1.29
5.3263
(3
6
)
10
(10)
Euro
(
677)
32
677
(37)
(32)
(1)
1.11
5.4463
3
9
(
51
)
(10)
At 31
December
202
0
US Dollar
(772)
55
772
(55)
(55)
–
1.29
5.3263
55
(39)
16
Euro
(677)
5
677
(5)
(5)
–
1.11
5.4463
5
(3)
2
1
Hedging instruments are included in other financial assets or liabilities in the balance sheet.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
97
19 Financial instruments continued
Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate risk;
and commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk ‒ The Group has significant cash flows (most significantly USD, followed by the EUR) denominated in
currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign
currency cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the Group enters into derivative
forward foreign currency transactions.
The Group economically hedges its GBP/USD exposure by forecasting highly probable net USD receipts up to ten years forward. Hedges are
taken out within prescribed maximum and minimum hedge positions set out in the Group FX policy. The maximum and minimum policy bands
decline gradually over the ten-year horizon and are calculated as a percentage of forecast net income. A similar policy is operated for the Group’s
EUR/USD exposure. For accounting purposes, these derivative contracts are not designated in hedging relationships with the exception of those
taken out by the Group's Spanish subsidiary, ITP Aero, where they are designated in cash flow hedges. ITP Aero is exposed predominantly to net
USD receipts that it hedges against EUR using foreign exchange forward contracts.
The Group also has exposures to cash flows on EUR and USD denominated fixed rate borrowings. To manage its exposures to changes in values
of future foreign currency cash flows, the Group has entered into fixed-to -fixed cross-currency interest rate swaps which for accounting purposes
are designated as cash flow hedges. The swaps have similar critical terms to the hedged items, such as the initial exchange amounts, payment
dates and maturities. Therefore there is an economic relationship and the hedge ratio is established as 1:1. Possible sources of ineffectiveness in
the cash flow hedge relationship are changes in the credit risk of either party to the interest rate swap. Another possible source of ineffectiveness
would be if the notional of the borrowings is less than the notional of the derivative, for example in the event of a partial repayment of hedged
debt prior to its maturity.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures
by matching the currencies of assets and liabilities.
Liquidity risk ‒ The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that
the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and opportunities.
The Group holds cash and short-term investments, which together with the undrawn committed facilities, enable the Group to manage its liquidity
risk.
Credit risk ‒ The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its ﬁnancial
instruments. The effective monitoring and controlling of credit risk is a key component of the Group's risk management activities. The Group has
credit policies covering both trading and ﬁnancial exposures. Credit risks arising from treasury activities are managed by a central treasury
function in accordance with the Group credit policy. The objective of the policy is to diversify and minimise the Group's exposure to credit risk
from its treasury activities by ensuring the Group transacts strictly with 'BBB' or higher rated financial institutions based on pre-established limits
per financial institution. At the balance sheet date, there were no signiﬁcant concentrations of credit risk to individual customers or
counterparties. The Group’s revenue is generated from customers located across multiple geographical locations (see note 2), these customers
are typically: airframers and airline operators relating to Civil Aerospace; government defence departments for the UK and US; multiple smaller
entities for Power Systems; and aero engine manufacturers for ITP Aero. Whilst there are a limited number of customers related to Civil Aerospace
and Defence, they are spread across various geographical locations. The maximum exposure to credit risk at the balance sheet date is represented
by the carrying value of each ﬁnancial asset, including derivative ﬁnancial instruments.
Interest rate risk ‒ The Group’s interest rate risk is primarily in relation to its ﬁxed rate borrowings (fair value risk), ﬂoating rate borrowings and
cash and cash equivalents (cash ﬂow risk). Interest rate derivatives are used to manage the overall interest rate proﬁle of the Group. The fixed or
floating rate interest rate decision on long-term borrowings is determined for each new agreement at the point it is entered into. The aggregate
interest rate position of the Group is reviewed regularly and can be revised at any time in order to react to changes in market conditions or
circumstances.
The Group also has exposures to the fair values of non-derivative ﬁnancial instruments such as EUR, GBP and USD fixed rate borrowings. To
manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swaps and cross-currency interest rate
swaps which for accounting purposes are designated as fair value hedges. The swaps have similar critical terms to the hedged items, such as the
reference rate, reset dates, notional amounts, payment dates and maturities. Therefore there is an economic relationship and the hedge ratio is
established as 1:1. Possible sources of ineffectiveness in the fair value hedge relationship are changes in the credit risk of either party to the
interest rate swap and, for cross-currency interest rate swaps, the cross-currency basis risk as this risk is present in the hedging instrument only.
Another possible source of ineffectiveness would be if the notional of the borrowings is less than the notional of the derivative, for example in
the event of a partial repayment of hedged debt prior to its maturity.
The Group has exposure to changes in cash flows due to changes in interest rates. To manage this risk the Group has entered into floating-to-
fixed interest rate swaps to hedge a proportion of its floating rate exposure to fixed rates. The swaps have similar critical terms to the floating leg
of swaps that form part of the fair value hedges, such as the reference rate, reset dates, notional amounts, payment dates and maturities. For
accounting purposes, these derivative contracts are generally not designated as hedging instruments.
ITP Aero, has also entered into a floating-to-fixed interest rate swap to hedge the cash flow risk on a floating rate borrowing which for accounting
purposes is designated as a cash flow hedge.
Commodity risk ‒ The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash ﬂow
exposures to changes in commodity prices, the Group enters into derivative commodity transactions. The commodity hedging policy is similar to
the Group FX policy, in that the Group forecasts highly probable exposures to commodities, and takes out hedges within prescribed maximum
and minimum levels as set out in the policy. The maximum and minimum policy bands decline gradually over time. For accounting purposes, these
derivative contracts are generally not designated in hedging relationships.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
98
19 Financial instruments continued
Other price risk ‒ The Group’s cash equivalent balances represent investments in money-market instruments, with a term of up to three months.
The Group does not consider that these are subject to signiﬁcant price risk.
Derivative financial instruments
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:
Expected maturity Fair value
Nominal
amount
£m
Within one
year
£m
Between one
and two years
£m
Between two
and five years
£m
After five
years
£m
Assets
£m
Liabilities
£m
At 31 December
2021
Foreign exchange
contracts:
Non
-
hedge accounted
28,767
6,975
8,139
12,471
1,182
171
(3,210)
Interest rate contracts:
Fair value hedges
2,001
–
–
1,
517
484
135
(21)
Cash flow hedges
1,449
–
–
677
772
–
(57)
Non
-
hedge accounted
2,001
–
–
1,517
484
41
(4)
Commodity contracts:
Non
-
hedge accounted
179
85
60
34
–
32
–
34,397
7,060
8,199
16,216
2,922
379
(3,292)
At 31 December
2020
Foreign exchange
contracts:
Cash flow hedges
1
544
206
187
151
–
30
(4)
Non
-
hedge accounted
35,715
6,172
6,495
17,956
5,092
411
(3,308)
Interest rate contracts:
Fair value hedges
2,640
639
–
1,142
859
293
–
Cash flow hedges
1,461
4
4
4
1,449
–
(60)
Non
-
hedge accounted
2,001
–
–
1,142
859
7
(64)
Commodity contracts:
Cash flow hedges
1
41
6
7
19
9
12
–
Non
-
hedge accounted
217
97
77
43
–
13
(36)
42,619
7,124
6,770
20,457
8,268
766
(3,472)
1
Cash flow hedges in ITP Aero on foreign exchange contracts and commodity contracts have been classified as held for sale since 30 June 2021.
As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated
into hedging relationships for accounting purposes.
Currency analysis
Foreign exchange contracts are denominated in the following currencies:
Nominal amount of currencies purchased forward
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
At 31 December 2021
Currencies sold forward:
Sterling
–
5,479
–
250
5,729
US dollar
19,916
–
2,430
325
22,671
Euro
–
263
–
46
309
Other
2
41
14
1
58
At 31 December
2020
Currencies sold forward:
Sterling
–
7,132
–
226
7,358
US dollar
23,857
–
3,910
486
28,253
Euro
5
306
–
161
472
Other
10
116
47
3
176
The nominal value of interest rate and commodity contracts are denominated in the following currencies:
2021
£m
2020
£m
Sterling
2,376
2,376
US dollar
1,600
1,
6
7
6
Euro
1,654
2,308
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
99
19 Financial instruments continued
Non-derivative financial instruments are denominated in the following currencies:
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
At 31 December 2021
Other non-current investments 12 23 1 – 36
Trade receivables and similar items
511 2,776 450 64 3,801
Other non-derivative financial assets 16 640 30 18 704
Other assets – 28 – – 28
Short-term investments – – 8 – 8
Cash and cash equivalents 700 673 1,135 113 2,621
Assets 1,239 4,140 1,624 195 7,198
Borrowings (2,915)
(1,518)
(1,598)
(1)
(6,032)
Lease liabilities (188)
(1,300)
(48)
(208)
(1,744)
Financial RRSAs – – (12)
– (12)
Other liabilities (17)
(58)
– – (75)
Trade payables and similar items (503)
(3,035)
(444)
(63)
(4,045)
Other non-derivative financial liabilities (287)
(1,957)
(113)
(46)
(2,403)
Contract liabilities – (264)
– – (264)
Liabilities (3,910)
(8,132)
(2,215)
(318)
(14,575)
(2,671)
(3,992)
(591)
(123)
(7,377)
At 31 December 2020
Other non-current investments
1
15
3
–
19
Trade receivables and similar items
483
2,933
440
57
3,913
Other non-derivative financial assets
80
599
44
17
740
Other assets
–
28
–
–
28
Short-term investments
–
–
–
–
–
Cash and cash equivalents
1
1,43
6
56
1
1,
314
141
3,
4
5
2
Assets
2,00
0
4,13
6
1,
801
215
8,
152
Borrowings (1,266)
(1,526)
(2,494)
(1)
(5,287)
Lease liabilities (211)
(1,559)
(67)
(206)
(2,043)
Financial RRSAs – –
(81)
– (81)
Other liabilities (16)
(57)
– – (73)
Trade payables and similar items (682)
(2,707)
(554)
(185)
(4,128)
Other non-derivative financial liabilities (333)
(2,540)
(125)
(23)
(3,021)
Contract liabilities – (186)
– – (186)
Liabilities (2,508)
(8,575)
(3,321)
(415)
(14,819)
(508)
(4,439)
(1,520)
(200)
(6,667)
1
Cash and cash equivalents for 2020 have been re-presented to exclude cash held for sale.
Currency exposures
The Group’s actual currency exposure on financial instruments after taking account of derivative foreign currency contracts, which are not
designated as hedging instruments for accounting purposes are as follows:
Functional currency of Group operations
Sterling
£m
US dollar
£m
Euro
£m
Other
£m
Total
£m
At 31 December 2021
Sterling
– 1 1 (4)
(2)
US dollar (8)
– – 4 (4)
Euro 1 (4)
– 3 –
Other 82 14 51 2 149
At 31 December 2020
Sterling
–
–
–
(4)
(4)
US dollar
(11)
–
(2)
2
(11)
Euro
1
3
–
(17)
(13)
Other
78
9
59
–
146
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
100
19 Financial instruments continued
Ageing beyond contractual due date of financial assets
Within terms
£m
Up to three
months
overdue
£m
Between three
months and one
year overdue
£m
More than one
year overdue
£m
Total
£m
At 31 December 2021
Other non-current asset investments
36
–
–
–
36
Trade receivables and similar items
3,084
369
211
137
3,801
Other non-derivative financial assets
698
–
5
1
704
Other assets
28
– – –
28
Derivative financial assets
379
– – –
379
Short-term investments
8
– – –
8
Cash and cash equivalents
2,6
21
– – –
2,6
21
6,8
54
369
216
138
7,
577
At 31 December 2020
Other non-current asset investments
19
–
–
–
19
Trade receivables and similar items
3,002
467
373
71
3,913
Other non-derivative financial assets
738
1
–
1
740
Other assets
28
–
–
–
28
Derivative financial assets
766
–
–
–
766
Short-term investments
–
–
–
–
–
Cash and cash equivalents
1
3,
4
5
2
–
–
–
3,
452
8,0
05
468
373
72
8,
918
1
Cash and cash equivalents for 2020 have been re-presented to exclude cash held for sale.
Contractual maturity analysis of non-derivative financial liabilities
Gross values
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
After five years
£m
Carrying
value
£m
At 31 December
2021
Borrowings
(259)
(265)
(4,806)
(1,849)
(6,032)
Lease liabilities
(322)
(261)
(724)
(852)
(1,744)
Financial RRSAs
(6)
(5)
(2)
–
(12)
Other liabilities
(27)
(9)
(24)
(15)
(75)
Trade payables and similar items
(3,815)
(18)
(94)
(118)
(4,045)
Other
non
-
derivative financial liabilities
(1,812)
(83)
(207)
(301)
(2,403)
Contract liabilities
(264)
–
–
–
(264)
(6,505)
(641)
(5,857)
(3,135)
(14,575)
At 31 December
2020
Borrowings
(1,174)
(183)
(1,722)
(3,041)
(5,287)
Lease
liabilities
(320)
(373)
(746)
(1,091)
(2,043)
Financial RRSAs
(6)
(5)
(7)
(69)
(81)
Other liabilities
(25)
(8)
(23)
(17)
(73)
Trade payables and similar items
(3,969)
(53)
(23)
(83)
(4,128)
Other non
-
derivative financial liabilities
(2,260)
(228)
(176)
(357)
(3,021)
Contract liabilities
(186)
–
–
–
(186)
(7,940)
(850)
(2,697)
(4,658)
(14,819)
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
101
19 Financial instruments continued
Expected maturity analysis of derivative financial instruments
Gross values
Within one year
£m
Between one
and two years
£m
Between two
and five years
£m
After five years
£m
Carrying
value
£m
At 31 December 2021
Derivative financial assets:
Cash inflows 840 1,051 3,145 456
Cash outflows (811)
(1,017)
(2,922)
(445)
Other net cash flows
1
26 27 43 2
55 61 266 13 379
Derivative financial liabilities:
Cash inflows 6,246 7,198 11,441 1,987
Cash outflows (6,917)
(8,022)
(13,200)
(2,314)
Other net cash flows
1
(2)
(1)
– –
(673)
(825)
(1,759)
(327)
(3,292)
At 31 December 2020
Derivative financial assets:
Cash inflows 2,153 984 6,358 2,777
Cash outflows (2,038)
(937)
(6,122)
(2,634)
Other net cash flows
1
18 20 35 12
133 67 271 155 766
Derivative financial liabilities:
Cash inflows 5,019 5,810 13,308 4,340
Cash outflows (5,557)
(6,398)
(15,189)
(4,993)
Other net cash flows
1
(36)
(27)
(40)
(4)
(574)
(615)
(1,921)
(657)
(3,472)
1
Derivative financial assets and liabilities that are settled on a net cash basis.
Interest rate risk
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates.
The value shown is the carrying amount, before taking account of swaps.
2021 2020
Fixed rate
£m
Floating
rate
£m
Total
£m
Fixed rate
£m
Floating
rate
£m
Total
£m
Short
-
term investments
–
8
8
–
–
–
Cash and cash equivalents
1
–
2,621
2,621
–
3,452
3,452
Borrowings
(4,041)
(1,991)
(6,032)
(4,576)
(711)
(5,287)
Lease liabilities
(1,084)
(660)
(1,744)
(1,224)
(819)
(2,043)
(5,125)
(22)
(5,147)
(5,800)
1,922
(3,878)
Weighted average interest rates
Borrowings
3.7%
4.1%
3.1%
1.3%
Lease liabilities
2
4.0%
2.0%
3.8%
2.4%
1
Cash and cash equivalents comprises bank balances and term deposits and earn interest based on short-term floating market interest rates. Cash and cash equivalents for 2020 have been re-
presented to exclude cash held for sale.
2
Interest rates for lease liabilities are considered to be the discount rates at the balance sheet date.
£8m (2020: £15m) of the Group’s borrowings (including borrowings classified as held for sale) are subject to the Group meeting certain obligations,
including customary ﬁnancial covenants. If the Group fails to meet its obligations these arrangements give rights to the lenders, upon agreement,
to accelerate repayment of the facilities. At 31 December 2021 none of these were in breach (2020: none). There are no rating triggers contained
in any of the Group’s facilities that could require the Group to accelerate or repay any facility for a given movement in the Group’s credit rating.
£99m (2020: £166m) of the Group’s lease liabilities include a customary loan-to-value covenant. The Group has several contractual cures available
in the event the stipulated loan-to-value ratio is exceeded. The Group has several contractual cures available in the event the stipulated loan-to-
value ratio is exceeded. Failure by the Group to satisfy its contractual obligations under the covenant gives rights to the lessor to terminate its
lease and claim termination amounts for the outstanding lease balance. At 31 December 2021 none (2020: none) of these were in breach.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
102
19 Financial instruments continued
Sensitivity Analysis
Sensitivities at 31 December (all other variables held constant)
–
impact on profit after tax and equity
2021
£m
2020
£m
Sterling 10% weaker against the US dollar
(1,687)
(1,992)
Sterling 10% stronger against the US dollar
1,382
1,642
Euro 10% weaker against the US dollar
(227)
(315)
Euro 10% stronger against the US dollar
185
258
Sterling 10% weaker against the Euro
(15)
(14)
Sterling 10% stronger
against the Euro
12
12
Commodity prices 10% lower
(17)
(20)
Commodity prices 10% higher
17
20
Interest rates 50 basis points lower
(67)
(77)
Interest rates 50 basis points higher
65
82
20 Provisions for liabilities and charges
At
1 January
2021
£m
Charged to
income
statement
1
£m
Reversed
£m
Utilised
£m
Transfers to
held for sale
£m
Exchange
differences
£m
At
31 December
2021
£m
Trent 1000 exceptional costs
321
80
(45)
(199)
–
–
157
Contract losses
808
272
(190)
(27)
(13)
(5)
845
Restructuring
236
5
(138)
(74)
(5)
(3)
21
Warranty and guarantees
327
84
(5)
(75)
(11)
(15)
305
Customer financing
17
–
–
–
–
–
17
Insurance
60
22
(20)
(10)
–
–
52
Tax related interest and penalties
33
5
(13)
(11)
–
–
14
Employer liability claims
50
3
(3)
(2)
(1)
–
47
Other
93
61
(11)
(17)
–
(2)
1
24
1,945
53
2
(425)
(415)
(30)
(25)
1,58
2
Current liabilities
826
4
75
Non
-
current liabilities
1,119
1,107
1
The charge to the income statement includes £32m (2020: £48m) as a result of the unwinding of the discounting of provisions previously recognised.
Trent 1000 exceptional costs
In November 2019, the Group announced the outcome of testing and a thorough technical and financial review of the Trent 1000 TEN programme,
following technical issues which were identified in 2019, resulting in a revised timeline and a more conservative estimate of durability for the
improved HP turbine blade for the TEN variant. In the year, the Group has utilised £199m of the Trent 1000 exceptional costs provision. This
represents customer disruption costs settled in cash and credit notes, and remediation shop visit costs. The value of the remaining provision
reflects the single most likely outcome and is expected to be utilised over the period 2022 to 2024.
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected revenue. In
the year, additional contract losses for the Group of £272m have been recognised as a result of a changes in future cost estimates, primarily in
relation to LTSA shop visits; £20m was a result of revised estimates in relation to climate change. Contract losses of £190m previously recognised
have been reversed following a reassessment of the number of engines impacted by the Trent 1000 technical issues and the cost of meeting
contractual obligations. The Group continues to monitor the contract loss provision for changes in the market and revises the provision as
required. The value of the remaining contract loss provisions reflect in each case the single most likely outcome. The provisions for contract
losses are expected to be utilised over the term of the customer contracts, typically within 8–16 years. From 1 January 2022, provisions for contract
losses will be measured on a fully costed basis. See note 1 for further detail.
Warranties and guarantees
Provisions for warranties and guarantees primarily relate to products sold and are calculated based on an assessment of the remediation costs
related to future claims based on past experiences. The provision generally covers a period of up to three years.
Restructuring
In May 2020, the Group announced a fundamental restructuring programme in response to the financial and operational impact caused by
COVID-19 with a plan to remove at least 9,000 roles across the Group. During the year, £74m of the provision was utilised as part of these plans
and £138m of the provision released following reassessment of the anticipated cost per role and a higher than expected rate of natural attrition.
At 31 December 2021, around 9,000 roles had been removed across the Group. The remaining provision is expected to be utilised by the end of
2022.
Customer financing
Customer financing provisions have been made to cover guarantees provided for asset value and/or financing where it is probable that a payment
will be made. In addition to the provisions recognised, the Group has contingent liabilities for customer financing arrangements where the
payment is not probable as described on page 103.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
103
20 Provisions for liabilities and charges continued
Customer financing (continued)
In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers, generally in respect of
civil aircraft. The Group’s commitments relating to these financing arrangements are spread over many years, relate to a number of customers
and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of $1.7bn (2020: $1.9bn)
(on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $952m could be called during 2022).
These facilities may only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the market rate. Significant
events impacting the international aircraft financing market, including the COVID-19 pandemic, the failure by customers to meet their obligations
under such financing agreements, or inadequate provisions for customer financing liabilities may adversely affect the Group’s financial position.
Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis at
the Group’s borrowing rate to better reflect the time span over which these exposures could arise. These amounts do not represent values that
are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow hedge accounting
for future foreign exchange transactions, this amount is reported together with the sterling equivalent at the reporting date spot rate. The values
of aircraft providing security are based on advice from a specialist aircraft appraiser.
2021
2020
£m
$m
£m
$m
Gross commitments 32
43
38
52
Value of security
1
(10)
(13)
(14)
(19)
Guarantees
(2)
(3)
(5)
(6)
Net commitments
20
27
19
27
Net commitments with security reduced by 20%
1
22
29
22
30
1
Although sensitivity calculations are complex, the reduction of the relevant security by 20% illustrates the sensitivity of the contingent liability to changes in this assumption.
Insurance
The Group’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group which include
policies for aviation claims, employer liabilities and healthcare claims. Significant delays can occur in the notification and settlement of claims and
judgement is involved in assessing outstanding liabilities, the ultimate cost and timing of which cannot be known with certainty at the balance
sheet date. The insurance provisions are based on information currently available, however it is inherent in the nature of the business that ultimate
liabilities may vary if the frequency or severity of claims differs from estimated. Provisions for outstanding claims are established to cover the
outstanding expected liability as well as claims incurred but not yet reported.
Tax related interest and penalties
Provisions for tax related interest and penalties relate to uncertain tax positions in some of the jurisdictions in which the Group operates. Utilisation
of the provisions will depend on the timing of resolution of the issues with the relevant tax authorities.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result of an historical insolvency of the previous provider and is expected to
be utilised over the next 30 years.
Other
During the year, £61m of other provisions have been charged to the income statement. The largest item is £29m for costs related to the termination
of a contract under which the Group now has an obligation to enter an onerous lease. On commencement of that lease, expected to be in 2022,
this balance will be recognised as a lease liability. The additional items that make up the remaining charge in the year are individually immaterial
and predominantly relate to claims. At 31 December 2021, other provisions includes those items as well as others (predominantly supplier claims),
where the related legal proceedings are ongoing and utilisation will depend upon their resolution. The value of the provision reflects the single
most likely outcome in each case.
21 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes:
– The UK defined benefit scheme is funded, with the assets held in a separate trustee administered fund. Employees are entitled to retirement
benefits based on either their final or career average salaries and length of service. On 31 December 2020, the scheme was closed to future
accrual.
– Overseas defined benefit schemes are a mixture of funded and unfunded plans and provide benefits in line with local practice. Additionally,
in the US, and to a lesser extent in some other countries, the Group’s employment practices include the provision of healthcare and life
insurance benefits for retired employees. These schemes are unfunded.
The valuations of the defined benefit schemes are based on the results of the most recent funding valuation, where relevant, updated by the
scheme actuaries to 31 December 2021.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
104
21 Post-retirement benefits continued
Changes to the UK defined benefit scheme
On 20 May 2020, the Group announced its intention to reshape and resize the Group due to the financial and operational impact of COVID-19.
As part of this restructuring programme, a voluntary severance programme was offered to certain UK employees and pension liabilities were
remeasured in 2020 to reflect the number of members who were expected to leave the scheme. During the year, a £4m past service credit has
arisen from the updated scope of the fundamental restructuring programmes following a higher than expected rate of natural attrition.
On the 29 July 2020, the Group announced a consultation with the active members of the UK scheme on a proposal to close the scheme to future
accrual on 31 December 2020. As at 31 December 2020 a non-underlying past-service credit of £67m was recognised. Following the confirmation
of the scheme closure, the Group held discussions with the employees' representatives and the Trustee regarding additional transitional
protections that could be granted from the scheme. At 31 December 2021, £7m had been recognised as a non-underlying past service credit which
relates to the differences between the final protections agreed and the obligation estimated at 31 December 2020.
During the year to 31 December 2021, 236 employed deferred members transferred employment in anticipation of a business disposal. As a
consequence of this, a £4m non-underlying past service credit has been recognised.
Amounts recognised in the income statement
2021
2020
UK
schemes
£m
Overseas
schemes
£m
Total
£m
UK
schemes
£m
Overseas
schemes
£m
Total
£m
Defined
benefit schemes:
Current service cost and administrative expenses 10
61
71
153
67
220
Other past service
(
credit)
/cost
1
(15)
(33)
(48)
(308)
20
(288)
(5)
28
23
(155)
87
(68)
Defined contribution schemes 146
81
227
80
84
164
Operating cost
141
109
250
(75)
171
96
Net financing (credit)/charge in respect of defined benefit
schemes
(16)
19
3
(26)
27
1
Total income statement charge
125
128
253
(101)
198
97
1
The past service credit recognised during the year comprises the changes in the UK schemes above and £32m from the remeasurement of the US defined benefit liability to remove spousal
benefits not included in the plan benefits. During the year to 31 December 2020, a UK past-service credit of £308m was recognised which comprised £213m arising from the restructuring
programme and the introduction of the bridging pension option (BPO), £67m as a result of the closure of the scheme to future accrual, £35m as a result of changes to management benefits
and a £7m past-service cost recognised as a result of the 20 November High Court judgement that previous statutory transfer values including guaranteed minimum pensions built up between
May 1990 and April 1997 must be equalised between men and women.
The operating cost is charged as follows:
Defined benefit
Defined contribution
Total
2021
£m
2020
£m
2021
£m
Restated
2020
£m
2021
£m
Restated
2020
£m
Cost of sales
50
170
158
115
208
285
Commercial and administrative costs
(38)
(271)
32
2
1
(6)
(25
0
)
Research and development costs
11
33
35
23
46
56
23
(68)
225
1
59
248
9
1
Discontinued operations
–
–
2
5
2
5
23
(68)
227
164
250
96
Pension contributions to UK pension arrangements are generally paid via a salary sacrifice scheme under which employees agree to a reduction
in gross contractual pay in return for the Group making additional pension contributions on their behalf. As a result, there is a decrease in wages
and salaries and a corresponding increase in pension costs of £45m (2020: £46m) in the year.
Net financing comprises:
2021
2020
UK
schemes
£m
Overseas
schemes
£m
Total
£m
UK
schemes
£m
Overseas
schemes
£m
Total
£m
Financing on scheme obligations
137
41
178
148
54
202
Financing on scheme assets
(153)
(22)
(175)
(174)
(27)
(201)
Net financing (income)/charge in respect of defined benefit
schemes
(16)
19
3
(26)
27
1
Financing income on scheme surpluses
(16)
(1)
(17)
(26)
(2)
(28)
Financing cost on scheme deficits
–
20
20
–
29
29
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
105
21 Post-retirement benefits continued
Amounts recognised in OCI in respect of defined benefit schemes
2021
2020
UK
schemes
£m
Overseas
schemes
£m
Total
£m
UK
schemes
£m
Overseas
schemes
£m
Total
£m
Actuarial gains and
(
losses
)
arising from:
Demographic assumptions
1
(101)
(2)
(103)
(85)
34
(51)
Financial assumptions
2
416
159
575
(1,387)
(246)
(1,633)
Experience adjustments
3
(88)
12
(76)
(157)
(7)
(164)
Return on scheme assets excluding financing income
2
(112)
(30)
(142)
1,166
92
1,258
115
139
254
(463)
(127)
(590)
1
For the UK Scheme, this reflects latest available CMI mortality projections and an update of the post-retirement mortality assumptions based on an analysis prepared for the 31 March 2020
funding valuation.
2
These arise primarily due to changes in interest rates and inflation.
3
This reflects updated membership data available from the 31 March 2020 funding valuation, actual experience of options selected by members leaving employment under the voluntary
severance arrangements (see above) offset by lower than expected pension and deferred pension increases.
Amounts recognised in the balance sheet in respect of defined benefit schemes
2021
2020
UK
schemes
£m
Overseas
schemes
£m
Total
£m
UK
schemes
£m
Overseas
schemes
£m
Total
£m
Present value of funded obligations
(8,010)
(863)
(8,873)
(8,879)
(895)
(9,774)
Fair value of scheme assets
9,128
861
9,989
9,762
894
10,656
Net asset/(liability) on funded schemes
1,118
(2)
1,116
883
(1)
882
Present value of unfunded obligations
–
(1,341)
(1,341)
–
(1,568)
(1,568)
Net asset/(liability) recognised in the balance sheet
1,118
(1,343)
(225)
883
(1,569)
(686)
Post-retirement scheme surpluses
1
1,118
30
1,148
883
24
907
Post-retirement scheme deficits
–
(1,373)
(1,373)
–
(1,580)
(1,580)
Included in liabilities associated with assets held for sale
–
–
–
–
(13)
(13)
1
The surplus in the UK scheme is recognised as on an ultimate wind-up when there are no longer any remaining members, any surplus would be returned to the Group, which has the power to
prevent the surplus being used for other purposes in advance of this event.
Overseas schemes are located in the following countries:
2021
2020
Assets
£m
Obligations
£m
Net
£m
Assets
£m
Obligations
£m
Net
£m
Canada
245
(275)
(30)
243
(293)
(50)
Germany
2
(883)
(881)
2
(1,016)
(1,014)
US pensions schemes
614
(643)
(29)
649
(669)
(20)
US healthcare schemes
–
(400)
(400)
–
(469)
(469)
Other
–
(3)
(3)
–
(16)
(16)
Net asset/(liability) recognised in the balance sheet
861
(2,204)
(1,343)
894
(2,463)
(1,569)
Defined benefit schemes
Assumptions
Significant actuarial assumptions for the UK schemes at the balance sheet date were as follows:
2021
2020
Discount rate
1.90%
1.45%
Inflation assumption (RPI) ¹
3.60%
3.10%
Rate of increase in salaries
2
n/a
2.55%
Transfer assumption (
employed deferred
/deferred)
50%/40%
40%/40%
BPO assumption
25%
30%
Life expectancy from age 65: current male pensioner
21.8 years
21.8 years
future male pensioner currently aged 45
23.2 years
23.2 years
current female pensioner
23.6 years
23.6
years
future female pensioner currently aged 45
25.4 years
25.4 years
1
This is the assumption for the Retail Price Index. The Consumer Price Index is assumed to be on average 0.55% lower, taking account of the announcement in 2020 that from 2030, RPI will be
replaced by CPIH (2020: 0.55% lower).
2
Following the closure to future accrual during 2020, future salaries do not affect the defined benefit obligation. In 2020, this assumption (with zero increase in 2021) was made to determine
the split between past-service credit arising from the closure included in the income statement and the actuarial gain or loss included in OCI.
Discount rates are determined by reference to the market yields on AA rated corporate bonds. The rate is determined by using the profile of
forecast benefit payments to derive a weighted average discount rate from the yield curve.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
106
21 Post-retirement benefits continued
The inflation assumption is determined by the market-implied assumption based on the yields on long-term index-linked government securities
and increases in salaries are based on actual experience, allowing for promotion, of the real increase above inflation.
The mortality assumptions adopted for the UK pension schemes are derived from the SAPS S3 'All' actuarial tables, with future improvements in
line with the CMI 2020 core projections updated to reflect use of an ‘A’ parameter of 0.25% for future improvements and long-term improvements
of 1.25%. Where appropriate, these are adjusted to take account of the scheme's actual experience.
The assumption for transfers and the BPO has been updated based on actual experience and actuarial advice.
Other assumptions have been set on advice from the actuary, having regard to the latest trends in scheme experience and the assumptions used
in the most recent funding valuation. The rate of increase of pensions in payment is based on the rules of the scheme, combined with the inflation
assumption where the increase is capped.
Assumptions for overseas schemes are less significant and are based on advice from local actuaries. The principal assumptions are:
2021
£m
2020
£m
Discount rate
2.20%
1.80%
Inflation assumption
2.10%
1.90%
Long
-
term healthcare cost trend rate
4.75%
4.73%
Male life expectancy from age 65: current pensioner
20.7 years
20.8 years
future
pensioner currently aged 45
22.5 years
22.4 years
Changes in present value of defined benefit obligations
2021
2020
UK schemes
Overseas
schemes
Total
UK schemes
Overseas
schemes
Total
£m
£m
£m
£m
£m
£m
At 1 January
(8,879)
(2,463)
(11,342)
(8,499)
(2,194)
(10,693)
Exchange
differences
–
49
49
-
(5)
(5)
Current service cost
(4)
(60)
(64)
(147)
(65)
(212)
Past
-
service credit
15
33
48
308
(15)
293
Finance cost
(137)
(41)
(178)
(148)
(53)
(201)
Contributions by
employe
es
–
(2)
(2)
(2)
(3)
(5)
Benefits paid out
1
768
101
869
816
100
916
Disposal of businesses
–
12
12
-
-
-
Actuarial gains/(losses)
227
169
396
(1,629)
(225)
(1,854)
Transfers
–
(2)
(2)
-
(3)
(3)
Settlement
–
–
–
422
-
422
At
31
December
(8,010)
(2,204)
(10,214)
(8,879)
(2,463)
(11,342)
Funded schemes
(8,010)
(863)
(8,873)
(8,879)
(895)
(9,774)
Unfunded schemes
–
(1,341)
(1,341)
-
(1,568)
(1,568)
1
Benefits paid out includes amounts paid to members transferring out of the scheme. This has increased in 2020 and 2021 as a result of the voluntary severance programme.
The defined benefit obligations are in respect of:
Active plan participants
1
(3,451)
(1,193)
(4,644)
(4,369)
(1,362)
(5,731)
Deferred plan
participants
(2,258)
(176)
(2,434)
(2,750)
(197)
(2,947)
Pensioners
(2,301)
(835)
(3,136)
(1,760)
(904)
(2,664)
Weighted average duration of obligations (years)
22
15
21
23
16
22
1
Although the UK scheme closed to future accrual on 31 December 2020, members who became deferred as a result of the closure and remain employed by the Group retain some additional
benefits compared with other deferred members. The obligations for these members are shown as active plan participants.
Changes in fair value of scheme
2021
2020
UK schemes
Overseas
schemes
Total
UK schemes
Overseas
schemes
Total
£m
£m
£m
£m
£m
£m
At 1 January
9,762
894
10,656
9,640
845
10,485
Exchange
differences
–
12
12
‒
(27)
(27)
Administrative expenses
(6)
(1)
(7)
(6)
(2)
(8)
Financing
153
22
175
174
27
201
Return on plan assets excluding financing
(112)
(30)
(142)
1,166
92
1,258
Contributions by employe
r
99
63
162
24
56
80
Contributions by employe
es
–
2
2
2
3
5
Benefits paid out
(768)
(101)
(869)
(816)
(100)
(916)
Acquisition of businesses
–
–
–
‒
‒
‒
Settlement
–
–
–
(422)
‒
(422)
At
31 December
9,128
861
9,989
9,762
894
10,656
Total return on scheme assets
41
(8)
33
1,340
119
1,459
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
107
21 Post-retirement benefits continued
Fair value of scheme assets at 31 December
2021
2020
UK schemes
Overseas
schemes
Total
UK schemes
Overseas
schemes
Total
£m
£m
£m
£m
£m
£m
Sovereign debt
5,756
217
5,973
7,220
276
7,496
Corporate debt instruments
3,122
389
3,511
2,878
521
3,399
Interest rate swaps
54
–
54
52
–
52
Inflation swaps
106
–
106
(55)
–
(55)
Cash and similar instruments
1
(811)
144
(667)
(1,156)
10
(1,146)
Liability driven investment (‘LDI’) portfolio
2
8,227
750
8,977
8,939
807
9,746
Listed equities
–
101
101
–
71
71
Unlisted equities
54
–
54
64
–
64
Synthetic equities
3
43
4
47
41
12
53
Sovereign debt
–
4
4
–
–
–
Corporate debt
instruments
802
–
802
709
–
709
Cash
–
2
2
–
6
6
Other
2
–
2
9
(2)
7
At 31 December
9,128
861
9,989
9,762
894
10,656
1
Cash and similar instruments include repurchase agreements on UK Government bonds amounting to £(1,087)m (2020: £(1,539)m). The latest maturity date for these short-term borrowings is
September 2023.
2
A portfolio of gilt and swap contracts, backed by investment-grade credit instruments and LIBOR-generating assets, that is designed to hedge the majority of the interest rate and inflation
risks associated with the schemes’ obligations.
3
Portfolios of swap contracts designed to provide investment returns in line with global equity markets. The maximum exposure (notional value and accrued returns) on the portfolios was
£550m (2020: £727m).
The investment strategy for the UK scheme is controlled by the Trustee in consultation with the Group. The scheme assets do not directly include
any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group. At 31 December 2021, there was
no indirect holding of the Group’s financial instruments (2020: none).
Future contributions
The Group expects to contribute approximately £66m to its defined benefit schemes in 2022 (2021: £160m): UK: nil, Overseas: £66m (2020: UK: £100m,
Overseas: £60m).
In the UK, cash funding is based on a statutory triennial funding valuation process. This process includes a negotiation between the Group and the
Trustee on the actuarial assumptions used to value the liabilities (Technical Provisions); assumptions which may differ from those used for accounting
set out on page 105. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability. Most notably, the
Technical Provision discount rate is currently based upon UK Government yields plus a margin (0.5% at the 31 March 2020 valuation) rather than being
based on yields of AA corporate bonds. Following the triennial valuation process, a Schedule of Contributions (SoC) must be agreed which sets out the
agreed rate of cash contributions and any contributions from the employer to eliminate a deficit. The most recent valuation, as at 31 March 2020, agreed
by the Trustee in June 2021, showed that the UK scheme was estimated to be 105% funded on the Technical Provisions basis. This funding level reflected
the short-term market impact of the COVID-19 pandemic. Funding has now returned to pre-pandemic levels and was estimated to be 112% at 31 December
2021. Following the closure of the scheme to future accrual on 31 December 2020, no contributions will be made in respect of future accrual and no
deficit reduction contributions are required. The 2021 contributions included above are in respect of 2020 accrual, the payment of some of which were
deferred in agreement with the Trustee as a result of the COVID-19 pandemic. All cash due has been paid in full. The current SoC includes an
arrangement for potential contributions during 2024 to 2027 (capped at £145m in total) if the Technical Provisions funding position is below 107% at 31
March 2023.
Sensitivities
The calculations of the defined benefit obligations are sensitive to the assumptions set out on pages 105 and 106. The following table summarises
how the estimated impact of a change in a significant assumption would affect the UK defined benefit obligation at 31 December 2021, while
holding all other assumptions constant. This sensitivity analysis may not be representative of the actual change in the defined benefit obligation
as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
For the most significant funded schemes, the investment strategies hedge the risks from interest rates and inflation measured on a proxy solvency
basis.
For the UK scheme, the interest rate and inflation hedging is currently based on UK Government bond yields without any adjustment for any
credit spread. The sensitivity analysis set out below have been determined based on a method that estimates the impact on the defined benefit
obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
108
21 Post-retirement benefits continued
2021
£m
2020
£m
Reduction in the discount rate of 0.25%
1
Obligation
(460)
(530)
Plan assets (LDI portfolio)
484
602
Increase in inflation of 0.25%
1
Obligation
(210)
(290)
Plan
assets (LDI portfolio)
147
267
Increase of 1% in transfer value assumption
Obligation
s
(55)
(67)
Increase of 5% of transfers instead of BPO
Obligations
(30)
(45)
One year increase in life expectancy
Obligation
s
(365)
(455)
1
The differences between the sensitivities on obligations and plan assets arise largely due to differences in the methods used to value the obligations for accounting purposes and the adopted
proxy solvency basis.
22 Share Capital
Equity
Ordinary
shares of
20p each
Millions
Nominal
value
£m
Issued and fully paid
At 1 January 2020 and 31 December 2020 1,691 338
At 31 December 2021 1,691
338
Rights, preferences and restrictions
Each member has one vote for each ordinary share held. Holders of ordinary shares are entitled to receive the Company’s Annual Report; attend
and speak at general meetings of the Company; to appoint one or more proxies or, if they are corporations, corporate representatives; and to
exercise voting rights. The ordinary shares are not listed.
23 Share-based payments
Effect of share-based payment transactions on the Company’s results
2021
£m
2020
£m
Total expense recognised for equity
-
settled share
-
based payment transactions
28
27
Total credit
recognised for cash
-
settled share
-
based payment transactions
–
(2)
Share
-
based payments recognised in the consolidated income statement
28
25
Liability for cash
-
settled share
-
based payment transactions
–
–
A description of the share-based payment plans is included below.
Movements in the Group’s share-based payment plans during the year
ShareSave
LTIP
DSBP
Number
Millions
Weighted average
exercise price
Pence
1
Number
Millions
Number
Millions
Outstanding at 1 January 2020
31.9
693
13.2
0.4
Granted
–
–
23.0
0.3
Forfeited
(15.9)
237
(2.8)
–
Exercised
–
–
(3.2)
(0.2)
Changes as a result of the rights issue
1
33.6
239
37.4
0.9
Outstanding at 1 January
2021
49.6
239
67.6
1.4
Granted
56.8
97
33.8
0.1
Forfeited
(31.3)
239
(
14.3
)
(0.1)
Exercised
–
–
(10.1)
(0.6)
Outstanding at 31 December
2021
75.1
132
77.0
0.8
Exercisable at 31 December
2021
–
–
–
–
Exercisable at 31 December
2020
–
–
–
–
1
The weighted average exercise price for share movements during 2020 was re-based following the rights issue in November 2020.
The weighted average share price at the date share options were exercised was 119p (2020: 203p). The closing price at 31 December 2021 was
123p (2020: 111p).
The weighted average remaining contractual life for the share options as at 31 December 2021 was two years (2020: two years).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
109
23 Share-based payments continued
Fair values of share-based payment plans
The weighted average fair values per share of equity-settled share-based payment plans granted during the year, estimated at the date of grant
are as follows:
2021
2020
LTIP
104p
388p
LTIP (ELT & Board)
n/a
354p
ShareSave
–
three
-
year grant
67p
n/a
DSBP
105p
490p
LTIP
The fair value of shares awarded are calculated using a pricing model that takes account of the non-entitlement to dividends (or equivalent)
during the vesting period and the market-based performance condition based on expectations about volatility and the correlation of share price
returns in the group of FTSE 100 companies and which incorporates into the valuation the interdependency between share price performance
and TSR vesting. This adjustment decreases the fair value of the award relative to the share price at the date of grant.
ShareSave
The fair value of the options granted is calculated using a pricing model that assumes that participants will exercise their options at the beginning
of the six-month window if the share price is greater than the exercise price. Otherwise, it assumes that options are held until the expiration of
their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
Deferred Share Bonus Plan (DSBP)
The fair value of shares awarded under DSBP is calculated as the share price on the date of the award, excluding expected dividends (or
equivalent).
24 Contingent liabilities
Contingent liabilities in respect of customer financing commitments are described in note 20.
In January 2017, after full cooperation, the Group concluded deferred prosecution agreements (DPA) with the SFO and the US Department of
Justice (DoJ) and a leniency agreement with the MPF, the Brazilian federal prosecutors. The terms of both DPAs have now expired; the DPA with
the DoJ was dismissed by the US District Court on 19 May 2020 and the SFO filed notice of discontinuance of proceedings with the UK Court on
18 January 2022. Certain authorities are investigating members of the Group for matters relating to misconduct in relation to historical matters.
The Group is responding appropriately. Action may be taken by further authorities against the Group or individuals. In addition, the Group could
still be affected by actions from customers and customers’ financiers. The Directors are not currently aware of any matters that are likely to lead
to a material financial loss over and above the penalties imposed to date, but cannot anticipate all the possible actions that may be taken or their
potential consequences.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, commitments
made for future service demand in respect of maintenance, repair and overhaul, and performance and reliability. The Group has, in the normal
course of business, entered into arrangements in respect of export ﬁnance, performance bonds, countertrade obligations and minor
miscellaneous items. Various Group undertakings are parties to legal actions and claims (including with tax authorities) which arise in the ordinary
course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported, the
Group is no longer fully insured against known and potential claims from employees who worked for certain of the Group’s UK based businesses
for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters cannot precisely be foreseen,
the Directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in signiﬁcant
loss to the Group.
25 Related party transactions
2021
£m
2020
£m
Sale of goods and services to joint ventures and associates
1
3,548
3,760
Purchases of goods and services from joint ventures and associates
1
(3,677)
(4,2
88
)
Lease payments to joint ventures and associates
(2
25
)
(226)
Guarantees of joint
arrangements’ and associates’ borrowings
1
3
Guarantees of non
-
wholly owned subsidiaries’ borrowings
3
3
Dividends received from joint ventures and associates
27
60
Other income received from joint ventures and associates
3
3
1
Sales of goods and services to joint ventures and associates and purchases of goods and services from joint ventures and associates are included at the average exchange rate, consistent
with the statutory income statement.
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to £157m (2020: £102m). Profit
recognised in the period on such sales amounted to £47m (2020: £91m), including profit on current year sales and recognition of profit deferred
on similar sales in previous years. Cash receipts relating to the sale of spare engines amounted to £181m (2020: £193m).
The aggregated balances with joint ventures and the parent company are shown in notes 13 and 18. Transactions with Group pension schemes
are shown in note 21.
In the course of normal operations, related party transactions entered into by the Group have been contracted on an arms-length basis.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
110
25 Related party transactions continued
Key management personnel are deemed to be the Directors and historically, members of the ET (both described on page 39). Remuneration for
key management personnel is shown below:
2021
£m
2020
£m
Salaries and short
-
term benefits
19
7
Post
-
retirement schemes
–
–
Share
-
based payments
4
1
23
8
More detailed information regarding the Directors’ remuneration, shareholdings, pension entitlements, share options and other long-term
incentive plans is shown in the Directors’ Remuneration Report of Rolls-Royce Holdings plc on pages 81 to 100. The charge for share-based
payments above is based on when the award is charged to the income statement in accordance with IFRS 2 Share-Based Payments, rather than
when the shares vest, which is the basis used in the Directors’ Remuneration Report.
26 Disposals, assets held for sale and discontinued operations
Disposals
On 28 February 2020, the Group announced the decision to carry out a strategic review of Bergen Engines AS, the Group’s medium-speed gas
and diesel engine business. Bergen Engines AS formed part of the Power Systems business and from 31 December 2020 it has been classified as
a disposal group held for sale. During the year to 31 December 2021, an impairment charge of £9m was recognised against the disposal group as
a result of a change in the anticipated proceeds. On 31 December 2021, the Group completed the sale of Bergen Engines AS to Langley Holdings
plc for a value of €91m. In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, the Group has recycled the cumulative
currency translation reserve through the income statement in 2021.
On 7 December 2020, the Group signed an agreement for the sale of Civil Nuclear Instrumentation & Control business to Framatome and
consequently, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the business was classified as a disposal
group held for sale at 31 December 2020. During the year to 31 December 2021, no impairment charge was recognised. On 5 November 2021, the
Group completed the sale to Framatome for a value of £85m. In accordance with IAS 21, the Group has recycled the cumulative currency
translation reserve through the income statement in 2021.
Bergen
Engines
£m
Civil
Nuclear
£m
Total
subsidiaries
£m
Proceeds
Cash
consideration
77
85
162
Cash and cash equivalents disposed
(29)
(14)
(43)
Net cash consideration
per cash flow statement
48
71
119
Disposal costs
paid
(9)
(3)
(12)
Cash inflow per cash flow statement
39
68
107
Intangible
assets
–
16
16
Property, plant and equipment
–
6
6
Right
-
of
-
use assets
–
7
7
Deferred tax assets
3
5
8
Inventory
81
17
98
Trade receivables and other assets
70
41
111
Current tax (liabilities)/assets
(1)
3
2
Lease
liabilities
(3)
(5)
(8)
Trade payables and other liabilities
(99)
(74)
(173)
Provisions for liabilities and charges
(17)
(4)
(21)
Post
-
retirement scheme deficits
–
(12)
(12)
Less: Net assets disposed
34
–
34
Profit on
disposal before disposal costs and continuing obligations
14
71
85
Cumulative current translation
(
loss)
/gain
(1)
2
1
Disposal costs
(20)
(3)
(23)
(L
oss)
/profit
before taxation
(7)
70
63
Disposal completed in prior periods
On 1 June 2018, the Group sold its L’Orange business, part of Rolls-Royce Power Systems, to Woodward Inc. for €673m. Under the sale agreement,
the cash consideration may be adjusted by up to +/-€44m, based on L’Orange aftermarket sales over the five-year period to 31 May 2023. A
liability of €28m is recognised for amounts that are now expected to be payable in relation to the years 2022 and 2023 (2020: €29m liability in
relation to the years 2021-2023). Cash of €9m has been paid during the year with an increase in the liability of €8m (£7m) reflected as an adjustment
to sales proceeds. The maximum adjustment to sales proceeds has now been provided for in all future years to 2023.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
111
26 Disposals, assets held for sale and discontinued operations continued
Reconciliation of profit/(loss) to the income statement:
Total
£m
Profit on disposal of businesses
63
Adjustment to L’Orange sales proceeds
(7)
Profit
on acquisition & disposal of businesses
per
income statement
56
Reconciliation of cash flow on disposal of businesses to the cash flow statement:
Total
£m
Net consideration on disposal of businesses
107
Cash outflow on disposals completed in prior periods
(8)
Cash flow on disposal of businesses per cash
flow statement
99
Businesses held for sale
On 27 August 2020, the Group announced its intention to sell ITP Aero. During the period to 30 June 2021, the Hucknall site with associated
fabrications activities, that were previously reported as part of the Civil Aerospace segment, were transferred to ITP Aero (see note 2 for more
detail) and other preparatory work had been performed such that as at 30 June 2021 the business was classified as a disposal group held for sale.
On 27 September 2021, the Group signed an agreement for the sale of ITP Aero to Bain Capital for £1.3bn and consequently, in accordance with
IFRS 5, the business continues to be classified as a disposal group held for sale at 31 December 2021. The assets of ITP Aero have been assessed
for impairment in line with the requirements of IFRS 5 and no impairment is required at 31 December 2021. ITP Aero had an additional £153m of
cash which was held by another Group company at 31 December 2021 and consequently is not included in the disposal group as the resulting
intra-group balances are eliminated on consolidation. On completion, such cash is expected to be included in the disposal group. In addition, the
Group records significant adjustments to eliminate the impact of ITP Aero margin within onerous contract provisions within Civil Aerospace.
Certain consolidation adjustments are not included in the balances held for sale but will be derecognised upon the sale of ITP Aero and the
related income statement charge will be recognised as part of the profit on disposal.
On 13 September 2021, the Group signed an agreement with Equitix Investment Management Limited to dispose its 23.1% shareholding in AirTanker
Holdings Limited for a cash consideration of £189m. The sale completed on 9 February 2022. In accordance with IFRS 5, the Group has classified
£47m of the AirTanker assets as held for sale at 31 December 2021.
At 31 December 2021, the Group recognised property, plant and equipment and the deferred income of a related grant as held for sale in line
with IFRS 5. These assets relate to the Group's site rationalisation activities.
The table below summarises the categories of assets and liabilities classified as held for sale at 31 December 2021 and 2020.
2021
2020
ITP
Aero
£m
Other
1
£m
Total
£m
Bergen
Engines
£m
Civil
Nuclear
£m
Total
£m
Intangible assets
872
–
872
–
16
16
Property, plant and equipment
313
26
339
3
4
7
Right
-
of
-
use assets
12
–
12
2
7
9
Investment in associates and joint ventures
1
34
35
–
–
–
Deferred tax assets
16
7
–
16
7
2
4
6
Inventory
222
–
222
97
14
111
Trade receivables and other assets
342
14
356
50
38
88
Cash and cash equivalents
25
–
25
25
26
51
Assets held for sale
1,9
5
4
74
2,0
2
8
179
109
288
Trade payables and other liabilities
(540)
(7)
(547)
(100)
(84)
(184)
Provisions for liabilities and charges
(22)
–
(22)
(11)
(7)
(18)
Borrowings and lease liabilities
(72)
–
(72)
(4)
(7)
(11)
Deferred tax liabilities
(82)
–
(82)
(2)
–
(2)
Post
-
retirement scheme deficits
–
–
–
–
(13)
(13)
Liabilities associated with assets held for sale
(716)
(7)
(723)
(117)
(111)
(228)
Net assets
/(liabilities)
held for sale
1,2
3
8
67
1,3
0
5
62
(2)
60
1
Other assets and liabilities held for sale comprise: investment in joint venture and accrued interest with Airtanker Holdings Limited; and assets and associated government grant, related to the
Group's site rationalisation activities.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
112
26 Disposals, assets held for sale and discontinued operations continued
Discontinued operations
ITP Aero represents a separate major line of business and is classified as a disposal group held for sale. Therefore, in line with IFRS 5, ITP Aero
has been classified as a discontinued operation.
The financial performance and cash flow information presented reflects the operations for the year that have been classified as discontinued
operations.
2021
2020
£m
£m
Revenue
1
365
33
3
Operating loss
1
(
4
)
(
109
)
P
rofit
/(loss)
before taxation
1
2
(1
11
)
Income tax credit
34
43
P
rofit
/(loss)
for the year
from discontinued operations on ordinary activities
36
(6
8
)
Costs of disposal of discontinued operations
(39)
–
Loss for the year from discontinued operations
(
3
)
(
68
)
Net cash inflow from operating activities
2
12
40
Net cash outflow from investing activities
(32)
(39)
Net cash outflow from financing activities
(2
5
)
(22)
Exchange
gain/(losses)
4
(4)
Net change in cash and cash equivalents
(41)
(25)
1
Profit/(loss) from discontinued operations on ordinary activities is presented net of internal margin, related consolidation adjustments and amortisation of intangible assets arising on previous
acquisition (prior to classification to held for sale). In the year to 31 December 2020, results included a number of write-offs and programme impairments.
2
Cash flows from operating activities include £39m costs of disposal paid during the year to 31 December 2021 that are not a movement in the cash balance of the disposal group as they were
borne centrally.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
113
27 Derivation of summary funds flow statement
2021
2020
£m
£m
£m
£m
Source
Underlying operating profit
/(loss)
(see note
2
)
4
14
(
2,008
)
Operating loss from discontinued operations (see note
2
6
)
(43)
(109)
Amortisation and impairment of intangible assets
290
902
Cash flow statement (CFS)
Depreciation and impairment of property, plant and equipment
462
821
CFS
Depreciation and impairment of right
–
of
–
use assets
257
732
CFS
Adjustment to residual value guarantees in lease liabilities
(
4
)
(102)
CFS
Impairment of joint ventures
, associates and other investments
7
24
Note 11
Reversal of
non
-
underlying impairments of non
-
current assets
9
(1,2
44
)
Reversal of underlying adjustment (note 2)
Acquisition accounting
(50)
(
85
)
Reversal of underlying adjustment (note 2)
Depreciation and amortisation
and impairment
97
1
1,048
Additions of intangible assets
(
185
)
(316)
CFS less exceptional restructuring (see below)
Purchases of property, plant and equipment
(
311
)
(579)
CFS less exceptional restructuring (see below)
Lease payments (capital plus interest)
(403)
(379)
CFS (capital and interest payments adjusted for foreign
exchange (FX))
(
I
ncrease)
/decrease
in inventories
(169)
588
CFS
Movement in receivables/payables
(4
68
)
(2,
295
)
CFS adjusted for the impact of exceptional programme
charges and exceptional restructuring shown on the
basis of the FX rate achieved on settled derivative
contracts
Movement in contract balances (excluding Civil LTSA)
(
289
)
(2
63
)
CFS adjusted for the impact of exceptional programme
charges and FX and excluding Civil LTSAs (shown
separately below)
Underlying movement in Civil Aerospace LTSA contract balances
66
479
Movement in Civil LTSA balances within movement of
contract balances in CFS less impact of FX
Revaluation of trading assets (excluding exceptional items)
32
2
1
9
Adjustment to reflect the impact of the FX contracts
held on receivables/payables
Realised derivatives in financing
85
226
Realised cash flows on FX contracts not included in
underlying operating profit less cash flows on
settlement of excess derivative contracts
Movement on receivables/payables/contract balances
(
57
4
)
(1,6
34
)
Movement on provisions
(13
6
)
(195)
CFS adjusted for the impact of exceptional programme
charges and anticipated recoveries, exceptional
restructuring and FX contracts held
Net interest received and paid
(197)
(75)
CFS
Fees paid on undrawn facilities
(62)
(97)
CFS
Cash flows on
settlement of excess derivative contracts
(452)
(202)
CFS
Cash flows on financial instruments net of realised losses
included in operating profit
(85)
(
105
)
Cash flows on other financial instruments (CFS) not
allocated to lease payments or exceptional programme
expenditure adjusted for the impact of FX not held for
trading
Other
68
(
48
)
Principally disposals of non-current assets, joint
venture
trading and the effect of share
-
based payments
Trading cash flow
(1,16
4
)
(4,111)
Trading
cash flow from
continuing
operations
(1,211)
(4,198)
Contributions to defined benefit schemes (in excess of)/less
than underlying operating profit charge
(92)
160
CFS
Tax
(185)
(231)
CFS
Free cash flow
(1,44
1
)
(4,182)
Free cash flow from continuing operations
(1,
4
8
4
)
(4,
25
2
)
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Consolidated Financial Statements
114
27 Derivation of summary funds flow statement continued
2021
2020
£m
£m
£m
£m
Source
Free cash flow
(1,44
1
)
(4,182)
Net cash flow from changes in borrowings and lease liabilities
666
1,630
CFS excluding repayment of debt acquired. See
below.
(Decrease)/increase in short
-
term investments
(8)
6
CFS
Movement in net funds from cash flows
658
1,636
Exclude: Capital element of lease repayments
374
284
CFS
Movement in net funds from cash flows (excluding lease
liabilities)
1,032
1,920
Movement on balances with parent company
(4)
1,887
CFS
Dividend to NCI
(1)
(1)
CFS
Acquisition of businesses
–
(130)
CFS including repayment of debt acquired
Disposal of businesses
99
23
CFS
Other acquisitions and disposals
(50)
(12)
£50m related to costs incurred on central M&A activity
Changes in
G
roup structure
49
(119)
Exceptional
restructuring costs
(231)
(323)
£168m related to severance costs and £63m capital
expenditure (2020: £268m and £55m respectively)
Payments of financial penalties
(156)
(135)
CFS
Other
(23)
(33)
Cash outflow on M&A spend and timing of cash flows
on a prior period disposal
Change in cash and cash equivalents
(775)
(986)
The comparative information for the year ended 31 December 2020 has been re-presented to be on a comparable basis with the presentation
adopted for the year ended 31 December 2021. There is no change to trading or group free cash flow. In summary foreign exchange transactions
have been re-presented within line items to be consistent with presentation throughout the financial statements.
Free cash flow is a measure of financial performance of the business’ cash flow to see what is available for distribution among those stakeholders
funding the business (including debt holders and shareholders). Free cash flow is calculated as trading cash flow less recurring tax and post-
employment benefit expenses. It excludes amounts spent or received on activity related to business acquisitions, financial penalties paid,
exceptional restructuring costs, foreign exchange changes on net funds and movements on balances with parent company. The Board considers
that free cash flow reflects cash generated from the Group’s underlying trading.
Trading cash flow is defined as free cash flow (as defined above) before the deduction of recurring tax and post-employment benefit expenses.
Financial statements Rolls-Royce plc Annual Report 2021
115
COMPANY BALANCE SHEET
As at 31 December 2021
202
1
2020
Notes
£m
£m
ASSETS
Intangible assets
3
2,148
2,159
Property, plant and equipment
4
1,782
1,896
Right
-
of
-
use assets
5
163
160
Investments
-
subsidiary undertakings
6
1,442
2,040
Investments
-
joint ventures and associates
6
8
73
Investments
-
o
ther
6
34
16
Loan receivable from subsidiary undertaking
6
1,866
1,857
Other financial assets
11
347
643
Deferred tax
assets
16
1,562
1,077
Post
-
retirement schemes surpluses
17
1,118
883
Non
-
current assets
10,470
10,804
Inventories
7
1,729
1,690
Trade receivables and other assets
8
6,693
7,102
Contract assets
9
1,081
879
Taxation recoverable
2
2
Other financial assets
11
97
98
Cash and cash equivalents
10
2,047
2,812
Assets held for sale
730
–
Current assets
12,379
12,583
TOTAL ASSETS
22,849
23,387
LIABILITIES
Borrowings and lease liabilities
12
(34)
(1,016)
Other financial liabilities
11
(
662
)
(586)
Trade payables and other liabilities
14
(9,385)
(10,682)
Contract liabilities
9
(2,289)
(2,580)
Current tax liabilities
(4)
(7)
Provisions for liabilities and charges
15
(204)
(506)
Current liabilities
(12,5
78
)
(15,377)
Borrowings and lease liabilities
12
(6,183)
(4,386)
Other financial liabilities
11
(
2,729
)
(2,990)
Trade payables and other liabilities
14
(1,479)
(1,637)
Contract liabilities
9
(4,939)
(4,381)
Deferred tax liabilities
16
(391)
(309)
Provisions for liabilities and charges
15
(961)
(906)
Non
-
current liabilities
(1
6,682
)
(14,609)
TOTAL LIABILITIES
(29,260)
(29,986)
NET LIABILITIES
(6,411)
(6,599)
EQUITY
Called
-
up shared capital
18
338
338
Share premium
631
631
Merger reserve
650
650
Other reserves
186
158
Accumulated losses
(8,216)
(8,376)
TOTAL EQUITY
(6,411)
(6,599)
Profit/(loss) for the year
54
(2,184)
The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the parent company income
statement.
The Financial Statements on pages 115 to 148 were approved by the Board on 24 February 2022 and signed on its behalf by:
Warren East Panos Kakoullis
Chief Executive Chief Financial Officer
Company’s registered number: 01003142
Financial statements Rolls-Royce plc Annual Report 2021
116
COMPANY STATEMENT OF COMPREHENSIVE IN COME
For the year ended 31 December 2021
202
1
2020
Notes
£m
£m
Profit/(loss) for the year
54
(2,184)
Other comprehensive income (OCI)
Actuarial movement in post
-
retirement schemes
17
115
(463)
Revaluation to fair value of other investments
(2)
–
Related tax movements
(40)
162
Items that will not be reclassified to profit or loss
73
(301)
Movement on fair values credited/(debited) to cash flow hedge reserve
3
(
43
)
Reclassified to income statement from cash flow hedge reserve
35
25
Related tax movements
(10)
3
Items that
will
be reclassified to profit or loss
28
(15)
Total other comprehensive
income/(
expense
)
101
(316)
Total comprehensive income/(
expense
) for the year
155
(2,500)
COMPANY STATEMENT OF CHANGES IN EQ UITY
For the year ended 31 December 2021
Non-distributable reserves
Share
capital
Share
premium
Merger
reserves
Other
reserves ¹
Accumulated
losses
Total
equity
Note £m £m £m £m £m £m
At 1 January 2020
338
631
650
173
(5,919)
(4,127)
Loss for the year
–
–
–
–
(2,184)
(2,184)
Movement on post
-
retirement schemes
17
–
–
–
–
(463)
(463)
Reclassified to income statement from cash flow hedge
reserve
–
–
–
25
–
25
Movement on fair values debited to cash flow hedge
reserve
–
–
–
(43)
–
(43)
Related tax
movements
–
–
–
3
162
165
Total comprehensive expense for the year
–
–
–
(15)
(2,485)
(2,500)
Share
-
based payments
–
direct to equity
2
–
–
–
–
23
23
Related tax movements
–
–
–
–
5
5
Other changes in equity in the year
–
–
–
–
28
28
At
31 December 2020
338
631
650
158
(8,376)
(6,599)
At 1 January 2021
338
631
650
1
58
(8,3
76
)
(6,
599
)
Profit for the year
–
–
–
–
54
54
Movement on post
-
retirement schemes
17
–
–
–
–
115
115
Reclassified to income statement from cash flow hedge
reserve
–
–
–
35
–
35
Movement on fair values credited to cash flow hedge
reserve
–
–
–
3
–
3
Revaluation to fair value of other investments
6
–
–
–
–
(2)
(2)
Related tax movements
–
–
–
(10)
(40)
(50)
Total comprehensive
income
for the year
–
–
–
28
127
155
Share
-
based payments
–
direct to equity
2
19
–
–
–
–
16
16
Related tax movements
–
–
–
–
17
17
Other changes in equity in the year
–
–
–
–
33
33
At 31 December 2021
338
631
650
186
(8,216)
(6,411)
1
Other reserves includes a translational reserve of £4m (2020: £4m).
2
Share-based payments – direct to equity is the share-based payment charge for the year less the actual cost of vesting excluding those vesting own shares and cash received on share-based
schemes vesting.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
117
NOTES TO THE C OMPANY FINANCIA L STATEMENTS
1 Accounting policies
The Company
Rolls-Royce plc (the ‘Company’) is a public company limited by shares incorporated under the Companies Act 2006 and domiciled in England in
the United Kingdom. The Company’s registered number is 01003142 and its registered address is at Kings Place, 90 York Way, London, N1 9FX,
United Kingdom.
Basis of preparation
The financial statements of the Company have been prepared in accordance with Financial Reporting Standards 101 Reduced Disclosure
Framework on the historical cost basis. In accordance with the Companies Act 2006, the Company Financial Statements have been prepared in
accordance with UK-adopted international accounting standards. Where necessary, amendments are made in these Financial Statements in order
to comply with Companies Act 2006 and to take advantage of the exemptions available under FRS 101 in respect of the following disclosures:
– a cash flow statement and related notes;
– IFRS 2 Share Based Payments in respect of group settled share-based payments;
– disclosures in respect of transactions with wholly owned subsidiaries;
– IFRS 7 Financial Instruments: Disclosures;
– comparative period reconciliations for share capital, investments, property, plant and equipment and intangible assets; and
– disclosures in respect of the compensation of key management personnel.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Financial
Statements.
The Financial Statements are presented in sterling, which is the Company’s functional currency.
As permitted by Section 408 of the Companies Act 2006, a separate income statement for the Company has not been included in these Financial
Statements. As permitted by the audit fee disclosure regulations, the disclosure of non-audit fees information is not included in respect of the
Company.
These financial statements have been prepared on a going concern basis. Further details are given in the Going Concern Statement on pages 41 to
42. After due consideration, the Directors consider that the Company has sufficient liquidity to continue in operational existence for a period of
at least 18 months from the date of this report and are therefore satisfied that it is appropriate to adopt the going concern basis of accounting in
preparing the financial statements.
In preparing the Company Financial Statements, the Directors have considered the potential impact of climate change, please see pages 52 to
54 for further details.
Revision to IFRS applicable in 2021
In April 2021, the IFRS IC published its final agenda decision on Configuration and Customisation costs in a Cloud Computing Arrangement. The
agenda decision considers how a customer accounts for configuration or customisation costs where an intangible asset is not recognised in a
cloud computing arrangement. The agenda decision does not have a material impact on the Company in respect of the current period or prior
periods.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Amendments to IAS 37 for Onerous Contracts – Cost of Fulfilling a Contract is effective from 1 January 2022. It clarifies the meaning of ‘costs to
fulfil a contract’, explaining that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract (for example,
direct labour and materials) and an allocation of other costs that relate directly to fulfilling contracts (for example, an allocation of the depreciation
charge for an item of PPE used to fulfil the contract). The Company has assessed the impact of this amendment on its contracts (of which the
most significant onerous contracts are in Civil Aerospace) and the inclusion of additional allocated costs is expected to increase the total contract
loss provision by £0.7bn to £0.8bn. As required by the transition arrangements in relation to the amendment, there will be a corresponding impact
to 2022 opening retained earnings.
IFRS 17 Insurance Contracts
IFRS 17 is effective from 1 January 2023. The new Standard establishes the principles for the recognition, measurement, presentation and
disclosure of insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information
that faithfully represents those contracts.
There are no amendments to accounting standards, no new standards or IFRIC interpretations that are effective for the year ended 31 December
2021 that have a material impact on the Company’s financial statements.
Significant accounting policies
The Company’s significant accounting policies are set out below. These accounting policies have been applied consistently to all periods
presented in these Financial Statements.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
118
1 Accounting policies continued
Revenue recognition
Revenue recognised comprises sales to the Company’s customers after discounts and amounts payable to customers. Revenue excludes value
added taxes. The transaction price of a contract is typically clearly stated within the contract, although the absolute amount may be dependent
on escalation indices and long-term contracts require the key estimates highlighted below. Refund liabilities where sales are made with a right of
return are not typical in the Company’s contracts. Where they do exist, and consideration has been received, a portion, based on an assessment
of the expected refund liability is recognised within other payables. The Company has elected to use the practical expedient not to adjust revenue
for the effect of financing components, where the expectation is that the period between the transfer of goods and services to customers and
the receipt of payment is less than a year.
Sales of standard OE, spare parts and time and material overhaul services are generally recognised on transfer of control to the customer. This is
generally on delivery to the customer unless the specific contractual terms indicate a different point. The Directors consider whether there is a
need to constrain the amount of revenue to be recognised on delivery based on the contractual position and any relevant facts, however, this is
not typically required.
Sales of OE and services that are specifically designed for the contract (most significantly in the Defence business) are recognised by reference
to the progress towards completion of the performance obligation, using the cost method described in the key judgements, provided the outcome
of contracts can be assessed with reasonable certainty.
The Company generates a significant portion of its revenue and profit on aftermarket arrangements arising from the installed OE fleet. As a
consequence, in particular in the Civil Aerospace large engine business, the Company will often agree contractual prices for OE deliveries that
take into account the anticipated aftermarket arrangements. Sometimes this may result in losses being incurred on OE. As described in the key
judgements, these contracts are not combined. The consideration in the OE contract is therefore allocated to OE performance obligations and
the consideration in the aftermarket contract to aftermarket performance obligations. Key areas of accounting policy are:
– Future variable revenue from long-term contracts is constrained to take account of the risk of non-recovery of resulting contract balances
from reduced utilisation e.g. engine flying hours (EFHs), based on historical forecasting experience and the risk of aircraft being parked by
the customer.
– A significant amount of revenue and cost related to long-term contract accounting is denominated in currencies other than that of the
Company, most significantly US dollar transactions in sterling and euro denominated undertakings. These are translated at estimated long-
term exchange rates.
– A contract asset/liability is recognised where payment is received in arrears/advance of the costs incurred to meet performance obligations.
– Where material, wastage costs (see key judgements below) are recorded as an exceptional expense.
If the expected costs to fulfil a contract exceed the expected revenue, a contract loss provision is recognised in the excess costs.
The Company pays participations fees to airframe manufacturers, its customers for OE, on certain programmes. Amounts paid are initially treated
as contract assets and subsequently charged as a reduction to the OE revenue when the engines are transferred to the customer.
The Company has elected to use the practical expedient to expense as incurred any incremental costs of obtaining or fulfilling a contract if the
amortisation period of an asset created would have been one year or less. Where costs to obtain a contract are recognised in the balance sheet,
they are amortised over the performance of the related contract (nine years).
Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined
In the Civil Aerospace business, OE contracts for the sale of engines to be installed on new aircraft are with the airframers, while the contracts
to provide spare engines and aftermarket goods and services are with the aircraft operators, although there may be interdependencies
between them. IFRS 15 Revenue from Contracts with Customers includes guidance on the combination of contracts, in particular that contracts
with unrelated parties should not be combined. Notwithstanding the interdependencies, the Directors consider that the engine contract should
be considered separately from the aftermarket contract. In making this judgement, they also took account of industry practice.
Key judgement – How performance on long-term aftermarket contracts should be measured
The Company generates a significant proportion of its revenue from aftermarket arrangements. These aftermarket contracts, such as TotalCare
and CorporateCare agreements in the Civil Aerospace business, cover a range of services and generally have contractual terms covering
more than one year. Under these contracts, the Company’s primary obligation is to maintain customers’ engines in an operational condition
and this is achieved by undertaking various activities, such as maintenance, repair and overhaul, and engine monitoring over the period of the
contract. Revenue on these contracts is recognised over the period of the contract and the basis for measuring progress is a matter of
judgement. The Directors consider that the stage of completion of the contract is best measured by using the actual costs incurred to date
compared to the estimated costs to complete the performance obligations, as this reflects the extent of completion of the activities to be
performed.
Key judgement – Whether any costs should be treated as wastage
In rare circumstances, the Company may incur costs of wasted material, labour or other resources to fulfil a contract where the level of cost
was not reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected to arise where
there has been a series of abnormal events which give rise to a significant level of cost of a nature that the Company would not expect to incur
and hence is not reflected in the contract price. Examples include technical issues that: require resolution to meet regulatory requirements;
have a wide-ranging impact across a product type; and cause significant operational disruption to customers. Similarly, in these rare
circumstances, significant disruption costs to support customers resulting from the actual performance of a delivered good or service may be
treated as a wastage cost. Provision is made for any costs identified as wastage when the obligation to incur them arises – see note 15.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
119
1 Accounting policies continued
Revenue recognition (continued)
Key estimate – Whether sales of spare engines to joint ventures are at fair value
The Civil Aerospace business maintains a pool of spare engines to support its customers. Some of these engines are sold to, and held by, joint
venture companies. The assessment of whether the sales price reflects fair value is a key judgement. The Company considers that based upon
the terms and conditions of the sales, and by comparison to the sales price of spare engines to other third parties, the sales made to joint
ventures reflect the fair value of the goods sold. See note 21 for value of sales to joint ventures during the year.
Key judgement – When revenue should be recognised in relation to spare engine sales to related entities
The Company recognises revenue when a performance obligation is settled. A judgement has been made on whether the Company relinquishes
control of these spare engines at the point of legal sale, as the customer, in some instances, is contracted to provide some future spare engine
capacity to the Company to support its installed fleet. The customer in the engine sale has responsibility for generating revenue from the
engines and exposure to periods of non-utilisation; exposure to risk of damage or loss, risk from residual value movements, and will determine
if and when profits will be made from disposal. The spare engines that will be made available to the Company in the future do not consist of
identified assets and the provider retains a substantive right to substitute the asset through the Company’s period of use. It is therefore
appropriate to recognise revenue from the sale of the spare engines at the point that title transfers.
Key estimate – Estimates of future revenues and costs on long-term contractual arrangements
The Company has long-term contracts that fall into different accounting periods and which can extend over significant periods (generally up
to 25 years) the most significant of these are long-term service arrangements (LTSAs) in the Civil Aerospace business with an average remaining
term of around 10 years. The estimated revenue and costs are inherently imprecise and significant estimates are required to assess: EFH’s,
time-on-wing and other operating parameters; the pattern of future maintenance activity and the costs to be incurred; lifecycle cost
improvements over the term of the contracts; and escalation of revenue and costs. The impact of climate change on EFH and costs is also
considered when making these estimates. Industry and customer data on expected levels of utilisation is included in the forecasts used. Across
the length of the current Civil LTSA contracts, allowance has been made for around a 1% projected cost increase resulting from carbon pricing
and commodity price changes.
The sensitivities below demonstrate how changes in assumptions (including as a result of climate change) could impact the level of revenue
recognised were assumptions to change. The Directors believe that the estimates used to prepare the financial statements take account of the
inherent uncertainties, constraining the expected level of revenue as appropriate.
The ongoing COVID-19 pandemic continues to result in uncertainty over the recovery of demand across the civil aviation industry. Further
details have been included in the going concern disclosure on pages 41 to 42. Estimates of future LTSA revenue within Civil Aerospace are
based upon future EFH forecasts, influenced by assumptions over the recovery of the civil aviation industry. Finally, many of the revenues and
costs are denominated in currencies other than that of the relevant Group undertaking. These are translated at an estimated long-term exchange rate,
based on historical trends and economic forecasts.
During the year, changes to the estimate in relation to long-term contracts resulted in catch-up adjustments to revenue of £(80)m.
Based upon the stage of completion of all widebody LTSA contracts within Civil Aerospace as at 31 December 2021, the following reasonably
possible changes in estimates would result in catch-up adjustments being recognised in the period in which the estimates change (at
underlying rates):
– A change in forecast EFHs of 1% over the remaining term of the contracts would impact LTSA income and to a lesser extent costs, resulting
in a catch-up adjustment of around £6m to £9m. This would be expected to be seen as a change in revenue with a modest proportion
relating to onerous contracts which would be a reported within cost of sales.
– A 1% increase or decrease in our pricing to customers over the life of the contracts would lead to a revenue catch-up adjustment in the
next 12 months of around £100m.
– A 1% increase or decrease in shop visit costs over the life of the contracts would lead to a revenue catch-up adjustment in the next 12
months of around £25m.
Risk and revenue sharing arrangements (RRSAs)
Cash entry fees received are initially deferred on the balance sheet within trade payables and other liabilities. They are then recognised as a
reduction in cost of sales incurred. Individual programme amounts are allocated pro rata to the estimated number of units to be produced.
Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.
The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales when OE
sales are recognised or as LTSA costs are incurred.
The Company also has arrangements with third parties who invest in a programme and receive a return based on its performance, but do not
undertake development work or supply parts. Such arrangements (financial RRSAs) are financial instruments as defined by IAS 32 Financial
Instruments: Presentation and are accounted for using the amortised cost method.
Key judgement – Determination of the nature of entry fees received
RRSAs with key suppliers (workshare partners) are a feature of the civil aviation industry business. Under these contractual arrangements, the
key commercial objectives are that: (i) during the development phase the workshare partner shares in the risks of developing an engine by
performing its own development work, providing development parts and paying a non-refundable cash entry fee; and (ii) during the production
phase it supplies components in return for a share of the programme cash flows as a ‘life of type’ supplier (i.e. as long as the engine remains
in service).
The non-refundable cash entry fee is judged by the Company to be a contribution towards the development expenditure incurred. These
receipts are deferred on the balance sheet and recognised against the cost of sales over the estimated number of units to be delivered on a
similar basis to the amortisation of development costs – see 122.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
120
1 Accounting policies continued
Royalty payments
Where a government or similar body has previously acquired an interest in the intellectual property of a programme, royalty payments are
matched to the related sales.
Government grants
Government grants received are varied in nature and are recognised in the income statement so as to match them with the related expenses that
they are intended to compensate. Where grants are received in advance of the related expenses, they are initially recognised as liabilities within
trade payables and other liabilities and released to match the related expenditure. Non-monetary grants are recognised at fair value.
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are
attributable to the acquisition, construction or production of a qualifying asset, such costs are capitalised as part of the specific asset.
Taxation
The tax charge/credit on the profit or loss for the year comprises current and deferred tax:
– Current tax is the expected tax payable for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
– Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the amounts used for tax purposes and is calculated using the enacted or
substantively enacted rates that are expected to apply when the asset or liability is settled. The deferred tax liability on the pension scheme
surplus is recognised consistently with the basis for recognising the rate applicable to refunds from a trust.
Tax is charged or credited in the income statement or OCI as appropriate, except when it relates to items credited or charged directly to equity
in which case the tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint arrangements, except
where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse
in the foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition of goodwill or for
temporary differences arising from the initial recognition of assets and liabilities in a transaction that is not a business combination and that
affects neither accounting nor taxable profit.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can
be utilised. Further details on the Company’s tax position can be found on pages 136 to 137.
Key estimate – Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise the
deferred tax assets
Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available, against which the deductible
temporary difference can be utilised. Further details are included in note 16.
In addition to taking into account a severe but plausible downside forecast (see below), the climate related estimates and assumptions (set out
on pages 52 to 54) have also been considered when assessing the recoverability of the deferred tax assets. Recognising the longer term over
which these assets will be recovered the Company has also considered the impact on OE and aftermarket sales if new more efficient civil
aircraft or new engine options enter the market earlier than assumed in our most likely estimates. Under this scenario some older products
would see a reduction in profits, but additional opportunities exist for our newer products such as the Trent XWB.
While carbon and commodity pricing may put pressure on costs, decarbonisation and new supplier and customer contracts offer the
opportunity to receive value for more efficient and sustainable products.
The ongoing COVID-19 pandemic continues to result in uncertainty over the recovery of demand across the civil aviation industry. As explained
in note 16, a 25% probability of there being a severe but plausible downside forecast in relation to the civil aviation industry has been taken
into account in the assessment of the recovery of the UK deferred tax assets.
The estimates take account of the inherent uncertainties constraining the expected level of profit as appropriate. Changes in these estimates
will affect future profits and therefore the recoverability of deferred tax assets. The following sensitivities have been modelled to demonstrate
the impact of changes in assumptions on the recoverability of deferred tax assets.
– A 5% change in margin in the main Civil Aerospace widebody programmes.
– A 5% change in the number of shop visits driven by EFHs.
– Assumed future cost increases from climate change expected to flow through to customers at 100%, are restricted to 90% pass through.
All of these could be driven by a number of factors including the impact of climate change as explained on pages 52 to 54.
A 5% change in margin or shop visits would result in an increase/decrease in the deferred tax asset of around £150m.
If only 90% of assumed future cost increases are passed on to customers, this would result in a decrease in the deferred tax asset of around
£40m, and if carbon prices were to double, this would be £110m.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
121
1 Accounting policies continued
Foreign currency translation
Transactions denominated in currencies other than the function currency of the Company are translated into the functional currency at the
average monthly exchange rate when the transaction occurs. Monetary assets and liabilities denominated in foreign currencies are translated
into sterling at the rate prevailing at the year end. Exchange differences arising on foreign exchange transactions and the retranslation of assets
and liabilities into sterling at the rate prevailing at the year-end are included in profit/(loss) before taxation.
The trading results of the Company are translated into sterling at the average exchange rates for the year. The assets and liabilities of overseas
undertakings, including fair value adjustments arising on acquisition, are translated at the exchange rates prevailing at the year end. Exchange
adjustments arising from the retranslation of the opening net assets, and from the translation of the profits or losses at average rates, are
recognised in OCI.
Financial instruments – Classification and measurement
Financial assets primarily include trade receivables, cash and cash equivalents, short-term investments, derivatives (foreign exchange, commodity
and interest rate contracts), and other investments.
– Trade receivables are classified either as held to collect and measured at amortised cost or as held to collect and sell and measured at fair
value, with movements in fair value recognised through other comprehensive income (FVOCI).
– Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds and short-term deposits)
and short-term investments are subject to low market risk. Cash balances and short-term investments are measured at fair value through
profit and loss (FVPL). Money market funds and short-term deposits are measured at FVOCI.
– Derivatives and other investments are measured at FVPL. During the year, the Company elected to measure its listed investment at FVOCI.
Financial liabilities primarily consist of trade payables, borrowings, derivatives, and financial RRSAs.
– Derivatives are classified and measured at FVPL.
– All other financial liabilities are classified and measured at amortised cost.
Financial instruments – Impairment of financial assets and contract assets
IFRS 9 Financial Instruments sets out the basis for the accounting of expected credit losses (ECLs) on financial assets and contract assets resulting
from transactions within the scope of IFRS 15 Revenue from Contracts with Customers. The Company has adopted the simplified approach to
provide for ECLs, measuring the loss allowance at a probability weighted amount that considers reasonable and supportable information about
past events, current conditions and forecasts of future economic conditions of customers. These are incorporated in the simplified model adopted
by using credit ratings which are publicly available or through internal risk assessments derived using customer’s latest available financial
information. The ECLs are updated at each reporting date to reflect changes in credit risk since initial recognition. ECLs are calculated for all
financial assets in scope, regardless of whether or not they are overdue.
Financial instruments – Hedge accounting
Forward foreign exchange contracts and commodity swaps (derivative financial instruments) are held to manage the cash flow exposures of
forecast transactions denominated in foreign currencies or in commodities respectively. Derivative financial instruments qualify for hedge
accounting when: (i) there is a formal designation and documentation of the hedging relationship and the Company’s risk management objective
and strategy for undertaking the hedge at the inception of the hedge; and (ii) the hedge is expected to be effective.
In general, the Company has chosen to not apply hedge accounting in respect of these exposures.
The Company economically hedges the fair value and cash flow exposures of its borrowings. Cross-currency interest rate swaps are held to
manage the FX or cash flow exposures of borrowings denominated in foreign currencies and are designated as fair value hedges or cash flow
hedges as appropriate. Interest rate swaps are held to manage the interest rate exposures of fixed and floating rate borrowings and may be
designated as fair value hedges, cash flow hedges or FVPL as appropriate.
Changes in the fair values of derivatives that are designated as fair value hedges are recognised directly in the income statement. The fair value
changes of effective cash flow hedge derivatives are recognised in OCI and subsequently recycled in the income statement in the same period
or periods during which the hedged cash flows affect profit or loss. Any ineffectiveness in the hedging relationships is included in the income
statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting. At that time, for cash flow hedges and, if the forecast transaction remains probable, any cumulative gain or loss on the hedging
instrument recognised in SOCIE is retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss is recycled to the income statement.
Financial instruments – Replacement of benchmark interest rates
In August 2020, Phase 2 of IBOR reform was published, effective from 1 January 2021. The amendments address issues that arise from the
implementation of the reforms including the replacement of one benchmark with an alternative one. The Phase 2 amendments provide additional
temporary reliefs from applying specific IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments hedge
accounting requirements to hedging relationships directly affected by IBOR reform.
During 2021, the Company carried out an IBOR reform transition project to assess and implement changes to systems, processes, risk and valuation
models, as well as managing related tax and accounting implications. The Company’s risk exposure that is directly affected by the interest rate
benchmark reform is its portfolio of long-term borrowings of £6.1bn and a number of its foreign exchange contracts. The borrowings are hedged,
using interest rate swaps and cross-currency interest rate swaps, for changes in fair value and cash flows attributable to the relevant benchmark
interest rate. The Company has made amendments to the contractual terms of IBOR-referenced floating-rate debt, GBP and EUR LIBOR-
referenced agreements with Group undertakings, swaps and foreign exchange contracts, and updated the relevant hedge designations.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
122
1 Accounting policies continued
Financial instruments – Replacement of benchmark interest rates (continued)
A number of the Company’s lease liabilities are based on a LIBOR index. These are predominantly referencing USD LIBOR which is not expected
to cease until 2023, hence the change in relation to these contracts has not impacted the 2021 financial statements. These contracts will be
amended in due course.
Certification costs
Costs incurred in respect of meeting regulatory certification requirements for new Civil Aerospace aero-engine/aircraft combinations including
payments made to airframe manufacturers for this are recognised as intangible assets to the extent that they can be recovered out of future sales.
They are charged to the income statement over the programme life. Individual programme assets are allocated pro rata to the estimated number
of units to be produced. Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.
Research and development
Expenditure incurred on research and development is distinguished as relating either to a research phase or to a development phase. All research
phase expenditure is charged to the income statement. Development expenditure is recognised as an internally generated intangible asset
(programme asset) only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits.
More specifically, development costs are capitalised from the point at which the following conditions have been met:
– the technical feasibility of completing the programme and the intention and ability (availability of technical, financial and other resources) to
complete the programme asset and use or sell it;
– the probability that future economic benefits will flow from the programme asset; and
– the ability to measure reliably the expenditure attributable to the programme asset during its development.
Capitalisation continues until the point at which the programme asset meets its originally contracted technical specification (defined internally as
the point at which the asset is capable of operating in the manner intended by management).
Subsequent expenditure is capitalised where it enhances the functionality of the programme asset and demonstrably generates an enhanced
economic benefit to the Company. All other subsequent expenditure on programme assets is expensed as incurred.
Individual programme assets are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is
delivered and then charged on a 15-year straight-line basis. In accordance with IAS 38 Intangible Assets, the basis on which programme assets
are amortised is assessed annually.
Key judgement – Determination of the point in time where costs incurred on an internal programme development meet the criteria for
capitalisation or ceasing capitalisation
The Company incurs significant research and development expenditure in respect of various development programmes. Determining when
capitalisation should commence and cease is a critical judgement, as is the determination of when subsequent expenditure on the programme
assets should be capitalised. During the year, £83m of development expenditure was capitalised.
Within the Company there is an established Product Introduction and Lifecycle Management process (PILM), in place. Within this process, the
technical feasibility, the commercial viability and financial assessment of the programme is assessed at certain milestones. When these are met,
development expenditure is capitalised. Prior to this, expenditure is expensed as incurred.
The Company continues to invest in new technologies as a result of the Company’s decarbonisation commitments. As these are new technol-
ogies, there is a higher level of uncertainty over potential outcomes and therefore, this could impact the level of expenditure that is capitalised
or recognised in the income statement in future years.
Subsequent expenditure after entry into service, which enhances the performance of the engine and the economic benefits to the Company
is capitalised. This expenditure is referred to as enhanced performance and is governed by the PILM process referred to above. All other
development costs are expensed as incurred.
Key judgement – Determination of the basis for amortising capitalised development costs
The economic benefits of the development costs are primarily those cash inflows arising from LTSAs, which are expected to be relatively
consistent for each engine within a programme. Amortisation of development costs is recognised on a straight-line basis over the period of
operation of the engine by its initial operator.
Software and other intangibles
Software that is not specific to an item of property, plant and equipment is classified as an intangible asset, recognised at its acquisition cost
and amortised on a straight-line basis over its useful economic life, up to a maximum of five years. The cost of internally developed software
includes direct labour and an appropriate proportion of overheads.
Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any provision for impairment in value. The cost
of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads and, where appropriate,
interest.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over
their estimated useful lives. No depreciation is recorded on assets in the course of construction. Estimated useful lives are reassessed annually
and are as follows:
– Land and buildings, as advised by the Company’s professional advisors:
– freehold buildings – five to 40 years (average 28 years);
– no depreciation is provided on freehold land.
– Plant and equipment – three to 25 years (average 11 years).
– Aircraft and engines – five to 20 years (average 11 years).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
123
1 Accounting policies continued
Leases
Assets and liabilities arising from a lease are initially measured on a present value basis.
Lease liabilities include the net present value of the following lease payments:
– fixed payments less any lease incentive receivable;
– variable lease payments that are based on an index or a rate;
– amounts expected to be payable by the Company under residual value guarantees;
– the exercise price of a purchase option if the Company is reasonably certain to exercise that option; and
– payments of penalties for termination of the lease, if the lease term reflects the Company exercising that option.
Where leases commence after the initial IFRS 16 Leases transition date, the lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be determined, the Company’s incremental borrowing rate is used, being the rate that the Company would have to pay
to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Where
appropriate, lease liabilities are revalued at each reporting date using the spot exchange rate.
Right-of-use assets are measured at cost comprising the following:
– the amount of the initial measurement of lease liability or a revaluation of the liability;
– any lease payments made at or before the commencement date less any lease incentives received;
– any initial direct costs; and
– restoration costs.
Each right-of-use asset is depreciated over the shorter of its useful economic life and the lease term on a straight-line basis unless the lease is
expected to transfer ownership of the underlying asset to the Company, in which case the asset is depreciated to the end of the useful life of the
asset.
Short-term leases are leases with a lease term of 12 months or less. Payments associated with short-term leases and low value leases are recognised
on a straight-line basis as an expense in the income statement.
Key judgement – Determining the lease term
In determining the lease term, the Company considers all facts and circumstances that create an economic incentive to exercise an extension option,
or not exercise a termination option. Extension options (or periods after termination) are only included in the lease term if the lease is reasonably
certain to be extended (or not terminated). Certain land and building leases have renewal options with renewal dates for the most significant property
leases in 2025 and 2028. The Company reviews its judgements on lease terms annually, including the operational significance of the site, especially
where utilised for manufacturing activities.
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash flows
that are independent of other assets, impairment is considered for the cash-generating unit (CGU) to which the asset belongs. Intangible assets
not yet available for use are tested for impairment annually. Other intangible assets (including programme-related intangible assets), property,
plant and equipment and investments are assessed for any indications of impairment annually. If any indication of impairment is identified, an
impairment test is performed to estimate the recoverable amount.
If the recoverable amount of an asset (or CGU) is estimated to be below the carrying value, the carrying value is reduced to the recoverable
amount and the impairment loss recognised as an expense. The recoverable amount is the higher of value in use or fair value less costs of disposal,
if this is readily available. The value in use is the present value of future cash flows using a pre-tax discount rate that reflects the time value of
money and the risk specific to the asset. The relevant local statutory tax rates have been applied in calculating post-tax to pre-tax discount rates.
Key estimate – Estimates of cash flow forecasts to support the carrying value of intangible assets (including programme-related intangible
assets)
The assessment of the recoverable value of development expenditure and certification costs recognised as intangible assets (31 December
2021: £1,731m, 2020: £1,715m) is dependent on estimates of cash flows generated by the relevant programme, the discount rate used to calculate
a present value and assumptions on foreign exchange rates. The estimates of cash flows generated by a programme comprise: future market
share; product performance related estimates (including EFHs and time-on-wing); pricing and cost for uncontracted business; assumptions
over the recovery from COVID-19 of the industries in which we operate; and climate-related matters including assessment of future contractual
terms with suppliers and customers in relation to the cost of carbon (with details set out on pages 52 and 54).
A weaker than expected recovery from the impacts of COVID-19 or a reduction in OE volumes, for example due to reduced customer demand
and an increase in costs as a result of climate change, could result in a deterioration in future cash flow forecasts.
– For programmes that have not previously been impaired, but where there is existing headroom that could be significantly reduced over
the next 12 months, the Company has considered whether an increase in costs of up to 10% would lead to an additional impairment and
concluded that it would not.
Inventories
Inventories are valued on a first-in, first-out basis, at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and those overheads, including depreciation of property, plant and equipment, that have been incurred in bringing
the inventories to their present location and condition. Net realisable value represents the estimated selling prices less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution. All inventories are classified as current as it is expected that they will
be used in the Company’s operating cycle, regardless of whether this is expected to be within 12 months of the balance sheet date.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
124
1 Accounting policies continued
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds and short-term deposits with a maturity of three
months or less on inception. Where the Company operates pooled banking arrangements across multiple accounts, these are presented on a net
basis when it has both a legal right and intention to settle the balances on a net basis.
The Company offers a supply chain financing (SCF) programme in partnership with banks to enable suppliers, including joint ventures, who are
on our standard 75 day or more payment terms to receive their payment sooner. The election to utilise the programme is the sole decision of
the supplier. As the Company continues to have a contractual obligation to pay its suppliers and it does not retain any ongoing involvement in
the SCF, the related payables are retained on the Company’s balance sheet and classified as trade payables. Further details are disclosed in
note 14.
Provisions
Provisions are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be
required to settle that obligation and are discounted to present value where the effect is material.
The principal provisions are recognised as follows:
– Trent 1000 in-service issues when wastage costs are identified as described on page 134;
– contract losses based on an assessment of whether the direct costs to fulfil a contract are greater than the expected revenue;
– warranties and guarantees based on an assessment of future claims with reference to past experience and recognised at the earlier of when
the underlying products and services are sold and when the likelihood of a future cost is identified; and
– restructuring when the Company has approved a detailed and formal restructuring plan, and the restructuring has either commenced or
has created a valid expectation to those affected.
Key judgement – Whether any costs should be treated as wastage
As described further on page 134, in rare circumstances, the Company may incur costs of wasted material, labour or other resources to fulfil
a contract where the level of cost was not reflected in the contract price. The identification of such costs is a matter of judgement and would
only be expected to arise where there has been a series of abnormal events which give rise to a significant level of cost of a nature that the
Company would not expect to incur and hence is not reflected in the contract price. Provision is made for any costs identified as wastage
when the obligation to incur them arises.
Specifically for the Trent 1000 wastage costs, provision has been made as the Company is an owner of an engine Type Certificate under
which it has a present obligation to develop appropriate design changes to address certain engine conditions that have been noted in
issued Airworthiness Directives. The Company is also required to ensure engine operators can continue to safely operate engines within
the terms of their LTSAs, and this requires the engines to be compliant with the requirements of those issued Airworthiness Directives. These
requirements cannot be met without the Company incurring significant costs in the form of replacement parts and customer claims. Given the
significant activities of the Company in designing and overhauling aero engines it is very experienced in making the required estimates in
relation to the number and timing of shop visits, parts costs, overhaul labour costs and customer claims.
Key estimates – Estimates of the time to resolve the technical issues on the Trent 1000, including the development of the modified HPT blade
and estimates of the expenditure required to settle the obligation relating to Trent 1000 claims and to settle Trent 1000 long-term contracts
assessed as onerous
The Company has provisions for Trent 1000 exception costs at 31 December 2021 of £157m (2020: £321m). These represent the Directors’ best
estimate of the expenditure required to settle the obligations at the balance sheet date. These estimates take account of information available
and different possible outcomes.
The Company considers that at 31 December 2021 the Trent 1000 contract loss provisions and the Trent 1000 exceptional cost provision are
most sensitive to changes in estimates. A 12-month delay in the availability of the modified HPT blade could lead to around a £60 - 100m
increase in the Trent 1000 exceptional costs provision.
Key estimates – Estimates of the future revenues and costs to fulfil onerous contracts
The Company has provisions for onerous contracts at 31 December 2021 of £899m (2020: £843m).
An increase in Civil Aerospace widebody estimates of LTSA costs of 1% over the remaining term of the contracts could lead to around a £100-120m
increase in the provision for contract losses across all programmes.
Post-retirement benefits
Pensions and similar benefits are accounted for under IAS 19 Employee Benefits.
For defined benefit plans, obligations are measured at discounted present value whilst plan assets are recorded at fair value. Surpluses in schemes
are recognised as assets only if they represent economic benefits available to the Company in the future. Surpluses in schemes are recognised
as assets only if they represent economic benefits available to the Company in the future. Actuarial gains and losses are recognised immediately
in OCI. The service and financing costs of such plans are recognised separately in the income statement.
– current service costs are spread systematically over the lives of employees;
– past-service costs and settlements are recognised immediately; and
– financing costs are recognised in the periods in which they arise.
In 2018 and 2020, following clarification provided by the UK High Court judgements on the Lloyds Banking Group on 26 October 2018 and 23
November 2020, the Company recognised the estimated impact of the obligation to equalise defined benefit pensions and transfer values
respectively for men and women as a past-service cost – see note 17.
Payments to defined contribution schemes are charged as an expense as they fall due.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
125
1 Accounting policies continued
Post-retirement benefits (continued)
Key estimate – Estimates of the assumptions for valuing the defined benefit obligation
The Company’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19 Employee Benefits.
The valuations, which are based on assumptions determined with independent actuarial advice, resulted in a net surplus of £1,118m before
deferred taxation being recognised on the balance sheet at 31 December 2021 (2020: surplus of £883m). The size of the net surplus/deficit is
sensitive to the actuarial assumptions, which include the discount rate, price inflation, pension and salary increases, longevity and, in the UK,
the number of plan members who take the option to transfer their pension to a lump sum on retirement or who choose to take the Bridging
Pension Option. Following consultation, the UK scheme closed to future accrual on 31 December 2020 and following conclusion on the final
protections agreed in the year to 31 December 2021, the Company has trued up the estimate recognised at 31 December 2020.
A reduction in the discount rate of 0.25% from 1.90% could lead to an increase in the defined benefit obligations of the RR UK Pension Fund
of approximately £460m. This would be expected to be broadly offset by changes in the value of scheme assets, as the scheme’s investment
policies are designed to mitigate this risk.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from 23.2 years (male aged 45) would increase the defined benefit
obligations of the RR UK Pension Fund by approximately £365m.
It is assumed that 50% of employed deferred and 40% of deferred (2020: 40%) of members of the RR UK Pension Fund will transfer out of the
fund on retirement. The change in this assumption is a result of actual experience An increase of 5% in this assumption would increase the
defined benefit obligation by £30m.
Further details and sensitivities are included in note 17.
Share-based payments
The Company provides share-based payment arrangements to certain employees, which are settled in Rolls-Royce Holdings plc shares. These
are principally equity-settled arrangements and are measured at fair value (excluding the effect of non-market based vesting conditions) at the
date of grant. The fair value is expensed on a straight-line basis over the vesting period. The amount recognised as an expense is adjusted to
reflect the actual number of shares or options that will vest, except where additional shares vest as a result of the total shareholder return (TSR)
performance condition in the long-term incentive plan (LTIP), where no adjustment is required as allowance for this is included in the initial fair
value.
Customer financing support
In connection with the sale of its products, the Company will, on occasion, provide financing support for its customers. These arrangements fall
into two categories: credit-based guarantees and asset-value guarantees. Credit-based guarantees are disclosed as commitments or contingent
liabilities dependent on whether aircraft have been delivered or not. The Company considers asset-value guarantees to be non-financial liabilities
and provides for amounts required. As described on page 135, the Directors consider the likelihood of crystallisation in assessing whether
provision is required for any contingent liabilities.
The Company’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers and a
broad product portfolio and are reported on a discounted basis.
Investment in subsidiaries
Investments in subsidiaries are held at cost less accumulated impairment losses.
Joint arrangements
The Company accounts for joint operations by consolidating their results on a proportional basis, rather than holding them at their investment
value.
Post balance sheet events
The Company has taken the latest legal position in relation to any ongoing legal proceedings and reflected these in the 2021 results as appropriate.
In addition, the Company completed the sale of its 23.1% shareholding in AirTanker Holdings Limited to Equitix Investment Management Limited
on 9 February 2022. Further details are included in Note 6.
2 Emoluments of Directors
The total amount of remuneration paid to Directors for the year ended 31 December 2021 was £6,088,000 (2020: £2,691,000). £3,838,000 of this
was attributed to the highest paid Director (2020: £889,000). A cash allowance in lieu of company contributions to a pensions scheme was also
paid to three Directors (2020: two), which totalled £186,000 (2020: £364,000). No Directors exercised share options during the year (2020: none)
nor received vested shares under the Long-Term Incentive Plan (2020: none).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
126
3 Intangible assets
Development
costs
£m
Certification
costs
£m
Software
and other
3
£m
Total
£m
Cost
At 1 January 2021
1,860
922
1,065
3,847
Additions
83
2
69
154
Disposal of businesses
1
–
–
(1)
(1)
Disposals
–
(21)
(35)
(56)
Reclassifications
–
–
6
6
At 31 December 2021
1,943
903
1,104
3,950
Accumulated amortisation and impairment
At 1 January 2021
654
413
621
1,688
Charge for the year
2
50
19
92
161
Impairment
–
–
1
1
Disposals
–
(21)
(33)
(54)
Reclassifications
–
–
6
6
At 31 December 2021
704
411
687
1,802
Net book value
At 31 December 2021
1,239
492
417
2,148
At 31
December 2020
1,206
509
444
2,159
1
As part of the footprint review and reorganisation of the Company’s Civil Aerospace activities announced in 2020, all activities carried out at Rolls-Royce’s Hucknall site in the UK transferred
to ITP Aero in May 2021 along with certain fabrication supply chain activities. During the year to 31 December 2021, the Company transferred certain intangible assets from the Hucknall site
previously held by Rolls-Royce plc to ITP Aero. The assets were transferred at net book value.
2
Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development.
3
Includes £113m (2020: £110m) of software under course of construction of which is not amortised.
At 31 December, the Company had expenditure commitments for software of £38m (2020: £25m).
The carrying amounts and the residual life of the material intangible assets for the Company are as follows:
Residual life
Net book value
2021
£m
2020
£m
Trent programme intangible assets ¹
7
-
15
years
1,787
1,770
1
Included within the Trent programmes are the Trent 1000, Trent 7000 and Trent XWB.
Other intangible assets (including programme intangible assets) have been reviewed for impairment in accordance with IAS 36 Impairment of
Assets. Assessments have considered potential triggers of impairment such as external factors including climate change, significant changes with
an adverse effect on a programme and by analysing latest management forecasts against those prepared in 2020 to identify any deterioration in
performance.
The Company believe there are significant business growth opportunities to come from Rolls-Royce playing a leading role in the transition to net
zero, whilst at the same time climate change poses potentially significant risks. The assumptions used by the Directors are based on past
experience and external sources of information. The main areas that have been considered are demand for engines and their in-service lives,
utilisation of the products whilst in service, and the impact of market and regulatory change. The investment required to ensure new products
will be compatible with net zero operation by 2030, and to achieve net zero scope 1 and 2 GHG emissions is reflected in the forecasts used.
A 1.5°C Paris-aligned sensitivity, based on IEA and Oxford Economics forecasts, has been considered which assumes that governments adopt strict
product and behavioural standards, high carbon pricing and strategic investments in low carbon alternatives, with markets willing to pay for low
carbon solutions. The sensitivity has considered the likelihood of demand changes for our products based on their relative fuel efficiency in the
marketplace and the probability of alternatives being introduced earlier than currently expected. The sensitivity also reflects a broad range of
potential costs imposed by policy or regulatory interventions (through carbon pricing). This sensitivity does not indicate the need for an
impairment charge. Further detail can be found on pages 52 and 54.
Where a trigger event has been identified, an impairment test has been carried out. Where an impairment was required the test was performed
on the following basis:
– The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent
forecasts prepared by the Directors, which are consistent with past experience and external sources of information on market conditions over
the lives of the respective programmes; and
– The key assumptions underlying cash flow projections are based on estimates of product performance related estimates, future market share
and pricing and cost for uncontracted business. Climate risks are considered when making these estimates consistent with the assumptions
above. The uncertainty over the recovery from COVID-19 has been modelled by including downside forecasts at an appropriate weighting
taking into account the business segment being considered.
There have been no individually material impairment charges or reversals recognised during the year.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
127
4 Property, plant and equipment
Land and
buildings
£m
Plant and
equipment
£m
Aircraft
and
engines
£m
In course of
construction
£m
Total
£m
Cost or valuation
At 1 January 202
1
844
2,599
274
230
3,947
Additions
3
123
18
68
212
Disposal of businesses
1
(44)
(83)
–
(4)
(131)
Reclassifications
2
119
8
9
–
(214)
(6)
Disposals
(
27
)
(
112
)
(8)
–
(
147
)
At 31 December
202
1
895
2,
616
284
80
3,
875
Accumulated depreciation
At 1 January 202
1
285
1,666
93
7
2,051
Charge for the year
3
33
178
15
–
226
Impairment
4
–
8
–
–
8
Disposal of businesses
1
(13)
(45)
–
–
(58)
Reclassifications
2
–
(6)
–
–
(6)
Disposals
(
23
)
(
105
)
–
–
(
128
)
At 31 December 202
1
282
1,
696
108
7
2,
093
Net book value
At 31 December 202
1
613
920
176
73
1,782
At 31 December 2020
559
933
181
223
1,896
1
As part of the footprint review and reorganisation of the Company’s Civil Aerospace activities announced in 2020, all activities carried out at Rolls-Royce’s Hucknall site in the UK transferred
to ITP Aero in May 2021 along with certain fabrication supply chain activities. During the year to 31 December 2021, the Company transferred certain property, plant and equipment from the
Hucknall site previously held by Rolls-Royce plc to ITP Aero. The assets were transferred at net book value.
2
Includes reclassifications of assets under construction to the relevant classification in property, plant and equipment, right-of-use assets and intangible assets when available for use.
3
Depreciation is charged to cost of sales or commercial and administrative costs or included in the cost of inventory as appropriate.
4
The carrying values of property, plant and equipment have been assessed during the period in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed
for impairment together with other assets used in individual programmes – see assumptions in note 3. Land and buildings are generally used across multiple programmes and are considered
based on future expectations of the use of the site, which includes any implications from climate related risks as explained in note 3. As a result of this assessment, there are no individually
material impairment charges or reversals in the year.
Property, plant and equipment includes:
Assets held for use in leases where the Company is
the lessor:
2021
£m
2020
£m
Cost
3
3
Depreciation
(3)
(3)
Net book value
–
–
Capital expenditure commitments
60
84
Cost of fully depreciated assets
9
84
883
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
128
5 Right-of-use assets
Land and
buildings
£m
Plant and
equipment
£m
Aircraft and
engines
£m
Total
£m
Cost
At 1 January 202
1
145
92
6
243
Additions/modifications of leases
4
9
14
27
Disposal of businesses
1
–
(2)
–
(2)
Disposals
(2)
(8)
(3)
(13)
At 31 December 202
1
147
91
17
255
Accumulated depreciation and
impairment
At 1 January 202
1
42
36
5
83
Charge for the year
13
17
2
32
Impairment
2
(3)
(6)
–
(9)
Disposal of businesses
1
–
(1)
–
(1)
Disposals
(2)
(8)
(3)
(13)
At 31 December 202
1
50
38
4
92
Net book value
At 31 December 202
1
97
53
13
163
At 31 December 2020
103
56
1
160
Right
-
of
-
use assets held for use in operating leases
Cost
2
1
17
20
Depreciation
(1)
(1)
(4)
(6)
Net book value at 31 December 202
1
1
–
13
14
1
As part of the footprint review and reorganisation of the Company’s Civil Aerospace activities announced in 2020, all activities carried out at Rolls-Royce’s Hucknall site in the UK transferred
to ITP Aero in May 2021 along with certain fabrication supply chain activities. During the year to 31 December 2021, the Company transferred certain right-of-use assets from the Hucknall site
previously held by Rolls-Royce plc to ITP Aero. The assets were transferred at net book value.
2
The carrying values of right-of-use assets have been assessed during the period in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed for impairment
together with other assets used in individual programmes – see assumptions in note 3. Land and buildings are generally used across multiple programmes and are considered based on future
expectations of the use of the site (which includes any implications from climate related risks as explained in note 3). As a result of this assessment, an impairment reversal of £9m has been
recognised through non-underlying profit. The reversal relates to an element of the non-underlying impairments recorded in 2020 in Civil Aerospace for site rationalisation where there has
been a subsequent change in strategy to continue production on that site.
6 Investments
Subsidiary
undertakings ¹
Joint ventures and associates
1
Other
investments
Shares at
cost
£m
Loans
*
£m
Shares at
cost
£m
Loans
*
£m
Total
£m
At 1 January 2021
2,040
1,857
24
49
73
16
Additions
2, 3
64
–
–
–
–
27
Disposal
–
–
–
–
–
(1)
Repayment of loan and interest
4
–
9
–
3
3
–
Revaluation of investment
s
accounted for at FVOCI
5
–
–
–
–
–
(2)
Impairment
–
–
–
–
–
(5)
Exchange differences
–
–
–
–
–
(1)
Reclassification to asset held for sale
6
(662)
–
(21)
(47)
(68)
–
At 31 December 2021
1,422
1,866
3
5
8
34
1
Subsidiary and joint venture undertakings and associates are listed on pages 142 to 148.
2
On 30 April 2021, the Company agreed and paid a capital injection of £37m in subsidiary EMA. On 8 November 2021, the Company invested £27m in Rolls-Royce SMR Limited, further investment
alongside other investors is expected over the next three years. The Company has uncalled share capital in Nightingale Insurance Limited, one of its subsidiaries at 31 December 2021 of £30m
(2020: £30m).
3
On 18 May 2020, the Company increased its shareholding in Reaction Engines Limited from 2% to 10.1% for £20m which was payable (and the associated shares acquired) in instalments. During
the year, the Company paid the remaining instalments for the Reaction Engines investment. On 17 December 2021, the Company also acquired a 1% investment in Vertical Aerospace for
consideration of £9m.
4
The Company has an interest-bearing outstanding loan to Vinters International Limited, one of its subsidiaries. The loan is classified as a loan receivable from subsidiary undertakings within
non-current assets as the loan is considered to be part of the capital funding of the subsidiary undertaking. During the year, Vinters International Limited made no repayments of the loan and
interest (2020: made a part repayment of £84m). Of interest accrued during the year, £9m of the £11m (2020: £3m) has been capitalised and is shown within repayment of loan and interest for
the year.
5
The Company has elected to value the investment in Vertical Aerospace at fair value through other comprehensive income (FVOCI).
6
On 13 September 2021, the Company signed an agreement with Equitix Investment Management Limited to dispose its 23.1% shareholding in AirTanker Holdings Ltd. The sale completed on 9
February 2022. In accordance with IFRS 5, the Company has classified £47m of the AirTanker assets as held for sale at 31 December 2021. On 27 August 2020, the Group announced its intention
to sell ITP Aero and as at 30 June 2021, it was assessed that ITP Aero met the criteria to be held for sale. Consequently, in accordance with IFRS 5, the investment in subsidiary has been
classified as a non-current asset held for sale. On 27 September 2021, the Company signed an agreement for the sale of ITP Aero to Bain Capital for £1.3bn and consequently, in accordance
with IFRS 5, the investment in subsidiary has been classified as a non-current asset held for sale at 31 December 2021. The investment of ITP Aero has been assessed for impairment in line with
the requirements of IFRS 5 and no impairment is required at 31 December 2021.
*
Loan interest is added to the loan balance where it is not expected to be repaid in the short-term.
Investments in subsidiaries are recorded at cost, which is the fair value of the consideration paid.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
129
7 Inventories
2021
£m
2020
£m
Raw materials
8
29
Work in progress
471
398
Finished goods
1,237
1,246
Payments on account
13
17
1,729
1,690
Inventories stated at net realisable value
155
238
Amount of inventory write
-
down
16
2
Reversal of inventory write
-
down
18
11
Inventories are stated after provisions for impairment of £218m (2020: £231m).
8 Trade receivables and other assets
Current Non-current Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Trade receivables ¹
1,225
1,430
52
–
1,277
1,430
Receivables due on RRSAs
706
607
67
82
773
689
Amounts owed by:
Subsidiary undertakings
2,099
2,893
227
–
2,326
2,893
Joint ventures ¹
561
413
–
–
561
413
Parent undertaking
335
331
–
–
335
331
Costs to obtain contracts with
customers ²
2
5
3
4
5
9
Prepayments
491
338
374
425
865
763
Other taxation and social security
receivable
141 123 – – 141 123
Other receivables
3
394
432
16
19
410
451
5,954
6,572
739
530
6,693
7,102
1
In 2021, the Company has no trade receivables classified as held to collect or sell. In 2020, this amount included £483m of trade receivables held to collect or sell and £361m receivables from
joint ventures and associates held to collect or sell. Non-current trade receivables of £52m (2020: nil) relate to amounts not expected to be received in the next 12 months from customers on
payment plans.
2
These are amortised over the term of the related contract, resulting in amortisation of £3m (2020: £3m) in the year. There were no impairment losses.
3
Other receivables include unbilled recoveries relating to overhaul activity.
During the year to 31 December 2021, the Company reassessed which trade receivables are held to collect or sell. The Company’s intent is to no
longer utilise invoice discounting and consequently, balances are generally not classified as held to collect or sell.
All amounts owed by subsidiary undertakings (except those listed below) are unsecured, interest free, have no fixed date of repayment and are
repayable on demand.
– $294m (£218m) balance receivable from Rolls-Royce Overseas Investments Limited. This incurs interest at USD LIBOR +0.5% and has a
repayment date of 14 December 2024.
– €11m (£9m) receivable from Aerospace Transmission Technologies GmbH. This incurs interest at EURO LIBOR +2% and has a repayment date
of 31 December 2037.
The expected credit losses on parent and group undertakings amounts to £15m (2020: £17m). The assumptions and inputs used for the estimation
of the allowance takes into account the market credit ratings.
The expected credit losses for trade receivables and other assets have decreased by £11m to £142m (31 December 2020: £153m). This decrease is
mainly driven by the Civil Aerospace business of £14m, of which £3m relates to specific customers and £11m relates to updates to the recoverability
of other receivables.
The Company has adopted the simplified approach to provide for expected credit losses, measuring the loss allowance at a probability weighted
amount incorporated by using credit ratings which are publicly available, or through internal risk assessments derived using the customer’s latest
available financial information. The assumptions and inputs used for the estimation of the expected credit losses are shown in the table below:
2021
20
20
Trade
receivables
and other
financial
assets
Loss
allowance
Average
expected
credit loss
rate
Trade
receivables
and other
financial
assets
Loss
allowance
Average
expected
credit loss
rate
£m
£m
%
£m
£m
%
Investment grade
639
(6)
1%
925
(9)
1%
Non
-
investment grade
13
3
(2)
2%
141
(7)
5%
Without credit rating
2,
388
(134)
6
%
2,081
(137)
7%
3,160
(142)
4%
3,147
(153)
5%
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
130
8 Trade receivables and other assets continued
The movements of the Company’s expected credit losses provision are as follows:
2021
£m
2020
£m
At 1 January
(153)
(72)
Increases in loss allowance recognised in the
income statement during the year
(69)
(71)
Loss allowance utilised
32
4
Releases of loss allowance previously provided
28
1
Other net movements
20
(15)
At 31 December
(142)
(153)
9 Contract assets and liabilities
Current Non-current Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Contract assets
Contract assets with customers
381
181
532
517
913
698
Participation fee contract assets
15
27
153
154
168
181
396
208
685
671
1,081
879
1
Contract assets and contract liabilities have been presented on the face of the balance sheet in line with the operating cycle of the business. Contract liabilities is further split according to
when the related performance obligation is expected to be satisfied and therefore when revenue is estimated to be recognised in the income statement. Further disclosure of contract assets
is provided in the table above, which shows within current the element of consideration that will become unconditional in the next year.
2
Contract assets are classified as non-financial instruments.
Contract assets mainly consist of LTSA balances. The main driver of the increase in the Company balance is revenue recognised in Civil Aerospace
in the year as performance obligations have been completed exceeding amounts received, partly reduced by £(22)m relating to performance
obligations satisfied in previous years, together with FX movements.
Participation fee contract assets have reduced as balances are amortised. No impairment losses (2020: none) of contract assets have arisen during
the year.
The absolute value of expected credit losses for contract assets has increased by £2m to £15m (31 December 2020: £13m).
Current Non-current Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Contract liabilities
2,289
2,580
4,939
4,381
7,228
6,961
During the year £1,366m (2020: £1,265m) of the opening contract liability was recognised as revenue.
Contract liabilities have increased by £267m. The main drivers of the change is as a result of increases in relation to the Civil Aerospace LTSA
liabilities of £327m as revenue billed has been ahead of revenue recognised in the period, with £2m of revenue recognised relating to performance
obligations satisfied in previous years. This is partially offset by the utilisation of deposits reflecting utilisation of amounts received in previous
years as engines and aftermarket services were delivered in 2021.
10 Cash and cash equivalents
2021
£m
2020
£m
Cash at bank
and in hand
254
339
Money
-
market funds
33
660
Short
-
term deposits
1,760
1,813
Cash and cash equivalents
2,047
2,812
Overdrafts (note
12)
(3)
(2)
Balances are presented on a net basis when the Company has both a legal right of offset and the intention to either settle on a net basis or realise
the asset and settle the liability simultaneously.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
131
11 Other financial assets and liabilities
Details of the Company’s policies on the use of financial instruments are given in the accounting policies on pages 121 and 122.
The fair values of other financial instruments held by the Company are as follows:
Foreign
exchange
contracts
£m
Commodity
contracts
£m
Interest
rate
contracts
£m
Total
Derivative
financial
instruments
£m
Financial
RRSAs
£m
Other
£m
Total
£m
202
1
Current assets
76
21
–
97
–
–
97
Non
-
current assets
160
11
176
347
–
–
347
Current liabilities
(
632
)
(4)
–
(
636
)
(13)
(13)
(
662
)
Non
-
current liabilities
(
2,583
)
–
(82)
(
2,665
)
(64)
–
(
2,729
)
(2,979)
28
94
(2,857)
(77)
(13)
(2,947)
2020
Current assets
51
4
43
98
–
–
98
Non
-
current assets
377
9
257
643
–
–
643
Current liabilities
(532)
(17)
(11)
(560)
(10)
(16)
(586)
Non
-
current liabilities
(2,794)
(19)
(113)
(2,926)
(64)
–
(2,990)
(2,898)
(23)
176
(2,745)
(74)
(16)
(2,835)
Derivative financial instruments
The Company uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Company uses commodity
swaps to manage its exposure to movements in the price of commodities (jet fuel and base metals). To hedge the currency risk associated with a
foreign currency borrowing, the Company has currency derivatives designated as part of a fair value hedge. The Company uses interest rate
swaps to manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial instruments were as follows:
Foreign
exchange
instruments
£m
Commodity
instruments
£m
Hedge
accounted
interest rate
instruments
£m
Non-hedge
accounted
interest rate
instruments
£m
Total
£m
At 1 January 20
20
(3,050)
6
229
14
(2,801)
Movements in fair value hedges
–
–
139
–
139
Movements in cash flow hedges
–
–
(60)
–
(60)
Movements in other
derivative contracts
(14)
(62)
–
(75)
(151)
Contracts settled
166
33
(75)
4
128
At 1 January 2021
(2,898)
(23)
233
(57)
(2,745)
Movements in fair value hedges
–
–
(143)
–
(143)
Movements in cash flow hedges
–
–
(2)
–
(2)
Movements in other
derivative contracts
(602)
56
–
80
(466)
Contracts settled
521
(5)
(31)
14
499
At 31 December 2021
(2,979)
28
57
37
(2,857)
Where applicable, market values have been used to determine fair values. Where market values are not available, fair values have been calculated
by discounting expected future cash flows at prevailing interest rates and translating at prevailing exchange rates.
Financial risk and revenue sharing arrangements (RRSAs) and other liabilities
The Company has financial liabilities arising from financial RRSAs. These financial liabilities are valued at each reporting date using the amortised
cost method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the
inception of the arrangements as the discount rate.
Movements in carrying values were as follows:
Financial
RRSAs
Other Financial
RRSAs
Other
2021
£m
2021
£m
2020
£m
2020
£m
At 1 January
(74)
(16)
(114)
(42)
Cash paid
4
3
32
8
Additions
–
–
-
8
Changes in forecast payments
–
–
17
-
Financing charge
(6)
–
(8)
-
Exchange adjustments
(1)
–
(1)
-
Other
–
–
-
10
At 31 December
(77)
(13)
(74)
(16)
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
132
12 Borrowings and lease liabilities
Current
Non
-
current
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Unsecured
Overdrafts
3
2
–
–
3
2
Bank loans
1
–
–
1,975
–
1,975
–
Commercial paper
2
–
300
–
–
–
300
2.125% Notes 2021
€750m
3
–
680
–
–
–
680
0.875% Notes 2024
€550m
4
–
–
471
511
471
511
3.625% Notes 2025 $1,000m
4
–
–
781
800
781
800
3.375% Notes 2026 £375m
5
–
–
394
420
394
420
4.625% Notes 2026
€750m
6
–
–
624
667
624
667
5.75% Notes 2027 $1,000m
6
–
–
735
724
735
724
5.75% Notes 2027 £545m
–
–
540
539
540
539
1.625% Notes 2028
€550m
4
–
–
493
545
493
545
Total unsecured
3
982
6,013
4,206
6,016
5,188
Lease liability
–
Land and buildings
15
15
118
128
133
143
Lease liability
–
Aircraft and engines
1
1
13
5
14
6
Lease liability
–
Plant and
equipment
15
18
39
47
54
65
Total lease liabilities
31
34
170
180
201
214
Total borrowings and lease liabilities
34
1,016
6,183
4,386
6,217
5,402
Less than
one year
£m
Between
one and
five years
£m
After five
years
£m
Total
£m
At 31 December
2021
Unsecured borrowings
3
4,245
1,768
6,016
Lease liabilities
31
122
48
201
34
4
,
367
1,816
6,217
At 31 December
2020
Unsecured borrowings
982
1,311
2,895
5,188
Lease liabilities
34
116
64
214
1,016
1,427
2,959
5,402
All outstanding items described as notes above are listed on the London Stock Exchange.
1
On the 15 June 2021, the Company drew down the £2,000m loan maturing in 2025 (supported by an 80% guarantee from UK Export Finance).
2
On 17 March 2021, the Company repaid commercial paper of £300m issued as part of the COVID Corporate Financing Facility (CCFF), a fund operated by the Bank of England on behalf of HM
Treasury.
3
These notes were the subject of cross-currency interest rate swap agreements under which the Company had undertaken to pay floating rates of GBP interest, which form a fair value hedge.
On the 18 June 2021, the Company repaid €750m (£639m) loan notes in line with repayment terms.
4
These notes are the subject of cross-currency interest rate swap agreements under which the Company has undertaken to pay floating rates of GBP interest, which form a fair value hedge.
They are also subject to interest rate swap agreements under which the Company has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.
5
These notes are the subject of interest rate swap agreements under which the Company has undertaken to pay ﬂoating rates of interest, which form a fair value hedge. They are also subject
to interest rate swap agreements under which the Company has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.
6
These notes are the subject of cross-currency interest rate swap agreements under which the Company has undertaken to pay fixed rates of GBP interest, which form a cash flow hedge.
During the year, the Company entered into a new £1,000m loan maturing in 2026 (supported by an 80% guarantee from UK Export Finance and
available to draw until March 2025). This facility was undrawn at 31 December 2021.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
133
13 Leases
Leases as lessee
The net book value of lease right-of-use assets at 31 December 2021 was £163m (2020: £160m) (as per note 5), with a lease liability of £201m (2020:
£214m) (as per note 12). Leases that have not yet commenced to which the Company is committed have a future liability of £26m. The financial
statements include the following amounts relating to leases:
2021
£m
Land and buildings depreciation and impairment reversals (10)
Plant and equipment depreciation and impairment reversals (11)
Aircraft and engines depreciation (2)
Total depreciation and impairment charge for right-of-use assets (23)
The total cash outflow for leases in 2021 was £56m (2020: £53m). Of this, £43m related to leases reflected in the lease liability, £13m to short-term
leases where lease payments are expensed on a straight-line basis and nil for variable lease payments where obligations are only due when the
assets are used. The timing difference between income statement charge and cash flow relates to costs incurred at the end of leases for residual
value guarantees and restoration costs that are recognised within depreciation over the term of the lease, the most significant amounts relate to
engine leases.
Leases as lessor
The Company acts as lessor for engines to Civil Aerospace customers when they require engines to support their fleets. Lease agreements with
the lessee provide protection over the Company's assets. Usage in excess of specified limits and damage to the engine while on lease are covered
by variable lease payment structures. Lessee bankruptcy risk is managed through the Cape Town Convention on International Interests in Mobile
Equipment (including a specific protocol relating to aircraft equipment), an international treaty that creates common standards for the registration
of lease contracts and establishes various legal remedies for default in financing agreements, including repossession and the effect of particular
states' bankruptcy laws. Engines are only leased once the Company can confirm that appropriate insurance documentation is established that
covers the engine assets to pre-agreed amounts. All such contracts where the Company are lessor are operating leases. The Company also leases
out a small number of properties, or parts of properties, where there is excess capacity under operating leases.
Non-cancellable future operating lease rentals receivables (undiscounted) are £1m (2020: £1m), these are predominantly due after five years.
In a limited number of circumstances, the Company sublets properties that are treated as a finance lease when the arrangement transfers
substantially all the risks and rewards of ownership of the asset. At 31 December 2021, the total undiscounted lease payments receivable is £19m
(2020: £22m) on annual lease income of £2m (2020: £3m). The discounted finance lease receivable at 31 December 2021 is £17m (2020: £19m). There
was nil (2020: nil) finance income recognised during the year.
14 Trade payables and other liabilities
Current Non-current Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Trade payables
582
709
–
–
582
709
Payables due on RRSAs
739
697
–
–
739
697
Amounts owed to:
Subsidiary undertakings
4,810
5,493
–
–
4,810
5,493
Joint ventures and associates
476
576
–
1
476
577
Customer concessions payable
1,017
1,534
399
514
1,416
2,048
Warranty credits
201
173
161
196
362
369
Accruals
1,324
1,205
177
101
1,501
1,306
Deferred receipts from RRSA workshare
partners
23
16
484
500
507
516
Government grants
1
21
2
12
20
33
22
Other taxation and social security
–
46
–
–
–
46
Other payables
2
192
231
246
305
438
536
9,385
10,682
1,479
1,637
10,864
12,319
1
During the year £2m (2020: £6m) of government grants were recognised in the income statement.
2
Other payables includes parts purchase obligations, payroll liabilities, HM UK Government levies and payables associated with business disposals.
All amounts due to subsidiary undertakings (except those outlined below) are unsecured, interest free and are repayable on demand.
The Company is part of the Rolls-Royce group banking arrangements and the Company’s main bank accounts are subject to offset and pooling
arrangements with cash balances acquired from other group entities. As a result of these arrangements the balances are presented as
intercompany payables as funds are pooled by the Company on the last working day of the month with funds returned the next day. The amounts
owed by the Company of £959m as at 31 December 2021 (2020: £265m) are interest bearing and repayable on demand.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
134
14 Trade payables and other liabilities continued
Other intercompany payable balances outstanding as at 31 December 2021 were as follows:
– $35m (£26m) balance payable to Rolls-Royce Canada Limited (2020: US$60m (£44)). This incurs interest at the 3 month USD LIBOR rate +0.1%
and is repayable on demand.
– CAD419m (£245m) balance payable to Rolls-Royce Canada Limited (2020: CAD344m (£198m)). This incurs interest at the 3 month CAD LIBOR
rate +0.1% and is repayable on demand.
– £81m balance payable to Nightingale Insurance Limited (2020: £81m). This incurs interest at GBP LIBOR +0.1% and is repayable on demand.
– $139m (£103m) balance payable to Rolls-Royce North America (USA) Holdings Co (2020: US$20m (£15m)). This incurs interest at the 1 month
USD LIBOR rate +0.1% and is repayable on demand.
– €633m (£532m) balance payable to Rolls-Royce Power Systems AG (2020: €375m (£337m)). This incurs interest at EURIBOR +0.1% and is
repayable on demand.
– $49m (£36m) balance payable to Industria de Turbo Propulsores S.A (2020: US$55m (£40m)). This incurs interest at the 1 month USD LIBOR
rate +0.1% and is repayable on demand.
– €139m (£117m) balance payable to Industria de Turbo Propulsores S.A (2020: €425m (£382m)). This incurs interest at EURIBOR +0.1% and is
repayable on demand.
– €200m (£168m) balance payable to RR Deutschland Ltd & Co KG (2020: €200m (£180m)). This incurs interest at the 3 month EURIBOR rate
+0.1% and is repayable on demand.
The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature.
The Company’s payment terms with suppliers vary on the products and services being sourced, the competitive global markets we operate in and
other commercial aspects of suppliers' relationships. Industry average payment terms vary between 90-120 days. The Company offers reduced
payment terms for smaller suppliers, so that they are paid in 30 days. In line with civil aviation industry practice, the Company offers a supply
chain financing (SCF) programme in partnership with banks to enable suppliers, including joint ventures, who are on standard 75-day payment
terms to receive their payments sooner. The SCF programme is available to suppliers at their discretion and does not change rights and obligations
with suppliers nor the timing of our payment of suppliers. At 31 December 2021 suppliers had drawn £540m under the SCF scheme (31 December
2020: £582m).
15 Provisions for liabilities and charges
At 1
January
2021
£m
Charged to
income
statement
1
£m
Reversed
£m
Utilised
£m
At 31
December
2021
£m
Trent 1000 exceptional costs
321
80
(45)
(199)
157
Contract losses
843
265
(189)
(20)
899
Warranties and guarantees
24
1
(1)
(3)
21
Customer financing
17
–
–
–
17
Restructuring
138
4
(108)
(27)
7
Tax
related interest and penalties
3
–
–
(3)
–
Employer liability claims
8
–
(1)
(2)
5
Other
58
1
–
–
59
1,412
351
(344)
(254)
1,165
Current liabilities
506
204
Non
-
current liabilities
906
961
1
The charge to the income statement includes £32m (2020: £48m) as a result of the unwinding of the discounting of provisions previously recognised.
Trent 1000 exceptional costs
In November 2019, the Company announced the outcome of testing and a thorough technical and financial review of the Trent 1000 TEN
programme, following technical issues which were identified in 2019, resulting in a revised timeline and a more conservative estimate of durability
for the improved HP turbine blade for the TEN variant. In the year, the Company has utilised £199m of the Trent 1000 exceptional costs provision.
This represents customer disruption costs settled in cash and credit notes, and remediation shop visit costs. The value of the remaining provision
reflects the single most likely outcome and is expected to be utilised over the period 2022 to 2024.
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected revenue. In
the year, additional contract losses for the Group of £265m have been recognised as a result of changes in future cost estimates, primarily in
relation to LTSA shop visits; £20m was a result of revised estimates in relation to climate change. Contract losses of £189m previously recognised
have been reversed following a reassessment of the number of engines impacted by the Trent 1000 technical issues and the cost of meeting
contractual obligations. The Group continues to monitor the contract loss provision for changes in the market and revises the provision as
required. The value of the remaining contract loss provisions reflect in each case the single most likely outcome. The provisions for contract
losses are expected to be utilised over the term of the customer contracts, typically within 8–16 years. From 1 January 2022, provisions for contract
losses will be measured on a fully costed basis. See note 1 for further detail.
Warranties and guarantees
Provisions for warranties and guarantees primarily relate to products sold and are calculated based on an assessment of the remediation costs
related to future claims based on past experiences. The provision generally covers a period of up to three years.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
135
15 Provisions for liabilities and charges continued
Restructuring
In May 2020, the Company announced a fundamental restructuring programme in response to the financial and operational impact caused by
COVID-19 with a plan to remove at least 9,000 roles. During the year, £27m of the provision was utilised as part of these plans and £108m of the
provision released following reassessment of the anticipated cost per role and a higher than expected rate of natural attrition. The remaining
provision is expected to be utilised by the end of 2022.
Customer financing
Customer financing provisions have been made to cover guarantees provided for asset value and/or financing where it is probable that a payment
will be made. In addition to the provisions recognised, the Company has contingent liabilities for customer financing arrangements where they
payment is not probable as described on page 125.
In connection with the sale of its products the Company will, on some occasions, provide financing support for its customers, generally in respect
of civil aircraft. The Company’s commitments relating to these financing arrangements are spread over many years, relate to a number of
customers and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of $1.7bn
(2020: $1.9bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $952m could be called
during 2022). These facilities may only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the market
rate. Significant events impacting the international aircraft financing market, including the COVID-19 pandemic, the failure by customers to meet
their obligations under such financing agreements, or inadequate provisions for customer financing liabilities may adversely affect the Company’s
financial position.
Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis at
the Company’s borrowing rate to better reflect the time span over which these exposures could arise. These amounts do not represent values
that are expected to crystallise. The commitments are denominated in US dollars. As the Company does not generally adopt cash flow hedge
accounting for future foreign exchange transactions, this amount is reported together with the sterling equivalent at the reporting date spot rate.
The values of aircraft providing security are based on advice from a specialist aircraft appraiser.
The discounted value of the total gross contingent liabilities relating to financing arrangements on all delivered aircraft less insurance
arrangements and relevant provisions were:
2021
20
20
£m
$m
£m
$m
Gross commitments
32
43
38
52
Value of security
1
(10)
(13)
(14)
(19)
Indemnities
(2)
(3)
(5)
(6)
Net commitments
20
27
19
27
Net commitments with security reduced by 20%
1
22
29
22
30
1
Although sensitivity calculations are complex, the reduction of the relevant security by 20% illustrates the sensitivity of the contingent liability to this assumption.
Insurance
The Company’s captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Company. Significant
delays can occur in the notification and settlement of claims and judgement is involved in assessing outstanding liabilities, the ultimate cost and
timing of which cannot be known with certainty at the balance sheet date. The insurance provisions are based on information currently available,
however it is inherent in the nature of the business that ultimate liabilities may vary. Provisions for outstanding claims are established to cover
the outstanding expected liability as well as claims incurred but not yet reported.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result of an historical insolvency of the previous provider and is expected to
be utilised over the next 30 years.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
136
16 Deferred taxation
2021
£m
2020
£m
At 1 January
768
1,073
Amount credited/(charged) to income statement
436
(475)
Amount
(charged)/credited to statement of comprehensive income
(50)
165
Amount credited to equity
17
5
At 31 December
1,171
768
Deferred tax assets
1,562
1,077
Deferred tax liabilities
(391)
(309)
Deferred tax
1,171
768
The analysis of the deferred tax position is as follows:
2021
£m
2020
£m
Property, plant and equipment
131
68
Intangible assets
(343)
(229)
Other temporary differences
165
45
Pensions and other post
-
retirement scheme benefits
(391)
(309)
Foreign exchange and commodity financial assets and liabilities
339
185
Losses
1,054
801
Advance corporation tax
162
163
Research and development expenditure credit withholding tax
54
44
1,171
768
Unprovided deferred tax
Other temporary
differences
14
–
Foreign exchange and commodity financial assets and liabilities
392
369
Losses
1,563
1,181
1,969
1,550
Gross amount of losses and other deductible temporary differences for which no deferred tax has been
recognised on which there is no expiry
Other temporary differences
55
–
Foreign exchange and commodity financial assets and liabilities
1,567
1,940
Losses
6,251
6,214
7,873
8,154
Deferred tax assets of £1,562m include £1,054m (2020: £801m) relating to tax losses and £162m (2020: £163m) relating to advance corporation tax
(ACT). These assets have been recognised based on the expectation that the business will generate taxable profits and tax liabilities in the future
against which the losses and ACT can be utilised.
Most of the tax losses relate to the Civil Aerospace widebody business which makes initial losses through the investment period of a programme
and then makes a profit through its contracts for services. The programme lifecycles are typically in excess of 30 years. In the past few years
there have been four new engines that have entered into service (Trent 1000–TEN, Trent 7000, Trent XWB-84 and Trent XWB-97).
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can
be utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset
and using latest UK forecasts, which are mainly driven by the Civil Aerospace widebody business, to assess the level of future taxable profits.
The recoverability of deferred tax assets relating to tax losses and ACT has been assessed in 2021 on the following basis:
– using the most recent UK profit forecasts prepared by management, which are consistent with past experience and external sources on market
conditions. These forecasts cover the next five years;
– the long-term forecast profit profile of certain of the major widebody engine programmes which is typically in excess of 30 years from initial
investment to retirement of the fleet, including the aftermarket revenues earned from airline customers;
– taking into account forecast reductions in the usage of older aircraft, and including new business in certain areas;
– taking into account a 25% probability of the severe but plausible downside forecast materialising in relation to the civil aviation industry; and
– the long-term forecast profit and cost profile of the other parts of the business.
The assessment takes into account UK tax laws that, in broad terms, restrict the offset of the carried forward tax losses to 50% of current year
profits. In addition, management’s assumptions relating to the amounts and timing of future taxable profits take into account the impact of COVID-
19 and climate change on existing widebody engine programmes. Based on this assessment, the Company has recognised a deferred tax asset of
£1,054m relating to losses and £162m relating to ACT. This reflects the conclusions that:
– It is probable that the business will generate taxable income and tax liabilities in the future against which these losses and the ACT can be
utilised.
– Based on current forecasts and using various scenarios these losses and the ACT will be used in full within the expected widebody engine
programme lifecycles.
– The Company has not recognised any deferred tax assets in respect of 2021 UK tax losses.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
137
16 Deferred taxation continued
An explanation of the potential impact of climate change on forecast profits and sensitivity analysis can be found in note 1.
The Company has also reassessed the recovery of other deferred tax assets, including those arising on unrealised losses on derivative contracts,
resulting in a net increase of £154m of which £58m relates to the increase in the UK corporation tax rate (see below). Any future changes in tax
law or the structure of the Group could have a significant effect on the use of losses, ACT and other deferred tax assets, including the period
over which they can be used. In view of this and the significant judgement involved the Board continuously reassess this area.
The Spring Budget 2021 announced that the UK corporation tax rate will increase from 19% to 25% from 1 April 2023. The new law was substantively
enacted on 24 May 2021. The prior year UK deferred tax assets and liabilities were calculated at 19%, as this was the enacted rate at the 2020
balance sheet date. As the 25% rate has been substantively enacted before 31 December 2021, the UK deferred tax assets and liabilities have been
re-measured at 25%.
The resulting credits and charges have been recognised in the income statement except to the extent that they relate to items previously credited
or charged to equity. Accordingly, in 2021, £257m has been credited to the income statement and £17m has been credited directly to equity.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not
been recognised, aggregate to £957m (2020: £907m). No deferred tax liability has been recognised on the potential withholding tax due on the
remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will not be given
in the foreseeable future.
17 Post-retirement benefits
Defined benefit schemes
The Company operates a funded UK defined benefit scheme, with the assets held in a separate trustee administered fund. Employees are entitled
to retirement benefits based on either their final or career average salaries and length of service. On 31 December 2020, the scheme was closed
to future accrual.
The valuation of the defined benefit scheme is based on the most recent funding valuation, where relevant, updated by the scheme actuaries to
31 December 2021.
Changes to the UK defined benefit scheme
On 20 May 2020, the Company announced its intention to reshape and resize the Company due to the financial and operational impact of COVID-
19. As part of this restructuring programme, a voluntary severance programme was offered to certain UK employees and pension liabilities were
remeasured in 2020 to reflect the number of members who were expected to leave the scheme. During the year, a £4m past service credit has
arisen from the updated scope of the fundamental restructuring programmes following a higher than expected rate of natural attrition.
On the 29 July 2020, the Company announced a consultation with the active members of the UK scheme on a proposal to close the scheme to
future accrual on 31 December 2020. As at 31 December 2020 a past-service credit of £67m was recognised. Following the confirmation of the
scheme closure, the Company held discussions with the employees' representatives and the Trustee regarding additional transitional protections
that could be granted from the scheme. At 31 December 2021, £7m had been recognised as a past service credit which relates to the differences
between the final details agreed and the obligation estimated at 31 December 2020.
During the year to 31 December 2021, 236 employed deferred members transferred employment in anticipation of a business disposal. As a
consequence of this, a £4m past service credit was recognised.
Amounts recognised in OCI in respect of defined benefit schemes
2021
£m
2020
£m
Actuarial gains and losses arising from:
Demographic assumptions
1
(101)
(85)
Financial assumptions
2
416
(1,387)
Experience adjustments
3
(88)
(157)
Return on plan assets excluding financing income
2
(112)
1,166
115
(463)
¹ This reflects latest available CMI mortality projections and an update of the post-retirement mortality assumptions based on an analysis prepared for the 31 March 2020 funding valuation.
2
These arise primarily due to changes in interest rates and inflation.
3
This reflects updated membership data available from the 31 March 2020 funding valuation, actual experience of options selected by members leaving employment under the voluntary
severance arrangements (see above) offset by lower than expected pension and deferred pension increases.
Amounts recognised in the balance sheet
in respect of defined benefit schemes
2021
£m
2020
£m
Present value of funded obligations
(8,010)
(8,879)
Fair value of scheme assets
9,128
9,762
Net asset recognised in the balance sheet
–
Post retirement surplus
1
1,118
883
¹ The surplus is recognised as, on an ultimate wind-up when there are no longer any remaining beneficiaries, any surplus would be returned to the Group, which has the power to prevent the
surplus being used for other purposes in advance of this event.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
138
17 Post-retirement benefits continued
Assumptions
Significant actuarial assumptions used at the balance sheet date were as follows:
2021
£m
2020
£m
Discount rate
1.90%
1.45%
Inflation assumption (RPI) ¹
3.60%
3.10%
Rate of increase in salaries
2
n/a
2.55%
Transfer assumption
(active/deferred)
50%/40%
40%/40%
BPO assumption
25.00%
30
.00
%
Life expectancy from age 65:
current male pensioner
21.8 years
21.8 years
future male pensioner currently aged 45
23.2 years
23.2 years
current female pensioner
23.6 years
23.6 years
future female pensioner currently aged 45
25.4 years
25.4 years
1
This is the assumption for the Retail Price Index. The Consumer Price Index is assumed to be on average 0.55% lower, taking account of the announcement in 2020 that from 2030, RPI will be
replaced by CPIH (2020: 0.55% lower).
2
Following the closure to future accrual, future salaries do not affect the defined benefit obligation. In 2020, this assumption (with zero increase in 2021) was made to determine the split between
past-service credit arising from the closure included in the income statement and the actuarial gain or loss included in OCI.
Discount rates are determined by reference to the market yields on AA rated corporate bonds. The rate is determined by using the profile of
forecast benefit payments to derive a weighted average discount rate from the yield curve.
The inflation assumption is determined by the market-implied assumption based on the yields on long-term index-linked government securities
and increases in salaries are based on actual experience, allowing for promotion, of the real increase above inflation.
The mortality assumptions adopted for the UK pension schemes are derived from the SAPS S3 'All' actuarial tables, with future improvements in
line with the CMI 2019 core projections updated to reflect use of an ‘A’ parameter of 0.25% for future improvements and long-term improvements
of 1.25%. Where appropriate, these are adjusted to take account of the scheme's actual experience.
The assumption for transfers and the BPO has been updated based on actual experience and actuarial advice.
Other assumptions have been set on advice from the actuary, having regard to the latest trends in scheme experience and the assumptions used
in the most recent funding valuation. The rate of increase of pensions in payment is based on the rules of the scheme, combined with the inflation
assumption where the increase is capped.
Changes in present value of defined benefit obligations
2021
£m
2020
£m
At 1 January
(8,879)
(8,499)
Current service cost
(4)
(147)
Past
-
service cost
15
308
Finance costs
(137)
(148)
Contributions by employees
–
(2)
Benefits paid out
1
768
816
Actuarial losses
227
(1,629)
Settlement
–
422
At 31 December
(8,010)
(8,879)
Funded schemes
(8,010)
(8,879)
Unfunded schemes
–
–
1
Benefits paid out includes amounts paid to members transferring out of the scheme. This has increased in 2020 and 2021 as a result of the voluntary severance programme.
The defined benefit
obligations are in respect of:
2021
£m
2020
£m
Active participants
1
(3,451)
(4,369)
Deferred plan participants
(2,258)
(2,750)
Pensioners
(2,301)
(1,760)
Weighted average duration of obligations (years)
22
23
1
Although the UK scheme closed to future accrual on 31 December 2020, members who became deferred as a result of the closure and remain employed by the Company retain some additional
benefits compared with other deferred members. The obligations for these members are shown as active plan participants.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
139
17 Post-retirement benefits continued
Changes in fair value of scheme assets
2021
£m
2020
£m
At 1 January
9,762
9,640
Administrative expenses
(6)
(6)
Financing
153
174
Return on plan assets excluding financing
(112)
1,166
Contributions by employer
1
99
24
Contributions by employees
–
2
Benefits paid out
(768)
(816)
Settlement
–
(422)
At 31 December
9,128
9,762
Total return on Scheme
a
ssets
41
1,340
1
During the year, contributions by the employer of £99m to the UK scheme were deferred payments paid during the year but related to pensionable service for the prior year.
Fair value of scheme assets
2021
£m
2020
£m
Sovereign debt
5,756
7,220
Corporate debt instruments
3,122
2,878
Interest rate swaps
54
52
Inflation swaps
106
(55)
Cash and similar instruments ¹
(811)
(1,156)
Liability driven investment (LDI) portfolios ²
8,227
8,939
Listed equities
–
–
Unlisted equities
54
64
Synthetic equities
3
43
41
Corporate debt instruments
802
709
Partial buy
-
in insurance policy
–
–
Other
2
9
At 31 December
9,128
9,762
1
Cash and similar instruments include repurchase agreements on UK Government bonds amounting to £(1,087)m (2020: £(1,539)m). The latest maturity date for these short-term borrowings is
September 2023.
2
A portfolio of gilt and swap contracts, backed by investment grade credit instruments and LIBOR generating assets, that is designed to hedge the majority of the interest rate and inflation
risks associated with the schemes’ obligations.
3
Portfolios of swap contracts designed to provide investment returns in line with global equity markets. The maximum exposure (notional value and accrued returns) on the portfolios was
£505m (2020: £650m).
The investment strategy is controlled by the Trustee in consultation with the Company. The scheme assets do not directly include any of the
Company’s own financial instruments, nor any property occupied by, or other assets used by, the Company. At 31 December 2021, there was no
indirect holding of the Company’s financial instruments (2020: none).
Future contributions
The Company does not expect to contribute to its defined benefit scheme in respect of 2022 (2021: £100m).
Cash funding is based on a statutory triennial funding valuation process. This process includes a negotiation between the Company and the
Trustee on the actuarial assumptions used to value the liabilities (Technical Provisions); assumptions which may differ from those used for
accounting set out on page 138. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability.
Most notably, the Technical Provision discount rate is currently based upon UK Government yields plus a margin (0.5% at the 31 March 2020
valuation) rather than being based on yields of AA corporate bonds. Following the triennial valuation process, a Schedule of Contributions (SoC)
must be agreed which sets out the agreed rate of cash contributions and any contributions from the employer to eliminate a deficit. The most
recent valuation, as at 31 March 2020, agreed by the Trustee in June 2021, showed that the UK scheme was estimated to be 105% funded on the
Technical Provisions basis. This funding level reflected the short-term market impact of the COVID-19 pandemic. Funding has now returned to
pre-pandemic levels and was estimated to be 112% at 31 December 2021. Following the closure of the scheme to future accrual on 31 December
2020, no contributions will be made in respect of future accrual and no deficit reduction contributions are required. The 2021 contributions
included above are in respect of 2020 accrual, the payment of some of which were deferred in agreement with the Trustee as a result of the
COVID-19 pandemic. All cash due has been paid in full. The current SoC includes an arrangement for potential contributions during 2024 to 2027
(capped at £145m in total) if the Technical Provisions funding position is below 107% at 31 March 2023.
Sensitivities
The calculations of the defined benefit obligations are sensitive to the assumptions set out on page 138. The following table summarises how the
estimated impact of a change in a significant assumption would affect the UK defined benefit obligation at 31 December 2021, while holding all
other assumptions constant. This sensitivity analysis may not be representative of the actual change in the defined benefit obligation as it is
unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
The investment strategies are designed to hedge the risks from interest rates and inflation on an economic basis.
The interest rate and inflation hedging is currently based on UK Government bond yields without any adjustment for any credit spread. The
sensitivity analysis set out below have been determined based on a method that estimates the impact on the defined benefit obligation as a result
of reasonable changes in key assumptions occurring at the end of the reporting period.
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
140
17 Post-retirement benefits continued
2021
£m
2020
£m
Reduction in discount rate of 0.25%
1
Obligation
(460)
(530)
Plan assets (LDI portfolio)
484
602
Increase in inflation rate of 0.25%
1
Obligation
(210)
(290)
Plan assets (LDI portfolio)
147
267
Increase of 1% in transfer value assumption
Obligations
(55)
(67)
Increase of 5% of transfers instead of BPO
Obligations
(30)
(45)
One year
increase in life expectancy
Obligations
(365)
(455)
1
The differences between the sensitivities on obligations and plan assets arise largely due to differences in the methods used to value the obligations for accounting purposes and the adopted
proxy solvency basis.
Defined contribution schemes
The Company operates a number of defined contribution schemes. The total expense recognised in the income statement was £125m (2020:
£80m).
18 Share Capital
Equity
ordinary
shares of
20p each
Millions
Nominal
value
£m
Authorised
At 1 January and 31 December 2021
2,000
400
Issued and fully paid
At 1 January 2021 and 31 December 2021
1,691
338
Rights, preferences and restrictions
Each member has one vote for each ordinary share held. Holders of ordinary shares are entitled to receive the Company’s Annual Report; attend
and speak at general meetings of the Company; to appoint one or more proxies or, if they are corporations, corporate representatives; and to
exercise voting rights. The ordinary shares are not listed.
19 Share-based payments
Effect of share-based payment transactions on the Company’s results
2021
£m
2020
£m
Total expense recognised for equity
-
settled share
-
based payment transactions
16
22
Share-based payment plans in operation during the year
During the year, the Company participated in the following share-based payment plans operated by Rolls-Royce Holdings plc:
Long-Term Incentive Plan (LTIP)
These plans involve the award of shares to participants subject to performance conditions. Vesting of the performance shares is based on the
achievement of both non-market based conditions (EPS and cash flow per share) and a market based performance condition (Total Shareholder
Return –TSR) over a three-year period.
ShareSave share option plan
Based on a three or five-year monthly savings contract, eligible employees are granted share options with an exercise price of up to 20% below
the share price when the contract is entered into. Vesting of the options is not subject to the achievement of a performance target. The plan is
HM Revenue & Customs approved.
Deferred Share Bonus Plan (DSBP)
The fair value of shares awarded under DSBP is calculated as the share price on the date of the award, excluding expected dividends (or
equivalent).
The related weighted average share price at the time of exercise was 119p (2020: 203p) per share.
The closing price at 31 December 2021 was 123p (2020: 111p). The number of shares and, where relevant, the exercise prices were adjusted to
reflect the impact of the rights issue of Rolls-Royce Holdings plc which completed on 12 November 2020.
The weighted average remaining contractual life for the cash settled options as at 31 December 2021 was three years (2020: two years).
Financial statements Rolls-Royce plc Annual Report 2021
Notes to the Company Financial Statements
141
19 Share-based payments continued
Share options outstanding at the end of the year have the following expiry dates and exercise prices:
ShareSave share options (m)
Grant
-
vest
Expiry date (31
January)
Exercise price in
pence per share
option
2021
2020
2015
–
2021
2021
212
–
3.6
2017
–
2021
2021
260
–
2.7
2017
–
2023
2023
260
1.4
3.5
2019
–
2023
2023
232
2.3
6.7
2019
-
2025
2025
232
2.1
5.6
2021
-
2025
2025
97
35.9
–
41.7
22.1
20 Contingent liabilities
Contingent liabilities in respect of customer financing commitments are described in note 15.
In January 2017, after full cooperation, the Company concluded deferred prosecution agreements (DPA) with the SFO and the US Department of
Justice (DoJ) and a leniency agreement with the MPF, the Brazilian federal prosecutors. The terms of both DPAs have now expired; the DPA with
the DoJ was dismissed by the US District Court on 19 May 2020 and the SFO filed notice of discontinuance of proceedings with the UK Court on
18 January 2022. Certain authorities are investigating members of the Company for matters relating to misconduct in relation to historical matters.
The Company is responding appropriately. Action may be taken by further authorities against the Company or individuals. In addition, the
Company could still be affected by actions from customers and customers’ financiers. The Directors are not currently aware of any matters that
are likely to lead to a material financial loss over and above the penalties imposed to date, but cannot anticipate all the possible actions that may
be taken or their potential consequences.
Contingent liabilities exist in respect of guarantees provided by the Company in the ordinary course of business for product delivery,
commitments made for future service demand in respect of maintenance, repair and overhaul, and performance and reliability. The Company has,
in the normal course of business, entered into arrangements in respect of export ﬁnance, performance bonds, countertrade obligations and minor
miscellaneous items. Various Company undertakings are parties to legal actions and claims (including with tax authorities) which arise in the
ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported,
the Company is no longer fully insured against known and potential claims from employees who worked for certain of the Company's UK based
businesses for a period prior to the acquisition of those businesses by the Company. While the outcome of some of these matters cannot precisely
be foreseen, the Directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result
in signiﬁcant loss to the Company
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company
considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a
contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. At 31
December 2021, these guarantees amounted to £940m (2020: £1,354m). At 31 December 2021, there were Company guarantees in respect of joint
ventures’ lending amounting to £1m (2020: £3m).
The Company participates in a Cash Pooling Arrangement. Under the Pooling Arrangement the Company benefits from more favourable interest
rates than would be available outside of the Pooling Arrangement as well as more streamlined treasury functions. As part of the Pooling
Arrangement, the Company cross-guarantees the borrowings of other pooling participants. At 31 December 2021, these guarantees amounted to
£4m (2020: £4m).
21 Related party transactions
2021
£m
2020
£m
Sale of goods and services to joint ventures and associates
3,432
3,479
Purchases of goods from joint ventures and associates
(3,359)
(4,059)
Guarantees of joint arrangements’ and
associates’ borrowings
1
3
Guarantees of non
-
wholly owned subsidiaries’ borrowings
3
3
The Company is a wholly owned subsidiary of its ultimate parent Rolls-Royce Holdings plc, and is included within the consolidated results of Rolls-
Royce Holdings plc and therefore has taken advantage of the exemption in FRS 101 not to disclose related party transactions with its parent
company and other wholly owned group companies. The aggregated balances with joint ventures are shown in notes 8 and 14.
22 Parent and ultimate parent company
The direct parent of the Company is Rolls-Royce Group Limited and the ultimate holding company is Rolls-Royce Holdings plc, incorporated in
Great Britain. The Financial Statements for Rolls-Royce Holdings plc may be obtained from the Company Secretary, Rolls-Royce Holdings plc,
Kings Place, 90 York Way, London, N1 9FX, United Kingdom.
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
142
Subsidiaries
As at 31 December 2021, the companies listed below and on the following pages are indirectly held by Rolls-Royce plc except those
companies indicated which are directly held by Rolls-Royce plc. The financial year end of each company is 31 December unless otherwise
indicated.
Company name
Address
Class
of shares
% of
class
held
Aeromaritime America, Inc. M&H Agent Services, Inc., 1850 North Central Avenue, Suite 2100,
Phoenix, Arizona 85004, United States
Common 100
Aeromaritime Mediterranean Limited 7 Industrial Estate, Hal Far, Birzebbuga, BBG 3000, Malta Ordinary
100
Aerospace Transmission Technologies
GmbH
*
,1
Adelheidstrasse 40, D-88046, Friedrichshafen, Germany Capital Stock
50
Amalgamated Power Engineering Limited
2
London
3
Deferred
100
Ordinary
100
Bristol Siddeley Engines Limited *
,2
London
3
Ordinary
100
Brown Brothers & Company Limited
2
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife, KY11
9JT, Scotland
Ordinary 100
C.A. Parsons & Company Limited
2
London
3
Ordinary
100
Derby Specialist Fabrications Limited
2
London
3
Ordinary
100
Europea Microfusioni Aerospaziali S.p.A. * Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy Ordinary
100
Heaton Power Limited
2
London
3
Ordinary
100
Industria de Tuberías Aeronáuticas
México S.A. de C.V.
Acceso IV, No.6B, Zona Industrial Benito Juárez, Querétaro, 76120,
Mexico
Class A 100
Industria de Tuberías Aeronáuticas S.A.U. Pabellón Industrial, Torrelarrgoiti, Parcela 5H, Naves 7 a 10, Zamudia,
Vizcaya, Spain
Ordinary 100
Industria de Turbo Propulsores S.A.U. * Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary
100
ITP Aero UK Limited The Whittle Estate, Cambridge Road, Whetstone, Leicester, LE8 6LH,
England
Ordinary 100
ITP Engines UK Limited The Whittle Estate, Cambridge Road, Whetstone, Leicester, LE8 6LH,
England
Ordinary 100
ITP Externals India Private Ltd Plot 60/A, IDA Gandhi Nagar, Hyderabad, 500037, India Ordinary
100
ITP Externals S.L.U.
Pabellón Industrial, Polígono Ugaldeguren I, PIIIA, Pab 1
–
2
Ordinary
100
Zamudio, Vizcaya, Spain
ITP Ingeniería y Fabricación S.A. de C.V.
Acceso IV, No.6D, Zona
Industrial Benito Juárez, Querétaro,
Class A
100
76120, Mexico Class B
100
ITP México Fabricación S.A. de C.V. Acceso IV, No.6, Zona Industrial Benito Juárez, Querétaro, 76120,
Mexico
Class A 100
ITP México S.A. de C.V.
Acceso IV, No.6, Zona
Industrial Benito Juárez, Querétaro,
Fixed capital B
100
76120, Mexico Variable capital B
100
ITP Next Generation Turbines S.L.U. * Parque Technológico Edificio 300, 48170 Zamudio, Vizcaya, Spain Ordinary
100
John Thompson Cochran Limited
2
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife, KY11
9JT, Scotland
6% Cumulative
Preference
100
Ordinary
100
Karl Maybach-Hilfe GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock
100
Kinolt FZE
4
Warehouse Number FZLIU10BD09, Liu 10, BD09 Jafza South Jebel
Ordinary
100
Ali Free Zone, PO Box 263346, Dubai, United Arab Emirates
Kinolt Immo SA Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary
100
Kinolt Immobilien SA Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary
100
Kinolt LLC
4
Electrozavodskaya str, 33, bld.5, floor 4, room VII, office 12, Moscow,
107076, Russia
Ordinary 100
*
Directly held by the Company
1
Though the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
2
Dormant entity.
3
Kings Place, 90 York Way, London, N1 9FX, England.
4
Entity in liquidation.
5
Though the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
6
Reporting year end is 31 March.
7
Moor Lane, Derby, Derbyshire, DE24 8BJ, England.
8
Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States.
9
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ended 31 December 2021. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
10
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ending 31 March 2022. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
11
The entity is not included in the consolidation as the Company does not have a beneficial interest in the net assets of the entity.
12
The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements).
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
143
Subsidiaries continued
Company name
Address
Class
of shares
% of
class
held
Kinolt Trading and Contracting LLC
5
REGUS Service Office, Office No. 1034, Shoumoukh Tower, 10th Floor,
Tower B, C-Ring Road, Al Sadd, PO Box 207207, Doha, Qatar
Ordinary 49
Kinolt Sistemas de UPS Limitada Alameda dos Maracatins 780-2502, Indianopolis 04089-001, Sao
Paulo, Brazil
Ordinary 100
Kinolt Sistemas de UPS SpA Bucarest No 17 Oficina, No 33, Previdencia, Santiago, Chile Ordinary
100
Kinolt UK Limited 101/102 Cirencester Business Park, Love Lane, Cirencester, GL7 1XD,
United Kingdom
Ordinary 100
LLC Rolls-Royce Solutions Rus Shabolovka Street 2, 119049, Moscow, Russian Federation Ordinary
100
Manse Opus Management Company Limited
6
Third Floor Queensberry House, 3 Old Burlington Street, London,
United Kingdom, W1S 3AE
Limited by
guarantee
33
MTU India Private Limited
6
6th Floor, RMZ Galleria, S/Y No. 144 Bengaluru, Bangalore,
Kamataka 560,064, India
Ordinary 100
MTU Polska Sp. z o.o. Ul. Lekka 3., Lokal U4. Raum, PLZ: 01-910, Ort: Warszawa, Poland Ordinary 100
NEI International Combustion Limited
2
London
3
Ordinary
100
NEI Mining Equipment Limited
2
London
3
Ordinary
100
NEI Nuclear Systems Limited
2
London
3
Ordinary
100
NEI Parsons Limited
2
London
3
Ordinary
100
NEI Peebles Limited
2
London
3
Ordinary
100
NEI Power Projects Limited
2
London
3
Ordinary
100
Nightingale Insurance Limited PO Box 33, Dorey Court, Admiral Park, St Peter Port, GY1 4AT,
Guernsey
Ordinary 100
No-Break Power Limited
2
Unit 29 Birches Industrial Estate, East Grinstead, England, RH19 1XZ Ordinary 100
Power Jets (Research and Development) Limited
2
The Whittle Estate, Cambridge Road, Whetstone, Leicester, LE8 6LH,
England
Ordinary 100
Powerfield Limited
2
Derby
7
Ordinary
100
Precision Casting Bilbao S.A.U. Calle El Barracón 1, Baracaldo, Vizcaya, 48910, Spain Ordinary
100
PT Rolls-Royce Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,
Jakarta, 13610, Indonesia
Ordinary 100
PT Rolls Royce Solutions Indonesia Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,
Jakarta, 13610, Indonesia
Ordinary 100
Rolls-Royce (Ireland) Unlimited Company
2
Ulster International Finance, 1st Floor IFSC House, IFSC, Dublin 1,
Ireland
Ordinary 100
Rolls-Royce (Thailand) Limited 4, 4.5 Level 12, Suite 1299, Rajdamri Road, Pathumwan, Bangkok,
10330, Thailand
Ordinary 100
Rolls-Royce Aero Engine Services Limited *
,2
London
3
Ordinary
100
Rolls-Royce Australia Pty Limited Level 1, 60 Martin Place, Sydney NSW 2000, Australia Ordinary
100
Rolls-Royce Australia Services Pty Limited Level 1, 60 Martin Place, Sydney NSW 2000, Australia Ordinary
100
Rolls-Royce Brasil Limitada * Rua Jose Versolato, No. 111, Torre B, Sala 2502, Centro, São Bernando
do Campo, Sao Paulo, CEP 09750-730, Brazil
Quotas 100
Rolls-Royce Canada Limited 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common Stock
100
Rolls-Royce Chile SpA Alcantra 200 office 601, Piso 6, C.O, 7550159 Las Condes, Santiago,
Chile
Ordinary 100
Rolls-Royce China Holding Limited * 305 Indigo Building 1, 20 Jiuxianqiao Road, Beijing, 100016, China Registered
Capital
100
Rolls-Royce Commercial Aero Engines Limited *
,2
London
3
Ordinary
100
Rolls-Royce Control Systems Holdings Co
2
Wilmington
8
Common Stock
100
Rolls-Royce Controls and Data Services
Limited *
,2
London
3
Ordinary
100
Rolls-Royce Controls and Data Services (NZ)
Limited
c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Ordinary 100
Rolls-Royce Controls and Data Services (UK)
Limited *
Derby
7
Ordinary 100
Rolls-Royce Corporation Wilmington
8
Common Stock
100
Rolls-Royce Crosspointe LLC Wilmington
8
Partnership
(no equity)
100
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
144
Subsidiaries continued
Company name
Address
Class
of shares
% of
class
held
Rolls-Royce Defense Products and Solutions,
Inc.
Wilmington
8
Common Stock 100
Rolls-Royce Defense Services, Inc. Wilmington
8
Common Stock
100
Rolls-Royce Deutschland Ltd & Co KG Amtsgericht Potsdam, Blankenfelde-Mahlow, Germany Ordinary
100
Rolls-Royce Electrical Norway AS * Jarleveien 8A, 7041, Trondheim 500, Norway Ordinary
100
Rolls-Royce Energy Angola, Limitada
2
Rua Rei Katyavala, Edificio Rei Katyavala, Entrada B, Piso 8, Luanda,
Angola
Quota 100
Rolls-Royce Energy Systems Inc.
2
Wilmington
8
Common Stock
100
Rolls-Royce Engine Services Holdings Co. Wilmington
8
Common Stock
100
Rolls-Royce Engine Services Limitada Inc.
4
Bldg. 06 Berthaphil Compound, Jose Abad Santos Avenue, Clark
Special Economic Zone, Clark, Pampanga, Philippines
Capital Stock 100
Rolls-Royce Erste Beteiligungs GmbH * Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock
100
Rolls-Royce Finance Company Limited
2
London
3
Deferred
Ordinary
100
Rolls-Royce Finance Holdings Co. Wilmington
8
Common Stock
100
Rolls-Royce Fuel Cell Systems Limited *
,9
Derby
7
Ordinary
100
Rolls-Royce General Partner (Ireland) Limited *
29 Earlshot Terrace, Dublin 2, Ireland Ordinary
100
Rolls-Royce General Partner Limited *
,2
London
3
Ordinary
100
Rolls-Royce High Temperature Composites, Inc.
Corporation Service Company, 2710 Gateway Oaks Drive, Suite
150N, Sacramento, California 95833, United States
Ordinary 100
Rolls-Royce Holdings Canada Inc. * 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common C
100
Rolls-Royce Hungary Kft * Gizella U. 51–57, 1143 Budapest, Hungary Cash shares
100
Rolls-Royce India Limited
2,6,10
Derby
8
Ordinary
100
Rolls-Royce India Private Limited
6
Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi,
110001, India
Equity 100
Rolls-Royce Industrial & Marine Power Limited
2
London
3
Ordinary
100
Rolls-Royce Industrial Power (India) Limited
2,6
Derby
7
Ordinary
100
Rolls-Royce Industrial Power Engineering
(Overseas Projects) Limited
Derby
7
Ordinary 100
Rolls-Royce Industries Limited *
,9
Derby
7
Ordinary
100
Rolls-Royce International Limited * Derby
7
Ordinary
100
Rolls-Royce Japan Co., Limited 31st Floor, Kasumigaseki Building, 3-2-5 Kasumigaseki, Chiyoda-Ku,
Tokyo, 100-6031, Japan
Ordinary 100
Rolls-Royce Leasing Limited * Derby
7
Ordinary
100
Rolls-Royce Malaysia Sdn. Bhd. C-2-3A TTDI Plaza, Jalan Wan Kadir 3, Taman Tun Dr Ismail, 6000
Kuala Lumpur, Malaysia
Ordinary 100
Rolls-Royce Marine North America, Inc. Wilmington
8
Common Stock
100
Rolls-Royce Military Aero Engines Limited *
,2,6,10
London
3
Ordinary
100
Rolls-Royce New Zealand Limited c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Ordinary 100
Rolls-Royce North America (USA) Holdings Co. Wilmington
8
Common Stock
100
Rolls-Royce North America Holdings, Inc. Wilmington
8
Common Stock
100
Rolls-Royce North America Ventures, Inc. Wilmington
8
Common Stock
100
Rolls-Royce North America, Inc. Wilmington
8
Common Stock
100
*
Directly held by the Company
1
Though the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
2
Dormant entity.
3
Kings Place, 90 York Way, London, N1 9FX, England.
4
Entity in liquidation.
5
Though the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
6
Reporting year end is 31 March.
7
Moor Lane, Derby, Derbyshire, DE24 8BJ, England.
8
Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States.
9
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ended 31 December 2021. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
10
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ending 31 March 2022. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
11
The entity is not included in the consolidation as the Company does not have a beneficial interest in the net assets of the entity.
12
The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements).
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
145
Subsidiaries continued
Company name
Address
Class
of
shares
% of
class
held
Rolls-
Royce North American Technologies, Inc.
Wilmington
8
Common Stock 100
Rolls-Royce Oman LLC Bait Al Reem, Business Office #131, Building No 81, Way No 3409,
Block No 234, Al Thaqafa Street, Al Khuwair, PO Box 20,
Postal Code
103, Oman
Ordinary 100
Rolls-Royce Operations (India) Private
Limited
2, 6
Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi,
Ordinary
Ordinary 100
Rolls-Royce Overseas Holdings Limited * Derby
7
Ordinary
Ordinary A
100
100
Rolls-Royce Overseas Investments Limited Derby
7
Ordinary 100
Rolls-Royce Placements Limited London
3
Ordinary 100
Rolls-Royce Power Engineering plc * Derby
7
Ordinary 100
Rolls-Royce Power Systems AG Maybachplatz 1, 88045, Friedrichshafen, Germany Ordinary 100
Rolls-Royce Retirement Savings Trust
Limited *
,2,6
Derby
7
Ordinary 100
Rolls-Royce Saudi Arabia Limited PO Box 88545, Riyadh, 11672, Saudi Arabia Cash shares 100
Rolls-Royce Singapore Pte. Limited 6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,
Singapore
Ordinary 100
Rolls-Royce SMR Limited * Derby
7
Ordinary 91.2
Rolls-Royce Solutions (Suzhou) Co. Ltd 9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024, Jiang Su,
China
Ordinary 100
Rolls-Royce Solutions Africa (Pty) Limited 36 Marconi Street, Montague Gardens, Cape Town, 7441, South
Africa
Capital Stock 100
Rolls-Royce Solutions America Inc. Wilmington
8
Ordinary 100
Rolls-Royce Solutions Asia Pte. Limited 10 Tukang Innovation Drive, Singapore 618302 Ordinary 100
Rolls-Royce Solutions Augsburg GmbH Dasinger Strasse 11, 86165, Augsburg, Germany Capital Stock 100
Rolls-Royce Solutions Benelux B.V Merwedestraat 86, 3313 CS, Dordrecht, Netherlands Oridnary 100
Rolls-Royce Solutions Berlin GmbH Villa Rathenau, Wilhelminenhofstrasse 75, 12459 Berlin, Germany Common
Seed Preferred
Series A
Preferred
47.7
100
100
Rolls-Royce Solutions Brasil Limitada Via Anhanguera, KM 29203, 05276-000 Sao Paulo – SP, Brazil Ordinary 100
Rolls-Royce Solutions Enerji Deniz Ve
Savunma Hatira
Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy, Istanbul, Turkey
Rolls-Royce Solutions France S.A.S. Immeuble Colorado, 8/10 rue de Rosa Luxembourg-Parc des
Bellevues 95610, Erangy-sur-Oise, France
Ordinary 100
Rolls-Royce Solutions GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock 100
Rolls-Royce Solutions Hong Kong Limited No.8 Hart Avenue, Unit D, 8th Floor, Tsim Sha Tsui, Kowloon, Hong
Kong
Ordinary 100
Rolls-Royce Solutions Ibérica s.l.u Calle Copérnico 26–28, 28823 Coslada, Madrid, Spain Ordinary 100
Rolls-Royce Solutions Israel Limited 4 Ha’Alon Street, South Building, Third Floor, 4059300 Kfar Neter,
Israel
Ordinary 100
Rolls-Royce Solutions Italia S.r.l. Via Aurelia Nord, 328, 19021 Arcola (SP), Italy Capital Stock 100
Rolls-Royce Solutions Japan Co. Limited Resorttrust Building 4-14-3, Nishitenma Kita-ku, Osaka 530-0047,
Japan
Ordinary 100
Rolls-Royce Solutions Korea Limited 22nd Floor, Olive Tower, 41 Sejongdaero 9 gil, Junggu, 100-737
Seoul, Republic of Korea
Ordinary 100
Rolls-Royce Solutions Liège Holding S.A. Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary 100
Rolls
-
Royce
Solutions Liège S.A.
Rue de l’Avenir 61, 4460, Grace
-
Hollogne, Belgium
Ordinary
100
Rolls-Royce Solutions Magdeburg GmbH Friedrich-List-Strasse 8, 39122 Magdeburg, Germany Capital Stock 100
Rolls-Royce Solutions Middle East FZE S3B5SR06, Jebel Ali Free Zone, South P.O. Box 61141, Dubai, United
Arab Emirates
Ordinary 100
Rolls-Royce Solutions Ruhstorf GmbH Rotthofer Strasse 8, 94099 Ruhstorf a.d. Rott, Germany Capital Stock 100
Rolls-Royce Solutions South Africa (Pty)
Limited
36 Marconi Street, Montague Gardens, Cape Town, 7441, South
Africa
Ordinary 100
Rolls-Royce Solutions UK Limited Derby
7
Ordinary 100
Rolls-Royce Solutions Willich GmbH Konrad-Zuse-Str. 3, 47877, Willich, Germany Ordinary 100
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
146
Subsidiaries continued
Company name
Address
Class
of shares
% of
class
held
Rolls-Royce Sp z.o.o. * Opolska 100 31-323, Krakow, Poland Ordinary
100
Rolls-Royce Submarines Limited * Atlantic House, Raynesway, Derby, DE21 7BE, Derbyshire, England Ordinary
100
Rolls-Royce Technical Support Sarl Centreda I, Avenue Didier Daurat, 31700 Blagnac, Toulouse, France Ordinary
100
Rolls-Royce Total Care Services Limited *
,9
Derby
7
Ordinary
100
Rolls Royce Turkey Güç Çözümleri San. ve Tic.
Ltd.Şti.
Levazim Mahellesi, Koru Sokagi, Zorlu Center, No. 2 Teras Evler T2
D:204, Zincirlikuyu, Besiktas, Istanbul 34340, Turkey
Cash shares 100
Rolls-Royce UK Pension Fund Trustees Limited *
,2
Derby
7
Ordinary
100
Rolls-Royce Zweite Beteiligungs GmbH * Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock
100
Ross Ceramics Limited Derby
7
Ordinary
100
Servowatch Systems Limited Endeavour House, Benbridge Industrial Estate, Holloway Road,
Heybridge, Maldon, Essex, CM9 4ER, United Kingdom
Ordinary 100
Sharing in Growth UK Limited
11
Derby
7
Limited by
guarantee
100
Spare IPG 20 Limited
2
London
3
Ordinary
100
Spare IPG 21 Limited
2
London
3
Ordinary
100
Spare IPG 24 Limited
2
London
3
Ordinary
100
Spare IPG 32 Limited
2
London
3
7.25% Cumulative
Preference
Ordinary
100
Spare IPG 4 Limited
2
London
3
Ordinary
100
The Bushing Company Limited
2
London
3
Ordinary
100
Timec 1487 Limited
2
London
3
Ordinary
100
Turbine Surface Technologies Limited *
,11
Derby
7
Ordinary A
Ordinary B
Nil
100
Turborreactores S.A. de C.V. Acceso IV, No.6C, Zona Industrial Benito Juárez, Querétaro, 76120,
Mexico
Class A
Class B
100
Vessel Lifter, Inc.
2
Corporation Service Company, 1201 Hays Street, Tallahassee, Florida
32301, United States
Common Stock 100
Vinters Defence Systems Limited
2
London
3
Ordinary
100
Vinters Engineering Limited Derby
7
Ordinary
100
Vinters International Limited
9
Derby
7
Ordinary
100
Vinters Limited *
,9
Derby
7
Ordinary
100
Vinters-Armstrongs (Engineers) Limited
2
London
3
Ordinary
100
Vinters-Armstrongs Limited
2
London
3
Ordinary B
100
Yocova PTE. Ltd. * 6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,
Singapore
Ordinary 100
*
Directly held by the Company
1
Though the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
2
Dormant entity.
3
Kings Place, 90 York Way, London, N1 9FX, England.
4
Entity in liquidation.
5
Though the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
6
Reporting year end is 31 March.
7
Moor Lane, Derby, Derbyshire, DE24 8BJ, England.
8
Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States.
9
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ended 31 December 2021. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
10
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ending 31 March 2022. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
11
The entity is not included in the consolidation as the Company does not have a beneficial interest in the net assets of the entity.
12
The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements).
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
147
Joint ventures and Associates
Company name
Address
Class of
shares
% of
class
held
Group
interest
held %
Aero Gearbox International SAS *
,12
18 Boulevard Louis Sequin, 92700 Colombes, France Ordinary 50 50
Airtanker Holdings Limited Airtanker Hub, RAF Brize Norton, Carterton,
Oxfordshire, OX18 3LX, England
Ordinary
23 23
Airtanker Services Limited *
Airtanker Hub, RAF Brize Norton, Carterton,
Oxfordshire, OX18 3LX, England
Ordinary 23.5 23.5
Alpha Leasing (US) (No.2) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) (No.4) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) (No.5) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) (No.6) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) (No.7) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) (No.8) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Leasing (US) LLC
Wilmington
8
Partnership
(no equity
held)
– 50
Alpha Partners Leasing Limited
1 Brewer’s Green, London, SW1H 0RH, England Ordinary A 100 50
CFMS Limited
43 Queen Square, Bristol, BS1 4QP, England Limited by
guarantee
– 50
Clarke Chapman Portia Port
Services Limited
Maritime Centre, Port of Liverpool, Liverpool,
L21 1LA, England
Ordinary A 100 50
Consorcio Español para el Desarrollo
Industrial del Helicóptero de Ataque
Tigre, A.I.E.
Avda. de Aragón 404, 28022 Madrid, Spain Partnership
(no equity
held)
– 50
Consorcio Español para el Desarrollo
Industrial del Programa Eurofighter, A.I.E.
Paseo de John Lennon, s/n, edificio T22, 2ª planta, Getafe,
Madrid, Spain
Partnership
(no equity
held)
– 50
Egypt Aero Management Services
(in liquidation)
EgyptAir Engine Workshop, Cairo International Airport, Cairo,
Egypt
Ordinary 50 50
EPI Europrop International GmbH *
Pelkovenstr. 147, 80992 München, Germany Capital Stock 44 44
Eurojet Turbo GmbH *
Lilienthalstrasse 2b, 85399 Halbergmoos, Germany Ordinary 46 46
Force MTU Power Systems
Private Limited
Mumbai
Pune Road, Akurdi, Pune, Maharashtra 411035, India
Capital Stock
49
49
Genistics Holdings Limited *
Derby
7
Ordinary A 100 50
Global Aerospace Centre for Icing and
Environmental Research Inc.
12
1000 Marie-Victorin Boulevard, Longueuil Québec,
J4G 1A1, Canada
Ordinary 50 50
Hong Kong Aero Engine
Services Limited
33rd Floor, One Pacific Place, 88 Queensway,
Hong Kong
Ordinary 50 50
International Aerospace Manufacturing
Private Limited
6,1
2
Survey No. 3 Kempapura Village, Varthur Hobli, KA 560037,
India Bangalore,
Ordinary 50 50
Light Helicopter Turbine Engine Company
(unincorporated partnership)
Suite 119, 9238 Madison Boulevard, Madison, Alabama 35758,
United States
Partnership
(no equity
held)
– 50
MEST Co., Limited
97 Bukjeonggongdan 2-gil, Yangsan-si,
Gyeongsangnam-do, 50571, Republic of Korea
Normal 46.8 46.8
Metlase Limited * Unipart House, Garsington Road, Cowley,
Oxford, OX4 2PG, England
Ordinary B 100 20
MTU Cooltech Power Systems
Co., Limited
Building No. 2, No. 1633 Tianchen Road, Qingpu District,
Shanghai, China
Equity 50 50
MTU Power Systems Sdn. Bhd.
Level 10 Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr Ismail
6000 Kuala Lumpur, Malaysia
Ordinary A 100 49
MTU Turbomeca Rolls-Royce ITP GmbH *
Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 50 50
Financial Statements
Subsidiaries, Joint Ventures and Associates Rolls-Royce plc Annual Report 2021
148
Joint ventures and Associates continued
Company name Address
Class
of shares
% of
class
held
Group
interest
held %
MTU Turbomeca Rolls-Royce GmbH * Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 33.3
33.3
MTU Yuchai Power Company Limited No 7 Danan Road, Yuzhou, Yulin, Guangxi, China, 537005,
China
Capital Stock 50
50
N3 Engine Overhaul Services GmbH & Co
KG
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50
50
N3 Engine Overhaul Services
Verwaltungsgesellschaft Mbh
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50
50
Rolls Laval Heat Exchangers Limited *
,2
Derby
7
Ordinary 50
50
Rolls-Royce & Partners Finance (US) (No 2)
LLC
Wilmington
8
Partnership (no
equity held)
–
50
Rolls-Royce & Partners Finance (US) LLC Wilmington
8
Partnership (no
equity held)
–
50
SAFYRR Propulsion Limited *
,2
Derby
7
B Shares 100
50
Shanxi North MTU Diesel Co. Limited No.97 Daqing West Road, Datong City,
Shanxi Province, China
Ordinary 49
49
Singapore Aero Engine Services Private
Limited
11 Calshot Road, 509932, Singapore Ordinary 50
50
Taec Ucak Motor Sanayi AS Buyukdere Caddesi, Prof. Ahmet Kemal Aru, Sokagi Kaleseramik,
Binasi Levent No. 4, Besiktas, Istanbul, Turkey
Cash Shares 49
49
Techjet Aerofoils Limited
12
Tefen Industrial Zone, PO Box 16, 24959, Israel Ordinary A
Ordinary B
50
50
50
Texas Aero Engine Services LLC
2
The Corporation Trust Company, 1209, Orange Street,
Wilmington, Delaware 19801, United States
Partnership (no
equity held)
–
50
TRT Limited * Derby
7
Ordinary B 100
50
Turbo-Union GmbH * Lilienthalstrasse 2b, 85399 Halbergmoos, Germany Capital Stock 40.0
40.0
United Battery Management GmbH Wilhelminenhofstr. 76/77, 12459, Berlin, Germany Ordinary 30
25.7
Xian XR Aero Components Co., Limited *
,11
Xujiawan, Beijiao, Po Box 13, Xian 710021, Shaanxi, China Ordinary 49
49
*
Directly held by the Company
1
Though the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
2
Dormant entity.
3
Kings Place, 90 York Way, London, N1 9FX, England.
4
Entity in liquidation.
5
Though the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records a non-
controlling interest.
6
Reporting year end is 31 March.
7
Moor Lane, Derby, Derbyshire, DE24 8BJ, England.
8
Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States.
9
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ended 31 December 2021. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
10
Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the financial year ending 31 March 2022. The Company will issue a guarantee pursuant to
s479A in relation to the liabilities of the entity.
11
The entity is not included in the consolidation as the Company does not have a beneficial interest in the net assets of the entity.
12
The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements).
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
149
Independent auditors’ report to the members of Rolls-Royce plc
Report on the audit of the financial statements
Opinion
In our opinion:
– Rolls-Royce plc’s consolidated financial statements and company financial statements (the “financial statements”) give a true and
fair view of the state of the group’s and of the company’s affairs as at 31 December 2021 and of the group’s profit and the group’s
cash flows for the year then ended;
– the consolidated financial statements have been properly prepared in accordance with UK-adopted international accounting
standards;
– the company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and company balance
sheets as at 31 December 2021; the consolidated income statement, the consolidated and company statement of comprehensive income,
the consolidated cash flow statement, and the consolidated and company statements of changes in equity for the year then ended; and
the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee of Rolls-Royce Holdings plc (the company’s ultimate parent
company).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
During the period, we identified that we had been involved in the administrative preparation and filing of a subsidiary company’s annual
return under local company law, which is a prohibited service under paragraph 5.40 of the FRC’s Ethical Standard. The service related
to an immaterial subsidiary that did not form part of our evidence in respect of the group audit.
We confirm that based on our assessment of the breach, nature and scope of the service and the subsequent action taken, the provision
of this service has not compromised our professional judgement or integrity and as such believe that an objective, reasonable and
informed third party in possession of these facts would conclude that our integrity and objectivity has not been impaired and
accordingly we remain independent for the purposes of the audit.
Other than the matter referred to above, to the best of our knowledge and belief, we declare that no non-audit services prohibited by
the FRC’s Ethical Standard were provided to the group or the company.
Other than those disclosed in note 6 to the consolidated financial statements, we have provided no non-audit services to the company
or its controlled undertakings in the period under audit.
Our audit approach
Context
There is significant interest from stakeholders including members about how climate change will affect the group’s businesses and its
future financial performance. The Sustainability section of the Rolls-Royce Holdings plc Strategic report describes the group’s
decarbonisation strategy and explains how climate change could have a significant impact on the group’s businesses but also provides
a number of significant opportunities. Rolls-Royce Holdings plc has publicly set out its 2030 net carbon zero from operations (excluding
product testing and development) and net zero 2050 commitments and has a strategy aligned to meeting these albeit the pathway to
the 2050 net zero target is not fully developed.
A number of financial risks could arise from both the physical and transitional risks due to climate change. Management, assisted by an
independent expert, has evaluated these as disclosed in the Sustainability section of the Rolls-Royce Holdings plc Strategic report. This,
with further analysis has then informed the evaluation of financial risks that have been reflected by management in the preparation of
the financial statements, or where appropriate allowed it to conclude there is no material impact. The future financial impacts are clearly
uncertain given the timeframe involved and their dependency on how Governments, global markets, corporations and society respond
to the issue of climate change. Accordingly, financial statements cannot capture all possible future outcomes as these are not yet known.
As part of our audit we understood the process management and its expert on climate change undertook to support the disclosures
made within the Sustainability section of the Rolls-Royce Holdings plc Strategic report (including its TCFD disclosures) and its
assessment of the impact on the financial statements. Using our knowledge of the business and with assistance from our internal climate
and valuation experts, we evaluated management’s risk assessment, its estimates as described in note1 of the consolidated financial
statements and resulting disclosures where significant.
The key areas of the financial statements where management evaluated that climate change has a potential significant impact, taking
into account the group’s 2030 and 2050 commitments, are:
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
150
– Long term contract accounting in the UK Civil business (including contract loss provisions);
– The recoverability of deferred tax assets in the UK; and
– The recoverability of the carrying value of goodwill and certain intangible assets.
Where significant further details of how climate change has been considered in the above areas and our audit response is given in the
key audit matters that follow. The impact of climate change in respect of the impairment assessments for goodwill and certain intangible
assets did not give rise to an impairment or result in the assessment being sensitive to reasonably possible changes in key assumptions
in those assessments including a sensitivity to reflect the impact of the group’s 1.5
0
C scenario aligned to the Paris Agreement that has
been used in the Rolls-Royce Holdings plc TCFD disclosures. We also considered the impact of climate change in the Directors’
assessments of going concern and viability and the associated disclosures in the going concern and viability statements within the
Directors’ report.
Overview
Audit scope
– Following our assessment of the risks of material misstatement of the consolidated financial statements we subjected 37 individual
components (including three joint ventures) to full scope audits for group purposes, which following an element of sub-
consolidation, equates to 16 group reporting opinions. In addition, targeted specified procedures were performed for eight
components.
– In addition, the group engagement team audited the company and other centralised functions including those covering the group
treasury operations, corporate costs, corporate taxation, post-retirement benefits, and certain goodwill and intangible asset
impairment assessments. The group engagement team performed audit procedures over the group consolidation and financial
statements disclosures and performed group level analytical procedures over out of scope components.
– The components on which full scope audits, targeted specified procedures and centralised work was performed accounted for 93%
of revenue from continuing and discontinued operations, 82% of loss before tax from continuing and discontinued operations and
86% of total assets.
– Central audit testing was performed where appropriate for reporting components in group audit scope who are supported by the
group’s Finance Service Centres (FSCs).
– As part of the group audit supervision process, the group engagement team performed 13 virtual file reviews, which included
meetings on approach and conclusions with the component teams and review of their audit files and final deliverables. In person
site visits to component teams in the UK and US and a virtual site visit to a component team in Germany were also performed.
– As the company comprises a number of the UK components that were in scope for the group audit we leveraged that work for the
purposes of the company audit and performed additional testing on how the company related components were combined, with
appropriate eliminations made, to form the company financial statements. Our work performed accounted for 98% of the total assets
of the company.
Key audit matters
— Long-term contract accounting and associated provisions (group and company)
— Deferred tax asset recognition and recoverability (group and company)
— Translation of foreign-currency denominated transactions and balances (group and company)
— Presentation and accuracy of underlying results and disclosure of other one-off items (including exceptional items) (group)
— Determination of ITP Aero disposal group (group)
— Accounting treatment and related consolidation adjustments for Civil engine sales to related entities (group and company).
Materiality
— Overall group materiality: £80m (2020: £70m) based on approximately 0.6% of four year average underlying revenues from
continuing and discontinued operations.
— Overall company materiality: £76m (2020: £66m) based on approximately 1.0% of four year average revenues.
— Performance materiality: £60m (2020: £53m) (group) and £57m (2020: £50m) (company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Determination of the ITP Aero disposal group and the accounting treatment and related consolidation adjustments for Civil engine sales
to related entities are new key audit matters this year. Recoverability of accounts receivable and contract assets, recoverability of
intangible programme assets, ability of the group and company to continue as a going concern and impact of the COVID-19 pandemic,
which were key audit matters last year, are no longer included because of developments in the industry and the outlook since 2020.
The group recorded £481m of impairments to development expenditure in the year ended 31 December 2020 which included those
programmes most sensitive to changes in forecasts. Following additional liquidity raised by the group in the year and the timing of the
next debt maturity, we did not consider the ability of the company or group to continue as a going concern to be a key audit matter.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
151
Notwithstanding this, we audited management's assessment as detailed in the relevant section below. We have captured the impact of
COVID-19, where applicable, separately in the individual key audit matters below. Otherwise, the key audit matters below are consistent
with last year.
Key audit matter How our audit addressed the key audit matter
Long-term contract accounting and associated provisions
(group and company)
Note 1 to the consolidated and company financial
statements – Accounting policies – Revenue recognition
The Civil Aerospace and Defence businesses operate
primarily with long-term customer contracts that span
multiple periods. These long-term contracts require a
number of assumptions to be made in order to determine
the expected lifetime revenue and costs of the contract
and the amounts of revenue and profit that are recognised
in each reporting period.
Small adjustments can have a significant impact on the
results of an individual financial year. In addition, changes
to the operating condition of engines such as changes in
route structure can result in different performance
assumptions and hence cost profiles which impact the
expected profitability of a contract.
For Defence, long term contracts tend to be for a fixed
price or based on a cost plus or target cost reimbursement
for qualifying costs and there are also some flying hours
arrangements. For Civil Aerospace aftermarket contracts,
cash is earned based on engine flying hours, which
requires management to estimate future engine flying
hours (EFH) and associated pricing in order to arrive at the
total income expected over the life of a contract. There
remains uncertainty over the speed and shape of recovery
in EFH for large engines. The group expects international
passenger traffic to reach 2019 levels in late 2024.
In addition, the profitability of aftermarket contracts
typically assumes that there will be cost improvements over
the lifetime (15–25 years) of the programmes. Significant
judgement needs to be applied in determining time-on-
wing, whether incremental costs should be treated as
wastage or are part of the ongoing cost of servicing a
contract, future exchange rates used to translate foreign
currency income and costs and other operating
parameters used to calculate the projected life cycle.
These future costs are also risk adjusted to take into
account forecasting accuracy which represents an
additional judgement.
At the development stage of a programme, agreements are
entered into with certain Civil suppliers to share in the risk
and rewards of the contracts (Risk and Revenue Sharing
Partners – ‘RRSP’). This can involve upfront participation
fees from the RRSP that are amortised over the engine
production phase. In addition, specified revenue and costs
are recorded in the consolidated income statement net of
the RRSP’s share.
The nature of the Civil Aerospace business gives rise to a
number of contractual guarantees, warranties and
potential claims, including the in-service issues of the Trent
1000 programme. The accounting for these can be
complex and judgemental and may impact the results of the
group and company immediately or over the life of the
contract. The valuation of provisions for the associated
amounts may be judgemental and needs to be considered
on a contract by contract basis.
Management has engaged a third party expert to model the
potential impact of climate change on its forecasts and has
incorporated these estimates into the long-term
We focused our work on a number of contracts where we
consider there to be the highest degree of management
judgement or estimation and designed specific procedures
over the long-term contract accounting targeted at the
associated risks. We also sample tested the remaining
population of contracts. This approach was applied in the
Civil Aerospace and Defence businesses and was
substantive in nature. The audit procedures performed
included:
— We attended meetings with Civil Aerospace and
Defence engine programme and customer contract
managers in order to understand the operational
matters impacting the performance of specific
contracts and any amendments to contractual
arrangements required by changes to underlying
expectations of performance;
— We obtained and read the relevant sections of a
sample of contracts to understand the key terms
including performance obligations and pricing
structures;
— We assessed how management had forecast the speed
and shape of the recovery of engine flying hours
including by considering the downside scenarios
modelled and comparing the assumptions to industry
data;
— We challenged management’s judgments and
associated risk adjustments relating to the risk of
customer default and insolvency, the risk of airlines
parking more mature aircraft as a result of COVID-19
and climate change concerns and the ability for
contractual protection clauses to be enforced across
the customer portfolio;
— We re-performed the calculations used to determine
the degree of completion for a sample of contracts
and this was also used in assessing the magnitude of
any catch-up adjustments;
— We compared the previously forecast results of a
sample of contracts with the actual results to assess
the performance of the contract and the historical
accuracy of forecasting;
— We verified a sample of costs incurred to third party
documentation in order to test the assessment of the
forecast costs to complete;
— We assessed the assumptions relating to life cycle cost
reductions to determine the likelihood of realisation
and where relevant the speed at which they would be
achieved, including the impact on the number of shop
visits, validating these assumptions directly with the
senior programme engineers;
— We obtained support for the risk adjustments made in
respect of future costs and challenged management’s
assumptions through assessment against historical
performance, known technical issues and the stage of
completion of the programme;
— Where disruption has resulted in payments to
customers we validated the settlement to contractual
agreements, considered the terms of previous
settlements, correspondence with customers, the
forecast period of further aircraft being on the ground
and the completeness of this liability;
— We challenged the assessment of provisions for loss
making or onerous contracts to determine the
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
152
Key audit matter How our audit addressed the key audit matter
contract models. This included an assessment of the impact
on aviation demand, the potential impact of carbon prices
on the group’s direct emissions and those of its suppliers,
and the potential impact of climate change on commodity
prices in cost estimates. The impact of climate change on
long-term contracts is highly uncertain and requires
estimates on carbon prices, the cost and speed of
decarbonisation, the ability of the group and its suppliers
to pass on incremental costs.
completeness of the unavoidable costs to fulfil the
contractual obligations including an assessment of the
discount rates used and how management has
considered the potential impact of climate change;
— We assessed the sensitivity of the Trent 1000 provision
to reasonable changes in estimates, particularly in
respect of the repair and overhaul facility capacity,
technical cost creep on the known issues and cost
outturns against previous provisions, in determining
whether the provision was sufficient;
— We read and understood the key terms of a sample of
RRSP contracts to assess whether revenue and costs
had been appropriately reflected, net of the share
attributable to the RRSP;
— With assistance from our valuation experts, we
considered the appropriateness of the key
assumptions used by management’s expert to model
the impact of climate change, including the
reasonableness of the carbon and commodity price
forecasts. We validated management’s assertions on
the ability of suppliers and the group to pass on
incremental costs by reviewing a sample of supplier
and customer contracts for price change mechanisms.
Where appropriate we performed independent
sensitivity analysis to determine to what extent
reasonably possible changes in these assumptions
could result in material changes to the revenue
recorded in the year and assessed the
appropriateness of the associated disclosures;
— We considered whether there were any indicators of
management override of controls or bias in arriving at
their reported position; and
— We also assessed the adequacy of disclosures in note
1 of the key judgements and estimates involved in long-
term contract accounting.
Based on the work performed, we concur that management’s
estimates for long-term contract accounting and associated
provisions and its disclosures of the key estimates and
judgements involved are materially appropriate.
Deferred tax asset recognition and recoverability (group
and company)
Note 1 to the consolidated and company financial
statements – Accounting policies – Taxation and note 5 to
the consolidated financial statements – Taxation
The recognition and recoverability of deferred tax assets
in Rolls-Royce plc is a significant judgement. Rolls-Royce
plc has recognised significant deferred tax assets on the
basis of expected future levels of profitability. The
magnitude of the assets recognised, which largely
increased in the year as a result of the substantial
enactment of the change in UK corporation tax rate from
19% to 25% from 1 April 2023, necessitates the need for a
number of assumptions in assessing the future levels of
profitability in the UK over an extended period.
The additional UK loss recorded for 2021, along with the
existence of tax losses brought forward and other deductible
temporary differences in Rolls-Royce plc, combined with the
impact of COVID-19 and climate change on future forecasts,
presents a heightened risk that deferred tax assets
previously recognised may not be recoverable. Since the
recognised deferred tax asset is recoverable over a long
period, management has reflected its assessment of the
impact of climate change within the model forecasting
probable taxable profits. This incorporates multi
ple
We evaluated management’s methodology for assessing the
recognition and recoverability of deferred tax assets,
including the ability to offset certain deferred tax liabilities
and deferred tax assets. Where recognition is supported by
the availability of sufficient probable taxable profits in future
periods against which the asset can be utilised in future
periods, our evaluation of these future profits considered
both the business model and the applicable UK tax
legislation.
We tested the increase in the opening UK deferred tax asset
balance as a result of the increase in the UK corporation tax
rate.
We assessed the future profit forecasts and the
underpinning assumptions including management’s risk
weighting of profit forecasts in Rolls-Royce plc and tested
the reasonableness of the assumptions and forecasts for
periods beyond the normal five year forecasting horizon.
Where applicable we assessed the consistency of the
forecasts used to justify the recognition of deferred tax
assets to those used elsewhere in the business, including for
long-term contract accounting, impairment assessments, or
for the Directors’ viability and going concern statements.
We also assessed the risk adjustments applied by
management to these profit forecasts to future periods that
are significantly further in time than the group’s normal five
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
153
Key audit matter How our audit addressed the key audit matter
assumptions including future carbon prices, commodity
prices, the impact on aviation demand, the cost and speed of
decarbonisation and the ability of suppliers and Rolls-Royce
plc to pass on price changes. To assess the impact of
inherent uncertainty it has performed sensitivities over key
estimates.
year forecasting process and considered whether these
appropriately reflect the estimation risk in the longer term
forecasts.
We challenged management to incorporate climate change
as part of their probability weighted scenarios to forecast
probable profit levels. As described in the long-term
contract accounting and associated provisions key audit
matter, this included deploying valuation experts to assess
the reasonableness of carbon pricing and commodity
assumptions as well as the comparison of forecast aviation
demand to third party sources. We considered the
likelihood that the group and its suppliers would be able to
pass on incremental climate related costs in the short,
medium and longer term and verified that management’s
forecasts included the costs arising from the group’s stated
commitment to reach net zero for direct emissions by 2030.
We requested that management perform additional
sensitivity analysis to understand whether reasonably
possible changes to these assumptions could lead to a
material change in the recognised asset and where
appropriate ensured that adequate disclosure was
provided.
We assessed the treatment of the losses that are realised or
unrealised on the group’s hedge book and whether they
were treated appropriately and how they are recovered
using the same profit forecasts.
We also assessed the adequacy of disclosures over this area,
particularly the impact of changes in key estimates of the
asset recognised and this has been disclosed in notes 1 and
5 of the consolidated financial statements and note 16 of the
company financial statements.
We did not identify any material uncorrected exceptions from
our audit work.
Translation of foreign-currency denominated transactions
and balances (group and company)
In addition to our testing in other areas of the various
financial statement line items, we performed the following
specific audit procedures over this area:
— Obtained an understanding of the process employed
by management to correctly record the translation of
foreign currency balances and transactions;
— Tested on a sample basis the manual calculations of
the adjustment needed to correctly record the
translation of the foreign currency denominated
transactions and balances;
— Sampled balances and transactions requiring
adjustment by source currency and tested to source
data and assessed the completeness of these balances
and transactions;
— Created an independent expectation of the gain/loss
on the translation of monetary assets and liabilities
based on the movements in the group’s key exchange
rates and associated balances in the year;
— Agreed the exchange rates used in management’s
translation adjustments to an independent source; and
— For each adjustment sampled, assessed whether the
foreign currency denominated balance or transaction
was translated at the appropriate exchange rate
depending on its nature.
There were no material uncorrected exceptions from our audit
work.
Note 1 to the consolidated and company financial
statements – Accounting policies – Foreign currency
translation
Foreign exchange rate movements influence the reported
consolidated income statement, the consolidated cash flow
statement and the consolidated and company balance
sheets. One of the company’s primary accounting systems
that is used by it and a number of its subsidiaries translates
transactions and balances denominated in foreign
currencies at a fixed budget rate for management
information purposes. Foreign currency denominated
transactions and balances are then re-translated to actual
average and closing spot rates through manual
adjustments. Due to the manual nature of the process and
significance of the recurring adjustments needed there is
a risk that transactions and balances denominated in
foreign currencies are incorrectly translated in the
consolidated and company financial statements.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
154
Key audit matter How our audit addressed the key audit matter
Presentation and accuracy of underlying results and
disclosure of other one-off items (including exceptional
items) (group)
We considered the judgements taken by management to
determine what should be treated as a one-off or
exceptional item and the translation of foreign currency
amounts and obtained corroborative evidence for these.
We also considered whether there were items that were
recorded within underlying profit that are exceptional in
nature and should be reported as an exceptional item. No
such material items were identified. As part of this
assessment we challenged management’s rationale for the
designation of certain items as exceptional or one-off and
assessed such items against the group’s accounting policy,
considering the nature and value of those items.
Within underlying results, foreign currency transactions are
presented at rates achieved on derivative contracts
hedging the net operating cash flows of the group and
monetary assets and liabilities are retranslated at rates
forecast to be achieved on derivative contracts when the
associated cash flows occur. We agreed these forecast
rates to the profile of the derivatives that are expected to
mature in the future and tested their application to the
relevant monetary assets and liabilities.
We audited the reconciling items between the underlying
profit before tax and free cash flow disclosed in note 27
including verifying that the items adjusted for are consistent
with the prior period. We also considered whether free cash
flow contains material one-off items which require further
disclosure.
We assessed the appropriateness and completeness of the
disclosures of the impact of one-off or non-underlying items
primarily in notes 1, 2, 4 and 27 to the consolidated financial
statements and found them to be appropriate. This included
assessing the explanations management provided on the
reconciling items between underlying performance and
statutory performance in Note 2. We also assessed the
appropriateness of excluding the results of ITP Aero from
underlying profit, reflecting the internal reporting of the
group and considered the associated disclosure explaining
the change.
Overall we found that the classification judgements made by
management were in line with their policy for underlying
results and exceptional items, had been consistently applied
and there are no material uncorrected misstatements
resulting from our testing.
Note 1 to the consolidated financial statements – Accounting
policies – Presentation of underlying results, note 2 to the
consolidated financial statements – Segmental analysis and
note 27 to the consolidated financial statements – Derivation
of summary of funds flow statement
In addition to the performance measures prescribed by
International Financial Reporting Standards, the group also
presents its results on an underlying basis, as the Directors
believe this better reflects the performance of the group
during the year. The group also presents a free cash flow
metric which the Directors believe reflects the cash
generated from underlying trading; this differs from the cash
flows presented in the consolidated cash flow statement.
The underlying results differ from the reported statutory
results and are used extensively to explain performance to
the shareholders. Alternative performance measures can
provide investors with a better understanding of the group’s
performance if consistently calculated, properly used and
presented. However, when improperly used and presented,
these non-GAAP measures can mislead investors and may
mask the real financial performance and position. There is
judgement on whether items should be excluded from
underlying profit or free cash flow.
A key adjustment between the statutory results and the
underlying results relates to the foreign exchange rates used
to translate foreign currency transactions and balances. The
underlying results reflect the achieved rate on foreign
currency derivative contracts settled in the period and
retranslates assets and liabilities at the foreign currency
rates at which they are expected to be realised or settled in
the future. As the group can influence which derivative
contracts are settled in each reporting period it has the
ability to influence the achieved rate and hence the
underlying results. This risk is more limited for free cash flow
as there are a small number of items that are excluded from
free cash flows.
During the year, the group excluded a number of items from
underlying profit before tax including £105m of credits from
the net release of onerous contracts and Trent-1000
provisions and a net £45m of credits associated with lower
restructuring costs.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
155
Key audit matter How our audit addressed the key audit matter
Determination of ITP Aero disposal group (group)
We assessed the appropriateness of classifying ITP Aero as a
discontinued operation held for sale based on the progress of
the sale. This included validating management’s judgement on
the likelihood of the disposal through reviewing the sales
agreement and understanding the status of the transaction,
including the required regulatory approval.
We considered the restructuring made to contractual
arrangements by the group prior to the sale of ITP Aero,
including the transfer of businesses to the disposal group. We
validated that these changes and the impact of intra-group
trading had been appropriately eliminated in arriving at the
consolidated results for the group.
We also validated management’s judgement that the impact of
intra-group trading should be eliminated against the results
of the discontinued operation, which most closely reflects the
relationship the continuing group will have with ITP Aero
following its sale.
We assessed the adequacy of the disclosures in the notes to
the consolidated financial statements explaining this change.
We found them, along with the classifications, to be materially
appropriate in the context of the consolidated financial
statements when taken as a whole.
Note 1 to the consolidated financial statements – Accounting
policies – Discontinued operations and note 26 to the
consolidated financial statements – Assets held for sale and
discontinued operations
Following the group’s announcement of the planned sale of
ITP Aero, the business was classified as a discontinued
operation held for sale. This resulted in the assets and
liabilities being recognised as held for sale within the
consolidated balance sheet and the results being presented
within the loss from discontinued operations line on the
consolidated income statement.
There remains significant trading between ITP Aero and the
rest of the group which is required to be eliminated when
arriving at the group’s results. Whether these adjustments
should be classified within balances held for sale is
judgemental and dependent on the structure of the business
post disposal. Further, additional adjustments were required
to be recorded in 2021 to reflect commercial restructuring
between ITP Aero and the rest of the group prior to disposal.
Accounting treatment and related consolidation
adjustments for Civil engine sales to related entities (group
and company)
Note 1 to the consolidated and company financial
statements – Accounting policies – Revenue recognition
The group and company has historically made engine sales
to related entities. In 2021, a new related entity was
established, which will provide in some instances spare
engine capacity to the group and company to support its
installed fleet. A limited number of engine sales were made
to this related entity in the year, which are expected to
increase in the future.
In order for revenue to be recognised on engine sales to
related entities, these entities cannot be controlled by Rolls-
Royce and control of the engines must have passed from the
company and its subsidiaries to the related entity. There is
significant judgement whether this is the case based on the
terms of the sale, any ongoing arrangement and the
structure of the entity.
Accounting standards require the group’s share of
unrealised profit on sales to related entities to be eliminated
and therefore the value of sales and the related unrealised
profit need to be accurately reflected within the group’s
consolidation adjustments.
We considered management’s assessment of whether the
related entity was controlled by Rolls-Royce by reference to
its articles of association, the indirect shareholding and the
influence that Rolls-Royce has over the direction and strategy
of the entity.
We obtained and reviewed the engine sales contract and the
capacity agreement setting out the ongoing arrangement
between Rolls-Royce and the new related entity, as well as
management’s assessment of whether control of the engines
and transfer of risks and reward of ownership, can be
demonstrated. In assessing this, we considered:
— The rights of the related entity to choose how engines
are utilised and any commitments of the ongoing
capacity agreement;
— The commercial structure of the ongoing arrangement
including commitments made and penalty arrangements;
and
— Whether Rolls-Royce remained exposed to risks
associated with engine ownership following the sale
including non-utilisation of engines, the risk to
movements in the end of life engine value, the risk to
damage or misuse to the engine and whether Rolls-
Royce is committed to buy back the engines.
We also considered whether there are any side agreements
between Rolls-Royce and the related entity which may alter
the main contract arrangements through our enquiries with
management, review of meeting minutes and our audit
procedures in other areas and did not identify any such
arrangements.
We verified that the group’s share of unrealised profit from
engine sales to related entities has been appropriately
eliminated from the group’s profit in the year.
We reviewed the group’s disclosure of the engine sales to
related entities including the key judgement disclosed in note
1 and transactions with related parties disclosed in note 25 and
found these to be appropriate.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
156
Key audit matter How our audit addressed the key audit matter
As a result of our work we did not identify any material
exceptions from the treatment or disclosure of engine sales to
related entities.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements
as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry
in which they operate.
Our scoping is based on the group’s consolidation structure. We define a component as a single reporting unit which feeds into the
group consolidation. Of the group’s 427 reporting components, 37 individual components (including three joint ventures) were subject
to full scope audits for group purposes, which following an element of consolidation, equates to 16 group reporting opinions. In addition,
targeted specified procedures were performed for eight components.
The group operates Finance Service Centres (FSCs) to bulk process financial transactions in Derby (UK), Indianapolis (US) and Bengaluru
(India). Based on our assessment it is not possible to fully test revenue and profit centrally as certain key processes, such as long-term
contracting, remain within the business due to their nature and are not handled by the FSCs.
Our group audit covered 93% of revenue from continuing and discontinued operations, 82% of loss before tax from continuing and
discontinued operations and 86% of total assets. All entities that contribute in excess of 1% of the group’s revenue were included in full
scope.
Further specific audit procedures over central functions, the group consolidation and areas of significant judgement (including
corporate costs, corporate taxation, certain goodwill and intangible asset impairment assessments, treasury and post-retirement
benefits) were directly led by the group engagement team.
Where work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at
those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion
on the consolidated financial statements.
We issued formal written instructions to all component auditors setting out the audit work to be performed by each of them and
maintained regular communication with the component auditors throughout the audit cycle. These interactions included attending
certain component clearance meetings and holding regular conference calls, as well as reviewing and assessing any matters reported.
The group engagement team also reviewed selected audit working papers for certain component teams to evaluate the sufficiency of
audit evidence obtained and fully understand the matters arising from the component audits.
In addition, senior members of the group engagement team visited component teams across the UK, US and Germany. These visits were
in-person for the UK and US and virtual in Germany due to COVID-19 pandemic related restrictions. They included meetings with the
component auditor and attendance at component clearance meetings.
Our group audit scoping took into account the fact that the company financial statements comprise several of the UK components
together with a central function, the group work is therefore leveraged for the audit of the company financial statements. Additional
audit procedures were also performed by the group audit team on the combination of these UK components and central functions,
together with appropriate eliminations, to form the company financial statements.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
157
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Financial statements - group Financial statements - company
Overall
materiality
£80m (2020: £70m). £76m (2020: £66m).
How we
determined it
Based on approximately 0.6% of four year average
underlying revenues from continuing and
discontinued operations
Based on approximately 1.0% of four year average
revenues
Rationale for
benchmark
applied
We have consistently used underlying revenue to
determine materiality as opposed to a profit based
benchmark. This is because there is considerable
volatility in profit before tax as a result of revenue
recognition under IFRS 15 and from the fair value
movement in the group’s derivatives. Underlying
revenue continues to be a key performance metric
for the group and is much less volatile than the
profit metric. However, from 2020 COVID-19
introduced additional volatility that impacted
benchmarks. To mitigate this we have used a four
year average underlying revenue measure to
calculate materiality. ITP Aero, which is classified as
a discontinued operation, contributed a full year’s
results and remained part of the group at 31
December 2021. Therefore, in our view, it is
appropriate to continue to take the results of this
business into account when determining our
materiality.
We have consistently used revenue to determine
materiality as opposed to a profit based benchmark.
This is because there is considerable volatility in
profit before tax as a result of revenue recognition
under IFRS 15 and from the fair value movement in
the company’s derivatives. Revenue continues to be
a key performance metric for the group and is
much less volatile than the profit metric. However,
from 2020 COVID-19 introduced additional volatility
that impacted benchmarks. To mitigate this we have
used a four year average revenue measure to
calculate materiality.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range
of materiality allocated across components was between £5m and £74m. Certain components were audited to a local statutory audit
materiality that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% (2020: 75%) of overall materiality, amounting to £60m (2020: £53m) for the group
financial statements and £57m (2020: £50m) for the company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee of Rolls-Royce Holdings plc that we would report to them misstatements identified during our
audit above £3m (group audit) (2020: £3m) and £3m (company audit) (2020: £3m) as well as misstatements below those amounts that, in
our view, warranted reporting for qualitative reasons.
Conclusions relat ing to going concern
Our evaluation of the directors’ assessment of the group's and the company’s ability to continue to adopt the going concern basis of
accounting included:
— Testing the model used for management’s going concern assessment which is primarily a liquidity assessment given there are no
significant financial covenants in its committed debt facilities. Management’s assessment covered the 18 months to August 2023. We
focussed on this period and also considered the forecast liquidity in the subsequent four months to the end of 2023.
— Management’s base case forecasts are based on its normal budget and forecasting process for each of its businesses for the next
five years. We understood and assessed this process by business including the assumptions used for 2022 and 2023 and assessed
whether there was adequate support for these assumptions. We also considered the reasonableness of the monthly phasing of cash
flows. A similar assessment was performed of the downside cash flows, including understanding of the scenarios modelled by
management, how they were quantified and the resultant monthly phasing of the downside cash flow forecasts.
— We read and understood the key terms of all committed debt facilities to understand any terms, covenants or undertakings that may
impact the availability of the facility.
— Using our knowledge from the audit and assessment of previous forecasting accuracy we calculated our own sensitivities to apply
to management's cash flow forecasts. We overlaid these on management’s forecasts to arrive at our own view of management’s
downside forecasts. This included consideration of management's assessment of the impact of climate change and the likelihood of
any downside risks crystallising in the period to August 2023.
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
158
— We assessed the adequacy of disclosures in the Going Concern statement and statements in note 1 of the consolidated and company
financial statements and found these appropriately reflect the key areas of uncertainty identified.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the group's and the company’s ability to continue as a going concern for a period of at
least twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the
company's ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this
report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required
to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of
the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’
report for the year ended 31 December 2021 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements.
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we
did not identify any material misstatements in the Strategic report and Directors’ report.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities in respect of the Financial Statements, the directors are responsible
for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true
and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations
related to tax compliance legislation, the regulations of country aviation authorities such as the Civil Aviation Authority, import and
export restrictions (including International Traffic in Arms Regulations), and the UK Bribery Act, and we considered the extent to which
non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a
direct impact on the financial statements such as the Companies Act 2006, and tax legislation. We evaluated management’s incentives
and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined
that the principal risks were related to : (1) posting inappropriate journal entries to manipulate financial results; (2) management bias in
accounting estimates such as long-term contract accounting and associated provisions and deferred tax asset recognition; (3) the sale
of Civil engines to related entities for no clear commercial purpose or above market prices; and (4) inappropriately including or
excluding transactions from the group's underlying or free cash flow alternative performance metrics. The group engagement team
Independent Auditors’ Report Rolls-Royce plc Annual Report 2021
159
shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such
risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:
— Discussions throughout the year with management, internal audit, the group’s internal and external legal counsel, and the head of
ethics and compliance, including consideration of known or suspected instances of non-compliance with laws and regulation and
fraud;
— Reading the minutes of the Rolls-Royce Holdings plc Safety, Ethics & Sustainability committee and assessment of 'speak-up' matters
reported through the Rolls-Royce Ethics Line and the results of management’s investigation of such matters;
— Reading the minutes of Board meetings to identify any inconsistencies with other information provided by management;
— Reviewing legal expense accounts to identify significant legal spend that may be indicative of non-compliance with laws and
regulations;
— Challenging assumptions and judgements made by management in determining significant accounting estimates (because of the
risk of management bias), in particular in relation to long-term contract accounting and associated provisions and the recoverability
of deferred tax assets (see related key audit matters above);
— Testing the purpose and the pricing of sales of spare engines to related entities;
— Understanding and evaluating changes in processes and controls as a result of the COVID-19 pandemic;
— Identifying and testing unusual journal entries, in particular journal entries posted with unusual account combinations, and testing
all material consolidation journals; and
— Challenging why certain items are excluded or included from underlying profit or free cash flow.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-
compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also,
the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud
may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We
will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling
to enable us to draw a conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Other required rep orting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
— we have not obtained all the information and explanations we require for our audit; or
— adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from
branches not visited by us; or
— certain disclosures of directors’ remuneration specified by law are not made; or
— the company financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee of Rolls-Royce Holdings plc, we were appointed by the members on 3 May 2018
to audit the financial statements for the year ended 31 December 2018 and subsequent financial periods. The period of total
uninterrupted engagement is four years, covering the years ended 31 December 2018 to 31 December 2021.
Other matter
As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements form
part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in
accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether the
annual financial report has been prepared using the single electronic format specified in the ESEF RTS.
Ian Chambers (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
25 February 2022
Other Financial Information Rolls-Royce plc Annual Report 2021
160
Other Financial Information
Foreign exchange
Foreign exchange rate movements influence the reported
income statement, the cash flow and closing net funds balance.
The average and spot rates for the principal trading currencies
of the Group are shown in the table below:
£m
2021 2020 Change
USD per
GBP
Year-end
spot rate
1.35 1.36 -1%
Average
spot rate
1.38 1.28 +8%
EUR per
GBP
Year-end
spot rate
1.19 1.11 +7%
Average
spot rate
1.16 1.13 +3%
The Group’s global corporate income tax contribution
The Group’s total corporation tax payments in 2021 were £185m.
Around 90% of this was paid in the US, Germany, UK, Singapore
and Canada which reflects the fact that the majority of the
Group’s business is undertaken, and employees are based, in
these countries. The balance was paid in around 40 other
countries.
In common with most multinational groups, the total of all
profits in respect of which corporate income tax is paid is not
the same as the consolidated loss before tax reported on page
45. The main reasons for this are:
(i) the consolidated income statement is prepared under IFRS,
whereas the corporate income tax profits and losses for
each company are determined by local accounting rules;
(ii) accounting rules require certain income and costs relating
to our commercial activities to be eliminated from, or
added to, the aggregate of all the profits of the Group
companies when preparing the consolidated income
statement (consolidation adjustments); and
(iii) specific tax rules including exemptions or incentives as
determined by the tax laws in each country.
In most cases, (i) and (ii) are only a matter of timing and
therefore tax will be paid in an earlier or later year. The impact
of (iii) will often be permanent depending on the relevant tax
law. Further information on the tax position of the Group can
be found as follows:
— Rolls-Royce Holdings plc Audit Committee Report (page 84
of the Rolls-Royce Holdings plc Financial Statements) –
updates were given to the Audit Committee during the year
which covered key sources of estimation uncertainty, in
particular the recognition of deferred tax assets;
— note 1 to the Consolidated Financial Statements (page 59)
‒ details of key areas of uncertainty and accounting
policies for tax; and
— note 5 to the Consolidated Financial Statements (page 76)
‒ details of the tax balances in the Consolidated Financial
Statements together with a tax reconciliation. This explains
the main drivers of the tax rate and the impact of our
assessment on the recovery of UK deferred tax assets.
Information on the Group’s approach to managing its tax affairs
can be found at www.rolls-royce.com.
Investments and capital expenditure
The Group subjects all major investments and capital
expenditure to a rigorous examination of risks and future cash
flows to ensure that they create shareholder value. All major
investments, including the launch of major programmes,
require Board approval.
The Group has a portfolio of projects at different stages of their
lifecycles. All of our major investments and projects are
assessed using a range of financial metrics, including
discounted cash flow and return on investment.
Financial risk management
The Board has established a structured approach to financial
risk management. The Financial risk committee (Frc) is
accountable for managing, reporting and mitigating the
Group’s financial risks and exposures. These risks include the
Group’s principal counterparty, currency, interest rate,
commodity price, liquidity and credit rating risks outlined in
more depth in note 19. The Frc is chaired by the Chief Financial
Officer or group controller. The Group has a comprehensive
financial risk policy that advocates the use of financial
instruments to manage and hedge business operations risks
that arise from movements in financial, commodities, credit or
money markets. The Group’s policy is not to engage in
speculative financial transactions. The Frc sits quarterly to
review and assess the key risks and agree any mitigating
actions required.
Capital structure
£m
2021
2020
Total equity
(4,
2
7
8
)
(4,517)
Cash flow hedges
45
94
Group capital
(4,2
33
)
(4,425)
Net
debt
(
5,157
)
(
3,576
)
Operations are funded through various shareholders’ funds,
bank borrowings, bonds and notes. The capital structure of the
Group reflects the judgement of the Board as to the
appropriate balance of funding required. Funding is secured
by the Group’s continued access to the global debt markets.
Borrowings are funded in various currencies using derivatives
where appropriate to achieve a required currency and interest
rate profile. The Board’s objective is to retain sufficient
financial investments and undrawn facilities to ensure that the
Group can both meet its medium-term operational
commitments and cope with unforeseen obligations and
opportunities.
The Group holds cash and short-term investments which,
together with the undrawn committed facilities, enable it to
manage its liquidity risk.
Other Financial Information Rolls-Royce plc Annual Report 2021
161
Other Financial Information continued
During the year, the Group repaid £300m of commercial paper
drawn under the Covid Commercial Finance Facility and a
€750m bond at its maturity in June 2021. The Group also drew
the £2,000m loan maturing 2025.
During 2021 the Group entered into a new £1,000m loan
maturing 2026 (supported by an 80% guarantee from UK
Export Finance).
The £2,500m revolving credit facility, the £1,000m UKEF-
supported loan and £1,000m bank loan were undrawn at the
period end.
At the year end, the Group retained aggregate liquidity of
£7.1bn, including cash and cash equivalents of £2.6bn and
undrawn borrowing facilities of £4.5bn.
The Group has no material debt maturities until 2024. The
maturity profile of the borrowing facilities is regularly reviewed
to ensure that refinancing levels are manageable in the context
of the business and market conditions. There are no rating
triggers in any borrowing facility that would require the facility
to be accelerated or repaid due to an adverse movement in the
Group’s credit rating. The Group conducts some of its business
through a number of joint ventures. A major proportion of the
debt of these joint ventures is secured on the assets of the
respective companies and is non-recourse to the Group. This
debt is further outlined in note 11.
Credit rating
£m
Rating
Outlook
Moody’s Investors
Service
Ba3- Negative
Standard & Poor’s
BB
-
Stable
Fitch
BB
-
Stable
The Group subscribes to Moody’s, Standard & Poor’s and Fitch
for independent long-term credit ratings with the ratings in the
table above being applicable at the date of this report.
Accounting
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS), as adopted by the UK.
No new accounting standards had a material impact in 2021.
Other than Amendments to IAS 37 Provisions, Contingent
Liabilities and Contingent Assets – Onerous Contracts
described on page 65, the Group does not consider that any
standards, amendments or interpretations issued by the IASB,
but not yet applicable will have a significant impact on the
Consolidated Financial Statements in 2022.
Alternative Performance Measures Rolls-Royce plc Annual Report 2021
162
Reconciliation of Alternative Performance Measures (APMs) to their Statutory Equivalent
Alternative Performance Measures (APMs)
Business performance is reviewed and managed on an
underlying basis. These alternative performance measures
reflect the economic substance of trading in the year,
including the impact of the Group’s foreign exchange
activities. In addition, a number of other APMs are utilised to
measure and monitor the Group’s performance.
Definitions and reconciliations to the relevant statutory
measure are included below.
Underlying results from continuing operations
Underlying results include underlying revenue and underlying
operating profit. Underlying results are presented by
recording all relevant revenue and cost of sales transactions at
the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs.
Underlying results also exclude: the effect of acquisition
accounting and business disposals, impairment of goodwill and
other non-current assets where the reasons for the impairment
are outside of normal operating activities, exceptional items
and certain other items which are market driven and outside of
managements control. Statutory results have been adjusted for
discontinued operations and underlying results from
continuing operations have been presented on the same basis.
Further detail can be found in note 2 and note 26.
Revenue from continuing
operations
Notes
2021
£m
2020
£m
Statutory
revenue
11,218
11,491
Derivative & FX adjustments
2
(271)
(61)
Underlying revenue
10,947
11,430
Operating profit/(loss) from
continuing operations
Notes
2021
£m
2020
£m
Statutory operating
profit/(loss)
513
(1,972)
Derivative & FX adjustments
2
40
(1,003)
Programme exceptional
charges
2
(105)
(620)
Restructuring exceptional
charges
2
(45)
470
Acquisition accounting &
M&A
2
50
85
Impairments & asset write-
offs
2
(9)
1,336
Pension past service credit
2
(47)
(308)
Other underlying
adjustments
2
17
4
Underlying operating
profit/(loss)
414
(2,008)
Underlying results from discontinued operations
Results from discontinued
operations
Notes
2021
£m
2020
£m
Profit/(loss) for the year from
discontinued operations on
ordinary activities
26
36
(68)
Costs of disposal on
discontinued operations
26
(39)
‒
Statutory loss from
discontinued operations
(3)
(68)
Acquisition accounting & M&A
64
48
Derivative & FX adjustments
5
(3)
Restructuring exceptional
charges
‒
82
Impairments & asset write
-
offs
(1)
19
Related tax effects
(14)
(36)
Underlying profit from
discontinued operations
51
42
Trading cash flow
Trading cash flow is defined as free cash flow (as defined on
page 114) before the deduction of recurring tax and post-
employment benefit expenses. Trading cash flow per segment
is used as a measure of business performance for the relevant
segments. For a reconciliation of group trading cash flow to
free cash flow and reported cash flow, see note 27.
2021
£m
2020
£m
Civil Aerospace
(1,670)
(4,510)
Defence
377
298
Power Systems
219
162
New Markets
(56)
(55)
Total reportable segments
trading cash flow
(1,130)
(4,105)
Other businesses
(43)
(30)
Central and
Inter
-
segment
(38)
(63)
Trading cash flow from
continuing operations
(1,211)
(4,198)
Discontinued business
46
84
Trading cash flow
(1,165)
(4,114)
Underlying operating profit
charge (exceeded by)/in excess
of contributions to defined
benefit
schemes
(92)
160
Tax
1
(185)
(231)
Free cash flow
(1,442)
(4,185)
1
See page 48 for tax paid on statutory cash flow.
Alternative Performance Measures Rolls-Royce plc Annual Report 2021
163
Reconciliation of Alternative Performance Measures (APMS) to their Statutory Equivalent
continued
Free cash flow
Free cash flow is a measure of financial performance of the
businesses’ cash flow to see what is available for distribution
among those stakeholders funding the business (including
debt holders and shareholders). Free cash flow is the change
in cash and cash equivalents excluding: amounts spent or
received on activity related to business acquisitions or
disposals; financial penalties paid; exceptional restructuring
payments; proceeds from increase in loans; and repayment of
loans. Free cash flow from continuing operations has been
presented to remove free cash flow from discontinued
operations as defined in note 26. For further detail, see note
27.
2021
£m
2020
£m
Statutory change in cash and cash
equivalents
(775)
(986)
Net cash flow from changes in
short-term investments, borrowings
and lease liabilities
(658)
(1,636)
Movement in net debt from cash
flows
(1,433)
(2,622)
Exclude: capital element of lease
payments
(374)
(284)
Movement on balances with parent
company
4
(1,887)
Business acquisitions & disposals
(49)
119
Penalties paid on agreements with
investigating bodies
156
135
Restructuring exceptional cash flow
231
323
Other underlying adjustments
24
34
Free cash flow
(1,441)
(4,182)
Discontinued operations free cash
flow
1
(43)
(70)
Free cash flow from continuing
operations
(1,484)
(4,252)
1
Discontinued operations free cash excludes: transactions with parent company of
£(15)m (2020: £103m), movements in borrowings of £22m (2020: £7m), exceptional
restructuring costs of £8m (2020: £2m), M&A costs of £44m (2020: nil) and other
of £29m (2020: £(21)m).
Free cash flow from cash flows from operating activities
In addition to the above, a reconciliation of free cash flow to
the statutory cash flow from operating activities has been
provided below:
2021
£m
2020
£m
Statutory cash flows from operating
activities
(258)
(3,007)
Capital expenditure (including
investment from NCI and movement
in joint ventures, associates and
other investments)
(489)
(933)
Capital element of lease payments
(374)
(284)
Interest paid
(331)
(259)
Settlement of excess derivatives
(452)
(202)
Exceptional restructuring costs
231
323
M&A costs
50
12
Financial penalties paid
156
135
Other
2
6
33
Free cash flow
(1,44
1
)
(4,182)
Discontinued operations free cash
flow
(43)
(70)
Free cash flow from continuing
operations
(1,48
4
)
(4,25
2
)
Group R&D expenditure
R&D expenditure during the year excluding the impact of
contributions and fees, including government funding,
amortisation and impairment of capitalised costs and amounts
capitalised during the year.
Gross R&D expenditure from
continuing operations
Notes
2021
£m
2020
£m
Statutory research and
development costs
(778)
(1,204)
Amortisation and
impairment of capitalised
cost
3
70
560
Capitalised as intangible
assets
(105)
(228)
Contributions and fees
(366)
(353)
Gross R&D expenditure
(1,179)
(1,225)
Key performance indicators
The following measures are key performance indicators and
are calculated using alternative performance measures or
statutory results. See below for calculation of these amounts.
Order backlog
Order backlog, also known as unrecognised revenue, is the
amount of revenue on current contracts that is expected to be
recognised in future periods. Civil Aerospace OE orders where
the customer has retained the right to cancel (for deliveries in
the next 7-12 months) are excluded. Further details are
included in note 2 on page 71.
Self-funded R&D as a proportion of underlying revenue
Self-funded cash expenditure on R&D before any capitalisation
or amortisation relative to underlying revenue. Self-funded
R&D and underlying revenue are presented for continuing
operations in line with presentation in the statutory income
statement. We expect to spend approximately 5% of underlying
revenue on R&D although this proportion will fluctuate
depending on the stage of development of current
programmes. We expect this proportion will reduce modestly
over the medium-term.
Notes
2021
£m
2020
£m
Gross R&D expenditure
3
(
1,179
)
(1,
225
)
Contributions and fees
3
366
353
Self funded R&D
3
(
813
)
(
872
)
Underlying revenue
10,947
11,430
%
%
Self funded R&D as a % of
underlying revenue
7.4
7.6
Capital expenditure as a proportion of underlying revenue
Cash purchases of PPE in the year relative to underlying
revenue presented for continuing operations. All proposed
investments are subject to rigorous review to ensure that they
are consistent with forecast activity and will provide value for
money. We measure annual capital expenditure as the cash
purchases of PPE acquired during the period; over the
medium-term we expect a proportion of around 3-4%.
2021
£m
2020
£m
Purchases of PPE (cash flow
statement)
328
585
Capital expenditure from
discontinued operations
(24)
(33)
Net capital expenditure
304
552
Underlying revenue
10,947
11,430
%
%
Capital expenditure as a % of
underlying revenue
2.8
4.8
164
GLOSSARY
APM
alternative performance measure
IASB
International Accounting Standards Board
Articles
Articles of Association of Rolls
-
Royce plc
IFRS
International financial reporting standards
C&A
commercial and administrative
KPIs
key performance indicators
CEO
chief executive officer
LIBOR
London inter
-
bank offered rate
Our Code
Global Code of Conduct
LTIP
long
-
term incentive plan
the Code
UK Corporate Governance Code 2018
LTSA
long
-
term service agreement
Company
Rolls
-
Royce plc
M&A
mergers & acquisitions
D&I
diversity &
inclusion
MW
megawatts
DoJ
US Department of Justice
OE
original equipment
DPAs
deferred prosecution agreements
PBT
profit before tax
DTR the FCA’s Disclosure Guidance and Transparency
Rules
PPE property, plant and equipment
EFH
engine flying
hours
PSP
performance share plan
ERG
employee resource group
R&D
research and development
ESG
environment, social and governance
R&T
research and technology
EU European Union REACH registration, evaluation, authorisation and
restriction
of chemicals
EUR
euro
RMS
risk management system
EVTOL
electric vertical take
-
off and landing
RRH
Rolls
-
Royce Holdings plc
FCA
Financial Conduct Authority
RRMS
Rolls
-
Royce management system
FX
foreign exchange
RRSAs
risk and revenue sharing arrangements
GBP
Great British pound or pound sterling
SAF
sustainable aviation fuel
GHG
greenhouse gas
SFO
UK Serious Fraud Office
Group
Rolls
-
Royce plc and its subsidiaries
SMR
small modular reactors
HPT
high pressure turbine
TCFD
Taskforce on
Climate
-
related Financial Disclosures
HSE
health, safety and environment
TSR
total shareholder return
USD/US$
United States dollar