financial tementsats/media/files/r/rolls-royce/... · 2020-03-18 · other financial assets 19 86...

Consolidated Financial Statements

Consolidated Income Statement 116Consolidated Statement of Comprehensive Income 117Consolidated Balance Sheet 118Consolidated Cash Flow Statement 119Consolidated Statement of Changes in Equity 122

Notes to the Consolidated Financial Statements1 Accountingpolicies 1232 Segmentalanalysis 1343 Researchanddevelopment 1404 Netfinancing 1415 Taxation 1416 Earningsperordinaryshare 1447 Auditors’remuneration 1458 Employeeinformation 1459 Intangibleassets 14610 Property,plantandequipment 14911 Right-of-useassets 15012 Investments 15113 Inventories 15314 Tradereceivablesandotherassets 15315 Contractassetsandliabilities 15416 Cash and cash equivalents 15517 Borrowingsandleaseliabilities 15518 Tradepayablesandotherliabilities 15619 Financialinstruments 15720 Provisionsforliabilitiesandcharges 16621 Post-retirementbenefits 16822 Share capital 17223 Share-basedpayments 17324 Leases 17425 Contingentliabilities 17626Relatedpartytransactions 17627 Acquisitionsanddisposals 17728 Derivationofsummaryfunds

flowstatement 17929 ImpactofadoptingIFRS16Leases 181

Company Financial Statements

CompanyBalanceSheet 183Company Statement ofChangesinEquity 183

Notes to the Company Financial Statements 1 Accountingpolicies 1842 Investments–subsidiaryundertakings 1843 Tradereceivablesandotherassets 1854 Tradepayablesandotherliabilities 1855 Financialliabilities 1856 Share capital 1857 Reconciliationofnetassetsbetween

Rolls-RoyceHoldingsplcGroupandCompany 186

8 Contingentliabilities 1869 Otherinformation 186

Subsidiaries 187Joint Ventures and Associates 192

FINANCIAL STATEMENTS

Rolls-RoyceHoldingsplcAnnualReport2019 FinancialStatements

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115

CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2019

Notes2019

£m2018

£m

Revenue 1 2 16,587 15,729Cost of sales 1 (15,645) (14,531)Gross profit 942 1,198Commercialandadministrativecosts1 (1,128) (1,595)Researchanddevelopmentcosts 3 (770) (768)Shareofresultsofjointventuresandassociates 12 104 4Operating loss (852) (1,161)Gainarisingondisposalofbusinesses2 27 139 358Loss before financing and taxation 2 (713) (803)

Financing income 4 252 271 Financing costs 4 (430) (2,415)Net financing costs (178) (2,144)

Loss before taxation 3 (891) (2,947)

Taxation 5 (420) 554Loss for the year (1,311) (2,393)

Attributable to:Ordinaryshareholders (1,315) (2,401)Non-controllinginterests 4 8

Loss for the year (1,311) (2,393)Other comprehensive (expense)/income (1,013) 182Total comprehensive expense for the year (2,324) (2,211)

Loss per ordinary share attributable to ordinary shareholders: 6

Basic (69.07)p (129.15)pDiluted (69.07)p (129.15)p

Payments to ordinary shareholders in respect of the year: 19

Pencepershare 11.7p 11.7pTotal 224 220

Underlyingprofitbeforetaxation3 2 583 466

1 Includedwithinrevenue,costofsalesandcommercialandadministrativecostsareexceptionalchargesrelatingtoCivilAerospaceprogrammes,impairmentchargesandrestructuringcosts.Further detailscanbefoundinnote2.

2 CommercialMarinewasdisposedofon1April2019andRolls-RoycePowerDevelopmentLimitedwasdisposedofon15April2019.L’Orangewasdisposedofon1June2018.3 (Loss)/profitbeforetaxationdisclosedonastatutoryandunderlyingbasis.

Rolls-RoyceHoldingsplcAnnualReport2019Financial StatementsConsolidated Income Statement116

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2019

Notes2019

£m2018

£m

Loss for the year (1,311) (2,393)

Other comprehensive (expense)/income (OCI)Actuarialmovementsonpost-retirementschemes1 21 (934) 27 ShareofOCIofjointventuresandassociates 12 (1) (1)Relatedtaxmovements 5 324 (2)Items that will not be reclassified to profit or loss (611) 24

Foreignexchangetranslationdifferencesonforeignoperations (313) 171 Reclassifiedtoincomestatementondisposalofbusinesses 27 (98) (19)Cashflowhedgereservemovements 22 (17)ShareofOCIofjointventuresandassociates 12 (7) 18 Relatedtaxmovements 5 (6) 5 Items that may be reclassified to profit or loss (402) 158

Total other comprehensive (expense)/income (1,013) 182

Total comprehensive expense for the year (2,324) (2,211)

Attributable to:Ordinaryshareholders (2,328) (2,219)Non-controllinginterests 4 8

Total comprehensive expense for the year (2,324) (2,211)

1 Includesanassetre-measurementnetlossestimatedat£600mfollowingtheagreementtotransferthefuturepensionobligationsofcirca33,000pensionsintheUKschemetoLegal&GeneralAssuranceSocietyLimited.Seenote21forfurtherinformation.

Financial StatementsConsolidated Statement of Comprehensive Income 117

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Rolls-RoyceHoldingsplcAnnualReport2019

Notes2019

£m2018

£m

ASSETSIntangible assets 9 5,442 5,295Property,plantandequipment 10 4,803 4,929Right-of-useassets1 11 2,009 –Investments–jointventuresandassociates 12 402 412Investments–other 12 14 22 Otherfinancialassets 19 467 343Deferredtaxassets 5 1,887 2,092Post-retirementschemesurpluses 21 1,170 1,944Non-current assets 16,194 15,037Inventories 13 4,320 4,287Tradereceivablesandotherassets 14 5,065 4,690Contractassets 15 2,095 2,057Taxationrecoverable 39 34Otherfinancialassets 19 86 22 Short-terminvestments 19 6 6 Cash and cash equivalents 16 4,443 4,974Current assets 16,054 16,070Assets held for sale 27 18 750TOTAL ASSETS 32,266 31,857LIABILITIESBorrowingsandleaseliabilities 17 (775) (858)Otherfinancialliabilities 19 (493) (647)Tradepayablesandotherliabilities 18 (8,450) (8,292)Contractliabilities 15 (4,228) (3,794)Currenttaxliabilities (172) (138)Provisionsforliabilitiesandcharges 20 (858) (1,122)Current liabilities (14,976) (14,851)Borrowingsandleaseliabilities 17 (4,910) (3,804)Otherfinancialliabilities 19 (3,094) (3,542)Tradepayablesandotherliabilities 18 (2,071) (1,940)Contractliabilities 15 (6,612) (5,336)Deferredtaxliabilities 5 (618) (962)Provisionsforliabilitiesandcharges 20 (1,946) (795)Post-retirementschemedeficits 21 (1,378) (1,303)Non-current liabilities (20,629) (17,682)Liabilities associated with assets held for sale 27 (15) (376)TOTAL LIABILITIES (35,620) (32,909)

NET LIABILITIES (3,354) (1,052)

EQUITYCalled-upsharecapital 22 386 379Share premium account 319 268 Capitalredemptionreserve 159 161 Cashflowhedgingreserve (96) (106)Mergerreserve 650 406Translationreserve 397 809Accumulated losses (5,191) (2,991)Equity attributable to ordinary shareholders (3,376) (1,074)Non-controllinginterests 22 22 TOTAL EQUITY (3,354) (1,052)

1 IFRS16Leaseshasbeenadoptedfrom1January2019andunderthetransitionalarrangementstheGrouphasadoptedIFRS16onamodifiedretrospectivebasis.Therehasbeennorestatementof2018comparatives.Seenotes1and29formoredetails.

Thefinancialstatementsonpages116to182wereapprovedbytheBoardon28February2020andsignedonitsbehalfby:

Warren East Stephen Daintith ChiefExecutive ChiefFinancialOfficer

CONSOLIDATED BALANCE SHEETAt 31 December 2019

FinancialStatementsConsolidated Balance Sheet118 Rolls-RoyceHoldingsplcAnnualReport2019

CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2019

Notes2019

£m2018

£m

Reconciliation of cash flows from operating activitiesOperatingloss (852) (1,161)(Profit)/lossondisposalofproperty,plantandequipment (13) 11 Shareofresultsofjointventuresandassociates 12 (104) (4)Dividendsreceivedfromjointventuresandassociates 12 92 105Amortisationandimpairmentofintangibleassets1 9 372 565 Depreciationandimpairmentofproperty,plantandequipment1 10 532 521 Depreciationandimpairmentofright-of-useassets 11 411 –Impairmentofandothermovementsoninvestments 12 1 6 Increase in provisions 1,108 1,003Increaseininventories (43) (616)Increaseintradereceivablesandotherassets (610) (469)Increaseincontractassets (41) (112)Penaltiespaidonagreementswithinvestigatingbodies (102) –Increaseintradepayablesandotherliabilities 683 1,732Increaseincontractliabilities 1,778 1,419Cashflowsonotherfinancialassetsandliabilitiesheldforoperatingpurposes (757) (732)Interest received 31 –Netdefinedbenefitpost-retirementcostrecognisedinlossbeforefinancing 21 222 352Cashfundingofdefinedbenefitpost-retirementschemes 21 (266) (181)Share-basedpayments 23 30 35Netcashinflowfromoperatingactivitiesbeforetaxation 2,472 2,474Taxationpaid (175) (248)Net cash inflow from operating activities 2 2,297 2,226

Cash flows from investing activitiesNetmovementinunlistedinvestments 12 3 (6)Additionsofintangibleassets 9 (640) (680)Disposals of intangible assets 9 13 13Purchasesofproperty,plantandequipment (747) (905)Disposalsofproperty,plantandequipment 50 43Acquisitionsofbusinesses 27 (43) –Disposal of businesses 27 453 573Movementininvestmentsinjointventuresandassociatesandothermovementsoninvestments 12 (8) (13)Disposalsofjointventures 1 –Net cash outflow from investing activities (918) (975)

Cash flows from financing activitiesRepaymentofloans (1,136) (37)Proceedsfromincreaseinloans 22 1,054Capitalelementofleasepayments(2018:Capitalelementoffinanceleasepayments) (271) (23)Net cash flow from (decrease)/increase in borrowings and leases (1,385) 994Interest received – 27Interest paid (104) (92)Interestelementofleasepayments(2018:Interestelementoffinanceleasepayments) (88) (5)Increaseinshort-terminvestments – (3)Issueofordinaryshares(netofexpenses) 24 1 Purchaseofordinaryshares (15) (1)DividendstoNCI (4) (3)RedemptionofCShares (220) (216)Net cash (outflow)/inflow from financing activities (1,792) 702

Change in cash and cash equivalents (413) 1,953Cash and cash equivalents at 1 January 4,952 2,933Exchange(losses)/gainsoncashandcashequivalents (104) 66 Cash and cash equivalents at 31 December 3 4,435 4,952

1 In2019,animpairmentof£58minrespectofBergenEnginesASwasincludedintheselines(2018:£160minrespectofCommercialMarine).2 OperatingcashflowincludesTrent1000insurancereceiptsof£173m.3 TheGroupconsidersoverdrafts(repayableondemand)tobeanintegralpartofitscashmanagementactivitiesandtheseareincludedincashandcashequivalentsforthepurposesofthecashflowstatement.

Inderivingtheconsolidatedcashflowstatement,movementsinbalancesheetlineitemshavebeenadjustedfornon-cashitems.Thecashflowintheyearincludesthesaleofgoodsandservicestojointventuresandassociates–seenote26.

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2019£m

2018£m

Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt)Change in cash and cash equivalents (413) 1,953Cashflowfromdecrease/(increase)inborrowingsandleases 1,385 (994)Cashflowfromincreaseinshort-terminvestments – 3Change in net funds resulting from cash flows 972 962 Newleasesintheyear(2018:newfinanceleasesintheyear) (217) (97)Netdebt(excludingcashandcashequivalents)ofpreviouslyunconsolidatedsubsidiary (1) –Exchange(losses)/gainsonnetfunds (32) 54Fairvalueadjustments 48 (69)Transferredtoliabilitiesassociatedwithassetsheldforsale 3 –Movement in net funds 773 850Netfunds/(debt)at1Januaryexcludingthefairvalueofswaps 318 (532)Reclassifications1 (79) –AdoptionofIFRS16(seenote29) (2,248) –Net debt at 1 January restated (2,009) (532)Net (debt)/funds at 31 December excluding the fair value of swaps (1,236) 318Fairvalueofswapshedgingfixedrateborrowings 243 293Net (debt)/funds at 31 December (993) 611

1 In2019,theGrouphasreclassified£79masborrowingspreviouslyincludedinotherfinancialliabilities.Theseborrowingsmaturebetween2019and2029–seenote17.

CONSOLIDATED CASH FLOW STATEMENT CONTINUEDFor the year ended 31 December 2019

Financial StatementsConsolidated Cash Flow Statement120 Rolls-RoyceHoldingsplcAnnualReport2019

Themovementinnetfunds/(debt)(definedbytheGroupasincludingtheitemsshownbelow)isasfollows:

At31December

2018£m

TransitiontoIFRS16

andreclassi-fications1

£m

At 1 January

£m

Fundsflow

£m

Net funds onacquisition/

disposal £m

Exchangedifferences

£m

Fair value adjustments

£m

Reclassi-fications

£m

Othermovements

on leases£m

At 31 December

£m

2019Cashatbankandinhand 1,023 – 1,023 (179) – (19) – – – 825 Moneymarketfunds 1,222 – 1,222 (124) – (3) – – – 1,095 Short-termdeposits 2,729 – 2,729 (124) – (82) – – – 2,523 Cash and cash equivalents 2 (perbalancesheet) 4,974 – 4,974 (427) – (104) – – – 4,443 Overdrafts (22) – (22) 14 – – – – – (8)Cash and cash equivalents (per cash flow statement) 4,952 – 4,952 (413) – (104) – – – 4,435 Short-term investments 6 – 6 – – – – – – 6 Othercurrentborrowings (802) (14) (816) 799 – 2 5 (417) – (427)Non-currentborrowings (3,609) (65) (3,674) 315 (1) 4 43 417 – (2,896)Finance leases (229) 229 – – – – – – – – Leaseliabilities – (2,477) (2,477) 271 – 66 – 3 (217) (2,354)Financial liabilities (4,640) (2,327) (6,967) 1,385 (1) 72 48 3 (217) (5,677)Net funds/(debt) excluding fair value swaps 318 (2,327) (2,009) 972 (1) (32) 48 3 (217) (1,236)Fairvalueofswapshedgingfixedrateborrowings3 293 – 293 – – – (50) – – 243 Net funds/(debt) 611 (2,327) (1,716) 972 (1) (32) (2) 3 (217) (993)

Net funds (excluding lease liabilities) 840 (79) 761 1,361

2018

Cashatbankandinhand 838 170 – 15 – – – 1,023

Moneymarketfunds 589 630 – 3 – – – 1,222

Short-termdeposits 1,526 1,155 – 48 – – – 2,729Cash and cash equivalents (perbalancesheet) 2,953 1,955 – 66 – – – 4,974

Overdrafts (20) (2) – – – – – (22)Cash and cash equivalents (percashflowstatement) 2,933 1,953 – 66 – – – 4,952

Short-terminvestments 3 3 – – – – – 6

Othercurrentborrowings (39) (38) – (1) 15 (739) – (802)

Non-currentborrowings (3,292) (972) – – (84) 739 – (3,609)

Finance leases (137) (81) – (11) – – – (229)

Financialliabilities (3,468) (1,091) – (12) (69) – – (4,640)Net(debt)/fundsexcludingfair value swaps (532) 865 – 54 (69) – – 318Fairvalueofswapshedgingfixedrateborrowings3 227 – – – 66 – – 293Net(debt)/funds (305) 865 – 54 (3) – – 611

1 In2019,theGrouphasreclassified£79masborrowingspreviouslyincludedinotherfinancialliabilities.Theseborrowingsmaturebetween2019and2029–seenote17.2 IncludesTrent1000insurancereceiptsof£173m.3 Allinterestrateswapsareenteredintoforriskmanagementpurposes,althoughthesemaynotbedesignatedintohedgingrelationshipsforaccountingpurposes–seenote19.

CONSOLIDATED CASH FLOW STATEMENT CONTINUEDFor the year ended 31 December 2019

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2019

Attributable to ordinary shareholders

Notes

Share capital

£m

Share premium

£m

Capitalredemption

reserve£m

Cash flow hedging reserve 1

£m

Merger reserve

£m

Translation reserve

£m

Accum- ulated losses 2

£mTotal

£m

Non-controlling

interests (NCI)

£m

Totalequity

£m

At31December2017 368 195 162 (112) 3 657 (343) 930 3 933ImpactofadoptingIFRS9 – – – – – – (15) (15) – (15)

At1January2018 368 195 162 (112) 3 657 (358) 915 3 918 (Loss)/profitfortheyear – – – – – – (2,401) (2,401) 8 (2,393)Foreignexchangetranslationdifferencesonforeignoperations – – – – – 171 – 171 – 171 Reclassifiedtoincomestatement ondisposalofL’Orange – – – – – (19) – (19) – (19)Movementsonpost-retirementschemes 21 – – – – – – 27 27 – 27 Debitedtocashflowhedgereserve – – – (17) – – – (17) – (17)OCIofjointventuresandassociates 12 – – – 18 – – (1) 17 – 17 Relatedtaxmovements 5 – – – 5 – – (2) 3 – 3

Totalcomprehensiveincome/(expense)fortheyear – – – 6 – 152 (2,377) (2,219) 8 (2,211)SharesissuedinrespectofacquisitionofITPAero 10 – – – 403 – – 413 – 413Otherissuesofordinaryshares 22 1 73 – – – – – 74 – 74Issue of C Shares 3 – – (217) – – – 1 (216) – (216)RedemptionofCShares – – 216 – – – (216) – – –Sharesissuedtoemployeesharetrust – – – – – – (75) (75) – (75)Share-basedpayments–directtoequity4 – – – – – – 32 32 – 32Transferofjointoperationstosubsidiaries – – – – – – – – 15 15 TransactionswithNCI – – – – – – – – (4) (4)Relatedtaxmovements 5 – – – – – – 2 2 – 2

Otherchangesinequityintheyear 11 73 (1) – 403 – (256) 230 11 241At31December2018 379 268 161 (106) 406 809 (2,991) (1,074) 22 (1,052)ImpactofadoptingIFRS16 – – – – – – (40) (40) – (40)

At 1 January 2019 379 268 161 (106) 406 809 (3,031) (1,114) 22 (1,092)(Loss)/profitfortheyear – – – – – – (1,315) (1,315) 4 (1,311)Foreignexchangetranslationdifferencesonforeignoperations – – – – – (313) – (313) – (313)ReclassifiedtoincomestatementondisposalofCommercialMarine – – – – – (98) – (98) – (98)Movementsonpost-retirementschemes 21 – – – – – – (934) (934) – (934)Creditedtocashflowhedgereserve – – 22 – – – 22 – 22 OCIofjointventuresandassociates 12 – – – (7) – – (1) (8) – (8)Relatedtaxmovements 5 – – – (5) – (1) 324 318 – 318

Total comprehensive income/(expense) for the year – – – 10 – (412) (1,926) (2,328) 4 (2,324)Arisingonissuesofordinaryshares 22 1 51 – – – – – 52 – 52 SharesissuedinrespectofacquisitionofITPAero 6 – – – 244 – – 250 – 250 Issue of C Shares 3 – – (222) – – – 1 (221) – (221)RedemptionofCShares – – 220 – – – (220) – – – Ordinarysharespurchased – – – – – – (15) (15) – (15)Sharesissuedtoemployeesharetrust – – – – – – (51) (51) – (51)Share-basedpayments–directtoequity4 – – – – – – 50 50 – 50 TransactionswithNCI – – – – – – – – (4) (4)Relatedtaxmovements 5 – – – – – – 1 1 – 1

Other changes in equity in the year 7 51 (2) – 244 – (234) 66 (4) 62 At 31 December 2019 386 319 159 (96) 650 397 (5,191) (3,376) 22 (3,354)

1 Seeaccountingpoliciesnote1.2 At31December2019,12,476,576ordinaryshareswithanetbookvalueof£108m(2018:13,538,921,2017:6,466,153ordinaryshareswithnetbookvaluesof£123mand£52mrespectively)wereheldforthepurposeofshare-basedpaymentplansandincludedinaccumulatedlosses.Duringtheyear,8,984,219ordinaryshareswithanetbookvalueof£82m(2018:468,165shareswithanetbookvalueof£4m)vestedinshare-basedpaymentplans.Duringtheyear,theCompanyacquired118,831 (2018:80,810)ofitsordinarysharesviareinvestmentofdividends received on its own shares and purchased 1,673,143(2018:nil)ofitsordinarysharesthroughpurchasesontheLondonStockExchange.Duringtheyear,theCompanyissued28,973,262newordinarysharesrelatingtotheremainingthreeinstalmentsfortheacquisitionofITPAero(2018:47,556,914newordinarysharesrelatingtothefirstfiveinstallments)and 7,803,043newordinaryshares(2018:7,460,173)totheGroup’ssharetrustforitsemployeeshare-basedpaymentplanswithanetbookvalueof£66m (2018:£74m).

3 InRolls-RoyceHoldingsplc’sCompanyFinancialStatements,CSharesareissuedfromthemergerreserve,thisreservewascreatedbyaschemeofarrangementin2011.Asthisreserveis eliminatedonconsolidation,intheConsolidatedFinancialStatements,theCSharesareshownasbeingissuedfromthecapitalredemptionreserve.

4 Share-basedpayments–directtoequityistheshare-basedpaymentchargefortheyearlesstheactualcostofvestingexcludingthosevestingfromownsharesandcashreceivedon share-basedschemesvesting.

Financial StatementsConsolidated Statement of Changes in Equity122 Rolls-RoyceHoldingsplcAnnualReport2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies

The CompanyRolls-RoyceHoldingsplc(the‘Company’)isapubliccompanyincorporatedundertheCompaniesAct2006anddomiciledintheUnitedKingdom.TheConsolidatedFinancialStatementsoftheCompanyfortheyearended31December2019consistoftheconsolidationoftheFinancialStatementsoftheCompanyanditssubsidiaries(togetherreferredtoastheGroup)andincludetheGroup’sinterestinjointlycontrolledandassociatedentities.

Basis of preparation and statement of complianceInaccordancewiththeCompaniesAct2006andEuropeanUnion(EU)regulations,theseConsolidatedFinancialStatementshavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(IFRS)issuedbytheInternationalAccountingStandardsBoard(IASB)andinterpretationsissuedbytheIFRSInterpretationsCommittee(IFRIC),asadoptedforuseintheEUeffectiveat31December2019(AdoptedIFRS).

TheCompanyhaselectedtoprepareitsindividualCompanyFinancialStatementsunderFRS101Reduced Disclosure Framework. They are setoutonpages183to186andtheaccountingpoliciesinrespectofitsindividualCompanyFinancialStatementsaresetoutonpage184.

TheConsolidatedFinancialStatementshavebeenpreparedonthehistoricalcostbasisexceptwhereAdoptedIFRSrequirestherevaluationoffinancialinstrumentstofairvalueandcertainotherassetsandliabilitiesonanalternativebasis–mostsignificantlypost-retirementschemeobligationsarevaluedonthebasisrequiredbyIAS19Employee Benefits–andonagoingconcernbasisasdescribedonpage55.

TheConsolidatedFinancialStatementsarepresentedinsterlingwhichistheCompany’sfunctionalcurrency.

ThepreparationofConsolidatedFinancialStatementsinconformitywithAdoptedIFRSrequiresmanagementtomakejudgementsandestimatesthataffectthereportedamountsofassetsandliabilitiesatthedateoftheConsolidatedFinancialStatementsandthereportedamountsofrevenueandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.

Revisions to Adopted IFRS in 2019

IFRS 16 LeasesTheGroupadoptedIFRS16on1January2019usingthemodifiedretrospectiveapproach.Underthespecifictransitionalprovisionsinthestandard,comparativeinformationhasnotbeenrestated.Thereclassificationsandtheadjustmentsarisingfromthenewleasingruleshavebeenrecognisedintheopeningbalancesheeton1January2019(seenote29).

Until31December2018,leasesofaircraftandengines,plantandequipmentandlandandbuildingswereclassifiedaseitherfinanceoroperatingleases.Paymentsmadeunderoperatingleaseswerechargedtoprofitorlossonastraight-linebasisovertheperiodofthelease.From1January2019,leasesarerecognisedasaright-of-useassetandacorrespondingliabilityatthedateatwhichtheleasedassetisavailableforusebytheGroup.Eachleasepaymentisallocatedbetweenreducingtheliabilityandafinancecost.Thefinancecostischargedtotheincomestatementovertheleaseperiodsoastoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.

OnadoptionofIFRS16,theGrouprecognisedadditionalleaseliabilitiesinrelationtoleaseswhichhadpreviouslybeenclassifiedasoperatingleasesunderthepreviousprinciplesofIAS17Leases.Theseliabilitiesweremeasuredatthepresentvalueoftheremainingleasepayments,discountedusingtheGroup’sincrementalborrowingrateasof1January2019.TheweightedaverageincrementalborrowingrateappliedbytheGrouptotheleaseliabilitieson1January2019was3.7%.

Theassociatedright-of-useassetsforcertainhighvaluepropertyleasesaremeasuredonaretrospectivebasisasifthenewruleshadalwaysbeenapplied.Asabove,theGroup’sincrementalborrowingratehasbeenused.Otherright-of-useassetsaremeasuredattheamountequaltotheleaseliability,adjustedbytheamountofanyprepaidoraccruedleasepaymentsrelatingtothatleaserecognisedinthebalancesheetasat1January2019.InapplyingIFRS16forthefirsttime,theGrouphasusedthefollowingpracticalexpedientspermittedbythestandard:

– oninitialapplication,IFRS16wasonlyappliedtocontractsthatwerepreviouslyclassifiedasleases,theGrouphaselectednottoreassesswhetheracontractis,orcontains,aleaseatthedateofinitialapplication.Instead,forcontractsenteredintobeforethetransitiondatetheGrouphasreliedonitsassessmentmadeapplyingIAS17andIFRIC4Determining whether an Arrangement contains a Lease;

– leasecontractswithadurationoflessthan12monthswillcontinuetobeexpensedtotheincomestatementonastraight-linebasisovertheleaseterm;

– theleasetermhasbeendeterminedwiththeuseofhindsightwherethecontractcontainsoptionstoextendthelease;and – relianceonpreviousassessmentsonwhetherornotleasesareonerous.

Note29setsouttheadjustmentsmadeontransitiontoIFRS16on1January2019.ThemostsignificantchangesarewheretheGroupisalesseeasthestandardhasnotsignificantlychangedtheaccountingwheretheGroupisalessorinaleasearrangement.

IFRIC 23 Uncertainty over Income Tax TreatmentTheGroupadoptedIFRIC23on1January2019.Theinterpretationclarifieshowtoapplytherecognitionandmeasurementrequirementsin IAS 12 Income Taxeswhenthereisuncertaintyoverincometaxtreatments.AdoptionofthisinterpretationdidnothaveamaterialimpactontheGroup’sfinancialstatements.

Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark ReformTheGrouphaselectedtoearlyadopttheamendmentsinaccordancewiththetransitionprovisions.DetailsoftheimpacttotheGrouparegiven on page 129.

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1 Accounting policies continued

Key areas of judgement and sources of estimation uncertaintyThedeterminationoftheGroup’saccountingpoliciesrequiresjudgement.Thesubsequentapplicationofthesepoliciesrequiresestimates;theactualoutcomemaydifferfromthatcalculated.Thekeyjudgementsandkeysourcesofestimationuncertaintyatthebalancesheetdate,thathaveasignificantriskofcausingmaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyear,aresummarisedbelow.Furtherdetailsareincludedwithinthesignificantaccountingpoliciesasindicated.

Area Key judgements Key sources of estimation uncertainty Page

Revenuerecognition – WhetherCivilAerospaceOEandaftermarketcontractsshouldbecombined

– Howperformanceonlong-termaftermarketcontractsshouldbemeasured

– Whetheranycostsshouldbetreated as wastage

– Whethersalesofspareenginestojointventuresareatfairvalue

Estimatesoffuturerevenueandcostsoflong-termcontractualarrangements

125

Riskandrevenuesharing arrangements

Determinationofthenatureofentryfeesreceived 127

Taxation Whetherdeferredtaxassetsshould be recognised

EstimatesnecessarytoassesswhetheritisprobablethatsufficientsuitabletaxableprofitswillariseintheUKtoutilisethedeferredtaxassets

127

Financialinstruments Applicationofthebusinessmodeland‘solelyprincipalandinterest’test

128

Businesscombinations Identificationofacquiredassetsandliabilities 129Researchanddevelopment – Determinationofthepointintimewherecosts

incurredonaninternalprogrammedevelopmentmeetthecriteriaforcapitalisationorceasingcapitalisation

– Determinationofthebasisforamortisingcapitalised development costs

130

Leases Determinationofleaseterm Estimatesofthepaymentsrequiredtomeetresidualvalueguaranteesattheendofengineleases

131

Impairmentofgoodwill Determinationofcash-generatingunitsforassessingimpairmentofgoodwill

131

Impairmentofintangibleassets (including programme-related intangibleassets)

Estimatesofcashflowforecastsanddiscountratestosupportthecarryingvalueofintangibleassets(includingprogramme-relatedintangibleassets)

131

Provisions Assessmentofsatisfyingthecriteriafortherecognitionandmeasurementofprovisions

EstimatesofexpenditurerequiredtosettletheobligationrelatingtoTrent1000claimsandtosettlelong-termcontractsassessedasonerous

132

Post-retirementbenefits Estimatesoftheassumptionsappliedforvaluing thedefinedbenefitobligation

133

Sensitivitiesforkeysourcesofestimationriskaredisclosedintherelevantnoteswherethisisappropriateandpracticable.

Significant accounting policies TheGroup’ssignificantaccountingpoliciesaresetoutbelow.WiththeexceptionofIFRS16andIFRIC23,whichhavebeenadopted witheffectfrom1January2019,theseaccountingpolicieshavebeenappliedconsistentlytoallperiodspresentedintheseConsolidatedFinancial Statements.

Presentation of underlying resultsWemeasurefinancialperformanceonanunderlyingbasis.Webelievethisisthemostappropriatebasistomeasureourin-yearperformanceasunderlyingresultsreflectthesubstanceoftradingactivity,includingtheimpactoftheGroup’sforeignexchangeforwardcontracts,whichlockintransactionsatpredeterminedexchangerates.Inaddition,underlyingresultsexcludetheaccountingimpactofbusinessacquisitionsanddisposals,impairmentchargesandexceptionalitems.ItisalsoconsistentwiththewaythatfinancialperformanceismeasuredbymanagementandreportedtotheBoardinaccordancewithIFRS8Operating Segments.Furtherdetailsaregiveninnote2.

Basis of consolidationTheConsolidatedFinancialStatementsincludetheCompanyFinancialStatementsanditssubsidiaryundertakingstogetherwiththeGroup’sshareoftheresultsinjointarrangementsandassociatesmadeupto31December.

AsubsidiaryisanentitycontrolledbytheCompany.ControlexistswhentheCompanyhaspoweroveranentity,exposuretovariablereturnsfromitsinvolvementwithanentityandtheabilitytouseitspoweroveranentitysoastoaffecttheCompany’sreturns.

Rolls-RoyceHoldingsplcAnnualReport2019Financial StatementsNotestotheConsolidatedFinancialStatements124

1 Accounting policies continuedAjointarrangementisanentityinwhichtheGroupholdsalong-terminterestandwhichisjointlycontrolledbytheGroupandoneormoreotherventurersunderacontractualarrangement.Jointarrangementsmaybeeitherjointventuresorjointoperations.Anassociateisanentity,beingneitherasubsidiarynorajointarrangement,inwhichtheGroupholdsalong-terminterestandwheretheGrouphasasignificantinfluence.Theresultsofjointventuresandassociatesareaccountedforusingtheequitymethodofaccounting.Jointoperationsareaccountedforusingproportionateaccounting.

Anysubsidiaryundertaking,jointarrangementorassociatesoldoracquiredduringtheyearareincludedupto,orfrom,thedateofchangeofcontrol.Transactionswithnon-controllinginterestsarerecordeddirectlyinequity.

TheCommercialMarinebusinesswasdisposedofon1April2019andRolls-RoycePowerDevelopmentLimitedwasdisposedofon15April2019.WeannouncedtheproposeddisposaloftheNorthAmericaCivilNuclearbusinesson26September2019,andtheKnowledgeManagementSystembusinesson17December2019.BothNorthAmericaCivilNuclearandKnowledgeManagementSystemhavebeentreatedasadisposalgroupheldforsaleat31December2019,withtheirassetsandliabilitiespresentedseparatelyinthebalancesheet.Thesedisposalswerecompletedon31January2020and3February2020respectively.In2018,L’Orangewasdisposedofon1JuneandCommercialMarinewastreatedasadisposalgroupandheldforsale(seenote27).

On30September2019,weacquiredSiemens’eAircraftbusinessandinaccordancewithIFRS3Business Combinations,thefairvalue oftheassetsandliabilitiesacquiredhavebeenconsolidatedintheGroup’sresultsfromthedateofacquisition(seenote27).

Allintra-grouptransactions,balances,incomeandexpensesareeliminatedonconsolidation.Adjustmentsaremadetoeliminatethe profitorlossarisingontransactionswithjointarrangementsandassociatestotheextentoftheGroup’sinterestintheentity.

Revenue recognition

Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combinedIntheCivilAerospacebusiness,OEcontractsarewiththeairframers(exceptforspareengines),whiletheaftermarketcontractsarewiththeaircraftoperators,althoughtheremaybeinterdependenciesbetweenthem.IFRS15Revenue from Contracts with Customers includesguidanceonthecombinationofcontracts,inparticularthatcontractswithunrelatedpartiesshouldnotbecombined.Notwithstandingtheinterdependencies,theDirectorsconsiderthat,astheoperatorsareultimatelypurchasinganaircraftfromtheairframer,ofwhichtheenginesarepart,theenginecontractshouldbeconsideredseparatelyfromtheaftermarketcontract.Inmakingthisjudgement,theyalsotookaccountofindustrypractice.

Key judgement – How performance on long-term aftermarket contracts should be measuredTheGroupgeneratesasignificantproportionofitsrevenuefromaftermarketarrangements.Theseaftermarketcontracts,suchasTotalCareandCorporateCareagreementsintheCivilAerospacebusiness,coverarangeofservicesandgenerallyhavecontractualtermscoveringmorethanoneyear.Underthesecontracts,theGroup’sprimaryobligationistomaintaincustomers’enginesinanoperationalconditionandthisisachievedbyundertakingvariousactivities,suchasmaintenance,repairandoverhaul,andenginemonitoringovertheperiodofthecontract.Revenueonthesecontractsisrecognisedovertheperiodofthecontractandthebasisformeasuringprogressisamatterofjudgement.TheDirectorsconsiderthatthestageofcompletionofthecontractisbestmeasuredbyusingtheactualcostsincurredtodatecomparedtotheestimatedcoststocompletetheperformanceobligations,asthisreflectstheextentofcompletionoftheactivitiesperformed.

Key judgement – Whether any costs should be treated as wastageInrarecircumstances,theGroupmayincurcostsofwastedmaterial,labourorotherresourcestofulfilacontractwherethelevelofcostwasnotreflectedinthecontractprice.TheidentificationofsuchcostsisamatterofjudgementandwouldonlybeexpectedtoarisewheretherehasbeenaseriesofabnormaleventswhichgiverisetoasignificantlevelofcostwhichisalsoofanaturethattheGroupwouldnotexpecttoincurandhenceisnotreflectedinthecontractprice.Forexample:wheretherearetechnicalissuesthatrequireresolutiontomeetregulatoryrequirements;haveawide-rangingimpactacrossaproducttype;andcausesignificantoperationaldisruptiontocustomers.Similarly,intheserarecircumstances,significantdisruptioncoststosupportcustomersresultingfromtheactualperformanceofadeliveredgoodorservicemaybetreatedasacostintheperiod.Anycostsidentifiedaswastageareexpensedwhentheobligationtoincurthemarises–seenote2.

Key judgement – Whether sales of spare engines to joint ventures are at fair valueTheCivilAerospacebusinessmaintainsapoolofspareenginestosupportitscustomers.Someoftheseenginesaresoldto,andheldby,jointventurecompanies.Theassessmentofwhetherthesalespricereflectsfairvalueisakeyjudgement.TheGroupconsidersthatbaseduponitsassessment,andbycomparisontothesalespriceofspareenginestootherthirdparties,thesalesmadetojointventuresreflectthefairvalueofthegoodssold.

Key estimate – Estimates of future revenue and costs on long-term contractual arrangementsTheGrouphaslong-termcontractsthatfallintodifferentaccountingperiodsandwhichcanextendoversignificantperiods(generallyupto25years)–themostsignificantofthesearelong-termservicearrangements(LTSAs)intheCivilAerospacebusiness.Theestimatedrevenueandcostsareinherentlyimpreciseandsignificantestimatesarerequiredtoassess:engineflyinghours,time-on-wingandotheroperatingparameters;thepatternoffuturemaintenanceactivityandthecoststobeincurred;lifecycle costimprovementsoverthetermofthecontracts;andescalationofrevenueandcosts.Theestimatestakeaccountoftheinherentuncertainties,constrainingtheexpectedlevelofrevenueasappropriate.Inaddition,manyoftherevenuesandcostsaredenominatedincurrenciesotherthanthatoftherelevantGroupundertaking.Thesearetranslatedatanestimatedlong-termexchangerates,basedonhistoricaltrendsandeconomicforecasts.


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Key estimate – Estimates of future revenue and costs on long-term contractual arrangements (continued)Aspreviouslyexplained,underIFRS15theGroup,mostsignificantlyinCivilAerospace,experiencesvolatilityinrevenuerecognitionandcontractaccountingadjustmentsof£33mhavebeenrecognisedin2019(2018:£(276)m).Baseduponthestageofcompletionofallwidebodyprogrammesasat31December2019withinCivilAerospace,thefollowingchangesinkeyestimateswouldresultinthefollowingcatch-upadjustmentsrecognisedin2020(atunderlyingrates): – 5%increase/decreaseinshopvisitcostsoverthelifeoftheprogrammes–£142mimpact – 2%increase/decreaseinrevenueoverthelifeoftheprogrammes–£200mimpact

RevenuerecognisedcomprisessalestotheGroup’scustomersafterdiscountsandamountspayabletocustomers.Revenueexcludesvalueaddedtaxes.Thetransactionpriceofacontractistypicallyclearlystatedwithinthecontract,althoughtheabsoluteamountmaybedependentonescalationindicesandlong-termcontractsrequirethekeyestimateshighlightedabove.RefundliabilitieswheresalesaremadewitharightofreturnarenottypicalintheGroup’scontracts.Wheretheydoexist,andconsiderationhasbeenreceived,aportion,basedonanassessmentoftheexpectedrefundliabilityisrecognisedwithinotherpayables.TheGrouphaselectedtousethepracticalexpedientnottoadjustrevenuefortheeffectoffinancingcomponents,wheretheexpectationisthattheperiodbetweenthetransferofgoodsandservicestocustomersandthereceiptofpaymentislessthanayear.

SalesofstandardOE,sparepartsandtimeandmaterialoverhaulservicesaregenerallyrecognisedontransferofcontroltothecustomer.Thisisgenerallyondeliverytothecustomer,unlessthespecificcontractualtermsindicateadifferentpoint.TheDirectorsconsiderwhetherthereisaneedtoconstraintheamountofrevenuetoberecognisedondeliverybasedonthecontractualpositionandanyrelevantfacts,however,thisisnottypicallyrequired.

SalesofservicesandOEspecificallydesignedforthecontract(mostsignificantlyintheDefencebusiness)arerecognisedby referencetotheprogresstowardscompletionoftheperformanceobligation,usingthecostmethoddescribedinthekeyjudgements,providedtheoutcomeofcontractscanbeassessedwithreasonablecertainty.

TheGroupgeneratesasignificantportionofitsrevenueandprofitonaftermarketarrangementsarisingfromtheinstalledOEfleet.Asaconsequence,inparticularintheCivilAerospacelargeenginebusiness,theGroupwilloftenagreecontractualpricesforOEdeliveriesthattakeintoaccounttheanticipatedaftermarketarrangementsandthereforesometimesthismayresultinlossesbeingincurredonOE.Asdescribedinthekeyjudgements,thesecontractsarenotcombined.TheconsiderationintheOEcontractisthereforeallocatedtoOEperformanceobligationsandtheconsiderationintheaftermarketcontracttoaftermarketperformanceobligations.

– Futurevariablerevenuefromlong-termcontractsisconstrainedtotakeaccountoftheriskofnon-recoveryofresultingcontractbalancesfromreducedutilisatione.g.engineflyinghours,basedonhistoricalforecastingexperienceandtheriskofaircraftbeingparkedbythecustomer.

– Asignificantamountofrevenueandcostrelatedtolong-termcontractaccountingisdenominatedincurrenciesotherthanthatoftherelevantGroupundertaking,mostsignificantlyUSdollartransactionsinsterlingandeurodenominatedundertakings.Thesearetranslatedatestimatedlong-termexchangerates.

– Theassessmentofstageofcompletionisgenerallymeasuredforeachcontract.However,incertaincases,suchasforCorporateCareagreementswheretherearemanycontractscoveringaftermarketservices,eachforasmallnumberofengines,theGroupaccountsforaportfolioofcontractstogetherastheeffectontheConsolidatedFinancialStatementswouldnotdiffermateriallyfromapplyingthestandardtotheindividualcontractsintheportfolio.Whenaccountingforaportfoliooflong-termservicearrangementstheGroupusesestimatesandassumptionsthatreflectthesizeandcompositionoftheportfolio.

– Acontractasset/liabilityisrecognisedwherepaymentisreceivedinarrears/advanceofthecostsincurredtomeetperformanceobligations. – Wherematerial,wastagecosts(seekeyjudgementsonpage125)arerecordedasanexceptionalnon-underlyingexpense.

Iftheexpectedcoststofulfilacontractexceedtheexpectedrevenue,acontractlossprovisionisrecognisedfortheexcesscosts.

TheGrouppaysparticipationfeestoairframemanufacturers,itscustomersforOE,oncertainprogrammes.AmountspaidareinitiallytreatedascontractassetsandsubsequentlychargedasareductiontotheOErevenuewhentheengineistransferredtothecustomer.

TheGrouphaselectedtousethepracticalexpedienttoexpenseasincurredanyincrementalcostsofobtainingorfulfillingacontract iftheamortisationperiodofanassetcreatedwouldhavebeenoneyearorless.Wherecoststoobtainacontractarerecognisedinthebalancesheettheyareamortisedovertheperformanceoftherelatedcontract(averageofthreeyears).


1 Accounting policies continuedRisk and revenue sharing arrangements (RRSAs)

Key judgement – Determination of the nature of entry fees receivedRRSAswithkeysuppliers(worksharepartners)areafeatureoftheCivilAerospacebusiness.Underthesecontractualarrangements,thekeycommercialobjectivesarethat:(i)duringthedevelopmentphasetheworksharepartnersharesintherisksofdevelopinganenginebyperformingitsowndevelopmentwork,providingdevelopmentpartsandpayinganon-refundablecashentryfee;and (ii)duringtheproductionphaseitsuppliescomponentsinreturnforashareoftheprogrammecashflowsasa‘lifeoftype’supplier(i.e.aslongastheengineremainsinservice).

Thenon-refundablecashentryfeeisjudgedbytheGrouptobeacontributiontowardsthedevelopmentexpenditureincurred. Thesereceiptsaredeferredonthebalancesheetandrecognisedagainstthecostofsalesovertheestimatednumberofunits to be delivered.

Thepaymentstosuppliersoftheirsharesoftheprogrammecashflowsfortheirproductioncomponentsarechargedtocostofsalesasprogrammerevenuearises.Cashentryfeesreceivedareinitiallydeferredonthebalancesheetandrecognisedasareductionincostofsalesincurred,ona15-yearstraight-linebasisprorataovertheestimatednumberofunitsproduced.

TheGrouphasarrangementswiththirdpartieswhoinvestinaprogrammeandreceiveareturnbasedonitsperformance,butdonot undertakedevelopmentworkorsupplyparts.Sucharrangements(financialRRSAs)arefinancialinstrumentsasdefinedbyIAS 32 Financial Instruments: Presentationandareaccountedforusingtheamortisedcostmethod.

Royalty paymentsWhereagovernmentorsimilarbodyhaspreviouslyacquiredaninterestintheintellectualpropertyofaprogramme,royaltypaymentsarematchedtotherelatedsales.

Government grantsGovernmentgrantsarerecognisedintheincomestatementsoastomatchthemwiththerelatedexpensesthattheyareintendedtocompensate.Wheregrantsarereceivedinadvanceoftherelatedexpenses,theyareinitiallyrecognisedinthebalancesheetandreleasedtomatchtherelatedexpenditure.Non-monetarygrantsarerecognisedatfairvalue.

InterestInterestreceivable/payableiscredited/chargedtotheincomestatementusingtheeffectiveinterestmethod.Whereborrowingcostsareattributabletotheacquisition,constructionorproductionofaqualifyingasset,suchcostsarecapitalisedaspartofthespecificasset.

Taxation

Key judgement – Whether deferred tax assets should be recognisedDeferredtaxassetsarerecognisedtotheextentitisprobablethatfuturetaxableprofitswillbeavailable,againstwhichthedeductibletemporarydifferencecanbeutilised,basedonmanagement’sassumptionsrelatingtothequantumoffuturetaxableprofits.

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 assetsFuturetaxableprofitsrequiresignificantestimatestobemade,including:thepatternoffuturemaintenanceactivityandthecoststobeincurred;lifecyclecostimprovementsoverthetermofthecontracts;andescalationofrevenueandcosts.Theestimatestakeaccountoftheinherentuncertainties,constrainingtheexpectedlevelofprofitasappropriate.Changesintheseestimateswillaffectfutureprofitsandthereforetherecoverabilityofthedeferredtaxassets.Furtherdetailscanbefoundinnote5.

A5%changeinmargininthemainCivilAerospacewidebodyprogrammeswouldresultinanincrease/decreaseinprofitsbycirca£2bn(increase/decreasethedeferredtaxassetby£170m).

Thetaxcharge/creditontheprofitorlossfortheyearcomprisescurrentanddeferredtax:

– Currenttaxistheexpectedtaxpayablefortheyear,usingtaxratesenactedorsubstantivelyenactedatthebalancesheetdate,andanyadjustmenttotaxpayableinrespectofpreviousyears.

– Deferredtaxisprovidedusingthebalancesheetliabilitymethod,providingfortemporarydifferencesbetweenthecarryingamountsoftheassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedfortaxpurposesandiscalculatedusingtheenactedorsubstantivelyenactedratesthatareexpectedtoapplywhentheassetorliabilityissettled.IntheUK,thedeferredtaxliabilityonthepensionschemesurplusisrecognisedconsistentlywiththebasisforrecognisingthesurplus,i.e.attherateapplicabletorefundsfromatrust.

TaxischargedorcreditedtotheincomestatementorOCIasappropriate,exceptwhenitrelatestoitemscreditedorchargeddirectlytoequityinwhichcasethetaxisalsodealtwithinequity.

Deferredtaxliabilitiesarerecognisedfortaxabletemporarydifferencesarisingoninvestmentsinsubsidiariesandjointarrangements,exceptwheretheGroupisabletocontrolthereversalofthetemporarydifferenceanditisprobablethatthetemporarydifferencewill notreverseintheforeseeablefuture.Deferredtaxisnotrecognisedontaxabletemporarydifferencesarisingontheinitialrecognition ofgoodwillorfortemporarydifferencesarisingfromtheinitialrecognitionofassetsandliabilitiesinatransactionthatisnotabusinesscombinationandthataffectsneitheraccountingnortaxableprofit.


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1 Accounting policies continuedDeferredtaxassetsarerecognisedonlytotheextentthatitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheassetscanbeutilised.FurtherdetailsontheGroup’staxpositioncanbefoundonpage204.

Foreign currency translationTransactionsdenominatedincurrenciesotherthanthefunctionalcurrencyofthetransactingGroupundertakingaretranslatedintothefunctionalcurrencyattheaveragemonthlyexchangeratewhenthetransactionoccurs.Monetaryassetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedintotherelevantfunctionalcurrencyattherateprevailingattheyearend.Exchangedifferencesarisingonforeignexchangetransactionsandtheretranslationofassetsandliabilitiesintofunctionalcurrenciesattherateprevailingattheyearendareincludedinprofit/(loss)beforetaxation.

ThetradingresultsofGroupundertakingsaretranslatedintosterlingattheaverageexchangeratesfortheyear.Theassetsandliabilitiesofoverseasundertakings,includinggoodwillandfairvalueadjustmentsarisingonacquisition,aretranslatedattheexchangeratesprevailingattheyearend.Exchangeadjustmentsarisingfromtheretranslationoftheopeningnetinvestments,andfromthetranslationoftheprofitsorlossesataveragerates,arerecognisedinOCI.Thecumulativeamountofexchangeadjustmentswas,ontransitiontoIFRSin2004,deemed to be nil.

Financial instruments

Key judgement – Application of the business model and ‘solely payments of principal and interest’ testTheGroup’scustomerinvoiceshaverelativelyshortpaymenttermsandtherelatedcontractsareexposedtobasiccreditriskandtimevalueofmoneyandthereforetheassociatedfinancialassetsareheldaspaymentsofprincipalandinterest.

TheGroup’scustomerinvoicesareordinarilysettledattheirduedate,inaccordancewiththecontractualpaymentterms.Forcertaincustomers,theGrouphastherighttodiscountinvoicesbeforetheirduedatetoacceleratepayment.Wherethisoccurs,customerbalancesareclassifiedas‘heldtocollectandsell’.FairvaluemovementsarerecognisedinOCI,ifmaterial(seenote14).

Financial instruments – Classification and measurementFinancial assetsFinancialassetsprimarilyincludetradereceivables,cashandcashequivalents(comprisingcashatbank,moneymarketfundsandshort-termdeposits),short-terminvestments,derivatives(foreignexchange,commodityandinterestratecontracts),andunlistedinvestments. – Tradereceivablesareclassifiedeitherasheldtocollectandmeasuredatamortisedcostorasheldtocollectandsellandmeasuredatfairvaluethroughothercomprehensiveincome(FVOCI).TheGroupmayselltradereceivablesduefromcertaincustomersbeforetheduedate.Anytradereceivablesfromsuchcustomersthatarenotsoldatthereportingdateareclassifiedas‘heldtocollectandsell’.

– Cashandcashequivalents(consistingofbalanceswithbanksandotherfinancialinstitutions,money-marketfunds,short-termdeposits)andshort-terminvestmentsaresubjecttolowmarketrisk.Cashbalancesandshort-terminvestmentsaremeasuredatfairvaluethroughprofitandloss(FVPL).Moneymarketfundsandshort-termdepositsaremeasuredatFVOCI.

– DerivativesandunlistedinvestmentsaremeasuredatFVPL.

Financial liabilitiesFinancialliabilitiesprimarilyconsistoftradepayables,borrowings,derivatives,financialRRSAsandCShares. – DerivativesareclassifiedandmeasuredatFVPL. – Allotherfinancialliabilitiesareclassifiedandmeasuredatamortisedcost.

Financial instruments – Impairment of financial assets and contract assetsIFRS9Financial Instrumentssetsoutthebasisfortheaccountingofexpectedcreditlosses(ECLs)onfinancialassetsandcontractassetsresultingfromtransactionswithinthescopeofIFRS15.TheGrouphasadoptedthesimplifiedapproachtoprovideforECLs,measuring thelossallowanceataprobabilityweightedamountthatconsidersreasonableandsupportableinformationaboutpastevents,currentconditionsandforecastsoffutureeconomicconditionsofcustomers.Theseareincorporatedinthesimplifiedmodeladoptedbyusingcreditratingswhicharepubliclyavailableorthroughinternalriskassessmentsderivedusingthecustomer’slatestavailablefinancialinformation.TheECLsareupdatedateachreportingdatetoreflectchangesincreditrisksinceinitialrecognition.ECLsarecalculated forallfinancialassetsinscope,regardlessofwhetherornottheyareoverdue.

Financial instruments – Hedge accountingForwardforeignexchangecontractsandcommodityswaps(derivativefinancialinstruments)areheldtomanagethecashflowexposuresofforecasttransactionsdenominatedinforeigncurrenciesorincommoditiesrespectively.Ingeneral,theGrouphaschosentonotapplyhedgeaccountinginrespectoftheseexposures.Priortoitsacquisitionin2017,ITPAeroadoptedhedgeaccountingforitsequivalentexposures.Ithascontinuedtodoso,althoughthevalueofthederivativesisnotmaterial,relativetothoseheldbytherestoftheGroup.

TheGroupeconomicallyhedgesthefairvalueandcashflowexposuresofitsborrowings.Cross-currencyinterestrateswapsareheldtomanagethefairvalueexposuresofborrowingsdenominatedinforeigncurrenciesandaredesignatedasfairvaluehedges.Interestrateswapsareheldtomanagetheinterestrateexposuresoffixedandfloatingrateborrowingsandmaybedesignatedasfairvaluehedges,cashflowhedgesorFVPLasappropriate.


1 Accounting policies continuedDerivativefinancialinstrumentsqualifyforhedgeaccountingwhen:(i)thereisaformaldesignationanddocumentationatinceptionofthehedgeofthehedgingrelationshipandtheGroup’sriskmanagementobjectiveandstrategyforundertakingthehedge;and(ii)thehedgeisexpectedtobeeffective.

Changesinthefairvaluesofderivativesthataredesignatedasfairvaluehedgesarerecogniseddirectlyintheincomestatement.ThefairvaluechangesofeffectivecashflowhedgederivativesarerecognisedinOCIandsubsequentlyrecycledintheincomestatementtomatchtherecognitionofthehedgeditem.Anyineffectivenessinthehedgingrelationshipsisincludedintheincomestatement.

Hedgeaccountingisdiscontinuedwhenthehedginginstrumentexpiresorissold,terminated,exercised,ornolongerqualifiesforhedgeaccounting.Atthattime,forcashflowhedgesandiftheforecasttransactionremainsprobable,anycumulativegainorlossonthehedginginstrumentrecognisedinOCIisretaineduntiltheforecasttransactionoccurs.Ifahedgedtransactionisnolongerexpectedtooccur,thenetcumulativegainorlossisrecycledtotheincomestatement.

Financial instruments – Replacement of benchmark interest ratesFollowingthefinancialcrisis,thereformandreplacementofbenchmarkinterestratessuchasGBPLIBORandotherinterbankofferedrates(IBORs)hasbecomeapriorityforglobalregulators.Thereiscurrentlyuncertaintyaroundthetimingandprecisenatureofthesechanges.TheGroup’sriskexposurethatisdirectlyaffectedbytheinterestratebenchmarkreformisitsportfoliooflong-termborrowingsof£3.0bn.Theseborrowingsarehedged,usinginterestrateswapsandcross-currencyinterestrateswaps,forchangesinfairvalueattributabletotherelevantbenchmarkinterestrate.However,aspartofthereformsnotedabove,theUKFinancialConductAuthorityhas decidedtonolongercompelpanelbankstoparticipateintheIBORsubmissionprocessaftertheendof2021andtoceaseoversight ofthesebenchmarkinterestrates.RegulatoryauthoritiesandprivatesectorworkinggroupshavebeendiscussingalternativebenchmarkratesforIBOR.ItiscurrentlyanticipatedthatIBORrateswillbereplacedwithabackwardlookingrisk-freeratebasedon actualtransactions.

ManagementisintheprocessofestablishingacommitteetooverseetheGroup’sIBORtransitionplan.Thistransitionprojectwillincludechangestosystems,processes,riskandvaluationmodels,aswellasmanagingrelatedtaxandaccountingimplications.TheGroupcurrentlyanticipatesthattheareasofgreatestchangewillbeamendmentstothecontractualtermsofIBOR-referencedfloating-ratedebtandswaps,andupdatinghedgedesignations.

DuetotheuncertaintyaroundthesechangestheGrouphaselectedtoearlyadopttheAmendmentstoIFRS9,IAS39andIFRS7Interest Rate Benchmark ReformissuedinSeptember2019.Inaccordancewiththetransitionprovisions,theamendmentshavebeenadoptedretrospectivelytohedgingrelationshipsthatexistedatthestartofthereportingperiodorweredesignatedthereafter.TheamendmentsprovidetemporaryrelieffromapplyingspecifichedgeaccountingrequirementstohedgingrelationshipsdirectlyaffectedbyIBORreform.

ThereliefshavetheeffectthatIBORreformshouldnotgenerallycausehedgeaccountingtoterminate.However,anyhedgeineffectivenessshouldcontinuetoberecordedintheincomestatement.Furthermore,theamendmentssetouttriggersforwhenthereliefswillend,whichincludetheuncertaintyarisingfrominterestratebenchmarkreformnolongerbeingpresent.

Insummary,thereliefsprovidedbytheamendmentsthatapplytotheGroupare:

– Inassessingwhetherthehedgeisexpectedtobehighlyeffectiveonaforward-lookingbasis,theGrouphasassumedthattherelevantIBORinterestrateonwhichthecashflowsoftheinterestrateswapthathedgesfixed-rateborrowingsisnotalteredbyIBORreform.

– TheGrouphasassessedwhetherthehedgedIBORriskcomponentisaseparatelyidentifiableriskonlywhenitfirstdesignatesaborrowingasincludedinahedgingrelationshipandnotonanongoingbasis.Anyhedgeineffectivenessrelatingtofairvaluehedges isrecognisedimmediatelyintheincomestatement.

Business combinations and goodwill

Key judgement – Identification of acquired assets and liabilitiesInallocatingthepurchasepricetotheacquiredassetsandliabilities,suchastechnology,patentsandlicences,customerrelationships,trademarksandin-processdevelopment,judgementisrequired.TheallocationsbasedontheGroup’sindustryexperienceandtheadviceofthirdpartyvaluers,ifrequired.

GoodwillrecognisedrepresentstheexcessofthefairvalueofthepurchaseconsiderationoverthefairvaluetotheGroupofthenet oftheidentifiableassetsacquiredandtheliabilitiesassumed.OntransitiontoIFRSon1January2004,businesscombinationswerenotretrospectivelyadjustedtocomplywithAdoptedIFRSandgoodwillwasrecognisedbasedonthecarryingvalueunderthepreviousaccountingpolicies.Goodwillinrespectoftheacquisitionofasubsidiaryisrecognisedasanintangibleasset.Goodwillarisingontheacquisitionofjointarrangementsandassociatesisincludedinthecarryingvalueoftheinvestment.

Customer relationshipsThefairvalueofcustomerrelationshipsrecognisedasaresultofabusinesscombinationrelatetotheacquiredcompany’sestablishedrelationshipswithitsexistingcustomersthatresultinrepeatpurchasesandcustomerloyalty.Amortisationischargedonastraight-linebasisoveritsusefuleconomiclife,uptoamaximumof15years.

Certification costsCostsincurredinrespectofmeetingregulatorycertificationrequirementsfornewCivilAerospaceaeroengine/aircraftcombinationsincludingpaymentsmadetoairframemanufacturersforthisarerecognisedasintangibleassetstotheextentthattheycanberecoveredoutoffuturesales.Theyarechargedtotheincomestatementovertheprogrammelifeona15-yearstraight-linebasisprorataovertheestimatednumberofunitsproduced.


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1 Accounting policies continuedResearch and development

Key judgement – Determination of the point in time where costs incurred on an internal programme development meet the criteria for capitalisation or ceasing capitalisationTheGroupincurssignificantresearchanddevelopmentexpenditureinrespectofvariousdevelopmentprogrammes.Determiningwhencapitalisationshouldcommenceandceaseisacriticaljudgement,asisthedeterminationofwhensubsequentexpenditureontheprogrammeassetsshouldbecapitalised.

WithintheGroupthereisanestablishedProductIntroductionandLifecycleManagementprocess(PILM)inplace.Withinthisprocess,thetechnicalfeasibility,thecommercialviabilityandfinancialassessmentoftheprogrammeisassessedatcertainmilestones.Whenthesearemet,developmentexpenditureiscapitalised.Priortothis,expenditureisexpensedasincurred.

SubsequentexpenditureafterentryintoservicewhichenhancestheperformanceoftheengineandtheeconomicbenefitstotheGroupiscapitalised.ThisexpenditureisreferredtoasenhancedperformanceandisgovernedbythePILMprocessreferredtoabove.Allotherdevelopmentcostsareexpensedasincurred.

Key judgement – Determination of the basis for amortising capitalised development costsTheeconomicbenefitsofthedevelopmentcostsareprimarilythosecashinflowsarisingfromlong-termserviceagreements,whichareexpectedtoberelativelyconsistentforeachengine.Amortisationofdevelopmentcostsisrecognisedonastraight-linebasisover15yearsonaproportionalbasistoaircraftdelivery.

Expenditureincurredonresearchanddevelopmentisdistinguishedasrelatingeithertoaresearchphaseortoadevelopmentphase. Allresearchphaseexpenditureischargedtotheincomestatement.Developmentexpenditureisrecognisedasaninternallygeneratedintangibleasset(programmeasset)onlyifitmeetsstrictcriteria,relatinginparticulartotechnicalfeasibilityandgenerationoffutureeconomicbenefits.

Morespecifically,developmentcostsarecapitalisedfromthepointatwhichthefollowingconditionshavebeenmet:

– thetechnicalfeasibilityofcompletingtheprogrammeandtheintentionandability(availabilityoftechnical,financialandotherresources)tocompletetheprogrammeassetanduseorsellit;

– theprobabilitythatfutureeconomicbenefitswillflowfromtheprogrammeasset;and – theabilitytomeasurereliablytheexpenditureattributabletotheprogrammeassetduringitsdevelopment.

Capitalisationcontinuesuntilthepointatwhichtheprogrammeassetmeetsitsoriginallycontractedtechnicalspecification(definedinternallyasthepointatwhichtheassetiscapableofoperatinginthemannerintendedbymanagement).

SubsequentexpenditureiscapitalisedwhereitenhancesthefunctionalityoftheprogrammeassetanddemonstrablygeneratesanenhancedeconomicbenefittotheGroup.Allothersubsequentexpenditureonprogrammeassetsisexpensedasincurred.

Thedevelopmentcostsassociatedwitheachengineareamortisedonastraight-linebasis,overa15-yearperiodfromitsdelivery.Theperiodof15yearsisanestimateoftheperiodofoperationoftheenginebyitsinitialoperator.InaccordancewithIAS38,thebasisonwhichprogrammeassetsareamortisedisassessedannually.

SoftwareSoftwarethatisnotspecifictoanitemofproperty,plantandequipmentisclassifiedasanintangibleasset,recognisedatitsacquisitioncostandamortisedonastraight-linebasisoveritsusefuleconomiclife,uptoamaximumoffiveyears.Thecostofinternallydevelopedsoftwareincludesdirectlabourandanappropriateproportionofoverheads.

Other intangible assetsTheseprincipallyincludeintangibleassetsarisingonacquisitionofbusinesses,suchastechnology,patentsandlicenceswhichareamortisedonastraight-linebasisoveramaximumof15yearsandtrademarkswhicharenotamortised.

Property, plant and equipmentProperty,plantandequipmentarestatedatacquisitioncostlessaccumulateddepreciationandanyprovisionforimpairmentinvalue. Thecostofself-constructedassetsincludesthecostofmaterials,directlabourandanappropriateproportionofoverheadsand,whereappropriate,interest.

Depreciationisprovidedonastraight-linebasistowriteoffthecost,lesstheestimatedresidualvalue,ofproperty,plantandequipmentovertheirestimatedusefullives.Nodepreciationisrecordedonassetsinthecourseofconstruction.Estimatedusefullivesarereassessedannuallyandareasfollows:

– Landandbuildings,asadvisedbytheGroup’sprofessionaladvisers: – freeholdbuildings–fiveto45years(average25years); – leaseholdbuildings–lowerofadviser’sestimatesorperiodoflease;and – nodepreciationisprovidedonfreeholdland.

– Plantandequipment–fiveto25years(average12years). – Aircraftandengines–fiveto20years(average14years).


1 Accounting policies continuedLeases

Key judgement – Determination of lease termIndeterminingtheleaseterm,theGroupconsidersallfactsandcircumstancesthatcreateaneconomicincentivetoexerciseanextensionoption,ornotexerciseaterminationoption.Extensionoptions(orperiodsaftertermination)areonlyincludedintheleasetermiftheleaseisreasonablycertaintobeextended(ornotterminated).Certainlandandbuildingleaseshaverenewaloptionswithrenewaldatesforthemostsignificantpropertyleasesevenlyspreadbetween2022–2028andin2041.TheGroupreviewsitsjudgementsonleasetermsannually,includingtheoperationalsignificanceofthesite,especiallywhereutilisedformanufacturingactivities.

Key estimates – Estimates of the payments required to meet residual value guarantees at the end of engine leasesEngineleasesintheCivilAerospacesegmentoftenincludeclausesthatrequiretheenginestobereturnedtothelessorwithspecificlevelsofuseableliferemainingorcashpaymentstothelessor.Thecostsofmeetingtheserequirementsareincludedintheleasepayments.Theamountspayablearecalculatedbaseduponanestimateoftheutilisationoftheenginesovertheleaseterm,whethertheengineisrestoredtotherequiredconditionbyperforminganoverhaulatourowncostorthroughthepaymentsofamountsspecifiedinthecontractandanynewcontractualarrangementsarisingwhenthecurrentleasecontractsend.At31December2019,theleaseliabilityincluded£401mrelatingtothecostofmeetingtheseresidualvalueguarantees,withupto£80min2020and£112mdueoverthefollowingfouryears.Whereestimatesofpaymentschange,anadjustmentismadetotheleaseliabilityandthe right-of-useasset.

Assetsandliabilitiesarisingfromaleaseareinitiallymeasuredonapresentvaluebasis.Leaseliabilitiesincludethenetpresentvalueofthefollowingleasepayments:

– fixedpaymentslessanyleaseincentivereceivable; – variableleasepaymentsthatarebasedonanindexorarate; – amountsexpectedtobepayablebytheGroupunderresidualvalueguarantees; – theexercisepriceofapurchaseoptioniftheGroupisreasonablycertaintoexercisethatoption;and – paymentsofpenaltiesforterminationofthelease,iftheleasetermreflectstheGroupexercisingthatoption.

Whereleasescommenceaftertheinitialtransitiondate,theleasepaymentsarediscountedusingtheinterestrateimplicitinthelease. Ifthatratecannotbedetermined,theGroup’sincrementalborrowingrateisused,beingtheratethattheGroupwouldhavetopaytoborrowthefundsnecessarytoobtainanassetofsimilarvalueinasimilareconomicenvironmentwithsimilartermsandconditions.Leaseliabilitiesarerevaluedateachreportingdateusingthespotexchangerate.

Right-of-useassetsaremeasuredatcostcomprisingthefollowing:

– theamountoftheinitialmeasurementofleaseliabilityorarevaluationoftheliability; – anyleasepaymentsmadeatorbeforethecommencementdatelessanyleaseincentivesreceived; – anyinitialdirectcosts;and – restorationcosts.

Eachright-of-useassetisdepreciatedovertheshorterofitsusefuleconomiclifeandtheleasetermonastraight-linebasisunlesstheleaseisexpectedtotransferownershipoftheunderlyingassettotheGroup,inwhichcasetheassetisdepreciatedtotheendoftheusefullifeoftheasset.

Paymentsassociatedwiththeshort-termleasesarerecognisedonastraight-linebasisasanexpenseintheincomestatement.Short-termleasesareleaseswithaleasetermof12monthsorless.

Impairment of non-current assets

Key judgement – Determination of cash-generating units for assessing impairment of goodwillTheGroupconductsimpairmentreviewsatthecashgeneratingunit(CGU)level.AspermittedbyIAS36Impairment of assets,impairmentreviewsforgoodwillareperformedatthegroupsofCGUslevel,representingthelowestlevelatwhichtheGroupmonitorsgoodwillforinternalmanagementpurposesandnohigherthantheGroup’soperatingsegments.ThelevelatwhichgoodwillimpairmentreviewswasperformedwasattheRolls-RoyceDeutschlandLtd&CoKGandRolls-RoycePowerSystemsAGaggregatedlevel.

Key estimate – Estimates of cash flow forecasts and discount rates to support the carrying value of intangible assets (including programme related intangible assets)ThecarryingvalueofintangibleassetsonthebalancesheetisdependentontheestimatesoffuturecashflowsarisingfromtheGroup’soperations,inparticular: – Theassessmentastowhetherthereareanyindicationsofimpairmentofdevelopmentexpenditure,certificationcosts,andcustomerrelationshipsrecognisedasintangibleassets(31 December 2019: £3,612m,31December2018:£3,427m)isdependentonestimatesofcashflowsgeneratedbytherelevantprogramme,thediscountrateusedtocalculateapresentvalueandassumptionson foreign exchange rates.

– Inaddition,inrelationtoprogrammeintangibleassets,estimatescomprise:productperformancerelatedestimates(includingflyinghoursandtime-on-wing);andestimatesforfuturemarketshare,pricingandcostforuncontractedbusiness.Sensitivitieshavebeendisclosed in note 9.


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1 Accounting policies continuedImpairmentofnon-currentassetsisconsideredinaccordancewithIAS36.Wheretheassetdoesnotgeneratecashflowsthatareindependentofotherassets,impairmentisconsideredforthecash-generatingunittowhichtheassetbelongs.Goodwill,indefinitelifeintangibleassetsandintangibleassetsnotyetavailableforusearetestedforimpairmentannually.Otherintangibleassets(includingprogrammerelatedintangibleassets),property,plantandequipmentandinvestmentsareassessedforanyindicationsofimpairmentannually.Ifanyindicationofimpairmentisidentified,animpairmenttestisperformedtoestimatetherecoverableamount.

Iftherecoverableamountofanasset(orcash-generatingunit)isestimatedtobebelowthecarryingvalue,thecarryingvalueisreducedtotherecoverableamountandtheimpairmentlossisrecognisedasanexpense.Therecoverableamountisthehigherofvalueinuseorfairvaluelesscoststodispose,ifthisisreadilyavailable.Thevalueinuseisthepresentvalueoffuturecashflowsusingapre-taxdiscountratethatreflectsthetimevalueofmoneyandtheriskspecifictotheasset.

InventoriesInventoriesarevaluedonafirst-in,first-outbasis,atthelowerofcostandnetrealisablevalue.Costcomprisesdirectmaterialsand,whereapplicable,directlabourcostsandthosedirectandindirectoverheads,includingdepreciationofproperty,plantandequipment,thathavebeenincurredinbringingtheinventoriestotheirpresentlocationandcondition.Netrealisablevaluerepresentstheestimatedsellingpriceslessallestimatedcostsofcompletionandcoststobeincurredinmarketing,sellinganddistribution.AllinventoriesareclassifiedascurrentasitisexpectedthattheywillbeusedintheGroup’soperatingcycle,regardlessofwhetherthisisexpectedtobewithin12monthsofthebalancesheetdate.

Cash and cash equivalentsCashandcashequivalentsincludecashatbankandinhand,investmentsinmoney-marketfundsandshort-termdepositswithamaturityofthreemonthsorlessoninception.TheGroupconsidersoverdrafts(repayableondemand)tobeanintegralpartofitscashmanagementactivitiesandtheseareincludedincashandcashequivalentsforthepurposesofthecashflowstatement.WheretheGroupoperatespooledbankingarrangementsacrossmultipleaccounts,thesearepresentedonanetbasiswhenithasbothalegalrightandintentionto settlethebalancesonanetbasis.

Invoice discounting –TheGrouponaperiodicbasisundertakesthesaleofcertaintradereceivablestobanks.Thesetradereceivablesarefactoredonanon-recoursebasisandthereforearederecognisedfromtheGroup’sbalancesheetatthepointofsaletothebank.Furtherdetailsaredisclosedinnote14.

Supply chain financing (SCF) –TheGroupoffersaSCFprogrammeinpartnershipwithbankstoenablesupplierswhoareonourstandard75dayormorepaymenttermstoreceivetheirpaymentsooner.AstheGroupcontinuestohaveacontractualobligationtopayitssuppliersanditdoesnotretainanyongoinginvolvementintheSCF,therelatedpayablesareretainedontheGroup’sbalancesheetandclassifiedastradepayables.Furtherdetailsaredisclosedinnote18.

Provisions

Key judgement – Assessment of satisfying the criteria for the recognition and measurement of provisionsJudgementisrequiredtodeterminewhetheravalidexpectationhasbeencreatedandwhatcostsareallowabletobeprovidedfor(especiallywhenmeasuringcontractlossprovisions).

Key estimate – Estimates of expenditure required to settle the obligation relating to Trent 1000 claims and to settle long-term contracts assessed as onerousTheGrouphasprovisionsat31December2019of £2,804m(31December2018:£1,917m).TheserepresenttheDirectors’bestestimateoftheexpenditurerequiredtosettletheobligationsatthebalancesheetdate.Theseestimatestakeaccountofinformationavailableanddifferentpossibleoutcomes.TheGroupconsidersthatat31December2019,thecontractlossprovisionandtheTrent1000exceptionalcostprovisionaremostsensitivetochangesinestimates.

TheGrouphasconsideredtwosensitivitieswhicharetheimpactofathree-monthdelayonachievingsingledigitAOGsanda 12-monthdelayintheavailabilityofthefinalHPTblade.Ifeitherofthesetwosensitivitiesmaterialisedthefinancialimpactcould beintherangeof£60m–£100m.

ProvisionsarerecognisedwhentheGrouphasapresentobligationasaresultofapastevent,anditisprobablethattheGroupwillberequiredtosettlethatobligationandarediscountedtopresentvaluewheretheeffectismaterial.


1 Accounting policies continuedTheprincipalprovisionsarerecognisedasfollows:

– Trent1000in-serviceissues–whenwastagecostsareidentifiedasdescribedonpage125; – contractlosses–basedonanassessmentofwhetherthedirectcoststofulfilacontractaregreaterthantheexpectedrevenue; – warrantiesandguarantees–basedonanassessmentoffutureclaimswithreferencetopastexperienceandrecognisedattheearlier ofwhentheunderlyingproductsandservicesaresoldandwhenthelikelihoodofafuturecostisidentified;and

– restructuring–whentheGrouphasapprovedadetailedandformalrestructuringplan,andtherestructuringhaseithercommenced or has been publicly announced.

Post-retirement benefits

Key estimate – Estimates of the assumptions for valuing the defined benefit obligationTheGroup’sdefinedbenefitpensionschemesandsimilararrangementsareassessedannuallyinaccordancewithIAS19Employee Benefits.Thevaluation,whichisbasedonassumptionsdeterminedwithindependentactuarialadvice,resultedinanetdeficitof£208mbeforedeferredtaxationbeingrecognisedonthebalancesheetat31December2019(31December2018:surplusof£641m).Thesizeofthenetsurplus/deficitissensitivetotheactuarialassumptions,whichincludethediscountrate,priceinflation,pensionandsalaryincreases,transfers,mortalityandotherdemographicassumptionsandthelevelsofcontributions.Furtherdetailsandsensitivitiesareincludedinnote21.

Pensionsandsimilarbenefits(principallyhealthcare)areaccountedforunderIAS19.

Fordefinedbenefitplans,obligationsaremeasuredatdiscountedpresentvalue,usingadiscountratederivedfromhigh-qualitycorporatebondsdenominatedinthecurrencyoftheplan,whilstplanassetsarerecordedatfairvalue.SurplusesinschemesarerecognisedasassetsonlyiftheyrepresenteconomicbenefitsavailabletotheGroupinthefuture.

Theserviceandfinancingcostsofsuchplansarerecognisedseparatelyintheincomestatement:

– currentservicecostsarespreadsystematicallyoverthelivesofemployees; – past-servicecostsandsettlementsarerecognisedimmediately;and – financingcostsarerecognisedintheperiodsinwhichtheyarise.

ActuarialgainsandlossesarerecognisedimmediatelyinOCI.

In2018,followingclarificationprovidedbytheHighCourtjudgementontheLloydsBankingGroupon26October2018,intheUK,theGrouprecognisedtheestimatedimpactoftheobligationtoequalisepensionsformenandwomenasapast-servicecost–seenote21.

Paymentstodefinedcontributionschemesarechargedasanexpenseastheyfalldue.

Share-based paymentsTheGroupprovidesshare-basedpaymentarrangementstocertainemployees.Theseareprincipallyequity-settledarrangementsandaremeasuredatfairvalue(excludingtheeffectofnon-marketbasedvestingconditions)atthedateofgrant.Thefairvalueisexpensedonastraight-linebasisoverthevestingperiod.Theamountrecognisedasanexpenseisadjustedtoreflecttheactualnumberofsharesoroptionsthatwillvest,exceptwhereadditionalsharesvestasaresultofthetotalshareholderreturn(TSR)performanceconditioninthelong-termincentiveplan(LTIP).

Cash-settledshareoptions(grantsintheInternationalShareSaveplan)aremeasuredatfairvalueatthebalancesheetdate.TheGrouprecognisesaliabilityatthebalancesheetdatebasedonthesefairvalues,takingintoaccounttheestimatednumberofoptionsthatwillactuallyvestandtherelativecompletionofthevestingperiod.Changesinthevalueofthisliabilityarerecognisedintheincomestatementfortheyear.

ThecostofsharesofRolls-RoyceHoldingsplcheldbytheGroupforthepurposeoffulfillingobligationsinrespectofemployeeshareplansisdeductedfromequityintheconsolidatedbalancesheet.Seenote23forafurtherdescriptionoftheshare-basedpaymentplans.

Customer financing supportInconnectionwiththesaleofitsproducts,theGroupwill,onoccasion,providefinancingsupportforitscustomers.Thesearrangementsfallintotwocategories:credit-basedguaranteesandasset-valueguarantees.InaccordancewiththerequirementsofIFRS9andIFRS4Insurance Contracts,credit-basedguaranteesaretreatedasinsurancecontracts.TheGroupconsidersasset-valueguaranteestobenon-financialliabilitiesandaccordinglythesearealsotreatedasinsurancecontracts.Asdescribedonpage167,theDirectorsconsider thelikelihoodofcrystallisationinassessingwhetherprovisionisrequiredforanycontingentliabilities.

TheGroup’scontingentliabilitiesrelatingtofinancingarrangementsarespreadovermanyyearsandrelatetoanumberofcustomersandabroadproductportfolio,andarereportedonadiscountedbasis.

Post balance sheet eventsNon-adjustingpostbalancesheeteventsinrelationtopensionsandmergersandacquisitionsactivityaredisclosedinnotes21and27respectively.


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Revisions to IFRS not applicable in 2019StandardsandinterpretationsissuedbytheIASBareonlyapplicableifendorsedbytheEU.OtherthanIFRS17Insurance Contracts describedbelow,theGroupdoesnotconsiderthatanystandards,amendmentsorinterpretationsissuedbytheIASB,butnotyetapplicablewillhaveasignificantimpactontheConsolidatedFinancialStatements.

IFRS 17 Insurance ContractsIFRS17 iseffectivefromthebeginningof1January2021(althoughtheIASBproposedtodelaytheeffectivedatebyoneyearto1January2022).IFRS17establishestheprinciplesfortherecognition,measurement,presentationanddisclosureofinsurancecontractswithinthescopeoftheStandard.TheobjectiveofIFRS17istoensurethatanentityprovidesrelevantinformationthatfaithfullyrepresentsthosecontracts.

TheGroupisintheprocessofassessingwhetherthenewstandardwillimpactontheConsolidatedFinancialStatements.

2 Segmental analysisTheanalysisbydivisions(businesssegment)ispresentedinaccordancewithIFRS8Operating Segments,onthebasisofthosesegmentswhoseoperatingresultsareregularlyreviewedbytheBoard(whichactsastheChiefOperatingDecisionMakerasdefinedbyIFRS8).Our fourdivisionsaresetoutbelowandreferredtocollectivelyasthecorebusinesses.

CivilAerospace–development,manufacture,marketingandsalesofcommercialaeroenginesandaftermarketservicesPowerSystems –development,manufacture,marketingandsalesofreciprocatingengines,powersystemsandnuclearsystemsforcivil

powergenerationDefence –development,manufacture,marketingandsalesofmilitaryaeroengines,navalengines,submarinenuclearpowerplantsand

aftermarketservicesITPAero –design,researchanddevelopment,manufactureandcasting,assemblyandtestingofaeronauticalenginesandgasturbines,

andMROservices

Non-corebusinessesincludethetradingresultsoftheNorthAmericaCivilNuclearbusinessandtheKnowledgeManagementSystembusinesswhichhavebeentreatedasadisposalgroupheldforsaleat31December2019,theCommercialMarinebusinessuntilthedateofdisposalon1April2019,Rolls-RoycePowerDevelopmentLimited(RRPD)untilthedateofdisposalon15April2019,L’Orangeuntilthedateofdisposalon1June2018and othersmallerbusinessesincludingformerEnergybusinessesnotincludedinthedisposaltoSiemensin2014(RetainedEnergy).Segmentalanalysisfor2018hasbeenrestatedtoreflectthe2019definitionofnon-core.

Underlying resultsWepresentthefinancialperformanceofourbusinessesinaccordancewithIFRS8andconsistentlywiththebasisonwhichperformanceiscommunicatedtotheBoardeachmonth.UnderlyingresultsarepresentedtoreflecttheeconomicimpactoftheGroup’sforeignexchangeandinterestrateriskmanagementactivitieswithinterestreceivable/(payable)oninterestrateswapsnotdesignatedintohedgingrelationshipsforaccountingpurposesreclassifiedfromfairvaluemovementonareportedbasistointerestreceivable/(payable)onanunderlyingbasis–seenote4.

Underlyingperformanceexcludesthefollowing: – theeffectofacquisitionaccountingandbusinessdisposals; – impairmentofgoodwillandothernon-currentassetswherethereasonsforimpairmentareoutsideofnormaloperatingactivities; – exceptionalitems;and – otheritemswhicharemarketdrivenandoutsidethecontrolofmanagement.

Acquisition accounting, business disposals and impairmentWeexcludethesesothatthecurrentyearandcomparativeresultsaredirectlycomparable.

Exceptional itemsWeclassifyitemsasexceptionalwheretheDirectorsbelievethatpresentationofourresultsinthiswayismorerelevanttoanunderstandingofourfinancialperformance,asexceptionalitemsareidentifiedbyvirtueoftheirsize,natureorincidence.

Indeterminingwhetheraneventortransactionisexceptional,managementconsidersquantitativeaswellasqualitativefactorssuchasthefrequencyorpredictabilityofoccurrence.Examplesofexceptionalitemsincludeone-timecostsandchargesinrespectofaerospaceprogrammes,costsofrestructuringprogrammesandone-timepast-servicechargesandcreditsonourpost-retirementschemes.

In2019,therisk-freediscountrateweappliedtoexceptionalonerouscontractprovisionsreducedfrombetween4%–5%to2%–3%.This waslargelydrivenbymovementsinUSbondsinthelastquarterof2019.Thechangeintherisk-freerate(USbonds)ismarketdriven andtheimpactofthereductionintheratehasbeenincludedasareconcilingdifferencebetweenunderlyingperformanceand reportedperformance.

Exceptionalitemsarenotallocatedtosegmentsandmaynotbecomparabletosimilarlytitledmeasuresusedbyothercompanies.


2 Segmental analysis continuedOther itemsThefinancingcomponentofthedefinedbenefitpensionschemecostisdeterminedbymarketconditionsandhasthereforebeenincludedasareconcilingdifferencebetweenunderlyingperformanceandreportedperformance.

Penaltiespaidonagreementswithinvestigatingbodiesareconsideredtobeone-offinnatureandarethereforeexcludedfromunderlyingperformance.

Thetaxeffectsoftheadjustmentsaboveareexcludedfromtheunderlyingtaxcharge.Inaddition,changesintaxratesorchangesintheamountofrecoverableadvancecorporationtaxrecognisedarealsoexcluded.

Seepage139forthereconciliationbetweenunderlyingperformanceandreportedperformance.

Thefollowinganalysissetsouttheresultsofthecorebusinessesonthebasisdescribedaboveandalsoincludesareconciliationoftheunderlyingresultstothosereportedintheconsolidatedincomestatement.

CivilAerospace

£m

PowerSystems 1

£mDefence

£m ITP Aero

£m

Corporateand

inter-segment£m

Corebusinesses

£m

Year ended 31 December 2019Underlyingrevenuefromsaleoforiginalequipment 3,246 2,386 1,461 782 (502) 7,373 Underlyingrevenuefromaftermarketservices 4,861 1,159 1,789 154 (75) 7,888 Total underlying revenue 8,107 3,545 3,250 936 (577) 15,261 Grossprofit/(loss) 622 909 669 206 (64) 2,342 Commercialandadministrativecosts (299) (374) (151) (61) (53) (938)Restructuring (7) – (7) (1) – (15)Researchanddevelopmentcosts (374) (176) (105) (33) – (688)Shareofresultsofjointventuresandassociates 102 (2) 9 – – 109 Underlying operating profit/(loss) 44 357 415 111 (117) 810

Segment assets 17,954 3,587 2,743 2,160 (2,476) 23,968 Interestsinjointventuresandassociates 365 18 19 – – 402 Segmentliabilities (24,819) (1,450) (2,950) (1,129) 2,645 (27,703)Net(liabilities)/assets (6,500) 2,155 (188) 1,031 169 (3,333)Investmentinintangibleassets,property,plantandequipment,right-of-useassetsandjointventuresandassociates 1,274 197 110 53 – 1,634 Depreciation,amortisationandimpairment 807 278 109 88 – 1,282

Yearended31December2018Underlyingrevenuefromsaleoforiginalequipment 3,119 2,310 1,452 666 (375) 7,172Underlyingrevenuefromaftermarketservices 4,259 1,124 1,672 113 (54) 7,114Totalunderlyingrevenue 7,378 3,434 3,124 779 (429) 14,286Grossprofit 493 866 690 156 35 2,240Commercialandadministrativecosts (336) (363) (170) (57) (51) (977)Restructuring (8) (1) (3) (2) – (14)Researchanddevelopmentcosts (332) (188) (100) (30) – (650)Shareofresultsofjointventuresandassociates 21 1 10 – – 32Underlyingoperating(loss)/profit (162) 315 427 67 (16) 631

Segment assets 14,271 3,692 2,612 2,210 (1,621) 21,164Interestsinjointventuresandassociates 380 14 16 – – 410Segmentliabilities (21,309) (1,651) (2,924) (1,168) 1,743 (25,309)Net(liabilities)/assets (6,658) 2,055 (296) 1,042 122 (3,735)Investmentinintangibleassets,property,plantandequipmentandjointventuresandassociates 1,283 119 151 74 – 1,627Depreciation,amortisationandimpairment 500 234 92 87 – 913

1 TheunderlyingresultsforPowerSystemsfor31December2018havebeenrestatedtoreclassifytheNorthAmericaCivilNuclearbusinessasnon-core.


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2 Segmental analysis continuedReconciliationtoreportedresults

Core businesses

£m

Non-corebusinesses 1,2

£m

Total underlying

£m

Underlying adjustments and

adjustments to foreign exchange

£m

Group at actual

exchange rates

£m

Year ended 31 December 2019Revenuefromsaleoforiginalequipment 7,373 83 7,456 596 8,052 Revenuefromaftermarketservices 7,888 106 7,994 541 8,535 Total revenue 15,261 189 15,450 1,137 16,587 Grossprofit/(loss) 2,342 45 2,387 (1,445) 942 Commercialandadministrativecosts (938) (41) (979) (149) (1,128)Restructuring (15) 1 (14) 14 – Researchanddevelopmentcosts (688) (8) (696) (74) (770)Shareofresultsofjointventuresandassociates 109 1 110 (6) 104 Operating profit/(loss) 810 (2) 808 (1,660) (852)Gainarisingondisposalofbusinesses – – – 139 139 Profit/(loss) before financing and taxation 810 (2) 808 (1,521) (713)Netfinancing (223) (2) (225) 47 (178)Profit/(loss) before taxation 587 (4) 583 (1,474) (891)Taxation (281) 4 (277) (143) (420)Profit/(loss) for the year 306 – 306 (1,617) (1,311)Attributable to:Ordinaryshareholders 302 (1,617) (1,315)Non-controllinginterests 4 – 4

Yearended31December2018Revenuefromsaleoforiginalequipment 7,172 358 7,530 285 7,815Revenuefromaftermarketservices 7,114 423 7,537 377 7,914Total revenue 14,286 781 15,067 662 15,729Grossprofit/(loss) 2,240 210 2,450 (1,252) 1,198Commercialandadministrativecosts (977) (184) (1,161) (434) (1,595)Restructuring (14) (2) (16) 16 –Researchanddevelopmentcosts (650) (39) (689) (79) (768)

Shareofresultsofjointventuresandassociates 32 – 32 (28) 4Operatingprofit/(loss) 631 (15) 616 (1,777) (1,161)GainarisingonthedisposalofL’Orange – – – 358 358Profit/(loss)beforefinancingandtaxation 631 (15) 616 (1,419) (803)Netfinancing (148) (2) (150) (1,994) (2,144)Profit/(loss)beforetaxation 483 (17) 466 (3,413) (2,947)Taxation (153) (8) (161) 715 554Profit/(loss)fortheyear 330 (25) 305 (2,698) (2,393)

Attributableto:Ordinaryshareholders 297 (2,698) (2,401)Non-controllinginterests 8 – 8

1 IncludestheNorthAmericaCivilNuclearbusinessandtheKnowledgeManagementSystembusinesswhichhavebeentreatedasadisposalgroupheldforsaleat31December2019,theCommercialMarinebusinessdisposedofonthe1April2019,RRPDdisposedofonthe15April2019,L’Orangeuntilthedateofdisposalon1June2018andothersmallernon-corebusinessesincludingformerEnergybusinessesnotincludedinthedisposaltoSiemensin2014(RetainedEnergy).Seenote27formoredetails.

2 Non-corebusinessesfor31December2018hasbeenrestatedtoincludetheNorthAmericaCivilNuclearbusiness.


2 Segmental analysis continued

Disaggregation of revenue from contracts with customers

Analysis by type and basis of recognitionCivil

Aerospace£m

Power Systems 1

£mDefence

£m ITP Aero 2

£m

Corporate andinter-segment

£m

Corebusinesses

£m

Year ended 31 December 2019Originalequipmentrecognisedatapointintime 3,246 2,285 567 702 (478) 6,322 Originalequipmentrecognisedovertime – 101 894 80 (24) 1,051 Aftermarketservicesrecognisedatapointintime 1,599 1,026 696 48 (32) 3,337 Aftermarketservicesrecognisedovertime 3,138 133 1,093 106 (43) 4,427 Total underlying customer contract revenue 3 7,983 3,545 3,250 936 (577) 15,137 Otherunderlyingrevenue 124 – – – – 124 Total underlying revenue 8,107 3,545 3,250 936 (577) 15,261

Yearended31December2018Originalequipmentrecognisedatapointintime 3,119 2,257 694 585 (355) 6,300Originalequipmentrecognisedovertime – 53 758 81 (20) 872 Aftermarketservicesrecognisedatapointintime 1,575 996 718 (4) 21 3,306Aftermarketservicesrecognisedovertime 2,630 128 954 117 (75) 3,754Totalunderlyingcustomercontractrevenue3 7,324 3,434 3,124 779 (429) 14,232Otherunderlyingrevenue 54 – – – – 54Totalunderlyingrevenue 7,378 3,434 3,124 779 (429) 14,286

1 TheunderlyingrevenueforPowerSystemsfor31December2018hasbeenre-presentedtoreclassifytheNorthAmericaCivilNuclearbusinessasnon-core.2 ITPAeroprioryeardisaggregationofrevenuehasbeenrestatedtobeconsistentwithcurrentyearpresentation.3 Includes £(93)m(2018:£(196)m)ofrevenuerecognisedintheyearrelatingtoperformanceobligationssatisfiedinpreviousyears.

Core businesses

£m

Non-corebusinesses 1,2

£m

Total underlying

£m

Underlying adjustments and

adjustmentsto foreignexchange 3

£m

Group at actual

exchange rates

£m

Year ended 31 December 2019Originalequipmentrecognisedatapointintime 6,322 40 6,362 596 6,958 Originalequipmentrecognisedovertime 1,051 43 1,094 – 1,094 Aftermarketservicesrecognisedatapointintime 3,337 94 3,431 313 3,744

Aftermarketservicesrecognisedovertime 4,427 12 4,439 228 4,667 Total customer contract revenue 15,137 189 15,326 1,137 16,463 Otherrevenue 124 – 124 – 124 Total revenue 15,261 189 15,450 1,137 16,587

Yearended31December2018Originalequipmentrecognisedatapointintime 6,300 64 6,364 283 6,647Originalequipmentrecognisedovertime 872 294 1,166 2 1,168Aftermarketservicesrecognisedatapointintime 3,306 388 3,694 148 3,842Aftermarketservicesrecognisedovertime 3,754 35 3,789 229 4,018Totalcustomercontractrevenue 14,232 781 15,013 662 15,675Otherrevenue 54 – 54 – 54Total revenue 14,286 781 15,067 662 15,729

1 IncludestheNorthAmericaCivilNuclearbusinessandtheKnowledgeManagementSystembusinesswhichhavebeentreatedasadisposalgroupheldforsaleat31December2019,theCommercialMarinebusinessdisposedofonthe1April2019,RRPDdisposedofon15April2019,L’Orangeuntilthedateofdisposalon1June2018andothersmallernon-corebusinessesincludingformerEnergybusinessesnotincludedinthedisposaltoSiemensin2014(RetainedEnergy).Seenote27formoredetails.

2 Non-corebusinessesfor31December2018hasbeenrestatedtoincludeNorthAmericaCivilNuclearbusiness.3 Includes £(187)m(2018:£nil)ofrevenuerecognisedrelatingtoperformanceobligationssatisfiedinpreviousyearsoverandabovethatinunderlyingrevenue.


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2 Segmental analysis continuedAnalysis by geographical destination

TheGroup’srevenuebydestinationoftheultimateoperatorisasfollows:2019

£m2018

£m

UnitedKingdom 1,805 1,505Germany 961 1,177Switzerland 520 675 Spain 375 343France 284 251 Italy 235 304Russia 106 79 Norway 87 246RestofEurope 979 815 Europe 5,352 5,395United States 4,720 5,041Canada 298 366North America 5,018 5,407South America 377 351United Arab Emirates 438 105RestofMiddleEast 714 584Middle East 1,152 689 China 1,698 1,483Singapore 702 452Japan 607 365SouthKorea 252 334India 82 82 Malaysia 32 111 RestofAsia 590 588 Asia 3,963 3,415Africa 246 152 Australasia 361 229 Other 118 91

16,587 15,729

Order backlogContractedconsiderationthatisexpectedtoberecognisedasrevenuewhenperformanceobligationsaresatisfiedinthefuture(referredtoasorderbacklog)isasfollows:

2019 2018

Within five years

£bn

Afterfive years

£bnTotal£bn

Withinfiveyears

£bn

Afterfiveyears

£bnTotal£bn

Civil Aerospace 22.9 25.6 48.5 22.1 30.2 52.3PowerSystems 2.6 0.3 2.9 2.9 0.2 3.1Defence 7.7 0.9 8.6 6.3 0.5 6.8 ITPAero 0.7 0.2 0.9 0.8 0.1 0.9

33.9 27.0 60.9 32.1 31.0 63.1

Thepartiestothesecontractshaveapprovedthecontractandourcustomersdonothaveaunilateralenforceablerighttoterminatethecontractwithoutcompensation. WeexcludeCivilAerospaceOEorders(fordeliveriesbeyondthenext7–12months)thatourcustomershaveplacedwheretheyretainarighttocancel. Ourexpectationbasedonhistoricalexperienceisthattheseorderswillbefulfilled. Withinthe0–5yearscategory,contractedrevenuein:Defencewilllargelyberecognisedinthenextthreeyears;PowerSystemswillberecognisedoverthenexttwoyearsasitisashortcyclebusiness;andITPAero(whereinternalGrouprevenueshavebeeneliminated)evenlyspreadoverthenextfiveyears.



Underlying adjustments2019 2018

Revenue£m

Profit beforefinancing

£m

Net financing

£mRevenue

£m

Profitbeforefinancing

£m

Netfinancing

£m

Underlying performance 15,450 808 (225) 15,067 616 (150)Transactionsrecognisedatexchangerateondateofcashflowandrevaluationoftradingassets/liabilities1 1,137 145 80 781 (23) 163Impactofunrealisedfairvaluechangestoderivativecontractsheldfortrading2 – (1) (6) – (1) (2,144)Impactofunrealisedfairvaluechangestoderivativecontractsheldforfinancing3 – – 1 – – (3)Exceptionalprogrammecharges4,5 – (1,409) – (119) (976) (15)Impact of discount rate changes 6 – – (40) – – –Exceptionalrestructuringcharges4,7 – (136) – – (317) –(Loss)/gainsarisingontheacquisitionsanddisposals 8 – (24) (8) – 183 (8)Impairmentsandassetwrite-offs9 – (84) – – (155) –Other10 – (12) 20 – (130) 13

Total underlying adjustments 1,137 (1,521) 47 662 (1,419) (1,994)Reported per consolidated income statement 16,587 (713) (178) 15,729 (803) (2,144)

1 Theadjustmentsforrealisedgains/(losses)onsettledderivativecontractsincludeadjustmentstoreflectthegains/(losses)inthesameperiodastherelatedtradingcashflows.2 Theadjustmentsforunrealisedfairvaluechangestoderivativecontractscontainthoseincludedinequityaccountedjointventuresandexcludethoseforwhichtherelatedtradingcontractshavebeencancelledwhenthefairvaluechangesarerecognisedimmediatelyinunderlyingprofitbeforetaxation.

3 Includesthelossesonhedgeineffectivenessintheperiodof£13m(2018:losses£3m).4 Thetablebelowsummarisestheexceptionalitemsrecordedin2019and2018.

Year to 31 December

2019£m

2018£m

Programmechargesandassociatedcontractlosses5 1,409 976

Relatedforeignexchangeimpact5 171 147

Restructuringcharges7 136 317

Pensioncharges10 – 121

1,716 1,561

5 Includedwithinprogrammeexceptionalitemsis£1,361m (2018:£790m),£1,531m (2018:£905m)atprevailingexchangerates,inrespectoftheabnormalwastagecostsonthe Trent1000.Thisincludes£0.2bnofinsurancereceiptsinrespectoftheTrent1000in-serviceissues.In addition,thereisanexceptionalitemof£48m(2018:186m),£49m(2018:£218m) atprevailingexchangeratesthatrelatestothedecisionbyAirbustoceaseA380deliveriesin2021.Forinformationontheassociatedprovisions–seenote20.

6 Includedwithindiscountratechangesis£30mrelatingtoTrent900and£10mrelatingtoTrent1000fortheimpactfromthechangeindiscountratesoncontractlossesrecorded inexceptionalitemsinprioryearsasaresultofthefallinUSbonds,whichdrivesthecalculationoftherisk-freerate.

7 TheGrouprecordedanexceptionalrestructuringchargeof£136m(2018:£317m)intheyear.Thecostsinclude:£88m(2018:£223m)inrespectoftheGroup-widerestructuringprogrammeannouncedon14June2018;costsrelatingtoongoingmulti-yearsignificantrestructuringprogrammesincludingrestructuringatPowerSystemsandinrespectofDefence,reflectingactionstoremovecostandimproveoperationalefficiency.

8 (Loss)/gainsarisingontheacquisitionsanddisposalsofbusinesses.Seenote27formoredetails(alsoincludingtheamortisationofintangibleassetsarisingonpreviousacquisitions).9 In2019,therehasbeenanimpairmentof£58mrelatingtoBergenEnginesAS,andimpairmentchargeandassetwriteoffsof£26mfollowingtheannouncementtoselltheNorth AmericaCivilNuclearbusinesswithinthePowerSystemsbusinesssegment.Theimpairmentchargein2018of£155mrelatedtoCommercialMarine.

10Otherincludesthe2018costofequalisationofpensionbenefitsbetweenmenandwomen–seenote21.

Appropriateratesoftaxhavebeenappliedtoadjustmentsmadetoprofitbeforetaxinthetableabove.Adjustmentsin2019whichimpacttheUKtaxlosshaveaneffectivetaxrateofzero.Seenote5formoredetails.Thetotalunderlyingadjustmentstoprofitbeforetaxin2019areachargeof£143m(2018:credit£715m).Thechargein2019was£57mplusanadditionalchargeof£86mrelatingtothederecognitionofUKdeferredtaxassetsonforeignexchangeandcommodityfinancialassetsandliabilities.Thecreditin2018was£672mplusanadditionalcreditof£43mrelatingtothereductionintheSpanishBasqueregiontaxrate.


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Reconciliation to the balance sheet2019

£m2018

£m

Reportablesegmentassets 23,968 21,164Interestsinjointventuresandassociates 402 412Non-corebusinesses 84 188 Assets held for sale 18 750Cashandcashequivalentsandshort-terminvestments 4,449 4,980Fairvalueofswapshedgingfixedrateborrowings 249 293Deferredandincometaxassets 1,926 2,126Post-retirementschemesurpluses 1,170 1,944Total assets 32,266 31,857Reportablesegmentliabilities (27,703) (25,309)Non-corebusinesses (43) (159)Liabilitiesassociatedwithassetsheldforsale (15) (376)Borrowingsandleaseliabilities (5,685) (4,662)Fairvalueofswapshedgingfixedrateborrowings (6) –Deferredandincometaxliabilities (790) (1,100)Post-retirementschemedeficits (1,378) (1,303)Total liabilities (35,620) (32,909)Net liabilities (3,354) (1,052)

ThecarryingamountsoftheGroup’snon-currentassetsincludinginvestmentsbutexcludingfinancialinstruments,deferredtaxassets andpost-employmentbenefitsurpluses,bythegeographicalareainwhichtheassetsarelocated,areasfollows:

2019£m

2018£m

UnitedKingdom 6,446 4,626Germany 2,568 2,604United States 1,506 1,338Spain 1,324 1,380Other 826 710

12,670 10,658

3 Research and development2019

£m2018

£m

Expenditureintheyear (1,118) (1,145)Capitalised as intangible assets 481 498Amortisationandimpairmentofcapitalisedcosts1 (133) (121)Net cost recognised in the income statement (770) (768)Underlyingadjustmentsrelatingtoeffectsofacquisitionaccountingandforeignexchange 74 79 Net underlying cost recognised in the income statement (696) (689)

1 Seenote9foranalysisofamortisationandimpairment.


4 Net financing2019 2018

Note

Per consolidated

income statement

£m

Underlyingfinancing 1

£m

Perconsolidated

income statement

£m

Underlyingfinancing 1

£m

Interest receivable 31 31 27 27 Netfairvaluegainsonnon-hedgeaccountedinterestrateswaps2 19 14 – – – FinancialRRSAs–foreignexchangedifferencesandchanges in forecast payments 19 11 – 25 – Netfairvaluegainsoncommoditycontracts 19 36 – – – Financingonpost-retirementschemesurpluses 21 60 – 56 – Netforeignexchangegains 100 – 163 – Financing income 252 31 271 27

Interest payable (182) (163) (107) (99)Netfairvaluelossesonforeigncurrencycontracts 19 (43) – (2,122) – FinancialRRSAs–foreignexchangedifferencesandchanges in forecast payments 19 (10) – (27) – FinancialchargerelatingtofinancialRRSAs 19 (3) (3) (8) (8)

Netfairvaluelossesoncommoditycontracts 19 – – (22) – Financingonpost-retirementschemedeficits 21 (37) – (33) – Otherfinancingcharges (155) (90) (96) (70)

Financing costs (430) (256) (2,415) (177)

Net financing costs (178) (225) (2,144) (150)

Analysed as:Netinterestpayable (151) (132) (80) (72)Netfairvaluegains/(losses)onderivativecontracts 7 – (2,144) –Netpost-retirementschemefinancing 23 – 23 –Netotherfinancing (57) (93) 57 (78)

Net financing costs (178) (225) (2,144) (150)

1 Seenote2fordefinitionofunderlyingresults.2 Theconsolidatedincomestatementshowsthenetfairvaluegainonanyinterestrateswapsnotdesignatedintohedgingrelationshipsforaccountingpurposes.Underlyingfinancingreclassifiestheinterestreceivableontheseinterestratesswapsfromfairvaluemovementtointerestpayable.

5 TaxationUK Overseas Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Currenttaxchargefortheyear 15 13 228 167 243 180Adjustmentsinrespectofprioryears (4) (13) (3) 15 (7) 2 Current tax 11 – 225 182 236 182

Deferredtaxcharge/(credit)fortheyear 117 (630) (24) (43) 93 (673)Adjustmentsinrespectofprioryears 20 22 (15) (42) 5 (20)Derecognitionofdeferredtax 86 – – – 86 –Deferredtaxcreditresultingfromreduction in tax rates – – – (43) – (43)Deferred tax 223 (608) (39) (128) 184 (736)

Charged/(credited) in the income statement 234 (608) 186 54 420 (554)


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5 Taxation continued

Other tax credits/(charges)OCI Equity

Items that will not be reclassified

Items that may be reclassified

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Deferred tax:Movementinpost-retirementschemes 324 (2) – – – –Share-basedpayments–directtoequity – – – – 1 2 Cashflowhedge – – (5) 5 – –Netinvestmenthedge – – (1) – – –

Other tax credits/(charges) 324 (2) (6) 5 1 2

Tax reconciliation2019

£m2018

£m

Lossbeforetaxation (891) (2,947)Lessshareofresultsofjointventuresandassociates(note12) (141) (114)Lossbeforetaxationexcludingjointventuresandassociates (1,032) (3,061)

NominaltaxcreditatUKcorporationtaxrate19%(2018:19%) (196) (582)UKtaxratedifferential1 56 51Overseasratedifferences2 58 91Impairmentofgoodwill 1 29 ExemptgainonthedisposalofCommercialMarine (20) –ExemptgainonthedisposalofL’Orange – (117)R&Dcredits (34) (23)Otherpermanentdifferences 8 36Taxlossesinyearnotrecognisedindeferredtax3 463 22 Derecognitionofdeferredtax4 86 –Adjustmentsinrespectofprioryears (2) (18)ReductioninclosingdeferredtaxesresultingfromdecreaseintaxrateintheSpanishBasqueregion – (43)

420 (554)

Underlyingitems(note2) 277 161 Non-underlyingitems 143 (715)

420 (554)

1 TheUKtaxratedifferentialarisesonthedifferencebetweenthedeferredtaxrateandtheUKstatutorytaxrate.2 Overseasratedifferencesmainlyrelatetotaxonprofitsincountries,suchastheUSandGermany,whichhavehighertaxratesthantheUK.3 TaxlossesnotrecognisedmainlyrelatetotheUKin2019–seepages143to144.4 Derecognitionofdeferredtaxassetsrelatingtoforeignexchangeandcommodityfinancialassetsandliabilities–seepage144.

Deferred taxation assets and liabilities2019

£m2018

£m

At1January 1,130 380ImpactofadoptingIFRS16(2018:ImpactofadoptingIFRS9) 8 2 Amount(charged)/creditedtoincomestatement (184) 736Amountcredited/(charged)toothercomprehensiveincome 323 (2)Amount(charged)/creditedtocashflowhedgereserve (5) 5 Amount credited to equity 1 2 Ondisposal/acquisitionofbusinesses1 (3) 6 Transferredtoassetsheldforsale2 (2) (4)Exchangedifferences 1 5

At 31 December 1,269 1,130

Deferredtaxassets 1,887 2,092Deferredtaxliabilities (618) (962)

1,269 1,130

1 The2019deferredtaxondisposalofbusinessesrelatestoCommercialMarine.The2018comparativerelatestothedisposalofL’Orange.2 The2019deferredtaxtransferredtoassetsheldforsalerelatestotheNorthAmericaCivilNuclearbusiness.The2018comparativerelatestoCommercialMarine.


5 Taxation continuedTheanalysisofthedeferredtaxpositionisasfollows:

At1January

£m

Impact ofadoptingIFRS16

£m

At1 January

restated£m

Recognisedin incomestatement

£m

Recognisedin OCI

£m

Recognisedin equity

£m

Merger andacquisition

relatedactivity

£m

Exchangedifferences

£m

At 31December

£m

2019

Intangible assets (620) – (620) (135) – – (2) 31 (726)Property,plantandequipment (85) (74) (159) 10 – – (1) 12 (138)Othertemporarydifferences 164 82 246 147 (6) 1 2 (16) 374 Netcontractliabilities 57 – 57 (2) – – – – 55 Pensionsandotherpost-retirementschemebenefits (461) – (461) (1) 324 – (3) (13) (154)Foreign exchange and commodity financialassetsand liabilities 625 – 625 (200) – – – – 425 Losses 1,010 – 1,010 9 – – (1) (1) 1,017 R&Dcredit 277 – 277 (12) – – – (12) 253 Advancecorporationtax 163 – 163 – – – – – 163

1,130 8 1,138 (184) 318 1 (5) 1 1,269

At1January

£m

Impact ofadoptingIFRS9

£m

At1Januaryrestated

£m

Recognisedin incomestatement

£m

Recognisedin OCI

£m

Recognisedin equity

£m

Merger andacquisition

relatedactivity

£m

Exchangedifferences

£m

At31December

£m

2018Intangible assets (419) – (419) (203) – – 5 (3) (620)Property,plantandequipment (158) – (158) 77 – – 1 (5) (85)Othertemporarydifferences 258 2 260 (106) 5 2 (1) 4 164Netcontractliabilities 63 – 63 (6) – – – – 57 Pensionsandotherpost-retirementschemebenefits (482) – (482) 19 (2) – (3) 7 (461)Foreign exchange and commodity financialassetsand liabilities 381 – 381 244 – – – – 625 Losses 306 – 306 704 – – – – 1,010R&Dcredit 268 – 268 7 – – – 2 277 Advancecorporationtax 163 – 163 – – – – – 163

380 2 382 736 3 2 2 5 1,130

Unrecognised deferred tax assets2019

£m2018

£m

Advancecorporationtax 19 19 UKlosses 438 –Foreignexchangeandcommodityfinancialassetsandliabilities 86 –Lossesandotherunrecogniseddeferredtaxassets 68 111 Deferredtaxnotrecognisedonunusedtaxlossesandotheritemsonthebasisthatfutureeconomic benefitisuncertain 611 130

Deferredtaxassetsof£1,887m include £1,010m(2018:£998m)relatingtotaxlossesintheUKand£163m(2018:£163m)relatingtoAdvanceCorporationTax(ACT).TheseassetshavebeenrecognisedbasedontheexpectationthattheUKbusinesswillgeneratetaxableprofitsandtaxliabilitiesinthefutureagainstwhichthelossesandACTcanbeutilised.

MostofthetaxlossesrelatetotheGroup’sCivilAerospacewidebodybusinessintheUKwhichmakesinitiallossesthroughtheinvestmentperiodofaprogrammeandthenmakesaprofitthroughitscontractsforservices.Theprogrammelifecyclestypicallyrangebetween 30and55yearswithmoreofthewidebodyengineprogrammesforecastattheupperendofthatrange.Inthepastfewyearstherehavebeenfournewenginesthathaveenteredintoservice(Trent1000TEN,Trent7000,TrentXWB-84andTrentXWB-97),allofwhicharestillintheinvestmentstage.

Deferredtaxassetsarerecognisedonlytotheextentthatitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheassetscanbeutilised.Arecoverabilityassessmenthasbeenundertaken,takingaccountofdeferredtaxliabilitiesagainstwhichthereversalcanbeoffsetandusinglatestUKforecasts,whicharemainlydrivenbytheGroup’sCivilAerospacewidebodybusiness,toassesstheleveloffuturetaxableprofits.


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5 Taxation continuedTherecoverabilityofUKdeferredtaxassetsrelatingtoUKtaxlossesandACThasbeenassessedin2019onthefollowingbasis:

– usingthemostrecentUKprofitforecastspreparedbymanagement,whichareconsistentwithpastexperienceandexternalsourcesonmarketconditions.Theseforecastscoverthenextfiveyears;

– thelong-termforecastprofitprofileofcertainofthemajorwidebodyengineprogrammeswhichistypicallybetween30and55yearsfrominitialinvestmenttoretirementofthefleet,includingtheaftermarketrevenueearnedfromairlinecustomers;and

– thelong-termforecastprofitandcostprofileoftheotherpartsoftheGroup’sUKbusiness.

TheassessmenttakesintoaccountUKtaxlawsthat,inbroadterms,restricttheoffsetofthecarriedforwardtaxlossesto50%ofcurrentyearprofits.Basedonthisassessment,theGrouphasrecognisedadeferredtaxassetof£1,010mrelatingtolossesand£163mrelatingtoACT.ThisreflectstheGroup’sconclusionsthat:

– ItisprobablethattheUKbusinesswillgeneratetaxableincomeandtaxliabilitiesinthefutureagainstwhichtheselossesandtheACTcanbeutilised.

– BasedoncurrentforecastsandusingvariousscenariostheselossesandtheACTwillbeusedinfullwithinthenext20to30yearswhichiswithintheexpectedwidebodyengineprogrammelifecycles.

Adeferredtaxassetof£438mhasnotbeenrecognised.Thisisbasedonmanagement’sassumptionsrelatingtotheamountsandtimingoffuturetaxableprofitsandtakesintoaccountthathigherlosseswereincurredin2019thanexpected,primarilyduetotherecognitionofa£1.4bnexceptionalchargeinrespectoftheTrent1000.

Changesinfutureprofitswillimpacttherecoverabilityofthedeferredtaxassets,andasexplainedinnote1,thekeyassumptionsimpactcontractmargins.A5%changeinsuchmarginswouldresultinarounda£2bnchangeinUKprofitsovertheremaininglifeoftheprogrammesagainstwhichtherecoveryofthetaxlossesandACTwouldbeassessed.Suchavariancecouldresultinachangeofupto£170mintherelateddeferredtaxbalancesrecordedontheGroupbalancesheet,assuminga17%taxrateandthe50%lossoffsetrestrictionmentionedabove.

TheGrouphasalsoreassessedtherecoveryofotherdeferredtaxassets,includingthosearisingonunrealisedlossesonderivativecontracts.Whilstthedeferredtaxassethasreducedanywayasaresultofthereductionintheunrealisedlossesin2019,theGrouphasalsoderecognised£86minlinewiththeapproachoutlinedabove.Theimpactofthisisnon-underlying.

AnyfuturechangesintaxlaworthestructureoftheGroupcouldhaveasignificanteffectontheuseoflossesandACT,includingtheperiodoverwhichtheycanbeused.Inviewofthisandthesignificantjudgementinvolved,theBoardcontinuouslyreassessesthisarea.

The2016BudgetannouncedthattheUKtaxratewillreduceto17%witheffectfrom1April2020.Theratereductionto17%hasbeensubstantivelyenactedon6September2016.ThedeferredtaxassetsandliabilitiesofUKcompanieswithintheGrouphavethereforebeencalculatedat17%.

Thetemporarydifferencesassociatedwithinvestmentsinsubsidiaries,jointventuresandassociates,forwhichadeferredtaxliabilityhasnotbeenrecognised,aggregateto£108m(2018:£99m).NodeferredtaxliabilityhasbeenrecognisedonthepotentialwithholdingtaxdueontheremittanceofundistributedprofitsastheGroupisabletocontrolthetimingofsuchremittancesanditisprobablethatconsentwillnotbegivenintheforeseeablefuture.

6 Earnings per ordinary shareBasicearningsperordinaryshare(EPS)iscalculatedbydividingthelossattributabletoordinaryshareholdersbytheweightedaveragenumberofordinarysharesinissueduringtheyear,excludingordinarysharesheldundertrust,whichhavebeentreatedasiftheyhadbeencancelled.

DilutedEPSiscalculatedbyadjustingtheweightedaveragenumberofordinarysharesinissueduringtheyearforthebonuselementofshareoptions.

2019 2018

Basic

Potentially dilutive

share options 1 Diluted Basic

Potentiallydilutive

shareoptions1 Diluted

Lossattributabletoordinaryshareholders(£m) (1,315) (1,315) (2,401) (2,401)Weightedaveragenumberofordinaryshares(millions) 1,904 − 1,904 1,859 – 1,859EPS(pence) (69.07p) − (69.07p) (129.15p) – (129.15p)

1 Asthereisaloss,theeffectofpotentiallydilutiveordinarysharesisantidilutive.

ThereconciliationbetweenunderlyingEPSandbasicEPSisasfollows:2019 2018

Pence £m Pence £m

UnderlyingEPS/underlyingprofitattributabletoordinaryshareholders 15.86 302 15.98 297 Totalunderlyingadjustmentstolossbeforetax(note2) (77.42) (1,474) (183.59) (3,413)Relatedtaxeffects (7.51) (143) 38.46 715

EPS/lossattributabletoordinaryshareholders (69.07) (1,315) (129.15) (2,401)

DilutedunderlyingEPS 15.86 15.98


7 Auditors’ remuneration2019

£m2018

£m

FeespayabletotheCompany’sauditorsanditsassociatesfortheauditoftheParentCompanyandConsolidated Financial Statements 2.8 1.8 FeespayabletotheCompany’sauditoranditsassociatesfortheauditoftheCompany’ssubsidiaries pursuanttolegislation1 7.0 7.3Total fees payable for audit services 9.8 9.1 FeespayabletotheCompany’sauditoranditsassociatesforotherservices:Auditrelatedassuranceservices2 0.5 0.5Otherassuranceservices3 0.6 0.4

Total fees payable to the Company’s auditor and its associates 4 10.9 10.0

FeespayableinrespectoftheGroup’spensionschemes:Audit 0.1 0.1

1 TheleveloffeespayabletotheCompany’sauditorfortheauditoftheCompany’sFinancialStatementsreflectsthefactthatlimitedincrementalworkisrequiredinrespectoftheauditofthesefinancialstatements.Rolls-Royceplc,asubsidiaryoftheCompany,isalsorequiredtoprepareConsolidatedFinancialStatementsandthefeespayabletotheCompany’sauditorfortheauditofthosefinancialstatements,includingtheauditofthesub-consolidation,isincludedintheauditoftheCompany’ssubsidiariespursuanttolegislation.

2 This includes £0.5m(2018:£0.5m)forthereviewofthehalf-yearreport.3 Thisrelatestotheauditofgrantclaims.4 Auditfeesforoverseasentitiesarereportedattheaverageexchangeratefortheyear.

8 Employee information2019

Number2018

Number

UnitedKingdom 23,300 23,400Germany 9,800 10,000United States 6,000 6,300Spain 3,200 2,800Nordics 1,300 3,000Singapore 1,300 1,400Canada 1,000 1,000India 1,000 1,000Italy 900 800France 700 700Restofworld 3,200 4,100Monthly average number of employees 51,700 54,500

Civil Aerospace 26,100 25,500PowerSystems 10,400 10,500Defence 9,900 10,500ITPAero 3,900 3,700Corporate1 100 100Core businesses 50,400 50,300Non-corebusinesses2 1,300 4,200Monthly average number of employees 51,700 54,500

2019£m

2018£m

Wages,salariesandbenefits 3,075 3,208Socialsecuritycosts 473 479Share-basedpayments(note23) 30 35Pensionsandotherpost-retirementschemebenefits(note21) 356 470Group employment costs 3 3,934 4,192

1 Corporateconsistsofemployeeswhodonotprovideasharedservicetothebusinesssegments.Wherecorporatefunctionsprovidesuchaservice,employeeshavebeenallocatedtothebusinesssegmentsonanappropriatebasis.

2 IncludestheNorthAmericaCivilNuclearbusiness(disposalgroupheldforsale),CommercialMarine(disposedofon1April2019),RRPD(disposedofon15April2019),L’Orange(disposedofon1June2018)andRetainedEnergy.Seenote27formoredetails.

3 Remunerationofkeymanagementpersonnelisshowninnote26.


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9 Intangible assets

Goodwill£m

Certificationcosts

£m

Developmentexpenditure

£m

Customer relationships

£mSoftware

£mOther

£mTotal

£m

CostAt1January2018 1,869 917 2,459 1,432 869 794 8,340Additions – 35 498 – 110 37 680Transferredtoassetsheldforsale1 (666) – (38) (26) (6) (12) (748)DisposalofL’Orange2 (136) – (48) (40) – (11) (235)Disposals – (4) (1) – (16) – (21)Reclassifications 5 – – – 3 (3) 5 Exchangedifferences 15 – 13 18 4 6 56

At31December2018 1,087 948 2,883 1,384 964 811 8,077Additions – 15 481 – 101 43 640 Acquisitionofbusinesses 11 – – – 4 23 38 Transferredtoassetsheldforsale1 (34) – (11) (16) (3) (11) (75)Disposals – – (8) (1) (111) (19) (139)ReclassificationsfromPPE – – 17 – 19 (18) 18 Exchangedifferences (40) (1) (68) (64) (7) (26) (206)

At 31 December 2019 1,024 962 3,294 1,303 967 803 8,353

Accumulated amortisation and impairmentAt1January2018 324 339 1,045 256 488 323 2,775Chargefortheyear3 – 35 114 90 103 39 381Impairment 155 – 7 – 22 – 184Transferredtoassetsheldforsale1 (439) – (29) (21) (1) (12) (502)DisposalofL’Orange2 – – (31) (27) – (8) (66)Disposals – – – – (8) – (8)Reclassifications 5 (1) – – 1 – 5 Exchangedifferences (3) – 5 6 2 3 13

At31December2018 42 373 1,111 304 607 345 2,782Chargefortheyear3 – 19 113 72 88 26 318 Impairment 18 – 20 9 7 – 54 Transferredtoassetsheldforsale1 (34) – (11) (16) (3) (11) (75)Disposals – – (7) (1) (99) (19) (126)ReclassificationsfromPPE – – – – 10 (1) 9 Exchangedifferences 4 – (25) (14) (5) (11) (51)

At 31 December 2019 30 392 1,201 354 605 329 2,911

Net book valueAt 31 December 2019 994 570 2,093 949 362 474 5,442 At31December2018 1,045 575 1,772 1,080 357 466 5,295

1 TheNorthAmericaCivilNuclearbusinesswasclassifiedasadisposalgroupheldforsaleon26September2019,priortothisanimpairmentofgoodwillof£15mwasrecognised.The CommercialMarinebusinesswasclassifiedasadisposalgroupheldforsaleon30June2018–seenote27.2 ThedisposaloftheL’OrangebusinesstoWoodwardInc.wascompletedon1June2018–seenote27.3 Chargedtocostofsalesandcommercialandadministrativecostsexceptdevelopmentcosts,whicharechargedtoresearchanddevelopmentcosts.


9 Intangible assets continued

GoodwillInaccordancewiththerequirementsofIAS36Impairment of Assets,goodwillisallocatedtotheGroup’scash-generatingunits(CGUs),orgroupsofCGUs,thatareexpectedtobenefitfromthesynergiesofthebusinesscombinationthatgaverisetothegoodwillasfollows:

Primaryreportingsegment

2019£m

2018£m

Rolls-RoycePowerSystemsAG PowerSystems 718 750Rolls-RoyceDeutschlandLtd&CoKG Civil Aerospace 234 246Other Various 42 49

994 1,045

Goodwillhasbeentestedforimpairmentduring2019onthefollowingbasis:

– Thecarryingvaluesofgoodwillhavebeenassessedbyreferencetovalueinuse.Thesehavebeenestimatedusingcashflowsfromthemostrecentforecastspreparedbymanagement,whichareconsistentwithpastexperienceandexternalsourcesofinformationonmarketconditions.Theseforecastsgenerallycoverthenextfiveyears.Growthratesfortheperiodnotcoveredbytheforecastsarebasedonarangeofgrowthratesbetween1.0%–2.5%thatreflecttheproducts,industriesandcountriesinwhichtherelevantCGUorgroupof CGUsoperate.

– Thekeyassumptionsfortheimpairmenttestsarethediscountrateand,inthecashflowprojections,theprogrammeassumptions,the growthratesandtheimpactofforeignexchangeratesontherelationshipbetweensellingpricesandcosts.Impairmenttestsareperformedusingprevailingexchangerates.

Theprincipalvalueinuseassumptionsforgoodwillbalancesconsideredtobeindividuallysignificantare:

Rolls-Royce Power Systems AG – tradingassumptions(e.g.volumeofequipmentdeliveries,pricingachievedandcostescalation)arebasedoncurrentandknownfutureprogrammes,estimatesofcaptureofmarketshareandlong-termeconomicforecasts;

– cashflowsbeyondthefive-yearforecastsareassumedtogrowat1.0%(2018:1.8%);and – pre-taxdiscountrate12%(2018:12%).

TheDirectorsdonotconsiderthatanyreasonablypossiblechangesinthekeyassumptionswouldcausethevalueinuseofthegoodwilltofallbelowitscarryingvalue.

Rolls-Royce Deutschland Ltd & Co KG – tradingassumptions(e.g.volumeofenginedeliveries,flyinghoursofinstalledfleetandcostescalation)arebasedoncurrentandknownfutureprogrammes,estimatesofcustomers’fleetrequirementsandlong-termeconomicforecasts;

– cashflowsbeyondthefive-yearforecastsareassumedtogrowat2.5%(2018:2.5%);and – pre-taxdiscountrate14%(2018:13%).

TheDirectorsdonotconsiderthatanyreasonablypossiblechangesinthekeyassumptionswouldcausethevalueinuseofthegoodwilltofallbelowitscarryingvalue.

Commercial MarineOn6July2018,theGroupannouncedthesaleofCommercialMarinetoKONGSBERG.ThedisposalmetthecriteriaofIFRS5Non-current Assets Held for Sale and Discontinued Operationsthatwherethecarryingvalueofadisposalgroupisexpectedtoberecoveredthroughasaletransaction,thedisposalgroupshouldbetreatedasheldforsale,withassetsandliabilitiespresentedseparatelyonthebalancesheetmeasuredatthelowerofcarryingvalueorfairvaluelesscoststosell.

AsaresultoftheclassificationoftheCommercialMarinebusinessasadisposalgroup,itscarryingvaluewasassessedagainsttheanticipatedproceedsandthedisposalcosts.Animpairmentchargeof£155mfortherelatedgoodwill(withanadditional£5mimpairmentchargetoproperty,plantandequipment)wasrecognisedintheincomestatementat31December2018andtheremainingnetbalanceof£227mtransferredtoassetsheldforsaleandassociatedliabilities.

TheCommercialMarinebusinesswasdisposedofon1April2019–seenote27.


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9 Intangible assets continued

Other intangible assets (including programme-related intangible assets)OtherintangibleassetshavebeenreviewedforimpairmentinaccordancewiththerequirementsofIAS36 Impairment of Assets. Where an impairmenttestwasconsiderednecessary,ithasbeenperformedonthefollowingbasis:

– Thecarryingvalueshavebeenassessedbyreferencetovalueinuse.Thesehavebeenestimatedusingcashflowsfromthemostrecentforecastspreparedbymanagement,whichareconsistentwithpastexperienceandexternalsourcesofinformationonmarketconditionsoverthelivesoftherespectiveprogrammes.

– Thekeyassumptionsunderlyingcashflowprojectionsareassumedmarketshare,programmetimings,unitcostassumptions,discountrates,andforeignexchangerates.

– Thepre-taxcashflowprojectionshavebeendiscountedat7%–15%(2018:7%–13%),basedontheGroup’sweightedaveragecostof capital,adjustedfortheestimatedprogrammerisk,forexampletakingaccountofwhetherornottheforecastcashflowsarisefromcontractedbusiness.

Inaddition,forprogramme-relatedintangibleassets,thesehavebeenreviewedforimpairmentinaccordancewiththerequirementsofIAS 36.Wherethereisatriggeringevent,animpairmenttesthasbeenperformedonthefollowingbasis:

– Theprogrammerelatedintangibleasset’scarryingvalueasat31Decemberiscomparedtotheasset’srecoverableamount.TheGrouphasdeterminedthattherecoverableamountoftheassetshouldbecalculatedonavalueinusebasisasthisrepresentsthehighestvaluetotheGroupintermsofthefuturecashflowsthatitcangenerate.

– Futurecashflowsusedinthevalueinusecalculationsarebasedonourmostrecentforecastspreparedbymanagementandarediscountedusingapre-taxdiscountratethatreflectscurrentmarketassessmentofthetimevalueofmoney.Theseforecastsincludecontractedbusinesstogetherwithmanagement’sexpectationofspeculativebusinessoverthelifeoftheprogrammetogetherwithcashoutflowsthatarenecessarytomaintainthecurrentlevelofeconomicbenefitexpectedtoarisefromtheassetinitscurrentcondition.

– Thekeyprogrammeassumptionsunderlyingcashflowprojectionsareforecastmarketshareandpricing,engineflyinghours,numberofshopvisits/costofshopvisits,R&D,capitalinvestmentandforeignexchangerates.

– Thepre-taxcashflowprojectionshavebeendiscountedat7%–15%(2018:7%–13%).

Noimpairmentwasidentified(2018:noimpairment).Forprogrammeswheretheheadroomcouldbesignificantlyreducedoverthenext12monthsanyofthefollowingchangesinassumptions,inisolation,wouldcausetherecoverableamountoftheprogrammeassetstoequalitscarryingvalue:

– anincreaseindiscountratesby36% – anincreaseincostsof10%

Thecarryingamountandtheresiduallifeofthematerialintangibleassets(excludinggoodwill)fortheGroupisasfollows:

Residuallife Net book value

2019£m

2018£m

Trent programme intangible assets 1 7–15years 1,720 1,524BusinessAviationprogrammeintangibleassets2 15 years 587 393

CustomerrelationshipassetsonacquisitionofITPAerotypically

13–35years 676 740IntangibleassetsfromacquisitionofPowerSystems3 489 578

3,472 3,235

1 IncludedwithintheTrentprogrammesaretheTrent1000,Trent7000andTrentXWB.2 IncludedwithinBusinessAviationarethePearl700andPearl15.3 Includes£109minrespectofabrandintangibleassetwhichisnotamortised.Remainingassetsareamortisedoverarangeof2–10years.

Thecarryingamountofgoodwillorintangibleassetsallocatedacrossmultiplecash-generatingunitsisnotsignificantincomparisonwiththeGroup’stotalcarryingamountofgoodwillorintangibleassetswithindefiniteusefullives.


10 Property, plant and equipmentLand and buildings

£m

Plant and equipment

£m

Aircraft and engines

£m

In course of construction

£mTotal

£m

CostAt1January2018 1,842 5,022 734 773 8,371Additions 54 273 251 396 974Transferredtoassetsheldforsale1 (91) (138) – (30) (259)DisposalofL’Orange2 (23) (72) – (4) (99)Disposals/write-offs (29) (140) (19) – (188)Reclassifications 140 287 (3) (424) –Exchangedifferences 23 64 4 11 102

At31December2018 1,916 5,296 967 722 8,901

ImpactofadoptingIFRS16(note29) (12) (11) (205) (29) (257)

At 1 January 2019 1,904 5,285 762 693 8,644

Additions 27 286 126 328 767

Acquisitionofbusinesses – 3 – – 3

Transferredtoassetsheldforsale1 (5) (9) – (2) (16)

Disposal of businesses (4) (168) – – (172)

Disposals/write-offs (54) (187) (17) (4) (262)

Reclassifications3 186 390 11 (605) (18)

Reclassificationofjointventuretojointoperations 5 3 – – 8

Exchangedifferences (39) (106) (6) (9) (160)

At 31 December 2019 2,020 5,497 876 401 8,794

Accumulated depreciation

At1January2018 554 2,984 173 2 3,713

Chargefortheyear4 67 376 80 – 523

Impairment – 2 – 5 7

Transferredtoassetsheldforsale 1 (26) (96) – – (122)

DisposalofL’Orange2 (4) (34) – – (38)

Disposals/write-offs (19) (123) (9) – (151)

Exchangedifferences 7 33 – – 40

At31December2018 579 3,142 244 7 3,972

ImpactofadoptingofIFRS16(note29) (7) (13) (40) – (60)

At 1 January 2019 572 3,129 204 7 3,912

Chargefortheyear4 67 381 43 – 491

Impairment 1 29 – 11 41

Transferredtoassetsheldforsale1 (5) (9) – (1) (15)

Disposal of businesses – (165) – – (165)

Disposals/write-offs (45) (150) (5) (1) (201)

Reclassifications3 9 6 (19) (5) (9)

Reclassificationofjointventuretojointoperations 1 3 – – 4

Exchangedifferences (10) (57) – – (67)At 31 December 2019 590 3,167 223 11 3,991

Net book value

At 31 December 2019 1,430 2,330 653 390 4,803

At 1 January 2019 1,332 2,156 558 686 4,732

At31December2018 1,337 2,154 723 715 4,929

1 TheNorthAmericaCivilNuclearbusinesswasclassifiedasadisposalgroupheldforsaleon26September2019.TheCommercialMarinebusinesswasclassifiedasadisposalgroup heldforsaleon30June2018–seenote27. 2 ThedisposaloftheL’OrangebusinesstoWoodwardInc.wascompletedon1June2018–seenote27.3 Includesreclassificationsforassetsunderconstructionandtointangibleassets.4 Depreciationchargedduringtheyearispresentedintheincomestatementorincludedinthecostofinventoryasappropriate.


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10 Property, plant and equipment continuedProperty,plantandequipmentincludes:

2019£m

2018£m

AssetsheldforuseinoperatingleasesCost 720 813Depreciation (214) (192)

Netbookvalue 506 621

Capitalexpenditurecommitments 317 362Cost of fully depreciated assets 1,666 1,498Cost of fully depreciated assets included in assets held for sale 2 75

TheGroup’sshareofequityaccountedentities’capitalcommitmentsis£30m(2018:£9m).

11 Right-of-use assetsLand and buildings

£m

Plant and equipment

£m

Aircraft and engines

£mTotal

£m

CostAt31December2018 – – – –ImpactofadoptingIFRS16(seenote29) 493 107 1,654 2,254Transferredtoassetsheldforsale1 (40) (1) – (41)

At 1 January 2019 453 106 1,654 2,213 Additions/modificationsofleases 70 28 129 227 Transferredtoassetsheldforsale 1 (4) – – (4)Disposals (2) (4) (13) (19)Exchangedifferences (13) (2) (3) (18)

At 31 December 2019 504 128 1,767 2,399

Accumulated depreciation and impairmentAt 1 January 2019 – – – – Chargefortheyear 58 32 309 399 Impairment 1 1 10 12 Transferredtoassetsheldforsale 1 (1) – – (1)Disposals (2) (4) (13) (19)Exchangedifferences (1) – – (1)

At 31 December 2019 55 29 306 390

Net book valueAt 31 December 2019 449 99 1,461 2,009 At 1 January 2019 453 106 1,654 2,213 At31December2018 – – – –

Right-of-use assets held for use in operating leases

Cost 4 2 1,767 1,773Depreciation (2) (1) (306) (309)

Net book value at 31 December 2019 2 1 1,461 1,464

1 TheNorthAmericaCivilNuclearbusinesswasclassifiedasadisposalgroupheldforsaleon26September2019.TheCommercialMarinebusinesswasclassifiedasadisposalgroup heldforsaleon30June2018–seenote27.


12 Investments

Composition of the GroupTheentitiescontributingtotheGroup’sfinancialresultsarelistedonpages187to193.

WheretheGroupdoesnotown100%ofthesharesofaGroupundertaking,thereareanumberofarrangementswiththeothershareholder(s)thatgivetheGrouptheoptionorpotentialobligationtoacquirethethirdparties’shares.Thesearrangementshavebeenassessedandarenotconsideredtohaveasignificantvalue,individuallyorinaggregate.

Non-controlling interestsTheGroupdoesnothaveanymaterialnon-whollyownedsubsidiaries.

Equity accounted and other investmentsEquity accounted Other

Joint ventures£m

Associates£m

Total£m

Unlisted£m

At1January2018 375 – 375 26 Additions 17 – 17 6

Disposals – – – (3)Impairment (7) – (7) (2)Consolidationofpreviouslynon-consolidatedsubsidiary – – – (5)Share of retained loss 1 (101) – (101) –Reclassificationofdeferredprofittodeferredincome2 70 – 70 –Exchangedifferences 41 – 41 –Share of OCI 17 – 17 –

At 1 January 2019 412 – 412 22 Additions 8 – 8 2 Disposals (4) – (4) (6) Transferfromjointventuretojointoperation (3) – (3) – Impairment – – – (1)Consolidationofpreviouslynon-consolidatedsubsidiary – – – (4)Shareofretainedprofit1 12 – 12 – Reclassificationofdeferredprofittodeferredincome2 4 – 4 – Exchangedifferences (19) – (19) 1 Share of OCI (8) – (8) –

At 31 December 2019 402 – 402 14

1 See table below.2 TheGroup’sshareofunrealisedprofitonsalestojointventuresiseliminatedagainstthecarryingvalueoftheinvestmentintheentity.Anyexcessamount,oncethecarryingvalueisreducedtonil,isrecordedasdeferredincome.

Reconciliationofshareofretainedprofit/(loss)totheincomestatementandcashflowstatement:

2019£m

2018£m

Shareofresultsofjointventuresandassociates 141 114Adjustmentsforintercompanytrading (37) (110)ShareofresultsofjointventuresandassociatestotheGroup(incomestatement) 104 4DividendspaidbyjointventuresandassociatestotheGroup(cashflowstatement) (92) (105)Shareofretainedprofit/(loss)above1 12 (101)

1 Duringtheyear,wesoldspareenginestoRolls-Royce&PartnersFinance,ajointventurecompany.

ThefollowingjointventuresareconsideredtobeindividuallymaterialtotheGroup:

Principal location Activity Ownership interest

AlphaPartnersLeasingLimited(APL) UK Aero engine leasing 50.0%HongKongAeroEngineServicesLimited(HAESL) HongKong Aeroenginerepairandoverhaul 50.0%SingaporeAeroEngineServicesPteLimited(SAESL) Singapore Aeroenginerepairandoverhaul 50.0%


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12 Investments continued SummarisedfinancialinformationoftheGroup’sindividuallymaterialjointventuresisasfollows:

APL HAESL SAESL

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Revenue 322 254 1,907 1,497 1,529 1,141Profitandtotalcomprehensiveincomefortheyear 107 61 81 72 47 41Dividendspaidduringtheyear (29) (47) (76) (65) (42) (43)Profitfortheyearincludedthefollowing:Depreciationandamortisation (146) (110) (15) (13) (16) (12)Interest income 4 1 – – – –Interest expense (89) (58) (3) (2) (6) (3)Income tax expense (22) (14) (16) (14) (3) (4)

Currentassets 119 355 453 421 433 379Non-currentassets 3,319 2,759 113 124 172 161 Currentliabilities (230) (755) (269) (248) (264) (207)Non-currentliabilities (2,617) (1,825) (103) (101) (163) (164)Netassets 591 534 194 196 178 169 Includedintheabove:

Cash and cash equivalents 25 103 4 46 14 17 Currentfinancialliabilities1 (182) (702) – – – –Non-currentfinancialliabilities1 (2,364) (1,603) (89) (88) (163) (164)

ReconciliationtothecarryingamountrecognisedintheConsolidated Financial StatementsOwnership interest 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%Groupshareofnetassetsabove 296 267 97 98 89 85 Goodwill – – 35 36 94 97 Adjustmentsforintercompanytrading (296) (267) (7) (3) (1) –Includedinthebalancesheet – – 125 131 182 182

1 Excludingtradepayablesandotherliabilities.

ThesummarisedaggregatedresultsoftheGroup’sshareofequityaccountedinvestmentsisasfollows:

Individually material joint ventures (above) Other joint ventures Associates Total

2019£m

2018*£m

2019£m

2018*£m

2019£m

2018£m

2019£m

2018*£m

Assets:Non-currentassets 1,802 1,522 745 911 – – 2,547 2,433Currentassets 503 578 456 467 – – 959 1,045

Liabilities:1

Currentliabilities (382) (605) (322) (262) – – (704) (867)Non-currentliabilities (1,441) (1,045) (703) (802) – – (2,144) (1,847)Groupadjustmentforgoodwill 129 133 – – – – 129 133Adjustmentforintercompanytrading (304) (270) (81) (215) – – (385) (485)

307 313 95 99 – – 402 4121 Liabilitiesincludeborrowingsof (1,399) (1,278) (627) (650) – – (2,026) (1,928)

* Thesummarisedresultsfor2018havebeenre-presentedtoincludetheGroup’sshareofallitsindividuallymaterialjointventuresonagrossbasis.Previously,theassetsandliabilitiesofcertainjointventureswereshownonanetbasis.DisclosureofGroupadjustmentsforintercompanytradingandgoodwilluponconsolidationhavebeendisclosedseparatelytoprovidegreatertransparency.Thecarryingamountsat31December2018remainthesameaspreviouslyreported.ThisenhancedpresentationdoesnotimpacttheGroupconsolidatedresultsorfinancialpositionpreviouslyreported.


13 Inventories2019

£m2018

£m

Rawmaterials 522 553Workinprogress 1,652 1,551Finished goods 2,119 2,168Paymentsonaccount 27 15

4,320 4,287

Inventoriesstatedatnetrealisablevalue 227 223Amountofinventorywrite-down 69 69 Reversalofinventorywrite-down 12 21

14 Trade receivables and other assetsCurrent Non-current Total

2019£m

2018*£m

2019£m

2018*£m

2019£m

2018*£m

Trade receivables 1 2,538 2,680 – – 2,538 2,680Amountsowedbyjointventuresandassociates 1 197 229 12 – 209 229 Coststoobtaincontractswithcustomers 2 10 8 33 34 43 42Otherreceivables3 1,490 1,218 181 145 1,671 1,363Prepayments 356 367 248 9 604 376

4,591 4,502 474 188 5,065 4,690

Tradereceivablesandotherassetsareanalysedasfollows:Financialinstruments(note19):

Trade receivables and similar items 3,477 3,578Othernon-derivativefinancialassets 726 489

Non-financialinstruments 862 6235,065 4,690

* Balancesat31December2018havebeenre-presentedtomove£217mfromprepaymentstootherreceivablestobetterreflectthenatureofthesebalances.1 Includes £267m(2018:£146m)oftradereceivablesheldtocollectorselland£76m(2018:nil)receivablesfromjointventuresandassociatesheldtocollectorsell.2 Theseareamortisedoverthetermoftherelatedcontract,resultinginamortisationof £8m (2018:£13m)intheyear.Therewerenoimpairmentlossesrecognisedineitheryear.3 OtherreceivablesincludestheRRSAcomponentoftheLTSAwhichisheldseparatelyonthebasisofdifferingcounterparties,togetherwithreceivablesarisingfromoverhaulactivityoutsideofLTSAcoverage.

Theexpectedcreditlossesfortradereceivablesandotherassetshasincreasedby£12mto£138m(2018:£126m).Amountsincludedareconsideredascurrentsonoageingofexpectedcreditlossesisdisclosed.

FormanyyearstheGrouphasundertakenthesaleoftradereceivables,withoutrecourse,tobanks.Thisiscommonlyknownasinvoicediscountingorfactoring,andiscommonplaceintheaerospaceindustry.Theabsoluteamountcarriedoutinanygivenyeardependsonspecificenginedeliveryvolumesandphasing.Thisactivityhasbeenusedtonormalisecustomerreceiptsascertainaerospacecustomershaveextendedtheirpaymentterms.ThisinturnhashelpedtonormaliseourGroupcashflowsinlinewithphysicaldeliveryvolumes.Overthelastthreeyearsthesaleoftradereceivableshasaveraged£1,037mattheyearend.Tradereceivablesfactoredaregenerallyduewithinthefollowingquarter.

At31December2019£1,117mwasdrawnunderfactoringfacilities,anincreaseof£95mcomparedtoDecember2018,representingcashcollectedbeforeitwascontractuallyduefromthecustomer.

Inexceptionalcircumstances,thesaleoftradereceivableshastakenplacewhereamountscontractuallyduefromaerospacecustomersbeforetheperiodendhavebeendeferredintothefollowingperiod.Therewas£504mrelatingtothisactivityatthe2018yearend.Therewerenoequivalentamountsin2019.

Theassumptionandinputsusedfortheestimationoftheexpectedcreditlossesaredisclosedinthetablebelow:

2019 2018

Trade receivablesand other

financial assets£m

Lossallowance

£m

Range ofexpected credit

loss rate%

Trade receivablesandother

financialassets£m

Lossallowance£m

Rangeofexpected credit

loss rate%

Investmentgrade 1,230 (40) 0%–2.45% 976 (34) 0%–2.06%Non-investmentgrade 271 (2) 0%–2.51% 348 (5) 0%–2.06%Withoutcreditrating 2,636 (96) 0%–54% 2,653 (87) 0%–47%

4,137 (138) 3% 3,977 (126) 3%


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14 Trade receivables and other assets continuedThemovementsoftheGroupexpectedcreditlossesprovisionareasfollows:

2019£m

2018£m

At1January (126) (95)Increasesinlossallowancerecognisedintheincomestatementduringtheyear (27) (15)Othernetmovements 14 (16)At31December (139) (126)

15 Contract assets and liabilitiesCurrent Non-current Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Contract assetsContractassetswithoperators 404 295 1,092 1,108 1,496 1,403Participationfeecontractassets 57 49 542 605 599 654

461 344 1,634 1,713 2,095 2,057

Contractassetsareanalysedasfollows:Financialinstruments(note19) – –Non-financialinstruments 2,095 2,057

2,095 2,057

Contractassetsinclude£1,086m(2018:£1,097m)ofCivilAerospaceLTSAassets,withmostoftheremainderrelatingtoDefence.ThemaindriveroftheincreaseisdrivenbyDefencewhichincreasedby£90mduetothetimingdifferencesbetweenrevenuebeingrecognisedonastageofcompletionbasisandwhencustomersarebilled,aswellasthetimingoftheflowdownofamountsreceivedinprioryearsfromprogrammepartners.Revenuefromperformanceobligationssatisfiedinpreviousyearshasbeenadjustedby£(166)m.

Participationfeecontractassetshavereducedby£(55)mduetoamortisationexceedingadditionsby£(35)mandFXonconsolidationofoverseasentitiesof£(20)m.Noimpairmentlosses(2018:none)ofcontractassetshavearisenduringtheyear.

Theexpectedcreditlossesforcontractassetshasdecreasedby£9minrelationtonormalbusinesscycleto£13m(2018:£22m).

Current Non-current Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Contract liabilities 4,228 3,794 6,612 5,336 10,840 9,130

Contractliabilitiesareanalysedasfollows:Financialinstruments(note19) 131 –Non-financialinstruments 10,709 9,130

10,840 9,130

Duringtheyear,£3,491m(2018:£2,823m)oftheopeningcontractliabilitywasrecognisedasrevenueandcontractliabilitieshaveincreasedby£1,710m.Themainreasonsfortheincreasebeinga£1,199mgrowthinCivilAerospaceLTSAliabilitiesto£6,783m(2018:£5,584m)drivenbyanoverallgrowthinengineflyinghourreceipts.Ourinstalledbaseincreasedby6%in2019comparedwith2018.Inaddition,engineflyinghoursincreasedby7%year-on-year.Revenuefromperformanceobligationssatisfiedinpreviousyearshasbeenadjustedby£(114)m.


16 Cash and cash equivalents2019

£m2018

£m

Cashatbankandinhand 825 1,023Money-marketfunds 1,095 1,222Short-termdeposits 2,523 2,729Cashandcashequivalentsperthebalancesheet 4,443 4,974Overdrafts(note17) (8) (22)Cashandcashequivalentspercashflowstatement(page119) 4,435 4,952

Cashheldascollateralagainstthirdpartyobligations(note20) – 4

Cashandcashequivalentsat31December2019includes£34m(2018:£31m)thatisnotavailableforgeneralusebytheGroup.Thisbalancepredominantlyrelatestocashheldinnon-whollyownedsubsidiariesandjointarrangements.

BalancesarepresentedonanetbasiswhentheGrouphasbothalegalrightofoffsetandtheintentiontoeithersettleonanetbasisorrealisetheassetandsettletheliabilitysimultaneously.

17 Borrowings and lease liabilitiesCurrent Non-current Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

UnsecuredOverdrafts 8 22 – – 8 22 Bankloans 27 298 16 354 43 652 6.75%Notes2019£500m1 – 504 – – – 5042.375%Notes2020US$500m2 378 – – 383 378 3832.125%Notes2021€750m2 – – 655 699 655 699 0.875%Notes2024€550m3 – – 481 498 481 4983.625%Notes2025US$1,000m3 – – 781 765 781 765 3.375%Notes2026£375m4 – – 410 403 410 4031.625%Notes2028€550m3 – – 501 502 501 502Otherloans5 22 – 52 5 74 5 Total unsecured 435 824 2,896 3,609 3,331 4,433

Secured 6 Leaseliabilities–property 50 – 473 – 523 –Leaseliabilities–aeroengines 261 – 1,463 – 1,724 –Leaseliabilities–equipment 29 – 78 – 107 –Obligationsunderfinanceleases – 34 – 195 – 229 Total secured 340 34 2,014 195 2,354 229

Total borrowings and lease liabilities 775 858 4,910 3,804 5,685 4,662

1 ThesenotesarethesubjectofinterestrateswapagreementsunderwhichtheGrouphasundertakentopayfloatingratesofinterest,whichformafairvaluehedge.2 Thesenotesarethesubjectofcross-currencyinterestrateswapagreementsunderwhichtheGrouphasundertakentopayfloatingratesofGBPinterest,whichformafairvaluehedge.3 Thesenotesarethesubjectofcross-currencyinterestrateswapagreementsunderwhichtheGrouphasundertakentopayfloatingratesofGBPinterest,whichformafairvalue hedge.TheyarealsosubjecttointerestrateswapagreementsunderwhichtheGrouphasundertakentopayfixedratesofinterest,whichareclassifiedasfairvaluethroughprofit and loss.4 ThesenotesarethesubjectofinterestrateswapagreementsunderwhichtheGrouphasundertakentopayfloatingratesofinterest,whichformafairvaluehedge.TheyarealsosubjecttointerestrateswapagreementsunderwhichtheGrouphasundertakentopayfixedratesofinterest,whichareclassifiedasfairvaluethroughprofitandloss.

5 In2019,theGroupreclassified£79masborrowingspreviouslyincludedinotherfinancialliabilities.Otherloansof£8m(2018:£5m)areheldbyentitiesclassifiedasjointoperations. TheloansaredisclosedafteradjustmentshavebeenmadeonconsolidationtoeliminatetheextentoftheGroup’sinterestintheentity.6 Obligationsunderleasesaresecuredbyrelatedleasedassets.


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18 Trade payables and other liabilitiesCurrent Non-current Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Trade payables 2,300 2,520 – – 2,300 2,520Amountsowedtojointventuresandassociates 798 635 36 18 834 653Accruals 1,751 1,673 89 109 1,840 1,782DeferredreceiptsfromRRSAworksharepartners 17 9 516 520 533 529 Governmentgrants1 12 14 71 85 83 99 Othertaxationandsocialsecurity 128 125 – – 128 125 Otherpayables2 3,444 3,316 1,359 1,208 4,803 4,524

8,450 8,292 2,071 1,940 10,521 10,232

Tradepayablesandotherliabilitiesareanalysedasfollows:Financialinstruments(note19):

Trade payables and similar items 5,849 5,659Othernon-derivativefinancialliabilities 1,541 1,754

Non-financialinstruments 3,131 2,81910,521 10,232

1 Duringtheyear£12m(2018:£8m)ofgovernmentgrantswerereleasedtotheincomestatement.2 Otherpayablesinclude£280m(2018:£378m)forfinancialpenaltiesfromagreementswithinvestigatingbodiesand£nil(2018:£245m)fordeferredconsiderationinrelationtotheacquisitionofITPAero.Inaddition,otherpayablesincludesamountsduetoRRSAconcessions,warrantycreditsandothersundrypayables.

Ourpaymenttermswithsuppliersvaryontheproductsandservicesbeingsourced,thecompetitiveglobalmarketsweoperateinandothercommercialaspectsofsuppliers’relationships.Industryaveragepaymenttermsvarybetween90–120days.Weofferreducedpaymenttermsforsmallersuppliers,sothattheyarepaidin30days.Inlinewithaerospaceindustrypractice,weofferaSCFprogrammeinpartnershipwithbankstoenablesupplierswhoareonourstandard75-daypaymenttermstoreceivetheirpaymentsooner.TheSCFprogrammeisavailable tosuppliersattheirdiscretionanddoesnotchangeourrightsandobligationswithsuppliersnorthetimingofourpaymenttosuppliers. At31December2019,suppliershaddrawn£859mundertheSCFscheme(31December2018:£817m).


19 Financial instruments

Carrying values and fair values of financial instrumentsAssets 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

2019Unlistednon-currentassetinvestments 12 A 14 – – – – 14 Trade receivables and similar items 14 B/C – 344 3,133 – – 3,477 Othernon-derivativefinancialassets 14 B – – 726 – – 726 Otherassets D 28 – – – – 28 Derivativefinancialassets1 C 525 – – – – 525 Short-terminvestments B – – 6 – – 6 Cash and cash equivalents 16 B 1,095 – 3,348 – – 4,443 Borrowings 17 E/F – – – – (3,331) (3,331)Leaseliabilities 17 G – – – – (2,354) (2,354)Derivativefinancialliabilities1 C – – – (3,374) – (3,374)FinancialRRSAs H – – – – (110) (110)Otherliabilities H – – – – (72) (72)C Shares B – – – – (31) (31)Trade payables and similar items 18 B – – – – (5,849) (5,849)Othernon-derivativefinancialliabilities 18 B – – – – (1,541) (1,541)Contractliabilities 15 B – – – – (131) (131)

1,662 344 7,213 (3,374) (13,419) (7,574)

2018*Unlistednon-currentassetinvestments 12 A 22 – – – – 22 Trade receivables and similar items 14 B/C – 146 3,432 – – 3,578Othernon-derivativefinancialassets 14 B – – 489 – – 489Derivativefinancialassets1 C 365 – – – – 365Short-terminvestments B – – 6 – – 6 Cash and cash equivalents 16 B 1,222 – 3,752 – – 4,974Borrowings 17 E/F – – – – (4,662) (4,662)Derivativefinancialliabilities1 C – – – (3,871) – (3,871)FinancialRRSAs H – – – – (227) (227)Otherliabilities H – – – – (62) (62)C Shares B – – – – (29) (29)Trade payables and similar items 18 B – – – – (5,659) (5,659)Othernon-derivativefinancialliabilities 18 B – – – – (1,754) (1,754)

1,609 146 7,679 (3,871) (12,393) (6,830)

* Disclosuresrelatingto31December2018havebeenre-presentedinthistableandtheotherrelatedtablesinthisnotetoreflectthechangesexplainedinnote14.1 Intheeventofcounterpartydefaultrelatingtoderivativefinancialassetsandliabilities,offsettingwouldapplyandfinancialassetsandliabilitiesheldwiththesamecounterpartywouldnetoff.Ifthisoccurredwitheverycounterparty,totalfinancialassetswouldbe£13m(2018:£11m)andliabilities£2,862m(2018:£3,517m).

Fairvaluesequatetobookvaluesforboth2019and2018,withthefollowingexceptions:

2019 2018

Basis fordetermining

fair valueBook value

£mFair value

£mBookvalue

£mFair value

£m

Borrowings E (3,206) (3,147) (3,754) (3,634)Borrowings F (125) (130) (908) (887)FinancialRRSAs H (110) (112) (227) (235)

Thefairvalueofafinancialinstrumentisthepriceatwhichanassetcouldbeexchanged,oraliabilitysettled,betweenknowledgeable,willingpartiesinanarms-lengthtransaction.Fairvalueshavebeendeterminedwithreferencetoavailablemarketinformationatthebalancesheetdate,usingthemethodologiesdescribedonpage158.


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19 Financial instruments continued

A Theseprimarilycompriseunconsolidatedcompanieswherefairvalueapproximatestothebookvalue.B Fairvaluesareassumedtoapproximatetocosteitherduetotheshort-termmaturityoftheinstrumentsorbecausetheinterestrateoftheinvestmentsisresetafterperiodsnotexceedingsixmonths.

C Fairvaluesofderivativefinancialassetsandliabilitiesandtradereceivablesheldtocollectorsellareestimatedbydiscountingexpectedfuturecontractualcashflowsusingprevailinginterestratecurves.Amountsdenominatedinforeigncurrenciesarevaluedattheexchangerateprevailingatthebalancesheetdate.Thesefinancialinstrumentsareincludedonthebalancesheetatfairvalue,derivedfromobservablemarketprices(Level2asdefinedbyIFRS13Fair Value Measurement).

D Otherassetsareincludedonthebalancesheetatfairvalue,derivedfromobservablemarketpricesorlatestforecast(Level2/Level3asdefinedbyIFRS13).E Borrowingsarecarriedatamortisedcost.Amountsdenominatedinforeigncurrenciesarevaluedattheexchangerateprevailingatthebalancesheetdate.Thefairvalueofborrowingsisestimatedusingquotedprices.(Level1asdefinedbyIFRS13).

F Borrowingsarecarriedatamortisedcost.Amountsdenominatedinforeigncurrenciesarevaluedattheexchangerateprevailingatthebalancesheetdate.Thefairvalueofborrowingsisestimatedbydiscountingcontractualfuturecashflows.(Level2asdefinedbyIFRS13).

G ThefairvalueofleaseliabilitiesareestimatedbydiscountingfuturecontractualcashflowsusingeithertheinterestrateimplicitintheleaseortheGroup’sincrementalcostofborrowing(Level2asdefinedbyIFRS13).

H ThefairvalueofRRSAsandotherliabilitiesareestimatedbydiscountingexpectedfuturecashflows.Thecontractualcashflowsarebasedonfuturetradingactivity,whichisestimatedbasedonlatestforecasts(Level3asdefinedbyIFRS13).

IFRS13definesathreelevelvaluationhierarchy: Level1–quotedpricesforsimilarinstruments Level2–directlyobservablemarketinputsotherthanLevel1inputs Level3–inputsnotbasedonobservablemarketdata

Carrying values of other financial assets and liabilitiesForeign

exchange contracts

£m

Commodity contracts

£m

Interest rate contracts 1

£m

Total derivatives

£m

FinancialRRSAs

£mOther

£mC Shares

£mTotal

£m

2019Non-currentassets 234 14 203 451 – 16 – 467 Currentassets 16 9 49 74 – 12 – 86 Assets 250 23 252 525 – 28 – 553 Currentliabilities (394) (5) – (399) (31) (32) (31) (493)Non-currentliabilities (2,960) (6) (9) (2,975) (79) (40) – (3,094)Liabilities (3,354) (11) (9) (3,374) (110) (72) (31) (3,587)

(3,104) 12 243 (2,849) (110) (44) (31) (3,034)

2018Non-currentassets 47 4 292 343 – – – 343Currentassets 16 2 4 22 – – – 22 Assets 63 6 296 365 – – – 365Currentliabilities (523) (15) – (538) (52) (28) (29) (647)Non-currentliabilities (3,304) (25) (4) (3,333) (175) (34) – (3,542)Liabilities (3,827) (40) (4) (3,871) (227) (62) (29) (4,189)

(3,764) (34) 292 (3,506) (227) (62) (29) (3,824)

1 Includestheforeignexchangeimpactofcross-currencyinterestrateswaps.

Derivative financial instrumentsTheGroupusesvariousfinancialinstrumentstomanageitsexposuretomovementsinforeignexchangerates.Wheretheeffectivenessofahedgingrelationshipinacashflowhedgeisdemonstrated,changesinthefairvaluethataredeemedeffectiveareincludedinthecashflowhedgereserveandreleasedtomatchactualpaymentsonthehedgeditem.TheGroupusescommodityswapstomanageitsexposuretomovementsinthepriceofcommodities(jetfuelandbasemetals).Tohedgethecurrencyriskassociatedwithaborrowingdenominatedinaforeigncurrency,theGrouphascurrencyderivativesdesignatedaspartoffairvaluehedges.TheGroupusesinterestrateswapsandforwardrateagreementstomanageitsexposuretomovementsininterestrates.

Movementsinthefairvaluesofderivativefinancialassetsandliabilitieswereasfollows:Foreign exchange

instruments Commodity instrumentsInterest rate instruments – hedge accounted

Interest rate instruments –non-hedge accounted Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018*£m

2019£m

2018£m

2019£m

2018£m

At1January (3,764) (2,312) (34) 1 292 227 – – (3,506) (2,084)Movements in fair value hedges – – – – (27) 101 – – (27) 101

Movements in cashflowhedges (4) (14) 13 (9) – (1) – – 9 (24)Movementsinotherderivativecontracts 1 (43) (2,122) 36 (22) – – 14 – 7 (2,144)Contractssettled 707 684 (3) (4) (36) (35) – – 668 645

At 31 December (3,104) (3,764) 12 (34) 229 292 14 – (2,849) (3,506)

*Prioryearbalanceshavebeenre-presentedinordertogiveamoreaccuratereflectionofthecashflowsassociatedwithinterestrateinstruments.1 Includedinfinancing.



Financial risk and revenue sharing arrangements (RRSAs) and other financial liabilitiesTheGrouphasfinancialliabilitiesarisingfromfinancialRRSAs.Thesefinancialliabilitiesarevaluedateachreportingdateusingtheamortisedcostmethod.Thisinvolvescalculatingthepresentvalueoftheforecastcashflowsofthearrangementsusingtheinternalrateof returnattheinceptionofthearrangementsasthediscountrate.

Movementsinthecarryingvalueswereasfollows:Financial RRSAs Other liabilities Other assets

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

At1Januaryaspreviouslyreported (227) (247) (62) (57) – –Reclassificationtoborrowings1 79 – – – – –

At1Januaryrestated (148) (247) (62) (57) – –ExchangeadjustmentsincludedinOCI 10 (3) 1 (1) – –Additions (4) (3) (37) (25) – –Financing charge 2 (3) (8) (3) (1) – –Excludedfromunderlyingprofit:

Changes in forecast payments 2 1 (2) – – – –Exchangeadjustments2 6 – – – – –

Cash paid 28 36 29 22 – –Reclassificationfromtradereceivables – – – – 16 –

At 31 December (110) (227) (72) (62) 16 –

1 In2019,theGroupreclassified£79masborrowingspreviouslyincludedinotherfinancialliabilities.2 Includedinfinancing.

Effect of hedging instruments on the financial position and performanceTomanagetheriskofchangesinthefairvaluesoffixedrateborrowings(thehedgeditems)theGrouphasenteredintofixed-to-floatinginterestrateswapsandcross-currencyinterestrateswaps(thehedginginstruments)whichforaccountingpurposesaredesignatedasfairvaluehedges.Althoughthehedginginstrumentshavesimilarcriticaltermstothehedgeditem,someineffectiveness,predominantlyduetocrosscurrencybasis,willstillremain.TheimpactofanyhedgeineffectivenessonthefinancialpositionandperformanceoftheGroupisasfollows:

Hedged item 1 Hedging instrument 2

Nominal£m

FV adjustment

in the period

£m

FV adjustment

sinceinception

£m

Carryingamount

£mNominal

£m

Carryingamount

asset£m

Carryingamountliability

£m

FV movement

in the period

£m

Hedgeineffect-

iveness inthe period 3

£m

Weightedaverage FX

rate

Weightedaverage interest

rate

At 31 December 2019

Sterling (375) (3) (36) (410) 375 36 – 3 – 1.00 GBP LIBOR

+ 0.893

US Dollar (987) (10) (175) (1,159) 987 172 – 2 (8) 1.52 GBP LIBOR

+ 1.2575

Euro (1,607) 63 (34) (1,637) 1,607 27 (6) (69) (6) 1.15 GBP LIBOR

+ 0.8301

At31December2018

Sterling (875) 25 (34) (907) 875 34 – (25) – 1.00GBP LIBOR

+ 2.0867

US Dollar (987) (61) (165) (1,148) 987 169 – 65 4 1.52 GBP LIBOR

+ 1.2575

Euro (1,607) (33) (97) (1,699) 1,607 90 – 26 (7) 1.15 GBP LIBOR

+ 0.8301

1 Hedgeditemsareincludedinborrowingsinthebalancesheet.2 Hedginginstrumentsareincludedinotherfinancialassetsorliabilitiesinthebalancesheet.3 Hedgeineffectivenessisincludedinnetfinancingintheincomestatement.

TheGrouphaselectedtoearlyadopttheamendmentstoIFRS9,IAS39andIFRS7Interest Rate Benchmark Reform issued in September 2019.Incalculatingthechangeinfairvalueattributabletothehedgedriskforthefixed-rateborrowings,theGrouphasmadethefollowingassumptionsthatreflectitscurrentexpectations:

– theGrouphasassumedthatpre-existingfallbackprovisionsintheborrowingsdonotapplytoIBORreform; – borrowingsmovetoarisk-freerateduring2022,andthespreadwillbesimilartothespreadincludedintheinterestrateswapsusedashedginginstruments;and

– nootherchangestothetermsofthehedgedborrowingsareanticipated.


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Risk management policies and hedging activitiesTheprincipalfinancialriskstowhichtheGroupisexposedare:foreigncurrencyexchangeraterisk;liquidityrisk;creditrisk;interestraterisk;andcommoditypricerisk.TheBoardhasapprovedpoliciesforthemanagementoftheserisks.

Foreign currency exchange rate risk–TheGrouphassignificantcashflows(mostsignificantlyUSdollars,followedbytheeuro)denominatedincurrenciesotherthanthefunctionalcurrencyoftherelevanttradingentity.Tomanageitsexposurestochangesinvaluesoffutureforeigncurrencycashflows,soastomaintainrelativelystablelong-termforeignexchangeratesonsettledtransactions,theGroupentersintoderivativeforwardforeigncurrencytransactions.

TheGroupeconomicallyhedgesitsGBP/USDexposurebyforecastinghighlyprobablenetUSDreceiptsuptotenyearsforward.HedgesaretakenoutwithinprescribedmaximumandminimumhedgepositionssetoutintheGroupFXpolicy.Themaximumandminimumpolicybandsdeclinegraduallyovertheten-yearhorizonandarecalculatedasapercentageofforecastnetincome.AsimilarpolicyisoperatedfortheGroup’sEUR/USDexposure.Foraccountingpurposes,thesederivativecontractsarenotdesignatedinhedgingrelationshipswiththeexceptionofthosetakenoutbytheGroup’sSpanishsubsidiary,ITPAero,wheretheyaredesignatedincashflowhedges.ITPAeroisexposedpredominantlytonetUSDreceiptsthatithedgesagainstEURusingforeignexchangeforwardcontracts.

TheGroupregardsitsinterestsinoverseassubsidiarycompaniesaslong-terminvestments.TheGroupaimstomatchitstranslationalexposuresbymatchingthecurrenciesofassetsandliabilities.

Liquidity risk –TheGroup’spolicyistoholdfinancialinvestmentsandmaintainundrawncommittedfacilitiesatalevelsufficienttoensurethattheGrouphasavailablefundstomeetitsmedium-termcapitalandfundingobligationsandtomeetanyunforeseenobligationsandopportunities.TheGroupholdscashandshort-terminvestments,whichtogetherwiththeundrawncommittedfacilities,enabletheGrouptomanageitsliquidityrisk.

Credit risk –TheGroupisexposedtocreditrisktotheextentofnon-paymentbyeitheritscustomersorthecounterpartiesofitsfinancialinstruments.TheeffectivemonitoringandcontrollingofcreditriskisakeycomponentoftheGroup’sriskmanagementactivities.TheGrouphascreditpoliciescoveringbothtradingandfinancialexposures.CreditrisksarisingfromtreasuryactivitiesaremanagedbyacentraltreasuryfunctioninaccordancewiththeGroupcreditpolicy.TheobjectiveofthepolicyistodiversifyandminimisetheGroup’sexposuretocreditriskfromitstreasuryactivitiesbyensuringtheGrouptransactsstrictlywith‘BBB’orhigherratedfinancialinstitutionsbasedonpre-establishedlimitsperfinancialinstitution.Atthebalancesheetdate,therewerenosignificantconcentrationsofcreditrisktoindividualcustomersorcounterparties.TheGroup’srevenueisgeneratedfromcustomerslocatedacrossmultiplegeographicallocations(seenote2),thesecustomersaretypically:airframersandairlineoperatorsrelatingtoCivilAerospace;governmentdefencedepartmentsfortheUKandUS;multiplesmallerentitiesforPowerSystems;andaeroenginemanufacturersforITPAero.WhilsttherearealimitednumberofcustomersrelatedtoCivilAerospaceandDefence,theyarespreadacrossvariousgeographicallocations.Themaximumexposuretocreditriskatthebalancesheetdateisrepresentedbythecarryingvalueofeachfinancialasset,includingderivativefinancialinstruments.

Interest rate risk–TheGroup’sinterestrateriskisprimarilyinrelationtoitsfixedrateborrowings(fairvaluerisk),floatingrateborrowingsandcashandcashequivalents(cashflowrisk).InterestratederivativesareusedtomanagetheoverallinterestrateprofileoftheGroup.Thefixedorfloatingrateinterestratedecisiononlong-termborrowingsisdeterminedforeachnewagreementatthepointitisenteredinto.TheaggregateinterestratepositionoftheGroupisreviewedregularlyandcanberevisedatanytimeinordertoreacttochangesinmarketconditionsorcircumstances.

TheGroupalsohasexposurestothefairvaluesofnon-derivativefinancialinstrumentssuchasUSD,EURandGBPandfixedrateborrowings.Tomanagetheriskofchangesinthesefairvalues,theGrouphasenteredintofixed-to-floatinginterestrateswapsandcross-currencyinterestrateswapswhichforaccountingpurposesaredesignatedasfairvaluehedges.Theswapshavesimilarcriticaltermstothehedgeditems,suchasthereferencerate,resetdates,notionalamounts,paymentdatesandmaturities.Thereforethereisaneconomicrelationshipandthehedgeratioisestablishedas1:1.Possiblesourcesofineffectivenessinthefairvaluehedgerelationshiparechangesinthecreditriskofeitherpartytotheinterestrateswapand,forcross-currencyinterestrateswaps,thecross-currencybasisriskasthisriskispresentinthehedginginstrumentonly.Anotherpossiblesourceofineffectivenesswouldbeifthenotionaloftheborrowingsislessthanthenotionalofthederivative,forexampleintheeventofapartialrepaymentofhedgeddebtpriortoitsmaturity.

TheGrouphasexposuretochangesincashflowsduetochangesininterestrates.TomanagethisrisktheGrouphasenteredintofloating-to-fixedinterestrateswapstohedgeaproportionofitsfloatingrateexposuretofixedrates.Theswapshavesimilarcriticaltermstothefloatinglegofswapsthatformpartofthefairvaluehedges,suchasthereferencerate,resetdates,notionalamounts,paymentdatesandmaturities.Foraccountingpurposes,thesederivativecontractsaregenerallynotdesignatedashedginginstruments.

TheGroup’sSpanishsubsidiary,ITPAero,hasalsoenteredintoafloating-to-fixedinterestrateswaptohedgethecashflowriskonafloatingrateborrowingwhichforaccountingpurposesisdesignatedasacashflowhedge.

Commodity risk–TheGrouphasexposurestothepriceofjetfuelandbasemetalsarisingfrombusinessoperations.Tominimiseitscashflowexposurestochangesincommodityprices,theGroupentersintoderivativecommoditytransactions.ThecommodityhedgingpolicyissimilartotheGroupFXpolicy,inthattheGroupforecastshighlyprobableexposurestocommodities,andtakesouthedgeswithinprescribedmaximumandminimumlevelsassetoutinthepolicy.Themaximumandminimumpolicybandsdeclinegraduallyovertime. Foraccountingpurposes,thesederivativecontractsaregenerallynotdesignatedinhedgingrelationships.

Other price risk–TheGroup’scashequivalentbalancesrepresentinvestmentsinmoney-marketinstruments,withatermofuptothreemonths.TheGroupdoesnotconsiderthatthesearesubjecttosignificantpricerisk.



Derivative financial instrumentsThenominalamounts,analysedbyyearofexpectedmaturity,andfairvaluesofderivativefinancialinstrumentsareasfollows:

Expected maturity Fair value

Nominalamount

£m

Withinone year

£m

Between one and

two years£m

Betweentwo and

five years£m

Afterfive years

£mAssets

£mLiabilities

£m

At 31 December 2019 Foreignexchangecontracts:Cashflowhedges 646 266 206 174 – 13 (17)Non-hedgeaccounted 29,878 5,151 4,704 13,300 6,723 237 (3,337)

Interestratecontracts:Fair value hedges 2,969 329 639 484 1,517 235 (6)Cashflowhedges 15 4 4 7 – – – Non-hedgeaccounted 2,001 – – 484 1,517 17 (3)

Commoditycontracts:Cashflowhedges 54 11 9 21 13 8 (1)Non-hedgeaccounted 342 125 101 116 – 15 (10)

35,905 5,886 5,663 14,586 9,770 525 (3,374)

At31December2018Foreignexchangecontracts:Cashflowhedges 335 162 120 53 – 4 (11)Non-hedgeaccounted 29,080 5,528 5,113 14,808 3,631 59 (3,816)

Interestratecontracts:Fair value hedges 3,469 500 329 639 2,001 293 –Cashflowhedges 19 4 4 11 – – (1)Non-hedgeaccounted – – – – – 3 (3)

Commoditycontracts:Cashflowhedges 6 2 1 1 2 1 (8)Non-hedgeaccounted 250 92 79 77 2 5 (32)

33,159 6,288 5,646 15,589 5,636 365 (3,871)

Asdescribedabove,allderivativefinancialinstrumentsareenteredintoforriskmanagementpurposes,althoughthesemaynotbedesignatedintohedgingrelationshipsforaccountingpurposes.

Currency analysisForeignexchangecontractsaredenominatedinthefollowingcurrencies:

Nominal amount of currencies purchased forward

Sterling£m

US dollar£m

Euro£m

Other£m

Total£m

At 31 December 2019 Currenciessoldforward:Sterling – 4 – 221 225 US dollar 24,411 – 4,468 581 29,460 Euro 21 297 – 264 582 Other 8 91 152 6 257

At31December2018Currenciessoldforward:Sterling – – 63 230 293US dollar 24,376 – 3,280 753 28,409Euro 84 119 – 274 477Other 87 39 94 16 236


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19 Financial instruments continuedThenominalvalueofinterestrateandcommoditycontractsaredenominatedinthefollowingcurrencies:

2019£m

2018£m

Sterling 2,376 875 US dollar 1,370 1,233Euro 1,635 1,636

Non-derivativefinancialinstrumentsaredenominatedinthefollowingcurrencies:

Sterling£m

US dollar£m

Euro£m

Other£m

Total£m

At 31 December 2019Unlistednon-currentinvestments 4 8 2 – 14 Trade receivables and similar items 139 2,735 541 62 3,477 Othernon-derivativefinancialassets 33 649 23 21 726 Otherassets – 28 – – 28 Short-terminvestments – – 6 – 6 Cash and cash equivalents 2,269 853 1,224 97 4,443 Assets 2,445 4,273 1,796 180 8,694 Borrowings (416) (1,172) (1,739) (4) (3,331)Leaseliabilities (225) (1,784) (76) (269) (2,354)FinancialRRSAs – (25) (85) – (110)Otherliabilities (29) (43) – – (72)C Shares (31) – – – (31)Trade payables and similar items (1,802) (3,244) (730) (73) (5,849)Othernon-derivativefinancialliabilities (758) (576) (136) (71) (1,541)Contractliabilities – (131) – – (131)Liabilities (3,261) (6,975) (2,766) (417) (13,419)

(816) (2,702) (970) (237) (4,725)

At31December2018Unlistednon-currentinvestments 2 7 13 – 22 Trade receivables and similar items 376 2,463 687 52 3,578Othernon-derivativefinancialassets 72 341 47 29 489Short-terminvestments – – – 6 6 Cash and cash equivalents 2,008 928 1,792 246 4,974Assets 2,458 3,739 2,539 333 9,069Borrowings (1,441) (1,435) (1,753) (33) (4,662)FinancialRRSAs – (47) (180) – (227)Otherliabilities (24) (38) – – (62)C Shares (29) – – – (29)Trade payables and similar items (2,099) (2,600) (860) (100) (5,659)Othernon-derivativefinancialliabilities (854) (421) (379) (100) (1,754)Liabilities (4,447) (4,541) (3,172) (233) (12,393)

(1,989) (802) (633) 100 (3,324)



Currency exposuresTheGroup’sactualcurrencyexposureonfinancialinstrumentsaftertakingaccountofderivativeforeigncurrencycontracts,whicharenotdesignatedashedginginstrumentsforaccountingpurposesareasfollows:

FunctionalcurrencyofGroupoperationsSterling

£mUS dollar

£mEuro

£mOther

£mTotal

£m

At 31 December 2019Sterling – 2 2 (4) – US dollar – – (1) – (1)Euro 1 (3) – (1) (3)Other 70 12 69 4 155

At31December2018Sterling1 – 3 (237) 6 (228)US dollar (2) – (5) 5 (2)Euro 2 (14) – 12 –Other – 10 13 – 23

1 TheeuroexposureprimarilyrelatestodeferredconsiderationontheacquisitionofITPAero.Movementsinthisbalanceinrelationtoforeignexchange(recognisedthroughtheconsolidatedincomestatement)arepartiallymatchedbytherelatedforeignexchangemovementinthesubsidiary’snetassets,recognisedthroughtheconsolidatedstatement ofothercomprehensiveincome.

Ageing beyond contractual due date of financial assets

Withinterms

£m

Up tothree

monthsoverdue

£m

Betweenthree

months andone yearoverdue

£m

More thanone yearoverdue

£mTotal

£m

At 31 December 2019Unlistednon-currentassetinvestments 14 – – – 14 Trade receivables and similar items 3,102 210 92 73 3,477 Othernon-derivativefinancialassets 722 2 1 1 726 Otherassets 28 – – – 28 Derivativefinancialassets 525 – – – 525 Short-terminvestments 6 – – – 6 Cash and cash equivalents 4,443 – – – 4,443

8,840 212 93 74 9,219

At31December2018Unlistednon-currentassetinvestments 22 – – – 22 Trade receivables and similar items 3,108 265 132 73 3,578Othernon-derivativefinancialassets 489 – – – 489Derivativefinancialassets 365 – – – 365Short-terminvestments 6 – – – 6 Cash and cash equivalents 4,974 – – – 4,974

8,964 265 132 73 9,434


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Contractual maturity analysis of non-derivative financial liabilitiesGross values

Withinone year

£m

Betweenone and

two years£m

Betweentwo and

five years£m

Afterfive years

£m

Carryingvalue

£m

At 31 December 2019Borrowings (511) (722) (662) (1,704) (3,331)Leaseliabilities (425) (306) (872) (1,258) (2,354)FinancialRRSAs (35) (7) (14) (63) (110)Otherliabilities (34) (23) (10) (5) (72)C Shares (31) – – – (31)Trade payables and similar items (5,677) (62) (20) (90) (5,849)Othernon-derivativefinancialliabilities (1,162) (308) (35) (36) (1,541)Contractliabilities (131) – – – (131)

(8,006) (1,428) (1,613) (3,156) (13,419)

At31December2018Borrowings (983) (520) (1,014) (2,699) (4,662)FinancialRRSAs (48) (62) (59) (73) (227)Otherliabilities (27) (3) (25) (7) (62)C Shares (29) – – – (29)Trade payables and similar items (5,542) (51) (40) (26) (5,659)Othernon-derivativefinancialliabilities (1,273) (150) (259) (72) (1,754)

(7,902) (786) (1,397) (2,877) (12,393)

Expected maturity analysis of derivative financial instrumentsGross values

Withinone year

£m

Betweenone and

two years£m

Betweentwo and

five years£m

Afterfive years

£m

Carryingvalue

£m

At 31 December 2019Derivative financial assets: Cashinflows 1,475 1,487 2,072 3,202 Cashoutflows (1,376) (1,448) (2,035) (3,085)Othernetcashflows1 17 12 34 24

116 51 71 141 525 Derivative financial liabilities: Cashinflows 4,383 4,113 11,987 4,804 Cashoutflows (4,960) (4,737) (13,872) (6,186)Othernetcashflows1 (5) (5) (4) –

(582) (629) (1,889) (1,382) (3,374)

At31December2018Derivativefinancialassets:Cashinflows 1,001 934 2,187 2,061Cashoutflows (979) (869) (2,185) (1,934)Othernetcashflows1 24 7 15 16

46 72 17 143 365

Derivativefinancialliabilities:Cashinflows 4,753 4,753 13,481 3,437Cashoutflows (5,531) (5,656) (16,298) (4,257)Othernetcashflows1 (14) (12) (12) –

(792) (915) (2,829) (820) (3,871)

1 Derivativefinancialassetsandliabilitiessettledonanetcashbasis.

TheGroupregularlyrenegotiatesthecontractualmaturitiesofitsforeignexchangecontracts.Ingeneral,theeffectofsuchnegotiationsisthesettlementofderivativefinancialliabilitiessomewhatearlierthanthecontractualmaturitydate.



Interest rate riskInrespectofincome-earningfinancialassetsandinterest-bearingfinancialliabilities,thefollowingtableindicatestheireffectiveinterestrates.Thevalueshownisthecarryingamount,beforetakingaccountofswaps.

2019 2018

Fixed rate£m

Floating rate£m

Total£m

Fixed rate£m

Floatingrate£m

Total£m

Short-terminvestments – 6 6 – 6 6 Cash and cash equivalents 1 – 4,443 4,443 – 4,974 4,974Borrowings (2,252) (1,079) (3,331) (99) (4,334) (4,433)Leaseliabilities(2018:financeleaseliabilities) (1,578) (776) (2,354) (229) – (229)

(3,830) 2,594 (1,236) (328) 646 318

Weighted average interest ratesBorrowings 1.9% 1.6% 1.5% 2.1%Leaseliabilities2 3.6% 3.1% 4.1%

1 Cashandcashequivalentscomprisesbankbalancesandtermdepositsandearninterestbasedonshort-termfloatingmarketinterestrates.2 Interestratesforleaseliabilitiesareconsideredtobethediscountratesatthebalancesheetdate.

SomeoftheGroup’sborrowingsaresubjecttotheGroupmeetingcertainobligations,includingcustomaryfinancialcovenants.IftheGroupfailstomeetitsobligationsthesearrangementsgiverightstothelenders,uponagreement,toacceleraterepaymentofthefacilities.At31December2019,noneofthesewereinbreach(2018:none).TherearenoratingtriggerscontainedinanyoftheGroup’sfacilitiesthatcouldrequiretheGrouptoaccelerateorrepayanyfacilityforagivenmovementintheGroup’screditrating.

Inaddition,theGrouphas£2,500m(2018:£2,500m)ofundrawncommittedborrowingfacilitieswhichareavailableforatleastthenextfour years.

Sensitivity analysisSensitivities at 31 December (all other variables held constant) – impact on profit after tax and equity

2019£m

2018£m

Sterling10%weakeragainsttheUSdollar (2,557) (2,401)Sterling10%strongeragainsttheUSdollar 2,105 1,998Euro10%weakeragainsttheUSdollar (376) (268)Euro10%strongeragainsttheUSdollar 307 219 Sterling10%weakeragainsttheEuro (32) (32)Sterling10%strongeragainsttheEuro 26 26 Commodityprices10%lower (32) (21)Commodityprices10%higher 32 21 Interestrates50basispointslower (82) –Interestrates50basispointshigher 85 –


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C Shares and payments to shareholdersTheCompanyissuesnon-cumulativeredeemablepreferenceshares(CShares)asanalternativetopayingacashdividend.CSharesinrespectofayearareissuedinthefollowingyear.ShareholdersareabletoredeemanynumberoftheirCSharesforcash.AnyCSharesretainedattractadividendof75%ofLIBORonthe0.1pnominalvalueofeachshare,paidonatwice-yearlybasis,andhavelimitedvotingrights.TheCompanyhastheoptiontocompulsorilyredeemtheCShares,atanytime,iftheaggregatenumberofCSharesinissueislessthan10%oftheaggregatenumberofCSharesissued,orontheacquisitionorcapitalrestructuringoftheCompany.

MovementsinissuedandfullypaidCSharesduringtheyearwereasfollows:

2019 2018

Millions

Nominalvalue

£m Millions

Nominalvalue

£m

At1January 29,071 29 28,429 28 Issued 221,954 222 216,717 217 Redeemed (220,417) (220) (216,075) (216)

At 31 December 30,608 31 29,071 29

PaymentstoshareholdersinrespectoftheyearrepresentthevalueofCSharestobeissuedinrespectoftheresultsfortheyear.IssuesofCSharesweredeclaredasfollows:

2019 2018

Penceper share £m

Penceper share £m

Interim 4.60 87 4.60 86 Final 7.10 137 7.10 135

11.70 224 11.70 221

20 Provisions for liabilities and chargesAt

1 January2019

£m

Reclassified tolease liabilities

(IFRS 16)£m

Charged toincome

statement£m

Reversed£m

Utilised£m

Transfers£m

Exchangedifferences

£m

At31 December

2019£m

Trent1000exceptionalcosts1 779 – 1,275 – (672) – – 1,382 Contractlosses2 206 – 592 (4) (78) 62 (5) 773 Warrantiesandguarantees 373 – 129 (19) (123) – (15) 345 Customerfinancing 17 – 12 – (7) – – 22 Restructuring 204 (8) 49 (48) (128) – (1) 68 Insurance 87 – 25 (17) (25) – – 70 Taxrelatedinterestandpenalties 62 – 14 (19) (1) – (1) 55 Employer liability claims 48 – 4 – (3) – – 49 Other 141 (67) 33 (34) (21) (9) (3) 40

1,917 (75) 2,133 (141) (1,058) 53 (25) 2,804 Currentliabilities 1,122 858 Non-currentliabilities 795 1,946

1 ThechargetotheincomestatementforTrent1000includes£15masaresultofdiscountunwind.2 Thechargetotheincomestatementforcontractlossesincludesa£40mimpactfromthechangeindiscountratesoncontractlossesrecordedinprioryearsasaresultofthefallinUSbonds,whichdrivesthecalculationoftherisk-freediscountrate.

InNovember,weannouncedtheoutcomeofrecenttestingandathoroughtechnicalandfinancialreviewoftheTrent1000TENprogramme,followingtechnicalissueswhichwereidentifiedin2019.ThisresultedinarevisedtimelineandamoreconservativeestimateofdurabilityfortheimprovedHPturbinebladefortheTENvariant.Anexceptionalchargeof£1,361m(atunderlyingexchangerates)hasbeenrecordedintheincomestatement.Thechargeis£1,531matprevailingexchangeratesandnetof£203mreflectinginsurancereceiptsandcontractaccountingadjustments.Ofthecharge,£1,275mhasbeenrecordedinrelationtoTrent1000exceptionalcosts,andafurther£459minrelationtocontractlosses(seebelow).Seenote2forfurtherdetails.

During2019,wehaveutilised£672moftheTrent1000exceptionalcostsprovision.Thisrepresentscustomerdisruptioncostssettledincashandcreditnotes,andremediationshopvisitcosts.Weexpecttousethisprovisionovertheperiod2020to2023.

Provisionsforcontractlossesarerecordedwhenthedirectcoststofulfilacontractareassessedasbeinggreaterthantheexpectedrevenue.Includedwithintheprovisionchargedof£592m,is£459m(atprevailingexchangerates)relatingtotheupfrontrecognitionoffuturelossesonasmallnumberofcontractswhicharenowlossmakingasaresultofthemarginimpactofourupdatedHPturbinedurabilityexpectationsontheTrent1000TEN.Provisionsforcontractlossesareexpectedtobeutilisedoverthetermofthecustomercontracts,typicallywithin10–15years.

Provisionsforwarrantiesandguaranteesprimarilyrelatetoproductssoldandgenerallycoveraperiodofuptothreeyears.


20 Provisions for liabilities and charges continuedCustomerfinancingprovisionscoverguaranteesprovidedforassetvalueand/orfinancing.

InconnectionwiththesaleofitsproductstheGroupwill,onsomeoccasions,providefinancingsupportforitscustomers–generallyinrespectofcivilaircraft.TheGroup’scommitmentsrelatingtothesefinancingarrangementsarespreadovermanyyears,relatetoanumberofcustomersandabroadproductportfolioandaregenerallysecuredontheassetsubjecttothefinancing.Theseincludecommitmentsof US$2.8bn(2018:US$2.3bn)(onadiscountedbasis)toprovidefacilitiestoenablecustomerstopurchaseaircraft(ofwhichapproximatelyUS$656mcouldbecalledduring2020).Thesefacilitiesmayonlybeusedifthecustomerisunabletoobtainfinancingelsewhereandarepricedatapremiumtothemarketrate.Consequently,theDirectorsdonotconsiderthatthereisasignificantexposurearisingfromtheprovisionofthesefacilities.

Commitmentsondeliveredaircraftinexcessoftheamountsprovidedareshowninthetablebelow.ThesearereportedonadiscountedbasisattheGroup’sborrowingratetoreflectbetterthetimespanoverwhichtheseexposurescouldarise.Theseamountsdonotrepresentvaluesthatareexpectedtocrystallise.ThecommitmentsaredenominatedinUSdollars.AstheGroupdoesnotgenerallyadoptcashflowhedgeaccountingforfutureforeignexchangetransactions,thisamountisreported,togetherwiththesterlingequivalentatthereportingdatespotrate.Thevaluesofaircraftprovidingsecurityarebasedonadvicefromaspecialistaircraftappraiser.

2019 2018

£m $m £m $m

Grosscommitments 60 79 93 119 Valueofsecurity1 (9) (11) (24) (30)Indemnities (8) (11) (19) (24)Netcommitments 43 57 50 65

Netcommitmentswithsecurityreducedby20%2 43 57 60 77 1Securityincludesunrestrictedcashcollateralof: – – 4 6

2 Althoughsensitivitycalculationsarecomplex,thereductionofrelevantsecurityby20%illustratesthesensitivitytochangesinthisassumption.

RestructuringprovisionsaremadeforGroupapproved,formalrestructuringprogrammeswheretherestructuringhaseithercommencedorhasbeenpubliclyannounced.IncludedistheGroup-widerestructuringprogrammeannouncedon14June2018,whichisanon-goingmulti-yearrestructuringprogrammeacrossthebusinessandreflectstheseverancecostsaswellastheconsultancycoststhatwillhelpdelivertheplannedreductions.Themajorityoftheprovisionisexpectedtobeutilisedoverthenexttwoyears.

TheGroup’scaptiveinsurancecompanyretainsaportionoftheexposuresitinsuresonbehalfoftheremainderoftheGroup.Significantdelaysoccurinthenotificationandsettlementofclaimsandjudgementisinvolvedinassessingoutstandingliabilities,theultimatecostandtimingofwhichcannotbeknownwithcertaintyatthebalancesheetdate.Theinsuranceprovisionsarebasedoninformationcurrentlyavailable,howeveritisinherentinthenatureofthebusinessthatultimateliabilitiesmayvary.Provisionsforoutstandingclaimsareestablishedtocovertheoutstandingexpectedliabilityaswellasclaimsincurredbutnotyetreported.

ProvisionsfortaxrelatedinterestandpenaltiesrelatetouncertaintaxpositionsinsomeofthejurisdictionsinwhichtheGroupoperates.Utilisationoftheprovisionswilldependonthetimingofresolutionoftheissueswiththerelevanttaxauthorities.

Theprovisionrelatingtoemployerhealthcareliabilityclaimsisasaresultofanhistoricalinsolvencyofthepreviousproviderandisexpectedtobeutilisedoverthenext30years.

Otherprovisionscompriseanumberofliabilitieswithvaryingexpectedutilisationrates.


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21 Post-retirement benefitsTheGroupoperatesanumberofdefinedbenefitanddefinedcontributionschemes:

– TheUKdefinedbenefitschemeisfunded,withtheassetsheldinaseparatetrusteeadministeredfund.Employeesareentitled toretirementbenefitsbasedoneithertheirfinalorcareeraveragesalariesandlengthofservice.

– Overseasdefinedbenefitschemesareamixtureoffundedandunfundedplansandprovidebenefitsinlinewithlocalpractice.AdditionallyintheUS,andtoalesserextentinsomeothercountries,theGroup’semploymentpracticesincludetheprovision ofhealthcareandlifeinsurancebenefitsforretiredemployees.Theseschemesareunfunded.

Thevaluationsofthedefinedbenefitschemesarebasedonthemostrecentfundingvaluations,whererelevant,updatedbytheschemeactuariesto31December2019.

ThedefinedbenefitschemesexposetheGrouptoactuarialriskssuchaslongevity,interestrate,inflationandinvestmentrisks.IntheUK,andintheprincipalUSandCanadianpensionschemes,theGrouphasadoptedinvestmentpoliciestomitigatesomeoftheserisks.Thisinvolvesinvestingasignificantproportionoftheschemes’assetsinliabilitydriveninvestment(LDI)portfolios,whichholdinvestmentsdesignedtooffsetinterestrateandinflationraterisks.Inaddition,duringtheyear,theschemehascompletedabuy-in/buy-outofUKpensionerliabilities–seepage169.

Amounts recognised in the income statement2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

Definedbenefitschemes:Currentservicecostandadministrativeexpenses 164 52 216 183 58 241Past-servicecostinrespectofequalisation1 – – – 121 – 121 Otherpast-servicecost/(credit)2 – 6 6 (9) (1) (10)

164 58 222 295 57 352Definedcontributionschemes 66 91 157 41 100 141Operating cost 230 149 379 336 157 493Netfinancing(credit)/chargeinrespectofdefinedbenefitschemes (59) 36 (23) (55) 32 (23)Total income statement charge 171 185 356 281 189 470

1 IntheUKin2018,past-servicecostsof£121mwererecognisedrelatingtotheestimatedcostofequalisingbenefitsearnedafterMay1990betweenmenandwomen.TheUKscheme(Rolls-RoyceUK PensionFund)hastoprovideGuaranteedMinimumPensions(GMPs)which,asaresultofstatutoryrules,havebeencalculateddifferentlyformenandwomen.Althoughequaltreatmentinpensionprovisionformalesandfemaleshasbeenrequiredsince1990,therehasbeenuncertaintyonwhetherandhowpensionschemesarerequiredtoequaliseGMPs.AHighCourtjudgementontheLloydsBankingGrouphearingwaspublishedon26October2018.ThejudgementconfirmedthatGMPsearnedfrom1990mustbeequalisedandhighlightedanacceptablerangeofmethods.Theestimatedcostofthisequalisationwas£97m.Inaddition,acostof£24mwasrecognisedinrelationtoobligationstoequalisecertainotherpost-1990benefitsbetweenmenandwomen.Thetotalcostof£121mrepresentstheDirectors’bestestimateofthecost,basedonactuarialadvice.However,thefinalcost willdifferfromthisamountwhenthefinalmethodofequalisationisagreedwiththeTrusteeandsubsequentlyimplemented.

2 Inadditionin2018,apast-servicecreditof£9maroserelatedtotherestructuringactivities.Thiscreditwasoffsetagainsttherestructuringcosts.Allamountswereexcludedfromtheunderlyingresults.

Theoperatingcostischargedasfollows:

Defined benefit Defined contribution Total

2019£m

2018£m

2019£m

2018£m

2019£m

2018£m

Cost of sales 158 176 113 104 271 280Commercialandadministrativecosts 40 148 26 21 66 169 Researchanddevelopmentcosts 24 28 18 16 42 44

222 352 157 141 379 493

PensioncontributionstoUKpensionarrangementsaregenerallypaidviaasalarysacrificeschemeunderwhichemployeesagreetoareductioningrosscontractualpayinreturnfortheGroupmakingadditionalpensioncontributionsontheirbehalf.Asaresult,thereisadecreaseinwagesandsalariesandacorrespondingincreaseinpensioncostsof£47m(2018:£31m)intheyear.


21 Post-retirement benefits continuedNetfinancingcomprises:

2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

Financingonschemeobligations 303 66 369 286 59 345Financing on scheme assets (362) (30) (392) (341) (27) (368)Netfinancing(income)/chargeinrespectofdefinedbenefitschemes (59) 36 (23) (55) 32 (23)

Financingincomeonschemesurpluses (59) (1) (60) (55) (1) (56)Financingcostonschemedeficits – 37 37 – 33 33

Amounts recognised in OCI in respect of defined benefit schemes

2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

Actuarialgainsandlossesarisingfrom:Demographicassumptions 309 38 347 (130) (4) (134)Financialassumptions (1,723) (228) (1,951) 782 134 916 Experienceadjustments 79 29 108 (6) 9 3

Returnonschemeassetsexcludingfinancingincome 456 106 562 (705) (53) (758)(879) (55) (934) (59) 86 27

On5June2019,theGroupenteredintoapartialbuy-inwithLegal&GeneralAssuranceSocietyLimitedcoveringthebenefitsof circa33,000in-paymentpensioners.Asaresultofthetransaction,anassetre-measurementnetlossestimatedat£600mhasbeenrecognisedwithintheline‘Actuarialgains/(losses)recognisedinOCI’.Thebuy-inwasinanticipationofabuy-out.On1December2019,90%ofthebuy-inliabilities(covering29,614pensioners)weretransferred,resultinginpensionassetsandpensionliabilitiesof£3.6bnbeingderecognisedfromtheGroup’sbalancesheet.Theremaining10%ofthebuy-inliabilities(covering2,261pensioners)wasconcludedinJanuary2020withthefinalbalancingpaymentmadeon1February2020.Pensionassetsandliabilitiesof£408mwillbederecognisedin2020.Thereisnoimpactupontheincomestatementarisingfromthistransaction.

Amounts recognised in the balance sheet in respect of defined benefit schemes

2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

Presentvalueoffundedobligations (8,499) (842) (9,341) (10,847) (758) (11,605)Fair value of scheme assets 9,640 845 10,485 12,773 735 13,508Netasset/(liability)onfundedschemes 1,141 3 1,144 1,926 (23) 1,903Presentvalueofunfundedobligations – (1,352) (1,352) – (1,289) (1,289)Netasset/(liability)recognisedinthebalancesheet 1,141 (1,349) (208) 1,926 (1,312) 614

Post-retirementschemesurpluses¹ 1,141 29 1,170 1,926 18 1,944Post-retirementschemedeficits – (1,378) (1,378) – (1,303) (1,303)Includedinliabilitiesassociatedwithassetsheldforsale – – – – (27) (27)

1 ThesurplusintheUKschemeisrecognisedas,onultimatewind-upwhentherearenolongeranyremainingmembers,anysurpluswouldbereturnedtotheGroup,whichhasthepowertopreventthesurplusbeingusedforotherpurposesinadvanceofthisevent.

Overseasschemesarelocatedinthefollowingcountries:2019 2018

Assets£m

Obligations£m

Net£m

Assets£m

Obligations£m

Net£m

Canada 227 (275) (48) 186 (227) (41)Germany 2 (853) (851) – (749) (749)US pension schemes 616 (635) (19) 549 (596) (47)UShealthcareschemes – (420) (420) – (446) (446)Other – (11) (11) – (29) (29)Netasset/(liability)recognisedinthebalancesheet 845 (2,194) (1,349) 735 (2,047) (1,312)


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21 Post-retirement benefits continued

Defined benefit schemes

AssumptionsSignificantactuarialassumptionsfortheUKschemeatthebalancesheetdatewereasfollows:

2019 2018

Discount rate 2.15% 2.95%Inflationassumption(RPI)1 3.15% 3.40%Rateofincreaseinsalaries 3.15% 3.65%Transferassumption(active/deferred) 45%/35% 40%/32.5%Lifeexpectancyfromage65:currentmalepensioner 21.8 years 22.1 years futuremalepensionercurrentlyaged45 23.1 years 23.4years currentfemalepensioner 23.1 years 23.4years futurefemalepensionercurrentlyaged45 25.0 years 25.2 years

1 ThisistheassumptionfortheRetailPriceIndex.TheConsumerPriceIndexisassumedtobe1.0%lower(2018:1.1%lower).

DiscountratesaredeterminedbyreferencetothemarketyieldsonAAratedcorporatebonds.Therateisdeterminedbyusingtheprofileofforecastbenefitpaymentstoderiveaweightedaveragediscountratefromtheyieldcurve.

Theinflationassumptionisdeterminedbythemarket-impliedassumptionbasedontheyieldsonlong-termindex-linkedgovernmentsecuritiesandincreasesinsalariesarebasedonactualexperience,allowingforpromotion,oftherealincreaseaboveinflation.

ThemortalityassumptionsadoptedfortheUKpensionschemesarederivedfromtheSAPSS2‘All’actuarialtables,withfutureimprovementsinlinewiththeCMI2018coreprojectionsupdatedtoreflectuseofan‘A’parameterof0.25%forfutureimprovementsandlong-termimprovementsof1.25%.Whereappropriate,theseareadjustedtotakeaccountofthescheme’sactualexperience.

Otherassumptionshavebeensetonadvicefromtheactuary,havingregardtothelatesttrendsinschemeexperienceandtheassumptionsusedinthemostrecentfundingvaluation.Therateofincreaseofpensionsinpaymentisbasedontherulesofthescheme,combinedwiththeinflationassumptionwheretheincreaseiscapped.

Assumptionsforoverseasschemesarelesssignificantandarebasedonadvicefromlocalactuaries.Theprincipalassumptionsare:

2019 2018

Discount rate 2.40% 3.40%Inflationassumption 1.90% 2.90%Long-termhealthcarecosttrendrate 4.80% 4.80%Malelifeexpectancyfromage65: currentpensioner 21.4 years 21.1 years futurepensionercurrentlyaged45 21.7 years 23.1years

Changes in present value of defined benefit obligations2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

At1January (10,847) (2,047) (12,894) (11,499) (2,120) (13,619)Exchangedifferences – 71 71 – (56) (56)Currentservicecost (158) (50) (208) (179) (56) (235)Past-servicecost – – – (112) – (112)Finance cost (303) (65) (368) (286) (59) (345)Contributionsbyemployees (2) (3) (5) (2) (3) (5)Benefitspaidout 571 79 650 585 78 663Acquisitionofbusinesses – (2) (2) – – –Disposal of businesses – 28 28 – 31 31Actuarial(losses)/gains (1,335) (168) (1,503) 646 140 786 Transfers – (37) (37) – (2) (2)Settlement 3,575 – 3,575 – – –

At 31 December (8,499) (2,194) (10,693) (10,847) (2,047) (12,894)

Funded schemes (8,499) (842) (9,341) (10,847) (758) (11,605)Unfunded schemes – (1,352) (1,352) – (1,289) (1,289)

Thedefinedbenefitobligationsareinrespectof:Activeplanparticipants (4,751) (1,185) (5,936) (4,229) (1,088) (5,317)Deferredplanparticipants (2,154) (171) (2,325) (1,975) (157) (2,132)Pensioners (1,594) (838) (2,432) (4,643) (802) (5,445)Weightedaveragedurationofobligations(years) 23 16 22 19 15 18


21 Post-retirement benefits continuedChanges in fair value of scheme assets

2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

At1January 12,773 735 13,508 13,607 750 14,357Exchangedifferences – (17) (17) – 24 24Administrativeexpenses (6) (2) (8) (4) (2) (6)Financing 362 30 392 341 27 368Returnonplanassetsexcludingfinancing 456 106 562 (705) (53) (758)Contributionsbyemployer 199 67 266 117 64 181 Contributionsbyemployees 2 3 5 2 3 5 Benefitspaidout (571) (79) (650) (585) (78) (663)Acquisitionofbusinesses – 2 2 – – –Settlement (3,575) – (3,575) – – –

At 31 December 9,640 845 10,485 12,773 735 13,508

Totalreturnonschemeassets 818 136 954 (364) (26) (390)

Fair value of scheme assets at 31 December2019 2018

UKschemes

£m

Overseasschemes

£mTotal

£m

UKschemes

£m

Overseasschemes

£mTotal

£m

Sovereign debt 5,799 277 6,076 9,388 315 9,703Corporatedebtinstruments 3,135 467 3,602 3,447 356 3,803Interest rate swaps 14 – 14 1,342 – 1,342Inflationswaps (18) – (18) (375) – (375)Cashandsimilarinstruments1 (784) 13 (771) (1,991) 22 (1,969)Liability driven investment (LDI) portfolios 2 8,146 757 8,903 11,811 693 12,504Longevityswap3 – – – (292) – (292)Listedequities 323 76 399 592 39 631Unlistedequities 95 – 95 128 – 128 Syntheticequities4 3 5 8 (13) (4) (17)Sovereign debt – – – – 5 5 Corporatedebtinstruments 662 4 666 548 – 548Cash – 4 4 – 2 2 Partialbuy-ininsurancepolicy 408 – 408 – – –Other 3 (1) 2 (1) – (1)At31December 9,640 845 10,485 12,773 735 13,508

1 CashandsimilarinstrumentsincluderepurchaseagreementsonUKGovernmentbondsamountingto£(1,308)m(2018:£(1,991)m).Thelatestmaturitydatefortheseshort-termborrowingsis12October2020.

2 Aportfolioofgiltandswapcontracts,backedbyinvestment-gradecreditinstrumentsandLIBORgeneratingassets,thatisdesignedtohedgethemajorityoftheinterestrateandinflationrisksassociatedwiththeschemes’obligations.

3 ThelongevityswapwastransferredtoLegal&GeneralAssuranceSocietyLimitedaspartofthepartialbuy-indescribedonpage169.4 Aportfolioofswapcontractsdesignedtoprovideinvestmentreturnsinlinewithglobalequitymarkets.Themaximumexposure(notionalvalueandaccruedreturns)ontheportfolios was £328m(2018:£281m).

TheinvestmentstrategyfortheUKschemeiscontrolledbytheTrusteeinconsultationwiththeGroup.TheschemeassetsdonotdirectlyincludeanyoftheGroup’sownfinancialinstruments,noranypropertyoccupiedby,orotherassetsusedby,theGroup.At31December2019,therewasanindirectholdingof£0.1moftheGroup’sfinancialinstruments(2018:£0.3m).

Future contributionsTheGroupexpectstocontributeapproximately£170mtoitsdefinedbenefitschemesin2020(2019:£220m):UK:£100m,Overseas:£70m(2019:UK:£140m,Overseas:£80m).

IntheUK,thefundingisbasedonastatutorytriennialfundingvaluationprocess.ThisincludesanegotiationbetweentheGroupandtheTrusteeonactuarialassumptionsusedtovalueobligations(TechnicalProvisions)whichmaydifferfromthoseusedforaccountingsetoutabove.TheassumptionsusedtovalueTechnicalProvisionsmustbeprudentratherthanabestestimateoftheliability.Mostnotably,theTechnicalProvisiondiscountrateiscurrentlybaseduponUKGovernmentyieldsplus0.5%ratherthanbeingbasedonyieldsofAAcorporatebonds.Followingthetriennialvaluationprocess,aScheduleofContributions(SoC)mustbeagreedwhichsetsouttherequiredcontributionforcurrentservicecostandanycontributionsfromtheemployertoeliminateadeficit.Themostrecentvaluation,asat31 March2017,agreedbytheTrusteeinDecember2017,showedthattheUKschemewasestimatedtobe112%fundedontheTechnical


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21 Post-retirement benefits continuedProvisionsbasis.Employercontributions(inclusiveofemployeecontributionspaidbyasalarysacrificearrangement)willsubsequentlybepaidatarateof28.5%during2020untilanewSoCisagreed(2019:27%).ThecurrentSoCincludesanarrangementforapotentialincreaseincontributionsduring2021to2023(cappedat£48.3mayear)iftheTechnicalProvisionsfundingpositionisbelow107%at31 March2020.Asat31 December2019,theTechnicalProvisionsfundingpositionwasestimatedtobe112%(2018:111%).

Changes to UK defined benefit scheme AconsultationwithactivemanagersintheUKschemewasconcludedinJanuary2020.Theconsultationprocessagreedcertainchangesforfutureaccrualfortherelevantmanagergroupwhichwillmitigatefuturefundingcostincreases.Theaccountingimpactofthischangewilloccurin2020ratherthan2019.Thechangeisexpectedtobeimmaterialtotheseaccounts.Thetriennialvaluationdueat31March2020fortheUKschemewilltakethesechangesintoaccount.

SensitivitiesThecalculationsofthedefinedbenefitobligationsaresensitivetotheassumptionssetoutabove.Thefollowingtablesummariseshowthe estimatedimpactofachangeinasignificantassumptionwouldaffecttheUKdefinedbenefitobligationat31December2019,whileholdingallotherassumptionsconstant.Thissensitivityanalysismaynotberepresentativeoftheactualchangeinthedefinedbenefitobligationasitisunlikelythatthechangeinassumptionswouldoccurinisolationofoneanotherassomeoftheassumptionsmaybe correlated.

Forthemostsignificantfundedschemes,theinvestmentstrategieshedgetherisksfrominterestratesandinflationmeasuredonaproxysolvencybasis.FortheUKscheme,theinterestrateandinflationhedgingiscurrentlybasedonUKGovernmentbondyieldswithoutanyadjustmentforanycreditspread.

Thesensitivityanalysissetoutbelowhasbeendeterminedbasedonamethodthatestimatestheimpactonthedefinedbenefitobligationasaresultofreasonablechangesinkeyassumptionsoccurringattheendofthereportingperiod.

2019£m

2018£m

Reductioninthediscountrateof0.25%1 Obligation (495) (510)Planassets(LDIportfolio) 502 624

Increaseininflationof0.25%1 Obligation (290) (275)Planassets(LDIportfolio) 235 272

Realincreaseinsalariesof0.25% Obligations (80) (90)Increaseof1%intransfervalueassumption Obligations (64) (56)One year increase in life expectancy Obligations (408) (465)

1 Thedifferencesbetweenthesensitivitiesonobligationsandplanassetsariselargelyduetodifferencesinthemethodsusedtovaluetheobligationsforaccountingpurposesandtheadopted proxy solvency basis.

22 Share capitalNon-equity Equity

SpecialShare

of £1

Nominalvalue

£m

Ordinary shares

of 20p eachMillions

Nominalvalue

£m

Issued and fully paidAt1January2018 1 – 1,840 368Sharesissuedtoemployeesharetrust – – 8 2 SharesissuedinrelationtotheacquisitionofITPAero – – 48 9At31December2018 1 – 1,896 379Sharesissuedtoemployeesharetrust – – 6 1 SharesissuedinrelationtotheacquisitionofITPAero – – 29 6 At 31 December 2019 1 – 1,931 386

Therightsattachingtoeachclassofsharearesetoutonpage206.

InaccordancewithIAS32Financial Instruments: Presentation,theCompany’snon-cumulativeredeemablepreferenceshares(CShares)areclassifiedasfinancialliabilities.Accordingly,movementsinCSharesareincludedinnote19.


23 Share-based payments

Effect of share-based payment transactions on the Group’s results and financial position2019

£m 2018

£m

Totalexpenserecognisedforequity-settledshare-basedpaymenttransactions 30 32Totalexpenserecognisedforcash-settledshare-basedpaymenttransactions – 3Share-basedpaymentsrecognisedintheconsolidatedincomestatement 30 35

Liabilityforcash-settledshare-basedpaymenttransactions 1 6

Adescriptionoftheshare-basedpaymentplansisincludedintheDirectors’RemunerationReportonpages95to104.

Movements in the Group’s share-based payment plans during the yearShareSave LTIP and PSP APRA

NumberMillions

Weighted average

exercise pricePence

NumberMillions

NumberMillions

Outstandingat1January2018 27.5 714 13.0 0.2Granted – – 5.7 0.2Forfeited (1.3) 738 (4.4) –Exercised (0.1) 656 (0.4) –

Outstanding at 1 January 2019 26.1 713 13.9 0.4Granted 16.6 677 5.3 0.2 Forfeited (5.1) 814 (0.9) – Exercised (5.7) 627 (5.1) (0.2)

Outstanding at 31 December 2019 31.9 693 13.2 0.4 Exercisableat31December2019 – – – – Exercisableat31December2018 – – – –

Theweightedaveragesharepriceatthedateshareoptionswereexercisedwas906p(2018:883p).Theclosingpriceat31December2019was 683p(2018:830p).

Theweightedaverageremainingcontractuallifeforthecashsettledoptionsat31December2019wasone year(2018:twoyears).

Fair values of share-based payment plansTheweightedaveragefairvaluepershareofequity-settledshare-basedpaymentplansgrantedduringtheyear,estimatedatthedateofgrant,areasfollows:

2019 2018

LTIP 851p 815p LTIP(ELT&Board) 774p 739pShareSave–threeyeargrant 165p n/aShareSave–fiveyeargrant 176p n/aAPRA 892p 858p

LTIP and PSPThefairvalueofsharesawardediscalculatedusingapricingmodelthattakesaccountofthenon-entitlementtodividends(orequivalent)duringthevestingperiodandthemarket-basedperformanceconditionbasedonexpectationsaboutvolatilityandthecorrelationofsharepricereturnsinthegroupofFTSE100companiesandwhichincorporatesintothevaluationtheinterdependencybetweensharepriceperformanceandTSRvesting.Thisadjustmentdecreasesthefairvalueoftheawardrelativetothesharepriceatthedateofgrant.

ShareSaveThefairvalueoftheoptionsgrantediscalculatedusingapricingmodelthatassumesthatparticipantswillexercisetheiroptionsatthebeginningofthesix-monthwindowifthesharepriceisgreaterthantheexerciseprice.Otherwiseitassumesthatoptionsarehelduntiltheexpirationoftheircontractualterm.Thisresultsinanexpectedlifethatfallssomewherebetweenthestartandendoftheexercisewindow.

APRAThefairvalueofsharesawardedunderAPRAiscalculatedasthesharepriceonthedateoftheaward,excludingexpecteddividends (orequivalent).


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24 Leases

Leases as lesseeThenetbookvalueofright-of-useassetsat31December2019was£2,009m(seenote11)withaleaseliabilityof£2,354m(aspernote17).LeasesthathavenotyetcommencedtowhichtheGroupiscommittedhaveafutureliabilityof£5mandconsistsoffactoryequipmentandasingleproperty.Theconsolidatedincomestatementshowsthefollowingamountsrelatingtoleases:

2019£m

Landandbuildingsdepreciationandimpairment 1 (59)Plantandequipmentdepreciation 2 (33)Aircraftandenginesdepreciationandimpairment3 (319)Total depreciation and impairment charge for right-of-use assets (411)Interest expense4 (88)Expenserelatingtoshort-termleasesof12monthsorlessrecognisedasanexpenseonastraight-linebasis 2 (23)Expenserelatingtovariableleasepaymentsnotincludedinleaseliabilities3,5 (1)Total lease expense (523)Incomefromsub-leasingright-of-useassets 79 Total amount recognised in the income statement (444)

1 Includedincostofsalesandcommercialandadministrationcostsdependingonthenatureanduseoftheright-of-useasset.2 Includedincostofsales,commercialandadministrationcosts,orresearchanddevelopmentdependingonthenatureanduseoftheright-of-useasset.3 Included in cost of sales.4 Includedinfinancingcosts.5 Variableleasepaymentsprimarilyariseonasmallnumberofcontractswhereengineleasepaymentsaresolelydependentuponutilisationratherthanaperiodiccharge.

Thetotalcashoutflowforleasesin2019was£383m.Ofthis:£359mrelatedtoleasesreflectedintheleaseliability;£23mtoshort-termleaseswhereleasepaymentsareexpensedonastraight-linebasis;and£1mforvariableleasepaymentswhereobligationsareonlyduewhentheright-of-useassetsareused.Thetimingdifferencebetweentheincomestatementchargeandcashflowrelatestocostsincurredattheendofleasesforresidualvalueguaranteesthatarerecognisedwithindepreciationoverthetermofthelease,themostsignificantamounts relate to engine leases.

The Group’s leasing activities as a lessee and how they are accounted forTheGroupleasesaeroenginesthatareusedtosupportcustomers’aircraftfleets;landandbuildingsusedforproduction,administrationortrainingpurposes;andequipmentusedinthemanufacturingprocessandtosupportcommercialandadministrativeactivities.Leasetermsarenegotiatedonanindividualbasisandcontainawiderangeofdifferenttermsandconditions.Theleasearrangementsdonotimposeanycovenants,butleasedassetsmaynotbeusedassecurityforborrowingpurposes.

Until31December2018,leaseswereclassifiedaseitherfinanceoroperatingleases.Paymentsmadeunderoperatingleasesandresidualvalueguaranteeswerechargedtotheincomestatementonastraight-linebasisovertheperiodofthelease.From1January2019,leasesarerecognisedasaright-of-useassetandacorrespondingleaseliabilityatthedateatwhichtheleasedassetisavailableforusebytheGroup.Eachleasepaymentisallocatedbetweenreducingtheliabilityandafinancecost.Thefinancecostischargedtotheincomestatementovertheleaseperiodsoastoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.

Right-of-useassetsandleaseliabilitiesarisingovertheleasetermarenowinitiallymeasuredonapresentvaluebasis.Theleasetermrepresentedisthenon-cancellableperiodoftheleasetogetherwithperiodscoveredbyanoptiontoextendtheleasewheretheGroupisreasonablycertaintoextend.Leaseliabilitiesincludethenetpresentvalueofthefollowingleasepaymentswheresuchflowsexist:

– fixedpaymentslessanyleaseincentive; – variableleasepaymentsthatarebasedonanindexorarate; – amountsexpectedtobepayablebytheGroupunderresidualvalueguarantees; – theexercisepriceofapurchaseoptioniftheGroupisreasonablycertaintoexercisethatoption;and – paymentsofpenaltiesforterminatingthelease,iftheleasetermreflectstheGroupexercisingthatoption.

Leasesforenginestypicallycontainnospecificcontractualrighttorenew.Certainlandandbuildingleaseshaverenewaloptionswithrenewaldatesforthemostsignificantpropertyleasesevenlyspreadover2022–2028andin2041.Suchjudgementsonleasetermsaremadeeachperiodendandconsiderthespecifictermsoftheleaseandtheoperationalsignificanceofthesite,especiallywhereutilisedformanufacturingactivities.Leaseobligationsbeyondtherenewaldatesareincludedintheleaseliabilitywherewearereasonablycertaintoextendthelease.

EngineleasesintheCivilAerospacebusinessoftenincludeclausesthatrequiretheenginestobereturnedtothelessorwithspecificlevelsofuseableliferemaining.Thecostofmeetingtheserequirementsareincludedintheestimateoftheleasepaymentssetoutabove.Theamountpayableisdependentupontheutilisationoftheenginesovertheleaseterm,whethertheengineisrestoredtotherequiredconditionbyperforminganoverhaulatourowncostorthroughthepaymentofamountsspecifiedinthecontractandanynewcontractualarrangementsarisingwhenthecurrentleasecontractsend.Whereestimatesofpaymentschange,anadjustmentismadetotheleaseliabilityandtheright-of-useasset.LiabilitiesinUSDandothernon-functionalcurrenciesarereportedattheclosingspotrateswithchangesarisingfromachangeinexchangeratesreportedwithinfinancing.


24 Leases continuedOntransitiontoIFRS16on1January2019,financeleasescontinuedtoberecognisedattheir2018closingvalueandoperatingleases weremeasuredatthepresentvalueoftheremainingleasepaymentsdiscountedusinganincrementalborrowingrateappropriatetothelease.Fornewleases,theleasepaymentsarediscountedusingtheinterestrateimplicitintheleaseorifthatratecannotbereadilydetermined,whichisgenerallythecaseforleasesintheGroup,theincrementalborrowingrate,beingtheraterequiredtopaytoborrowthefundsnecessarytoobtainanassetofsimilarvaluetotheright-of-useassetinasimilareconomicenvironmentwithsimilarterms,securityandconditions.

Todeterminetheincrementalborrowingrate,theGroupusesabuild-upapproachthatstartswiththerisk-freeinterestratewhichisthenadjustedforcreditrisktoreflectthenatureoftheborrowingbasedonempiricalevidenceofsimilarexternalborrowingsundertakenbytheGroup.Therateusedreflectsthetermandcurrencyofthelease.

TheGroupisexposedtopotentialfutureincreasesorreductionsinleasepaymentswheretheamountpaidisbasedonanindex(suchasLIBOR)orrate,whicharenotincludedintheleaseliabilityuntilittakeseffect.Whenadjustmentstoleasepaymentsbasedonanindexorratetakeeffect,theleaseliabilityisremeasuredandanequivalentadjustmentismadetotheright-of-useassetexceptwherethechangeresultsfromachangeinfloatinginterestrateswhenareviseddiscountrateisusedthatreflectschangesintheinterestrate.

Right-of-useassetsaremeasuredatcostcomprisingthefollowing:

– theamountoftheinitialmeasurementoftheleaseliabilityorarevaluationoftheliability; – anyleasepaymentsmadeatorbeforethecommencementdatelessanyleaseincentivesreceived; – anyinitialdirectcosts;and – restorationcosts.

Eachright-of-useassetisdepreciatedovertheshorterofitsusefullifeandtheleasetermonastraight-linebasisunlesstheleaseisexpectedtotransferownershipoftheunderlyingassettotheGroup,inwhichcasetheassetisdepreciatedtotheendoftheusefullifeoftheasset.

TherewasasingleonerousleasecontractwhereasapermittedpracticalexpedienttheGrouphasadjustedtheright-of-useassetatthedateofinitialapplicationbytheamountoftheprovisiononthebalancesheetat31December2018.

Incomefromsub-leasingright-of-useassetsisprimarilygeneratedfromtheuseofenginesbyourCivilAerospacecustomers.Inasmallnumberofcircumstancescurrentexcesspropertycapacityissub-letatmarketrates.

Leases as lessorTheGroupactsaslessorforenginestoCivilAerospacecustomerswhentheyrequireenginestosupporttheirfleets.Leaseagreementswiththelesseeprovideprotectionoverourassets.Usageinexcessofspecifiedlimitsanddamagetotheenginewhileonleasearecoveredbyvariableleasepaymentstructures.LesseebankruptcyriskismanagedthroughtheCapeTownConventiononInternationalInterestsinMobileEquipment(includingaspecificprotocolrelatingtoaircraftequipment);aninternationaltreatythatcreatescommonstandardsfortheregistrationofleasecontractsandestablishesvariouslegalremediesfordefaultinfinancingagreements,includingrepossessionandtheeffectofparticularstates’bankruptcylaws.Enginesareonlyleasedonceweconfirmthatappropriateinsurancedocumentationisestablishedthatcoverstheengineassetstopre-agreedamounts.TheGroupalsoleasesoutasmallnumberofproperties,orpartsofproperties,wherethereisexcesscapacity.Allcontractswherewearelessorareoperatingleases.

2019£m

2018£m

Operatingleaseincome–creditedwithinrevenuefromaftermarketservices1,2 127 64

1 Includesvariableleasepaymentsof£97mthatdonotdependonanindexorarate.2 Itemsofproperty,plantandequipmentsubjecttoanoperatingleasearedisclosedinnote10.

Non-cancellableundiscountedoperatingleaserentalsarereceivableasfollows:

2019£m

2018£m

Withinoneyear 13 23Between one and two years 14 22 Betweentwoandthreeyears 12 22 Betweenthreeandfouryears 8 21 Betweenfourandfiveyears 5 17 Afterfiveyears 17 55

69 160


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25 Contingent liabilitiesContingentliabilitiesinrespectofcustomerfinancingcommitmentsaredescribedinnote20.

InJanuary2017,afterfullcooperation,theCompanyconcludeddeferredprosecutionagreementswiththeSFOandtheUSDepartment ofJusticeandaleniencyagreementwiththeMPF,theBrazilianfederalprosecutors.OtherauthoritiesareinvestigatingmembersoftheGroupformattersrelatingtomisconductinrelationtohistoricalmatters.TheGroupisrespondingappropriately.ActionmaybetakenbyfurtherauthoritiesagainsttheCompanyorindividuals.Inaddition,wecouldstillbeaffectedbyactionsfromcustomersandcustomers’financiers.TheDirectorsarenotcurrentlyawareofanymattersthatarelikelytoleadtoamaterialfinanciallossoverandabovethepenaltiesimposedtodate,butcannotanticipateallthepossibleactionsthatmaybetakenortheirpotentialconsequences.

ContingentliabilitiesexistinrespectofguaranteesprovidedbytheGroupintheordinarycourseofbusinessforproductdelivery,performanceandreliability.TheGrouphas,inthenormalcourseofbusiness,enteredintoarrangementsinrespectofexportfinance,performancebonds,countertradeobligationsandminormiscellaneousitems.VariousGroupundertakingsarepartiestolegalactionsandclaimswhichariseintheordinarycourseofbusiness,someofwhichareforsubstantialamounts.Asaconsequenceoftheinsolvencyofaninsureraspreviouslyreported,theGroupisnolongerfullyinsuredagainstknownandpotentialclaimsfromemployeeswhoworkedforcertainoftheGroup’sUKbasedbusinessesforaperiodpriortotheacquisitionofthosebusinessesbytheGroup.Whiletheoutcomeofsomeofthesematterscannotpreciselybeforeseen,theDirectorsdonotexpectanyofthesearrangements,legalactionsorclaims,afterallowingforprovisionsalreadymade,toresultinsignificantlosstotheGroup.

TheGroup’sshareofequityaccountedentities’contingentliabilitiesisnil(2018:nil).

26 Related party transactions2019

£m 2018

£m

Salesofgoodsandservicestojointventuresandassociates 3,776 3,237Purchasesofgoodsandservicesfromjointventuresandassociates (3,685) (2,957)Leasepaymentstojointventuresandassociates (210) (189)Guaranteesofjointarrangements’andassociates’borrowings 1 –Guaranteesofnon-whollyownedsubsidiaries’borrowings 3 3Dividendsreceivedfromjointventuresandassociates 92 105Otherincomereceivedfromjointventuresandassociates 1 2

Includedinsalesofgoodsandservicestojointventuresandassociatesaresalesofspareenginesamountingto£277m(2018:£563m).

Profitrecognisedintheyearonsuchsalesamountedto£93m(2018:£157m),includingprofitoncurrentyearsalesandrecognitionofprofitdeferredonsalesinpreviousyears.Onanunderlyingbasis(atactualachievedratesonsettledderivativetransactions),theamountswere £78m(2018:£132m).Cashreceiptsrelatingtothesaleofspareenginesamountedto£414m(2018:£563m).

Theaggregatedbalanceswithjointventuresareshowninnotes14and18.TransactionswithGrouppensionschemesareshowninnote21.

Inthecourseofnormaloperations,relatedpartytransactionsenteredintobytheGrouphavebeencontractedonanarms-lengthbasis.

KeymanagementpersonnelaredeemedtobetheDirectors(pages62to64)andthemembersoftheExecutiveTeam(describedonpage 65).Remunerationforkeymanagementpersonnelisshownbelow:

2019£m

2018£m

Salariesandshort-termbenefits 9 19 Post-retirementschemes – –Share-basedpayments 5 5

14 24

MoredetailedinformationregardingtheDirectors’remuneration,shareholdings,pensionentitlements,shareoptionsandotherlong-termincentiveplansisshownintheDirectors’RemunerationReportonpages95to104.Thechargeforshare-basedpaymentsaboveisbasedonwhentheawardischargedtotheincomestatementinaccordancewithIFRS2Share-Based Payments,ratherthanwhenthesharesvest,whichisthebasisusedintheDirectors’RemunerationReport.


27 Acquisitions and disposals

AcquisitionsSiemens’ eAircraft businessOnthe30September2019,theGroupcompletedtheacquisitionoftheelectricandhybrid-electricaerospacepropulsionactivitiesofSiemens.Onacquisitionthebookvalueofassetsacquiredconsistedof£2.8mofproperty,plantandequipmentand£0.2mofotherassetsandliabilities.Ofthe£43m(€48.5m)acquisitioncost,whichwassettledincash,£38mhasbeenallocatedtoidentifiableintangibleassetsand£5mtootherassetsandliabilities.Goodwillof£11mwasrecognisedonthetransaction.

TheGroupincreaseditsshareholdingintheBerlin-basedelectricitystoragespecialist,QinousGmbHfrom19.9%to73.1%on 15January2020foraconsiderationof€10m.TheacquisitionwillbeincorporatedwithinourPowerSystemsbusiness.

DisposalsCommercial Marine and Rolls-Royce Power Development LimitedOnthe1April2019,theGroupcompletedthesaleofitsCommercialMarinebusinesstoKONGSBERGfor£547m.Thebusinesswasdisclosedasadisposalgroupheldforsalefrom30June2018.Inour2018half-yearfinancialstatements,wereportedanimpairmentchargeof£160masaresultofthedecisiontoclassifyCommercialMarineasabusinessheldforsale.UponthedisposalofCommercialMarineon1April2019,andinaccordancewithIAS21The Effects of Changes in Foreign Exchange Rates wehaverecycledthecumulativecurrencytranslationreservethroughtheincomestatementin2019.Thishasresultedinacumulativecurrencytranslationgainof£98m.

Onthe15April2019,theGroupsolditsshareholdinginRolls-RoycePowerDevelopmentLimitedtoRocklandCapitalPartnersfor£46m.TheprincipalactivityofthiscompanywastooperateafleetofsixindustrialTrentpowerstationsintheUK.

Commercial Marine

£m

Rolls-Royce PowerDevelopment Limited

£mTotal

£m

ProceedsCashconsideration 547 46 593 Cash and cash equivalents disposed (118) – (118)Net cash consideration 429 46 475 Disposal costs paid (21) (1) (22)Cash inflow per cash flow statement 408 45 453

Assets and liabilities disposed

Intangible assets 236 – 236 Property,plantandequipment 139 7 146 Right-of-useassets 40 – 40 Deferredtaxassets 7 – 7 Inventory 207 4 211

Tradereceivablesandotherassets 210 4 214 Currenttaxassets 1 – 1 Leaseliabilities (39) – (39)Tradepayablesandotherliabilities (274) (5) (279)Deposits(paymentsreceivedonaccount) (74) – (74)Provisionsforliabilitiesandcharges (27) – (27)Post-retirementschemedeficits (28) – (28)Net assets disposed 398 10 408

Thegainondisposalofbusinessestotalled£139m.Commercial

Marine£m

Rolls-Royce PowerDevelopment Limited

£mTotal

£m

Income statementNet cash consideration 429 46 475 Less:carryingamountofnetassetssold (398) (10) (408)Profit on disposal before disposal costs 31 36 67 Disposal costs (23) (3) (26)Profit on disposal on business before tax 8 33 41 Tax on disposal – – – Profit on disposal of business after tax 8 33 41 Cumulativecurrencytranslationgainrecycledfromother comprehensive income 98 – 98 Gain recognised in the income statement 106 33 139


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27 Acquisitions and disposals continued

Disposals continuedTrigno Energy S.r.l.On29January2020,theGroupexerciseditsputoptiontosell100%ofthesharesheldinTrignoEnergyS.r.l.Thetransactionisexpectedtocompleteinthefirstquarterof2020.TheshareswillbetransferredtoPilkingtonItaliaS.r.l.foranestimatedconsiderationof€5.6m.

Businesses held for saleOn26September2019,theGroupsignedanagreementforthesaleoftheNorthAmericaCivilNuclearbusinesstoWestinghouseElectricCompanyLLC.foracashconsiderationofapproximately$18m.Thesalewascompletedon31January2020.

Asaresultofthedecisiontoclassifythebusinessasadisposalgroupheldforsale,inaccordancewithIFRS5Non-current Assets Held for Sale and Discontinued Operations,itscarryingvaluewasassessedagainsttheanticipatedproceedsandthedisposalcosts.Animpairmentchargeof£25mhasbeenrecognisedintheincomestatement,ofwhich£15mrelatestogoodwillandanadditional£10mimpairmentchargetoproperty,plantandequipmentandintangibleassets.Theimpairmentchargewasallocatedtothenon-corebusinesses.Theremainingassetsof£17mhavebeentransferredtoassetsheldforsale,togetherwithassociatedliabilitiesof£14mat31December2019.

On17December2019,theGroupsignedasharepurchaseagreementwithValsoftCorp.forthesaleoftheKnowledgeManagementSystembusiness.Theconsiderationforthedisposalisexpectedtobe$2.6m.Thesalewascompletedon3February2020.

Disposal – 2018L’OrangeOn1June2018,theGroupsolditsL’Orangebusiness,partofRolls-RoycePowerSystems,toWoodwardInc.for€673m.Underthesaleagreement,thecashconsiderationmaybeadjustedbyupto+/-€44m,basedonL’Orangeaftermarketsalesoverthefive-yearperiodto 31May2023andthiswillbereviewedateachreportingdateovertheadjustmentperiod,basedonactualsales.Nosignificantchangehasbeenidentifiedtothecashconsiderationat31December2019.Profitondisposalofthebusiness(netofdisposalcosts)was£358m.


28 Derivation of summary funds flow statementThetablebelowshowsthederivationofthesummaryfundsflowstatement(linesmarked*)onpage20fromthecashflowstatement (CFS)onpage119.

2019 2018†

£m £m £m £m

* Underlying operating profit (see note 2) 808 616 Depreciationandimpairmentofproperty,plantandequipment 532 521 Amortisationandimpairmentofintangibleassets 372 565 Depreciationandimpairmentofright-of-useassets 411 – Impairmentofgoodwill (84) (155)Acquisitionaccounting (163) (175)* Depreciation and amortisation 1,068 756* Lease payments (capital plus interest) (319) – * Additions of intangible assets (591) (680)* Purchases of property, plant and equipment (747) (905)* Increase in inventories (43) (616)Movementinreceivables/payables 77 1,129Movementincontractbalances 526 363Realisedderivativesinfinancing (187) (465)Revaluationoftradingassets(excludingexceptionalitems) 158 170* Movement on receivables/payables/contract balances (excluding Civil LTSA) 574 1,197* Underlying Civil Aerospace LTSA contract balances 754 679 * Movement on provisions (506) (242)* Trent 1000 insurance 173 –* Net interest received and paid (73) (70)* Other (41) 22* Trading cash flow 1,057 757* Contributions to defined benefit schemes in excess of underlying PBT charge (9) 59* Tax (175) (248)* Group free cash flow 873 568Of which: Disposed entities (41) (78)

Group free cash flow (pre disposed entities) 914 646

Of which: Non-core businesses 3 (2)

Core free cash flow 911 648

* Shareholder payments (224) (219)* Acquisition of eAircraft (43) –* Disposal of Commercial Marine and RRPD

(2018: Disposal of L’Orange) 453 573* Exceptional restructuring costs (216) (70)* DPA payments (102) –* Pension fund contribution (35) –* IFRS 16 123 –* Other (8) 10* Foreign exchange (98) 54* Change in net funds 723 916

Change in net funds 723 916

IFRS 16 impact (non cash) (123) –

Reclassification of other financial liabilities to borrowings (79) –Change in net funds excluding IFRS 16 521 916

† Thecomparativeinformationfortheyearended31December2018hasbeenre-presentedtobeonacomparablebasiswiththepresentationadoptedfortheyear ended31December2019.Thereisnochangetotradingorgroupfreecashflow.Insummary,itemspreviouslyincludedin‘other’within‘tradingcashflow’,whichrelated to‘movementsinreceivables/payables’ormovementsin‘contractbalances’havebeenincludedwithinthoseitems.

Duringtheyearended31December2019,theGroupreceivedinsurancereceiptsof£173mrelatingtotheTrent1000in-serviceissues. ThisamounthasbeenrecognisedwithintheGroup’sunderlyingresults–seenote2.


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28 Derivation of summary funds flow statement continuedFreecashflowisameasureoffinancialperformanceofthebusiness’cashflowtoseewhatisavailablefordistributionamongthosestakeholdersfundingthebusiness(includingdebtholdersandshareholders).Freecashflowiscalculatedastradingcashflowlessrecurringtaxandpost-employmentbenefitexpenses.Itexcludespaymentsmadetoshareholders,amountsspent(orreceived)onbusinessacquisitions,SFOpaymentsandforeignexchangechangesonnetfunds.TheBoardconsidersthatfreecashflowreflectscashgeneratedfromtheGroup’sunderlyingtrading.

Thetablebelowshowsareconciliationoffreecashflowtothechangeincashandcashequivalentspresentedinthecashflowstatementon page 119.

2019 2018

£m £m £m £m Source

Change in cash and cash equivalents (413) 1,953 AReturns to shareholders 224 219 ANet cash flow from changes in borrowings and lease liabilities (2018: finance leases) 1,385 (1,091) A Increase in short-term investments – 3 A AcquisitionofSiemens’eAircraftbusiness 43 – A DisposalofCommercialMarineandRRPD(2018:DisposalofL’Orange) (453) (573) A Otheracquisitionsanddisposals 1 (10) B Changes in group structure (409) (583)Payments of financial penalties from agreements with investigating bodies 102 – A Exceptional restructuring expenditure 216 70 B Pension fund contribution 35 – B Other 4 (3) B Capital element of lease repayments 1 (271) – A Free cash flow 873 568

1 AsIFRS16hasbeenadoptedwitheffectfrom1January2019,noadjustmentshavebeenmadetopresentthecomparativeperiodonaconsistentbasis.

Sources:ACashflowstatementBCashflowstatementadjustedfornon-underlyingitemsincludingexchangedifferences


29 Impact of adopting IFRS 16 LeasesForleasespreviouslyclassifiedasfinanceleases,theGrouprecognisedthecarryingamountoftheleaseassetandleaseliabilityimmediatelybeforetransitionasthecarryingamountoftheright-of-useassetandtheleaseliabilityatthedateofinitialapplication.The measurementprinciplesofIFRS16areonlyappliedafterthatdate.

Thefollowingtablereconcilestheoperatingleaseobligationsunderthepreviousaccountingstandard,IAS17Leases,totheleaseliabilityrecordedunderIFRS16ontransition:

£mOperatingleasecommitmentsasreportedat31December2018 2,343 Leasecommitmentsatendofaeroenginesleasecontractspreviouslyreflectedinprovisionsandotherliabilities 515 Discountedusingtheincrementalborrowingrateatthedateofinitialapplication (749)Additionalcommitmentsrecognisedduringfinaldatareview1 180 Impact of adopting IFRS 16 2,289 Commitmentsrelatingtodisposalgroups (41)At 1 January 2019 2,248 Financeleaseliabilitiesrecognisedasat31December2018 229 Lease liability recognised as at 1 January 2019 2,477 Ofwhichare:Currentleaseliabilities 322 Non-currentleaseliabilities 2,155

1 Thesehavebeenoffsetbyright-of-useassetswithanequivalentvalue.

Therecognisedright-of-useassetsrelatetothefollowingtypesofasset:

1 January 2019

£m

Landandbuildings 453 Plantandequipment 106 Aircraft and engines 1,654 Totalright-of-useassets 2,213


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29 Impact of adopting IFRS 16 Leases continued

Condensed consolidated balance sheetThechangeinaccountingpolicyaffectedthefollowingitemsinthebalancesheeton1January2019:

Previousaccounting

as at31December

2018£m

IFRS16impact

£m

Transferredto assets held

for sale 1£m

As at1 January

2019£m

ASSETSProperty,plantandequipment2 4,929 (197) – 4,732 Right-of-useassets3 – 2,254 (41) 2,213 Deferredtaxassets4 2,092 2 – 2,094 Othernon-currentassets 8,016 – – 8,016 Non-current assets 15,037 2,059 (41) 17,055 Current assets 16,070 – – 16,070 Assets held for sale 750 – 41 791 TOTAL ASSETS 31,857 2,059 – 33,916

LIABILITIESBorrowingsandleaseliabilities (858) (295) 7 (1,146)Tradepayablesandotherliabilities5 (8,292) 49 – (8,243)Provisionsforliabilitiesandcharges6 (1,122) 30 – (1,092)Othercurrentliabilities (4,579) – – (4,579)Current liabilities (14,851) (216) 7 (15,060)Borrowingsandleaseliabilities (3,804) (1,994) 34 (5,764)Tradepayablesandotherliabilities5 (1,940) 60 – (1,880)Deferredtaxliabilities4 (962) 6 – (956)Provisionsforliabilitiesandcharges6 (795) 45 – (750)Othernon-currentliabilities (10,181) – – (10,181)Non-current liabilities (17,682) (1,883) 34 (19,531)Liabilities associated with assets held for sale (376) – (41) (417)TOTAL LIABILITIES (32,909) (2,099) – (35,008)

NET LIABILITIES (1,052) (40) – (1,092)

EQUITYAccumulated losses 7 (2,991) (40) – (3,031)Otherequityattributabletoordinaryshareholders 1,917 – – 1,917 Equity attributable to ordinary shareholders (1,074) (40) – (1,114)Non-controllinginterests 22 – – 22 TOTAL EQUITY (1,052) (40) – (1,092)

1 RelatestotheCommercialMarinebusinesswhichwasclassifiedasheldforsaleat31December2018.Seenote27formoredetails.2 Transferofnetbookvalueoffinanceleasedassetstoright-of-useassets.3 Initialrecognitionofright-of-useassetsaccountedforunderIFRS16.4 Deferredtaxonthedifferencebetweentheright-of-useassetsmeasuredonaretrospectivebasisattheGroup’sincrementalborrowingrateandtheleaseliabilitiesattransitiondate.5 Lease-relatedcreditorsreclassifiedagainsttheIFRS16right-of-useassetsontransition.6 ProvisionsrelatedtoengineresidualvalueguaranteesreclassifiedagainstIFRS16right-of-useassets.7 Post-taxdifferencebetweenright-of-useassetsmeasuredonaretrospectivebasisandtheleaseliabilitiesatthetransitiondate.


Notes2019

£m2018

£m

ASSETSInvestments–subsidiaryundertakings 2 12,801 12,521

Tradereceivablesandotherassets 3 1,870 371Cash and cash equivalents 9 –Current assets 1,879 371TOTAL ASSETS 14,680 12,892

LIABILITIESTradepayablesandotherliabilities 4 (2,228) (2,008)Otherfinancialliabilities 5 (31) (29)Current liabilities (2,259) (2,037)

NET ASSETS 12,421 10,855

EQUITYCalled-upsharecapital 6 386 379Share premium account 319 268 Mergerreserve 7,051 7,029Capitalredemptionreserve 2,652 2,432Otherreserve 248 218 Retainedearnings 1,765 529 TOTAL EQUITY 12,421 10,855

TheCompanyhaselectedtotaketheexemptionundersection408oftheCompaniesAct2006frompresentingtheparentcompanyincomestatement.TheprofitfortheCompanyfortheyearwas£1,498m(2018:£nil).

TheFinancialStatementsonpages183to186wereapprovedbytheBoardon28February2020andsignedonitsbehalfby

Warren East Stephen DaintithChiefExecutive ChiefFinancialOfficer

Company’sregisterednumber:7524813

COMPANY BALANCE SHEETAt 31 December 2019

Attributable to ordinary shareholders

Sharecapital

£m

Sharepremium

£m

Mergerreserve

£m

Capitalredemption

reserve£m

Otherreserve 1

£m

Retainedearnings 2

£m

Totalequity

£m

At 1 January 2019 379 268 7,029 2,432 218 529 10,855 Profitfortheyear³ – – – – – 1,498 1,498 Arisingonissuesofordinaryshares⁴ 7 51 244 – – – 302 Issue of C Shares – – (222) – – – (222)RedemptionofCShares – – – 220 – (220) – Share-basedpayments–directtoequity – – – – 30 (42) (12)

At 31 December 2019 386 319 7,051 2,652 248 1,765 12,421

1 Otherreserverepresentsthevalueoftheshare-basedpaymentsinrespectofemployeesofsubsidiaryundertakingsforwhichpaymenthasnotbeenreceived.2 RetainedearningsrepresentstheCompany’sdistributablereservesasdefinedundertheCompaniesAct2006.3 Duringtheyear,theCompanyreceivedaninterimdividendof£1,500m(2018:nil)fromitssubsidiaryundertaking.4 Duringtheyear,theCompanyissued28,973,262newordinarysharesrelatingtotheremainingthreeinstalmentsfortheacquisitionofITPAero(2018:47,556,914newordinarysharesrelatingtothefirstfiveinstalments)and7,803,043newordinaryshares(2018:7,460,173)totheGroup’ssharetrustforitsemployeeshare-basedpaymentplanswithanetbookvalue of £66m(2018:£74m).

COMPANY STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2019

Rolls-RoyceHoldingsplcAnnualReport2019 Financial statementsCompany Balance Sheet

Company Statement of Changes in Equity183

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1 Accounting policies

Basis of accountingRolls-RoyceHoldingsplc(theCompany)isacompanyincorporatedanddomiciledintheUnitedKingdom.TheseFinancialStatementshavebeenpreparedinaccordancewithFinancialReportingStandard101Reduced Disclosure Framework(FRS 101)onthehistoricalcostbasis.

InpreparingtheseFinancialStatements,theCompanyappliedtherecognition,measurementanddisclosurerequirementsofInternationalFinancialReportingStandardsasadoptedbytheEU(AdoptedIFRS),butmakesamendmentswherenecessaryinordertocomplywith theCompaniesAct2006.

IntheseFinancialStatementstheCompanyhasappliedtheexemptionsavailableunderFRS101inrespectofthefollowingdisclosures:

– acashflowstatementandrelatednotes; – comparativeperiodreconciliationsforsharecapital; – theeffectsofnew,butnotyeteffectiveaccountingstandards;and – therequirementsofIAS24Related Party Transactionsandhas,therefore,notdisclosedtransactionsbetweentheCompanyandits wholly-ownedsubsidiaries.

Theaccountingpoliciessetoutbelowhave,unlessotherwisestated,beenappliedconsistentlytoallperiodspresentedintheseFinancial Statements.

TherewerenochangestoaccountingstandardsthathadamaterialimpactontheseFinancialStatements.

TheCompany’sFinancialStatementsarepresentedinsterling,whichistheCompany’sfunctionalcurrency.

Aspermittedbysection408oftheCompaniesAct2006,aseparateincomestatementfortheCompanyhasnotbeenincludedintheseFinancialStatements.Aspermittedbytheauditfeedisclosureregulations,disclosureofnon-auditfeesinformationisnotincludedinrespectof the Company.

Investments in subsidiary undertakingsInvestmentsincludedinfixedassetsareinvestmentsinsubsidiarycompaniesandtheseareheldathistoricalcostlessprovisionforimpairmentwhichisconsideredannuallybytheDirectors.

Trade receivablesTradereceivablesarerecognisedinitiallyatthetransactionprice.Theyaresubsequentlymeasuredatamortisedcostusingtheeffectiveinterestmethod,lessprovisionforimpairment.AprovisionfortheimpairmentoftradereceivablesisestablishedwhenthereisobjectiveevidencethattheCompanywillnotbeabletocollectallamountsdueaccordingtotheoriginaltermsofthereceivables.TheCompanyappliestheIFRS9Financial Instrumentssimplifiedapproachtomeasuringexpectedcreditlosseswhichusesalifetimeexpectedlossallowanceforalltradereceivables.

Trade payablesTradepayablesarerecognisedinitiallyatthetransactionpriceandsubsequentlymeasuredatamortisedcostusingtheeffective interestmethod.

EquityOrdinarysharesareclassifiedasequity.Equityinstrumentsaremeasuredatthefairvalueofthecashorotherresourcesreceivedorreceivable,netofthedirectcostsofissuingtheequityinstruments.

Share-based paymentsAsdescribedintheDirectors’RemunerationReportonpages95to104,theCompanygrantsawardsofitsownsharestoemployeesofitssubsidiaryundertakings(seenote23oftheConsolidatedFinancialStatements).Thecostsofshare-basedpaymentsinrespectoftheseawardsareaccountedfor,bytheCompany,asanadditionalinvestmentinitssubsidiaryundertakings.ThecostsaredeterminedinaccordancewithIFRS2Share-based Payment.Anypaymentsmadebythesubsidiaryundertakingsinrespectofthesearrangementsare treatedasareturnofthisinvestment.

Financial instrumentsInaccordancewithIAS32Financial Instruments: Presentation,theCompany’sCSharesareclassifiedasfinancialliabilitiesandheldat amortisedcostfromthedateofissueuntilredeemed.

2 Investments – subsidiary undertakings£m

Cost:At 1 January 2019 12,521 Additions1 250 Costofshare-basedpaymentsinrespectofemployeesofsubsidiaryundertakingslessreceiptsfromsubsidiariesinrespectofthosepayments 30

At 31 December 2019 12,801

1 AdditionsrelatetoinvestmentsinRolls-Royceplc,relatingtotheremainingthreeinstalmentsfortheGroup’sacquisitionofITPAero.

DetailsoftheCompany’ssubsidiaryundertakingsandjointventureandassociatesundertakingsarelistedonpages187to193.

NOTES TO THE COMPANY FINANCIAL STATEMENTS

Rolls-RoyceHoldingsplcAnnualReport2019Financial statementsNotestotheCompanyFinancialStatements184

2 Investments – subsidiary undertakings continuedThecarryingvalueoftheCompany’sinvestmentsinsubsidiaryundertakingshasbeentestedforimpairmentinaccordancewithIAS36Impairment of Assets.Thecarryingvalueiscomparedtotheasset’srecoverableamountandhasbeenassessedbyreferencetovalueinuse.ThevalueinusehasbeencalculatedbaseduponadiscountedcashflowmethodologyusingthemostrecentforecastpreparedbymanagementoftheRolls-RoyceHoldingsplcgroup.Cashflowsbeyondthefive-yearperiodhavebeenassumedtogrowat2.0%anddiscountedusingapre-taxdiscountrateof12.6%.Thekeyunderlyingassumptionsinthecashflowprojectionsareassumedmarketshare,programmetimings,unitcostassumptions,discountratesandforeignexchangerates.Noimpairmentwasidentified.

TheDirectorsdonotconsiderthatanyreasonablypossiblechangesinthekeyassumptionswouldcausethevalueinuseoftheinvestmentinsubsidiaryundertakingstofallbelowitscarryingvalue.

3 Trade receivables and other assets2019

£m2018

£m

Amountsowedby–subsidiaryundertakings 1,870 371

AmountsowedbysubsidiaryundertakingsarerelatedtodividendsreceivablefromRolls-RoyceGroupLimited(formerlyRolls-RoyceGroupplc).ThebalanceisshortterminnatureandRolls-RoyceGroupLimitedistheimmediateparentundertakingoftheRolls-Royceplcgroup.InaccordancewithIFRS9,aprovisionforimpairmentof£1mhasbeenrecognisedasat31December2019(2018:£nil)inrespectofthisbalance.

4 Trade payables and other liabilities2019

£m2018

£m

Amountsowedto–subsidiaryundertakings 2,228 2,008

Amountsowedtosubsidiaryundertakingsareinterest-freeandrepayableondemand.

5 Financial liabilities

C SharesMovementsduringtheyearwereasfollows:

C Sharesof 0.1p

millions

Nominalvalue

£m

At 1 January 2019 29,071 29 Issued 221,954 222 Redeemed (220,417) (220)

At 31 December 2019 30,608 31

TherightsattachingtoCSharesaresetoutonpage206.

6 Share capitalNon-equity Equity

SpecialShare

of £1

Preference shares of

£1 each

Nominalvalue

£m

Ordinaryshares of20p each

Millions

Nominalvalue

£m

Issued and fully paidAt 1 January 2019 1 – – 1,896 379 Sharesissuedtoemployeesharetrust – – – 6 1 SharesissuedinrelationtotheacquisitionofITPAero – – – 29 6 At 31 December 2019 1 – – 1,931 386

Therightsattachingtoeachclassofsharearesetoutonpage206.

InaccordancewithIAS32,theCompany’snon-cumulativeredeemablepreferenceshares(CShares)areclassifiedasfinancialliabilities.Accordingly,movementsinCSharesareincludedinnote5.

Rolls-RoyceHoldingsplcAnnualReport2019 Financial statementsNotestotheCompanyFinancialStatements 185

FINA

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7 Reconciliation of net assets between Rolls-Royce Holdings plc Group and CompanyAt31December2019,theRolls-RoyceHoldingsplcconsolidatedgrouphadnetliabilitiesof£3.4bn(2018:£1.1bn)comparedto£12.4bn(2018:£10.9bn)ofnetassetsoftheCompany.TheCompanyisaholdingcompanyanddoesnottradeinitsownright.Assetoutinnote2wehaveassessedthecarryingvalueoftheCompany’sinvestmentinsubsidiaries,whichsupportstherecoveryofthoseinvestments.

ThekeydriversofthedifferencebetweentheCompanyandconsolidatedgroupnetbalancesheetpositionsareasfollows:

– TheCompanywascreatedthroughaSchemeofArrangementandincorporatedin2011.Onincorporation,thevalueoftheCompany’sinvestmentinsubsidiarieswasbasedonthemarketcapitalisationoftheRolls-Roycegroup.TheGroup’sconsolidatedfinancialstatementsarepreparedonahistoricalcostbasisexceptwhereAdoptedIFRSrequiresavaluationbasistobeapplied.Seepage123 forfurtherdetails.

– TheadoptionofIFRS15at1January2017reducedtheGroup’snetbalancesheetpositionby£5.3bnandthepensionbuy-in(seenote21intheConsolidatedFinancialStatements)reducedtheGroup’snetbalancesheetpositionbycirca£600min2019.NeitheroftheseimpactedtheCompany;and

– Themark-to-marketlossontheforeignexchangehedgebookof£3.1bnisrecordedinasubsidiaryoftheCompanyandnotintheCompany itself.

8 Contingent liabilitiesWheretheCompanyentersintofinancialguaranteecontractstoguaranteetheindebtednessofothercompanieswithinitsgroup,the Companyconsidersthesetobeinsurancearrangements,andaccountsforthemassuch.Inthisrespect,theCompanytreatstheguaranteecontractasacontingentliabilityuntilsuchtimeasitbecomesprobablethattheCompanywillberequiredtomakeapaymentundertheguarantee.

At31December2019,theseguaranteesamountedto£3,085m(2018:£3,982m).

9 Other information

EmployeesTheCompanyhadnoemployeesin2019(2018:none).

Share-based paymentsSharesintheCompanyhavebeengrantedtoemployeesoftheGroupaspartofshare-basedpaymentplans,andarechargedintheemploying company.

Emoluments of DirectorsTheremunerationoftheDirectorsoftheCompanyisshownbelow,furtherinformationisintheDirectors’RemunerationReportonpages95to104.

2019 2018

Highest paiddirector

£000

Otherdirectors

£000Total£000

Highestpaiddirector£000

Otherdirectors

£000Total£000

Remuneration 2,080 2,754 4,834 2,209 2,733 4,942Gainsmadeonshareoptions 1,079 714 1,793 1,734 1,644 3,378Companycontributionstopensionschemes – – – – – –

3,159 3,468 6,627 3,943 4,377 8,320

NoDirectoraccruedanyretirementbenefitsintheyear(2018:nil).

Rolls-RoyceHoldingsplcAnnualReport2019Financial statementsNotestotheCompanyFinancialStatements186

SUBSIDIARIES

#Re-registeredasaprivatecompanyon5December2019.* Dormantentity.**Thoughtheinterestheldis50%,theCompanycontrolstheentity(seenote1accountingpolicies)and,asaresult,consolidatestheentityandrecordsanon-controllinginterest.1 MoorLane,Derby,DE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.3 Reportingyearendis31March.4 SoldtoWestinghousewitheffectfrom31January2020(seepage178).

Company name AddressClass of shares

%ofclass held

AeromaritimeAmerica,Inc. M&HAgentServices,Inc.,1850NorthCentralAvenue,Suite2100,Phoenix,Arizona85004,UnitedStates

Common 100

AeromaritimeMediterraneanLimited 7IndustrialEstate,HalFar,Birzebbuga,BBG3000,Malta Ordinary 100AerospaceTransmissionTechnologiesGmbH**Adelheidstrasse40,D-88046,Friedrichshafen,Germany CapitalStock 50AmalgamatedPowerEngineeringLimited* Derby1 Deferred

Ordinary100100

Bergen Engines AS Hordvikneset125,N-5108,Hordvik,Bergen1201,Norway Ordinary 100BergenEnginesBangladeshPrivateLimited GreenGrandeur,6thFloor,Plotno.58E,KamalAtaturkAvenue

Banani,C/ADhaka,1213,BangladeshOrdinary 100

BergenEnginesBV Werfdijk2,3195HVPernis,Rotterdam,Netherlands Ordinary 100BergenEnginesDenmarkA/S ØstreHavnepromenade349000Ålborg,Denmark Ordinary 100BergenEnginesIndiaPrivateLimited3 52-b,2ndFloor,OkhlaIndustrialEstate,PhaseIII,

NewDelhi110020,IndiaOrdinary 100

BergenEnginesLimited Derby1 Ordinary 100BergenEnginesPropertyCoAS Hordvikneset125,N-5108,Hordvik,Bergen1201,Norway Ordinary 100BergenEnginesS.L. CalleDinamarcas/n(esquinaCalleAlemania),Poligono

IndustrialdeConstanti,43120Constanti,Tarragona,SpainSocial Participation

100

Bergen Engines S.r.l. ViaCastelMorrone13,16161,Genoa,Italy Social Capital 100BristolSiddeleyEnginesLimited* Derby1 Ordinary 100BrownBrothers&CompanyLimited Taxiway,HillendIndustrialEstate,DalgetyBay,Dunfermline,

Fife,KY119JT,ScotlandOrdinary 100

C.A.Parsons&CompanyLimited* Derby1 Ordinary 100DataSystems&Solutions,LLC4 Wilmington 2 Partnership

(noequity)100

DerbySpecialistFabricationsLimited* Derby1 Ordinary 100EuropeaMicrofusioniAerospazialiS.p.A. ZonaIndustrialeAS1,83040MorradeSanctis,Avellino,Italy Ordinary 100HeatonPowerLimited* Derby1 Ordinary 100IndustriadeTuberíasAeronáuticas MéxicoS.A.deC.V.

AccesoIV,No.6B,ZonaIndustrialBenitoJuárez,Querétaro, 76120,Mexico

Class A 100

IndustriadeTuberíasAeronáuticasS.A.U. PabellónIndustrial,Torrelarrgoiti,Parcela5H,Naves7a10, Zamudia,Vizcaya,Spain

Ordinary 100

IndustriadeTurboPropulsoresS.A. ParqueTechnológicoEdificio300,48170Zamudio,Vizcaya,Spain Ordinary 100ITPEnginesUKLimited TheWhittleEstate,CambridgeRoad,Whetstone,Leicester,

LE86LH,EnglandOrdinary 100

ITPExternalsIndiaPrivateLtd Plot60/A,IDAGandhiNagar,Hyderabad,500037,India Ordinary 100ITPExternalsS.L.U. PabellónIndustrial,PolígonoUgaldegurenI,PIIIA,

Pab1–2Zamudio,Vizcaya,SpainOrdinary 100

ITPIngenieríayFabricaciónS.A.deC.V. AccesoIV,No.6D,ZonaIndustrialBenitoJuárez,Querétaro, 76120,Mexico

Class AClass B

100100

ITPMéxicoFabricaciónS.A.deC.V. AccesoIV,No.6,ZonaIndustrialBenitoJuárez,Querétaro, 76120,Mexico

Class A 100

ITPMéxicoS.A.deC.V. AccesoIV,No.6,ZonaIndustrialBenitoJuárez,Querétaro, 76120,Mexico

Fixed capital BVariablecapitalB

100100

ITPNextGenerationTurbinesS.L.U. ParqueTechnológicoEdificio300,48170Zamudio,Vizcaya,Spain Ordinary 100JohnThompsonCochranLimited* Taxiway,HillendIndustrialEstate,DalgetyBay,Dunfermline,Fife,

KY119JT,Scotland6%CumulativePreferenceOrdinary

100

100KamewaAB*(inliquidation) Box1010,S-68129,Kristinehamn,Sweden Ordinary 100KamewaHoldingAB*(inliquidation) Box1010,S-68129,Kristinehamn,Sweden Ordinary 100

Asat31December2019,thecompanieslistedbelowandonthefollowingpagesareindirectlyheldbyRolls-RoyceHoldingsplcexceptRolls-RoyceGroupLimited#whichis100%directlyownedbyRolls-RoyceHoldingsplc.Thefinancialyearendofeachcompanyis 31Decemberunlessotherwiseindicated.

Rolls-RoyceHoldingsplcAnnualReport2019 187Financial StatementsSubsidiaries

FINA

NC

IAL STATEM

ENTS

188


%ofclass held

KarlMaybach-HilfeGmbH Maybachplatz1,88045,Friedrichshafen,Germany CapitalStock 100MTUAfrica(Proprietary)Limited 36MarconiStreet,MontagueGardens,CapeTown,7441,

SouthAfricaCapitalStock 100

MTUAmericaInc. Wilmington 2 Ordinary 100MTUAsiaPTELimited 10TukangInnovationDrive,Singapore618302 Ordinary 100MTUBeneluxB.V. Merwedestraat86,3313CS,Dordrecht,Netherlands Ordinary 100MTUChinaCompanyLimited Room180318/FAscendasPlaza,No.333TianYaoQiaoRoad,Xuhai

Distrcit,Shanghai,200030,ChinaOrdinary 100

MTUdoBrasilLimitada ViaAnhanguera,KM29203,05276-000SaoPaulo–SP,Brazil Ordinary 100MTUEngineering(Suzhou)CompanyLimited 9LongYunRoad,SuzhouIndustrialPark,Suzhou215024,

JiangSu,ChinaOrdinary 100

MTU France S.A.S. ImmeubleColorado,8/10ruedeRosaLuxembourg-ParcdesBellevues95610,Erangy-sur-Oise,France

Ordinary 100

MTUFriedrichshafenGmbH Maybachplatz1,88045,Friedrichshafen,Germany CapitalStock 100MTUHongKongLimited Room1006,10/F,HangSengTsimshatsuiBuilding,18Carnarvon

Road,Tsimshatsui,Kowloon,HongKongOrdinary 100

MTUIbéricaPropulsiónyEnergiaS.L. CalleCopérnico26–28,28823Coslada,Madrid,Spain Ordinary 100MTUIndiaPrivateLimited3 6thFloor,RMZGalleria,S/YNo.144Bengaluru,Bangalore,

Kamataka560,064,IndiaOrdinary 100

MTUIsraelLimited 4Ha’AlonStreet,SouthBuilding,ThirdFloor, 4059300KfarNeter,Israel

Ordinary 100

MTU Italia S.r.l. ViaAureliaNord,328,19021Arcola(SP),Italy CapitalStock 100MTUJapanCo.Limited ResorttrustBuilding4-14-3,NishitenmaKita-ku,

Osaka530-0047,JapanOrdinary 100

MTUKoreaLimited 22ndFloor,OliveTower,41Sejongdaero9gil,Junggu, 100-737Seoul,RepublicofKorea

Ordinary 100

MTU Middle East FZE S3B5SR06,JebelAliFreeZone,SouthP.O.Box61141,Dubai, United Arab Emirates

Ordinary 100

MTUMotorTürbinSanayiveTicaret.A.Ş. HatiraSokak,No.5,ÖmerliMahellesi,34555Arnavutköy, Istanbul,Turkey

Ordinary 100

MTUOnsiteEnergyGmbH DasingerStrasse11,86165,Augsburg,Germany CapitalStock 100MTUOnsiteEnergySystemsGmbH RotthoferStrasse8,94099Ruhstorfa.d.Rott,Germany CapitalStock 100MTUPolskaSp.zo.o. Ul.Śląska,Nr9.Raum,Ort:StargardSzczeciński,Plz:73–110,Poland Ordinary 100MTUPowerSystemsSdn.Bhd Level10MenaraLGB,1JalanWanKadirTamanTunDrIsmail,

6000KualaLumpur,MalaysiaOrdinary 100

MTURemanTechnologiesGmbH Friedrich-List-Strasse8,39122Magdeburg,Germany CapitalStock 100MTURusLimitedLiabilityCompany ShabolovkaStreet2,119049,Moscow,RussianFederation Ordinary 100MTUSouthAfrica(Proprietary)Limited 36MarconiStreet,MontagueGardens,CapeTown,7441,South

AfricaOrdinary 100

MTUUKLimited Derby1 Ordinary 100NEIInternationalCombustionLimited* Derby1 Ordinary 100NEIMiningEquipmentLimited* Derby1 Ordinary 100NEINuclearSystemsLimited* Derby1 Ordinary 100NEIParsonsLimited* Derby1 Ordinary 100NEIPeeblesLimited* Derby1 Ordinary 100NEIPowerProjectsLimited* Derby1 Ordinary 100NightingaleInsuranceLimited MaisonTrinity,TrinitySquare,St.PeterPort,GY14AT,Guernsey Ordinary 100PKMJTechnicalServices,Inc.4 Wilmington 2 Ordinary 100PowerJets(Researchand Development)Limited*

TheWhittleEstate,CambridgeRoad,Whetstone,Leicester, LE86LH,England

Ordinary 100

PowerfieldLimited Derby1 Ordinary 100PrecisionCastingBilbaoS.A.U. CalleElBarracón1,Baracaldo,Vizcaya,48910Spain Ordinary 100

* Dormantentity.1 MoorLane,Derby,DE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.3 Reportingyearendis31March.4 SoldtoWestinghousewitheffectfrom31January2020(seepage178).

Rolls-RoyceHoldingsplcAnnualReport2019Financial StatementsSubsidiaries

* Dormantentity.1 MoorLane,Derby,DE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.4 SoldtoWestinghousewitheffectfrom31January2020(seepage178).5 SoldtoValsoftCorporationIncon3February2020.


%ofclass held

PTMTUIndonesia SecureBuildingBlokB,Jl.RayaProtokolHalim, Perdanakusuma,Jakarta,13610,Indonesia

Ordinary 100

PTRolls-Royce SecureBuildingBlokB,Jl.RayaProtokolHalim, Perdanakusuma,Jakarta,13610,Indonesia

Ordinary 100

Rolls-Royce(Ireland)UnlimitedCompany* UlsterInternationalFinance,1stFloorIFSCHouse,IFSC, Dublin1,Ireland

Ordinary 100

Rolls-Royce(Thailand)Limited 4,4.5Level12,Suite1299,RajdamriRoad,Pathumwan,Bangkok,10330,Thailand

Ordinary 100

Rolls-RoyceAeroEngineServicesLimited* Derby1 Ordinary 100Rolls-RoyceAustraliaPtyLimited Suite102,2–4LyonparkRoad,MacquariePark,NSW2113,Australia Ordinary 100Rolls-RoyceAustraliaServicesPtyLimited Suite102,2–4LyonparkRoad,MacquariePark,NSW2113,Australia Ordinary 100Rolls-RoyceBrasilLimitada RuadriveCincinatoBragaNo.47,PlanaltoDistrict,SãoBernando

doCampo,SP,09890-900,BrazilQuotas 100

Rolls-RoyceCanadaLimited 9500CôtedeLiesse,Lachine,QuébecH8T1A2,Canada CommonStock 100Rolls-RoyceChileSpA Alcantra200office601,Piso6,C.O,7550159LasCondes,

Santiago,ChileOrdinary 100

Rolls-RoyceChinaHoldingLimited 305–306IndigoBuilding1,20JiuxianqiaoRoad,Beijing, 100016,China

RegisteredCapital

100

Rolls-RoyceCivilNuclearCanadaLimited4 597TheQueensway,PeterboroughOntarioK9J7J6,Canada Common Shares 100Rolls-RoyceCivilNuclearS.A.S. 23cheminduVieuxChêne,38240,Meylan,France Ordinary 100Rolls-RoyceCommercialAero EnginesLimited*

Derby1 Ordinary 100

Rolls-RoyceControlSystemsHoldingsCo Wilmington 2 CommonStock 100Rolls-RoyceControlsandDataServices (NZ)Limited

c/oDeloitte,80QueenStreet,AucklandCentral,Auckland1010,NewZealand

Ordinary 100

Rolls-RoyceControlsandDataServices (UK)Limited

Derby1 Ordinary 100

Rolls-RoyceControlsandDataServices,Inc.5 Wilmington 2 CommonStock 100Rolls-RoyceControlsandData ServicesLimited*

Derby1 Ordinary 100

Rolls-RoyceCorporation Wilmington 2 CommonStock 100Rolls-RoyceCrosspointeLLC Wilmington 2 Partnership

(noequity)100

Rolls-RoyceDefenseProducts andSolutions,Inc.

Wilmington 2 CommonStock 100

Rolls-RoyceDefenseServices,Inc. Wilmington 2 CommonStock 100Rolls-RoyceDeutschlandLtd&CoKG Eschenweg11,15827Blankenfelde-Mahlow,Germany CapitalStock 100Rolls-RoyceElectricalNorwayAS Jarleveien8A,7041,Trondheim500,Norway Ordinary 100Rolls-RoyceEnergyAngola,Limitada* RuaReiKatyavala,EdificioReiKatyavala,EntradaB,Piso8,

Luanda,AngolaQuota 100

Rolls-RoyceEnergySystemsInc. Wilmington 2 CommonStock 100Rolls-RoyceEngineServicesHoldingsCo. Wilmington 2 CommonStock 100Rolls-RoyceEngineServicesLimitadaInc. (inliquidation)

Bldg.06BerthaphilCompound,JoseAbadSantosAvenue, ClarkSpecialEconomicZone,Clark,Pampanga,Philippines

CapitalStock 100

Rolls-RoyceErsteBeteiligungsGmbH Eschenweg11,15827Blankenfelde-Mahlow,Germany CapitalStock 100Rolls-RoyceFinanceCompanyLimited Derby1 Deferred

Ordinary100100

Rolls-RoyceFinanceHoldingsCo. Wilmington 2 CommonStock 100Rolls-RoyceFuelCellSystemsLimited Derby1 Ordinary 100Rolls-RoyceGeneralPartnerLimited* Derby1 Ordinary 100Rolls-RoyceGeneralPartner(Ireland)Limited 29EarlshotTerrace,Dublin2,Ireland Ordinary 100


FINA

NC

IAL STATEM

ENTS

190


%ofclass held

Rolls-RoyceGroupLimited# KingsPlace,90YorkWay,London,N19FX,England OrdinaryOrdinaryA

100100

Rolls-RoyceHighTemperature Composites,Inc.

CorporationServiceCompany,2710GatewayOaksDrive, Suite150N,Sacramento,California95833,UnitedStates

Ordinary 100

Rolls-RoyceHoldingsCanadaInc. 9500CôtedeLiesse,Lachine,QuébecH8T1A2,Canada Common C 100Rolls-RoyceHungaryKft GizellaU.51–57,1143Budapest,Hungary Cash shares 100Rolls-RoyceIndiaLimited*,3 Derby1 Ordinary 100Rolls-RoyceIndiaPrivateLimited3 BirlaTowerWest,2ndFloor25,BarakhambaRoad,NewDelhi,

110001,IndiaEquity 100

Rolls-RoyceIndustrial&Marine PowerLimited*

Derby1 Ordinary 100

Rolls-RoyceIndustrialPower(India)Limited*,3 Derby1 Ordinary 100Rolls-RoyceIndustrialPowerEngineering(OverseasProjects)Limited

Derby1 Ordinary 100

Rolls-RoyceIndustriesLimited* Derby1 Ordinary 100Rolls-RoyceInternationalLimited Derby1 Ordinary 100Rolls-RoyceInternationals.r.o. Pobřežní620/3,Postalcode18600,Karlin–Prague8,

CzechRepublicOrdinary 100

Rolls-RoyceJapanCo.,Limited 31stFloor,KasumigasekiBuilding,3-2-5Kasumigaseki, Chiyoda-Ku,Tokyo,100-6031,Japan

Ordinary 100

Rolls-RoyceLeasingLimited Derby1 Ordinary 100Rolls-RoyceMalaysiaSdn.Bhd. C-2-3ATTDIPlaza,JalanWanKadir3,TamanTunDrIsmail,6000

KualaLumpur,MalaysiaOrdinary 100

Rolls-RoyceMarineNorthAmerica,Inc. Wilmington 2 CommonStock 100Rolls-RoyceMexicoAdministrationS.deR.L.deC.V.

BoulevardAdolfoRuizCortinez3642-403,FraccCostadeOro,VerzcruzCP942996,Mexico

Ordinary 100

Rolls-RoyceMexicoS.deR.L.deC.V. BoulevardAdolfoRuizCortinez3642-403,FraccCostadeOro,VerzcruzCP942996,Mexico

Ordinary 100

Rolls-RoyceMilitaryAeroEnginesLimited*,3 Derby1 Ordinary 100Rolls-RoyceNewZealandLimited c/oDeloitte,80QueenStreet,AucklandCentral,Auckland1010,

NewZealandOrdinary 100

Rolls-RoyceNorthAmerica(USA)HoldingsCo. Wilmington 2 CommonStock 100Rolls-RoyceNorthAmericaHoldings,Inc. Wilmington 2 CommonStock 100Rolls-RoyceNorthAmerica,Inc. Wilmington 2 CommonStock 100Rolls-RoyceNorthAmericaVentures,Inc. Wilmington 2 CommonStock 100Rolls-RoyceNorthAmericanTechnologies,Inc.Wilmington 2 CommonStock 100Rolls-RoyceNuclearFieldServices France S.A.S. 4

ZANotre-Dame,84430,Mondragon,France Ordinary 100

Rolls-RoyceNuclearFieldServices,Inc.4 CorporationServiceCompany,80StateStreet,Albany,NewYork12207,UnitedStates

CommonStock 100

Rolls-RoyceOmanLLC BaitAlReem,BusinessOffice#131,BuildingNo81,WayNo3409,BlockNo234,AlThaqafaStreet,AlKhuwair,POBox20, PostalCode103,Oman

Ordinary 100

Rolls-RoyceOperations(India)PrivateLimited BirlaTowerWest,2ndFloor,25BarakhambaRoad,NewDelhi,110001,India

Ordinary 100

Rolls-RoyceOverseasHoldingsLimited Derby1 OrdinaryOrdinaryA

100100

Rolls-RoyceOverseasInvestmentsLimited Derby1 Ordinary 100Rolls-RoycePlacementsLimited Derby1 Ordinary 100Rolls-Royceplc KingsPlace,90YorkWay,London,N19FX,England Ordinary 100Rolls-RoycePowerEngineeringplc Derby1 Ordinary 100Rolls-RoycePowerSystemsAG Maybachplatz1,88045,Friedrichshafen,Germany Ordinary 100

# Re-registeredasaprivatecompanyon5December2019.* Dormantentity.1 MoorLane,Derby,DE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.3 Reportingyearendis31March.4 SoldtoWestinghousewitheffectfrom31January2020(seepage178).

Rolls-RoyceHoldingsplcAnnualReport2019Financial StatementsSubsidiaries


%ofclass held

Rolls-RoyceSaudiArabiaLimited POBox88545,Riyadh,11672,SaudiArabia Cash shares 100Rolls-RoyceRetirementSavings TrustLimited*,3

Derby1 Ordinary 100

Rolls-RoyceSingaporePte.Limited 6ShentonWay,#33-00OUE,DowntownSingapore068809,Singapore

Ordinary 100

Rolls-RoyceSpz.o.o. Opolska10031-323,Krakow,Poland Ordinary 100Rolls-RoyceSubmarinesLimited AtlanticHouse,Raynesway,Derby,DE217BE,Derbyshire,England Ordinary 100Rolls-RoyceTechnicalSupportSarl CentredaI,AvenueDidierDaurat,31700Blagnac,

Toulouse,FranceOrdinary 100

Rolls-RoyceTotalCareServicesLimited Derby1 Ordinary 100Rolls-RoyceTurkeyPowerSolutionsIndustryandTradeLimited

LevazimMahellesi,KoruSokagi,ZorluCenter,No.2TerasEvlerT2D:204,Zincirlikuyu,Besiktas,Istanbul34340,Turkey

Cash shares 100

Rolls-RoyceUKPensionFund TrusteesLimited*

Derby1 Ordinary 100

Rolls-RoyceZweiteBeteiligungsGmbH Eschenweg11,15827Blankenfelde-Mahlow,Germany CapitalStock 100RossCeramicsLimited Derby1 Ordinary 100SharinginGrowthUKLimited** Derby1 Limitedby

guarantee100

SpareIPG20Limited* Derby1 Ordinary 100SpareIPG21Limited* Derby1 Ordinary 100SpareIPG24Limited* Derby1 Ordinary 100SpareIPG32Limited* Derby1 7.25%

CumulativePreferenceOrdinary

100

100SpareIPG4Limited* Derby1 Ordinary 100TheBushingCompanyLimited* Derby1 Ordinary 100Timec1487Limited* Derby1 Ordinary 100TrignoEnergyS.R.L. ZonaIndustriale,SanSalvo,66050,Italy Ordinary 100TurbineSurfaceTechnologiesLimited** Derby1 OrdinaryA

OrdinaryBNil100

TurborreactoresS.A.deC.V. AccesoIV,No.6C,ZonaIndustrialBenitoJuárez,Querétaro, 76120,Mexico

Class AClass B

100100

VesselLifter,Inc.* CorporationServiceCompany,1201HaysStreet,Tallahassee, Florida32301,UnitedStates

CommonStock 100

VintersDefenceSystemsLimited* Derby1 Ordinary 100VintersEngineeringLimited Derby1 Ordinary 100VintersInternationalLimited Derby1 Ordinary 100VintersLimited Derby1 Ordinary 100Vinters-Armstrongs(Engineers)Limited* Derby1 Ordinary 100Vinters-ArmstrongsLimited* Derby1 OrdinaryB 100

* Dormantentity.**TheentityisnotincludedintheconsolidationasRolls-Royceplcdoesnothaveabeneficialinterestinthenetassetsoftheentity.1 MoorLane,Derby,DE248BJ,England.3 Reportingyearendis31March.


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%ofclass held

Groupinterest held%

AeroGearboxInternationalSAS** 18BoulevardLouisSequin,92700Colombes,France Ordinary 50 50AirtankerHoldingsLimited AirtankerHub,RAFBrizeNorton,Carterton,Oxfordshire,

OX183LX,EnglandOrdinary 20 20

AirtankerServicesLimited AirtankerHub,RAFBrizeNorton,Carterton,Oxfordshire,OX183LX,England

Ordinary 22 22

AlphaLeasing(US)(No.2)LLC Wilmington 2 Partnership (noequityheld)

– 50


– 50


– 50


– 50


– 50


– 50

AlphaLeasing(US)LLC Wilmington 2 Partnership (noequityheld)

– 50

AlphaPartnersLeasingLimited 1Brewer’sGreen,London,SW1H0RH,England OrdinaryA 100 50CFMSLimited 43QueenStreet,Bristol,BS14QP,England Limitedby

guarantee– 50

ClarkeChapmanPortiaPortServicesLimited

MaritimeCentre,PortofLiverpool,Liverpool,L211LA,England

OrdinaryA 100 50

Consorcio Español para el DesarrolloIndustrialdelHelicópterodeAtaqueTigre,A.I.E.

Avda.deAragón404,28022Madrid,Spain Partnership (noequityheld)

– 50

Consorcio Español para el DesarrolloIndustrialdelProgramaEurofighter,A.I.E.

PaseodeJohnLennon,s/n,edificioT22,2ªplanta,Getafe,Madrid,Spain

Partnership (noequityheld)

– 50

EgyptAeroManagementServices(inliquidation)

EgyptAirEngineWorkshop,CairoInternationalAirport,Cairo,Egypt

Ordinary 50 50

EPIEuropropInternationalGmbH DachauerStrasse655,80995,Munich,Germany CapitalStock 44 44EPIXPowerSystems,LLC TheCorporationTrustCompany,1209OrangeStreet,

Wilmington,Delaware19801,UnitedStatesPartnership (noequityheld)

– 50

EurojetTurboGmbH Lilienthalstrasse2b,85399Halbergmoos,Germany CapitalStock 46 46ForceMTUPowerSystemsPrivateLimited

MumbaiPuneRoad,Akurdi,Pune,Maharashtra411035,India

CapitalStock 49 49

GenisticsHoldingsLimited Derby1 OrdinaryA 100 50GlobalAerospaceCentreforIcing andEnvironmentalResearchInc.**

1000Marie-VictorinBoulevard,LongueuilQuébec J4G1A1,Canada

Ordinary 50 50

HongKongAeroEngine ServicesLimited

33rdFloor,OnePacificPlace,88Queensway, HongKong

Ordinary 50 50

InternationalAerospaceManufacturingPrivateLimited**,3

SurveyNo.3KempapuraVillage,VarthurHobli,Bangalore,KA560037,India

Ordinary 50 50

LightHelicopterTurbine Engine Company (unincorporatedpartnership)

Suite119,9238MadisonBoulevard,Madison,Alabama35758,UnitedStates


– 50

MESTCo.,Limited 97Bukjeonggongdan2-gil,Yangsan-si, Gyeongsangnam-do,50571,RepublicofKorea

Normal 46.8 46.8

MetlaseLimited UnipartHouse,GarsingtonRoad,Cowley,Oxford, OX42PG,England

OrdinaryB 100 20

MTUPowerSystemsSdn.Bhd. Level10MenaraLGB,1JalanWanKadirTamanTunDrIsmail6000KualaLumpur,Malaysia

OrdinaryA 100 49

MTUTurbomecaRolls-RoyceGmbH AmSöldnermoos17,85399Hallbergmoos,Germany CapitalStock 33.3 33.3

JOINT VENTURES AND ASSOCIATES

**Theseentitiesareaccountedforasjointoperations(seenote1accountingpolicies).1 MoorLane,Derby,DerbyshireDE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.3 Reportingyearendis31March.

192 Rolls-RoyceHoldingsplcAnnualReport2019Financial StatementsJointVenturesandAssociates


%ofclass held

Groupinterest held%

MTUTurbomecaRolls-Royce ITPGmbH

AmSöldnermoos17,85399Hallbergmoos,Germany CapitalStock 50 50

MTUYuchaiPowerCompanyLimited No7DananRoad,Yuzhou,Yulin,Guangxi,China,537005,China

CapitalStock 50 50

N3EngineOverhaulServices GmbH&CoKG

Gerhard-Höltje-Strasse1,D-99310,Arnstadt,Germany CapitalStock 50 50

N3EngineOverhaulServicesVerwaltungsgesellschaftMbh

Gerhard-Höltje-Strasse1,D-99310,Arnstadt,Germany CapitalStock 50 50

QinousGmbH VillaRathenau,Wilhelminenhofstrasse75, 12459Berlin,Germany

Preference 22 22

RollsLavalHeatExchangersLimited* Derby1 Ordinary 50 50Rolls-Royce&PartnersFinance(US)(No2)LLC

Wilmington 2 Partnership (noequityheld)

– 50

Rolls-Royce&PartnersFinance(US)LLC

Wilmington 2 Partnership (noequityheld)

– 50

SAFYRRPropulsionLimited Derby1 B Shares 100 50ShanxiNorthMTUDieselCo.Limited No.97DaqingWestRoad,DatongCity,

ShanxiProvince,ChinaOrdinary 49 49

SingaporeAeroEngineServicesPrivateLimited

11CalshotRoad,509932,Singapore Ordinary 50 50

TaecUcakMotorSanayiAS BuyukdereCaddesi,Prof.AhmetKemalAru,SokagiKaleseramik,BinasiLeventNo.4,Besiktas,Istanbul,Turkey

Cash Shares 49 49

TechjetAerofoilsLimited** TefenIndustrialZone,POBox16,24959,Israel OrdinaryAOrdinaryB

5050

50

TexasAeroEngineServicesLLC TheCorporationTrustCompany,1209,OrangeStreet,Wilmington,Delaware19801,UnitedStates


– 50

TRTLimited Derby1 OrdinaryB 100 49.9Turbo-UnionGmbH Lilienthalstrasse2b,85399Hallbergmoos,Munich,

GermanyCapitalStock 40 40

UKNuclearRestorationLimited* BoothsPark,ChelfordRoad,Knutsford,Cheshire, WA168QZ,England

Ordinary 20 20

XianXRAeroComponentsCo.,Limited**

Xujiawan,Beijiao,PoBox13,Xian710021,Shaanxi, China

Ordinary 49 49

* Dormantcompany.**Theseentitiesareaccountedforasjointoperations(seenote1accountingpolicies).1 MoorLane,Derby,DE248BJ,England.2 CorporationServiceCompany,251LittleFallsDrive,Wilmington,Delaware19808,UnitedStates.

Rolls-RoyceHoldingsplcAnnualReport2019 193Financial StatementsJointVenturesandAssociates

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