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

Confidential Accounting impacts IFRS 15 Revenue from Contracts with Customers 21st January, 2019

Today’s agenda ● Key headlines ● Accounting judgements under IFRS 15 ● Revenue under IFRS 15 ● Costs under IFRS 15 ● Impacts: 2017, 2018 and 2019 and beyond ● Reporting at prelims 2

Key headlines The standard governs how and when an entity should recognise revenue There is no impact on: ● Our Retail business ● Cash and contract value Only change is to revenue reporting for Ocado Solutions, as a division with long-term contracts ● As we are just starting to report revenue for international solutions, we have decided to adopt early ● For each customer contract Ocado must now ○ Identify the performance obligations within the contract ○ Only recognise revenue as and when the obligations are satisfied Result: Impact to 2018 Revenue and EBITDA is a reduction of £12-15m 3

Accounting judgements under IFRS 15 1. Performance obligations within the contract ● A typical Ocado Solutions contract has a single performance obligation: “To enable the client to access the OSP end-to-end online grocery platform from go-live date, with an agreed physical capacity for the use of its retail brands.” ● Note : a contractual obligation is not a performance obligation 2. Total transaction value of the contract and allocation across each obligation ● All fees allocated to the single performance obligation 3. Duration of the contract ● Need to make a judgement of customer life (as contracts typically have no end date) ● Current judgements on customer life are: ○ Morrisons Dordon - 25 years (as defined contract length) ○ Standard CFC - 10 years ○ Standard Store Pick (standalone) - 5 years 4

Revenue under IFRS 15 Recognise revenue as and when the obligations are satisfied: ● All cash fees recognised from commencement of operation to estimated end of customer life Result: recognised from when CFC goes live, over time (straight line) as value to the customer remains the same every day Pre IFRS 15 We expected to recognise based upon: ● contractual terms and the services performed ● the life of the assets ● the substance of the arrangements and nature of solution being developed Result : there was sufficient revenue to cover the P&L costs ahead of opening CFCs: ‘earnings neutral’ 5

Costs under IFRS 15 Current Solutions cost accounting: ● Some P&L costs incurred prior to launch (proportion of project costs per CFC) ● Increased investment in platform and support team (in admin costs) Result : Additional costs in 2019 for Solutions, as previously highlighted Under IFRS 15 ● Current accounting for capitalisation of cost unchanged ● New standard allows for specific sales bonuses to be capitalised, but this is not material for us Result: no material change 6

2017 impact All Ocado Solutions contracts impacted but: ● No revenue reported for Sobeys, ICA and Kroger ● Restatement for Bon Preu and Groupe Casino immaterial ● Only significant restatement for Morrisons Revenue EBITDA £m £m Solutions FY17* 117.7 2.5 IFRS 15 Adjustment (9.3) (9.3) Restated FY17 108.4 (6.8) * 53 weeks 7

2018 impact ● Consensus assumes revenue on old standards, so there is a material change for 2018 ● Impact £12-15m on both Revenue and EBITDA, all in Solutions ● Impact will be disclosed in CFO report 8

Ongoing impacts: 2019 and beyond Dependent on number of CFC deals signed Consideration of a typical CFC assuming 10 year life: ● Signing on and upfront fees 10-20% of first 10 years of expected cash fees ● Now no revenue recognised in years 1 and 2 ● This revenue is now spread over remaining 8 years ● Cashflows remain unchanged ○ for Andover sized CFC, peak cumulative negative outflow remains at c.£30m 2019 impact ● 5 CFCs underway currently ● 2019 Solutions OSP revenues estimated at £40m lower 9

Reporting at Prelims ● No change to Retail or Other segments ● For Solutions, we will report under IFRS 15 with an impact for 2018 disclosed in CFO report ● Balance sheet restatements and restated 1H 2018 will also be provided ● Ongoing we also disclose annual OSP cash fees for Solutions ● We plan to give separate guidance for: ○ Retail Revenue ○ Solutions OSP Revenue and Costs 10

Q&A 11