1.1 — Critical Accounting Policies
Our accounting policies, which we have applied consistently, are described below. However, the accounting policies related to the accounts impacted by the judgments and estimates described below are particularly important to reflect our financial position and results of operations. As we must exercise significant judgment when we apply these policies, their application is subject to an inherent degree of uncertainty.
Those accounting policies are consistent with those used to prepare our consolidated financial statements as of December 31, 2016, except for the first adoption of the following Standards, Amendments, and Interpretations:
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Amendments to IAS 7 — Disclosure initiative |
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Amendments to IAS 12 — Recognition of deferred tax assets for unrealized losses |
The adoption of these Standards, Amendments, and Interpretations had no impact on the Group’s financial statements.
The Group decided not to early adopt those Standards, Amendments and Interpretations that the European Union adopted but that were not effective as of December 31, 2017, namely:
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IFRS 9 — Financial instruments |
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IFRS 15 — Revenue from Contracts with Customers |
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IFRS 16 — Leases |
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Annual Improvements (2014-2016) |
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Amendments to IFRS 15 — Revenue from Contracts with Customers |
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Amendments to IFRS 2 — Share-based payment |
The applications of IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial instruments) are described below.
A first analysis of the application of IFRS 16 (Leases) is described below.
At the date of issuance of these consolidated financial statements, the following Standards, Amendments, and Interpretations were issued but not yet adopted by the European Union and were thus not effective:
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Amendments to IAS 28 — Long-term interests in associates and joint ventures |
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Amendments to IFRS 9 — Prepayment features with negative compensation and modifications of financial liabilities |
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Amendments to IAS 19 — Employee Benefits |
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Annual Improvements (2015-2017) |
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IFRIC 22 — Foreign Currency Transactions and Advance Consideration |
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IFRIC 23 — Uncertainty over income tax treatments |
We are currently reviewing these Standards, Amendments, and Interpretations to measure their potential impact on our consolidated financial statements.
IFRS 15 — Revenue from Contracts with Customers
The IASB issued a new revenue recognition standard, IFRS 15, replacing all existing IFRS standards on revenues. This standard is effective on January 1, 2018 with a full retrospective application (i.e. financial statements must be presented as if this standard had always been in force) or limited retrospective application (i.e. with cumulative impact reflected in the opening statement of financial position of the year of first adoption). CGG will implement IFRS 15 on January 1, 2018 with limited retrospective application.
IFRS 15 defines the framework of revenue recognition as a five step process: i) identify the contract, ii) identify the performance obligations, iii) determine the transaction price, iv) allocate the transaction price, v) recognize revenue. The second step still allows the revenue recognition over time provided certain criteria are met, depending on how control of the goods or services provided is transferred to the customer.
The Group analyzed this new standard at the corporate level starting in 2014. Because CGG includes various business lines and considering that the application of this new standard requires significant familiarity with operations the Group initiated a bottom up assessment in June 2016 with the aim to go through the five steps of the standard for each business line.
CGG does not expect significant changes in revenue recognition policies for exclusive surveys sales and after-sales of multi-client surveys.
Revenue recognition for multi-clients original participants contracts (formerly ‘pre-commitments’) has been subject to an in-depth analysis of the industry practice and of the multi-client business model with CGG’s auditors. In line with what was disclosed recently by other seismic players, a preliminary analysis, based purely on IFRS 15 form and applied to present contracts letter, is showing that there is a high risk that all the revenues related to multi-clients original participants contracts would have, under the new norm, to be recognized only at delivery of the final processed data, which may be more than one year after acquisition of the data. Subject to certain contractual documentation improvements and clarifications and consistent with former accounting applied throughout the seismic industry that differentiates original participants from after sales revenue recognition, CGG concluded that original participants contracts contain two different performance obligations. The first is an obligation to provide services for which revenue should be recognized over time based on the data acquisition and processing progress of the survey. The second obligation is to deliver the license for the final processed data, for which revenue should be recognized at final delivery. The value of the license delivery would represent 10% of the total contract on average, potentially rising to 20% or falling to 5% depending on the complexity level of the survey. This conclusion has been shared and discussed with other seismic companies. However, this conclusion has not yet been endorsed CGG’s auditors and the regulators of the financial markets where CGG securities are publicly listed.
The Group’s revenues related to multi-client original participants amounted to US$269 million in 2017.
IFRS 9 — Financial instruments
IFRS 9 issued on July 24, 2014 will replace IAS 39—Financial Instruments: Recognition and Measurement. The Group is required to adopt IFRS 9 Financial Instruments from January 1, 2018. IFRS 9 application will have no material impact on the Group consolidated Financial Statements.
Impairment of financial assets and contract assets
IFRS 9 introduces a new forward-looking “expected loss” impairment model which will replace the existing “incurred loss” impairment model. The Group has assessed the actual credit losses experienced over the past several years. Since our customers are generally large national or international oil and gas companies our credit losses were insignificant over those years and we estimate that the application of IFRS 9’s “expected loss” impairment model would not generate material differences as compared to the existing model. As a result, the Group will continue using the current impairment model and will continue to regularly monitor the absence of material credit losses.
First analysis of the application of IFRS 16 — Leases, applicable as from January 1, 2019 (approved by the European Union in November 2017)
IFRS 16 standard updates the accounting of leases, mainly for lessees. All leases will have to be on balance-sheet by recognizing the present value of the lease payments over the expected lease term and a corresponding right-of-use asset. Short-term leases and leases of low-value assets are exempted from this requirement.
CGG, as a lessee, will have to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.
The inventory of the Group leases and the assessment of IFRS 16 impact on our consolidated financial statements are in progress.