Surface Transforms plc (AIM:SCE), manufacturers of carbon fibre reinforced ceramic automotive brake discs, has announced that the audit of its statutory accounts for the year ended 31 December 2023 is ongoing and the Board of the Company currently anticipate its FY23 final results will be published in late June 2024.
There are two particular areas that have and are contributing to the extended audit timeline:
(1) Impairments to the carrying value of certain intangible and tangible assets; and
(2) Revenue recognition, namely relating to revenue generated from engineering, testing and tooling services provided to OEM customers during the development phase of the contract.
It is important to note that none of these matters impact cash, but taking each in turn:
1. Impairments
Intangible assets:
The Company has applied a significantly higher discount rate in its assessment of its intangible assets and whether there is any indication of impairment. This assessment was performed in order to address the combined challenges of cash flow forecasting risk and the potential gap between implied market value and carrying value and resulted in a recoverable amount lower than the carrying value. Whilst not yet agreed, the Board estimate that £6.2 million of non-cash impairments to intangible assets, specifically, capitalised R&D, software and right of use assets, will be recognised in FY23.
The Board note however that these assets continue to generate revenue, underpin its £390m order book and the accounting decision has no impact on daily operational performance.
Tangible assets:
Surface Transforms’ impairment assessment of its tangible assets has identified that a particular furnace was not performing to contracted specification. Furthermore, despite considerable engineering review with the supplier, the Board does not now believe a cost-effective solution to improve the performance of this one particular furnace, can be made. Consequently, and whilst not yet agreed, the Board estimate that £3.0 million of non-cash impairment to tangible assets will be recognised in FY23.
The poor performance of this furnace is not impacting current output due to better than planned output from a complementary furnace together with some outsourcing.
2. Revenue recognition
Following discussions with the Company’s auditors, the Board has re-assessed its revenue recognition policy relating to revenue generated from engineering, testing and tooling services performed, together “development revenues”. This will now result in development revenues being recognised upon completion of system integration by the OEM or when control is passed over for the contracted services as opposed to in line with work performed and percentage completed under the current policy. This change will not impact cash, and whilst not yet agreed is expected to transfer approximately £2.0m in total from FY23 and prior periods into future years.
Further updates will be made as appropriate.
