Further re IFRS
Northumbrian Water Group PLC
28 November 2005
25 November 2005
Northumbrian Water Group plc (NWG)
Adoption of International Financial Reporting Standards (IFRS)
NWG is required to report its consolidated financial results under IFRS from 1
April 2005. The first published financial results under IFRS will be the interim
results for the six months ended 30 September 2005, which will be announced on 7
December 2005.
To assess the impact on the Group's financial results, this statement presents
the unaudited reconciliations (from UK GAAP to IFRS) for the income statement
for the year ended 31 March 2005 and the balance sheet at 31 March 2005. The
unaudited reconciliations (from UK GAAP to IFRS) for the income statement for
the six months ended 30 September 2004, the transitional balance sheet at 1
April 2004 and the balance sheet at 30 September 2004 under UK GAAP to IFRS,
have also been presented.
The restated financial information for the year ended 31 March 2005 and the
opening balance sheet at 1 April 2004 have been prepared in accordance with
International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB).
The Group's adopted policies under IFRS have also been included.
For further information contact:
Northumbrian Water 0191 301 6367
Chris Green, Finance Director
Stew Hazon, Financial Controller
Alistair Baker, Communications & PR Manager
Finsbury 020 7251 3801
Andrew Mitchell
Sally Hogan
RECONCILIATION OF UK GAAP TO IFRS
Consolidated Income Statement
Year ended 31 March 2005
-------------- ------- ------- ------- ------- ------- ------- ------- -------
UK GAAP Property, Pensions IAS 39 Deferred Jointly Other Restated
plant & tax controlled under
equipment entities and IFRS
associates
£m £m £m £m £m £m £m £m
-------------- ------- ------- ------- ------- ------- ------- ------- -------
Revenue 578.6 - - - - - - 578.6
Operating
costs (373.9) (4.1) (2.7) - - - - (380.7)
------- ------- ------- ------- ------- ------- ------- -------
Group
operating
profit 204.7 (4.1) (2.7) - - - - 197.9
Share of
associates'
operating
profit 2.2 - - - - (2.2) - -
Share of
jointly
controlled
entities'
operating
profit 1.0 - - - - (1.0) - -
------- ------- ------- ------- ------- ------- ------- -------
Profit on
ordinary
activities
before
interest 207.9 (4.1) (2.7) - - (3.2) - 197.9
Finance (99.1) - - (3.4) - 2.9 - (99.6)
costs
Share of
associates
undertakings'
and jointly
controlled
entities'
profit - - - - - 0.1 - 0.1
------- ------- ------- ------- ------- ------- ------- -------
Profit on
ordinary
activities
before
taxation 108.8 (4.1) (2.7) (3.4) - (0.2) - 98.4
Taxation on profit on
ordinary activities
- current
taxation (1.3) - - - - - - (1.3)
- deferred
taxation (8.9) 1.2 0.8 (0.3) (13.9) - 0.1 (21.0)
- share of
associates'
and jointly
controlled
entities' tax (0.2) - - - - 0.2 - -
------- ------- ------- ------- ------- ------- ------- -------
Profit on
ordinary
activities
after taxation 98.4 (2.9) (1.9) (3.7) (13.9) - 0.1 76.1
------- ------- ------- ------- ------- ------- ------- -------
Basic earnings
per share 19.1p (0.6p) (0.4p) (0.7p) (2.7p) - - 14.7p
------- ------- ------- ------- ------- ------- ------- -------
Adjusted
earnings per
share
(excluding
deferred tax,
amortisation
of debt fair
value and IAS 39
adjustments) 18.1p (0.8p) (0.5p) - - - * (0.1p) 16.7p
------- ------- ------- ------- ------- ------- ------- -------
Diluted
earnings per
share 19.1p (0.6p) (0.4p) (0.7p) (2.7p) - - 14.7p
------- ------- ------- ------- ------- ------- ------- -------
Dividend per
share 10.00p - - - - - - 10.00p
------- ------- ------- ------- ------- ------- ------- -------
* Rounding
RECONCILIATION OF UK GAAP TO IFRS
Consolidated Balance Sheet
As at 31 March 2005
-------------- ------- ------- ------- ------- ------- ------- ------- -------
UK GAAP Property, Pensions IAS 39 Deferred Dividends Other Restated
plant & tax under
equipment IFRS
£m £m £m £m £m £m £m £m
-------------- ------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Non-current
assets
Goodwill 0.1 - - - - - - 0.1
Other
intangible
assets 64.2 - - - - - - 64.2
Property,
plant and
equipment 2,806.6 (6.3) - - - - - 2,800.3
Investments in
jointly
controlled
entities 3.6 - - - - - - 3.6
Investments in
associates 1.4 - - - - - - 1.4
Other
investments 0.4 - - - - - - 0.4
Pension 13.0 - (13.0) - - - - -
asset ------- ------- ------- ------- ------- ------- ------- -------
2,889.3 (6.3) (13.0) - - - - 2,870.0
------- ------- ------- ------- ------- ------- ------- -------
Current
assets
Inventories 4.5 - - - - - - 4.5
Trade and
other
receivables 121.9 - - - - - - 121.9
Cash and cash
equivalents 118.0 - - - - - - 118.0
------- ------- ------- ------- ------- ------- ------- -------
244.4 - - - - - - 244.4
------- ------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 3,133.7 (6.3) (13.0) - - - - 3,114.4
------- ------- ------- ------- ------- ------- ------- -------
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital 51.9 - - - - - - 51.9
Share 446.3 - - - - - - 446.3
premium
Cash flow
reserve - - - 4.3 - - - 4.3
Treasury
shares (0.9) - - - - - - (0.9)
Retained
earnings 71.0 (5.2) (62.6) - (311.9) 36.9 (0.6) (272.4)
------- ------- ------- ------- ------- ------- ------- -------
568.3 (5.2) (62.6) 4.3 (311.9) 36.9 (0.6) 229.2
Minority
interest 1.1 - - - - - - 1.1
------- ------- ------- ------- ------- ------- ------- -------
TOTAL EQUITY 569.4 (5.2) (62.6) 4.3 (311.9) 36.9 (0.6) 230.3
------- ------- ------- ------- ------- ------- ------- -------
Non-current
liabilities
Interest
bearing loans
and borrowings 1,929.7 - - - - - - 1,929.7
Provisions 5.2 - - - - - - 5.2
Deferred
income tax
liabilities 167.7 (2.2) (26.8) - 311.9 - (0.2) 450.4
Pension
liability - - 76.4 - - - - 76.4
Other payables 16.6 - - - - - - 16.6
Interest rate
swap 4.3 - - (4.3) - - - -
Grants 160.2 1.1 - - - - - 161.3
------- ------- ------- ------- ------- ------- ------- -------
2,283.7 (1.1) 49.6 (4.3) 311.9 - (0.2) 2,639.6
------- ------- ------- ------- ------- ------- ------- -------
Current
liabilities
Interest
bearing loans
and borrowings 73.9 - - - - - - 73.9
Trade and
other payables 205.5 - - - - (36.9) 0.8 169.4
Income tax
payable 1.2 - - - - - - 1.2
------- ------- ------- ------- ------- ------- ------- -------
280.6 - - - - (36.9) 0.8 244.5
------- ------- ------- ------- ------- ------- ------- -------
TOTAL
LIABILITIES 2,564.3 (1.1) 49.6 (4.3) 311.9 (36.9) 0.6 2,884.1
------- ------- ------- ------- ------- ------- ------- -------
TOTAL EQUITY
AND
LIABILITIES 3,133.7 (6.3) (13.0) - - - - 3,114.4
------- ------- ------- ------- ------- ------- ------- -------
RECONCILIATION OF UK GAAP TO IFRS
Consolidated Income Statement
6 months ended 30 September 2004
-------------------- ------- ------- ------- ------- ------- ------- -------
UK GAAP Property, Pensions IAS 39 Deferred Jointly Restated
plant & tax controlled under
equipment entities and IFRS
associates
£m £m £m £m £m £m £m
-------------------- ------- ------- ------- ------- ------- ------- -------
Revenue 286.5 - - - - - 286.5
Operating costs (185.2) (2.0) (1.4) - - - (188.6)
------- ------- ------- ------- ------- ------- -------
Group operating
profit 101.3 (2.0) (1.4) - - - 97.9
Share of
associates'
operating profit 1.1 - - - - (1.1) -
Share of jointly
controlled entities'
operating profit 0.5 - - - - (0.5) -
------- ------- ------- ------- ------- ------- -------
Profit on ordinary
activities before
interest 102.9 (2.0) (1.4) - - (1.6) 97.9
Finance costs (53.5) - - (3.4) - 1.4 (55.5)
Share of associates - - - - - - -
undertakings' and ------- ------- ------- ------- ------- ------- -------
jointly controlled
entities' profit
Profit on ordinary
activities before
taxation 49.4 (2.0) (1.4) (3.4) - (0.2) 42.4
Taxation on profit on
ordinary activities
- current taxation (3.4) - - - - - (3.4)
- deferred taxation (5.4) 0.5 0.4 0.3 (6.2) - (10.4)
- share of associates'
and jointly controlled
entities' tax (0.2) - - - - 0.2 -
------- ------- ------- ------- ------- ------- -------
Profit on ordinary
activities
after taxation 40.4 (1.5) (1.0) (3.1) (6.2) - 28.6
------- ------- ------- ------- ------- ------- -------
Basic earnings
per share 7.8p (0.3p) (0.2p) (0.6p) (1.2p) - 5.5p
------- ------- ------- ------- ------- ------- -------
Adjusted earnings
per share
(excluding
deferred tax,
amortisation
of debt fair
value and IAS 39
adjustments) * 8.3p (0.4p) (0.3p) - - - 7.6p
------- ------- ------- ------- ------- ------- -------
Diluted
earnings per
share 7.8p (0.3p) (0.2p) (0.6p) (1.2p) - 5.5p
------- ------- ------- ------- ------- ------- -------
Dividend per
share 2.87p - - - - - 2.87p
------- ------- ------- ------- ------- ------- -------
* The published adjusted EPS has been restated to exclude the amortisation of
debt fair value.
RECONCILIATION OF UK GAAP TO IFRS
Consolidated Balance Sheet
As at 30 September 2004
-------------- ------- ------- ------- ------- ------- ------- ------- -------
UK GAAP Property, Pensions IAS 39 Deferred Dividends Other Restated
plant & tax under
equipment IFRS
£m £m £m £m £m £m £m £m
-------------- ------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Non-current
assets
Goodwill 0.2 - - - - - - 0.2
Other
intangible
assets 64.2 - - - - - - 64.2
Property,
plant and
equipment 2,737.0 (4.5) - - - - - 2,732.5
Investments in
jointly
controlled
entities 3.5 - - - - - - 3.5
Investments in
associates 1.5 - - - - - - 1.5
Other
investments 0.4 - - - - - - 0.4
Pension 13.8 - (13.8) - - - - -
asset ------- ------- ------- ------- ------- ------- ------- -------
2,820.6 (4.5) (13.8) - - - - 2,802.3
------- ------- ------- ------- ------- ------- ------- -------
Current
assets
Inventories 6.8 - - - - - - 6.8
Trade and
other
receivables 117.5 - - - - - - 117.5
Cash and cash
equivalents 95.6 - - - - - - 95.6
------- ------- ------- ------- ------- ------- ------- -------
219.9 - - - - - - 219.9
------- ------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 3,040.5 (4.5) (13.8) - - - - 3,022.2
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital 51.9 - - - - - - 51.9
Share 446.3 - - - - - - 446.3
premium
Cash flow
reserve - - - 4.3 - - - 4.3
Treasury
shares (0.5) - - - - - - (0.5)
Retained
earnings 49.1 (3.8) (61.7) - (304.3) 14.9 (0.6) (306.4)
------- ------- ------- ------- ------- ------- ------- -------
546.8 (3.8) (61.7) 4.3 (304.3) 14.9 (0.6) 195.6
Minority
interest 1.6 - - - - - - 1.6
------- ------- ------- ------- ------- ------- ------- -------
TOTAL EQUITY 548.4 (3.8) (61.7) 4.3 (304.3) 14.9 (0.6) 197.2
------- ------- ------- ------- ------- ------- ------- -------
Non-current
liabilities
Interest
bearing loans
and borrowings 1,875.1 - - - - - - 1,875.1
Provisions 6.6 - - - - - - 6.6
Deferred
income tax
liabilities 164.2 (1.5) (26.4) - 304.3 - (0.2) 440.4
Pension
liability - - 74.3 - - - - 74.3
Other payables 12.8 - - - - - - 12.8
Interest rate
swap 4.3 - - (4.3) - - - -
Grants 148.2 0.8 - - - - - 149.0
------- ------- ------- ------- ------- ------- ------- -------
2,211.2 (0.7) 47.9 (4.3) 304.3 - (0.2) 2,558.2
------- ------- ------- ------- ------- ------- ------- -------
Current
liabilities
Interest
bearing loans
and borrowings 90.4 - - - - - - 90.4
Trade and
other payables 184.9 - - - - (14.9) 0.8 170.8
Income tax
payable 5.6 - - - - - - 5.6
------- ------- ------- ------- ------- ------- ------- -------
280.9 - - - - (14.9) 0.8 266.8
------- ------- ------- ------- ------- ------- ------- -------
TOTAL
LIABILITIES 2,492.1 (0.7) 47.9 (4.3) 304.3 (14.9) 0.6 2,825.0
------- ------- ------- ------- ------- ------- ------- -------
-
TOTAL EQUITY
AND
LIABILITIES 3,040.5 (4.5) (13.8) - - - - 3,022.2
------- ------- ------- ------- ------- ------- ------- -------
RECONCILIATION OF UK GAAP TO IFRS
Transitional Consolidated Balance Sheet
As at 1 April 2004
-------------- ------- ------- ------- ------- ------- ------- ------- -------
UK GAAP Property, Pensions IAS 39 Deferred Dividends Other Restated
plant & tax under
equipment IFRS
£m £m £m £m £m £m £m £m
-------------- ------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Non-current
assets
Goodwill 0.2 - - - - - - 0.2
Other
intangible
assets 64.2 - - - - - - 64.2
Property,
plant and
equipment 2,692.8 (2.8) - - - - - 2,690.0
Investments in
jointly
controlled
entities 3.4 - - - - - - 3.4
Investments in
associates 1.8 - - - - - - 1.8
Other
investments 0.4 - - - - - - 0.4
Pension 14.3 - (14.3) - - - - -
asset ------- ------- ------- ------- ------- ------- ------- -------
2,777.1 (2.8) (14.3) - - - - 2,760.0
------- ------- ------- ------- ------- ------- ------- -------
Current
assets
Inventories 4.8 - - - - - - 4.8
Trade and
other
receivables 118.1 - - - - - - 118.1
Interest rate
swap - - - 3.4 - - - 3.4
Cash and cash
equivalents 44.8 - - - - - - 44.8
------- ------- ------- ------- ------- ------- ------- -------
167.7 - - 3.4 - - - 171.1
------- ------- ------- ------- ------- ------- ------- -------
TOTAL ASSETS 2,944.8 (2.8) (14.3) 3.4 - - - 2,931.1
------- ------- ------- ------- ------- ------- ------- -------
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital 51.9 - - - - - - 51.9
Share 446.3 - - - - - - 446.3
premium
Cash flow
reserve - - - (2.9) - - - (2.9)
Treasury
shares (0.5) - - - - - - (0.5)
Retained
earnings 23.4 (2.3) (75.5) 3.3 (298.1) 24.0 (0.6) (325.8)
------- ------- ------- ------- ------- ------- ------- -------
521.1 (2.3) (75.5) 0.4 (298.1) 24.0 (0.6) 169.0
Minority
interest 1.9 - - - - - - 1.9
------- ------- ------- ------- ------- ------- ------- -------
TOTAL EQUITY 523.0 (2.3) (75.5) 0.4 (298.1) 24.0 (0.6) 170.9
------- ------- ------- ------- ------- ------- ------- -------
Non-current
liabilities
Interest
bearing loans
and borrowings 1,853.0 - - - - - - 1,853.0
Provisions 6.3 - - - - - - 6.3
Deferred
income tax
liabilities 158.8 (1.0) (32.4) 0.1 298.1 - (0.2) 423.4
Pension
liability - - 93.6 - - - - 93.6
Other payables 13.4 - - - - - - 13.4
Interest rate
swap - - - 2.9 - - - 2.9
Grants 142.8 0.5 - - - - - 143.3
------- ------- ------- ------- ------- ------- ------- -------
2,174.3 (0.5) 61.2 3.0 298.1 - (0.2) 2,535.9
------- ------- ------- ------- ------- ------- ------- -------
Current
liabilities
Interest
bearing loans
and borrowings 48.0 - - - - - - 48.0
Trade and
other payables 194.2 - - - - (24.0) 0.8 171.0
Income tax
payable 5.3 - - - - - - 5.3
------- ------- ------- ------- ------- ------- ------- -------
247.5 - - - - (24.0) 0.8 224.3
------- ------- ------- ------- ------- ------- ------- -------
TOTAL
LIABILITIES 2,421.8 (0.5) 61.2 3.0 298.1 (24.0) 0.6 2,760.2
------- ------- ------- ------- ------- ------- ------- -------
TOTAL EQUITY
AND
LIABILITIES 2,944.8 (2.8) (14.3) 3.4 - - - 2,931.1
------- ------- ------- ------- ------- ------- ------- -------
Northumbrian Water Group plc
International Financial Reporting Standards (IFRS)
Accounting policies
The restated financial information for the year ended 31 March 2005 and the
opening balance sheet at 1 April 2004 have been prepared in accordance with
International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB).
The financial information has been prepared on the basis of IFRS expected to be
in effect for the year ended 31 March 2006. The IFRS in effect at that date may
differ owing to decisions taken by the EC on endorsement, interpretative
guidance issued by the IASB or the International Financial Reporting
Interpretations (IFRIC) and the requirements of company legislation. The Group
has decided to adopt the amendments to IAS 19 "Employee Benefits" allowing
actuarial gains and losses to be recognised in full through reserves. The Group
has also adopted IAS 32 and 39 from 1 April 2004
The results of Northumbrian Water Group plc may change as a result of future
changes to IFRS.
The consolidated financial statements have been prepared on a historical cost
basis except for derivative financial instruments that have been measured at
fair value. The date of transition from accounting under UK GAAP to accounting
under IFRS is 1 April 2004. The directors consider the following accounting
policies to be relevant in relation to the Group's financial statements.
First time adoption
In general the Group is required to apply its accounting policies determined
under IFRS fully retrospectively to determine the opening IFRS balance sheet. In
order to ease the transition to IFRS the accounting standard IFRS 1 'First-time
Adoption of International Financial Reporting Standards' includes several
exceptions to this principle, some of which are mandatory and some permissive.
In preparing these preliminary statements the exemptions applied by the Group to
the restatement of historical data are as follows:
Cumulative translation differences in respect of foreign operations are deemed
to be zero at the date of transition. Any gains and losses on subsequent
disposals of foreign subsidiaries will exclude translation differences arising
prior to the transition date.
The Group has elected to recognise all cumulative actuarial gains and losses, in
equity, at the date of transition. Future actuarial gains and losses will be
recognised outside the income statement through the 'Statement of Recognised
Income and Expense' (SORIE).
Infrastructure assets have been measured at a date prior to transition to IFRSs
(23 May 2003) at their fair value which has been adopted as deemed historic
cost. The fair value, established at 23 May 2003, meets the criteria of
paragraph 19 of IFRS 1 as all assets and liabilities were measured at fair value
at that date, the event being the acquisition of AWL (Atlantic Water Limited)
and subsequent IPO of NWG.
The Group has elected to take the exemption available under IFRS 1 from
restating business combinations before 1 April 2004 on an IFRS basis.
The Group has elected to adopt IAS 32 'Financial Instruments: Disclosure and
Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement'
with effect from 1 April 2004, rather than deferring application of these
standards to 1 April 2005.
Basis of consolidation
The consolidated financial statements include the Company and its subsidiary
undertakings. The results of subsidiaries acquired during the period are
included from the date of their acquisition. The results of subsidiaries
disposed of during the period are included to the date of their disposal. Inter
segment sales and profits are eliminated fully on consolidation. Where, for
commercial reasons, the accounting reference date of a subsidiary is a date
other than that of the Company, management accounts made up to the Company's
accounting reference date have been used. In accordance with SIC 12
'Consolidation - Special Purpose Entities', the accounts of two companies are
consolidated as special purpose entities, with effect from 12 May 2004, the date
of the securitisation transaction which utilised these entities.
Where necessary, adjustments are made to bring the accounting policies used
under relevant local GAAP in the individual financial statements of the Company,
subsidiaries and jointly controlled entities into line with those used by the
Group under IFRS.
(a) Associates and jointly controlled entities
Investments in associates and jointly controlled entities in the group accounts
are accounted for using the equity method of accounting where the group
exercises significant influence over the associate. Significant influence is
generally presumed to exist where the group's effective ownership is 20% or
more. The Group's share of the post tax profits less losses of associates and
jointly controlled entities is included in the consolidated income statement and
the Group's share of their net assets/liabilities is included in the
consolidated balance sheet. Goodwill arising on the acquisition of associates
and jointly controlled entities is accounted for in accordance with the
accounting policy set out below.
(b) Goodwill
Goodwill arising on the acquisition of subsidiary undertakings, businesses,
associates and jointly controlled entities, representing the excess of the fair
value of the consideration given over the fair value of the identifiable assets
and liabilities acquired. Following initial recognition, goodwill is measured at
cost less any accumulated impairment losses. The Group has £0.2 million of
goodwill at 1 April 2004. Prior to 1 April 2004, goodwill was amortised over its
estimated useful life; such amortisation ceased on 31 March 2004. Goodwill
relating to acquisitions from 1 April 2004 is not amortised. Goodwill is
reviewed for impairment, annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
(c) Intangible assets other than goodwill
Other intangible fixed assets represent the right to receive income under the
operating agreement with the Environment Agency in respect of the Kielder Water
transfer scheme. The value of this intangible asset has been assessed with
reference to the net monies raised in accordance with the 'Kielder
securitisation' on 12 May 2004. The term of the operating agreement is in
perpetuity and accordingly no amortisation is provided. The value of this
intangible is assessed for impairment on an annual basis, in accordance with IAS
36 'Impairment of Assets'
Research and development expenditure is charged to the income statement in the
period in which it is incurred.
(d) Property, plant and equipment
Tangible fixed assets and depreciation
Tangible fixed assets, including assets in the course of construction, comprise
infrastructure assets (being mains and sewers, impounding and pumped raw water
storage reservoirs, dams, sludge pipelines and sea outfalls) and other assets
(including properties, overground plant and equipment):
Tangible assets are included at cost less accumulated depreciation and any
provision for impairment.
Freehold land is not depreciated. Other assets are depreciated evenly over their
estimated economic lives, which are principally as follows: freehold buildings,
30-60 years; short leasehold land and buildings, 25 years or lease term if
shorter; operational structures, plant and machinery, 4-92 years; infrastructure
assets 13-200 years (see below), fixtures, fittings, tools and equipment, 4-10
years.
Where the remaining useful economic life of the asset is estimated to be greater
than 50 years, an impairment review is performed at the end of each reporting
period to ensure that the carrying amount can be supported.
Assets in the course of construction are not depreciated until commissioned.
Infrastructure assets
In the regulated water services business, infrastructure assets comprise a
network of systems being mains and sewers, reservoirs, dams and sea outfalls.
Prior to 1 April 2004, expenditure on infrastructure assets relating to
increases in capacity or enhancements to the network and on maintaining the
operating capability of the network, in accordance with defined standards of
service, was treated as additions to fixed assets. This treatment is not
permitted under IAS 16. The opening balance for infrastructure assets was
determined as described under 'First time adoption' above.
Infrastructure assets are included at cost less depreciation. Expenditure on
infrastructure assets which enhances the asset base is treated as fixed asset
additions whilst maintenance expenditure which does not enhance the asset base
is charged as an operating cost.
Infrastructure assets are depreciated evenly to their estimated residual values
over their estimated economic lives, which are principally as follows:
Dams and impounding reservoirs 150 years
Water mains 100 years
Sea outfalls 60 years
Sewers 200 years
Dedicated pipelines 13-15 years
(e) Foreign currencies
The functional and presentational currency of Northumbrian Water Group plc is
United Kingdom Sterling (£). Assets and liabilities of subsidiaries and jointly
controlled entities in foreign currencies are translated into sterling at rates
of exchange ruling at the end of the financial period and the results of foreign
subsidiaries are translated at the average rate of exchange for the period.
Differences on exchange arising from the re-translation of the opening net
investment in subsidiary companies and jointly controlled entities, and from the
translation of the results of those companies at average rate, are taken to
reserves. All other foreign exchange differences are taken to the income
statement in the period in which they arise.
(f) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost
comprises direct materials and, where applicable, direct labour costs, as well
as an element of overheads that have been incurred in bringing the inventories
to their present locations and condition. Work in progress and finished goods
are valued at the lower of cost and net realisable value.
(g) Revenues
Provision of services
Revenue, which excludes value added tax, represents the fair value of the income
receivable in the ordinary course of business for services provided. Revenue is
recognised to the extent that it is probable that the economic benefits will
flow to the Group and the revenue can be reliably measured.
Revenue is not recognised until the services have been provided to the customer.
Revenue for services relates to the year, excluding any amounts paid in advance.
Revenue for measured water and waste water charges includes amounts billed plus
an estimation of the amounts unbilled at the year end. The accrual is estimated
using a defined methodology based upon daily average water consumption, which is
calculated based upon historical billing information.
Long term contracts revenue is recognised to reflect the proportion of the work
carried out at the year end, by recording revenue as contract activity
progresses. Revenues derived from variations on contracts are recognised only
when they have been accepted by the customer.
Interest
Revenue is recognised as the interest accrues, taking into account the effective
yield of the asset.
Dividends
Revenue is recognised when the shareholders' right to receive the revenue is
established.
(h) Government grants and contributions
Government grants are recognised at their fair value where there is reasonable
assurance that the grant will be received and all attaching conditions will be
complied with. Revenue grants are credited to the income statement in the period
to which they relate. Capital grants and contributions relating to property,
plant and equipment are treated as deferred income and amortised to the income
statement over the expected useful economic lives of the related assets.
(i) Leases
Where assets are financed by leasing arrangements which transfer substantially
all the risks and rewards of ownership to the Group, the assets are treated as
if they had been purchased at their fair value or, if lower, at the present
value of the minimum lease payments. Rentals or leasing payments are treated as
consisting of a capital element and finance charges, the capital element
reducing the outstanding liability and the finance charges being charged to the
income statement over the period of the leasing contract at a constant rate on
the reducing outstanding liability.
Rentals under operating leases (where the lessor retains substantially all the
risks and rewards of ownership) are expensed in the income statement on a
straight-line basis over the lease term.
(j) Pensions and other post-employment benefits
Defined benefit scheme
The Group operates a funded UK defined benefit pension scheme. The cost of
providing this benefit is determined using the projected unit method, with
actuarial valuations being carried out at each balance sheet date. The liability
or asset recognised in the balance sheet represents the present value of the
defined benefit obligations at the balance sheet date, less the fair value of
the scheme assets and past service costs.
The defined benefit obligation represents the estimated amount of future
benefits that employees have earned in return for their services in current and
prior periods, discounted at a rate representing the yield on a high quality
corporate bond at the balance sheet date, denominated in the same currency as
the obligations and having the same terms of maturity as the related pension
liability, applied to the estimated future cash outflows arising from these
obligations.
Actuarial gains and losses on experience adjustments and changes in actuarial
assumptions are recognised in full in the period in which they occur in the
SORIE.
Defined contribution scheme
The Group operates a defined contribution scheme for those members of staff who
are not members of its defined benefit scheme. Obligations for contributions to
the scheme are recognised as an expense in the income statement in the period in
which they arise.
(k) Share-based payments
The cost of equity-settled transactions with employees is measured by reference
to the fair value at the date at which they are granted and is recognised as an
expense over the vesting period, which ends on the date on which the relevant
employees become fully entitled to the award. Fair value is determined by an
external valuer using the Monte-Carlo simulation model. In valuing
equity-settled transactions, no account is taken of any vesting conditions,
other than conditions linked to the price of the shares of the company (market
conditions).
No expense is recognised for awards that do not ultimately vest, except for
awards where vesting is conditional upon a market condition, which are treated
as vesting irrespective of whether or not the market condition is satisfied,
provided that all other performance conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense is calculated,
representing the extent to which the vesting period has expired, management's
best estimate of the achievement or otherwise of non-market conditions and the
number of equity instruments that will ultimately vest or in the case of an
instrument subject to a market condition, be treated as vesting as described
above. The movement in cumulative expense since the previous balance sheet date
is recognised in the income statement, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is
designated as replacing a cancelled or settled award, the cost based on the
original award terms continues to be recognised over the original vesting
period. In addition, an expense is recognised over the remainder of the new
vesting period for the incremental fair value of any modification, based on the
difference between the fair value of the original award and the fair value of
the modified award, both as measured on the date of the modification. No
reduction is recognised if this difference is negative.
(l) Taxes
Current tax
Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted by the balance sheet date.
Deferred tax
Deferred tax is provided using the liability method on temporary differences at
the balance sheet date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences,
except:
• where the deferred tax liability arises from the initial recognition of
goodwill or of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and
• in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in jointly
controlled entities, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences,
carry-forward of unused tax credits and unused tax losses, to the extent
that it is probable that taxable profit will be available against which the
deductible temporary differences, and the carry-forward of unused tax
credits and unused tax losses can be utilised except:
• where the deferred tax asset relating to the deductible temporary
difference arises from the initial recognition of an asset or liability
in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable
profit or loss; and
• in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in jointly
controlled entities, deferred tax assets are recognised only to the
extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilised. Unrecognised deferred tax assets are
reassessed at each balance sheet date and are recognised to the extent
that it has become probable that future taxable profit will allow the
deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the year when the asset is realised or the liability is
settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date.
Deferred tax is recognised in the income statement unless it relates to items
accounted for in equity.
Deferred tax assets and deferred tax liabilities are offset, if a legally
enforceable right exists to set off current tax assets against current tax
liabilities and the deferred taxes relate to the same taxable entity and the
same taxation authority.
Value added tax
Revenues, expenses and assets are recognised net of the amount of value added
tax except:
• where the value added tax incurred on a purchase of assets or services
is not recoverable from the taxation authority, in which case the value
added tax is recognised as part of the cost of acquisition of the asset or
as part of the expense item as applicable; and
• receivables and payables that are stated with the amount of value added
tax included.
The net amount of value added tax recoverable from, or payable to, the taxation
authority is included as part of receivables or payables in the balance sheet.
(m) Derivative financial instruments
The Group utilises interest rate swaps, forward rate agreements and forward
exchange contracts as derivative financial instruments.
A derivative instrument is considered to be used for hedging purposes when it
alters the risk profile of an underlying exposure of the Group in line with the
Group's risk management policies. Interest rate swap agreements are used to
manage interest rate exposures. With effect from 1 April 2004, derivative
financial instruments are stated at their fair value.
Under IAS 39, derivative financial instruments are always measured at fair
value, with hedge accounting employed in respect of those derivatives fulfilling
the stringent requirements for hedge accounting as prescribed under IAS 39. In
summary, these criteria relate to initial designation and documentation of the
hedge relationship, prospective testing of the relationship to demonstrate the
expectation that the hedge will be highly effective throughout its life, and
subsequent retrospective testing of the hedge to verify effectiveness.
The fair value of forward exchange contracts is calculated by reference to
current forward exchange rates for contracts with similar maturity profiles. The
fair value of interest rate swaps is determined by reference to market values
for similar instruments.
Hedging transactions undertaken by the company are classified as either fair
value hedges when they hedge the exposure to changes in the fair value of a
recognised asset or liability; or cash flow hedges where they hedge exposure to
variability in cash flows that is either attributable to a particular risk
associated with a recognised asset or liability or a forecasted transaction.
In relation to fair value hedges, which meet the conditions for hedge
accounting, any gain or loss from remeasuring the hedging instrument at fair
value is recognised immediately in the income statement. Any gain or loss on the
hedged item attributable to the hedged risk is adjusted against the carrying
amount of the hedged item and recognised in the income statement. Where the
adjustment is to the carrying amount of a hedged interest-bearing financial
instrument, the adjustment is amortised to the net profit and loss such that it
is fully amortised by maturity.
In relation to cash flow hedges to hedge firm commitments which meet the
conditions for hedge accounting, the portion of the gain or loss on the hedging
instrument that is determined to be an effective hedge is recognised directly in
equity and the ineffective portion is recognised in net profit or loss.
When the hedged firm commitment results in the recognition of a non-monetary
asset or a non-monetary liability then, at the time the asset or liability is
recognised, the associated gains or losses that had previously been recognised
in equity are included in the initial measurement of the acquisition cost or
other carrying amount of the asset or liability. For all other cash flow hedges,
the gains or losses that are recognised in equity are transferred to the income
statement in the same periods in which the hedged firm commitment affects the
net profit and loss.
For derivatives that do not qualify for hedge accounting, any gains or losses
arising from changes in fair value are taken directly to net profit or loss for
the year.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifies for special hedge accounting. At
that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity is kept in equity until the forecasted transaction occurs.
If a hedged transaction is no longer expected to occur, the net cumulative gain
or loss recognised in equity is transferred to net profit or loss for the year.
(n) Interest-bearing loans and borrowings
All loans and borrowings are initially stated at the amount of the net proceeds,
being fair value of the consideration received net of issue costs associated
with the borrowing. Finance costs (including issue costs) are taken to the
income statement over the term of the debt at a constant rate on the balance
sheet carrying amount. The carrying amount is increased by the finance charges
amortised and reduced by payments made in respect of the accounting period.
Loans and borrowings acquired at acquisition are restated to fair value. The
adjustment arising on acquisition is amortised to the income statement on the
basis of the maturity profile of each instrument. Realised gains and losses that
occur from the early termination of loans and borrowings are taken to the income
statement in that period.
(o) Cash and cash equivalents
Cash and cash equivalents disclosed in the balance sheet comprise cash at bank
and in hand and short-term deposits with an original maturity of three months or
less.
For the purpose of the consolidated cash flow statement, cash and cash
equivalents consist of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.
(p) Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less an
allowance for any uncollectible amounts. Invoices for unmeasured water and waste
water charges are due on fixed dates, other receivables generally have 30 day
payment terms. An estimate for doubtful debts is made when collection of the
full amount is no longer probable. Bad debts are written off when identified.
Trade and other receivables do not carry any interest.
(q) Investments
Investments are initially recorded at cost, being the fair value of the
consideration given and including the acquisition charges associated with the
investment.
After initial recognition, investments, which are classified as held for trading
and available-for-sale are measured at fair value. Gains or losses on
investments held for trading are recognised in income. Gains or losses on
available-for-sale investments are recognised as a separate component of equity
until the investment is sold, collected or otherwise disposed of, or until the
investment is determined to be impaired, at which time the cumulative gain or
loss previously reported in equity is included in income.
(r) Provisions
Provisions are recognised when the group has a present obligation (legal or
constructive) as a result of a past event, it is probable that an outflow of
resources will be required and a reliable estimate can be made of the amount of
the obligation.
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