28th Nov 2005 14:29
Northumbrian Water Group PLC28 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 1April 2005. The first published financial results under IFRS will be the interimresults for the six months ended 30 September 2005, which will be announced on 7December 2005. To assess the impact on the Group's financial results, this statement presentsthe unaudited reconciliations (from UK GAAP to IFRS) for the income statementfor the year ended 31 March 2005 and the balance sheet at 31 March 2005. Theunaudited reconciliations (from UK GAAP to IFRS) for the income statement forthe six months ended 30 September 2004, the transitional balance sheet at 1April 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 theopening balance sheet at 1 April 2004 have been prepared in accordance withInternational Accounting Standards (IAS) and International Financial ReportingStandards (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 6367Chris Green, Finance DirectorStew Hazon, Financial ControllerAlistair Baker, Communications & PR Manager Finsbury 020 7251 3801Andrew MitchellSally 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 Operatingcosts (373.9) (4.1) (2.7) - - - - (380.7) ------- ------- ------- ------- ------- ------- ------- -------Groupoperatingprofit 204.7 (4.1) (2.7) - - - - 197.9 Share ofassociates'operatingprofit 2.2 - - - - (2.2) - -Share ofjointlycontrolledentities'operatingprofit 1.0 - - - - (1.0) - - ------- ------- ------- ------- ------- ------- ------- -------Profit onordinaryactivitiesbeforeinterest 207.9 (4.1) (2.7) - - (3.2) - 197.9 Finance (99.1) - - (3.4) - 2.9 - (99.6)costsShare ofassociatesundertakings'and jointlycontrolledentities'profit - - - - - 0.1 - 0.1 ------- ------- ------- ------- ------- ------- ------- -------Profit onordinaryactivitiesbeforetaxation 108.8 (4.1) (2.7) (3.4) - (0.2) - 98.4 Taxation on profit onordinary activities- currenttaxation (1.3) - - - - - - (1.3)- deferredtaxation (8.9) 1.2 0.8 (0.3) (13.9) - 0.1 (21.0)- share ofassociates'and jointlycontrolledentities' tax (0.2) - - - - 0.2 - - ------- ------- ------- ------- ------- ------- ------- -------Profit onordinaryactivitiesafter taxation 98.4 (2.9) (1.9) (3.7) (13.9) - 0.1 76.1 ------- ------- ------- ------- ------- ------- ------- ------- Basic earningsper share 19.1p (0.6p) (0.4p) (0.7p) (2.7p) - - 14.7p ------- ------- ------- ------- ------- ------- ------- -------Adjustedearnings pershare(excludingdeferred tax,amortisationof debt fairvalue and IAS 39adjustments) 18.1p (0.8p) (0.5p) - - - * (0.1p) 16.7p ------- ------- ------- ------- ------- ------- ------- -------Dilutedearnings pershare 19.1p (0.6p) (0.4p) (0.7p) (2.7p) - - 14.7p ------- ------- ------- ------- ------- ------- ------- -------Dividend pershare 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-currentassetsGoodwill 0.1 - - - - - - 0.1Otherintangibleassets 64.2 - - - - - - 64.2Property,plant andequipment 2,806.6 (6.3) - - - - - 2,800.3Investments injointlycontrolledentities 3.6 - - - - - - 3.6Investments inassociates 1.4 - - - - - - 1.4Otherinvestments 0.4 - - - - - - 0.4Pension 13.0 - (13.0) - - - - -asset ------- ------- ------- ------- ------- ------- ------- ------- 2,889.3 (6.3) (13.0) - - - - 2,870.0 ------- ------- ------- ------- ------- ------- ------- -------CurrentassetsInventories 4.5 - - - - - - 4.5Trade andotherreceivables 121.9 - - - - - - 121.9Cash and cashequivalents 118.0 - - - - - - 118.0 ------- ------- ------- ------- ------- ------- ------- ------- 244.4 - - - - - - 244.4 ------- ------- ------- ------- ------- ------- ------- -------TOTAL ASSETS 3,133.7 (6.3) (13.0) - - - - 3,114.4 ------- ------- ------- ------- ------- ------- ------- ------- EQUITY AND LIABILITIESEquity attributable to equity holders of the parent Issued capital 51.9 - - - - - - 51.9Share 446.3 - - - - - - 446.3premiumCash flowreserve - - - 4.3 - - - 4.3Treasuryshares (0.9) - - - - - - (0.9)Retainedearnings 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 Minorityinterest 1.1 - - - - - - 1.1 ------- ------- ------- ------- ------- ------- ------- -------TOTAL EQUITY 569.4 (5.2) (62.6) 4.3 (311.9) 36.9 (0.6) 230.3 ------- ------- ------- ------- ------- ------- ------- -------Non-currentliabilitiesInterestbearing loansand borrowings 1,929.7 - - - - - - 1,929.7Provisions 5.2 - - - - - - 5.2Deferredincome taxliabilities 167.7 (2.2) (26.8) - 311.9 - (0.2) 450.4 Pensionliability - - 76.4 - - - - 76.4Other payables 16.6 - - - - - - 16.6Interest rateswap 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 ------- ------- ------- ------- ------- ------- ------- -------CurrentliabilitiesInterestbearing loansand borrowings 73.9 - - - - - - 73.9Trade andother payables 205.5 - - - - (36.9) 0.8 169.4Income taxpayable 1.2 - - - - - - 1.2 ------- ------- ------- ------- ------- ------- ------- ------- 280.6 - - - - (36.9) 0.8 244.5 ------- ------- ------- ------- ------- ------- ------- -------TOTALLIABILITIES 2,564.3 (1.1) 49.6 (4.3) 311.9 (36.9) 0.6 2,884.1 ------- ------- ------- ------- ------- ------- ------- ------- TOTAL EQUITYANDLIABILITIES 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 operatingprofit 101.3 (2.0) (1.4) - - - 97.9 Share ofassociates'operating profit 1.1 - - - - (1.1) -Share of jointlycontrolled entities'operating profit 0.5 - - - - (0.5) - ------- ------- ------- ------- ------- ------- -------Profit on ordinaryactivities beforeinterest 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 controlledentities' profit Profit on ordinaryactivities beforetaxation 49.4 (2.0) (1.4) (3.4) - (0.2) 42.4Taxation on profit onordinary 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 controlledentities' tax (0.2) - - - - 0.2 - ------- ------- ------- ------- ------- ------- -------Profit on ordinaryactivitiesafter taxation 40.4 (1.5) (1.0) (3.1) (6.2) - 28.6 ------- ------- ------- ------- ------- ------- ------- Basic earningsper share 7.8p (0.3p) (0.2p) (0.6p) (1.2p) - 5.5p ------- ------- ------- ------- ------- ------- -------Adjusted earnings per share(excludingdeferred tax,amortisationof debt fairvalue and IAS 39adjustments) * 8.3p (0.4p) (0.3p) - - - 7.6p ------- ------- ------- ------- ------- ------- -------Dilutedearnings pershare 7.8p (0.3p) (0.2p) (0.6p) (1.2p) - 5.5p ------- ------- ------- ------- ------- ------- -------Dividend pershare 2.87p - - - - - 2.87p ------- ------- ------- ------- ------- ------- ------- * The published adjusted EPS has been restated to exclude the amortisation ofdebt 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-currentassetsGoodwill 0.2 - - - - - - 0.2Otherintangibleassets 64.2 - - - - - - 64.2Property,plant andequipment 2,737.0 (4.5) - - - - - 2,732.5Investments injointlycontrolledentities 3.5 - - - - - - 3.5Investments inassociates 1.5 - - - - - - 1.5Otherinvestments 0.4 - - - - - - 0.4Pension 13.8 - (13.8) - - - - -asset ------- ------- ------- ------- ------- ------- ------- ------- 2,820.6 (4.5) (13.8) - - - - 2,802.3 ------- ------- ------- ------- ------- ------- ------- -------CurrentassetsInventories 6.8 - - - - - - 6.8Trade andotherreceivables 117.5 - - - - - - 117.5Cash and cashequivalents 95.6 - - - - - - 95.6 ------- ------- ------- ------- ------- ------- ------- ------- 219.9 - - - - - - 219.9 ------- ------- ------- ------- ------- ------- ------- -------TOTAL ASSETS 3,040.5 (4.5) (13.8) - - - - 3,022.2 EQUITY AND LIABILITIESEquity attributable to equity holders of the parent Issued capital 51.9 - - - - - - 51.9Share 446.3 - - - - - - 446.3premiumCash flowreserve - - - 4.3 - - - 4.3Treasuryshares (0.5) - - - - - - (0.5)Retainedearnings 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 Minorityinterest 1.6 - - - - - - 1.6 ------- ------- ------- ------- ------- ------- ------- -------TOTAL EQUITY 548.4 (3.8) (61.7) 4.3 (304.3) 14.9 (0.6) 197.2 ------- ------- ------- ------- ------- ------- ------- ------- Non-currentliabilitiesInterestbearing loansand borrowings 1,875.1 - - - - - - 1,875.1Provisions 6.6 - - - - - - 6.6Deferredincome taxliabilities 164.2 (1.5) (26.4) - 304.3 - (0.2) 440.4 Pensionliability - - 74.3 - - - - 74.3Other payables 12.8 - - - - - - 12.8Interest rateswap 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 ------- ------- ------- ------- ------- ------- ------- ------- CurrentliabilitiesInterestbearing loansand borrowings 90.4 - - - - - - 90.4Trade andother payables 184.9 - - - - (14.9) 0.8 170.8Income taxpayable 5.6 - - - - - - 5.6 ------- ------- ------- ------- ------- ------- ------- ------- 280.9 - - - - (14.9) 0.8 266.8 ------- ------- ------- ------- ------- ------- ------- -------TOTALLIABILITIES 2,492.1 (0.7) 47.9 (4.3) 304.3 (14.9) 0.6 2,825.0 ------- ------- ------- ------- ------- ------- ------- ------- -TOTAL EQUITYANDLIABILITIES 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-currentassetsGoodwill 0.2 - - - - - - 0.2Otherintangibleassets 64.2 - - - - - - 64.2Property,plant andequipment 2,692.8 (2.8) - - - - - 2,690.0Investments injointlycontrolledentities 3.4 - - - - - - 3.4Investments inassociates 1.8 - - - - - - 1.8Otherinvestments 0.4 - - - - - - 0.4Pension 14.3 - (14.3) - - - - -asset ------- ------- ------- ------- ------- ------- ------- ------- 2,777.1 (2.8) (14.3) - - - - 2,760.0 ------- ------- ------- ------- ------- ------- ------- -------CurrentassetsInventories 4.8 - - - - - - 4.8Trade andotherreceivables 118.1 - - - - - - 118.1Interest rateswap - - - 3.4 - - - 3.4Cash and cashequivalents 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 LIABILITIESEquity attributable to equity holders of the parent Issued capital 51.9 - - - - - - 51.9Share 446.3 - - - - - - 446.3premiumCash flowreserve - - - (2.9) - - - (2.9) Treasuryshares (0.5) - - - - - - (0.5)Retainedearnings 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 Minorityinterest 1.9 - - - - - - 1.9 ------- ------- ------- ------- ------- ------- ------- -------TOTAL EQUITY 523.0 (2.3) (75.5) 0.4 (298.1) 24.0 (0.6) 170.9 ------- ------- ------- ------- ------- ------- ------- ------- Non-currentliabilitiesInterestbearing loansand borrowings 1,853.0 - - - - - - 1,853.0Provisions 6.3 - - - - - - 6.3Deferredincome taxliabilities 158.8 (1.0) (32.4) 0.1 298.1 - (0.2) 423.4 Pensionliability - - 93.6 - - - - 93.6Other payables 13.4 - - - - - - 13.4Interest rateswap - - - 2.9 - - - 2.9Grants 142.8 0.5 - - - - - 143.3 ------- ------- ------- ------- ------- ------- ------- ------- 2,174.3 (0.5) 61.2 3.0 298.1 - (0.2) 2,535.9 ------- ------- ------- ------- ------- ------- ------- ------- CurrentliabilitiesInterestbearing loansand borrowings 48.0 - - - - - - 48.0Trade andother payables 194.2 - - - - (24.0) 0.8 171.0Income taxpayable 5.3 - - - - - - 5.3 ------- ------- ------- ------- ------- ------- ------- ------- 247.5 - - - - (24.0) 0.8 224.3 ------- ------- ------- ------- ------- ------- ------- -------TOTALLIABILITIES 2,421.8 (0.5) 61.2 3.0 298.1 (24.0) 0.6 2,760.2 ------- ------- ------- ------- ------- ------- ------- -------TOTAL EQUITYANDLIABILITIES 2,944.8 (2.8) (14.3) 3.4 - - - 2,931.1 ------- ------- ------- ------- ------- ------- ------- ------- Northumbrian Water Group plcInternational Financial Reporting Standards (IFRS)Accounting policies The restated financial information for the year ended 31 March 2005 and theopening balance sheet at 1 April 2004 have been prepared in accordance withInternational Accounting Standards (IAS) and International Financial ReportingStandards (IFRS) issued by the International Accounting Standards Board (IASB). The financial information has been prepared on the basis of IFRS expected to bein effect for the year ended 31 March 2006. The IFRS in effect at that date maydiffer owing to decisions taken by the EC on endorsement, interpretativeguidance issued by the IASB or the International Financial ReportingInterpretations (IFRIC) and the requirements of company legislation. The Grouphas decided to adopt the amendments to IAS 19 "Employee Benefits" allowingactuarial gains and losses to be recognised in full through reserves. The Grouphas also adopted IAS 32 and 39 from 1 April 2004 The results of Northumbrian Water Group plc may change as a result of futurechanges to IFRS. The consolidated financial statements have been prepared on a historical costbasis except for derivative financial instruments that have been measured atfair value. The date of transition from accounting under UK GAAP to accountingunder IFRS is 1 April 2004. The directors consider the following accountingpolicies 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 determinedunder IFRS fully retrospectively to determine the opening IFRS balance sheet. Inorder to ease the transition to IFRS the accounting standard IFRS 1 'First-timeAdoption of International Financial Reporting Standards' includes severalexceptions to this principle, some of which are mandatory and some permissive. In preparing these preliminary statements the exemptions applied by the Group tothe restatement of historical data are as follows: Cumulative translation differences in respect of foreign operations are deemedto be zero at the date of transition. Any gains and losses on subsequentdisposals of foreign subsidiaries will exclude translation differences arisingprior to the transition date. The Group has elected to recognise all cumulative actuarial gains and losses, inequity, at the date of transition. Future actuarial gains and losses will berecognised outside the income statement through the 'Statement of RecognisedIncome 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 historiccost. The fair value, established at 23 May 2003, meets the criteria ofparagraph 19 of IFRS 1 as all assets and liabilities were measured at fair valueat 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 fromrestating business combinations before 1 April 2004 on an IFRS basis. The Group has elected to adopt IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement'with effect from 1 April 2004, rather than deferring application of thesestandards to 1 April 2005. Basis of consolidationThe consolidated financial statements include the Company and its subsidiaryundertakings. The results of subsidiaries acquired during the period areincluded from the date of their acquisition. The results of subsidiariesdisposed of during the period are included to the date of their disposal. Intersegment sales and profits are eliminated fully on consolidation. Where, forcommercial reasons, the accounting reference date of a subsidiary is a dateother than that of the Company, management accounts made up to the Company'saccounting reference date have been used. In accordance with SIC 12'Consolidation - Special Purpose Entities', the accounts of two companies areconsolidated as special purpose entities, with effect from 12 May 2004, the dateof the securitisation transaction which utilised these entities. Where necessary, adjustments are made to bring the accounting policies usedunder relevant local GAAP in the individual financial statements of the Company,subsidiaries and jointly controlled entities into line with those used by theGroup under IFRS. (a) Associates and jointly controlled entitiesInvestments in associates and jointly controlled entities in the group accountsare accounted for using the equity method of accounting where the groupexercises significant influence over the associate. Significant influence isgenerally presumed to exist where the group's effective ownership is 20% ormore. The Group's share of the post tax profits less losses of associates andjointly controlled entities is included in the consolidated income statement andthe Group's share of their net assets/liabilities is included in theconsolidated balance sheet. Goodwill arising on the acquisition of associatesand jointly controlled entities is accounted for in accordance with theaccounting policy set out below. (b) GoodwillGoodwill arising on the acquisition of subsidiary undertakings, businesses,associates and jointly controlled entities, representing the excess of the fairvalue of the consideration given over the fair value of the identifiable assetsand liabilities acquired. Following initial recognition, goodwill is measured atcost less any accumulated impairment losses. The Group has £0.2 million ofgoodwill at 1 April 2004. Prior to 1 April 2004, goodwill was amortised over itsestimated useful life; such amortisation ceased on 31 March 2004. Goodwillrelating to acquisitions from 1 April 2004 is not amortised. Goodwill isreviewed for impairment, annually or more frequently if events or changes incircumstances indicate that the carrying value may be impaired. (c) Intangible assets other than goodwillOther intangible fixed assets represent the right to receive income under theoperating agreement with the Environment Agency in respect of the Kielder Watertransfer scheme. The value of this intangible asset has been assessed withreference to the net monies raised in accordance with the 'Kieldersecuritisation' on 12 May 2004. The term of the operating agreement is inperpetuity and accordingly no amortisation is provided. The value of thisintangible is assessed for impairment on an annual basis, in accordance with IAS36 'Impairment of Assets' Research and development expenditure is charged to the income statement in theperiod 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, compriseinfrastructure assets (being mains and sewers, impounding and pumped raw waterstorage 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 anyprovision for impairment. Freehold land is not depreciated. Other assets are depreciated evenly over theirestimated economic lives, which are principally as follows: freehold buildings,30-60 years; short leasehold land and buildings, 25 years or lease term ifshorter; operational structures, plant and machinery, 4-92 years; infrastructureassets 13-200 years (see below), fixtures, fittings, tools and equipment, 4-10years. Where the remaining useful economic life of the asset is estimated to be greaterthan 50 years, an impairment review is performed at the end of each reportingperiod 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 anetwork of systems being mains and sewers, reservoirs, dams and sea outfalls.Prior to 1 April 2004, expenditure on infrastructure assets relating toincreases in capacity or enhancements to the network and on maintaining theoperating capability of the network, in accordance with defined standards ofservice, was treated as additions to fixed assets. This treatment is notpermitted under IAS 16. The opening balance for infrastructure assets wasdetermined as described under 'First time adoption' above. Infrastructure assets are included at cost less depreciation. Expenditure oninfrastructure assets which enhances the asset base is treated as fixed assetadditions whilst maintenance expenditure which does not enhance the asset baseis charged as an operating cost. Infrastructure assets are depreciated evenly to their estimated residual valuesover their estimated economic lives, which are principally as follows: Dams and impounding reservoirs 150 yearsWater mains 100 yearsSea outfalls 60 yearsSewers 200 yearsDedicated pipelines 13-15 years (e) Foreign currenciesThe functional and presentational currency of Northumbrian Water Group plc isUnited Kingdom Sterling (£). Assets and liabilities of subsidiaries and jointlycontrolled entities in foreign currencies are translated into sterling at ratesof exchange ruling at the end of the financial period and the results of foreignsubsidiaries are translated at the average rate of exchange for the period.Differences on exchange arising from the re-translation of the opening netinvestment in subsidiary companies and jointly controlled entities, and from thetranslation of the results of those companies at average rate, are taken toreserves. All other foreign exchange differences are taken to the incomestatement in the period in which they arise. (f) InventoriesInventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs, as wellas an element of overheads that have been incurred in bringing the inventoriesto their present locations and condition. Work in progress and finished goodsare 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 incomereceivable in the ordinary course of business for services provided. Revenue isrecognised to the extent that it is probable that the economic benefits willflow 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 plusan estimation of the amounts unbilled at the year end. The accrual is estimatedusing a defined methodology based upon daily average water consumption, which iscalculated based upon historical billing information. Long term contracts revenue is recognised to reflect the proportion of the workcarried out at the year end, by recording revenue as contract activityprogresses. Revenues derived from variations on contracts are recognised onlywhen they have been accepted by the customer. Interest Revenue is recognised as the interest accrues, taking into account the effectiveyield of the asset. Dividends Revenue is recognised when the shareholders' right to receive the revenue isestablished. (h) Government grants and contributionsGovernment grants are recognised at their fair value where there is reasonableassurance that the grant will be received and all attaching conditions will becomplied with. Revenue grants are credited to the income statement in the periodto which they relate. Capital grants and contributions relating to property,plant and equipment are treated as deferred income and amortised to the incomestatement over the expected useful economic lives of the related assets. (i) LeasesWhere assets are financed by leasing arrangements which transfer substantiallyall the risks and rewards of ownership to the Group, the assets are treated asif they had been purchased at their fair value or, if lower, at the presentvalue of the minimum lease payments. Rentals or leasing payments are treated asconsisting of a capital element and finance charges, the capital elementreducing the outstanding liability and the finance charges being charged to theincome statement over the period of the leasing contract at a constant rate onthe reducing outstanding liability. Rentals under operating leases (where the lessor retains substantially all therisks and rewards of ownership) are expensed in the income statement on astraight-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 ofproviding this benefit is determined using the projected unit method, withactuarial valuations being carried out at each balance sheet date. The liabilityor asset recognised in the balance sheet represents the present value of thedefined benefit obligations at the balance sheet date, less the fair value ofthe scheme assets and past service costs. The defined benefit obligation represents the estimated amount of futurebenefits that employees have earned in return for their services in current andprior periods, discounted at a rate representing the yield on a high qualitycorporate bond at the balance sheet date, denominated in the same currency asthe obligations and having the same terms of maturity as the related pensionliability, applied to the estimated future cash outflows arising from theseobligations. Actuarial gains and losses on experience adjustments and changes in actuarialassumptions are recognised in full in the period in which they occur in theSORIE. Defined contribution scheme The Group operates a defined contribution scheme for those members of staff whoare not members of its defined benefit scheme. Obligations for contributions tothe scheme are recognised as an expense in the income statement in the period inwhich they arise. (k) Share-based paymentsThe cost of equity-settled transactions with employees is measured by referenceto the fair value at the date at which they are granted and is recognised as anexpense over the vesting period, which ends on the date on which the relevantemployees become fully entitled to the award. Fair value is determined by anexternal valuer using the Monte-Carlo simulation model. In valuingequity-settled transactions, no account is taken of any vesting conditions,other than conditions linked to the price of the shares of the company (marketconditions). No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas 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'sbest estimate of the achievement or otherwise of non-market conditions and thenumber of equity instruments that will ultimately vest or in the case of aninstrument subject to a market condition, be treated as vesting as describedabove. The movement in cumulative expense since the previous balance sheet dateis 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 isdesignated as replacing a cancelled or settled award, the cost based on theoriginal award terms continues to be recognised over the original vestingperiod. In addition, an expense is recognised over the remainder of the newvesting period for the incremental fair value of any modification, based on thedifference between the fair value of the original award and the fair value ofthe modified award, both as measured on the date of the modification. Noreduction is recognised if this difference is negative. (l) Taxes Current tax Current tax assets and liabilities for the current and prior periods aremeasured at the amount expected to be recovered from or paid to the taxationauthorities. The tax rates and tax laws used to compute the amount are thosethat are enacted or substantively enacted by the balance sheet date. Deferred tax Deferred tax is provided using the liability method on temporary differences atthe balance sheet date between the tax bases of assets and liabilities and theircarrying 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 extentthat it is probable that taxable profit will be available against which thedeductible temporary differences, and the carry-forward of unused taxcredits 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 itemsaccounted for in equity. Deferred tax assets and deferred tax liabilities are offset, if a legallyenforceable right exists to set off current tax assets against current taxliabilities and the deferred taxes relate to the same taxable entity and thesame taxation authority. Value added taxRevenues, expenses and assets are recognised net of the amount of value addedtax 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 taxationauthority is included as part of receivables or payables in the balance sheet. (m) Derivative financial instrumentsThe Group utilises interest rate swaps, forward rate agreements and forwardexchange contracts as derivative financial instruments. A derivative instrument is considered to be used for hedging purposes when italters the risk profile of an underlying exposure of the Group in line with theGroup's risk management policies. Interest rate swap agreements are used tomanage interest rate exposures. With effect from 1 April 2004, derivativefinancial instruments are stated at their fair value. Under IAS 39, derivative financial instruments are always measured at fairvalue, with hedge accounting employed in respect of those derivatives fulfillingthe stringent requirements for hedge accounting as prescribed under IAS 39. Insummary, these criteria relate to initial designation and documentation of thehedge relationship, prospective testing of the relationship to demonstrate theexpectation that the hedge will be highly effective throughout its life, andsubsequent retrospective testing of the hedge to verify effectiveness. The fair value of forward exchange contracts is calculated by reference tocurrent forward exchange rates for contracts with similar maturity profiles. Thefair value of interest rate swaps is determined by reference to market valuesfor similar instruments. Hedging transactions undertaken by the company are classified as either fairvalue hedges when they hedge the exposure to changes in the fair value of arecognised asset or liability; or cash flow hedges where they hedge exposure tovariability in cash flows that is either attributable to a particular riskassociated with a recognised asset or liability or a forecasted transaction. In relation to fair value hedges, which meet the conditions for hedgeaccounting, any gain or loss from remeasuring the hedging instrument at fairvalue is recognised immediately in the income statement. Any gain or loss on thehedged item attributable to the hedged risk is adjusted against the carryingamount of the hedged item and recognised in the income statement. Where theadjustment is to the carrying amount of a hedged interest-bearing financialinstrument, the adjustment is amortised to the net profit and loss such that itis fully amortised by maturity. In relation to cash flow hedges to hedge firm commitments which meet theconditions for hedge accounting, the portion of the gain or loss on the hedginginstrument that is determined to be an effective hedge is recognised directly inequity and the ineffective portion is recognised in net profit or loss. When the hedged firm commitment results in the recognition of a non-monetaryasset or a non-monetary liability then, at the time the asset or liability isrecognised, the associated gains or losses that had previously been recognisedin equity are included in the initial measurement of the acquisition cost orother 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 incomestatement in the same periods in which the hedged firm commitment affects thenet profit and loss. For derivatives that do not qualify for hedge accounting, any gains or lossesarising from changes in fair value are taken directly to net profit or loss forthe year. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated or exercised, or no longer qualifies for special hedge accounting. Atthat point in time, any cumulative gain or loss on the hedging instrumentrecognised in equity is kept in equity until the forecasted transaction occurs.If a hedged transaction is no longer expected to occur, the net cumulative gainor loss recognised in equity is transferred to net profit or loss for the year. (n) Interest-bearing loans and borrowingsAll loans and borrowings are initially stated at the amount of the net proceeds,being fair value of the consideration received net of issue costs associatedwith the borrowing. Finance costs (including issue costs) are taken to theincome statement over the term of the debt at a constant rate on the balancesheet carrying amount. The carrying amount is increased by the finance chargesamortised and reduced by payments made in respect of the accounting period.Loans and borrowings acquired at acquisition are restated to fair value. Theadjustment arising on acquisition is amortised to the income statement on thebasis of the maturity profile of each instrument. Realised gains and losses thatoccur from the early termination of loans and borrowings are taken to the incomestatement in that period. (o) Cash and cash equivalentsCash and cash equivalents disclosed in the balance sheet comprise cash at bankand in hand and short-term deposits with an original maturity of three months orless. For the purpose of the consolidated cash flow statement, cash and cashequivalents consist of cash and cash equivalents as defined above, net ofoutstanding bank overdrafts. (p) Trade and other receivablesTrade receivables are recognised and carried at original invoice amount less anallowance for any uncollectible amounts. Invoices for unmeasured water and wastewater charges are due on fixed dates, other receivables generally have 30 daypayment terms. An estimate for doubtful debts is made when collection of thefull amount is no longer probable. Bad debts are written off when identified.Trade and other receivables do not carry any interest. (q) InvestmentsInvestments are initially recorded at cost, being the fair value of theconsideration given and including the acquisition charges associated with theinvestment. After initial recognition, investments, which are classified as held for tradingand available-for-sale are measured at fair value. Gains or losses oninvestments held for trading are recognised in income. Gains or losses onavailable-for-sale investments are recognised as a separate component of equityuntil the investment is sold, collected or otherwise disposed of, or until theinvestment is determined to be impaired, at which time the cumulative gain orloss previously reported in equity is included in income. (r) ProvisionsProvisions are recognised when the group has a present obligation (legal orconstructive) as a result of a past event, it is probable that an outflow ofresources will be required and a reliable estimate can be made of the amount ofthe obligation. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Natwest