1st Jul 2005 09:19
Scottish & Southern Energy PLC01 July 2005 SCOTTISH AND SOUTHERN ENERGY PLC INTERNATIONAL FINANCIAL REPORTING STANDARDS Scottish and Southern Energy plc ("SSE") has applied International FinancialReporting Standards adopted for use in the European Union ("IFRS") with effectfrom 1 April 2005 and will report its results for the six month period ending 30September 2005 on an IFRS basis. Its seminar for analysts and investors on thetransition to IFRS will be held on 28 September 2005 and the presentation willalso be available at scottish-southern.co.uk. SSE is on course to finalise its transition to IFRS. Its Annual Report 2005,published in May 2005, described seven areas of impact identified in respect ofthe recognition and measurement issues on conversion to IFRS, and since then SSEhas continued its preparations in respect of these and the other issues, workingclosely with its auditors, KPMG. These preparations were reviewed yesterday bythe Board of SSE and, in advance of the main presentation in September, progressin respect of the issues described in the Annual Report is set out below. Thisstatement does not include comment on specific accounting issues within theGroup's joint ventures and associates which are currently under review. Financial Instruments Under IFRS (IAS 39), financial instruments or derivatives, including contractsfor managing risks around interest rates and foreign currencies, which have beenheld off balance sheet under UK GAAP, are generally reflected at fair value onthe balance sheet. As permitted by the transitional rules set out in IFRS 1, SSE will be adoptingIAS 39 (together with IAS 32) from 1 April 2005 without retrospectiverestatement of previous years. The net effect of IAS 39 in terms of SSE'sTreasury and Energy Supply activities is expected to be mildly positive inrespect of net assets at 1 April 2005: (i) Treasury In terms of its Treasury activities, the principles of hedge accounting will beadopted where applicable. SSE believes that the application of IAS 39 willresult in a marginal decrease in net assets at 1 April 2005. (ii) Energy Supply Certain commodity contracts also fall within the definition of derivatives underIAS 39. These include contracts entered into in the course of SSE's energytrading activities for the purchase and sale of gas, coal, power and otherproducts. Contracts not meeting the criteria for 'own use' treatment must bereflected at fair value in the balance sheet. The net impact of bringing thesecontracts on to SSE's balance sheet at 1 April 2005 is likely to be positive.Over time, movements in underlying oil, gas or power prices will, however, leadto some volatility in reported results. Income Taxes Under IFRS (IAS 12) the discounting of deferred tax liabilities is no longerallowed and companies have to recognise the estimated future tax effects oftemporary differences. As a result, the deferred tax liability currently held onSSE's balance sheet will increase by just over £300m as at 31 March 2005. Property, Plant and Equipment Under IFRS (IAS 16) all fixed assets, with the exception of land, aredepreciated. Since privatisation, hydro civil assets have not been depreciatedbecause they have been considered to have an indefinite life under UK GAAP. Theexpenditure to maintain the hydro generation infrastructure, which is presentlydealt with using renewals accounting, will be reassessed, with appropriate IFRSbook value restatement, and new depreciation policies will be adopted. SSE intends to depreciate its hydro civil assets over 100 years. In futureyears, therefore, there will be a small additional depreciation charge, partlyoffset by the capitalisation of safety-related expenditure, resulting in a netadditional charge to the profit and loss account of up to £1m per annum. Employee Benefits SSE was an early adopter of the full requirements of FRS 17 for its definedbenefit pension schemes. As a result, the change to IAS 19 is not expected toresult in significant restatement, although there will be a reduction in thevalue of SSE's defined benefit pension scheme net assets as at 31 March 2005 ofthe order of £10m to £20m, to reflect minor differences in the two standards. Goodwill Under UK GAAP, SSE has amortised goodwill from business acquisitions. Under IAS36, residual goodwill balances will no longer be amortised but will instead besubject to an annual impairment review. Under transitional rules, SSE will notbe revisiting the goodwill on acquisitions made prior to 1 April 2004. On 31 March 2005, under UK GAAP, the value of goodwill on SSE's balance sheetwas £260.6m (£274.0m on 31 March 2004) and the charge for the year ended on thatdate was £15.4m. SSE intends to carry forward the balance at 31 March 2004 andwrite-back the goodwill amortised in 2004/05. SSE expects that all goodwill balances will pass the impairment tests for theforeseeable future. Share-Based Payments Under IFRS (IFRS 2) a charge is recognised on the fair value of the share-basedpayment awards. The fair value is calculated at the grant date using anoption-pricing model and the charge is spread over the vesting period but thiswill not be a material change for SSE. Emissions Rights As IFRIC 3 has been withdrawn, SSE will account for emissions at 30 September2005 in the light of discussions with other companies in the sector and what itbelieves to be best practice in accordance with the IFRS framework. Other Accounting Changes In addition to these seven issues, SSE has been addressing a number of otherimportant accounting changes stemming from the adoption of IFRS: •IAS 10 does not permit accounting for a dividend payable from the year's accounts unless that dividend has been declared before the end of the reporting year. As SSE normally declares its final dividend after its results are approved by its Board, it will not be accrued at the year end. This has the effect of increasing opening reserves at 1 April 2004 by £226m and closing reserves at 31 March 2005 by £260m, with a movement in the year of £34m. SSE will report dividend cover under IFRS, with the impact of IAS 39 (together with IAS 32), pension fund income and deferred tax being adjusted out. •SSE does not believe, based on it's current assessments, that any of its long term power purchase contracts would be classified as finance leases under IAS 17 and IFRIC 4. •Under IAS 32, which SSE will adopt in conjunction with IAS 39 from 1 April 2005, the convertible bond entered into in November 2004 will need to be split into debt and equity components which will result in a small increase to net assets and a small reduction in net debt. •The new standards require that the investors' share of the results of equity accounted joint ventures and associates, such as Scotia Gas Networks in the case of SSE, be disclosed on the face of the profit and loss account as a single line of profit after interest and tax. Nevertheless, given the importance of the contributions from joint ventures and associates to SSE, sufficient information will be provided to allow operating profit to be calculated on a basis that is consistent with previous statements. Summary The net impact on SSE of these changes on the net assets at 1 April 2005 isexpected to be immaterial with the negative adjustment for deferred tax beingoffset by the removal of the final dividend and a small net positivemark-to-market asset under IAS 39. Furthermore, it is likely that net debt at 1April 2005 will be marginally lower, as a consequence of the revised treatmentof the convertible bond. Similarly, the impact on the income statement for the year to 31 March 2005 isalso not likely to be significant, with the removal of the charge foramortisation of goodwill being the most significant amendment. SSE will continue to focus attention on underlying earnings. Currently this isbefore any goodwill write-off, pension fund income and deferred tax. Followingthe adoption of IFRS, the goodwill amortisation will not be required but anyincome statement impact of IAS 39 (together with IAS 32) accounting will also beadjusted out. While the transition to IFRS will lead to important changes in the way in whichSSE's results are presented, SSE continues to believe that its adoption will nothave any impact on its dividend policy. The IFRSs that will be effective (or available for early adoption) in the annualfinancial statements for the year ended 31 March 2006 are still subject tochange and to additional interpretations and therefore cannot be determined withcertainty. Accordingly, the accounting policies for that year will be determinedfinally only when the annual financial statements are prepared. Enquires to: Alan Young, Director of Corporate Communications 0870 900 0410Denis Kerby, Investor and Media Relations Manager 0870 900 0410 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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