28th Sep 2005 07:02
Scottish & Southern Energy PLC28 September 2005 Scottish & Southern Energy plc Update on the adoption of International Financial Reporting Standards 28 September 2005 IFRS Transition Statement Restatement and seminar Scottish and Southern Energy plc ("SSE") has adopted International FinancialAccounting Standards ("IFRS") with effect from 1 April 2005. The first resultsto be reported under IFRS will be the interim financial statements for the sixmonth period ending 30 September 2005 which will be reported in November 2005. This statement has been issued to present and explain the unaudited consolidatedresults of SSE, restated from UK Generally Accepted Accounting Principles ("UKGAAP") to IFRS, for the year to 31 March 2005, and the balance sheet at thetransition date of 1 April 2004. It expands on the statement issued on 1 July 2005 which commented upon theprogress being achieved on transition to IFRS and on the main areas impacted bythis transition. That announcement did not include comment on the impact of IFRSon SSE's jointly controlled entities and associates, which this statement nowdoes. SSE has applied the IFRS 1 exemption with relation to the application of IAS 32and IAS 39 to comparative information and will, instead, apply these standardsprospectively from 1 April 2005. Details on the impact of the initialapplication of these standards at 1 April 2005 are included within thisstatement. SSE's trading for the six months to 30 September 2005 is in line withexpectations. There will be an analysts' presentation starting at 09:30 UK time at the officesof Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB. Webcast facility: This is available by going to: www.scottish-southern.co.uk Telephone conference call: 0930, Wednesday 28 September 2005 UK: 0845 146 2004 International: +44 (0) 1452 569 393 Replay facility (for one week) UK: 0845 245 5205 International: +44 (0) 1452 550 000 Pin number: 9171458 # Enquiries to: Scottish and Southern Energy plcAlan Young - Director of Corporate Communications + 44 (0)870 900 0410Denis Kerby - Investor and Media Relations Manager + 44 (0)870 900 0410 Financial DynamicsAndrew Dowler + 44 (0)20 7831 3113 The preparation of financial statements that conform with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgement in the process of applying the Group's accountingpolicies. The areas requiring a higher degree of judgement or complexity, orareas where assumptions and estimates are significant to the consolidatedfinancial statements, will have additional notes disclosing the information. Contents Page Summary 4 Introduction 5 - 6 Analysis of key impacts 7 - 8 Other impacts 9 - 10 Reconciliation of the Group Income Statement under UK GAAP to IFRS for the year ended 31 March 2005 11 Reconciliation of the Group Balance Sheet under UK GAAP to IFRS at 1 April 2004 12 Reconciliation of the Group Balance Sheet under UK GAAP to IFRS at 31 March 2005 13 Group Cash Flow Statement under IFRS for the year ended 31 March 2005 14 Summary of impact of IAS 32 and IAS 39 at 1 April 2005 15 - 16 Reconciliation of the Group IFRS Balance Sheet from 31 March to 1 April 2005 17 Dates for further announcements 18 Summary The transition to IFRS from UK GAAP represents a significant change to SSE'saccounting policies. This statement explains the impact of this change prior tothe publication of its interim financial statements for the six month period to30 September 2005, the first results reported under IFRS. In explaining the impact of this change, it is important to stress that theadoption of IFRS, while a significant change in accounting, will not changeSSE's: • Business model; • Risk management strategies; • Operational activities; • Ability to generate cash; or, • Dividend policy. As a result, this statement concentrates on the main accounting changesintroduced by the adoption of IFRS, which, among others, impact materially onthe following areas: • Deferred Taxation; • Dividends; • Goodwill; • Property, Plant and Equipment; and, • Share based payments. The changes relate to the recognition and valuation of assets and liabilities onSSE's Balance Sheet, and also have an impact on the timing of charges andcredits to the Income Statement. In addition to the aforementioned, the adoption of IAS 32 Financial Instruments:Disclosure and Presentation and IAS 39 Financial Instruments: Recognition andMeasurement from 1 April 2005 requires SSE to recognise the fair value offinancial instruments, including certain commodity and treasury contracts, onthe Balance Sheet. This will introduce some volatility to future IncomeStatements. IAS 32 will also affect the treatment of SSE's convertible debt. The main financial impacts of conversion to IFRS can be summarised thus: Under IFRS Under Change Change UK GAAP Year ended 31 March 2005: £m £m £m % Underlying PBT (see page 6) 719.7 714.8 4.9 +0.7% Profit before taxation 789.3 785.3 4.0 +0.5% Profit after taxation 559.7 543.1 16.6 +3.1% At 31 March 2005:Net Assets 1,858.5 1,901.9 (43.4) -2.3% The adoption of IFRS will have no impact on cash flow and the Group's underlyingfinancial position is unaffected. Its distributable reserves under UK GAAP arelargely unaffected by IFRS resulting in no impact on SSE's dividend policy. Introduction SSE has to date prepared and published its consolidated financial statements inaccordance with UK Generally Accepted Accounting Principles ("UK GAAP"). As a listed company, it is required to present its consolidated financialstatements in accordance with EU-adopted IFRS and International AccountingStandards ("IAS"). These are collectively referred to within this document as "IFRS". SSE will, therefore, adopt IFRS for the first time for its consolidatedfinancial statements for the period commencing 1 April 2005. Consequently, thefirst published interim results under IFRS will be for the six month period to30 September 2005, to be published in November 2005. Overview The purpose of this statement is to present and explain how SSE's financialstatements reported under UK GAAP for the year to 31 March 2005 will differunder IFRS. Therefore, detailed reconciliations of the following are included: • Income statement for the year ended 31 March 2005; • Balance Sheet at 1 April 2004; • Balance Sheet at 31 March 2005; and, • Cash Flow for the year ended 31 March 2005. This financial information does not include any adjustments in respect of IAS 32and IAS 39, which are being applied prospectively from 1 April 2005 inaccordance with the transitional arrangements of IFRS 1. The impact of theadoption of these standards has been separately commented upon in this statementat pages 15 to 17. Basis of preparation 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 bedetermined finally only when the annual financial statements are prepared. In adopting IFRS for the first time, SSE is complying with IFRS 1 First TimeAdoption of IFRS, which states that a company should use the same accountingpolicies in its opening IFRS balance sheet and throughout all periods presentedin its first IFRS financial statements. In applying IFRS 1, however, SSE hastaken advantage of the following exemptions contained within the standard: • Financial Instruments: SSE has elected not to prepare comparative information in accordance with IAS 32 and IAS 39. The standards will be adopted from 1 April 2005. As a result, the comparative information contained in this statement and in the 2006 IFRS financial statements will be presented on the existing UK GAAP basis. A reconciliation from the closing balance sheet at 31 March 2005 and the opening balance sheet at 1 April 2005 is included at page 17 to this statement. • Business Combinations: SSE has elected not to restate business combinations prior to the transition date of 1 April 2004. As a result only business combinations that have occurred during the year ended 31 March 2005 and subsequently will be accounted for in line with IFRS 3 Business Combinations. • Property, Plant and Equipment: SSE has identified the carrying value of the Hydro Civil Assets acquired in 1990, at privatisation and rolled this balance forward for additions and depreciation based on a useful economic life of 100 years to arrive at the IFRS net book value. • Share-based payments: SSE has applied IFRS 2 Share Based Payments to all grants of equity instruments after 7 November 2002 that had not vested by 1 January 2005. This statement has been prepared on the basis of all applicable EU-approvedIFRSs published by 31 March 2005 and anticipated to be approved by the time theGroup publishes its results for the year ended 31 March 2006. This includes thefollowing standards and interpretation which are awaiting formal endorsement bythe EU: • IFRIC 4 Determining Whether an Arrangement Contains a Lease; and, • The revision to IAS 19 Employee Benefits issued in December 2004. The full consolidated financial statements for the year end 31 March 2006 willbe prepared in accordance with extant EU adopted International FinancialReporting Standards (IFRS). Underlying Profit The Group will continue to focus on underlying profit as the primary measure offinancial performance. This is calculated by adjusting profit before taxationfor net finance income from pension assets, the impact of IAS 32 and IAS 39,taxation on profits from jointly controlled entities and associates and itemspreviously disclosed as exceptional. The following table illustrates how underlying profit for the year ended 31March 2005 has been calculated under UK GAAP and the changes to this calculationwhich will arise following the conversion to IFRS. UK GAAP IFRS Year Ended 31 March 2005 £m £m Profit Before Taxation (PBT) 785.3 789.3 Exceptional items: - Settlement claim from TXU (133.5) (133.5) - Peterhead impairment charge 61.0 61.0 PBT before exceptionals 712.8 716.8 - Net income from pension funds (13.4) (12.4) - Goodwill 15.4 - - Tax on Jointly Controlled Entities and Associates - 15.3 - IAS 39 / 32 fair value gains / losses - - Underlying PBT 714.8 719.7 Analysis of Key Impacts Presentation of Financial Statements In restating the financial statements under IFRS, the format of the Group IncomeStatement and Group Balance Sheet have been prepared in accordance with therequirements of IAS 1 Presentation of Financial Statements. Main IFRS remeasurements The following explains the significant accounting remeasurements to amountspreviously reported under UK GAAP for the Group. • Dividends Under UK GAAP, proposed dividends are recognised in the year in which theprofits to which they relate are earned. IAS 10 Events after the Balance SheetDate requires that dividends should not be accrued until the date at which theyare declared. As SSE normally approves its final dividend after its results arepublished, final dividends will not be accrued at the year end. Consequently, this has the effect of increasing opening net assets at 1 April2004 by £226.1m and closing net assets at 31 March 2005 by £260.0m, with amovement in the year of £33.9m. • Income taxes Under UK GAAP, deferred tax is provided on timing differences whereas, under IAS12 Income Taxes, provision must be made based on temporary differences betweencarrying values and the related tax base of assets and liabilities except incertain circumstances. The net impact of this is to increase the provision fordeferred taxation by £0.2m at 1 April 2004 and by £3.5m at 31 March 2005,excluding the acquisition impact of the acquired Fiddler's Ferry and Ferrybridgeassets (see Business Combinations, page 8). More significantly for SSE, under UK GAAP, it had elected to recognise deferredtax on a discounted basis. This is not permitted by IFRS and has been restatedaccordingly. This is of importance to utility businesses where any reversal oftiming differences is likely to occur far into the future given the long livesof the assets affected. The effect of removing the discounting applied is toincrease the provision for deferred taxation by £311.6m at 1 April 2004 and£311.0m at 31 March 2005. As a result of these amendments, SSE's net assets under IFRS at 1 April 2004 arereduced by £311.8m. Similarly, the net assets at 31 March 2005 have been reducedby £314.5m for the same reason. An additional charge of £2.7m has been reflectedin the Income Statement for the year ended 31 March 2005. • Goodwill Under UK GAAP, goodwill is amortised over its estimated useful economic life.Under IFRS, this is prohibited by IFRS 3 Business Combinations which insteadrequires an annual impairment review to be carried out in accordance with IAS 36Impairment of Assets. At the transition date of 1 April 2004, the net balance of goodwill recognisedhas been maintained with no further amortisation to be charged. However, thebalance of goodwill is thereafter subject to a mandatory impairment review on atleast an annual basis. Assessments for impairment of goodwill were conducted atthe transition date and at March 2005 and no impairment was required. Therefore,the goodwill amortisation charge for the year ended 31 March 2005 of £15.4m hasbeen reversed in the Income Statement. • Property, Plant and Equipment The main change for SSE resulting from the adoption of IAS 16 Property, Plantand Equipment relates to the accounting for the hydro generation civilinfrastructure. Under UK GAAP, the hydro generation civil infrastructure, including the dams,tunnels and other hydro civil engineering structures, was considered to have anindefinite life and was not subject to depreciation. Expenditure to maintain thehydro generation civil infrastructure was dealt with using the renewalsaccounting paragraphs of FRS 15 Tangible Fixed Assets. Under IAS 16 Property, Plant and Equipment, this treatment is prohibited. UnderIFRS, all items of property, plant and equipment should be subject todepreciation, with the exception of land. Furthermore, renewals accounting isnot permitted. As a result all aspects of accounting for these assets andexpenditures have been amended to be compliant with IFRS. The accountingpolicies applied under UK GAAP for all other fixed assets are compliant with IAS16 and continue to remain appropriate. SSE has, therefore, identified the carrying value of the hydro generation civilinfrastructure assets acquired in 1990 on privatisation and rolled this balanceforward for additions and depreciation based on a useful economic life of 100years. The overall effect is to increase net assets by £3.4m at 1 April 2004,the date of transition, with an additional net charge of £1.1m in the year ended31 March 2005 being recognised. Qualifying expenditure on these assets will becapitalised and depreciated over the useful life of the assets. • Share based payments Under UK GAAP, Inland Revenue-approved "save as you earn schemes", such as SSE'sshare-save scheme, did not result in a charge being taken to the profit and lossaccount. Other employee share schemes were accounted for on an intrinsic valuebasis. Under IFRS 2 Share Based Payments, all grants of equity instruments arerequired to be measured at fair value, with an appropriate charge being made tothe income statement in the appropriate accounting period. SSE has elected to adopt the provisions of IFRS 1 which allow first timeadopters to apply the rules of IFRS 2 only to options granted after 7 November2002 and which had not vested by 1 January 2005. The standard requires SSE to spread the fair value of share-based payments suchas the Sharesave Scheme, the Saving Incentive Plan (SIP) and the Deferred BonusScheme across the period between the granting date and the vesting date of theaward. The net impact of applying both aspects of the standard has been to increaseSSE's operating profit in the year ended 31 March 2005 by £6.4m. Other impacts There are a number of less significant impacts of IFRS transition which areexplained below. • Pensions Under UK GAAP, SSE adopted full disclosure under FRS 17 Retirement Benefits in2002. IFRS requires that the retirement and other benefits are accounted for inaccordance with the revised version of IAS 19 Employee Benefits. Under IAS 19the method of accounting for pension scheme asset and liabilities, actuarialgains and losses and income and charges associated with such schemes is verysimilar to FRS 17. However, there are some changes to the accounting requirements under IAS 19.Firstly, IAS 19 requires scheme assets to be valued at a bid price rather than amid market valuation and therefore, the net pension liabilities at 1 April 2004and 31 March 2005 are increased by £12.6m and £15.8m respectively. This rebasinghas increased other finance costs under IAS 19 by £1.0m in the year to 31 March2005. Surpluses or deficits on SSE's schemes will be reported gross on the faceof the Balance Sheet rather than net of deferred tax, as is the practice underUK GAAP. The related deferred tax liability or asset will be reported separatelywithin Non Current Tax Liabilities or Assets. SSE will not be adopting the corridor approach under IAS 19 and will continue toreport the full surplus or deficits associated with its pension schemes, withactuarial gains and losses being recognised through equity via the Statement ofRecognised Income and Expense. • Non Current Assets Held for Sale SSE has adopted IFRS 5 Non-current Assets and Discontinued Operations. Thisrequires the reclassification and, in certain instances, revaluation of certainassets or businesses which have been identified as being held for disposalduring the financial reporting period. This has required the reclassification of certain assets (surplus property,carried at £2.3m) within Non Current Assets at 1 April 2004. There was no suchadjustment required as at 31 March 2005. • Business combinations Under UK GAAP, certain entities, of which SSE owns a 50% equity share, arerecognised as quasi-subsidiaries by the nature of their structure andoperations. Under IFRS, this is not a recognised form of investment andaccordingly these entities are identified and accounted for as subsidiaries.This will have no impact on the consolidation treatment for these entities. Under IFRS 1, SSE has elected not to restate business combinations accounted forprior to 1 April 2004. The acquisitions subsequent to this date, namely theAtlantic Electric and Gas supply business, the Fiddler's Ferry and Ferrybridgepower stations and the Eastern Contracting business, are required to be restatedto comply with IFRS 3 Business Combinations. In doing so, different values havebeen identified for deferred taxation and goodwill. The impact of these changeson net assets is zero and the adjustments, netting to zero, are shown in aseparate column within the restated 31 March 2005 Balance Sheet (page 13). • Associates and Joint Controlled Entities Under UK GAAP,SSE's share of the operating profit, interest and taxation ofassociates and joint ventures has been reported separately on the face of theIncome Statement. Under IFRS, SSE's share of post-tax profits of associates andjointly controlled entities is reported as a single line item. SSE intends todisclose such information as to allow continued reporting of total operatingprofit including the operating results of these entities. The reclassificationsmade are separately identified in the revised Income Statement at page 11. Inaddition to this, an adjustment in relation to deferred taxation under IAS 12requires a £0.4m reduction to the opening carrying value of investments injointly controlled entities. SSE will continue to use equity accounting for jointly controlled entities aspermitted by IAS 31 Interests in Joint Ventures. • Leases IFRIC 4 provides specific guidance as to whether an arrangement contains alease. The guidance is mandatory for accounting periods beginning on or after 1January 2006 but SSE has elected to early adopt it from 1 April 2004. Followingthe guidance within IFRIC 4, certain long-term power purchase agreements held bySSE have been identified as being leases. These leases were then assessedagainst the criteria contained within IAS 17 Leases to determine whether thesearrangements were operating or finance leases. Following this assessment, SSE has concluded that it does not have any long-termpower purchase agreements which require to be classified as finance leases.Additional disclosure around these agreements reclassified as operating leaseswill be provided under the guidance within IAS 17. • Intangible Assets Under IAS 38 Intangible Assets, SSE has reclassified the software licence anddevelopment costs incurred since 1 April 2000, which met the criteria forcapitalisation under IAS 38 and which were expensed under UK GAAP, as IntangibleAssets. SSE's policy for amortisation of these assets is to amortise these over a periodof five years. As a result, net assets at 1 April 2004 and 31 March 2005 havebeen increased by £4.9m and £4.5m, respectively, while the Income Statement inthe year ended 31 March 2005 has been adjusted by an additional net charge of£0.4m. • Exceptional Items In the UK GAAP accounts to 31 March 2005, the Group identified two exceptionalitems - a charge and a credit - on the face of the Profit and Loss Account. The Group will present sufficient information on the Income Statement toidentify these items and facilitate comparable presentation of results. • Current Asset Investments The assets previously disclosed as Current Asset Investments under UK GAAP havebeen redesignated as either Available For Sale Investments, in the case oflisted equities, or Cash Equivalents, in the case of short-term deposits. Reconciliation of the Group Income Statement under UK GAAP to IFRSfor the year ended 31 March 2005 IAS 12 IAS 10 IAS IAS 19 IAS 38 IAS 36 IAS 28 Deferred Dividend IFRS 16 and 31 Reclass- UK GAAP tax 2 HCA Pension Intangibles Goodwill ification IFRS £m £m £m £m £m £m £m £m £m £m £m Group and share 7,482.8 (58.2) 7,424.6of joint venturesJoint ventures (58.2) 58.2 - Revenue 7,424.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7,424.6 Cost of salesbefore assetimpairment (6,256.1) (1.1) (6,257.2)Asset impairment (61.0) (61.0)charge Cost of sales (6,317.1) (1.1) (6,318.2)Gross profit 1,107.5 0.0 0.0 0.0 (1.1) 0.0 0.0 0.0 0.0 0.0 1,106.4Distribution and (429.0) 6.4 (0.4) 15.4 (407.6)administrativecostsClaim settlement 111.2 111.2Operating Profitbefore JCEs/associates 789.7 0.0 0.0 6.4 (1.1) 0.0 (0.4) 15.4 0.0 0.0 810.0 Share of JointlyControlledEntities/Associatesoperating profit 50.8 50.8before claimssettlementClaim settlement 22.3 22.3 Share ofoperating profitof JCEs/ 73.1 73.1associates Share of JCEs/Associateinterest / tax - (25.8) (25.8)before claimsettlementTax on share of - (6.7) (6.7)claim settlement Share of interestand tax on JCEs/associates - (32.5) (32.5) Share of JCEs / 73.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (32.5) 0.0 40.6associates Operating profit 862.8 0.0 0.0 6.4 (1.1) 0.0 (0.4) 15.4 (32.5) 0.0 850.6Net finance costs (73.7) 12.4 (61.3)Joint Controlled (17.2) 17.2 -Entities /AssociatesOther finance 13.4 (1.0) (12.4) -income Profit before 785.3 0.0 0.0 6.4 (1.1) (1.0) (0.4) 15.4 (15.3) 0.0 789.3taxation Taxationexcluding impactof impairmentcharge and claimsettlements (215.0) (2.7) 8.6 (209.1)Taxation impactof impairmentcharge and claim (27.2) 6.7 (20.5)settlements Income tax (242.2) (2.7) 15.3 (229.6)expense Profit after 543.1 (2.7) 0.0 6.4 (1.1) (1.0) (0.4) 15.4 0.0 0.0 559.7taxationEquity minorityinterests insubsidiary 0.1 0.1undertakings Profit for the 543.2 (2.7) 0.0 6.4 (1.1) (1.0) (0.4) 15.4 0.0 0.0 559.8financial year Dividends (364.7) 33.9 (330.8) Transferred to 178.5 (2.7) 33.9 6.4 (1.1) (1.0) (0.4) 15.4 0.0 0.0 229.0reserves Reconciliation of the Group Balance Sheet under UK GAAP to IFRSas at 1 April 2004 IAS IAS 19 IAS 38 IAS IFRS IFRS 5 IAS 12 IAS 10 16 31 UK GAAP Reclass Resale Def Tax Dividend HCA Pensions Intang's JVs IFRS £m £m £m £m £m £m £m £m £m £mAssetsIntangible Assets - Goodwill 274.0 274.0 - Other intangible - 4.9 4.9assetsProperty, plant & 4,139.1 (2.3) 3.4 4,140.2equipmentInvestments under equity 197.0 (0.4) 196.6methodAvailable for sale - 2.9 2.9InvestmentsRetirement benefit assets - 75.3 75.3Deferred tax asset - 81.3 81.3Held for Resale - 2.3 2.3 Non-current assets 4,610.1 2.9 0.0 0.0 0.0 3.4 156.6 4.9 (0.4) 4,777.5 Inventories 46.0 46.0Trade and other 736.9 736.9receivablesCurrent asset investments 21.8 (21.8) -Cash and cash equivalents 6.5 18.9 25.4 Current assets 811.2 (2.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 808.3 Total assets 5,421.3 0.0 0.0 0.0 0.0 3.4 156.6 4.9 (0.4) 5,585.8 LiabilitiesLoans and other - (82.4) (82.4)borrowingsTrade and other payables (1,307.8) 192.7 226.1 (889.0)Current tax liabilities - (85.4) (85.4)Deferred income - (24.9) (24.9)Short-term provisions - - Current liabilities (1,307.8) 0.0 0.0 0.0 226.1 0.0 0.0 0.0 0.0 (1,081.7) Loans and other (1,652.3) 289.3 (1,363.0)borrowingsDeferred tax liabilities (512.7) (311.8) (22.6) (847.1)Long-term provisions (96.0) (96.0)Deferred Income - (289.3) (289.3)Retirement benefit (124.4) (146.6) (271.0)obligations Non-current liabilities (2,385.4) 0.0 0.0 (311.8) 0.0 0.0 (169.2) 0.0 0.0 (2,866.4) Total liabilities (3,693.2) 0.0 0.0 (311.8) 226.1 0.0 (169.2) 0.0 0.0 (3,948.1) Net assets 1,728.1 0.0 0.0 (311.8) 226.1 3.4 (12.6) 4.9 (0.4) 1,637.7 EquityShare capital 428.7 428.7Share premium 72.6 72.6Capital redemption 13.7 13.7reserveRetained earnings 1,213.4 (311.8) 226.1 3.4 (12.6) 4.9 (0.4) 1,123.0 Equity attributable toequity holders of theGroup 1,728.4 0.0 0.0 (311.8) 226.1 3.4 (12.6) 4.9 (0.4) 1,638.0 Minority interest (0.3) (0.3) Total equity 1,728.1 0.0 0.0 (311.8) 226.1 3.4 (12.6) 4.9 (0.4) 1,637.7 Reconciliation of the Group Balance Sheet under UK GAAP to IFRSas at 31 March 2005 IFRS IAS 12 IAS 10 IFRS IAS IAS 19 IAS 38 IFRS 3 IFRS 3 IAS 2 16 Combin- 31 UK GAAP Reclass Def Tax Div'ds HCA Pensions Intang's Goodwill ations JVs IFRS £m £m £m £m £m £m £m £m £m £m £m £mAssetsIntangible assets 0.0 - Goodwill 260.6 15.4 17.5 293.5 - Other 8.2 4.5 12.7intangible assetsProperty, plant & 4,383.8 2.3 4,386.1equipmentInvestments under 213.8 (0.4) 213.4equity methodRetirement - 98.9 98.9benefit assetsDeferred tax - 97.9 97.9asset Non-current 4,866.4 0.0 0.0 0.0 0.0 2.3 196.8 4.5 15.4 17.5 (0.4) 5,102.5assetsInventories 134.1 134.1Trade and other 1,073.7 1,073.7receivablesCurrent asset 218.5 (218.5) 0.0investmentsCash and cash 13.7 218.5 232.2equivalents Current assets 1,440.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,440.0 Total assets 6,306.4 0.0 0.0 0.0 0.0 2.3 196.8 4.5 15.4 17.5 (0.4) 6,542.5 LiabilitiesLoans and other - (28.9) (28.9)borrowingsTrade and other (1,700.8) 182.0 260.0 5.1 (1,253.7)payablesCurrent tax - (138.0) (138.0)liabilitiesDeferred income - (15.1) (15.1) Current (1,700.8) 0.0 0.0 260.0 5.1 0.0 0.0 0.0 0.0 0.0 0.0 (1,435.7)liabilitiesLoans and other (1,918.4) 266.3 (1,652.1)borrowingsDeferred tax (530.4) (314.5) (29.7) (17.5) (892.1)liabilitiesLong-term (111.3) (111.3)provisionsDeferred income - (266.3) (266.3)Retirement (143.6) (182.9) (326.5)benefitobligations Non-current (2,703.7) 0.0 (314.5) 0.0 0.0 0.0 (212.6) 0.0 0.0 (17.5) 0.0 (3,248.3)liabilities Total liabilities (4,404.5) 0.0 (314.5) 260.0 5.1 0.0 (212.6) 0.0 0.0 (17.5) 0.0 (4,684.0) Net assets 1,901.9 0.0 (314.5) 260.0 5.1 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,858.5 EquityShare capital 429.4 429.4Share premium 81.6 81.6Capital 13.7 13.7redemptionreserveRetained earnings 1,199.1 (311.8) 226.1 3.4 (14.8) 4.9 (0.4) 1,106.5 - current year 178.5 (2.7) 33.9 5.1 (1.1) (1.0) (0.4) 15.4 227.7 Equityattributable toequity holders of 1,902.3 0.0 (314.5) 260.0 5.1 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,858.9the Group Minority interest (0.4) (0.4) Total equity 1,901.9 0.0 (314.5) 260.0 5.1 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,858.5 Group Cash Flow Statement under IFRS for the year ended 31 March 2005 The consolidated cash flow statement under IFRS is substantially the same asunder FRS 1 Cash Flow Statements in UK GAAP. There are, however, certaindifferences with regard to the classification of items within the cash flowstatement. With regard to the definition of cash and cash equivalents,short-term deposits of £18.9m (at 1 April 2004) and £218.5m (at 31 March 2005),which had been described as liquid resources under UK GAAP, are treated as cashequivalents under IFRS. This increases the net increase in cash from £4.6m underUK GAAP to £204.1m under IFRS. The consolidated statement of cash flows under IFRS is set out below: Year ended 31 March 2005 £mOperating activitiesCash generated from operations 1,150.7Dividends received from jointly controlled entities 12.5Interest paid (92.5)Interest received 20.5Income taxes paid (152.9) Net cash from operating activities 938.3 Investing activitiesPurchase of property, plant and equipment (345.0)Deferred income received 7.9Deferred income paid (4.8)Proceeds from sale of property, plant and equipment 19.5Proceeds from sale of 'available for sale' investments 2.9Loans to jointly controlled entities (1.0)Loans repaid by jointly controlled entities 10.8Loans repaid by associates 2.7Purchase of businesses and subsidiaries (339.0) Net cash used in investing activities (646.0) Financing activitiesIssue of share capital 9.7Dividends paid to company's equity holders (330.8)Net proceeds from borrowings 233.0 Net cash from financing activities (88.1) Net increase in cash and cash equivalents 204.2 Cash and cash equivalents at 1 April 2004 23.6Net increase in cash and cash equivalents 204.2 Cash and cash equivalents at 31 March 2005 227.8 Summary of impact of IAS 39 and IAS 32 at 1 April 2005 General SSE will adopt IAS 39 and IAS 32 in full from 1 April 2005. These standards setout the accounting rules for the treatment, measurement and disclosure offinancial instruments. Under the definition of financial instruments in IAS 39, certain commoditycontracts are required to be treated as derivatives, with other aspectsimpacting on the disclosure of loans and borrowings, investments and cash. Underprevious UK GAAP, there was no standard with equivalent scope and accordinglythe first-time adoption of these standards is complex. The adoption of these standards has most impact on SSE's Energy Supply andTreasury activities. Energy Supply IAS 39 does not apply to commodity contracts that are held for SSE's 'own use'requirements, although the definition of 'own use' is very narrow. Suchcontracts continue to be accounted for under accruals accounting. Apart from own use contracts, all derivatives must be recognised at fair valuewith changes in value being recognised in the income statement, with theexception of contracts which qualify for cash flow hedge accounting treatment. Under cash flow hedge accounting, movements on the effective portion of thehedge are recognised through a special hedge reserve, while any ineffectivenessis taken to the income statement. The impact of this is to minimise the impactof fair value movements to the income statement and, hence, reduce potentialvolatility. The fair values applied to the contracts which require to be so treated arebased on forward price curves generated from a combination of published marketdata and, for periods where such data is not available, internal valuationtechniques. The values attributed to the balance sheet are based on the presentvalue of the differences between contract prices and these forward curves. The adoption of IAS 39 will not change SSE's hedging policies. It remains thecase that fuel and power contracts are entered into to meet the demands of itscustomers and the generation requirements of its power stations. Under IAS 39,the same net charge or credit to the income statement will be recognised overthe life of a contract as would be under UK GAAP. It is the timing of thoseentries that is different under IAS 39 and it is that which can provide thepotential for volatility in future income statements. The financial impact of this approach (net of the associated deferred tax impactof £39.1m) has been to increase opening net assets at 1 April 2005 by £91.0m,comprising £34.4m credited to the hedging reserve and £56.6m credited toretained earnings. Treasury IAS 39 also applies to SSE's Treasury activities and impacts the treatment ofits loans, borrowings and derivatives. Under IAS 39, loans and borrowings are carried at amortised cost. Derivativesare, however, recognised separately on the balance sheet at fair value withmovements in those fair values being reflected through the income statement. Qualifying interest rate derivatives are accounted for according to 'cash flow'hedging rules, as described above, or under 'fair value' hedge accounting rules.'Fair value' hedge accounting requires both the fair value of the hedged itemand the hedging instrument to be recognised on the balance sheet, with movementson both being recognised through the income statement. Furthermore, certainforeign exchange transactions are accounted for under the 'cash flow' hedgeaccounting rules previously described. The financial impact of this approach (net of the associated deferred tax impactof £13.1m) has been to reduce opening net assets at 1 April 2005 by £30.5m,comprising £16.1m debited to the hedging reserve and £14.4m debited to retainedearnings. Scotia Gas Networks In addition to the derivatives held by its Treasury function, the impact of theGroup's share of the contingent interest rate swap held by Scotia Gas NetworksLimited, of which the Group owns 50%, has been recognised at 1 April 2005. Scotia Gas Networks Limited's purchase of the gas networks in Scotland and theSouth of England completed at 1 June 2005. At 1 April 2005, however, theacquisition remained contingent on final approval by Ofgem and the Health andSafety Executive. As a result, the aforementioned swap was contingent on thesuccess of the consortium's proposed purchase. The derivative was valued as being £109.3m 'out of the money' before tax at thedate of conversion. SSE's share of this was therefore £54.7m. As a result of these transactions, SSE has recognised a further financialliability of £38.3m (net of the associated deferred tax of £16.4m) relating toits 50% share of this derivative. Convertible debt Under UK GAAP, SSE's convertible debt was accounted for as part of net debt andwas shown as a liability on the balance sheet. IAS 32 requires this compoundinstrument to be split into its debt and equity elements, with the debt elementbeing measured at fair value. This will increase interest charged to the incomestatement over the term of the debt and has the impact of increasing net assets,by reducing borrowings, and increasing shareholders' equity, by £14.6m at 1April 2005. Combined impact of changes Table 1, below, shows the effect on SSE of the implementation of IAS 39 and IAS32 at 1 April 2005. These adjustments reflect the incremental impact on SSE's UKGAAP balance sheet at 31 March 2005. Table 1 Commodity Treasury Scotia Gas Convertible TOTAL Contracts Contracts Networks Debt £m £m £m £m £m IAS 39 asset / (liability) 130.1 (43.6) (54.7) 31.8Deferred tax liability / (asset) (39.1) 13.1 16.4 (6.2) (15.8)Borrowings 20.8 20.8 Total net assets / (liability) 91.0 (30.5) (38.3) 14.6 36.8 Fair value deferred in hedge reserves 34.4 (16.1) 18.3Fair value deferred in retained 56.6 (14.4) (38.3) 3.9earningsShareholders' equity 14.6 14.6 Shareholders' funds 91.0 (30.5) (38.3) 14.6 36.8 The combined incremental impact to SSE's balance sheet of the implementation ofIAS 39 and IAS 32 at 1 April 2005 is an increase in net assets of £36.8m, net ofdeferred taxation of £15.8m. Reconciliation of Group IFRS Balance Sheet from 31 March to 1 April 2005 The adjustments in Table 1 have the following impact on the Group Balance Sheet: At 31 March IAS 39 IAS 32 At 1 April 2005 Adjustments Convertible 2005 IFRS IFRS £m £m £m £mAssetsProperty, plant and equipment 4,386.1 4,386.1Intangible assets: - goodwill 293.5 293.5 - other intangible assets 12.7 12.7Financial assets - 30.6 30.6Retirement benefit assets 98.9 98.9Deferred tax asset 97.9 97.9Investments 213.4 213.4 Non-current assets 5,102.5 30.6 - 5,133.1 Inventories 134.1 134.1Trade and other receivables 1,073.7 1,073.7Financial assets - 113.2 113.2Cash and cash equivalents 232.2 232.2 Current assets 1,440.0 113.2 - 1,553.2 Total Assets 6,542.5 143.8 - 6,686.3 LiabilitiesTrade and other payables (1,253.7) (1,253.7)Current tax liabilities (138.0) (138.0)Loans and other borrowings (28.9) (28.9)Deferred income (15.1) (15.1)Financial liabilities - (16.3) (16.3) Current liabilities (1,435.7) (16.3) - (1,452.0) Loans and other borrowings (1,652.1) 20.8 (1,631.3)including convertible debtDeferred tax liabilities (892.1) (9.6) (6.2) (907.9)Financial liabilities - (95.7) (95.7)Long-term provisions (111.3) (111.3)Deferred income (266.3) (266.3)Retirement benefit obligations (326.5) (326.5) Non-current liabilities (3,248.3) (105.3) 14.6 (3,339.0) Total liabilities (4,684.0) (121.6) 14.6 (4,791.0) Net assets 1,858.5 22.2 14.6 1,895.3 EquityShare capital 429.4 14.6 444.0Share premium 81.6 81.6Capital redemption reserve 13.7 13.7Hedge reserve - 18.3 18.3Retained earnings 1,334.2 3.9 1,338.1 Equity attributable to equity 1,858.9 22.2 14.6 1,895.7holders of the Group Minority interests - equity (0.4) (0.4) Total equity 1,858.5 22.2 14.6 1,895.3 Further notices IFRS Interim Financial Statements for the period ending 30 September 2005 willbe announced on 16 November 2005. IFRS Preliminary Financial Statements for the year ending 31 March 2006 will beannounced on 31 May 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SSE