19th Jul 2005 09:00
19 July 2005 UNITED UTILITIES PLC INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION United Utilities PLC has adopted International Financial Reporting Standards(IFRS) from 1 April 2005, as endorsed for use in the European Union. The firstfinancial information to be reported by the group in accordance with IFRS willbe for the six months ending 30 September 2005. At this time, the group willalso present comparative financial data for the six months ended 30 September2004 in accordance with IFRS and reconciliations to previously reported UK GAAPfinancial information.The group is today holding a presentation for investors and analysts to presentits 2005 income statement and balance sheet under IFRS and detailing the keydifferences for the group between IFRS and UK GAAP.The presentation will commence at 10.00am on Tuesday, 19 July 2005, in theAuditorium at the offices of Deutsche Bank, Winchester House, 1 GreatWinchester Street, London, EC2N 2DB. The presentation can also be accessed viaa one-way listen in conference call facility by dialling 0207 162 0094. Arecording will be available for seven days following the presentation on 0207031 4604, access code 666448. The presentation and announcement will beavailable at 10.00am on the day on our web site at: http://www.unitedutilities.comIFRS SUMMARY IMPACT IFRS UK GAAP Movement Full Year 2004/05 Operating profit ‚£676m* ‚£692m** (2%) Profit before tax ‚£395m* ‚£408m** (3%) Adjusted basic EPS 59.5p*** 61.4p**** (3%) Basic EPS 36.5p 46.8p (22%) As at 31 March 2005 Net assets ‚£2,144m ‚£3,119m (31%) Net debt ‚£4,279m ‚£4,141m 3% Parent company distributable reserves ‚£1,182m ‚£1,194m (1%)*before intangibles previously classified as goodwill under UK GAAP andrestructuring costs**before goodwill and exceptional items***before deferred tax, intangibles previously classified as goodwill under UKGAAP and restructuring costs****before deferred tax, goodwill and exceptional itemsGroup Finance Director Simon Batey said:"The impact of IFRS on the group's reported profit before tax is a reduction of‚£12.6 million from ‚£407.7 million** under UK GAAP to ‚£395.1 million* underIFRS.Consolidated net assets are reduced by ‚£974.3 million under IFRS, principallydue to the requirement to provide for deferred tax on an undiscounted basis.Net debt increases by ‚£137.5 million due to the proportional consolidation ofjoint venture debt, which is typically non-recourse to the group.IFRS has no impact on cash flow and as such the group's financial position isunaffected. The company's distributable reserves of ‚£1,193.6 million under UKGAAP are virtually unaffected by IFRS (total adjustments are less than ‚£15million), resulting in no impact to the company's dividend policy.The group's subsidiaries will continue to report in accordance with UK GAAP,with the exception of United Utilities Electricity PLC which must adopt IFRS asa consequence of it having listed debt securities and being required to prepareconsolidated accounts."BASIS OF PREPARATIONThe financial statements presented are in accordance with IFRS as endorsed bythe EU and interpretations issued by the International Financial ReportingInterpretations Committee (IFRIC). All such standards and interpretations havebeen reflected within the IFRS statements as presented. Whilst most of theissues regarding the adoption of IFRS for use in the EU have been resolved,there are still some areas to be concluded upon. Any new standards orinterpretations issued by the International Accounting Standards Board (IASB)will be assessed and considered by the group on an individual basis and mayresult in adjustments to the 2005 IFRS financial statements before they areconsidered final.IFRS is currently being applied in the United Kingdom and a number of othercountries simultaneously for the first time. Furthermore, due to a number ofnew or revised IFRS having been issued in the past 18 months there is not yetsignificant established practice on which to draw when forming decisionsregarding interpretation and application. Accordingly, practice is continuingto evolve. At this preliminary stage therefore, the full financial effect ofreporting under IFRS as it will be applied and reported on in the group's firstIFRS financial statements for the year ended 31 March 2005 may be subject tochange.IFRS 1 (First-time Adoption of International Financial Reporting Standards)requires that IFRS be applied retrospectively unless a specific exemption isapplied. In preparing these IFRS statements, the group has adopted thefollowing exemptions: * To apply IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) from 1 April 2005; * To establish a deemed cost for the opening balance sheet carrying value of the water and wastewater infrastructure fixed assets by reference to the fair value at the date of transition to IFRS (1 April 2004); * To select 1 April 1999 as the date of adoption of IFRS 3 (Business Combinations). As a result of this decision the group must also apply IAS 38 (Intangible Assets) and IAS 36 (Impairment of Assets) from the same date; * To apply IFRS 2 (Share-based Payment) to those share options granted after 7 November 2002 that had not vested by 1 April 2004; * To deem cumulative translation differences for all foreign operations to be zero as at the opening IFRS balance sheet date; and * To recognise in full all actuarial gains and losses relating to pension schemes both at the opening balance sheet date and, prospectively, through the statement of recognised income and expenses. The financial information set out in this statement relating to the year ended31 March 2005 does not constitute statutory accounts for that period. Fullaudited accounts of United Utilities PLC in respect of that financial period inaccordance with UK GAAP (which received an unqualified audit opinion and didnot contain a statement under either section 237(2) or (3) of the Companies Act1985) have been delivered to the Registrar of Companies.CONSOLIDATED INCOME STATEMENTYear ended 31 March 2005 Restated under IFRS Reported under UK GAAP Before Intangibles* Total Before Goodwill Total intangibles* and goodwill and and Restructuring and exceptional restructuring exceptional items items ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 2,337.3 - 2,337.3 2,253.9 - 2,253.9 Other income 19.8 - 19.8 11.9 - 11.9 Employee costs (421.7) - (421.7) (425.8) - (425.8) Depreciation and (402.7) (9.3) (412.0) (365.9) (15.5) (381.4)amortisation Purchases and (579.9) - (579.9) (528.6) - (528.6)production costs General and (277.1) - (277.1) (277.1) - (277.1)administration Other expenses - business - (29.7) (29.7) - (29.7) (29.7)restructuring --------- --------- --------- --------- --------- --------- Total operating (1,661.6) (39.0) (1,700.6) (1,585.5) (45.2) (1,630.7)costs --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating profit 675.7 (39.0) 636.7 668.4 (45.2) 623.2 --------- --------- --------- --------- --------- --------- Share of operating - - - 23.4 (0.7) 22.7profit of joint ventures --------- --------- --------- --------- --------- --------- Total operating 675.7 (39.0) 636.7 691.8 (45.9) 645.9profit --------- --------- --------- --------- --------- --------- Profit on sale or - - - - 4.5 4.5termination of operations Profit on disposal - - - - 4.1 4.1of fixed assets --------- --------- --------- --------- --------- --------- Profit on ordinary 675.7 (39.0) 636.7 691.8 (37.3) 654.5activities before interest Finance costs (280.6) - (280.6) (284.1) - (284.1) --------- --------- --------- --------- --------- --------- Profit before 395.1 (39.0) 356.1 407.7 (37.3) 370.4taxation --------- --------- --------- --------- --------- --------- Taxation (94.0) (35.5) --------- --------- Profit after 262.1 334.9taxation --------- --------- Equity minority (1.8) (1.8)interest --------- --------- Profit for the 260.3 333.1year --------- ---------*Intangibles previously classified as goodwill under UK GAAP.CONSOLIDATED BALANCE SHEETAt 31 March 2005 Restated under Reported under IFRS UK GAAP ‚£m ‚£m Assets Intangible assets 251.7 116.9 Property, plant and equipment 8,539.6 8,234.9 Other investments 9.7 80.2 --------- --------- Total non-current assets 8,801.0 8,432.0 --------- --------- Inventories 40.9 19.1 Trade and other receivables 385.0 774.9 Other investments 832.0 833.3 Cash and cash equivalents 90.4 49.0 --------- --------- Total current assets 1,348.3 1,676.3 --------- --------- --------- --------- Total assets 10,149.3 10,108.3 --------- --------- Equity Called up share capital 716.2 716.2 Share premium account 1,038.7 1,038.7 Revaluation reserve 158.8 - Equity reserve 4.7 - Retained earnings 224.7 1,362.5 --------- --------- Total shareholders' equity 2,143.1 3,117.4 --------- --------- Equity minority interest 1.3 1.3 --------- --------- Total equity 2,144.4 3,118.7 --------- --------- Liabilities Financial liabilities 505.2 505.2 Current tax payable 107.3 105.9 Trade and other payables 950.1 1,145.5 --------- --------- Total current liabilities 1,562.6 1,756.6 --------- --------- Financial liabilities 4,676.1 4,497.2 Other payables 325.9 323.3 Retirement benefit obligations 84.6 - Deferred taxation 1,337.3 395.2 Provisions 18.4 17.3 --------- --------- Total non-current liabilities 6,442.3 5,233.0 --------- --------- --------- --------- Total liabilities 8,004.9 6,989.6 --------- --------- Total equity and liabilities 10,149.3 10,108.3 --------- ---------SEGMENTAL OPERATING PROFITYear ended 31 March 2005 Restated Reported under IFRS under UK GAAP ‚£m ‚£m Continuing businesses: Licensed multi-utility operations 562.2 587.9 Infrastructure management 89.7 79.2 Business process outsourcing 23.9 26.4 Telecommunications (4.8) (5.1) Other activities 7.8 7.8 Corporate costs (3.1) (4.4) Total operating profit 675.7* 691.8** --------- --------- *before intangibles previously classified as goodwill under UK GAAP andrestructuring costs**before goodwill and exceptional itemsRECONCILIATION OF UK GAAP TO IFRSConsolidated income statementYear ended 31 March 2005 Reported Fixed Prop Pensions Def Tax Business Other Restated under UK Assets Consol Disc Combs under GAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 2,253.9 - 83.5 - - - (0.1) 2,337.3 Other income 11.9 - 1.2 - - (2.1) 8.8 19.8 Employee costs (425.8) - - 1.3 - - 2.8 (421.7) Depreciation (381.4) (27.0) (10.7) - - 7.5 (0.4) (412.0)and amortisation Purchases and (528.6) - (51.3) - - - - (579.9)production costs General and (277.1) - - - - - - (277.1)administration Other expenses - business (29.7) - - - - - - (29.7)restructuring --------- --------- --------- --------- --------- --------- --------- --------- Total (1,630.7) (27.0) (60.8) 1.3 - 5.4 11.2 (1,700.6)operating costs --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating 623.2 (27.0) 22.7 1.3 - 5.4 11.1 636.7profit --------- --------- --------- --------- --------- --------- --------- --------- Share of 22.7 - (22.7) - - - - -operating profit of joint ventures --------- --------- --------- --------- --------- --------- --------- --------- Total 645.9 (27.0) - 1.3 - 5.4 11.1 636.7operating profit --------- --------- --------- --------- --------- --------- --------- --------- - profit on 4.5 - - - - - (4.5) -sale or termination of operations - profit on 4.1 - - - - - (4.1) -disposal of fixed assets --------- --------- --------- --------- --------- --------- --------- --------- Profit on 654.5 (27.0) - 1.3 - 5.4 2.5 636.7ordinary activities before interest --------- --------- --------- --------- --------- --------- --------- --------- Finance costs (284.1) - - 3.2 - - 0.3 (280.6) --------- --------- --------- --------- --------- --------- --------- --------- Profit before 370.4 (27.0) - 4.5 - 5.4 2.8 356.1taxation --------- --------- --------- --------- --------- --------- --------- --------- Taxation (35.5) 5.8 - (1.3) (65.6) 2.9 (0.3) (94.0) --------- --------- --------- --------- --------- --------- --------- --------- Profit after 334.9 (21.2) - 3.2 (65.6) 8.3 2.5 262.1taxation --------- --------- --------- --------- --------- --------- --------- --------- Equity (1.8) - - - - - - (1.8)minority interest --------- --------- --------- --------- --------- --------- --------- --------- Profit for the 333.1 (21.2) - 3.2 (65.6) 8.3 2.5 260.3year --------- --------- --------- --------- --------- --------- --------- ---------Consolidated balance sheetAs at 31 March 2005 Reported Fixed Prop Pensions Def Tax Business Divs Other Restated under UK Assets Consol Disc Combs under GAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Assets Intangible 116.9 - 11.3 - - 13.8 - 109.7 251.7assets Property, 8,234.9 207.5 206.0 - - - - (108.8) 8,539.6plant and equipment Other 80.2 - (70.5) - - - - - 9.7investments --------- ------- --------- --------- --------- --------- -------- --------- --------- Total 8,432.0 207.5 146.8 - - 13.8 - 0.9 8,801.0non-current assets --------- ------- --------- --------- --------- --------- -------- --------- --------- Inventories 19.1 - 2.6 - - - - 19.2 40.9 Trade and 774.9 - 31.8 (401.2) - - - (20.5) 385.0other receivables Other 833.3 - (1.3) - - - - - 832.0investments Cash and cash 49.0 - 41.4 - - - - - 90.4equivalents --------- ------- --------- --------- --------- --------- -------- --------- --------- Total current 1,676.3 - 74.5 (401.2) - - - (1.3) 1,348.3assets --------- ------- --------- --------- --------- --------- -------- --------- --------- Total assets 10,108.3 207.5 221.3 (401.2) - 13.8 - (0.4) 10,149.3 --------- ------- --------- --------- --------- --------- -------- --------- --------- Equity Called up 716.2 - - - - - - - 716.2share capital Share premium 1,038.7 - - - - - - - 1,038.7account Revaluation - 158.8 - - - - - - 158.8reserve Equity - - - - - - - 4.7 4.7reserve Retained 1,362.5 (13.6) - (331.6) (952.0) 2.9 219.4 (62.9) 224.7earnings --------- ------- --------- --------- --------- --------- -------- --------- --------- Total 3,117.4 145.2 - (331.6) (952.0) 2.9 219.4 (58.2) 2,143.1shareholders' equity --------- ------- --------- --------- --------- --------- -------- --------- --------- Equity 1.3 - - - - - - - 1.3minority interest --------- ------- --------- --------- --------- --------- -------- --------- --------- Total equity 3,118.7 145.2 - (331.6) (952.0) 2.9 219.4 (58.2) 2,144.4 --------- ------- --------- --------- --------- --------- -------- --------- --------- Liabilities Financial 505.2 - - - - - - - 505.2liabilities Current tax 105.9 - 1.4 - - - - - 107.3payable Trade and 1,145.5 - 37.3 (12.2) - - (219.4) (1.1) 950.1other payables --------- ------- --------- --------- --------- --------- -------- --------- --------- Total current 1,756.6 - 38.7 (12.2) - - (219.4) (1.1) 1,562.6liabilities --------- ------- --------- --------- --------- --------- -------- --------- --------- Financial 4,497.2 - 178.9 - - - - - 4,676.1liabilities Other 323.3 - 2.6 - - - - - 325.9payables Retirement - - - 84.6 - - - - 84.6benefit obligations Deferred 395.2 62.3 - (142.0) 952.0 10.9 - 58.9 1,337.3taxation Provisions 17.3 - 1.1 - - - - 18.4 --------- ------- --------- --------- --------- --------- -------- --------- --------- Total 5,233.0 62.3 182.6 (57.4) 952.0 10.9 - 58.9 6,442.3non-current liabilities --------- ------- --------- --------- --------- --------- -------- --------- --------- --------- ------- --------- --------- --------- --------- -------- --------- --------- Total 6,989.6 62.3 221.3 (69.6) 952.0 10.9 (219.4) 57.8 8,004.9liabilities --------- ------- --------- --------- --------- --------- -------- --------- --------- --------- ------- --------- --------- --------- --------- -------- --------- --------- Total equity 10,108.3 207.5 221.3 (401.2) - 13.8 - (0.4) 10,149.3and liabilities --------- ------- --------- --------- --------- --------- -------- --------- ---------MATERIAL DIFFERENCES BETWEEN IFRS AND UK GAAP FOR THE GROUPThe IFRS accounting policies set out below have been arrived at following adetailed review of each IFRS and have been approved by the Audit Committee andGroup Board.The purpose of this section is to explain the material differences between IFRSand UK GAAP that affect the group and set out indicative accounting policiesfor each such area under IFRS. The impact on the UK GAAP 2004/05 results ofIFRS is then quantified.This should be read in the context of the full 2004/05 IFRS income statement,balance sheet and reconciliations to the UK reported financial information asshown above.Infrastructure Accounting (IAS 16)Material Differences to UK GAAPThe most material impact of IAS 16 (Property, Plant and Equipment) relates tothe accounting for water and wastewater infrastructure assets within thegroup's licensed multi-utility operations. Under UK GAAP, these assets wereaccounted for in accordance with the renewals accounting paragraphs of FRS 15(Tangible Fixed Assets). Such provisions are not present within IAS 16 and itis therefore necessary to change the way in which the assets are accounted foron transition to IFRS.The accounting policies applied under UK GAAP in respect of all other fixedassets, including water non-infrastructure assets and the electricityinfrastructure network, are compliant with IFRS and continue to remainappropriate.Under renewals accounting the water and wastewater infrastructure networks areassumed to be single assets and the depreciation charged is the estimated levelof annual expenditure required to maintain the operating capability of thenetwork. Actual expenditure is then capitalised as incurred.In accordance with IAS 16 this treatment may not be applied. Therefore, thesignificant parts within the infrastructure networks have been identified and,for each, a useful life and residual value determined so that each segment maybe depreciated individually. Furthermore, the classification between operatingexpenditure and capital expenditure for amounts incurred in maintaining thenetwork has been reassessed in accordance with the new standard.As the UK GAAP net book value of the infrastructure network was determinedusing an accounting policy not compliant with IFRS a deemed cost has beenestablished for the opening balance sheet carrying value of the infrastructurenetworks by reference to the fair value at the date of transition, 1 April 2004(as permitted by IFRS 1).Indicative IFRS Accounting Policy (Water and wastewater infrastructure assets)Infrastructure assets comprise a network of water and wastewater systems.Expenditure on the infrastructure assets relating to increases in capacity orenhancements of the network are treated as additions. Amounts incurred inmaintaining the operating capability of the network in accordance with definedstandards of service are expensed in the year in which the expenditure isincurred.Infrastructure assets are depreciated by writing off their deemed cost, lessthe estimated residual value, evenly over their useful lives. Residual valuesand useful lives are re-assessed annually and, if necessary, changes areaccounted for prospectively.ImpactThe segments recognised within the water and wastewater networks have beenbased upon asset class (for example sewers, water mains and tunnels) since nosingle pipe or section of sewer is significant compared to the total value ofthe networks. This has led to the identification of 14 segments which have beenassigned zero residual values at the end of their useful lives. The livesallocated to these segments range from 15 - 300 years.This results in an additional depreciation charge of ‚£27.0 million in the 2005IFRS reported results when compared with UK GAAP. Since the UK GAAPclassification of expenditure between operating expenses and costs to becapitalised remains the most appropriate treatment under IAS 16, thisadditional depreciation directly impacts profit before tax.The election to record the carrying value of the water and wastewaterinfrastructure networks at fair value, and to use that fair value as the deemedcost in the opening IFRS balance sheet, increases net assets by ‚£145.2 million(net of deferred tax) as at 31 March 2005 compared with UK GAAP.There is no impact of IFRS on the amounts reported under UK GAAP forelectricity infrastructure assets.Interests in Joint Ventures (IAS 31)Material Differences to UK GAAPFor the purposes of UK GAAP, FRS 9 (Associates and Joint Ventures) requiresjoint ventures to be accounted for in consolidated financial statements usingthe gross equity method. IAS 31 (Interests in Joint Ventures) does not permitgross equity accounting and instead presents the options of equity accountingor proportional consolidation.The group has elected to apply proportional consolidation on adoption of IAS31, as it the most representative accounting treatment of the group'sactivities. This enables the group to include its share of joint ventureresults, balance sheet and cashflows within each line item of the consolidatedfinancial statements.Indicative IFRS Accounting PolicyJoint ventures are entities in which United Utilities PLC holds an interest ona long-term basis and which are jointly controlled with one or more partiesunder a contractual arrangement. The group's share of joint venture income,expenses, assets, liabilities and cashflows are included in the consolidatedfinancial statements on a proportional consolidation basis.ImpactThe application of proportional consolidation results in the group includingits share of each joint venture income statement and balance sheet accountcaption on a line by line basis within the consolidated financial statements.Proportional consolidation does not affect operating profit, profit before taxor net assets. However, proportional consolidation does have a material impacton certain individual balance sheet captions: most noticeably an increase of ‚£206.0 million in property, plant and equipment and increased net debt of ‚£137.5million, which is typically non-recourse to the group.Defined Benefit Pension Scheme Accounting (IAS 19)Material Differences to UK GAAPThe group prepared its 2005 UK GAAP results in accordance with SSAP 24(Accounting for Pension Costs), with FRS 17 (Retirement Benefits) transitionaldisclosures provided in the notes to the accounts. FRS 17 became fullyeffective for accounting periods beginning on or after 1 January 2005. Thegroup will not adopt FRS 17 and will move directly to IAS 19 (EmployeeBenefits).Under SSAP 24, any pension scheme surplus or deficit identified at the mostrecent actuarial valuation is recognised gradually through the profit and lossaccount over the average expected future working lifetime of current employees.The net pension cost under SSAP 24 therefore includes both the cost ofproviding an additional year of pension benefits to employees (regular cost)and an element of the surplus / deficit relating to previous years (variation).The difference between employer's contributions paid and the SSAP 24 netpensions cost is recognised as a prepayment/accrual, resulting in a balancesheet position that does not necessarily reflect the actuarial position.Interest is calculated on this balance sheet entry and is also included withinthe net pension cost.In accordance with IAS 19, any legal and constructive obligation for postemployment benefit plans must be immediately recognised as an asset orliability on the balance sheet. Where actual experience differs from theassumptions made at the start of a financial year, actuarial gains and losseswill be recognised through the statement of recognised income and expense.The returns received on the pension scheme assets and the interest borne on theliabilities are recognised within finance costs under IAS 19. Under SSAP 24 allpension costs are recognised within operating profits.Indicative IFRS Accounting PolicyThe group operates a number of defined benefit pension schemes, which areindependent of the group's finances, for the substantial majority of itsemployees. Actuarial valuations of the schemes are carried out as determined bythe pension scheme trustees at intervals of not more than three years, therates of contribution payable and the pension cost being determined on theadvice of the actuaries, having regard to the results of these valuations. Inany intervening years, the actuaries review the continuing appropriateness ofthe contribution rates.Defined benefit assets are measured at fair value while liabilities aremeasured at present value. The difference between the two amounts is recognisedas an asset or liability in the balance sheet.The cost of providing pension benefits to employees relating to the currentyear's service is included in the income statement within other operatingcosts, whilst the difference between the expected return on scheme assets andinterest on scheme liabilities is included within finance costs.All actuarial gains and losses as at 1 April 2004, the date of transition toIFRS, were recognised in full. All future actuarial gains and losses arerecognised outside the income statement in retained earnings and presented inthe statement of recognised income and expense.ImpactThe adoption of IAS 19 increases the 2005 profit before tax by ‚£4.5 millioncompared with UK GAAP, representing increased operating profits of ‚£1.3 millionand reduced finance costs of ‚£3.2 million.The derecognition of the UK GAAP SSAP 24 prepayment reduces net assets by ‚£272.4 million (net of deferred tax). This prepayment reflects the lump sumpayment of ‚£320 million (pre tax) made at 31 March 2005. Net assets are thenfurther reduced by the recognition of the IAS 19 deficit of ‚£59.2 million (netof deferred tax).The final price determinations for both water and electricity make explicitallowance for funding of the relevant elements of the pension scheme deficit.Business Combinations (IFRS 3 / IAS 38)Material Differences to UK GAAPUnder IFRS, the recognition test for intangible fixed assets acquired inbusiness combinations is less restrictive than that of UK GAAP, and thereforemore intangible assets will be separately identified from goodwill. FRS 10(Goodwill and Intangible Assets) requires an intangible asset to be controlledby the entity through custody or legal rights and to be capable of disposalseparately from the business. By contrast IAS 38 does not require an intangibleto be separable from the entity if its ownership can be demonstrated throughcontractual or legal rights.Goodwill is not amortised under IFRS, but rather subject to annual impairmentreviews. Therefore, although it may be possible to carry goodwill for longer ifthe future cashflows are strong, there is the potential for increasedvolatility to be introduced to the income statement.Intangible assets (other than goodwill) are stated at cost less accumulateddepreciation and are amortised over their useful lives on a straight linebasis.Indicative IFRS Accounting PolicyPositive goodwill (representing the excess of the fair value of theconsideration and associated costs over the fair value of the identifiable netassets acquired) arising on consolidation is capitalised.Following initial recognition, positive goodwill is subject to impairmentreviews, at least annually, and measured at initial value less accumulatedimpairment losses.In accordance with IFRS 1 all business combinations prior to 1 April 1999 havebeen accounted for in accordance with UK GAAP applicable at the date ofacquisition. All combinations completed subsequent to that date are recorded inaccordance with IFRS.ImpactIFRS 3 has a minimal impact on the net assets of the group, with the reductionin goodwill broadly offset by the recognition of newly identified intangibleassets from business combinations (mainly relating to customer lists andcontracts). However, IAS 12 (Income Taxes) requires a deferred tax liability tobe created for any transfers from goodwill to intangible fixed assets. Thisdeferred tax liability results in an increase in the goodwill arising on thebusiness combination of ‚£13.8 million as at 31 March 2005.Since goodwill is no longer being amortised, the 2005 amortisation chargereduces by ‚£7.5 million. Profit on sale or termination of operations for 2005is reduced by ‚£2.1 million due to the reversal of goodwill amortisationrelating to businesses disposed of in 2004/05.Deferred Tax (IAS 12)Material Differences to UK GAAPThe major impact of IAS 12 for the group relates to discounting of deferred taxnot being permitted. FRS 19 (Deferred Tax) permits, but does not require, adeferred tax asset or liability to be discounted and as a result the group hasbeen able to apply a policy of discounting its deferred tax liability. However,IAS 12 does not permit discounting in any circumstances. This is of particularsignificance to a utility business where any reversal of timing differences islikely to be deferred long into the future due to the long asset lives ofnetwork assets.The deferred tax impacts arising from any other IFRS adjustments are includedin the relevant sections.Indicative IFRS Accounting PolicyDeferred tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes. Suchassets and liabilities are not recognised if the temporary difference arisesfrom goodwill or from the initial recognition (other than in a businesscombination) of other assets and liabilities in a transaction that affectsneither the tax profit nor the accounting profit.Deferred tax is measured at the average tax rates that are expected to apply inthe periods in which the temporary timing differences are expected to reverse,based on tax rates and laws that have been enacted or substantially enacted bythe balance sheet date.ImpactThe inability to discount results in an increase in the balance sheet deferredtax liability of ‚£952.0 million at 31 March 2005 and consequently a reductionin net assets.The final price determinations for both water and electricity set pricesallowing for tax on an anticipated cash basis and are therefore unaffected bydeferred tax.Dividends (IAS 10)Material Differences to UK GAAPIAS 10 (Events After the Balance Sheet Date) and SSAP 17 (Accounting for PostBalance Sheet Events) both distinguish `adjusting events' from `non-adjustingevents' with similar definitions and applications. However, under IAS 10dividends may not be recognised until they have been appropriately authorisedand are no longer at the discretion of the entity. Therefore, if this occursafter the balance sheet date, the dividends are not recognised as a liabilityat the balance sheet date. However, they are disclosed in the notes to theaccounts in accordance with IAS 1 (Presentation of Financial Statements).Furthermore, dividends are no longer recognised within the income statement andare instead reported in the statement of recognised income and expense.Indicative IFRS Accounting PolicyDividends are recognised in equity in the perioRelated Shares:
United Utilities