a) Basis of preparation of accounts
The accounts are prepared under the historical
cost convention and in accordance with
applicable UK accounting and financial
reporting standards.
The accounts have been prepared in accordance
with UK GAAP, which differs in certain respects
from US GAAP. A summary of the results under
US GAAP is shown in note 31 to the accounts
and an explanation of the main differences
between UK and US GAAP is set out in note 32.
The preparation of accounts in conformity
with generally accepted accounting principles
requires management to make estimates and
assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent
assets and liabilities and the reported amounts
of revenue and expenses during the reporting
period. Actual results could differ from these
estimates.
The Group has adopted Urgent Issues Task
Force (UITF) 38 ‘Accounting for ESOP trusts’
during the year. The impact of the adoption is
shown in note 1.
The Group is following the transitional
arrangements of Financial Reporting Standard
(FRS) 17 ‘Retirement Benefits’. The required
disclosures are shown in note 7.
b) Basis of consolidation
The Group accounts include the accounts of the
Company and all its subsidiary undertakings
(‘Group undertakings’), together with the Group’s
share of the results and net assets of its
associate and joint ventures (‘associated
undertakings’), less any provision for impairment.
An associated undertaking is an entity in which
the Group has a participating interest and over
which it exercises a significant influence. The
accounts of Group and associated undertakings
used for consolidation are generally made up
to 31 March. However, where this has not been
practical, the results of certain Group and
associated undertakings have been based
on their accounts to 31 December.
The results of newly acquired Group and
associated undertakings are included in the
Group accounts from the date the Group
acquires control or, in respect of associated
undertakings, an equity interest which enables it to exercise a significant influence. The results of
Group and associated undertakings are included
in the Group accounts up to the date that control
or the exercise of significant influence, as
appropriate, is relinquished.
In translating into sterling the Group’s share of the
net assets and results of a joint venture operating
in a hyper-inflationary economy for the years
ended 31 March 2003 and 2004, adjustments
have been made to reflect current price levels.
Such adjustments have been reflected through
the Group profit and loss account or statement of
total recognised gains and losses as appropriate.
The Group’s share of the gain on net monetary
liabilities has been credited to the Group profit and
loss account through ‘net interest’, and where the
effect is material is shown as part of the Group’s
exceptional financing costs (see note 4(c)).
The 21 October 2002 business combination
of National Grid and Lattice met the merger
accounting criteria under UK GAAP and the
Companies Act 1985 and therefore the
transaction was accounted for as a merger.
The consolidated accounts have been prepared
as if National Grid and Lattice had always
comprised the Group. The combined accounts
were adjusted for the issue on Merger of
1,323m shares with a nominal value of £132m
and for the elimination of balances between the
former groups.
c) Goodwill
Goodwill, representing the excess of the fair value
of the consideration given over the fair value of
the identifiable net assets acquired, is capitalised
and amortised on a straight-line basis, through
the profit and loss account over its estimated
useful economic life, principally 20 years.
d) Foreign currencies
The results of the Group’s overseas operations
are generally translated into sterling at weighted average rates of exchange for the period the
overseas operations are included within the
Group accounts. In certain limited circumstances,
where the use of a weighted average rate would
distort material transactions, those transactions
are separately translated at the rates of exchange
relevant to the dates on which the transactions
occurred.
Exchange differences arising on the translation
of the opening net assets of overseas operations,
the re-translation of the retained earnings of
overseas operations from average to closing
rates of exchange and the translation of foreign
currency borrowings or derivatives taken to
hedge overseas assets are taken directly to
reserves. Tax charges or credits arising on such
items are also taken directly to reserves.
Assets and liabilities in foreign currencies are
generally translated at the rates of exchange
ruling at the balance sheet date. In respect of
certain assets or liabilities that are matched by
an exact and directly related forward exchange
derivative, the relevant asset or liability is
translated at the rate of exchange under the
related derivative.
All other exchange differences and related tax
charges or credits are taken to the profit and loss
account and disclosed separately where deemed
exceptional.
e) Tangible fixed assets and depreciation
Tangible fixed assets are included in the balance
sheet at their cost less accumulated depreciation.
Cost includes payroll and finance costs incurred
which are directly attributable to the construction
of tangible fixed assets.
Tangible fixed assets include assets in which the
Group’s interest comprises legally protected
statutory or contractual rights of use.
Additions represent the purchase or construction
of new assets and extensions to or significant
increases in the capacity of tangible fixed assets.
Contributions received towards the cost of
tangible fixed assets are included in creditors as
deferred income and credited on a straight-line
basis to the profit and loss account over the
estimated economic lives of the assets.
No depreciation is provided on freehold land and
assets in the course of construction. Other
tangible fixed assets are depreciated, principally
on a straight-line basis, at rates estimated to
write off their book values over their estimated
useful economic lives. In assessing estimated
useful economic lives, which are reviewed on
a regular basis, consideration is given to any
contractual arrangements and operational
requirements relating to particular assets. Unless
otherwise determined by operational
requirements, the depreciation periods for the
principal categories of tangible fixed assets are,
in general, as shown below.
During 2004, the Group modified some
depreciation periods to more accurately reflect the
economic lives of the assets. There has not been
any significant change to the depreciation charged
in the year as a result of the modification.
| Depreciation periods for categories of tangible fixed assets | Years
|
 |
|
| | Plant and machinery |
| | Electricity transmission plant | 15 to 60
|
| Electricity distribution plant | 15 to 60
|
| Interconnector plant | 15 to 60
|
| Gas plant – mains, services and regulating equipment | 30 to 65
|
| Gas plant – storage | 40
|
| Gas plant – meters | 10 to 33
|
| Freehold and leasehold buildings | up to 65
|
| Motor vehicles and office equipment | up to 10 |
|
f) Impairment of fixed assets
Impairments of fixed assets are calculated as
the difference between the carrying values of the
net assets of income generating units, including,
where appropriate, investments and goodwill,
and their recoverable amounts. Recoverable
amount is defined as the higher of net realisable
value or estimated value in use at the date the
impairment review is undertaken. Net realisable
value represents the net amount that can be
generated through sale of the assets. Value in
use represents the present value of expected
future cash flows discounted on a pre-tax basis,
using the estimated cost of capital of the income
generating unit.
Impairment reviews are carried out if there is
some indication that an impairment may have
occurred, or where otherwise required, to ensure
that fixed assets are not carried above their
estimated recoverable amounts.
Impairments are recognised in the profit and loss
account, and where material are disclosed as
exceptional.
g) Replacement expenditure
Replacement expenditure represents the cost
of planned maintenance of the UK’s gas mains
and services assets by replacing or lining
sections of pipe. This expenditure is principally
undertaken to repair and to maintain the safety
of the network and is written off as incurred.
Expenditure that enhances the performance of
the mains and services assets is treated as an
addition to tangible fixed assets.
h) Deferred taxation and investment
tax credits
Deferred taxation is provided in full on all material
timing differences, with certain exceptions. No
provision for deferred taxation is made for any
timing differences on non-monetary assets
arising from fair value adjustments, except where
there is a binding agreement to sell the assets
concerned. However, no provision is made where
it is more likely than not that any taxable gain will
be rolled over into replacement assets.
Deferred tax assets are only recognised to the
extent that they are considered recoverable.
Deferred tax balances have not been discounted.
Investment tax credits are amortised over the
economic life of the asset giving rise to the credits.
i) Stocks
Stocks are carried at cost less provision for
deterioration and obsolescence.
j) Regulatory assets
The US Statement of Financial Accounting
Standards 71 ‘Accounting for the Effects of
Certain Types of Regulation’ (SFAS 71)
establishes US GAAP for utilities whose
regulators have the power to approve and/or
regulate rates that may be charged to customers.
Provided that through the regulatory process the
utility is substantially assured of recovering its
allowable costs by the collection of revenue
from its customers, such costs not yet recovered
are deferred as regulatory assets. Due to the
different regulatory environment, no equivalent
accounting standard applies in the UK.
Under UK GAAP, regulatory assets established
in accordance with the principles of SFAS 71 are
recognised in debtors where they comprise rights
or other access to future economic benefits
which arise as a result of past transactions or events which have created an obligation to
transfer economic benefit to a third party.
Measurement of the past transaction or event
and hence of the regulatory asset is determined
in accordance with UK GAAP.
k) Decommissioning and environmental
costs
Decommissioning and environmental costs,
based on discounted future estimated
expenditures, are provided for in full and where
appropriate a corresponding tangible fixed asset
or regulatory asset is also recognised. The
unwinding of the discount is included within the
profit and loss account as a financing charge net
of the unwinding of the discount on any related
regulatory asset.
l) Turnover
Turnover primarily represents the amounts
derived from the supply, transmission and
distribution of energy and the provision of related
services, including the recovery of stranded
costs. Turnover includes an assessment of
energy and transportation services supplied to
customers between the date of the last meter
reading and the year end, excludes inter-business
and inter-company transactions, and is stated
net of value added tax and similar sales-based
taxes. Where revenues received or receivable
exceed the maximum amount permitted by
regulatory agreement and adjustments will be
made to future prices to reflect this over-recovery,
no liability is recognised.
m) Pensions and other post-retirement
benefits
The cost of providing pensions and other post-retirement
benefits is charged to the profit and
loss account on a systematic basis over the
service lives of the employees in the schemes.
Variations from the regular pension cost are
allocated over the estimated average remaining
service lives of current employees, with the
interest component of any variation being
reflected in net interest and the other
component reflected through staff costs.
n) Leases
Operating lease payments are charged to the
profit and loss account on a straight-line basis
over the term of the lease.
o) Financial instruments
Derivative financial instruments (‘derivatives’) are
used by the Group mainly for the management of
its interest rate and foreign currency exposures
and commodity price risks in respect of expected
energy usage. The principal derivatives used
include interest rate swaps, currency swaps,
forward foreign currency agreements, interest
rate swaptions and indexed swap contracts
relating to the purchase of energy.
All transactions are undertaken with a view to,
or maintained to, provide a commercial hedge of
the interest, currency or commodity price risks
associated with the Group’s underlying business
activities and the financing of those activities.
Amounts payable or receivable in respect of
interest rate swaps are recognised in the profit
and loss account over the economic lives of the
agreements or underlying position being hedged,
either within net interest or disclosed separately
where deemed exceptional.
Termination payments made or received in
respect of derivatives are spread over the shorter
of the life of the original instrument or the life of
the underlying exposure in cases where the
underlying exposure continues to exist. Where
the underlying exposure ceases to exist, any
termination payments are taken to the profit
and loss account.
Those derivatives, relating both to interest rates
and/or currency exchange, that are directly
associated with a specific transaction and exactly
match the underlying cash flows relating to the
transaction are accounted for on the basis of the
combined economic result of the transaction
including the related derivative.
All other currency swaps and forward currency
agreements are translated at the rate of
exchange prevailing at the balance sheet date
with the corresponding exchange adjustment
being dealt with in reserves or the profit and loss
account as appropriate.
Liabilities recognised in respect of index-linked
swap contracts relating to the purchase of energy
are measured on the basis of their estimated
market value. In addition, a corresponding
movement in the value of a related regulatory
asset is also recognised.
p) Restructuring costs
Costs arising from Group restructuring
programmes primarily relate to redundancy
costs. Redundancy costs are charged to the
profit and loss account in the period in which
the Group becomes irrevocably committed to
incurring the costs and the main features of the
restructuring plan have been announced to
affected employees. Redundancy costs are
classified as part of ‘other operating charges’ as
these costs do not relate to services provided by
employees for the year.
|
