The principal accounting policies adopted in the preparation of these financial statements are set out below.
Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). These have been prepared on the going concern basis and the directors have set out factors considered in concluding the appropriateness of this presentation in the corporate governance report.
The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments, accounting for the transfer of assets from customers and the revaluation of infrastructure assets to fair value on transition to IFRS.
The preparation of financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods presented. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates.
Adoption of new and revised standards
The adoption of the following standards and interpretations, at 1 April 2014, has had no material impact on the group's financial statements. Had the standards not been applied in the current year, basic earnings per share from continuing and discontinued operations would have remained unchanged.
IFRS 11 'Joint Arrangements'
The standard replaces IAS 31 'Interests in Joint Ventures' and removes the option previously taken by the group to proportionately consolidate its joint ventures, requiring instead the application of the equity method. Under the equity method, the group's interests in the profit after taxation and net assets of its joint ventures are presented as one line in the consolidated income statement and the consolidated statement of financial position respectively. The application of the standard is retrospective and, hence, requires the restatement of the comparative period ended 31 March 2014.
The impact on the consolidated income statement, the consolidated statement of financial position and the consolidated statement of cash flows is detailed in the following tables.
|Impact on the consolidated income statement||Year ended|
31 March 2014
|Decrease in revenue||(15.7)|
|Decrease in total operating expenses||9.0|
|Decrease in operating profit||(6.7)|
|Decrease in investment income and finance expense||0.3|
|Increase in share of profits of joint ventures||5.0|
|Decrease in profit before taxation||(1.4)|
|Increase in taxation credit||1.4|
|Net impact on profit after taxation||–|
|Impact on the consolidated statement of financial position||31 March 2014|
|Increase in interests in joint ventures*||35.6|
|Decrease in other non-current assets||(52.0)|
|Decrease in current assets||(19.2)|
|Decrease in non-current liabilities||28.4|
|Decrease in current liabilities||7.2|
|Net impact on net assets||–|
* Includes £4.9 million of goodwill previously reported separately.
|Impact on the consolidated statement of cash flows||Year ended|
31 March 2014
|Decrease in net cash generated from operating activities||(8.1)|
|Decrease in net cash used in investing activities||6.5|
|Net decrease in cash and cash equivalents||(1.6)|
IFRS 10 'Consolidated Financial Statements'
The standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated accounts of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.
IFRS 12 'Disclosures of Interests in Other Entities'
The standard includes disclosure requirements for all forms of interest in other entities, including subsidiaries, associates, joint arrangements and unconsolidated structured entities.
Amendment to IAS 32 'Financial Instruments: Presentation'
This amendment provides clarification on the application of the offsetting rules affecting financial assets and financial liabilities in the event that relevant offsetting transactions occur.
IFRIC 21 'Levies'
The standard clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy.
Critical accounting judgements and key sources of estimation uncertainty
In the process of applying its accounting policies, the group is required to make certain estimates, judgements and assumptions that it believes are reasonable based on the information available. These judgements, estimates and assumptions affect the amounts of assets and liabilities at the date of the financial statements and the amounts of revenues and expenses recognised during the reporting periods presented.
On an ongoing basis, the group evaluates its estimates using historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results may differ significantly from the estimates, the effect of which is recognised in the period in which the facts that give rise to the revision become known.
The following paragraphs detail the estimates and judgements the group believes to have the most significant impact on the annual results under IFRS.
Property, plant and equipment
The group recognises property, plant and equipment (PPE) on its water and wastewater infrastructure assets where such expenditure enhances or increases the capacity of the network, whereas any expenditure classed as maintenance is expensed in the period it is incurred. Determining enhancement from maintenance expenditure is a subjective area, particularly when projects have both elements within them. In addition, management capitalise time and resources incurred by the group's support functions on capital programmes.
The estimated useful economic lives of PPE are based on management's judgement and experience. When management identifies that actual useful economic lives differ materially from the estimates used to calculate depreciation, that charge is adjusted prospectively. Due to the significance of PPE investment to the group, variations between actual and estimated useful economic lives could impact operating results both positively and negatively, although historically few changes to estimated useful economic lives have been required.
The group is required to evaluate the carrying values of PPE for impairment whenever circumstances indicate, in management's judgement, that the carrying value of such assets may not be recoverable. An impairment review requires management to make subjective judgements concerning the cash flows, growth rates and discount rates of the cash generating units under review.
Revenue recognition and allowance for doubtful receivables
The group recognises revenue generally at the time of delivery and when collection of the resulting receivable is reasonably assured. When the group considers that the criteria for revenue recognition are not met for a transaction, revenue recognition is delayed until such time as collectability is reasonably assured. Payments received in advance of revenue recognition are recorded as deferred income.
United Utilities Water Limited raises bills in accordance with its entitlement to receive revenue in line with the limits established by the periodic regulatory price review processes. For water and wastewater customers with water meters, the receivable billed is dependent on the volume supplied including the sales value of an estimate of the units supplied between the date of the last meter reading and the billing date. Meters are read on a cyclical basis and the group recognises revenue for unbilled amounts based on estimated usage from the last billing through to each reporting date. The estimated usage is based on historical data, judgement and assumptions; actual results could differ from these estimates, which would result in operating revenues being adjusted in the period that the revision to the estimates is determined. For customers who do not have a meter, the receivable billed and revenue recognised is dependent on the rateable value of the property, as assessed by an independent rating officer.
At each reporting date, the company and each of its subsidiaries evaluate the recoverability of trade receivables and record allowances for doubtful receivables based on experience. These allowances are based on, amongst other things, a consideration of actual collection history. The actual level of receivables collected may differ from the estimated levels of recovery, which could impact operating results positively or negatively.
Provisions and contingencies
The group is subject to a number of claims incidental to the normal conduct of its business, relating to and including commercial, contractual and employment matters, which are handled and defended in the ordinary course of business. The group routinely assesses the likelihood of any adverse judgements or outcomes to these matters as well as ranges of probable and reasonably estimated losses.
Reasonable estimates involve judgements made by management after considering information including notifications, settlements, estimates performed by independent parties and legal counsel, available facts, identification of other potentially responsible parties and their ability to contribute, and prior experience. A provision is recognised when it is probable that an obligation exists for which a reliable estimate can be made after careful analysis of the individual matter. The required provision may change in the future due to new developments and as additional information becomes available. Matters that either are possible obligations or do not meet the recognition criteria for a provision are disclosed as contingent liabilities in note 24, unless the possibility of transferring economic benefits is remote.
The group operates two defined benefit schemes which are independent of the group's finances. Actuarial valuations of the schemes are carried out as determined by the trustees at intervals of not more than three years. The pension cost under IAS 19 'Employee Benefits' is assessed in accordance with the advice of a firm of actuaries based on the latest actuarial valuation and assumptions determined by the actuary. The assumptions are based on information supplied to the actuary by the company, supplemented by discussions between the actuary and management. The assumptions are disclosed in note A4. Profit before taxation and net assets are affected by the actuarial assumptions used. The key assumptions include: discount rates, pay growth, mortality and increases to pensions in payment and deferred pensions, and may differ from actual results due to changing market and economic conditions and longer or shorter lives of participants.
Derivative financial instruments
The model used to fair value the group's derivative financial instruments requires management to estimate future cash flows based on applicable interest rate curves. Projected cash flows are then discounted back using discount factors which are derived from the applicable interest rate curves adjusted for management's estimate of counterparty and own credit risk, where appropriate.
Assessing the outcome of uncertain tax positions requires judgements to be made regarding the application of tax law and the result of negotiations with, and enquiries from, tax authorities in a number of jurisdictions.
For further information on accounting policies see note A6.
Recently issued accounting pronouncements
At the date of authorisation of these financial statements, the following relevant standards and interpretations were in issue but not yet effective. All of the standards in issue but not yet effective have been endorsed by the EU except where noted. The directors anticipate that the group will adopt these standards and interpretations on their effective dates.
The directors anticipate that the adoption of the following standards and interpretations may have a material impact on the group's financial statements.
IFRS 9 'Financial Instruments'
The standard is effective for periods commencing on or after 1 January 2018 but has not yet been endorsed by the EU. Under the provisions of this standard, where the group has chosen to measure borrowings at fair value through profit or loss, the portion of the change in fair value due to changes in the group's own credit risk will be recognised in other comprehensive income rather than within profit or loss. If this standard had been adopted in the current year, £4.6 million of losses would have been recognised in other comprehensive income rather than within the income statement.
The standard also broadens the scope of what can be included within a hedge relationship, which may enable the group's regulatory swaps to be designated within cash flow hedge relationships. If the standard had been adopted in the current year, with all such swaps being designated and all hedges being fully effective, £133.5 million of fair value losses would have been recognised in other comprehensive income rather than within the income statement.
The directors anticipate that the adoption of the following standards and interpretations will have no material impact on the group's financial statements.
Amendment to IAS 1 'Presentation of Financial Statements'
This amendment represents the International Accounting Standard Board's (IASB) first step in its disclosure initiative, is effective for periods commencing on or after 1 January 2016, but has not yet been endorsed by the EU. The narrow-focus amendments clarify, rather than significantly change, existing requirements within the standard.
IFRS 15 'Revenue from Contracts with Customers'
This standard is effective for periods commencing on or after 1 January 2017, but has not yet been endorsed by the EU. The standard introduces a new revenue recognition model and replaces IAS 18 'Revenue', IAS 11 'Construction Contracts', IFRIC 13 'Customer Loyalty Programmes', IFRIC 15 'Agreements for the Construction of Real Estate', IFRIC 18 'Transfer of Assets from Customers' and SIC-31 'Revenue - Barter Transactions Involving Advertising Services'.
Improvements to IFRS 2014
This is a collection of amendments to four standards as part of the IASB's programme of annual improvements. The improvements, issued in September 2014, are yet to be endorsed by the EU and are effective for periods commencing on or after 1 January 2016.
Improvements to IFRS (2012) and IFRS (2013)
This is a collection of amendments to 11 standards as part of the IASB's programme of annual improvements. The improvements were issued in December 2013 and are effective for periods commencing on or after 1 February 2015 and 1 January 2015 respectively.
All other standards and interpretations, which are in issue but not yet effective, are not considered relevant to the activities of the group.