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), including International Accounting Standards (IAS) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).
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 generally accepted accounting principles (GAAP) under 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.
The adoption of the following standards and interpretations, at 1 April 2013, 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 been 108.7p (2013: 43.5p) and diluted earnings per share from continuing and discontinued operations would have been 108.5p (2013: 43.5p).
IAS 19 (Revised) 'Employee Benefits'
The impact of the changes in this standard is to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit (obligations)/surplus. In addition, the standard clarifies that administration costs relating to the administration of benefits should be recognised as an employee benefits expense through the income statement, rather than as a deduction from the return on plan assets which was previously recognised through other comprehensive income. The application of the standard is retrospective and, hence, requires the restatement of the year ended 31 March 2013.
The impact in the year ended 31 March 2014 has been an increase in employee benefit expense of £2.2 million (2013: £2.9 million), a decrease in finance expense of £nil (2013: £10.0 million) and an offsetting gain to remeasurement gains and losses within other comprehensive income of £2.2 million (2013: £7.1 million loss). These amendments have had no overall impact on the retirement benefit (obligations)/surplus in the statement of financial position.
The impact on taxation in the year ended 31 March 2014 has been a deferred taxation credit of £0.4 million (2013: £1.6 million charge) and an offsetting charge to other comprehensive income of £0.4 million (2013: £1.6 million credit).
IFRS 13 'Fair Value Measurement'
The standard provides guidance on the measurement of fair value where required by existing accounting standards. The application of the standard is prospective and, hence, impacts the year ended 31 March 2014 only. The impact in the year ended 31 March 2014 has been a £0.3 million credit to finance expense and a corresponding reduction in derivative liabilities, due to the inclusion of the group's own credit risk in measuring the fair value of its liabilities.
Amendments to IAS 1 'Presentation of items of Other Comprehensive Income'
The impact of the amendments is that items, which may be reclassified to profit or loss in the future, are presented separately in the statement of other comprehensive income from those that would never be reclassified to profit and loss.
Improvements to IFRS (2011)
This is a collection of amendments to five standards as part of the International Accounting Standards Board's (IASB) programme of annual improvements. The improvements were issued May 2012 and are effective for periods commencing on or after 1 January 2013.
The financial statements have been prepared on the going concern basis. The directors have set out factors considered in concluding the appropriateness of this presentation in the corporate governance report.
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 charge to PPE in relation to the 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 PLC 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 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 27, 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 A2. 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 A5.
Recently issued accounting pronouncements
International Financial Reporting Standards
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' is effective for periods commencing on or after 1 January 2018 but will not be considered for endorsement by the EU until the remaining elements of the project have been completed. 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, £11.1 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 have an impact on profit or loss, subject to the extent which the group's regulatory swaps can be designated within a cash flow hedge relationship.
- IFRS 11 'Joint Arrangements' is effective for periods commencing on or after 1 January 2014 and replaces IAS 31 'Interests in Joint Ventures'. IFRS 11 removes the option currently taken by the group to proportionately consolidate its joint ventures and requires equity accounting. The impact on the income statement and statement of financial position for the year ended 31 March 2014 would be that the group's interests in its joint ventures' assets, liabilities, income and expenses, as summarised in note 14, and the value of goodwill arising on acquisition of the joint ventures, as shown in note 12, would be presented on an aggregated basis as one line in the statement of financial position and income statement. There would be no impact on net assets.
The directors anticipate that the adoption of the following standards and interpretations will have no material impact on the group's financial statements:
- IFRS 10 'Consolidated Financial Statements' is effective for periods commencing on or after 1 January 2014 and 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' is effective for periods commencing on or after 1 January 2014 and includes the disclosure requirements for all forms of interest in other entities, including subsidiaries, associates, joint arrangements and unconsolidated structured entities.
- IAS 32 'Financial Instruments: Presentation' amendment relating to offsetting financial assets and financial liabilities is effective for periods commencing on or after 1 January 2014. This amendment provides clarification on the application of the offsetting rules affecting financial assets and financial liabilities and will impact the group only if it enters into any relevant offsetting transactions in the future.
- IFRIC 21 'Levies' is effective for periods commencing on or after 1 January 2014, but has not yet been endorsed by the EU. This interpretation 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.
- Improvements to IFRS (2012) and IFRS (2013) is a collection of amendments to eleven standards as part of the International Accounting Standards Board (IASB) programme of annual improvements. The improvements, issued in December 2013, are yet to be endorsed by the EU and are effective for periods commencing on or after 1 July 2014.
All other standards and interpretations, which are in issue but not yet effective, are not considered relevant to the activities of the group.