Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of United Utilities Group PLC for the year ended 31 March 2014 set out in the Financial Statements. In our opinion:
- the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 March 2014 and of the group's profit for the year then ended;
- the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); and
- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows:
Capitalisation of costs relating to the capital programme (£695.4 million)
Refer to the Audit committee report, accounting policy and note 11 financial disclosures.
|The risk||Our response|
|The group has a substantial capital programme which has been agreed with the regulator ('Ofwat') and therefore incurs significant expenditure in relation to the development and maintenance of both infrastructure and non-infrastructure assets. Expenditure in relation to increasing the capacity or enhancing the network is treated as capital expenditure. Expenditure incurred in maintaining the operating capability of the network is expensed in the year in which it is incurred. Capital projects often contain a combination of enhancement and maintenance activity which are not distinct and therefore the allocation of costs between capital and operating expenditure is inherently judgemental. Within the costs of the capital programme is an allocation of overhead relating to the proportion of time that the group's support functions spend which relates directly to the capital programme. This allocation is also inherently judgemental. For these reasons there is a risk that capital and operating expenditure may be significantly misstated and so the group's capital programme is an area of focus for our work.||In this area our principal audit procedures included, but were not limited to, the following: we assessed the group's capitalisation policy to assess compliance with relevant accounting standards; we tested controls over the application of the policy to spend incurred on projects within the capital programme in the period including attending capital approval meetings to observe the judgements made; for a sample of capital projects we assessed the appropriate application of the capitalisation policy to actual spend incurred; we assessed, also for a sample of projects, variances in actual expenditure to budgeted capital and operating expenditure and where significant variances were identified we tested whether the proportionate allocation of costs between capital and operating expenditure was revised; we agreed overhead costs incurred to supporting documentation on a sample basis and performed comparative analysis of overheads absorbed into capital projects by category to assess consistency with the policy and absorption in previous years; we tested a sample of capital accruals to verify the existence and accuracy of the costs being capitalised. We also assessed the adequacy of the group's disclosures of its capitalisation policy and other related disclosures.|
Revenue recognition (£1,704.5 million) and provision for customer debts (£97.9 million)
Refer to the Audit committee report, accounting policy, and note 16 financial disclosures.
|The risk||Our response|
|Revenue recognition is one of the key judgemental areas for the audit, particularly in relation to:|
- the estimate of the revenue value of water supplied to metered customers between the last meter reading and the period end;
- supplies to properties where there is little prospect of revenue being realised through the occupier not being able to be identified or due to a past history of non-payment of bills relating to that property.
A proportion of the group's customers do not or cannot pay their bills which results in the need for provisions to be made for non-payment of the customer balance. Due to the level of judgement and the complexity of the calculation which could lead to revenue being overstated, this is considered a key audit risk.
|In this area our principal audit procedures included, but were not limited to, the following: we assessed whether appropriate revenue recognition policies are applied through comparison with relevant accounting standards and industry practice, including the policy of not recognising revenue where there is little prospect of revenue being realised; we tested the group's controls over revenue recognition including reconciliations between sales and cash receipts systems and the general ledger; we recalculated the metered accrued income calculation with the support of our own modelling specialists; we assessed the appropriateness of the customer debt provisioning policy based on historical cash collections, credits, re-bills and write-off information which we verified through testing the data in the billing system and analysed by comparing the data to that which we collect independently across the industry; we compared the policy to the customer debt provision calculation to assess the extent to which historical trends are taken into account and applied; we remodelled the customer debt provision calculation to verify the mathematical accuracy with the support of our own modelling specialists. We also assessed the adequacy of the group's disclosures of its revenue recognition, customer debt provisioning policy, disclosures in relation to the estimation uncertainty involved in calculating the provision and other related disclosures.|
Retirement benefit obligations (£177.4 million)
Refer to Audit committee report, accounting policy and notes 19 and A2 financial disclosures.
|The risk||Our response|
|Significant estimates are made in valuing the group's retirement benefit obligations. Small changes in assumptions and estimates used to value the group's net pension deficit would have a significant effect on the group's financial position.||Our principal audit procedures included, but were not limited to, the following: we tested the controls over the maintenance of the schemes' membership data; we challenged the key assumptions supporting the group's retirement benefit obligations valuation with input from our own actuarial specialists comparing the discount rate, inflation rate, salary, pension increase rates and life expectancy assumptions used against externally derived data; we obtained custodian asset valuation reports and reperformed the valuations using externally available data with input from our own valuation specialists; we verified contributions paid to the scheme; we verified changes in active members; we verified benefits paid to pensioners. We also assessed the group's disclosure in respect of the sensitivity of the deficit to changes in the key assumptions.|
Derivative financial instrument valuations (£409.8 million)
Refer to Audit committee report, accounting policy, and note A1 financial disclosures.
|The risk||Our response|
|The group has significant derivative financial instruments, the valuation of which is determined through the application of valuation techniques which often involve the exercise of judgement and the use of assumptions and estimates. Due to the significance of financial instruments and the related estimation uncertainty, this is considered a key audit risk.||Our audit procedures included, but were not limited to, the following: we assessed controls over the identification, measurement and management of derivative financial instruments and assessed the methodologies, inputs and assumptions used by the group in determining fair values; we compared observable inputs into valuation models such as quoted prices to externally available market data and we recalculated valuations utilising our own valuation specialists. Additionally, we assessed whether the financial statement disclosures of fair value risks and sensitivities appropriately reflect the group's exposure to valuation risk.|
3. Our application of materiality and an overview of the scope of our audit
In establishing the overall audit strategy and performing the audit, materiality for the group financial statements as a whole was set at £25.0 million. This has been determined with reference to a benchmark of group profit before taxation and net fair value gains and losses on debt and derivative instruments (of which it represents 6.0 per cent).
We agreed with the Audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £0.5 million, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
Audits for group reporting purposes were performed at the key reporting components based at the group's head office in the UK. These entities covered 99 per cent of group revenues, 99 per cent of group profit before tax and 98 per cent of group total assets.
4. Our opinion on the other matter prescribed by the Companies Act 2006 is unmodified
In our opinion:
- the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;
- the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
- information given in the Corporate governance statement with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
5. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's performance, business model and strategy.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
- the parent company financial statements and the part of the Directors' remuneration report to be audited are not in agreement with the accounting records and returns; or
- certain disclosures of directors' remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit; or
- a Corporate governance statement has not been prepared by the company.
Under the Listing Rules we are required to review:
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
As explained more fully in the Directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP
St James' Square
21 May 2014