Annual Report 2016 - Page 81

Annual Report 2016 Notes to the Financial Statements Notes to the reconciliation of Equity and Profit and Loss on transition to FRS 102 i) Infrastructure assets were previously accounted for in accordance with the infrastructure renewals accounting provisions of FRS 15. The estimated annual expenditure required to maintain the assets’ operating capability, the infrastructure renewals charge, was charged as depreciation with infrastructure renewals expenditure capitalised within tangible fixed assets. FRS 102 does not permit infrastructure renewals accounting. Under FRS 102, depreciation is now charged on the cost of these infrastructure assets (including the cost of new assets since transition and deemed cost of existing assets – see below) over the useful life of the assets and infrastructure renewals expenditure is charged to the profit and loss account as it arises and not through the previous annual infrastructure renewals charge. The Group has elected to measure infrastructure assets at fair value on the date of transition and to apply that fair value as deemed cost which will be depreciated in subsequent periods over the infrastructure’s useful economic life. In line with industry practice, the fair value of the assets has been calculated by reference to South Staffordshire Water’s Regulatory Asset Value (further details are provided in note 1). The impact of the adjustment to equity at 1 April 2014 represents the difference between the previous book value of infrastructure assets and their fair value after accounting for the corresponding deferred tax liability. ii) Infrastructure contributions receivable from third parties were previously netted against the book value of the infrastructure assets and renewals accounting applied as described above, with no corresponding amortisation credit recorded in the profit and loss account for these contributions. In accordance with FRS 102 the contributions are now classified as deferred income in the balance sheet and amortised to the profit and loss account over the expected life of the relevant assets. On transition to FRS 102, there is a balance sheet reclassification between tangible fixed assets and deferred income with no impact on equity. There is also an adjustment to recognise cumulative amortisation from the date of receipt of the contributions to the date of transition with a related increase to deferred tax liabilities. iii) In accordance with the relevant accounting standard (FRS 19), the Group previously elected to apply discounting to its net deferred tax liability over a period of up to 80 years. FRS 102 does not permit discounting of deferred tax and so on transition the deferred tax liability is increased by the removal of the discount. Previously, the annual movement in the discount was a profit and loss account item each year. With no discount recognised in the balance sheet under FRS 102, this profit and loss account entry is no longer recognised. iv) Deferred tax was not previously recognised in relation to certain infrastructure assets to which renewals accounting applied. Under FRS 102 a timing difference and therefore a deferred tax liability is now recognised for these assets, based on the difference between the restated book value of the relevant assets and the amounts for which future tax relief is available. v) Deferred tax was not previously recognised in relation to certain fixed assets acquired via a business combination where the assets did not qualify for tax relief at the date of the transaction. A deferred tax balance is required to be recognised under FRS 102. Therefore, on transition to FRS 102 an additional deferred tax liability is recognised in respect of the book value of these assets. A corresponding additional fair value adjustment has also been recognised for certain land and buildings, with the result that there is no overall increase or reduction in net assets and equity. vi) FRS 102 requires short term employee benefits to be charged to the profit and loss account as the employee services are received. This has resulted in the Group recognising a liability for unused but accrued holiday pay on transition to FRS 102. Previously holiday pay accruals were not recognised as a balance sheet liability and holiday pay was charged to the profit and loss account as it was paid. vii) The previous accounting standard (FRS 17) only permitted the Group to recognise a surplus on its defined benefit pension schemes to the extent that it was able to recover the surplus through reduced future contributions or through refunds to the Group. Under FRS 17 this resulted in a restriction being applied to the surplus recognised in the accounts. No such restriction applies under FRS 102 and therefore the pension scheme surplus recognised on transition in the Group is higher than previously reported as is the related deferred tax liability. Also, under FRS 17, the pension surplus was recognised as a consolidation adjustment, but under FRS 102 the pension surplus must be recognised in a participating employer. As detailed in note 1, the South Staffordshire section of the Water Companies Pension Scheme is recognised in the accounts of South Staffordshire Plc as required by FRS 102. 32 Ultimate Controlling Party The Company’s immediate parent undertaking is Aquainvest Acquisitions Limited. The ultimate controlling party in the United Kingdom is Hydriades IV Limited which is the largest and smallest set of accounts within which the Group is consolidated. The ultimate controlling party is KKR Infrastructure Limited. 79