1. Adoption of International Financial Reporting Standards (IFRS)

With effect from 1 April 2005, National Grid plc is required to report its consolidated financial statements in accordance with IFRS as adopted by the EU.

The tables below present the impact of conversion from UK generally accepted accounting principles (UK GAAP) to IFRS on the primary statements. The transition date chosen for the adoption of IFRS is 1 April 2004, and only one year of IFRS comparatives are included in these financial statements for the year ended 31 March 2006.

As permitted by International Financial Reporting Standard No. 1 ‘First-time Adoption of IFRS’ (IFRS 1), the comparative balance sheet at 31 March 2005 and income statement for the year ended 31 March 2005 have not been restated to reflect the adoption of IAS 39 and IAS 32 on 1 April 2005. Summary disclosures on the impact of the adoption of IAS 39 and IAS 32 as at 1 April 2005 are included in note 2.

A comparative balance sheet at 31 March 2005 and an income statement, cash flow statement and statement of recognised income and expense for the year ended 31 March 2005 were originally set out in the Group’s IFRS conversion statement for the year ended 31 March 2005, which was published on 29 July 2005. The financial information in respect of the year ended 31 March 2005 included in this Annual Report and Accounts has been derived from the Group’s IFRS conversion statement for the year ended 31 March 2005.

As noted in the IFRS conversion statement, the comparative results and financial position under IFRS were subject to change as there was not yet a significant established practice from which to draw conclusions on the application and interpretation of IFRS.

During the year ended 31 March 2006, a reassessment of the IFRS adjustment for regulatory assets has resulted in an increase in net assets under IFRS at 1 April 2004 and 31 March 2005 of £26m compared with the value attributed to net assets as presented in the IFRS conversion statement. There was no impact on the income statement for the year ended 31 March 2005.

In August 2005, the provisional fair values applied on the acquisition of the UK operations of Crown Castle International Corp. were reviewed and a number of adjustments were made to those provisional fair values as a result of better information becoming available. As required by IFRS 3 ‘Business Combinations’, the balance sheet presented for March 2005 has been re-presented to reflect these fair value adjustments. The overall impact on the carrying value of net assets was £nil: goodwill increased by £10m; property, plant and equipment decreased by £8m; deferred tax liabilities decreased by £4m; and non-current provisions increased by £6m. There was no impact on the income statement for the year ended 31 March 2005.

A past service pension cost of £41m (£24m net of tax) that arose in the second half of 2004/05, which was included within the IFRS conversion statement in operating profit before exceptional items and remeasurements, has been reclassified as an exceptional item as reported in note 6.

a) Impact of adoption of IFRS on net assets at 1 April 2004 (date of adoption of IFRS)

The following is a summary of the IFRS measurement and presentation adjustments as they affected net assets at 1 April 2004 (the date of adoption of IFRS), which arise as a consequence of applying IFRS measurement principles as compared with UK GAAP.

At 1 April 2004	Notes	£m
Net assets under UK GAAP		1,271
IFRS measurement adjustments
Replacement expenditure	1(c)(i)	2,778
Derecognition of regulatory assets	1(c)(ii)	(1,791)
Pensions and other post-retirement benefits	1(c)(v)	(1,382)
Deferred taxation	1(c)(vi)	(84)
Proposed final dividend	1(c)(vii)	366
Other adjustments	1(c)(viii)	(10)
		(123)
IFRS presentation adjustments
Non-equity minority interests	1(d)(i)	(38)
Net assets under IFRS		1,110

Amounts shown above are net of any related deferred tax on the underlying IFRS adjustment.

b) Reconciliation of profit for the year and net assets under UK GAAP to IFRS

The following tables show the effect of IFRS measurement and presentation adjustments on profit for the year and net assets measured under UK GAAP as a consequence of applying IFRS measurement principles as compared with UK GAAP:

For the year ended 31 March 2005	Notes	£m
Profit for the year before minority interests under UK GAAP		907
IFRS measurement adjustments
Replacement expenditure – gross	1(c)(i)	344
Replacement expenditure – depreciation	1(c)(i)	(108)
Derecognition of regulatory assets	1(c)(ii)	151
Goodwill amortisation	1(c)(iii)	109
Amortisation of intangible assets other than goodwill	1(c)(iv)	(4)
Pensions and other post-retirement benefits	1(c)(v)	41
Deferred taxation	1(c)(vi)	(11)
Other adjustments	1(c)(viii)	(6)
		516
IFRS presentation adjustments
Non-equity minority interests	1(d)(i)	(2)
Share of results of joint ventures	1(d)(ii)	3
		1
Profit for the year under IFRS		1,424
Less: profit for the year under IFRS – discontinued operations		(304)
Profit for the year under IFRS – continuing operations		1,120

Amounts shown above are net of any related deferred tax on the underlying IFRS adjustment.

At 31 March 2005	Notes	£m
Net assets under UK GAAP		1,391
IFRS measurement adjustments
Replacement expenditure	1(c)(i)	3,014
Derecognition of regulatory assets	1(c)(ii)	(1,587)
Goodwill	1(c)(iii)	28
Intangible assets other than goodwill	1(c)(iv)	99
Pensions and other post-retirement benefits	1(c)(v)	(1,149)
Deferred taxation	1(c)(vi)	(95)
Proposed final dividend	1(c)(vii)	469
Other adjustments	1(c)(viii)	(27)
		752
IFRS presentation adjustments
Non-equity minority interests	1(d)(i)	(22)
Net assets under IFRS		2,121

Amounts shown above are net of any related deferred tax on the underlying IFRS adjustment.

c) IFRS measurement adjustments

The following relate to the measurement adjustments included in the income statement and balance sheet.

1. Replacement expenditure (repex)
   Repex represents the cost of planned replacement of gas mains and services and is undertaken to maintain the safety of the networks. Under UK GAAP, the gas distribution pipeline network is treated as a single infrastructure asset for accounting purposes and repex is recorded as an expense as it represents a repair to that single infrastructure asset and repex does not have the effect of enhancing the economic benefits of the pipeline network as a whole. Under IFRS, the individual assets and components within the gas distribution pipeline network are recorded separately, and hence repex is treated as the replacement or restoration of those individual assets or components.
   
   The adjustment to net assets reflects the aggregate of the cumulative capitalisation of repex incurred, net of cumulative depreciation, the derecognition of previously replaced gas mains and services, and the effect on cumulative depreciation of depreciating gas mains and services at an individual asset or component level, rather than at a distribution pipeline network level.
2. Derecognition of regulatory assets
   Regulatory assets arise when a US-based public utility, authorised by its regulator, defers to its balance sheet certain costs or revenues that will be recovered from or passed on to customers through future rate changes. These assets were recognised in the balance sheet under UK GAAP as they met the definition of an asset as set out in FRS 5 ‘Reporting the Substance of Transactions’. Under IFRS, regulatory assets are not permitted to be recognised in the balance sheet as they do not meet the definition of an asset under the different definition that is set out in IAS 1. In addition, the International Financial Reporting Interpretations Committee has expressed the opinion that the recognition criteria of US Statement of Financial Accounting Standard (SFAS) 71 is not fully consistent with IFRS recognition criteria. Under IFRS, costs are charged to the income statement when incurred and recoveries from customers are recognised when receivable.
3. Goodwill and goodwill amortisation
   In accordance with IFRS 1, the Group has not restated any business combinations that occurred prior to 31 March 2004 and goodwill at 1 April 2004, which mainly related to US businesses, has therefore not been adjusted from the amount calculated under UK GAAP.
   
   Goodwill arising on the acquisition of the UK operations of Crown Castle International Corp. during the year ended 31 March 2005 has been remeasured under IFRS, resulting in a reduction in goodwill of £80m, principally relating to the recognition of intangible assets partially offset by higher deferred tax liabilities recognised on the acquisition under IFRS.
   
   In addition, an adjustment has been recorded in respect of goodwill amortisation of £109m. Under UK GAAP, goodwill is amortised over a period of 20 years, while under IFRS goodwill amortisation ceased from 1 April 2004 onwards. IFRS instead requires that goodwill is reviewed for impairment on an annual basis or when indicators of impairment are identified.
4. Intangible assets other than goodwill and related amortisation
   In a business combination, IFRS requires fair values to be attributed to intangible assets that are not recognised under UK GAAP together with associated deferred tax balances. A corresponding reduction in goodwill arises as a consequence. The acquisition of the UK operations of Crown Castle International Corp. during the year ended 31 March 2005 resulted in the recognition under IFRS of certain intangibles, amounting to £188m at the date of acquisition, which are being amortised on a straight-line basis over periods ranging from 10 to 25 years.
5. Pensions and other post-retirement benefits
   Under UK GAAP, the Group’s pensions and other post-retirement benefits were accounted for under SSAP 24 prior to the date of transition. Under IFRS, these benefits are accounted for under IAS 19, with the Group recognising all of its net pension and other post-retirement benefit obligations in the balance sheet at 1 April 2004 with a corresponding adjustment to opening reserves. There are also differences in the measurement of the annual pension expense under IAS 19 compared with SSAP 24.
6. Deferred taxation
   Under UK GAAP, deferred tax is recognised in respect of timing differences. Under IFRS, deferred tax is recognised in respect of temporary differences, being the differences between the book recorded value and the tax base of assets and liabilities. The adoption of IFRS resulted in a total reduction in the net deferred tax liability of £165m, which includes the tax effect of the other IFRS adjustments, which are shown net of tax in the reconciliations above.
7. Proposed final dividend
   Under UK GAAP, final ordinary dividends are recorded as a liability in the year in respect of which they are proposed by the Board of Directors for approval by the shareholders. Under IFRS, dividends are not provided for until approved.
8. Other measurement adjustments
   Other differences on transition from UK GAAP to IFRS for the year ended 31 March 2005 are not individually material and relate to recognition of finance lease obligations and the related finance lease assets, certain intangible assets and the timing of recognition of provisions.

d) IFRS presentation adjustments

The following notes relate to the presentation adjustments included in the income statement and balance sheet.

1. Non-equity minority interests
   In the income statement, under UK GAAP, dividends paid to non-equity minority interests are included within ‘Loss for the year attributable to minority interests’. Under IFRS, this amount is included within ‘Net finance costs’.
   
   Under UK GAAP, non-equity minority interests are shown separately from shareholders’ equity within capital and reserves. Under IFRS this amount is included within liabilities, resulting in lower net assets.
2. Share of results of joint ventures
   Under UK GAAP, the Group’s share of the joint ventures’ operating profits, interest and tax are classified within their respective income statement captions. IFRS instead requires that, where equity accounting is adopted, the post-tax share of results from joint ventures is separately disclosed as a single line-item in the income statement.
3. Gains on disposal of property, plant and equipment
   Under UK GAAP, gains and losses on disposal of properties by our property management business are included within exceptional items, even though these are considered to be part of the normal recurring operating activities of the Group. Under IFRS, such gains and losses are included within other operating income.
4. Profit on disposal of joint venture
   Under UK GAAP, the profit on disposal of a joint venture has been disclosed as a non-operating exceptional item. Under IFRS, this profit has been disclosed within the single line-item ‘profit for the year from discontinued operations’ in the income statement.
5. Cash and cash equivalents
   Under UK GAAP, cash excludes short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant change in value. Under IFRS, such investments are included within cash and cash equivalents.
6. Software
   Under UK GAAP, software is capitalised together with the related hardware within property, plant and equipment. Under IFRS, software is classified within intangible assets.
7. Short-term provisions
   Under UK GAAP, provisions are presented on the balance sheet separately from creditors and include both current and non-current provisions. Under IFRS, the current portion of provisions is included within current liabilities.
8. Cumulative translation differences
   Exchange adjustments arising on the retranslation of overseas subsidiaries’ net assets on consolidation are recorded directly in equity within the reserve for cumulative translation differences. As permitted by IFRS 1, this was set at nil on 1 April 2004. This adjustment reflects the reclassification of UK GAAP translation differences from retained earnings into the cumulative translation differences reserve during the year ended 31 March 2005.

e) Impact of adoption of IFRS on cash flow statement

The principal changes to the Group cash flow statement for the year ended 31 March 2005 on adoption of IFRS are summarised below.

Income taxes of £150m paid during the year ended 31 March 2005 are classified as part of operating cash flows under IFRS, but were classified as a separate category of the cash flow under UK GAAP.

Replacement expenditure of £474m, which was previously written off to the income statement under UK GAAP, is now capitalised under IFRS. Therefore, this expenditure is classified as investing activities in the IFRS cash flow statement, but was previously classified as operating cash flow under UK GAAP.

Profits on disposal of property, plant and equipment of £70m which were previously classified as investing activities under UK GAAP, are now presented within operating cash flow, in line with the treatment in the income statement under IFRS.

In accordance with IAS 7 ‘Cash flow statements’, cash equivalents include certain short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant change in value. These were previously shown within cash flows from the management of liquid resources, as they did not fall within the definition of cash according to UK GAAP.

f) Reconciliation of summary financial statements for the year ended 31 March 2005 from UK GAAP to IFRS

	As previously presented under UK GAAP (i) £m	IFRS measurement changes £m	IFRS presentation changes £m	IFRS discontinued operations £m	IFRS £m
Summary Group Income Statement for the year ended 31 March 2005
Group revenue	8,521	(37)	–	(1,102)	7,382
Other operating income	n/a	–	70	–	70
Operating costs	(6,676)	700	–	666	(5,310)
Operating profit	1,845	663	70	(436)	2,142
Share of joint ventures operating profit	7	–	(7)	–	n/a
Non-operating exceptional items	83	–	(83)	–	n/a
Net finance costs	(783)	69	8	–	(706)
Share of post-tax results of joint ventures	n/a	–	3	–	3
Profit before taxation	1,152	732	(9)	(436)	1,439
Taxation	(245)	(216)	2	140	(319)
Profit for the year from continuing operations	907	516	(7)	(296)	1,120
Profit for the year from discontinued operations	n/a	–	8	296	304
Minority interests	1	–	(1)	–	n/a
Profit for the year	908	516	–	–	1,424
Summary Group Balance Sheet as at 31 March 2005
Non-current assets	22,395	3,201	–	–	25,596
Current assets	2,316	(352)	–	–	1,964
Total assets	24,711	2,849	–	–	27,560
Current liabilities	(6,148)	447	(273)	–	(5,974)
Non-current liabilities	(17,172)	(2,544)	251	–	(19,465)
Total liabilities	(23,320)	(2,097)	(22)	–	(25,439)
Net assets	1,391	752	(22)	–	2,121
Equity
Called up share capital	309	–	–	–	309
Share premium account	1,289	–	–	–	1,289
Retained earnings	4,892	685	73	–	5,650
Other reserves	(5,131)	67	(73)	–	(5,137)
Total shareholders’ equity	1,359	752	–	–	2,111
Minority interests	32	–	(22)	–	10
Total equity	1,391	752	(22)	–	2,121
Summary Group Cash Flow Statement for the year ended 31 March 2005
Cash generated from operations
Cash flows from operating activities – continuing operations	2,909	479	70	(547)	2,911
Cash flows from operating activities – discontinued operations	n/a	–	–	547	547
Tax paid – continuing operations	(150)	–	–	98	(52)
Tax paid – discontinued operations	n/a	–	–	(98)	(98)
Net cash inflow from operations	2,759	479	70	–	3,308
Cash flows from investing activities
Cash flows from investing activities – continuing operations	(2,441)	(475)	(59)	323	(2,652)
Cash flows from investing activities – discontinued operations	n/a	–	–	(323)	(323)
Net cash used in investing activities	(2,441)	(475)	(59)	–	(2,975)
Net cash flows from financing activities	(305)	(4)	(16)	–	(325)
Net increase in cash and cash equivalents	13	–	(5)	–	8

 

1. Represents UK GAAP measurement principles, but presented in IFRS formats for comparability.