This information is derived from the financial statements included in the Company's report on Form 20-F for the year ended 31 December 2004, which will be filed with the US Securities and Exchange Commission. Form 20-F should be referred to for a complete discussion of the differences between UK GAAP and US GAAP that affect the Group.
Effect on profit after tax (net income) of significant differences between UK and US GAAP
| Note | Year ended 31 December 2004 £m |
Year ended 31 December 2003 (restated) £m |
|
|---|---|---|---|
| Net income | |||
| Profit/(loss) attributable to ordinary shareholders under UK GAAP | 94 | (219) | |
| Adjustments: | |||
| b) | Impairment of plant: | ||
| Impairment of US plant | – | 404 | |
| Reinstatement of HUBCO impairment | – | (35) | |
| Release a partial disposal of HUBCO | 7 | – | |
| Impact on depreciation charge | (21) | (7) | |
| c) | Purchase accounting and goodwill: | ||
| Impairment of goodwill | – | (28) | |
| Fair value and purchase accounting | 3 | 3 | |
| d) | Development expenditure | 2 | 1 |
| e) | Onerous property lease provision | 1 | 2 |
| f) | Liquidated damages and associated costs | 3 | (19) |
| g) | Insurance recovery | 6 | (3) |
| h) | Derivatives and hedging activities | (24) | (15) |
| i) | Deferred finance costs | (5) | 12 |
| j) | Disposal of investments | 3 | 1 |
| l) | Deferred tax | (10) | 1 |
| m) | Stock compensation schemes | (2) | (2) |
| Tax effect of US GAAP adjustments | (1) | (99) | |
| Net income/(loss) under US GAAP | 56 | (3) | |
| Effect of restatement: | |||
| Net loss under US GAAP, as previously reported | (17) | ||
| Effect of restatement of hedge accounting treatment of derivatives | 14 | ||
| Net loss under US GAAP, as restated | (3) | ||
| Earnings/(loss) per ordinary share: | |||
| Earnings/(loss) per share under US GAAP | |||
| Basic: | |||
| Before the effect of the restatement of hedge accounting of derivatives | 4.3p | (1.4)p | |
| Effect of restatement of hedge accounting of derivatives | – | 1.1p | |
| Total | 4.3p | (0.3)p | |
| Diluted: | |||
| Before the effect of the restatement of hedge accounting of derivatives | 4.2p | (1.4)p | |
| Effect of restatement of hedge accounting of derivatives | – | 1.1p | |
| Total | 4.2p | (0.3)p |
Effect on net assets of significant differences between UK and US GAAP
| Note | As at 31 December 2004 £m |
As at 31 December 2003 £m |
|
|---|---|---|---|
| Net assets | |||
| Total shareholders' funds – equity under UK GAAP | 1,825 | 1,521 | |
| UK minority interests | 237 | 39 | |
| 2,062 | 1,560 | ||
| Adjustments: | |||
| a) | Pensions | 10 | 10 |
| b) | Impairment of plant | 514 | 557 |
| c) | Purchase accounting and goodwill | (25) | (20) |
| d) | Development expenditure | (13) | (15) |
| e) | Onerous property lease provision | – | (1) |
| f) | Liquidated damages and associated costs | (131) | (144) |
| g) | Insurance recovery | 6 | – |
| h) | Derivatives and hedging activities | (43) | 1 |
| i) | Deferred finance costs | 6 | 12 |
| k) | Cash dividends | 37 | – |
| m) | Stock compensation schemes | (5) | (3) |
| l) | Deferred tax | (58) | (48) |
| Cumulative tax effect of US GAAP adjustments | (76) | (82) | |
| Net assets under US GAAP | 2,284 | 1,827 |
Restatement
As a result of a further review of hedge documentation by E&Y, Hazelwood's local auditors, power derivatives previously accounted for as cash flow hedges have been reclassified as non-hedges. Although these contracts were highly effective economic hedges, the strict requirement to document the methodology for ineffectiveness testing, should there be any, was not defined on inception of the hedge. Compliance with the documentation requirements of FAS 133 (Accounting for Derivative Instruments and Hedging Activities) had previously been confirmed during the year-end audit. The impact of the restatement was to transfer £14 million (net of tax) of deferred gains on derivative instruments to the income statement in 2003.
a) Pension costs
There are differences in the methods of valuation required under UK and US GAAP for valuing assets and liabilities of defined benefit pension plans. US GAAP is generally more prescriptive in respect of actuarial assumptions and the allocation of costs to accounting periods.
b) Impairment of plant
Under UK GAAP, an impairment provision is recognised when the discounted cash flows are less than the carrying amounts of the related assets. Under US GAAP, an impairment provision for assets is made when the undiscounted expected future cash flows fail to recover the carrying amounts of the related assets. Accordingly, a US GAAP difference arises when the carrying amount of the assets is greater than the discounted future cash flows but less than the undiscounted future cash flows. This difference in the carrying value results in different levels of depreciation under UK and US GAAP.
Under UK GAAP, an impairment may be reversed when the recoverable amount exceeds the carrying amount. Under US GAAP, recognition of subsequent recoveries in fair value is prohibited. Accordingly, the HUBCO impairment reversed in 2003 under UK GAAP is reinstated for US GAAP. A portion of the impairment has been realised in 2004 on the sale of a partial holding in HUBCO.
c) Purchase accounting and goodwill
Under UK GAAP, goodwill arising on acquisitions after 1 April 1998, accounted for under the purchase method, is capitalised in the balance sheet and amortised over a period not exceeding 20 years. Prior to that date such goodwill arising on acquisitions was and remains eliminated against reserves. Under US GAAP, goodwill arising on purchase business combinations is capitalised in the balance sheet. With effect from 1 January 2002 goodwill is not subject to amortisation but is evaluated for impairment in accordance with applicable accounting literature. Goodwill impairments were recorded in 2003.
d) Development expenditure
Under UK GAAP, the Group capitalises certain development expenditure as described in more detail in accounting policy note viii to the consolidated financial statements. US GAAP required such costs to be expensed as incurred.
e) Onerous property lease provision
Under UK GAAP, a provision in respect of an onerous property lease is stated on a discounted basis. Under US GAAP, this provision is measured on an undiscounted basis. Accordingly, the impact of the discounting is reversed under US GAAP.
f) Liquidated damages and associated damages
Under UK GAAP, liquidated damages relating to amounts receivable from contractors in respect of the late commissioning of new power plants are recorded as income when they represent compensation for lost earnings. This is offset by certain costs, including interest and costs associated with the rectification of the plant, which are expensed in the period in which liquidated damages are recorded as revenue. Under US GAAP, this net amount is recorded as a reduction in the cost of the asset, regardless of the nature of the compensation. These differences in the asset cost result in different levels of depreciation under UK and US GAAP.
Those receipts that relate to compensation for plants not achieving long-term contractual performance levels are recorded as a reduction in the cost of the assets under both UK and US GAAP.
g) Insurance recovery
Under UK GAAP, an insurance recovery has been recorded as a reduction in the cost of the relevant replaced assets on the balance sheet. Under US GAAP, even though the insurance proceeds have been used to finance replacement parts the cost base in the balance sheet is not adjusted and the insurance receipt is recognised as a gain in the profit and loss.
h) Derivatives and hedging activities
Under UK GAAP, the Group recognises only derivatives of a speculative nature at fair value on the balance sheet with related gains and losses charged or credited to the profit and loss account. Gains or losses on other derivative instruments are deferred until the hedged transactions actually occur.
Under US GAAP, the Group recognises all qualifying derivatives (including certain derivatives embedded in other instruments) at fair value on the balance sheet. Gains and losses arising on derivatives that do not meet the US GAAP hedge accounting criteria, along with the accretion of the discounted value of debt where bifurcation is required, are recognised in the profit and loss account. Gains and losses on the Group's derivatives that qualify for cash flow hedge accounting are initially recognised in reserves (to the extent that the hedge is effective) and subsequently reclassified to the profit and loss as the hedged item impacts earnings. Any ineffective element of these hedges is immediately recognised in earnings.
i) Deferred finance costs
For UK GAAP purposes an exceptional interest charge of £12 million has been recorded in 2003 in relation to the write off of deferred finance costs in respect of the ANP bank facility. In 2004, costs incurred specifically to finalise the restructured debt were capitalised and are being amortised over the revised term of the debt.
Under US GAAP, the restructured debt was deemed an extension of the existing facility. Accordingly, the unamortised deferred financing costs of the original facility continue to be capitalised and are being amortised over the revised term of the debt. Additionally, in 2004 only costs paid directly to the lender could be capitalised. These differences in deferred financing costs give rise to different amortisation charges.
j) Disposal of investments
Applying the accounting differences between UK and US GAAP can result in differences in the carrying values of net assets under UK and US GAAP. As a consequence of this, different gains and losses may result on the subsequent disposal of the asset.
k) Cash dividends
Under UK GAAP, final ordinary cash dividends are recognised in the financial year in respect of which they are proposed by the Board of Directors. Under US GAAP, such dividends are not recognised until they are formally declared by the Board of Directors.
l) Deferred tax
Under UK GAAP a deferred tax asset or liability is not recognised on the difference between the tax and book values of an asset or liability that existed at the date of a business combination. Under US GAAP, deferred tax is recognised on this difference. US GAAP is generally more prescriptive in its requirements for provisioning for potential tax exposures. This can lead to differences in provision levels under UK and US GAAP.
m) Stock compensation schemes
Under UK GAAP, no cost is recorded for the Sharesave Scheme. For other stock compensation schemes, the intrinsic value, being the difference between the book value of the shares before granting the options and the option price, is charged over the period of performance to which the award relates (the vesting period). Under US GAAP, the compensation expense for both schemes is measured as the difference between the market value of the shares at the date of grant and the option price and is spread over the same vesting period. Share options which are exercisable if certain performance criteria are achieved are accounted for as variable awards and compensation expense is calculated at the end of each year by reference to the market price of the shares that are considered likely to vest and recognised over the vesting period.
