Financial statements
NOTES TO THE FINANCIAL STATEMENTS
4. Critical accounting judgements and estimates
The Group's principal accounting policies are set out on the 'Principal accounting policies' page. Management is required to exercise significant judgement and make use of estimates and assumptions in the application of these policies.
Having considered the Group's funding position and financial projections, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.
Areas which management believes require the most critical accounting judgements are:
(a) Environmental and landfill restoration provisions
Restoration and aftercare provisions are recognised in the financial statements at the net present value of the estimated future expenditure required to settle the Group's restoration and aftercare obligations. A discount is applied to recognise the time value of money and is unwound over the life of the provision. This is included in the income statement as a financial item within finance costs. As at 31 March 2010 the Group's environmental and landfill restoration provisions were £96.6m (2009 £97.7m).
Where a provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group's depreciation policy.
(b) Capitalisation of borrowing costs
The Group capitalises borrowing costs which are material and directly attributable to the construction of qualifying assets, (assets necessarily taking a substantial period of time to be prepared for their intended use). At the balance sheet date only the assets under construction in the joint ventures for the construction of Energy from Waste plants meet the criteria for capitalisation of related borrowing costs.
(c) Retirement benefit obligations
The Group participates in defined benefit schemes plus a defined contribution scheme operated by the Parent.
The pension cost under IAS 19 is assessed in accordance with Directors' best estimates using the advice of an independent qualified actuary and assumptions in the latest actuarial valuation. The assumptions are based on information supplied to the actuary by Pennon Group Plc, supplemented by discussions between the actuary and management. The principal assumptions used to measure schemes' liabilities, sensitivities to changes in assumptions and future funding obligations are disclosed on the 'Retirement benefit obligations' page.
(d) Cash-generating units
For the purpose of assessing impairments, the Group aggregates all assets for the purpose of identifying cash flows and considers the business to be a single cash-generating unit as it is an integrated business.
Areas which management believes require the most critical accounting estimations are:
(a) Service concession arrangements
Consideration from public sector entities for the operation of waste management service concessions is treated as contract receivables, split between profit on the construction of assets, operation of the service and provision of finance recognised as interest receivable. Management's allocation between these three elements is assessed according to prevailing external market conditions according to the type of service provided.
(b) Site development costs
The development of waste management sites for additional landfill capacity and new projects (such as Energy from Waste plants) are subject to obtaining planning permissions. Development costs are capitalised using management's assessment of the likelihood of a successful outcome for each project.
(c) Landfill costs
The estimation of landfill reserves is of particular importance in assessing landfill costs, since the cost of a landfill site is depreciated over its estimated operational life taking into account the usage of void space and gas production at the site post closure. The estimates of landfill reserves are regularly reviewed and updated during the financial year for usage and other events (for example site extensions). Estimates are also subject to physical review by external advisors.
A number of factors impact on the depreciation of landfill reserves including the available landfill space, future capital expenditure and operating costs. The assumptions are revised as these factors change.
(d) Carrying value of property, plant and equipment
The Group's accounting policy for property, plant and equipment is detailed in note 2. The carrying value of property, plant and equipment as at 31 March 2010 was £401.6m (2009 £372.8m restated). In the year ended 31 March 2010 additions to property, plant and equipment totalled £46.6m (2009 £84.0m restated) and the depreciation charge was £41.7m (2009 £41.7m restated). Estimated useful economic lives of property, plant and equipment are based on management's judgement and experience. When management identifies that actual useful lives differ materially from the estimates used to calculate depreciation, that charge is adjusted prospectively. Due to the significance of capital investment, variations between actual and estimated useful lives could impact operating results both positively and negatively. Historically, only minor changes to estimated useful lives have been required.
(e) Revenue recognition
The Group's accounting policy for recognising revenue is detailed in note 2. Revenue is recognised once the services or goods have been provided to the customer. Payments received in advance of revenue recognition are recorded as a liability.
(f) impairment of trade receivables
At each balance sheet date, the Group evaluates the collectability of trade receivables and records provisions for doubtful debts based on experience including comparisons of the relative age of accounts and consideration of actual write-off history. The actual level of debt collected may differ from the estimated levels of recovery, and could impact operating results positively or negatively. As at 31 March 2010 current trade receivables were £97.1m (2009 £92.2m), against which £1.0m (2009 £1.4m) was provided for impairment.
(g) Impairment of intangible assets
The Group records all assets and liabilities acquired in business acquisitions, including goodwill, at fair value. Intangible assets which have an indefinite useful life, principally goodwill, are assessed annually for impairment.
The initial goodwill recorded and subsequent impairment analysis require management to make estimations of future cash flows, terminal values and an assessment of the long-term pre-tax discount rate to be applied to those cash flows to reflect an assessment of the cost of capital of the cash - generating unit.