IFRS presentation to analysts and investors - About United Utilities

Accounting for Derivatives (IAS 39)Impact of IAS 39• United Utilities has elected to apply IAS 39 from 1 April 2005– the 2004/05 IFRS financial statements therefore reflect derivatives underthe existing UK GAAP accounting policy• Under IAS 39, debt is carried at amortised cost whilst derivatives arerecognised on the balance sheet at fair value– movements in the fair values of derivatives are reflected through theincome statement• However, to the extent that derivatives can be demonstrated to representeffective hedges under IAS 39– movement in the fair value of the debt is reflected through the incomestatement– the carrying value of the debt is adjusted to reflect its fair value in respectof the hedged risk38I shall now move on to the impact of IAS 39.As I said earlier, United Utilities has elected to apply IAS 39 with effect from 1April 2005, rather than 1 April 2004. This means that the 2004/05 accountsreflect derivatives under UK GAAP.The impact assessment of IAS 39 has, nonetheless, been carried out and has beenprepared on the assumption that the group will apply hedge accounting, to thefullest extent possible, to minimise potential income statement volatility.Under IAS 39, the default treatment is for debt to be carried at amortised cost,whilst derivatives are recognised on the balance sheet at fair value withmovements in those fair values reflected through the income statement.Whilst this will introduce volatility to the income statement, to the extent thatderivatives can be demonstrated to represent effective hedges, changes in therecognised value of hedged debt can be adjusted through the income statement.