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Notes on the Condensed Interim Statements
for the period 1 April 2016 to 30 September 2016
4. Critical accounting judgements and key sources of estimation uncertainty
4.1 Significant Financial Judgements – Estimation Uncertainties (continued)
(ii) Revenue recognition – estimated energy consumption – Estimation Uncertainty
Revenue from Retail energy supply activities includes an estimate of the value of electricity or gas supplied to customers between the date
of the last meter reading and the year end. This estimation will comprise of values for billed revenue in relation to consumption from
unread meters based on estimated consumption taking account of various factors including usage patterns and weather trends (disclosed
as trade receivables) and for unbilled revenue (disclosed as accrued income). The volume of unbilled electricity or gas is calculated by
assessing a number of factors such as externally notified aggregated volumes supplied to customers, amounts billed to customers and
other adjustments. Unbilled income is calculated by applying the tariffs relevant to the customer type to the calculated volume of
electricity or gas. This estimation methodology is subject to an internal corroboration process that provides support for the judgements
made by management. This process requires the comparison of calculated unbilled volumes to a benchmark measure of unbilled volumes
which is derived using independently verified data and by assessing historical weather-adjusted consumption patterns and actual meter
data that is used in industry reconciliation processes for total consumption by supplier. This aspect of the corroboration process, which
requires a comparison of the estimated supplied quantity of electricity or gas that is deemed to have been delivered to customers and the
aggregate supplied quantity of electricity or gas applicable to the Group’s customers that is measured by industry system operators, is a
key judgement. The assessment of electricity unbilled revenue is further influenced by the impact on national settlements data of feed-intariff
supported volumes and spill from solar PV generation. The experience of the Group is that the industry estimated supplied
quantities in gas have historically been higher than actual metered supply. To take account of this, the Group applies a further judgement,
being a percentage reduction to unbilled consumption volume, to the measurement of its unbilled revenue in the financial statements. It
is expected that this judgement will become less critical as the industry transitions to smart meter technology.
(iii) Valuation of trade receivables – Estimation Uncertainty
The basis of determining the provisions for bad and doubtful debts is explained at Note 16 of the financial statements in the section on
credit risk and aged debt. While the provisions are considered to be appropriate, changes in estimation basis or in economic conditions
could lead to a change in the level of provisions recorded and consequently on the charge or credit to the income statement.
(iv) Retirement benefits – Estimation Uncertainty
The assumptions in relation to the cost of providing post-retirement benefits during the period are based on the Group’s best estimates
and are set after consultation with qualified actuaries. While these assumptions are believed to be appropriate, a change in these
assumptions would impact the level of the retirement benefit obligation recorded and the cost to the Group of administering the
schemes. The value of scheme assets are impacted by the asset ceiling test which (a) restricts the surplus that can be recognised to assets
that can be recovered fully through refunds and (b) may increase the value of scheme liabilities where there are minimum funding
liabilities in relation to agreed contributions. Further detail on the estimation basis is contained in Note 17 of the financial statements.
4.2 Other key accounting judgements
Other key accounting judgements applied in the preparation of these Financial Statements include the following:
(i)
Business Combinations and acquisitions – Accounting Judgement
Business combinations and acquisitions require a fair value exercise to be undertaken to allocate the purchase price to the fair value of the
identifiable assets acquired and the liabilities assumed. The determination of the fair value of the assets and liabilities is based, to a
certain extent, on management’s judgement. The amount of goodwill initially recognised as a result of a business combination is
dependent on the allocation of this purchase price to the identifiable assets and liabilities with any unallocated portion being recorded as
goodwill. There were no business combinations in the period.
(ii) Energy Company Obligation (ECO) costs – Accounting Judgement
The Energy Company Obligation (‘ECO’) legislation, in force since 1 January 2013, requires qualifying energy suppliers such as the Group’s
Energy Supply business, to meet defined targets by providing measures to improve the energy efficiency of and level of carbon emissions
from UK domestic households. Delivery of the measures is required by 31 March 2017. As the Group is not technically obligated to deliver
the measures until 31 March 2017, the costs of ECO are recorded when measures are delivered or other qualifying expenditure has been
incurred.
(iii) Metering contracts
Following the disposal of smart meter assets to Meter Fit 10 Limited in the period (see Note 12), the Group has entered into an agreement
for the provision of meter asset provider (MAP) services with that company. The Group has assessed that this arrangement, in common
with all similar arrangements, is not a lease because other parties take a significant amount of the output from the meters and due to the
Group being unable to control either the operation or the physical access to the meters.
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