Utilities to feel benefit of IFRS

UK utility companies are set to enjoy substantial benefits when they introduce IFRS after National Grid Transco became the first in the sector to quantify its positive impacts.

Link: IFRS update – a management briefing

NGT revealed that it expected statutory operating profit for 2004 to skyrocket 35% from £1.8bn to £2.4bn under IFRS. But, while those numbers make for good reading, the most significant benefit will come from changes to the accounting for replacement expenditure.

NGT and all other UK utilities have until now had to write off all replacement expenditure ð- the cost of planned maintenance on assets ð- to the profit and loss account, a practice that has disadvantaged them when compared with European utilities.

When international standards kick in, however, replacement expenditure will be capitalised and written off over its useful life, which will place NGT and other utility providers on an equal footing with European competition.

‘We regard these changes as positive in that they will enhance comparability with other European companies in our sector, not least in relation to the biggest change, which concerns the treatment of replacement expenditure,’ NGT FD Steve Lucas said.

Such is the influence of the replacement expenditure accounting change that Andrew Wright, utilities analyst at UBS, believes NGT has gone from being disadvantaged under UK GAAP to ‘flattered’ under IFRS.

‘Whereas under UK GAAP NGT was systematically disadvantaged relative to its peers on accounting treatment, we believe that it will be flattered under IFRS,’ Wright said in a research note.

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