National Grid 2008 Annual Report Download - page 637

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 36371
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 110
Description: EXHIBIT 15.1
0/1306.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/306/1*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 36371
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 110 Description: EXHIBIT 15.1
0/1306.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/306/1*
Table of Contents
118
Accountin
g
p
olicies continued
National Grid plc
Borrowings, which include interest bearing loans, UK retail
price index (RPI) linked debt and overdrafts are recorded at
their initial fair value which normally reflects the proceeds
received, net of direct issue costs less any repayments.
Subsequently these are stated at amortised cost, using the
effective interest rate method. Any difference between the
proceeds after direct issue costs and the redemption value is
recognised over the term of the borrowing in the income
statement using the effective interest rate method.
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets (being assets
that necessarily take a substantial period of time to prepare
for their intended use or sale) are added to their cost. Such
additions cease when the assets are substantially ready for
their intended use or sale.
Derivative financial instruments are recorded at fair value,
and where the fair value of a derivative is positive, it is
carried as a derivative asset and where negative, as a
derivative liability. Assets and liabilities on different
transactions are only netted if the transactions are with the
same counterparty, a legal right of set-off exists and the
cash flows are intended to be settled on a net basis. Gains
and losses arising from the changes in fair value are
included in the income statement in the period they arise.
Where we have derivatives embedded in financial
instruments or other contracts that are closely related to
those instruments or contracts, no adjustment is made with
respect to such derivative clauses. In particular, interest
payments on UK RPI debt are linked to movements in the
UK retail price index. The link to RPI is considered to be an
embedded derivative, which is closely related to the
underlying debt instrument based on the view that there is a
strong relationship existing between interest rates and
inflation in the UK economy. Consequently these embedded
derivatives are not accounted for separately from the debt
instrument.
An equity instrument is any contract that evidences a
residual interest in the consolidated assets of the Company
after deducting all of its liabilities and is recorded at the
proceeds received, net of direct issue costs, with an annual
amount equal to the nominal amount of the shares issued
included in the share capital account and the balance
recorded in the share premium account.
Subsequent to initial recognition, the fair values of financial
instruments measured at fair value that are quoted in active
markets are based on bid prices for assets held and offer
prices for issued liabilities. When independent prices are not
available, fair values are determined by using valuation
techniques which are consistent with techniques commonly
used by the relevant market. The techniques use observable
market data.
Q. Commodity contracts
Commodity contracts that meet the definition of a derivative
and which do not meet the exemption for normal sale,
purchase or usage are carried at fair value.
Remeasurements of commodity contracts carried at fair
value are recognised in the income statement, with changes
due to movements in commodity prices recorded in
operating costs and changes relating to movements in
interest rates recorded in finance costs.
Energy purchase contracts for the forward purchase of
electricity or gas that are used to satisfy physical delivery
requirements to our customers or for energy that we use
ourselves meet the normal purchase, sale or usage
exemption of IAS 32 ‘Financial Instruments: Presentation’.
They are, therefore, not recognised in the accounts.
Disclosure of commitments under such contracts is made in
the notes to the accounts (see note 29).
R. Hedge accounting
The Company and its subsidiaries enter into both derivative
financial instruments (derivatives) and non-derivative
financial instruments in order to manage interest rate and
foreign currency exposures, and commodity price risks
associated with underlying business activities and the
financing of those activities.
Hedge accounting allows derivatives to be designated as a
hedge of another (non-derivative) financial instrument, to
mitigate the impact of potential volatility in the income
statement of changes in fair value of the derivative
instruments. To qualify for hed
g
e accountin
g
, documentation
is prepared specifying the hedging strategy, the component
transactions and methodology used for effectiveness
measurement. National Grid uses three hedge accounting
methods.
Firstly, chan
g
es in the carryin
g
value of financial instruments
that are designated and effective as hedges of future cash
flows (cash flow hedges) are recognised directly in equity
and any ineffective portion is recognised immediately in the
income statement. Amounts deferred in equity in respect of
cash flow hedges are subsequently recognised in the
income statement in the same period in which the hedged
item affects net profit or loss. Where a non-financial asset or
a non-financial liability results from a forecasted transaction
or firm commitment being hedged, the amounts deferred in
equity are included in the initial measurement of that non-
monetary asset or liability.
Secondly, fair value hed
g
e accountin
g
offsets the chan
g
es in
the fair value of the hedging instrument against the change
in the fair value of the hedged item in respect to the risk
being hedged. These changes are recognised in the income
statement to the extent the fair value hedge is effective.
Adjustments made to the carrying amount of the hedged
item for fair value hedges will be amortised over the
remaining life, in line with the hedged item.
Thirdly, forei
g
n exchan
g
e
g
ains or losses arisin
g
on financial
instruments that are designated and effective as hedges of
the Company’s consolidated net investment in overseas
operations (net investment hedges) are recorded directly in
equity, with any ineffective portion reco
g
nised immediately in
the income statement.