Dubai Electricity and Water Authority. Consolidated financial statements for the year ended 31 December 2017

Transcription

1 Consolidated financial statements for the year ended 31 December 2017

2 Consolidated financial statements for the year ended 31 December 2017 Page(s) Independent auditor s report 1 6 Consolidated balance sheet 7 Consolidated statement of comprehensive income 8 Consolidated statement of changes in equity 9 10 Consolidated statement of cash flows 11 Notes to the consolidated financial statements 12 71

3 Independent auditor s report to the owner of Dubai Electricity and Water Authority Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects the consolidated financial position of Dubai Electricity and Water Authority ( DEWA or the Authority ) and its subsidiaries (together, the Group ) as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Group s consolidated financial statements comprise: the consolidated balance sheet as at 31 December 2017; the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and the ethical requirements that are relevant to our audit of the consolidated financial statements in the United Arab Emirates. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. Our audit approach Context The context of our audit is set by the Group s major activities in The most significant event of the last twelve months has been the adoption of International Financial Reporting Standards as its accounting framework by the Group. This has therefore become a new key audit matter for our audit in 2017 given the number of significant management estimates and judgements required to apply IFRS and the broad range of financial statement line items that are impacted. Our other key audit matters continue to reflect the fact that the operations of the Group were largely unchanged from the prior year, whilst noting that the Group continued to grow its customer base and revenues. Overview Key Audit Matters First-time adoption of International Financial Reporting Standards; and Accrual of unbilled electricity and water revenue. PricewaterhouseCoopers (Dubai Branch), License no Emaar Square, Building 4, Level 8, P O Box 11987, Dubai - United Arab Emirates T: +971 (0) , F: +971 (0) , Douglas O Mahony, Paul Suddaby, Jacques Fakhoury and Mohamed ElBorno are registered as practising auditors with the UAE Ministry of Economy

4 Independent auditor s report to the owner of Dubai Electricity and Water Authority (continued) Our audit approach (continued) Overview (continued) As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter First-time adoption of International Financial Reporting Standards Until 31 December 2016, the Group prepared its consolidated financial statements in accordance with what it termed DEWA Generally Accepted Accounting Principles ( DEWA GAAP ). Management decided to transition to International Financial Reporting Standards ( IFRS ) with effect from 1 January 2017 and adopt IFRS as its financial reporting framework. Accordingly, the Group followed the provisions of IFRS 1, First-time Adoption of IFRS, in preparing its opening IFRS consolidated balance sheet as at 1 January Management performed an exercise to identify differences between DEWA GAAP and IFRS and noted that certain accounting policies used in DEWA GAAP differed from IFRS for preparation and presentation of the consolidated financial statements. The major areas of such differences were : Componentisation and assessment of useful life of property, plant and equipment; Accounting for capital spares; and Accounting for income earned on assets transferred from customers. The resulting adjustments were recognised directly through retained earnings as of 1 January 2016 except for certain instances where permitted exemptions as set out by IFRS 1 were availed by the Group. How our audit addressed the key audit matter We obtained and reviewed the accounting memoranda prepared by the Group s management setting out their preliminary assessments of the likely significant changes in the Group s accounting policies occasioned by the proposed adoption and application of IFRS for each of the affected financial statement line items. With the support of our internal financial reporting accounting transition specialists, we met with management regularly to discuss their findings and proposed decisions to test both compliance of their proposals with IFRS and to ensure completeness in management s analysis. The Group s accounting memoranda were refined as a result of these meetings. The resulting policies and their application were deemed compliant with IFRS. Our audit procedures also included the following : Assessing the reasonableness of the methodology used by management in determining the impact on changes in accounting policies in compliance with IFRS; and 2

5 Independent auditor s report to the owner of Dubai Electricity and Water Authority (continued) Our audit approach (continued) Key audit matters (continued) Key audit matter How our audit addressed the key audit matter First-time adoption of International Financial Reporting Standards (continued) We focused on this area because of the risk of material misstatement in the adoption and application of IFRS on the consolidated financial statements given the size and complexity of the Group and the judgements and estimates required of management in this regard. Management s considerations and impact of adoption and application of IFRS are set out in the Note 5 to the consolidated financial statements. Testing management s quantification of the relevant adjustments arising from the adoption of IFRS for the opening consolidated balance sheet and comparative information, including agreeing, on a sample basis, information used in computing the relevant adjustments to the underlying accounting records for accuracy and completeness. We also considered the enhanced disclosure requirements of IFRS in the Group s consolidated financial statements, and tested these to ensure compliance. Accrual of unbilled electricity and water revenue The Group s electricity and water revenues include estimates of the value of electricity and water supplied to customers between the date of the last monthly meter reading and the year-end ( unbilled revenue ). The value of unbilled electricity and water revenue of AED 705 million (2016: AED 724 million) is included within revenue and trade receivables. The method of estimating such revenues is complex and judgemental and requires estimates and assumptions to: 1. Estimate the volumes of electricity and water consumed by customers between their last meter reading and the year end. Management s accrual for unbilled revenue at the year-end is based on the expected consumption pattern of customers based on historical experience; and 2. Assess the value to be applied to those volume estimates given the range of tariffs operated by the Group. Management applies a price per unit (which is dependent on a number of factors including the customer category) to the estimate of volume of electricity and water to be accrued at year end to arrive at the total estimated value of electricity and water revenue between the date of the last meter reading and the year-end. For unbilled revenue, our procedures included performing a recalculation using actual data to allow us to set expectations as to the likely level of unbilled revenue and then to compare this with the management s estimate, obtaining explanations for significant differences. We also obtained and tested management s underlying assumptions and base reference data relating to volume and price used in determining the level of unbilled revenue, as follows: Volume We agreed the core volume data underlying the calculation of the estimated unbilled volumes into sales and other systems having performed testing of the key controls on these systems. We compared and analysed the estimated volumes determined by management with benchmarks that management had also calculated using other internal information and sought explanations for variances from that benchmark. 3

6 Independent auditor s report to the owner of Dubai Electricity and Water Authority (continued) Our audit approach (continued) Key audit matters (continued) Key audit matter How our audit addressed the key audit matter Accrual of unbilled electricity and water revenue (continued) We focused on this area because of the complexities and uncertainties involved in arriving at the unbilled revenue figure as described above and because of the potentially material impact on the consolidated financial statements if errors were made in this calculation or if the assumptions used in estimating consumption patterns had been incorrectly applied. The management s considerations around this judgement are set out in the critical accounting judgements in note 4 to the consolidated financial statements. Price We tested the assumptions of price per unit by comparing the price applied in the estimation model with current data for each customer category. Finally, we assessed the overall consistency of the calculated unbilled revenue compared to the prior period based on our knowledge of the trends and the process. We also considered the adequacy of the Group s disclosures in the consolidated financial statements relating to this area. Other information Management is responsible for the other information. The other information comprises the Directors Report (but does not include the consolidated financial statements and our auditor s report thereon). Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. 4

7 Independent auditor s report to the owner of Dubai Electricity and Water Authority (continued) Auditor s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 5

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10 Consolidated statement of comprehensive income Year ended 31 December Note Revenue 20 21,602,330 20,604,954 Cost of sales 21 (12,748,324) (12,263,587) Gross profit 8,854,006 8,341,367 Administrative expenses 22 (2,205,853) (1,972,789) Other income 122, ,698 Operating profit 6,770,648 6,558,276 Finance income , ,164 Finance costs 24 (338,860) (464,935) Finance costs net 24 (108,484) (334,771) Share of profit from investments in joint ventures Profit for the year 6,662,542 6,223,644 Other comprehensive income: Items that will not be reclassified to profit or loss Remeasurements of retirement benefit obligations 16.1 (27,025) 19,659 Items that may be reclassified to profit or loss Reclassification of fair value changes on cash flow hedges 22,989 2,979 Cash flow hedges (137,092) (34,405) Other comprehensive loss for the year (141,128) (11,767) Total comprehensive income for the year 6,521,414 6,211,877 Profit for the year attributable to - Government of Dubai 6,428,332 6,039,289 - Non-controlling interests 234, ,355 6,662,542 6,223,644 Total comprehensive income for the year attributable to - Government of Dubai 6,340,698 6,042,921 - Non-controlling interests 180, ,956 6,521,414 6,211,877 The notes on pages 12 to 71 form an integral part of these consolidated financial statements. 8

11 Consolidated statement of changes in equity Attributable to the owner Government of Dubai account General reserve Statutory reserve Hedging reserve Retained earnings Total Noncontrolling interests Total equity At 1 January ,682,576 35,129, ,150 3,677-66,965, ,721 67,859,250 Profit for the year ,039,289 6,039, ,355 6,223,644 Other comprehensive income for the year (16,027) 19,659 3,632 (15,399) (11,767) Total comprehensive income for the year (16,027) 6,058,948 6,042, ,956 6,211,877 Transfer to general reserve - 4,436,165 44,907 - (4,481,072) - - Transactions with owner Non-cash distribution* (Note 14) (1,077,876) (1,077,876) - (1,077,876) Capital contribution by non-controlling interests ,450 2,450 Capital contribution by Government of Dubai value of land (net) 2,733, ,733,994-2,733,994 Dividend paid (Note 29) (500,000) (500,000) (195,000) (695,000) At 31 December ,416,570 39,565, ,057 (12,350) - 74,164, ,127 75,034,695 *The Group transfers an amount to the Government of Dubai account, as an appropriation of retained earnings, which is equivalent to the amount owed by the Government of Dubai to the Group with amounts owed to third parties assumed by the Government of Dubai (Note 14). The notes on pages 12 to 71 form an integral part of these consolidated financial statements. 9

12 Consolidated statement of changes in equity (continued) Attributable to the owner Government of Dubai account General reserve Statutory reserve Hedging reserve Retained earnings Total Noncontrolling interests Total equity At 1 January ,416,570 39,565, ,057 (12,350) - 74,164, ,127 75,034,695 Profit for the year ,428,332 6,428, ,210 6,662,542 Other comprehensive income (60,609) (27,025) (87,634) (53,494) (141,128) Total comprehensive income for the year (60,609) 6,401,307 6,340, ,716 6,521,414 Transfer to reserve - 4,510,881 55,569 (4,566,450) - - Transactions with owner Non-cash distribution* (Note 14) (834,857) (834,857) - (834,857) Capital contribution by non-controlling interests ,364 19,364 Capital contribution by Government of Dubai value of land (net) 3,103, ,103,706-3,103,706 Dividend paid (Note 29) (1,000,000) (1,000,000) (17,140) (1,017,140) At 31 December ,520,276 44,076, ,626 (72,959) - 81,774,115 1,053,067 82,827,182 *The Group transfers an amount to the Government of Dubai account, as an appropriation of retained earnings, which is equivalent to the amount owed by the Government of Dubai to the Group with amounts owed to third parties assumed by the Government of Dubai (Note 14). The notes on pages 12 to 71 form an integral part of these consolidated financial statements. 10

13 Consolidated statement of cash flows Year ended 31 December Note Net cash inflows from operating activities 12,537,879 11,480,508 Cash flows from investing activities Purchase of property, plant and equipment net of movements in trade payables and other long term liabilities (8,952,676) (5,708,904) Term deposits with original maturity of greater than three months (3,360,928) (4,872,582) Purchase of intangible assets (39,355) (16,774) Movement in held-to-maturity investments (100,368) - Proceeds from disposal of property, plant and equipment 831 6,116 Net cash outflow from investing activities (12,452,496) (10,592,114) Cash flows from financing activities Repayments of borrowings (397,478) (2,795,558) Proceeds from borrowings 2,242,781 1,172,576 Interest paid (627,213) (665,116) Interest received 125,499 86,100 Capital contribution from the non-controlling interest 2,000 2,450 Dividends paid to owner (1,000,000) (500,000) Dividends paid to non-controlling interests in subsidiaries (17,140) (195,000) Net cash inflow / (outflow) from financing activities 328,449 (2,894,548) Movement in regulatory deferral account credit balance 132,999 56,593 Net increase / (decrease) in cash and cash equivalents 546,831 (1,949,561) Cash and cash equivalents at the beginning of the year 13 1,765,044 3,714,605 Cash and cash equivalents at the end of the year 13 2,311,875 1,765,044 Material non-cash transactions: - Transfer of land to the Group by the Land Department of the Government of Dubai recorded through equity amounting to AED 3,104 million (2016: AED 2,734 million) (Note 8). - Conversion of borrowings into equity for a non-controlling interest in a subsidiary amounting to AED 17 million (2016: Nil). - During the year, non-cash distributions to the Government of Dubai amounted to AED 835 million (2016: AED 1,078 million). The notes on pages 12 to 71 form an integral part of these consolidated financial statements. 11

14 Establishment and operations Dubai Electricity and Water Authority ( DEWA or the Authority ) was incorporated on 1 January 1992 in the Emirate of Dubai by a Decree (the Original Decree ) issued by H.H The Ruler of Dubai, effective 1 January 1992, as an independent public authority having the status of a body corporate, financially and administratively independent from the Government. In accordance with the Original Decree, all rights, property and assets of Dubai Electricity Company (the DEC ) and Dubai Water Department (the Department ) belonging to the Government, were vested in the Authority, and the Authority was held responsible for all liabilities and debts of the DEC and the Department, of any kind whatsoever. Together, the DEC and the Department formed DEWA from the effective date of the Original Decree. The Authority is wholly owned by the Government of Dubai. The principal activities of the Authority, in accordance with the Original Decree and Decree No. 13 of 1999 which amended some of the provisions of the Original Decree, comprise water desalination and distribution and the generation, transmission and distribution of electricity, throughout the Emirate of Dubai. The registered address of the Authority is P.O. Box 564, Dubai, United Arab Emirates ( UAE ). DEWA and its subsidiaries are collectively referred to as the Group The Group is domiciled in UAE and is not subject to income tax. The Group has either directly or indirectly the following subsidiaries domiciled in UAE: Name of the entity Percentage of beneficial ownership % Principal business activities Al Etihad Energy Services Company LLC Implement energy efficiency measures in buildings. Jumeriah Energy International Holding company Holdings LLC Jumeirah Energy International Holding company LLC Mai Dubai LLC Purification of potable water. Hassyan Energy 1 Holdings Holding company LLC Shuaa Energy 2 Holdings LLC Holding company Jumeirah Energy International Holding company Capital Holding LLC**** Jumeirah Energy International Holding company Silicon Valley LLC *** Noor Energy 1 Holdings LLC***** Holding company 12

15 1 Establishment and operations (continued) Name of the entity DEWA Sukuk 2013 Limited (DSL) Data Hub Integrated Solutions LLC** Percentage of beneficial ownership % Principal business activities Investment company Established to provide services including IT, and infrastructure, networking and computer system housing services. Utilities Management Company Holding company Emirates Central Cooling Systems Corporation (EMPOWER) Provision of district cooling services, management, maintenance of central cooling plants and related distribution networks. Palm Utilities LLC Establish and operate district cooling projects and provide air conditioning, ventilator and refrigeration services. Palm District Cooling LLC Establish and operate district cooling projects and provide air conditioning, ventilator and refrigeration services. Empower Logstor LLC Manufacturing of pre-insulated pipes, mainly for district cooling. Shuaa Energy 2 P.S.C * 60 - Establish and provide full range of services for generation of electricity. Innogy International Middle East LLC (formerly RWE Power International Middle East LLC) Energy projects consultancy, desalination and sewage treatment plants operations and maintenance. Shuaa Energy 1 P.S.C Establish and provide full range of services for generation of electricity. Hassyan Energy Phase 1 P.S.C Establish and provide full range of services for generation of electricity. Istadama Carbon (L.L.C)****** Holding company * This entity was incorporated on 13 January 2017 ** This entity was incorporated on 10 January 2017 *** This entity was incorporated on 8 May 2017 **** This entity was incorporated on 17 October 2017 ***** This entity was incorporated on 17 October 2017 ****** The remaining balance of 57% is held by various parties. The Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity via management agreements and, accordingly, this entity is considered a subsidiary. 13

16 2 Summary of significant accounting policies The principal accounting policies applied by the Group in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation These financial statements are the first annual consolidated financial statements of the Group which have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and interpretations issued by the IFRS interpretations committee (IFRS IC) applicable to companies reporting under IFRS. Until 31 December 2016, the Group prepared its consolidated financial statements in accordance with the Group s internationally acceptable accounting principles ( DEWA GAAP ). The Group applied the provisions of IFRS 1 First-time Adoption of International Financial Reporting Standards in preparing its opening consolidated balance sheet as of the date of transition, 1 January Refer to Note 5 for further information The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Group s financial statements are disclosed in Note Basis of measurement The financial statements have been prepared on a historical cost basis, except for derivative financial instruments which are measured at fair value. 2.3 New and amended standards not yet adopted by the Group Certain new accounting standards and interpretations as detailed below, have been published that are not mandatory for reporting periods beginning on and after 1 January 2017 and have not been early adopted by the Group. The Group intends to adopt these standards, if applicable, when they become effective. Management has carried out a detailed impact assessment exercise to assess the impact of new financial reporting requirements related to financial instruments and revenue recognition. Phase 1 of the exercise involved a qualitative diagnostic exercise to identify all the significant financial reporting areas impacted by the new standards. Phase 2 dealt with the quantification of the financial impact of these areas. This exercise was led by the Chief Financial Officer of the Group who reviewed and approved all of the key changes and revised accounting treatment recommended by the project team. 14

17 2 Summary of significant accounting policies (continued) 2.3 New and amended standards not yet adopted by the Group (continued) (a) IFRS 9, Financial instruments, (effective from 1 January 2018); IFRS 9 - Financial Instruments ( IFRS 9 ), addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The standard will be effective from 1 January The majority of the Group s debt instruments that are currently classified as loans and receivables, comprising of trade and other receivables, term deposits and cash and cash equivalents, will satisfy the conditions for classification at amortised cost under IFRS 9 and hence there will be no change in the accounting for these assets. The other financial assets held by the Group include debt instruments currently classified as heldto-maturity and measured at amortised cost which meet the conditions for classification at amortised cost under IFRS 9. Accordingly, the Group does not expect the new standard to have a significant impact on the classification and measurement of its financial assets. There will be no impact on the Group s accounting for financial liabilities as the requirements under IFRS 9 only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules of financial instruments has not changed under the new standard. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. Based on assessments performed, that the Group s current hedging relationships would qualify as continuing hedges upon the adoption of IFRS 9. Accordingly, the Group does not expect a significant impact on the accounting for its hedging relationships. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than incurred credit losses in accordance with the requirements of IAS 39. Based on impact assessments undertaken to date, the Group does not expect the impact to be more than 3% of the total trade receivables. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group s disclosures about its financial instruments particularly in the year of adoption of the new standard. IFRS 9 must be applied for financial years commencing on or after 1 January The Group will apply the new rules retrospectively from 1 January 2018, with the practical expedients permitted under the standard. Comparatives for the financial year ended 2017 will not be restated. 15

18 2 Summary of significant accounting policies (continued) 2.3 New and amended standards not yet adopted by the Group (continued) (b) IFRS 15, Revenue from Contracts with Customers, (effective from 1 January 2018); The IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which covers contracts for goods and services and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. Management has assessed the impact of applying the new standard on the Group s consolidated financial statements and has identified following areas that will be affected: - Accounting for free electricity and water supplied to staff IFRS 15 requires the Group to recognise revenue against free units of water and electricity provided to staff. - Accounting for connection and reconnection fees Connection and reconnection fees will have to be accounted for over the estimated useful life of the related property (for connection fees) and tenancy contracts (for reconnection fees). The total expected impact of the above mentioned areas is not expected to be more than 1% of the total revenues reported by the Group. The Group intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of 1 January 2018 and that comparatives will not be restated. (c) IFRS 16, Leases, (effective from 1 January 2019); The IASB has issued a new standard for the recognition of leases. This standard will replace: IAS 17 - 'Leases' IFRIC 4 - 'Whether an arrangement contains a lease' SIC 15 - 'Operating leases - Incentives' SIC-27 - 'Evaluating the substance of transactions involving the legal form of a lease' Under IAS 17, lessees are required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflecting future lease payments and a 'right-of-use asset' for all lease contracts apart from an optional exemption for certain short-term or low value leases. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The mandatory date of adoption for the standard is 1 January

19 2 Summary of significant accounting policies (continued) 2.3 New and amended standards not yet adopted by the Group (continued) (c) IFRS 16, Leases, (effective from 1 January 2019) (continued); The Group is in the process assessing the potential impact of the application of IFRS 16 on the amounts reported and disclosures made in these consolidated financial statements. There are no other new or amended standards that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. 2.4 Basis of consolidation (a) Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated balance sheet respectively. (b) Joint arrangements Investments in joint arrangements are classified as either joint operations or joint venture depending on the contractual rights and obligations of each investor rather than the legal structure of the joint arrangement. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures and joint operations. Joint ventures are accounted for using the equity method in these consolidated financial statements. Under the equity method of accounting, interest in a joint venture is initially recognised at cost and adjusted thereafter to recognise the Groups s share of the post-acquisition profits or losses and movements in the consolidated statement of comprehensive income of the joint venture. Dividends received or receivable from joint ventures are recognised as a reduction in the carrying amount of the investment. When the Group s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. 17

20 2 Summary of significant accounting policies (continued) 2.4 Basis of consolidation (continued) (b) Joint arrangements (continued) The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in these consolidated financial statements under the appropriate headings. The financial statements of the joint ventures are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. Unrealised profits and losses resulting from transactions between the Group and its joint ventures are eliminated to the extent of the Group s interest in the joint ventures. 2.5 Property, plant and equipment Property, plant and equipment, other than land and capital work in progress, are stated at historical cost less accumulated depreciation and any provisions for impairment. The initial cost of an asset comprises its purchase price or construction cost and any costs directly attributable to bringing the asset into operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. When parts of property, plant and equipment are significant in cost in comparison to the total cost of the item, and where such parts/components have a useful life different than other parts and are required to be replaced at different intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major overhaul is performed, the directly attributable cost of the overhaul is recognised in the carrying amount of the plant and equipment if the recognition criteria are satisfied. This is recorded as a separate component with a useful life generally equal to the time period up to the next scheduled major overhaul. Subsequent expenditure incurred to replace a component of an item of property, plant and equipment or to improve its operational performance, that is accounted for separately, is included in the asset s carrying amount or recognised as a separate asset as appropriate when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced asset is subsequently derecognised. 18

21 2 Summary of significant accounting policies (continued) 2.5 Property, plant and equipment (continued) Expenditure on major inspection and overhauls of production plant is capitalised when it meets the asset recognition criteria and is depreciated over the period until the next major overhaul. All other repair and maintenance costs are charged to the consolidated statement of comprehensive income during the year in which they are incurred. Generation and desalination plants, supply lines and substation equipment are capitalised from the date these are available for use, after satisfactory completion of trial and reliability runs. Capital work in progress is stated at cost, less any impairment. When commissioned, capital work in progress is transferred to the appropriate property, plant and equipment category and depreciated in accordance with the Group s policies. Land is stated at cost and is not depreciated. Depreciation on other assets is calculated using the straight line method at rates calculated to reduce the cost of assets to their estimated residual values over their estimated useful lives or in case of leased assets, the shorter term. The useful lives of property, plant and equipment are as follows: Years Buildings 10 to 30 Generation and desalination plants 10 to 38 Transmission and distribution networks 10 to 30 Other equipment and assets 2 to 20 The assets residual values and useful lives are reviewed, and adjusted, if appropriate, at each consolidated balance sheet date. The carrying amount of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are included in the consolidated statement of comprehensive income and determined as the difference between the proceeds received and the asset s carrying amount. Insurance spares acquired together with the plant or purchased subsequently but related to a particular plant and are; i) only expected to be used during emergency breakdown situations, ii) are critical to the plant operation and must be available at stand-by at all times, iii) are capitalised within property, plant and equipment and depreciated from purchase date over the remaining useful life of the plant in which it is to be utilised. These do not form part of inventory provided the capitalisation criteria for property, plant and equipment is met. Capital spares are spare parts that are regularly replaced, repaired or overhauled usually as part of a replacement programme and are; i) only expected to be used in connection with an item of property, plant and equipment; ii) expected to be used during more than one period. These are carried under capital work in progress until they are put to use. 19

22 2 Summary of significant accounting policies (continued) 2.6 Intangible assets Intangible assets mainly include expenditure incurred on computer software by the Group. These are measured at cost upon initial recognition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated statement of comprehensive income in the year in which the expenditure is incurred. The costs of acquired computer software are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised using the straight line method over their estimated useful lives (3 to 5 years). Costs directly associated with the development of computer software programmes that are expected to generate economic benefits over a period in excess of one year are also capitalised and amortised over their estimated useful lives. Costs associated with maintaining computer software programmes are recognised as an expense as incurred. The residual values and useful lives of intangible assets are reviewed, and adjusted, if appropriate at each balance sheet date. Gains or losses arising from derecognising an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated statement of comprehensive income when the asset is derecognised. 2.7 Leases Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether the arrangement is or contains a lease. Upon determination that the arrangement contains a lease, the Group separates payments and other consideration required by the arrangement into those for the lease and those for other elements on the basis of their relative fair values. Operating leases Leases in which a significant proportion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of comprehensive income on a straight line basis over the period of the lease. 2.8 Inventories Inventories comprise consumables and repair spares, operating stock of fuel, pre-insulated pipes. Inventories are stated at the lower of cost and estimated net realisable value. Cost is determined using the weighted average method. Cost comprises of direct materials, and where applicable, direct labour and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less applicable selling expenses. 20

23 2 Summary of significant accounting policies (continued) 2.9 Borrowing costs Borrowing costs consists of interest and other costs that the Group incurs in connection with the borrowing of funds. General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. The Group has determined the substantial period to be greater than 1 year. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. Other borrowing costs are expensed in the year in which they are incurred Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation/amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. In assessing the value-in-use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash flows (cash-generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The Group s impairment calculation is based on detailed budgets and forecast calculations which are prepared separately for each of the Group s cash-generating units ( CGU ) to which the individual asset is allocated. Impairment losses of continuing operations are recognised in the consolidated statement of comprehensive income in those expense categories consistent with the function of the impaired asset Financial instruments Financial assets and financial liabilities are recognised on the consolidated balance sheet when the Group becomes a party to the contractual provisions on the instrument. 21

24 2 Summary of significant accounting policies (continued) 2.12 Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassified to the consolidated statement of comprehensive income within other income. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated statement of comprehensive income within other income. Amounts accumulated in equity are reclassified to profit or loss in the periods when the item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the ineffective portion is recognised in the consolidated statement of comprehensive income within other income. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, contracts work-in-progress or fixed assets), the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold in the case of contracts work in progress or in depreciation in the case of fixed assets Financial assets (a) Classification The Group classifies its financial assets in the following categories: - loans and receivables; and - held-to-maturity investments. 22