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Letters to Regulatory Directors
RD 05/08 9 April 2008 Dear Regulatory Director Regulatory accounts for 2007-08 Reporting requirements – RAG 3.06 This letter sets out the reporting requirements for companies' regulatory accounts for the 31 March 2008 year-end. It highlights those areas that we consider companies did not report adequately in their 2007 regulatory accounts. 1. General requirements Regulatory accounts should be submitted as soon as possible after the end of the financial year. You should submit four copies of: You should also publish your regulatory accounts on your website on the date they are submitted to us. Please include the web path in a covering letter to your regulatory accounts. If you have a statutory year-end different to 31 March, please remember to send us copies of your statutory accounts and group company annual report and accounts. The deadline for submitting regulatory accounts and the associated documents is 15 July. This is set out in condition F of your licence. You should draw up your regulatory accounts for 2007-08 on the basis of the revised regulatory accounting guidelines issued on 20 February 2007 in RD04/07 'Update of the regulatory accounting guidelines 1, 3 and 4'. All UK accounting standards extant at 31 March 2008 should be complied with (except FRS12 as detailed in RAG 1, RAG 3 and in RD11/00). Issues noted in RD07/07 and corresponding letters in previous years remain relevant. If you consider that the requirements of these conflict with those included in accounting standards, please contact Rob Lee, Acting Head of Regulatory Accounts and Business Affairs Team. 2. Specific regulatory accounts issues 2.1 Turnover recognition We have noticed that some companies are recognising turnover to the extent that it is probable that economic benefits will flow to the company (as per FRS5/IAS18). As such, some companies have chosen not to recognise as turnover the bills raised for customers who have a record of non-payment. Application note G9 to FRS5 states that if the effect is material to reported turnover, an adjustment will be necessary. We would not expect the amount of this adjustment to revenue to be material. This will affect the revenue correction mechanism, detailed in PR10/09 'Revenue correction mechanism – worked example', and our analysis of outstanding revenue as a proportion of turnover. It is also important when we assess relative efficiency that companies' accounting treatment of costs is consistent. Therefore, each company should recognise turnover relating to bills raised for customers who have a record of non-payment in its regulatory accounts and June return. 2.2 Link between directors' pay and standards of performance The Water Act 2003 introduced a requirement for each company to make a statement at the end of each financial year, regarding links between the pay of the board of the regulated business and standards of performance. You should disclose this statement linking directors' pay and standards of performance in a separate note to the regulatory accounts (or in the statutory accounts if both sets of accounts are bound together in the same volume). Detail on what the statement must include is set out in RAG 3.06. In the 2006-07 regulatory accounts many companies did not adequately explain whether they had achieved the targets set, how they calculated the remuneration for each standard, and the amounts paid to individual directors. We provided feedback in the annual letter to each company on its regulatory accounts. We expect an improvement in the standard of statements for this year. If, when preparing the statement, any details of the remuneration arrangements have not yet been finalised, we expect the statement for the following year to cover the finalised arrangements for the previous year as well. 2.3 Operating and Financial Review (OFR) RAG 3 required each company to complete an OFR for the first time in 2006-07. RAG 3.06 section 3.1.15 sets out our requirements for the OFR. This replaced both the previous requirements for the five-year summary table and commentary. The OFR should follow the 'Reporting Statement of best practice on the OFR' that the Accounting Standards Board issued on the 26 January 2006. In addition, it should cover the following specific areas. Companies that bind their regulatory and statutory accounts together in one volume, may refer to the enhanced business review in the statutory accounts when completing the OFR. Each company must make sure that if it submits regulatory and statutory accounts to us as one bound volume, it must: (a) be available to the public in the same hard copy format; and (b) published on the website in an identical manner. 2.4 Audit opinion The full wording of the opinion that we require for the regulatory accounts for 2007-08 is set out in annex A. Where a company submits a set of regulatory accounts that does not contain this wording, we will not consider them to be compliant with licence condition F. 3. June return audit reports Each company is required to have its June return information audited. We expect information in the June return submission and the regulatory accounts to be consistent. Previously, June return audit reports for some companies stated that auditors were not able to agree the June return figures to the regulatory accounts, as they had not been completed at that time. Where this is the case, we would expect your auditors to follow up this requirement and to issue a further letter confirming consistency of the June return and regulatory accounts when the regulatory accounts are complete. You should also submit this further letter by 15 July. If there are any differences between your June return submission and the regulatory accounts, they should be detailed and explained in a covering letter with the regulatory accounts. 4. Preliminary announcements Most companies' licence conditions require them to publish such information about the annual results of the appointed business as if it was a listed company, ie as required by the Listing Rules of the Financial Services Authority. You are reminded that any announcements made at the group level must also therefore contain enough information regarding the appointee's business to satisfy this requirement at the appointee level. Please tell us the date you will be making your announcement for your 2007-08 preliminary results. You should e-mail a copy to Gayle Pasley of the Regulatory Accounts Team (gayle.pasley@ofwat.gsi.gov.uk) on the day before your announcement. If this is not possible, please fax a copy of the announcement to this office (fax no. 0121 625 3609). Please note that we do not require each company to provide hard copies of its preliminary and interim announcements. The e-mailed or faxed copy is sufficient. Yours sincerely Keith Mason Director of Regulatory Finance and Competition Phone: 0121 625 1477 Annex A Wording of the regulatory accounts audit opinion Independent auditors' report To the Water Services Regulation Authority and Directors of [company] We have audited the Regulatory Accounts of [company] on pages [x] to [x] which comprise: This report is made, on terms that have been agreed, solely to the company and the Water Services Regulation Authority ("the WSRA") in order to meet the requirements of Condition F of the Instrument of Appointment granted by the Secretary of State for the Environment to the company as a water [and sewerage] undertaker under the Water Industry Act 1991 (the Regulatory Licence). Our audit work has been undertaken so that we might state to the company and the WSRA those matters that we have agreed to state to them in our report, in order (a) to assist the company to meet its obligation under the company's Instrument of Appointment to procure such a report and (b) to facilitate the carrying out by the WSRA of its regulatory functions, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the WSRA, for our audit work, for this report, or for the opinions we have formed. Basis of preparation The Regulatory Accounts have been prepared in accordance with Condition F of the Appointment and the Regulatory Accounting Guidelines, the accounting policies set out in the statement of accounting policies and, in the case of the regulatory historical cost accounting statements, under the historical cost convention. The Regulatory Accounts are separate from the statutory financial statements of the company. There are differences between United Kingdom Generally Accepted Accounting Principles (UK GAAP) and the basis of preparation of information provided in the regulatory accounts because the Regulatory Accounting Guidelines specify alternative treatment or disclosure in certain respects. Where the Regulatory Accounting Guidelines do not specifically address an accounting issue, then they require UK GAAP to be followed. Financial information other than that prepared wholly on the basis of UK GAAP may not necessarily represent a true and fair view of the financial performance or financial position of a company as shown in financial statements prepared in accordance with the Companies Act 1985. Respective responsibilities of the WSRA, the directors and auditors The nature, form and content of Regulatory Accounts are determined by the WSRA. It is not appropriate for us to assess whether the nature of the information being reported upon is suitable or appropriate for the WSRA's purposes. Accordingly we make no assessment. The Directors' responsibilities for preparing the Regulatory Accounts in accordance with Regulatory Accounting Guidelines are set out in the statement of directors' responsibilities for regulatory information on page [X]. Our responsibility is to audit the Regulatory Accounts in accordance with International Standards on auditing (UK and Ireland) issued by the Auditing Practices Board, except as stated in the "Basis of audit opinion", below and having regard to the guidance contained in Audit 05/03 'Reporting to Regulators of Regulated Entities'. We report to you our opinion as to whether the regulatory historical cost accounting statements present fairly, under the historical cost convention, the revenues and costs, assets and liabilities of the appointee and its appointed business in accordance with the company's Instrument of Appointment and Regulatory Accounting Guideline 2.03 (Guideline for the classification of expenditure), Regulatory Accounting Guideline 3.06 (Guideline for the contents of regulatory accounts) and Regulatory Accounting Guideline 4.03 (Guideline for the analysis of operating costs and assets); and whether the regulatory current cost accounting statements on pages [X] to [X] have been properly prepared in accordance with Regulatory Accounting Guideline 1.04 (Guideline for accounting for current costs and regulatory capital values), Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03. We also report to you if, in our opinion, the company has not kept proper accounting records as required by paragraph 3 of Condition F and whether the information is in agreement with the appointees' accounting records and has been properly prepared in accordance with the requirements of Condition F and, as appropriate, Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06, and Regulatory Accounting Guideline 4.03. We read the other information contained in the Regulatory Accounts, including any supplementary schedules on which we do not express an audit opinion, and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Regulatory Accounts. The other information comprises the performance review, the notes on regulatory information, and the additional information required by the licence. Basis of audit opinion We conducted our audit in accordance with International Standards on auditing (UK and Ireland) issued by the Auditing Practices Board except as noted below. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Regulatory Accounts. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Regulatory Accounts, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Regulatory Accounts are free from material misstatement, whether caused by fraud or other irregularity or error. However, as the nature, form and content of Regulatory Accounts are determined by the WSRA, we did not evaluate the overall adequacy of the presentation of the information, which would have been required if we were to express an audit opinion under Auditing Standards. Our opinion on the Regulatory Accounts is separate from our opinion on the statutory financial statements of the company on which we report, which are prepared for a different purpose. Our audit report in relation to the statutory accounts of the company (our "Statutory" audit) was made solely to the company's members, as a body, in accordance with section 235 of the Companies Act 1985. Our Statutory audit work was undertaken so that we might state to the company's members those matters we are required to state to them in a Statutory auditors' report and for no other purpose. In these circumstances, to the fullest extent permitted by law, we do not accept or assume any responsibility to anyone other than the company and the company's members as a body, for our Statutory audit work, for our Statutory audit report, or for the opinions we have formed in respect of that Statutory audit. The regulatory historical cost accounting statements on pages [X] and [X] have been drawn up in accordance with Regulatory Accounting Guideline 3.06 in that infrastructure renewals accounting as applied in previous years should continue to be applied and accordingly that the relevant sections of Financial Reporting Standards 12 and 15 be disapplied. The effect of this departure from Generally Accepted Accounting Principles, and a reconciliation of the balance sheet drawn up on this basis with that drawn up under Companies Act 1985 is given on page [X]. Opinion In our opinion the Regulatory Accounts of the company for the year ended 31 March [XX] fairly present in accordance with Condition F of the Instrument of Appointment granted by the Secretary of State for the Environment to the company as a water [and sewerage] undertaker under the Water Industry Act 1991, the Regulatory Accounting Guidelines issued by the WSRA and the accounting policies set out on page [X], the state of the company's affairs at 31 March [XX] on an historical cost and current cost basis, the historical cost and current cost profit for the year and the current cost cash flow for the year and have been properly prepared in accordance with those conditions, guidelines and accounting policies. In respect of this information we report that in our opinion: (a) proper accounting records have been kept by the appointee as required by paragraph 3 of Condition F of the instrument; (b) the information is in agreement with the appointee's accounting records and has been properly prepared in accordance with the requirements of Condition F and, as appropriate, Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA; (c) the regulatory historical cost accounting statements on pages [X] to [X] present fairly, under the historical cost convention, the revenues and costs, assets and liabilities of the appointee and its appointed business in accordance with the company's Instrument of Appointment and Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA; (d) the regulatory current cost accounting statements on pages [X] to [X] have been properly prepared in accordance with Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA.  |
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