NOTES TO THE FINANCIAL STATEMENTS - NOTE 2


 

2. Summary of significant accounting policies
  The principal accounting policies applied in the preparation of these separate and consolidated financial statements are set out below. The nature and effect of the changes to the accounting policies are discussed in note 50.2.
2.1 Basis of preparation and measurement
  Statement of compliance

The consolidated financial statements of Eskom at and for the year ended 31 March 2014 comprise the company and its subsidiaries (together referred to as the group) and the group’s interest in associates and joint ventures. The separate and consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Public Finance Management Act (PFMA), and the Companies Act of South Africa. The financial statements have been prepared on the going-concern basis.

Basis of measurement

The separate and consolidated financial statements are prepared on the historical cost basis except for the following items which are measured at fair value:

investment in securities
derivatives held for risk management
financial trading assets
financial trading liabilities
embedded derivatives
non-current assets and liabilities held-for-sale

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

Functional and presentation currency

Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency).The consolidated financial statements are presented in South African rand (rounded to the nearest million unless otherwise stated), which is the company’s functional currency and the presentation currency of the group.

Changes in accounting policies and comparability

The group has consistently applied the accounting policies to all periods presented in these consolidated financial statements except for the new or revised statements and interpretations implemented during the year. The nature and effect of the changes to the accounting policies are discussed in note 50.2.

2.2 Consolidation
  Investment in subsidiaries

Subsidiaries are entities (including structured entities) controlled by the group. The group controls an entity when it 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’s relevant activities. Subsidiaries are consolidated from the date on which control is transferred to the group.They are deconsolidated from the date that control ceases.

Investments in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company.

Disposal of subsidiaries

When the group ceases to have control in an entity, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

Business combinations

The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been adjusted where necessary, to ensure consistency with the policies adopted by the group.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognised in profit or loss.

Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with International Accounting Standard (IAS) 39 Financial instruments: recognition and measurement either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

Transactions with non-controlling interests

The group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the group. For such purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests that do not result in a loss of control are also recorded in equity.

Joint arrangements

A joint venture is an arrangement in which the group has joint control whereby the group has rights to the net assets of the arrangement, rather than direct rights to its assets and direct obligations for its liabilities.

A joint operation is an arrangement in which the group has joint control whereby the group has direct rights to the assets and obligations for the liabilities relating to the arrangement. The group entity that is a joint operator of a joint operation accounts for its portion of the following in its separate financial statements:

assets, including its share of any assets held jointly
liabilities, including its share of any liabilities incurred jointly
revenue from the sale of its share of the output arising from the joint operation
share of the revenue from the sale of the output by the joint operation
expenses, including its share of any expenses incurred jointly

Common control transactions

The group accounts for common control transactions in the consolidated financial statements using the book value (predecessor) basis of accounting. In applying the book value basis, the acquirer in a common control transaction recognises the assets and liabilities acquired using the book values in the financial statements of the relevant entity. Any difference between the consideration paid and the book values of the assets and liabilities acquired is recognised directly in equity.

The company also accounts for common control transactions in the separate financial statements using the book value basis of accounting. In applying the book value basis, the acquirer recognises the cost of its investment at the carrying amount of the investment recognised in the separate financial statements of the transferring entity.Any difference between the consideration paid and the cost of investment acquired is recognised directly in equity.

Investment in equity-accounted investees

Associates are all entities over which the group has significant influence but not control or joint control over the financial and operating policies, generally linked to a shareholding of 20% or more of the voting rights.

Investments in associates and joint ventures are accounted for at cost less impairment losses in the separate financial statements of the company. These investments are accounted for using the equity method of accounting in the financial statements of the group. The group’s investment in associates and joint ventures includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The group’s share of its associates’ and joint ventures’ post- acquisition profits or losses is recognised in profit or loss within share of profit of equity-accounted investees, and its share of post-acquisition movements in other comprehensive income is recognised directly in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.

Unrealised gains on transactions between the group and its associates or joint ventures are eliminated to the extent of the group’s interest in the associates or joint ventures. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of associates or joint ventures have been adjusted where necessary to ensure consistency with the policies adopted by the group.

If the financial statements of the associate or joint venture are prepared as of a different date to that of the group, adjustments are made to the financial statements of the associate or joint ventureforsignificanttransactionsandeventsthatoccurbetween the date of the financial statements of the associate or joint venture and the date of the financial statements of the group to enable the financial statements of the associate or joint venture to be used for the equity accounting of the associate or joint venture. The maximum time period between the date of the financial statements of the associate or joint venture and the date of financial statements of the group is three months.

2.3 Segment reporting
  Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the group executive management committee (Exco).

An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group’s other components. An operating segment’s results are reviewed regularly by Exco to make decisions about resources to be allocated to the segment and assess performance, and for which discrete financial information is available.

2.4 Foreign currency translation
  Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when recognised in other comprehensive income for qualifying cash flow hedges.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security, and other changes in the carrying amount of the security. Translation differences relating to changes in the amortised cost are recognised in profit or loss and other changes in the carrying amount are recognised in other comprehensive income within available-for-sale financial assets.

Non-monetary items are measured at historical cost. Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale, are recognised in other comprehensive income within available-for-sale financial assets.

Foreign loans are initially recognised at the exchange rate prevailing at transaction date and are translated at spot rate at every reporting date. Foreign exchange gains and losses that relate to loans and receivables, debt securities issued and borrowings are presented in profit or loss within net fair value gain/loss on financial instruments, excluding embedded derivatives.

Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to rand at the prevailing exchange rates at the reporting date.The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to rands at the average exchange rate. The group does not have any foreign operations in hyperinflationary economies.

Foreign currency differences arising as a result of the above are recognised in other comprehensive income within the foreign currency translation reserve.

2.5 Property, plant and equipment
  Land and buildings comprise mainly office, power station, substation, workshop and related buildings.

Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes:

any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period
borrowing costs (refer to note 2.8)
transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. When part of an asset is being replaced, the carrying amount of the replaced part is derecognised. Repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Works under construction are stated at cost which includes cost of materials and direct labour and any directly attributable costs incurred in bringing it to its present location and condition. Materials used in the construction of property, plant and equipment are stated at weighted average cost.

Spare parts classified as strategic and critical spares are recognised as property, plant and equipment.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

  Years  
Buildings and facilities 10 to 40  
Plant    
• Generation 6 to 80  
• Transmission 5 to 40  
• Distribution 10 to 35  
• Test, telecommunication and other plant 3 to 20  
Equipment and vehicles 1 to 10  

The depreciation method, residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date.

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Gains or losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in profit or loss within other income or other operating expenses.

2.6 Intangible assets
  Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary/associate/joint venture at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures is included ininvestments in equity-accounted investees and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. The group allocates goodwill to each business segment in each country in which it operates.

Licences

Licences are shown at historical cost. Licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of licences over their estimated useful life.

Computer software

Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of computer software over their estimated useful life. If software is integral to the functionality of related equipment, then it is capitalised as part of the equipment.

Costs that are directly associated with the development of identifiable and unique software products controlled by the group, and that will probably generate economic benefits exceeding costs beyond one year are recognised as intangible assets and amortised as above. Costs include employee costs incurred as a result of developing software, borrowing costs if relevant (refer to note 2.8) and an appropriate portion of relevant overheads. Costs associated with maintaining computer software programs are recognised as an expense as incurred.

Rights

Rights consist mainly of servitudes and rights of way under power lines. Rights are not amortised as they have an indefinite useful life. A servitude right is granted to Eskom for an indefinite period. Intangible assets with an indefinite life are required to be tested annually for impairment and carried at cost less accumulated impairment losses per IAS 36 Impairment of assets.

The life of the servitude will remain in force as long as the transmission or distribution line is used to transmit electricity. It is management’s assessment that a servitude will only become impaired if the line to which the servitude is linked is derecognised. In practice, a derecognised line will be refurbished or replaced by a new line and then the likelihood of an impairment of a servitude right is remote.

Concession assets

Concession assets consists of rights to charge for the usage of the infrastructure under service concession arrangements. Concession assets are capitalised on the basis of the cost of capital expenditure incurred in respect of service concession arrangements (which is the fair value at initial recognition), including borrowing costs on qualifying capital expenditures (refer to note 2.8). Subsequent to initial recognition, the concession assets are measured at cost less accumulated amortisation and impairment losses. Concession assets are amortised over their estimated useful life, which is the concession period during which they are available for use. Refer to note 2.9 and 22.

Intangible assets arising from a service concession arrangement are included within intangible assets under concession assets.

Research and development

Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled:

it is technically feasible to complete the intangible asset so that it will be available for use or sale
management intends to complete the intangible asset and use or sell it
there is an ability to use or sell the intangible asset
it can be demonstrated how the intangible asset will generate probable future economic benefits
adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available
the expenditure attributable to the intangible asset during its development can be measured reliably

Other development expenditure that does not meet these criteria is recognised in profit or loss within other operating expenses. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life.

2.7 Impairment of non-financial assets
  The carrying amounts of the group’s non-financial assets, other than inventories, deferred tax assets and tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Assets that have an indefinite useful life, for example land and rights over servitudes, are not subject to amortisation or depreciation and are tested annually for impairment. Assets that are subject to amortisation or depreciation 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 to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment loss or reversal is recognised in profit or loss within net impairment loss.
2.8 Capitalisation of borrowing costs
  Borrowing costs attributable to the construction of qualifying assets are capitalised as part of the cost of these assets over the period of construction, until the asset is substantially ready for intended use, to the extent that the assets are financed by borrowings. The capitalisation rate applied is the weighted average of the borrowing costs applicable to the borrowings of the entities in the group unless an asset is financed by a specific loan, in which case the specific rate is used.
2.9 Service concession arrangements
  A service concession arrangement is an arrangement involving an operator constructing and/or upgrading, operating and maintaining infrastructure used to provide a public service for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices and arrangements for arbitrating disputes. The grantor (the party that grants the service arrangement) controls the infrastructure, and the operator is required to return to the grantor the infrastructure at the end of the arrangement.

Financial asset

The group recognises a financial asset arising from a service concession arrangement to the extent that it has an unconditional right to receive cash or another financial asset from or at the direction of the grantor, for the construction, upgrade or operation services of concession assets. Financial assets recognised as a result of the service concession arrangement are measured at fair value upon initial recognition. Subsequent to initial recognition, the financial asset is accounted for in accordance with IAS 39 Financial instruments: recognition and measurement. Refer to note 2.11.

Financial assets arising from a service concession arrangement are included within trade and other receivables under other receivables. Refer to note 17.

Construction or upgrade services

The group accounts for revenue and costs relating to construction or upgrade services in accordance with IAS 11 Construction contracts.

Operation services

The group accounts for revenue relating to operation services in accordance with IAS 18 Revenue.

Contractual obligations to maintain and restore the infrastructure

The group accounts for the contractual obligations to maintain or restore the infrastructure in accordance with IAS 37 Provisions, contingent liabilities and contingent assets. The provision to restore the infrastructure is included within provisions.

2.10 Leases
  A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment, or series of payments, the right to use an asset for an agreed period of time. An assessment in terms of International Financial Reporting Interpretations Committee (IFRIC) 4 Determining whether an arrangement contains a lease is made as to whether the arrangement is dependent on the use of a specific asset and the arrangement conveys the right to use an asset to determine if an arrangement contains a lease. Refer to note 6, 15 and 29.

Finance leases – where the group is the lessee

The group leases certain property, plant and equipment. Leases ofproperty,plant and equipment where the group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other short-term and other long-term payables. The interest element of the finance cost is charged to profit or loss within finance cost over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated or amortised over the shorter of the useful life of the asset and the lease term.

Finance leases – where the group is the lessor

When property, plant and equipment are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is disclosed as unearned finance income within finance lease receivables.

Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

Finance lease receivables are assessed for impairment and derecognised in accordance with the requirements for financial assets. Derivatives embedded in leases are accounted for in accordance with the requirements for embedded derivatives. Refer to note 2.11.

Fair value

The fair value of finance lease receivables and finance lease liabilities is determined by discounting the future cash flows with respect to the finance lease at the interest rate implicit in the lease.

Operating leases

Leases where substantially all of the risks and rewards of ownership are not transferred to the group are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss within other operating expenses on a straight-line basis over the period of the lease.

Leases where substantially all of the risks and rewards of ownership are not transferred to the lessee (ie the group is the lessor) are classified as operating leases. Payments received under operating leases are recognised in profit or loss within other income on a straight-line basis over the period of the lease.

2.11 Financial instruments
2.11.1 Non-derivative financial instruments
  Recognition, measurement and derecognition of financial assets

Non-derivative financial assets comprise investment in securities, loans to subsidiaries, financial trading assets, loans receivable, trade and other receivables, finance lease receivables and cash and cash equivalents.

Cash and cash equivalents comprise balances with local and international banks, monies in call accounts, short-term assets and money market assets with an original maturity of less than 90 days. Bank overdrafts are shown within debt securities and borrowings in current liabilities on the statement of financial position.

All non-derivative financial assets are recognised on the date of commitment to purchase (trade date). Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the group has transferred substantially all the risks and rewards of ownership. Realised gains or losses on derecognition are determined using the last‑in-first-out (LIFO) method.

Non-derivative financial assets net of any directly attributable transaction costs are recognised initially at fair value. Directly attributable transaction costs related to financial assets at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred.Subsequent to initia lrecognition, non-derivative financial assets are measured per asset category (as stated below). The appropriate classification of the financial asset is determined at the time of commitment to acquire the financial asset.

When entering into a transaction, the financial instrument is recognised initially at the transaction price which is generally the best indicator of fair value. Where fair value of the financial instrument is different from the transaction price a day-one gain or loss may arise. The day-one gain or loss is immediately recognised in profit or loss (except for embedded derivatives and the subordinated loan from shareholder) within net fair value gain/(loss) on financial instruments, excluding embedded derivatives, provided that the fair value has been determined based on market-observable data. If the fair value has not been determined solely based on market-observable data, the day- one gain or loss is deferred in the statement of financial position and amortised over the term of the instrument in profit or loss.

Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that management has both the ability and intent to hold to maturity.

Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less any accumulated impairment losses.

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus principal payments, plus or minus the cumulative amortisation using the effective interest method and minus any reduction for impairment or uncollectibility.

The effective interest rate is the rate that discounts the estimated future cash receipts of the financial asset exactly to its net carrying amount.

Financial assets at fair value through profit or loss (held-for- trading)

Held-for-trading assets comprises financial trading assets. An instrument is classified at fair value through profit or loss if it is held-for-trading or is designated as such upon initial recognition. An instrument may only be designated at fair value through profit or loss when certain criteria are met. The group has elected not to designate financial assets at fair value through profit or loss.

A financial asset is classified as held-for-trading if it is:

acquired for the purpose of selling it in the short term
part of a portfolio of identified financial instruments that is managed together and for which there is evidence of a recent pattern of short-term profit taking
a derivative instrument

Subsequent to initial recognition, changes in the fair value of these financial assets are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives.

Loans and receivables

Loans and receivables comprises trade and other receivables, loans receivable, loan to subsidiaries and cash and cash equivalents. The trade and other receivables of the group are classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

those that management intends to sell immediately or in the short term, which are classified as held-for-trading
those that upon initial recognition are designated as available- for-sale
those for which the group may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available-for-sale

Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any accumulated impairment losses.

Available-for-sale financial assets

Available-for-sale assets comprises investment in securities. Available-for-sale financial assets are those assets that are designated as such or do not qualify to be classified as fair value through profit or loss, held-to-maturity or loans and receivables.

Subsequent to initial recognition, available-for-sale financial assets are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and losses (for monetary items), are recognised in other comprehensive income within available-for-sale financial assets. When the asset is derecognised, the cumulative gain or loss in equity is transferred to profit or loss.

Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in impairment provisions attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for- sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.

Fair value

The fair values of trading assets and available-for-sale assets are based on quoted bid prices if available. For assets that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market- related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market-related rate for a financial asset with similar terms and conditions at the reporting date.

The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

Impairment (held-to-maturity investments, loans and receivables)

A review for impairment indicators is carried out at each financial year end to determine whether there is any objective evidence that a financial asset not carried at fair value through profit or loss is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost or adverse changes in the technological, market or economic environment in which the entity operates are considered to be indicators that the securities are impaired.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss within net impairment loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets carried at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss within net impairment (loss)/reversal.

Where an asset has been impaired, the carrying amount of the asset is reduced through an allowance account.

Loans and receivables that would otherwise have been impaired but have been renegotiated are initially accounted for as impaired debt immediately after having been renegotiated. Once a payment history in terms of the renegotiated agreement is established the same impairment assessment as applicable to debts that have not been renegotiated are applied to assess whether the debt then should be impaired or not.

Recognition, measurement and derecognition of financial liabilities

Non-derivative financial liabilities comprise debt securities and borrowings, loans from subsidiaries, financial trading liabilities, finance lease liabilities and trade and other payables.

Non-derivative financial liabilities are recognised initially at fair value net of any directly attributable transaction costs except for financial liabilities at fair value through profit or loss. Directly attributable transaction costs related to liabilities recognised at fair value through profit or loss are recognised in profit or loss on initial recognition when incurred.Subsequent to initial recognition, non-derivative financial liabilities are measured at amortised cost or fair value as per the relevant liability category.

All non-derivative financial liabilities are recognised on the date of commitment (trade date) and are derecognised when the obligation expires, is discharged or cancelled, or there is a substantial modification to the terms of the liability. Realised gains and losses are determined using the LIFO method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services. The capitalised fees are amortised from the date of first draw-down to final maturity of each facility.

Financial liabilities at fair value through profit or loss (held-for-trading)

Held-for-trading liabilities comprises financial trading liabilities. An instrument is classified at fair value through profit or loss if it isheld-for-tradingorisdesignatedassuchuponinitialrecognition. An instrument may only be designated at fair value through profit or loss when certain criteria are met. The group has not elected to designate financial liabilities at fair value through profit or loss.

A financial liability is classified as held-for-trading if it is:

incurred principally for the purpose of selling or repurchasing it in the near term
part of a portfolio of identified financial instruments that is managed together and for which there is evidence of a recent pattern of short-term profit taking
a derivative instrument

Subsequent to initial recognition, financial liabilities at fair value through profit or loss continue to be measured at fair value.

Financial liabilities at amortised cost

Financial liabilities that are not held-for-trading are classified as financial liabilities at amortised cost. Debt securities and borrowings, including foreign loans, that are not held-for-trading, and loans from subsidiaries are classified as held at amortised cost. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. The trade and other payables of the group are classified as financial liabilities at amortised cost.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Fair value

The fair value of financial trading liabilities is based on quoted offer prices if available. For liabilities that are not quoted in an active market, valuation techniques are used. Where pricing models are used, inputs are based on market-related measures at the reporting date. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market-related rate for a financial liability with similar terms and conditions at the reporting date.

Market-making

Eskom partakes in market-making activities in a bid to reduce the funding cost of the company. Most investors place a premium on the liquidity of bonds and are therefore prepared to accept a lower yield (relative to alternative bonds) to invest in bonds where the issue sizes are large and deemed to be liquid. Eskom bonds used for market-making are accounted for as financial liabilities at amortised cost.

The risks of market-making include the anticipated loss on turnover, typically the bid/offer spread thereon, which is partially mitigated through repurchase agreement opportunities. In addition there is the potential negative impact on liquidity which Eskom believes is limited due to the strategy of holding sufficient liquidity buffers as well as a portfolio of liquid government bonds.

2.11.2 Financial guarantees
  Recognition

Financial guarantees are contracts that require the group to make specified payments to reimburse the holder for a loss that may occur because a specified counter party fails to make payment when due in accordance with the terms of a debt instrument.

Financial guarantee liabilities are initially recognised at fair value, and the initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortised cost and the present value of any expected payment (when a payment under the guarantee has become probable). Financial guarantees are included within other liabilities.

Fair value

Financial guarantees are valued initially by taking into account discounted future cash flows adjusted according to the probability of occurrence of the trigger event. The resultant guarantee is raised as a liability, with the costs being charged to profit or loss.The unprovided portion is disclosed as a contingent liability. As a result of using discounted cash flows, interest rate risk may arise due to the possibility of the actual yields on assets being different from the rates assumed in the discounting process.

2.11.3 Derivative financial instruments and hedging activities
  Recognition

A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial investment and is settled at a future date. All derivatives are classified as held-for-trading instruments, unless they meet the criteria for hedge accounting and have been designated for purposes of applying hedge accounting. Derivatives are initially recognised at fair value and remeasured subsequently at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and options pricing models which consider current market and contractual prices for the underlying instruments as well as the time value of money.

All derivative instruments of the group are included in the statement of financial position as derivatives held for risk management. Realised and unrealised gains or losses for derivatives used for economic hedging are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives. Realised and unrealised gains or losses for derivatives used for cash flow hedging are recognised in other comprehensive income within cash flow hedges.

Hedge accounting

The method of recognising the resulting gain or loss on the derivative depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Derivatives can be designated as:

hedges of the fair value of recognised liabilities and assets (fair value hedge)
hedges of a particular risk associated with a recognised liability, asset or a highly probable forecast transaction (cash flow hedge)
hedges of a net investment in a foreign operation (net investment hedge)

The group applies only cash flow hedge accounting.

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.

Movements on the hedging reserve are shown in other comprehensive income within cash flow hedges. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining period of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining period of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities.

Cash flow hedges

Insignificant day-one gains and losses are expensed in profit or loss while significant day-one gains and losses are deferred in the statement of financial position (derivatives held for risk management) and then amortised over the term of the hedging instrument in profit or loss. Day-one gains and losses on hedging instruments are predominantly a function of the inclusion of credit, liquidity and basis risk in the terms of the trading instrument. These risks are not included in the determination of a hypothetical derivative used to measure fair value movements in a hedged item and are therefore excluded from any hedge accounting relationships. The effective portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within cash flow hedges. The gain or loss relating to the ineffective portion and the forward points portion which is not designated (as part of the hedge) is recognised immediately in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives.

When the forecast transaction occurs, any cumulative gain or loss existing in other comprehensive income at that time is included in the initial cost or other carrying amount of the asset or liability.

When a hedging instrument expires, is sold or a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in other comprehensive income until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives.

Economic hedging

Certain derivative instruments do not qualify for hedge accounting and are used for economic hedging. Changes in the fair value of these derivative instruments are recognised in profit or loss within net fair value gain/(loss) on financial instruments, excluding embedded derivatives.

2.11.4 Repurchase and resale agreements
 

Securities sold subject to repurchase agreements are disclosed in the financial statements as financial trading assets. The liability to the counterparty is recorded as repurchase agreements and is included in financial trading liabilities.

Securities purchased under agreements to resell are recorded as repurchase agreements and are included in financial trading assets or in investments in securities.

The difference between the sale and repurchase price or purchase and resale price is treated as interest accrued over the life of the repurchase or resale agreement using the effective yield method.

2.11.5 Embedded derivatives
  Recognition

An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to those of a standalone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, or other variable. The hybrid contract is the entire contract and the host contract is the main body of the contract excluding the embedded derivative.

An embedded derivative is separated from the host contract and accounted for as a derivative if:

the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract
a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative
the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss

The determination of the host contract of an electricity contract (which includes an embedded derivative) is based on the standard electricity tariff specified in the contract and where no standard tariff is specified, the tariff that would best fit the profile of such a customer.

Fair value

Embedded derivatives are disclosed separately from derivatives held for risk management. The changes in fair value are included in net fair value gain/(loss) on embedded derivatives in profit or loss. The impact of the fair value gains or losses is taken into account in the calculation of current and deferred taxation.

Embedded derivatives that are not separated are effectively accounted for as part of the hybrid instrument.

Non-option based derivatives are separated on terms that result in a fair value at the date of inception of zero. Option-based derivatives are separated on the terms stated in the contracts and will not necessarily have a fair value equal to zero at the initial recognition of the embedded derivative resulting in day-one gains/(loss). These day-one gains or losses are spread equally over the period of the agreement. The fair value will depend on the strike price at inception.

The valuation at initial recognition is adjusted for cash flows since inception. The value of the embedded derivatives which involve a foreign currency is first determined by calculating the future cash flows and then discounting the cash flows by using the relevant interest rate curve and only then is the net present value of the cash flows converted at the relevant rand/foreign currency spot rate to the reporting currency.

The fair value of the embedded derivative is determined on the basis of its terms and conditions. If this is not possible, then the value of the embedded derivative is determined by fair valuing the whole contract and deducting from it the fair value of the host contract.

Where there is no active market for the embedded derivatives, valuation techniques are used to ascertain their fair values. Financial models are developed incorporating valuation methods, formulae and assumptions. The valuation methods include:

swaps: electricity tariff is swapped for a commodity in a foreign currency
forwards: electricity tariff or other revenue or expenditure is based on a foreign currency
options: electricity tariff or other revenue is based on an embedded derivative floor or cap on foreign consumer or production price indices or interest rates. A closed form analytic solution is used to produce various cap and floor strike prices

The fair value of embedded derivatives is adjusted, where applicable, to take into account the inherent uncertainty relating to the future cash flows of embedded derivatives such as liquidity, model risk and other economic factors.

The more important assumptions, which include the following, are obtained either with reference to the contractual provisions of the relevant contracts or from independent market sources where appropriate:

spot and forward commodity prices
spot and forward foreign currency exchange rates
spot and forward interest rates
forecast sales volumes
spot and forward foreign production price indices
spot and forward electricity prices
liquidity, model risk and other economic factors
2.12 Inventories
  Coal, liquid fuel, maintenance spares and consumables

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes expenditure incurred in acquiring inventories, production and conversion costs and other costs incurred in bringing inventory to present location and condition.

Nuclear fuel

Nuclear fuel is stated at the lower of cost and net realisable value. Cost is determined on the first-in-first-out basis. Nuclear fuel consists of raw materials, fabricated fuel assemblies and fuel in reactors.

Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventories include the transfer from equity of any gains/ losses on qualifying cash flow hedges relating to purchases of raw materials.

2.13 Future fuel suppliers
  Coal

Non-refundable advances to suppliers, together with related borrowing costs thereon, are deferred in the statement of financial position within future fuel supplies and amortised against the cost of coal supplied on the basis of the estimated life of the asset procured by the suppliers.

Repayable advances to suppliers are capitalised, and the related interest earned is credited to profit or loss within finance income and the refunds are repaid in terms of the agreements.

Nuclear

Fuel assemblies in the process of fabrication are stated at cost within future fuel supplies, which includes the non-refundable advance payments made in terms of the agreement. Hedge accounting is applied to foreign exchange contracts entered into with respect to the purchase of nuclear fuel, with the effective portion being capitalised during the fabrication period. Advance payments in terms of agreements are capitalised.

2.14 Share capital
  Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.
2.15 Equity reserve
  The subordinated loan from the shareholder is held at amortised cost. The market value of the loan at inception is calculated for each tranche utilising the expected cash flows which are discounted at market rates to determine the effective interest rates. The effective interest rates for each tranche remain constant over the life of the loan tranche. The future cash flows are reassessed annually and the loans are remeasured at each reporting period. Although the loan is interest bearing, the interest payment terms could potentially be favourable and are dependent on the liquidity and gearing of Eskom. The change in the loan value with respect to interest amortised and the remeasurement is reflected in the profit or loss in finance cost and is eligible for capitalisation as borrowing costs.
2.16 Income tax
  Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or equity, in which case it is recognised on that basis.

Current tax is expected tax payable on taxable income for the year, using tax rates (and laws) enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Tax on dividends declared after 1 April 2012 is withheld by the company on behalf of its shareholder at a rate of 15%. Amounts withheld are recognised in equity as part of dividends paid.

Dividends received are recognised at the gross amount with the related withholdings tax recognised as part of tax expense. If the withholding tax is reimbursable it is recognised as an asset.

2.17 Deferred tax
  Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. However, deferred tax is provided in respect of the temporary differences arising on the assets and provisions created in respect of decommissioning and nuclear waste management and closure, pollution control and rehabilitation. Deferred tax is determined using tax rates (and laws) enacted or substantively enacted at the reporting date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and reversed if it is no longer probable that the related tax benefits will be realised.

Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

2.18 Payments received in advance
  Payments received in advance consist mainly of upfront capital contributions for the construction of assets and government grants received for electrification and energy efficiency initiatives. Upfront capital contributions are recognised in profit or loss within other revenue when the customer is connected to the electricity network. Government grants for energy efficiency initiatives are recognised in profit or loss within other expenses when the related expenses are incurred.
2.19 Deferred income
  Grants

Government grants received relating to the creation of electrification assets are included in liabilities as deferred income and are credited to profit or loss within depreciation and amortisation expense on a straight-line basis over the expected useful lives of the related assets.

Capital contributions received from customers

Contributions paid in advance by electricity customers relating to the construction of regular distribution and transmission assets (with a standard supply) are credited to profit or loss within other revenue when the customer is connected to the electricity network. Refer to note 2.18.

2.20 Reinsurance contracts
  Escap SOC Limited (Escap), a wholly owned subsidiary of Eskom, acts as the primary insurer for the group. Escap only self-insures the group up to agreed limits by risk category, whereafter the risks are covered by the reinsurance market.

Contracts are entered into with reinsurers, under which the group is compensated for losses on one or more contracts issued by it and that meet the classification requirements for insurance contracts. The benefits to which Escap is entitled under its reinsurance contracts held are recognised as reinsurance assets in the statement of financial position. Amounts recoverable are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts due from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due. Reinsurance assets and liabilities are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

2.21 Employee benefit obligations
  Annual and performance bonus

The annual and performance bonus is a short-term employee benefit which is expensed as the related services are provided. A liability is recognised for the amount expected to be paid if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The group recognises a liability for annual and performance bonuses. A liability for annual bonuses is accrued on a proportionate basis as services are rendered. A liability for performance bonus is raised on the estimated amount payable in terms of the incentive scheme which is based on the business and employees’ performance in the applicable year.

Occasional and service leave

The liability for occasional and service leave is of a long-term nature as it is not expected to be settled wholly after 12 months after the reporting period. An actuarial valuation is performed on an annual basis for occasional and service leave. The accrued liabilities are determined by valuing all future leave expected to be taken and payments expected to be made in respect of benefits up to the valuation date. Allowance has been made in the calculations for the assumed benefit options employees will exercise, as well as salary increases and investment returns up to the date the benefit is received. All actuarial gains or losses and past service costs are recognised immediately in profit or loss within employee benefit expense. The present values of the benefit are determined by using the yield of long-dated corporate bonds (or government bonds where high quality corporate bonds are not available). In terms of IAS 1 Presentation of financial information there is no unconditional right to defer settlement of occasional and service leave for at least 12 months after the reporting period. The full provision is therefore presented as current in the statement of financial position.

Pension benefits

Pension benefits are provided for employees through the Eskom Pension and Provident Fund. Contributions to the fund are based on a percentage of pensionable emoluments and are expensed in the period in which they are incurred. The group accounts for its pension obligations as a defined contribution plan in line with IAS 19 Employee benefits.

Post-employment medical benefits

The liability for post-employment medical benefits is the present value of the obligation by using government bonds where high quality corporate bonds are not available (long-dated corporate bonds) which have maturities similar to the liability. Provision is made by accounting for the estimated cost over the expected period to retirement of the employees. The cost to the employer, in the form of employer contributions, is determined by using the projected unit credit method, with actuarial valuations being carried out at reporting date. Actuarial gains or losses are recognised in other comprehensive income within remeasurements of post-employment medical benefits immediately. Interest expense and other expenses related to these benefits are recognised in profit or loss.

The entitlement to these benefits is usually conditional on the employee remaining in-service up to retirement. All employees qualify for post-employment medical benefits, except for new employees appointed on or after 1 June 2003 at a managerial level. The group accounts for its post-employment medical benefits obligations as a defined benefit plan in line with IAS 19 Employee benefits.

If the benefits are changed or curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The group recognises gains or losses on the settlement of a defined benefit plan when the settlement occurs. A settlement occurs when payments are made to employees to eliminate any further liabilities.

A curtailment will occur when the group significantly reduces the number of employees covered by the termination plan. Curtailment gains and losses are accounted for as past service costs, which are recognised in profit or loss immediately in the period when the termination plan is amended.

Termination benefits

A liability and expense for termination benefits is recognised by the group at the earlier of the following dates:

when the group can no longer withdraw the offer of those benefits
when the group recognises costs for a restructuring that is within the scope of IAS 37 Provisions, contingent liabilities and contingent assets and involves the payment of termination benefits
2.22 Provisions
  Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, when it is probable that an outflow of resources will be required to settle the obligation and when the amount can be reliably estimated. Provisions are not recognised for future operating losses.

Provisions are determined by discounting the expected future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recognised as finance cost.

The provisions below are restated on an annual basis to reflect changes in measurement that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or a change in discount rate, which shall be accounted for as follows:

changes in the liability shall be added to, or deducted from, the cost of the related asset in the current period
the amount deducted from the cost of the asset shall not exceed its carrying amount. The excess shall be recognised in profit or loss
any additions to the cost of an asset shall be reviewed in terms of the normal impairment principles

Decommissioning and nuclear waste management

Nuclear and other generation plant

A provision is raised for the estimated decommissioning cost of nuclear and other generation plant and capitalised to the cost of nuclear or other generation plant when it is commissioned. The estimated cost of decommissioning at the end of the productive life of plant is based on engineering and technical estimates and reports from independent experts. Decommissioning costs capitalised to the cost of nuclear or other generation plant is written off on a straight-line basis over the estimated useful life of the plant.

Spent nuclear fuel

A provision is raised for the management of spent nuclear fuel assemblies and radioactive waste. The charge to profit or loss is based on the latest available cost information and is included in primary energy.

The provisions are restated on an annual basis to reflect the changes in the time value of money. The impact of the change in the time value of money on the provision is reflected in profit or loss within finance cost.

Closure, pollution control and rehabilitation

Expenditure on property, plant and equipment for pollution control is capitalised and depreciated over the useful lives of the assets. The cost of current ongoing programmes to prevent and control pollution and to rehabilitate the environment is charged to profit or loss within primary energy as incurred, unless a present legal or constructive obligation exists to recognise such expenditure, in which case a provision is created based on the best estimates available.

A provision is raised for the estimated cost of closure, pollution control and rehabilitation during and at the end of the life of the mines where a legal or constructive obligation exists to pay coal suppliers. Closure, pollution control and rehabilitation costs capitalised are written off over the estimated useful life of the power station.

Service concession arrangements

A provision is raised for contractual obligations to maintain and restore the infrastructure. These contractual obligations to maintain or restore infrastructure, except for any upgrade element, are recognised and measured at the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period. Refer to note 2.9.

2.23 Revenue recognition
  Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the group’s activities. Revenue is shown, net of value added tax (VAT), estimated returns, rebates and discounts.

The group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the group’s activities as described below. The amount of revenue is not considered to be reliably measured until all contingencies relating to the sale have been resolved. The group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Sale of goods

Sale of goods is recognised when significant risks and rewards of ownership have passed and the collectability of the related receivable is reasonably assured. Electricity revenue is recognised when electricity is consumed by the user except in the case of prepaid electricity which is recognised when purchased by the customer.

Sale of services

Sale of services is recognised in the reporting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Other revenue

Other revenue is recognised when the significant risks and rewards of ownership are transferred to the buyer and the amount of revenue can be measured reliably.

Service concession arrangements

Revenue relating to construction or upgrade services under a service concession arrangement is recognised based on the stage of completion of the work performed, consistent with the group’s accounting policy on recognising revenue on construction contracts. Refer to note 2.9.

Operation or service revenue is recognised in the period in which the services are provided by the group. When the group provides more than one service in a service concession arrangement the consideration received is allocated by reference to the relative fair values of the services delivered.

2.24 Finance income
  Finance income comprises interest receivable on loans, advances, trade receivables, finance lease receivables and income from financial market investments. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
2.25 Finance cost
  Finance cost comprises interest payable on borrowings, interest resulting from derivatives held for risk management and interest from the unwinding of discount on liabilities. Borrowing costs which are not capitalised are recognised in profit or loss (refer to note 2.8).
2.26 Dividend income
  Dividend income is recognised when the right to receive payment is established.
2.27 Dividend distribution
  Dividend distribution to the shareholder is recognised as a liability in the financial statements of the group in the period in which the dividends are approved by the shareholder.
2.28 Non-current assets and liabilities held-for-sale
  Non-current assets and liabilities (or disposal groups) which meet the definition of held-for-sale under IFRS 5 Non-current assets held-for-sale and discontinued operations, except for items excluded from the scope of IFRS 5 for measurement purposes, are stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.
2.29 Related-party transactions
  IAS 24 Related-party disclosures provides government related entities an exemption which eliminates the requirements to disclose information that is costly to gather and of less value to users. The group applies the exemption in respect of its relationship with government related entities and local levels of government. Refer to note 46.
2.30 Transfers of assets from customers
  If an item of property, plant and equipment is received from customers, an assessment is made as to whether that item of property, plant and equipment can be recognised in accordance with IAS 16 Property, plant and equipment. Any related revenue is recognised in accordance with IAS 18 Revenue.
2.31 Net debt
  The group manages its funding on a net basis by pooling funds. Net debt as disclosed in the statements of cash flows is calculated by totalling debt securities and borrowings, finance lease liabilities, loans to and from subsidiaries, derivatives held for risk management and netting off cash and cash equivalents, investments in securities and loans receivable.