Basis of preparation and recent accounting developments

Accounting policies describe our approach to recognising and measuring transactions and balances in the year. The accounting policies applicable across the financial statements are shown below, whereas accounting policies that are specific to a component of the financial statements have been incorporated into the relevant note.

This section also shows areas of judgement and key sources of estimation uncertainty in these financial statements. In addition, we have summarised new International Accounting Standards Board (IASB) accounting standards, amendments and interpretations and whether these are effective for this year end or in later years, explaining how significant changes are expected to affect our reported results.

National Grid’s principal activities involve the transmission and distribution of electricity and gas in Great Britain and northeastern US. The Company is a public limited liability company incorporated and domiciled in England and Wales, with its registered office at 1–3 Strand, London WC2N 5EH.

The Company, National Grid plc, which is the ultimate parent of the Group, has its primary listing on the London Stock Exchange and is also quoted on the New York Stock Exchange.

These consolidated financial statements were approved for issue by the Board on 17 June 2020.

These consolidated financial statements have been prepared in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and related interpretations as issued by the IASB and IFRS as adopted by the EU. They are prepared on the basis of all IFRS accounting standards and interpretations that are mandatory for periods ended 31 March 2020 and in accordance with the Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the EU IAS Regulation. The comparative financial information has also been prepared on this basis.

The consolidated financial statements have been prepared on a historical cost basis, except for the recording of pension assets and liabilities, the revaluation of derivative financial instruments and certain commodity contracts and certain financial assets and liabilities measured at fair value.

These consolidated financial statements are presented in pounds sterling, which is also the functional currency of the Company.

The notes to the financial statements have been prepared on a continuing basis unless otherwise stated.

A. Going concern

As at the date of approving these financial statements, the impact of COVID-19 on the Group’s operations is continually being assessed and subject to rapid change. The Directors have assessed the principal risks, including by modelling both a base case and a reasonable worst case scenario. The reasonable worst-case scenario covers the cash flow impact associated with an extended lockdown for a period of 12 months across both the UK and US. The main cash flow impacts identified in the reasonable worst-case scenario are:


•	a significant reduction in cash collections over an extended 12-month period driven by lower customer demand and increased bad debt in our US businesses;


•	additional working capital required to fund payment term extensions and charge deferrals in the UK electricity market, intended to help customers and end-user consumers;


•	one-off increases in other costs such as cleaning, safety equipment and IT; offset by


◦	a reduction in non-essential capital expenditure across the Group driven by increased absenteeism, supply chain issues and difficulty in accessing sites; and


◦	a reduction in discretionary spend across all areas (e.g. recruitment, travel and consultancy spend).

As part of their analysis, the Board also considered the following potential levers at their discretion to improve the position identified by the reasonable worst-case scenario in the event that the debt capital markets are not accessible:


•	further significant changes in the phasing of the Group’s capital programme with elements of non-essential works and programmes delayed beyond June 2021;


•	a number of further reductions in operating expenditure across the Group primarily related to workforce cost reductions in both the UK and the US; and


•	the payment of dividends to shareholders.

Having considered the reasonable worst-scenario and further levers at the Board’s discretion, the Group continues to have headroom against the Group’s committed facilities identified in note 33 to the financial statements.

In addition to the above, the ability to raise new financing was separately included in the analysis and the Directors noted the £0.9 billion debt issuances completed in April 2020 (disclosed in note 21 to the financial statements) as evidence of the Group’s ability to continue to have access to the debt capital markets if needed. Other factors considered by the Board as part of their Going Concern assessment included the potential impact of Brexit trade talks, the Group’s various ongoing rate case determinations in the UK and US alongside inherent uncertainties in cash flow forecasts (such as the impact of storms in our US business).

Based on the above, the Directors have concluded the Group is well placed to manage its financing and other business risks satisfactorily, and have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the signing date of these consolidated financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

1. Basis of preparation and recent accounting developments continued

B. Basis of consolidation

The consolidated financial statements incorporate the results, assets and liabilities of the Company and its subsidiaries, together with a share of the results, assets and liabilities of joint operations.

A subsidiary is defined as an entity controlled by the Group. Control is achieved where the Group is exposed to, or has the rights to, variable returns from its involvement with the entity and has the power to affect those returns through its power over the entity.

The Group accounts for joint ventures and associates using the equity method of accounting, where the investment is carried at cost plus post-acquisition changes in the share of net assets of the joint venture or associate, less any provision for impairment. Losses in excess of the consolidated interest in joint ventures and associates are not recognised, except where the Company or its subsidiaries have made a commitment to make good those losses.

Where necessary, adjustments are made to bring the accounting policies used in the individual financial statements of the Company, subsidiaries, joint operations, joint ventures and associates into line with those used by the Group in its consolidated financial statements under IFRS. Intercompany transactions are eliminated.

The results of subsidiaries, joint operations, joint ventures and associates acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Acquisitions are accounted for using the acquisition method, where the purchase price is allocated to the identifiable assets acquired and liabilities assumed on a fair value basis and the remainder recognised as goodwill.

C. Treatment of interests in Quadgas HoldCo Limited (Quadgas) – discontinued operations and held for sale

At the end of June 2019, we completed the disposal of our retained 39% interest in the UK Gas Distribution business (held through Quadgas) that was classified as held for sale. We have treated the results and cash flows of Quadgas as a discontinued operation in the consolidated income statement and consolidated cash flow statement. Refer to note 10 for further details.

D. Foreign currencies

Transactions in currencies other than the functional currency of the Company or subsidiary concerned are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at closing exchange rates. Non-monetary assets are not retranslated unless they are carried at fair value.

Gains and losses arising on the retranslation of monetary assets and liabilities are included in the income statement, except where the application of hedge accounting requires inclusion in other comprehensive income (see note 32(e)).

On consolidation, the assets and liabilities of operations that have a functional currency different from the Company’s functional currency of pounds sterling, principally our US operations that have a functional currency of US dollars, are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period where these do not differ materially from rates at the date of the transaction. Exchange differences arising are recognised in other comprehensive income and transferred to the consolidated translation reserve within other equity reserves (see note 28).

E. Areas of judgement and key sources of estimation uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimations is in the notes to the financial statements, and the key areas are summarised below.

Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are as follows:


•	the judgement that notwithstanding legislation enacted and targets established during the year ended 31 March 2020 committing the UK, New York State and Massachusetts to achieving net zero greenhouse gas emissions by 2050, these do not trigger a reassessment of the remaining useful economic lives of our gas network assets (see estimate below and note 13); and


•	following the legal separation of the Electricity System Operator on 1 April 2019, we concluded that the Electricity System Operator acts as an agent in respect of certain Transmission Network Use of Service revenues, principally those collected on behalf of the Scottish and Offshore transmission operators, as detailed in note 3.

Key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:


•	the valuation of liabilities for pensions and other post-retirement benefits (see note 25); and


•	the cash flows applied in determining the environmental provisions, in particular relating to three US Superfund sites (see note 26).

In light of the current ongoing impact of the COVID-19 pandemic, valuations of certain assets and liabilities are necessarily more subjective. In particular, two further areas of estimation uncertainty impacting the Group's position as at 31 March 2020 have been identified:


•	the valuation of certain pension assets, in particular unquoted equities, properties and diversified alternatives, in light of the volatile economic markets (see note 25); and


•	the recoverability of customer receivables, particularly in relation to US retail customers, in light of the suspension of debt collection activities and customer termination activities (see note 19).

In addition, we also highlight the estimates made regarding the useful economic lives of our gas network assets due to the length over which they are being depreciated, the potential for new and evolving technologies over that period, and the range of potential pathways for meeting net zero targets (see note 13 for details and sensitivity analysis).

In order to illustrate the impact that changes in assumptions for the valuation of pension assets and liabilities and cash flows for environmental provisions could have on our results and financial position, we have included sensitivity analyses in note 35. Information on what we believe a reasonably possible range of outcomes to be on recoverability of customer receivables are included in note 19.

1. Basis of preparation and recent accounting developments continued

F. Accounting policy choices

IFRS provides certain options available within accounting standards. Choices we have made, and continue to make, include the following:


•	Presentational formats: we use the nature of expense method for our income statement and aggregate our statement of financial position to net assets and total equity.


•	Financial instruments: we normally opt to apply hedge accounting in most circumstances where this is permitted (see note 32(e)).

•

Cash flow statement: Following a review in the year, we have changed our accounting policy in relation to the presentation of derivatives in the cash flow statement, which has resulted in £412 million of cash outflows for 2019 and £330 million of cash inflows from 2018 to be presented as investing activities rather than financing activities. The reclassified cash flows are in relation to derivatives associated with our net investment hedges, and given they are designated in a hedge relationship, the Group has decided to present them together with the underlying hedged item rather than as part of our overall financing activities.

G. New IFRS accounting standards and interpretations effective for the year ended 31 March 2020

The Group adopted IFRS 16 ‘Leases’ with effect from 1 April 2019. We have applied the modified retrospective approach permitted in the standard whereby prior year comparatives have not been restated on adoption. Instead, any cumulative transition adjustments are reflected through reserves. Refer to note 37 for full details of the impact and transition adjustments arising on adoption.

The UK’s Financial Conduct Authority announced that LIBOR will cease to exist by the end of 2021, and will be replaced by alternative reference rates. In September 2019, the IASB amended IFRS 9 and IFRS 7 by issuing Interest Rate Benchmark Reform, which provides exceptions to specific hedge accounting requirements to ensure that hedging relationships are not considered to be modified as a result of the change in the reference rate. The amendments were endorsed in January 2020 for adoption in the EU. The Group early-adopted these changes to IFRS 9 and IFRS 7 with effect from 1 April 2019. There were no transition adjustments on adoption. Refer to note 32(e) for further details of the impact in the current period.

The Group has also adopted the following amendments to standards, which have had no material impact on the Group’s results or financial statement disclosure:


•	IFRIC 23 ‘Uncertainty over Income Tax Treatments’;


•	Amendments to IAS 28 ‘Investments in Associates – Long-term Interests in Associates and Joint Ventures’;


•	Annual Improvements to IFRS Standards 2015–2017 Cycle; and


•	Amendments to IAS 19 ‘Employee Benefits’.

H. New IFRS accounting standards and interpretations not yet adopted

The following new accounting standards and amendments to existing standards have been issued but are not yet effective:


•	IFRS 17 ‘Insurance Contracts’;


•	Amendments to IFRS 3 ‘Business Combinations’;


•	Amendments to the References to the Conceptual Framework;


•	Amendments to IAS 1 and IAS 8: Definition of material; and


•	Amendments to IAS 1 'Presentation of Financial Statements'.

The Group is currently assessing the impact of the above standards, but they are not expected to have a material impact. The Group has not adopted any other standard, amendment or interpretation that has been issued but is not yet effective.