3.    Summary of accounting principles applied

3.1    General notes

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB) and endorsed by the European Commission. Under European law, compliance with these standards became compulsory for all listed companies in 2005. TenneT TSO is not a listed company, but has nevertheless chosen to adopt the IFRS with a view to ensuring (international) comparability. Moreover, adoption of IFRS is increasingly necessary to gain efficient access to capital markets.

The financial statements have been prepared in accordance with the historical cost convention, with the exception of derivative financial instruments and financial assets possibly available for sale, which have been stated at fair value.

The preparation of the financial statements requires the management to make certain estimates and assumptions. The most important of these estimates and assumptions are considered in greater detail on page 138.

Standards, amendments and interpretations effective in 2008 that are not relevant to TenneT or that have no implications for TenneT’s financial reporting:

• IFRIC 12 ‘Service Concession Arrangements’
• IFRIC 14, IAS 19 ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ (effective from 1 January 2009)
• IFRIC 11 ‘Group and Treasury Share Transactions’
• IFRIC 13 ‘Customer Loyalty Programmes’

Standards, amendments and interpretations that are not yet effective in 2008 and that have not been adopted early

• IAS 1 ‘Presentation of Financial Statements’
• IAS 23 ‘Borrowing Costs’ (effective from 1 January 2009)
• IFRS 3 / IAS 27 / IAS 12 ‘Business Combinations’ (effective from 1 July 2009)
• IAS 39 ‘Financial Instruments: Recognition and Measurement’
• IFRS 1, IFRS 2, IFRS 5, IFRS 8, IAS 16, IAS 20, IAS 28, IAS 29, IAS 31, IAS 32, IAS 38, IAS 40, IAS 41 and IFRIC 7, IFRIC 10, IFRIC 12, IFRIC 15 and IFRIC 16.

TenneT will assess the implications of these interpretations in the course of 2009.

3.2    Principles of consolidation

The consolidated financial statements cover TenneT and those group companies over whose financial and operating policies TenneT is able to exercise direct or indirect control. The assets, liabilities and results of such group companies are fully consolidated. Financial data concerning joint ventures, over which joint control is exercised pursuant to an agreement with a third party, are consolidated proportionally in accordance with TenneT’s accounting principles.

The financial data of new group companies are consolidated with effect from the date on which TenneT obtained decisive control. From the moment of acquisition, the acquired company is stated at the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed, plus the costs directly resulting from the acquisition. Identifiable assets acquired, liabilities incurred and contingent liabilities assumed (identifiable net assets) in a business combination are stated initially at their fair value on the acquisition date, irrespective of the extent of any minority interest. The excess of the acquisition price over the fair value of TenneT’s share in the identifiable net assets acquired is recorded as goodwill. If the acquisition price is lower than the fair value of the identifiable net assets acquired, the difference is recognised directly in the profit-and-loss account.

A company is deconsolidated from the date on which decisive control ceases or it is designated as a discontinued operation. The difference between the selling price, on the one hand, and the net asset value including associated goodwill and the currency translation reserve at the date of sale, on the other, is recognised in the profit-and-loss account.

The companies in which TenneT holds 50% of the share capital are joint ventures.

 
The consolidation also includes the Foundation for the Management of Allocated Funds from the National High-Voltage Grid (Stichting Beheer Doelgelden Landelijk Hoogspanningsnet), based in Arnhem.

 
The unrealised results of transactions between the group and its participating interests have been eliminated in proportion to the group’s interest in the participation. Unrealised losses have not been eliminated. Where necessary, the valuation principles applied by participating interests have been harmonised with those applied by the group.

3.3    Notes to the consolidated cash flow statement

The cash flow statement has been prepared using the indirect method. The cash flow statement covers the cash flows associated with clearing transactions, as well as those associated with operating, investment and financing activities.

The cash flows associated with clearing transactions derive from activities undertaken on behalf of third parties. These involve clearing transactions on physical exchanges, auctioning capacity on cross-border connections, application of the Electricity Production (Environmental Quality) Act (MEP grant scheme) and maintaining the energy balance between supply and demand. These cash flows have not been recognised in the profit-and-loss account; in a footnote to the balance sheet, they are classified as ‘Financial assets and cash equivalents not at free disposal’. TenneT is not exposed to any financial risks as a result of undertaking these activities, other than credit and liquidity risks, which are adequately covered.

The company is paid for the services in question.

3.4    Foreign currencies

Each item in the financial statements is measured using the currency of the primary economic environment in which the entity concerned operates (the functional currency). The consolidated financial statements are prepared in euros, as this is the functional and reporting currency of the company. The functional and presentation currency of the UK-based companies is pounds sterling.

The balance sheet items relating to foreign currency assets and liabilities have been converted at the exchange rate prevailing on the balance sheet date. The resulting translation differences have been recognised in the profit for the year. Foreign currency transactions completed during the reporting period have been recognised in the financial statements at the exchange rate at which they were effected.

The assets and liabilities of consolidated non-Dutch group companies have been converted at the exchange rate applicable on the balance sheet date. The resulting translation differences have been recognised directly in equity. The results of consolidated non-Dutch group companies have been recognised at the average exchange rate for the financial year in question.
The cumulative exchange rate differences resulting from the partial disposal of investments in non-Dutch participating interests have been recognised in the profit-and-loss account.

Goodwill acquired through the acquisition of a non-Dutch entity continues to be stated in the relevant non-Dutch currency and is converted at the exchange rate applicable on the balance sheet date.

3.5    Accounting principles applied to the valuation of assets and liabilities

Tangible fixed assets
The tangible fixed assets consist of high-voltage substations and connections and other assets; many of the assets in question are components of the transmission grids operated by TenneT TSO. TenneT TSO does not own the land on which its high-voltage pylons are located, but pays the landowners for the right to use the sites. The payments are charged to the result each year.

Where the valuation of tangible fixed assets within the national high-voltage grid is concerned, use has been made of the facility provided for in IFRS 1, which allows tangible fixed assets to be stated at their fair value on the transition date (1 January 2004), whereby this figure is subsequently used as the ‘deemed cost price’. The fair value of the national high-voltage grid components is derived from their regulated asset value. The latter value is set by the Office of Energy Regulation and partly determines the permissible revenue.

The other tangible fixed assets have been stated at acquisition price or manufacturing cost, including interest charges incurred during the construction phase and future decommissioning costs, less linear depreciation over the estimated useful life of the asset. The useful life and current residual value of tangible fixed assets are reviewed annually and adjusted if necessary.

Where applicable, the acquisition price or manufacturing cost of an asset does not exceed the investment budget specified by the Office of Energy Regulation. The depreciation principles applied have been defined by reference to the regulation system. Modification and maintenance costs incurred after the initial recognition of an asset in the financial statements are either included in the book value of the asset, or recognised as a separate asset. Other repair and maintenance costs are included in the profit-and-loss account for the period in which they are incurred.

Investments made at the request and expense of third parties are capitalised after the deduction of third-party contributions. Any profit on such projects is attributed to the appropriate financial year(s) in proportion to the progress of the project.

Depreciation is calculated on a linear basis, assuming the useful life of the various asset types to be as follows (in years):

Land (and its preparation for building) is not subject to depreciation.

Investments funded from auction revenues
With the approval of the Office of Energy Regulation, certain investments in tangible fixed assets are funded by revenues from the auctioning of cross-border interconnection capacity. Auction revenues applied for this purpose are recorded separately as investment contributions and therefore not deducted from the book values of the relevant tangible fixed assets.

Intangible asset
Goodwill represents the excess of the costs of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary/associate.

Computer software is capitalised at acquisition price or manufacturing cost, less linear depreciation. The depreciation period is equal to the estimated useful life (three to five years). The manufacturing cost is calculated by adding a mark-up for indirect costs to the direct labour costs. Research and maintenance expenditure associated with computer software is recognised in the profit-and-loss account.

The other intangible assets consist of an acquired trade name, a membership database and contracts and relationships with participants; these have been stated at acquisition price less linear depreciation. The amortisation period is equal to the estimated useful life and amounts to 5, 11 or 14.5 years.

Research costs are charged directly against the operating result. Development costs relate to the costs of a new technological development. Such costs are recorded as an intangible asset if the project in question is likely to be successful, in view of its commercial and technical feasibility, and if the costs can be reliably ascertained.

Financial assets and liabilities
Financiële activa en verplichtingen worden als volgt gecategoriseerd:

• Financial assets and liabilities held until maturity: initially stated at fair value and subsequently at amortised cost, using the effective interest method.
• Loans and receivables: initially stated at fair value and subsequently at amortised cost, using the effective interest method.
• Other financial assets and liabilities (including those held for sale): stated at fair value with movements in fair value incorporated into the profit-and-loss account.

Securities and deposits with a remaining term of more than one year have been included under long-term financial assets. Securities and deposits with an original term of more than three months and a remaining term of less than twelve months from the balance sheet date have been classified as short-term financial assets. Deposits with an original term of less than three months have been regarded as cash and cash equivalents.

Impairment of asset
Assets that have an indefinite useful life are not subject to depreciation and/or amortisation and are tested annually for impairment. An annual review is performed to determine whether acquired goodwill has been subject to any impairment; the value of goodwill is stated at cost less cumulative impairment. Impairment losses on goodwill are not reversed.

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. An impairment is deemed to have occurred if the asset’s book value is greater than its realisable value. Any impairment is recognised in the profit-and-loss account.

For the purposes of assessing impairment, assets are grouped at the lowest level which is monitored by management and for which there are separately identifiable cash flows.

Deferred tax assets and liabilities
Deferred tax assets and liabilities that are relevant in the context of forward loss compensation and temporary differences between the fiscal and carrying values of assets and liabilities are calculated on the basis of the prevailing rates of corporation tax applicable at the time of settlement.
Deferred tax assets are accounted for insofar as it is probable that future tax benefits will be available to make use of the temporary differences.

Deferred tax assets and liabilities are presented on a net basis insofar as they are associated with the same corporation tax entity and are likely to be settled in the same period.

Deferred corporation 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.

Non-current assets available for sale
Non-current assets available for sale are defined as non-current assets (other than financial instruments or property investments) likely to be sold within a year. Non-current assets available for sale have been stated at the lower of the asset’s book value and fair value less costs to sell.

Inventory
Inventory is stated at acquisition price, using the ‘first in, first out’ (FIFO) method or, if lower, the realisable value (i.e. the estimated sales return).

On an incidental basis, TenneT undertakes projects on behalf of third parties. Such projects are valued at construction cost, i.e. the direct costs of material and labour, plus an allowance for indirect costs, directly attributable subcontracting costs, other external costs and interest incurred during the construction phase. If such projects yield demonstrable net earnings, any profit is assigned to the appropriate financial year(s) in proportion to the progress of the project. Provisions for any anticipated losses are recognised in the period during which it becomes apparent that a project is likely to result in a loss; such losses are recognised under ‘Work in progress for third parties’.

Accounts receivable and other receivable
Accounts receivable and other receivables are initially stated at fair value and subsequently at amortised cost, using the effective interest method, less any bad-debt provisions that may be considered necessary.

Cash and cash equivalents
Cash and cash equivalents are bank account balances and other short-term high-liquidity investments with an original term of up to three months. Negative bank account balances are presented as bank overdrafts.

Loans
Loans are initially stated at fair value minus the associated transaction costs. Subsequently, they are stated at amortised cost, with the difference between the initial valuation and the redemption value included in the profit-and-loss account over the term of the loan. Calculations are made using the effective interest method. Redemption obligations with a term of less than one year are presented as current liabilities.

Investment contributions
The investment contributions included under ‘Liabilities’ relate to tangible fixed assets owned by TenneT TSO, to which contributions are made out of the auction proceeds. An annual amount equal to the depreciation charges, plus a portion of the operating expenses, is released to ‘Other revenues’.

Amounts received in advance
Amounts received in advance relate to amounts to be settled in future tariffs, or receipts that are not at free disposal. The figure for amounts received in advance included under ‘Liabilities’ takes interest into account.

Provisions
Provisions are formed when the company has a present legal or constructive obligation as a result of past events, when it is more likely than not that an outflow of resources will be required to settle the obligation, and when the amount can be reliably estimated. Where non-current liabilities are concerned, corresponding provisions are based on present value. The percentage is based on the specific risks associated with the liability. Any increase in the size of a provision over time is treated as an interest charge.

The provision for environmental management and decommissioning serves to cover the costs associated with the disposal of hazardous substances and the decommissioning of abandoned high-voltage connections and underground cables. The size of this provision is calculated on the basis of net present value.

Provisions have been created to cover the cost of special personnel benefit schemes with liabilities that existed prior to the balance sheet date. The schemes in question are redundancy schemes, long-service bonus schemes and health insurance premium schemes. The amounts set aside to cover these liabilities have been calculated in accordance with actuarial principles.

TenneT operates a number of pension and pension-related schemes for the benefit of current and former personnel. The pensions of almost all personnel are administered by the ABP Pension Fund in the form of a defined-benefit pension scheme, under which the amounts payable to pensioners are based on length of service and average salary during service.
The pension scheme administered by ABP is a multi-employer scheme. IAS 19 requires the reporting of certain information regarding defined-benefit pension schemes in the operators’ financial statements. In particular, the balance of the scheme’s assets and defined-benefit obligations has to be included on the balance sheet. However, ABP has indicated that it is unable to provide company-specific information of the kind required by IAS 19 for defined-benefit pension schemes. In addition, there is no obligation to make additional payments, nor a right to make withdrawals from the pension fund, other than through adjustments to the annual pension contributions. Hence, the scheme has been treated as if it were a defined-contribution scheme, and the pension contributions payable in respect of the financial year under review are charged against the result as pension costs.

As of 1 January 2008, TenneT TSO has been in charge (by operation of law) of managing all grids with a voltage level of 110 kV and higher, with the exception of grids encumbered by Cross Border Leases. This expansion of our remit is a consequence of the adoption of the Independent Grid Administration Act. Under the Act, TenneT has a legally enforceable obligation to execute the management of all grids with a voltage level of 110 kV and higher. Under the revenue regulation system defined by the Office of Energy Regulation for the fourth regulatory period, TenneT is unable to fulfil this obligation in such a manner that its costs are covered. TenneT has created a provision for this purpose.

Derivative financial instruments
Derivative financial instruments are stated at fair value. If effective cash flow hedging is employed, any changes in value are recorded in equity using hedge accounting methods.

Effective hedging means that the derivative financial instrument fully compensates any changes in the fair values or cash flows of the hedged position. In addition, the following information must be documented at the inception of a transaction: the relationship between the hedging instrument and the hedged position, the risk management objectives and the strategy for undertaking various hedging transactions. This documentation is prepared at the moment a derivative financial contract is entered into and is subsequently kept up-to-date.

If, on the basis of the above-mentioned criteria, it is not permitted to recognise changes in the value of derivative financial instruments in equity, the change in value is recognised in the profit-and-loss account as finance income or expenses.

3.6    Accounting principles for determining the profit

General

Profit is determined as the difference between the fair value of consideration received for services rendered and the costs incurred over the year.

Revenue
The revenue for connection services, transmission services and system services is based largely on the tariffs set by the Office of Energy Regulation for the year in question, in accordance with the structure specified in the Tariff Code and any supplementary decisions by the Office of Energy Regulation.

The revenue from maintenance of the energy balance between supply and demand is equal to the cost of obtaining the energy and capacity required for this purpose. This is an inherent feature of the system of programme responsibility. Under the System Code, parties with programme responsibility are required to pay the administrator of the national high-voltage grid for any imbalances arising out of departures from their declared programmes. The System Code requires the administrator of the national high-voltage grid to set each year’s system services tariff in a way that reflects the balance of the imbalance settlement charges and the costs associated with obtaining energy and capacity in the previous year.

Revenue from energy exchange activities includes membership subscriptions, transaction fees and income from services rendered by the energy exchanges.

Revenue from market facilitation services consists mainly of compensation to cover the costs of providing such services.

Interest income consists mainly of interest received on securities and short-term deposits made in the context of energy exchange activities.

Other revenues
The other revenues consist of the amortisation of investment contributions received in advance.

Operating expenses
The energy and capacity expenses arise out of the purchase of energy and capacity for the provision of transmission and system services and ensuring the energy balance between supply and demand.
The transmission grid and system expenses include both the cost of operating the transmission grids, and the cost of maintaining systems to support the primary business processes.

The costs of capitalisations associated with the construction of tangible fixed assets are deducted from the personnel expenses.

Finance income and expenses
The finance expenses consist of interest on loans, current account facilities and other debt positions. The finance income associated with resources managed by the Foundation for the Management of Allocated Funds from the National High-Voltage Grid and with MEP grant payments are added directly to the balances of the assets in question.

Leases
Leases that are the economic property of the lessor are qualified as operational leases. Payments made under such lease contracts are charged to the profit-and-loss account on a linear basis over the term of the lease.

Taxes
Taxes in respect of the profit have been calculated on the basis of the profit reported in these financial statements and the applicable rules and rates of taxation. Account has been taken of fiscally non-deductible expenses and possible forward loss compensation.

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