Basis of accounting
The Group accounts are prepared under the historical cost convention and in accordance with applicable accounting standards. The Group accounts include the accounts of the Company and its subsidiary undertakings made up to 31 March. The results of undertakings acquired or disposed of are consolidated from the effective date of acquiring control or to the effective date of disposal. The Group's share of the results of those undertakings is included in the Group profit and loss account. The investments are shown in the Company balance sheet at cost less provisions for impairment.

Goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life, which is assessed on the basis of the circumstances of each acquisition. Provision is made for any impairment.

Goodwill arising on acquisitions in the year ended 31 March 1998 and earlier years was written off to reserves in accordance with the accounting standard then in force. As permitted by the current accounting standard, the goodwill previously written off to reserves has not been reinstated in the balance sheet. On disposal or closure of a previously acquired business, the attributable amount of goodwill previously written off to reserves is included in determining the profit or loss on disposal.
Tangible fixed assets
These comprise:
(i)Infrastructure assets (mains, impounding and pumped raw water storage reservoirs);
(i)and
(ii) Other assets (including properties, overground plant and equipment).

(i) Infrastructure assets
(i)Infrastructure assets comprise a network of systems. Expenditure on infrastructure assets
(i)relating to increases in capacity or enhancement of the network and on maintaining the operating capability of
(i)the network in accordance with defined standards of service is treated as an addition and included at cost
(i)after deducting contributions. The depreciation charge on infrastructure assets is the estimated level of
(i)annual expenditure required to maintain the operating capability of the network which is based on the
(i)asset management plan.

(ii) Other assets
(ii)Other assets are included at cost, less accumulated depreciation. Freehold land is not depreciated.
(i)Other assets are depreciated evenly over their estimated useful lives, which are principally as follows:
(i)Buildings80 years
(i)Operational structures50 - 60 years
(i)Fixed plant and machinery20 years
(i)Other, including meters, vehicles, mobile plant, computers, furniture and fittings3-10 years

Assets in the course of construction and major schemes are not depreciated until they are commissioned.

In accordance with FRS15, the Group has adopted a policy of non-capitalisation of interest. Interest capitalised in previous years is not considered to be material.

Grants and contributions
Grants and contributions to capital expenditure on infrastructure assets are deducted from the cost of those assets. These grants and contributions are a contribution towards capital expenditure which is intended to ensure that the cost of extending the infrastructure system does not fall upon consumers generally. The accounting treatment is not in accordance with the Companies Act 1985 but in the directors' opinion is necessary in order to show a true and fair view, as it is not possible to amortise contributions to the profit and loss account over the lives of the fixed assets concerned since infrastructure assets do not have determinable finite lives. Grants and contributions are reflected in the depreciation charge.

Leases
Where assets are financed by leasing arrangements which transfer substantially all the risks and rewards of ownership to the lessee (finance leases), the assets are treated as if they had been purchased and an amount equal to their capital cost is shown as an obligation to the lessor within creditors. Leasing payments are treated as consisting of a capital element and finance costs, the capital element reducing the obligation to the lessor and the finance costs being charged to the profit and loss account over the period of the lease at a constant rate on the outstanding liability. The assets are depreciated over the shorter of their estimated useful lives and the lease period. Rentals under operating leases are charged to the profit and loss account as incurred.

Stocks
Stocks are stated at the lower of cost and net realisable value. Materials and consumables are stated at purchase cost, including transport. Work in progress and finished goods include the cost of materials and labour plus an appropriate proportion of overheads based on normal levels of activity.

Pension costs
Contributions to defined benefit pension schemes are charged to the profit and loss account so as to spread the regular cost of pensions over the average service lives of employees, in accordance with the advice of professionally qualified consulting actuaries. Actuarial surpluses and deficits are credited or charged to the profit and loss account over the estimated average remaining service lives of employees in proportion to their expected payroll costs. The Group also has defined contribution pension schemes, the costs of which are charged to the profit and loss account as incurred. Further information on pensions is given in note 30 to the accounts.

Research and development
Research and development expenditure is charged to the profit and loss account in the year in which it is incurred.

Taxation
Corporation tax payable is provided on taxable profits at the current rate.

Credit is taken for advance corporation tax written off in previous years when it is recovered against corporation tax liabilities.

Deferred taxation (which arises from differences in the timing of the recognition of items, principally depreciation, in the accounts and by the tax authorities) has been calculated on the liability method. Deferred taxation is not provided on timing differences that, in the opinion of the directors, will probably not reverse.

Long term incentive schemes
The costs of awards to employees which take the form of shares are charged to the profit and loss account over the period of service of the employees in respect of which the awards are granted.