The main accounting policies used in preparing the 2019 financial statements of Stedin Group are summarised below. The accounting policies used in these financial statements are consistent with the accounting policies applied in the 2018 financial statements, except for the effect of newly applied and amended standards as set out in note 1.3 International Financial Reporting Standards (IFRS).

Impairment is present when the book value of an asset is higher than the recoverable amount. The recoverable amount of an asset is the higher of the sale price less costs to sell and the value in use. An asset’s value in use is based on the present value of estimated future cash flows calculated using a pre-tax discount rate which reflects the time value of money and the specific risks of the asset. The recoverable amount of an asset which does not independently generate a cash flow and which is dependent on the cash flows of other assets or groups of assets is determined for the cash-generating unit of which the asset is part.

A cash-generating unit is the smallest identifiable group of assets separately generating cash flows that are significantly independent of the cash flows from other assets or groups of assets. Cash-generating units are distinguished on the basis of the economic interrelationship between assets and the generation of external cash flows rather than on the basis of separate legal entities.

Goodwill is allocated on initial recognition to one or more cash-generating units in line with the way in which the goodwill is assessed internally by the management. Impairment tests are performed each year to assess the value of goodwill based on expected future cash flows.

An assessment is carried out annually for assets other than goodwill to assess whether events or changes indicate impairment. If there is evidence of impairment, the recoverable amount of the relevant asset or cash-generating unit is determined.

When the book value of assets allocated to a cash-generating unit is higher than the recoverable amount, the book value is reduced to the recoverable amount. This impairment is recognised in profit or loss. Impairment of a cash-generating unit is first deducted from the goodwill attributed to that unit (or group of units) and then deducted proportionately from the book value of the other assets of that unit (or group of units).

Impairment previously recognised may be reversed through the income statement if the reasons for it no longer exist or have changed. Impairment is only reversed up to the original book value less regular depreciation. Impairment losses on goodwill are not reversed.

The financial statement items of Stedin are administrated in the currency of the economic environment in which Stedin Group operates. The euro (€) is Stedin Group's functional currency and the currency in which the financial statements are presented.

Transactions in foreign currencies are translated into the functional currency (€) at the exchange rate prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies on the reporting date are translated into euros at the exchange rate prevailing on the reporting date. Foreign currency exchange differences that arise on foreign currency transactions or translation of balance sheet items are recognised in the income statement, except if these foreign currency risks are hedged by derivative financial instruments for which hedge accounting is applied.

Receivables and payables with a counterparty are netted if there is a contractual right and the intention to settle these simultaneously. In the absence of an intention or actual netted settlement, the existence of an asset or liability is determined for each contract.

Business segments are based on Stedin Group’s internal organisation and management reporting structure. The results of business segments are reviewed regularly by the Board of Management to make decisions about resources to be allocated to a segment and assess its financial performance.

Transfer prices for internal revenues and costs are at arm’s length terms. The accounting policies of Stedin Group are also applied in segment reporting. The results of individual segments do not include financial income and expense, the share of profit of associates and joint ventures or the tax charge.

Net revenue

Stedin Group recognises revenue when it satisfies the performance obligation by transferring goods or services to the customer. The time of transfer is:

• over a period; or
• at a moment in time.

It is inherent in the services of Stedin Group that these are transferred to the customer during the period in which they are provided. The services of the Group can be subdivided into regulated services and non-regulated services. 

Revenue from regulated services

The rates for the regulated services of Stedin Group are subject to the regulation framework of the Dutch regulator for the provision of energy services: the Netherlands Authority for Consumers and Markets (ACM). With regard to the non-regulated services, Stedin Group is not subject to a regulator for the pricing of the services.

Energy distribution services
Energy distribution services comprise distribution, connection and metering services for electricity as well as distribution, connection and metering services for gas. Stedin Group distributes electricity and gas via its grids to the customer's connection. The distribution services are recognised during the supply period. The revenue from distribution services consists of a fixed periodic payment for the use and the availability of the grids as well as a payment per distributed volume. These services relate to performance obligations that are satisfied during a period. The revenues for the use and the availability of the grids are allocated to the supply period in equal amounts. Allocation in equal amounts represents the availability of the grid during the entire year under review. The volume-based payments are recognised in the income statement in the period in which the distribution service was provided.

Customer construction contributions received and reconstructions
In order to make distribution services for electricity and gas possible, Stedin Group will construct grid connections for new supply points. The customer pays a contribution towards the construction costs for such a new connection. The connection is inseparably linked to the distribution services and forms an integral part of the payment for distribution services. Revenue from customer construction contributions is therefore recognised in equal amounts over the expected useful life of the connection point concerned. Stedin Group also receives contributions for reconstruction work carried out on the grid. Like the customer construction contributions, these are recognised in equal amounts over the expected useful life of the grid. The customer construction and reconstruction contributions received in advance are contract liabilities which are recognised in the balance sheet under ‘Deferred income’.

Selling prices
The selling prices of regulated services are based on the rates as determined by the ACM for the distribution of energy. The rates for customer construction contributions have also been determined by the ACM. Adjustments in the selling prices of regulated services can arise mainly as a consequence of failures in the grid for which customers are required to be compensated by law and are recognised as variable revenue. These adjustments are based on statutory rates. The related revenues classify as variable revenues. Variable revenue is recognised only to the extent that it is highly probable that this revenue will not be reversed.

Revenue from non-regulated services

The non-regulated services of Stedin Group comprise the data processing of energy meters; the management, maintenance and rental services of energy meters; failure, management, maintenance and rental services for transformers; and services in the field of high-voltage projects. Stedin Group applies the portfolio approach for these activities, under which revenue is recognised for the progress of the delivered performance. Revenue from other services is mainly allocated on the basis of the percentage of completion of the project based on the accumulated costs of the project on the balance sheet date compared with the total expected project costs. Selling prices for non-regulated services are in line with the market as laid down in the relevant agreement between Stedin Group and the customer.

In addition, Stedin Group leases a number of business premises and transformers to third parties. The assets are recognised by Stedin Group in property, plant and equipment. Lease revenues are recognised in equal amounts through the income statement of Stedin Group as revenues over the term of the lease.

Contract assets and liabilities

Contract assets relate to the non-enforceable claims under and expenditure for contracts with customers. For Stedin Group, these are the amounts not yet invoiced. Stedin Group presents contract assets under ‘Trade and other receivables’. A bad debt provision is recognised for the balance sheet item 'amounts not yet invoiced' in the same way as for the Trade receivables. Contract liabilities are presented as ‘Deferred income’ and as part of ‘Trade and other liabilities’.

Other income

Items recognised under other income include the following: services to third parties, sales proceeds from discontinued operations and government grants.

The purchase costs for compensation of technical and administrative network losses are recognised in the period in which the revenues from the sale are realised. The costs of materials and services from third parties are also included in this line item.

Financial income comprises interest income from the financial assets, including loans issued, cash loans, and cash and cash equivalents. This interest income is calculated on the basis of the effective interest method.
Financial expenses consist mainly of interest expense on interest-bearing liabilities, calculated on the basis of the effective interest method. The interest-bearing liabilities consist of borrowings and debt, except the perpetual subordinated bond loan. The interest expense for the perpetual subordinated bond loan is not included in this item. It is accounted for directly in group equity. In addition, financial expenses also include the other financing costs.

Gains and losses on financial hedging instruments are, insofar as these are taken through the income statement, also accounted for under financial income and expenses. Dividend income from other capital interests is recognised when it falls due.

Income taxes comprise current taxes and movements in deferred taxes. These amounts are recognised in profit or loss unless they concern items that are recognised directly through group equity. Current tax is the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the year under review, and is calculated on the basis of applicable tax legislation and rates.

Income taxes comprise all taxes based on taxable profits and losses, including taxes payable by subsidiaries and associates on distributions to Stedin Holding N.V. Additional income taxes on the result before dividend distributions are recognised at the same time as the obligation to distribute that dividend is recognised.

Property, plant and equipment is subclassified into the following categories:

• Land and buildings
• Machinery and equipment
• Regulated networks
• Other operating assets
• Assets under construction

Networks and network-related assets

Stedin Group's networks and network-related assets in the regulated domain are measured at the revalued amounts. The revalued amount is the fair value at the date of the revaluation less accumulated depreciation and impairment.

The fair value of these network assets is measured at the beginning of each new regulatory period. If there are indications in the interim period that the fair value differs significantly from the book value, the revaluation will be adjusted. An increase in the book value as a result of a revaluation of networks and network-related assets in the regulated domain is recognised directly in group equity through the revaluation reserve. A reduction in the book value is first recognised directly in group equity through the revaluation reserve insofar as the amount of the revaluation reserve is sufficient. If the decrease exceeds the revaluation reserve, the excess is recognised through the consolidated income statement.

The difference between the depreciation based on the revalued book value and depreciation based on the original historical cost, less deferred tax, is transferred periodically from the revaluation reserve to retained earnings.

See note 2.2.26 Fair value for a detailed description of fair value.

Land and buildings, machinery and equipment, other operating assets and assets under construction

Other property, plant and equipment is recognised at cost less accumulated depreciation and impairment. Cost comprises the initial acquisition price plus all directly attributable costs. Cost of assets constructed by the company comprises the cost of materials and services, direct labour and an appropriate proportion of directly attributable overhead costs.

Financing costs

Financing costs directly attributable to the purchase, construction or production of an eligible asset are recognised in cost in accordance with IAS 23. If an asset comprises multiple components with differing useful lives, these components are recognised separately.

Subsequent expenditure

Expenses incurred at a later date are only added to the book value of an asset if and to the extent that the condition of the asset is improved compared to the originally formulated performance standards. Overhaul, repair and maintenance are recognised as an expense in the period in which the costs are incurred. If an asset comprises multiple components with differing useful lives, these components are recognised separately. Costs incurred to replace components of property, plant and equipment that are replaced for the asset to be capable of operating in the intended manner are capitalised while simultaneously removing the carrying amount of the replaced components.

Depreciation and amortisation

Depreciation is recognised in the consolidated income statement using the straight-line method based on estimated useful life, taking into account the estimated residual value. Useful lives and residual values are reassessed annually, and any changes are recognised prospectively. Land, sites and assets under construction are not depreciated.

Stedin Group has implemented IFRS 16 with effect from 1 January 2019. As a result, the leases (with Stedin as lessee) have been capitalised in the balance sheet under ‘right-of-use assets’. The corresponding lease liability is recognised in the balance sheet under ‘interest-bearing debt’. This situation led to an increase in the balance sheet of € 103 million. In addition, a shift occurred in the income statement from operational expenses to depreciation and amortisation, and to a very limited extent to financial expenses. In the cash flow statement, this shift led to a decrease in cash flow from operating activities, with a simultaneous increase in outgoing cash flow from financing activities by the same amount. For the impact analysis of the adoption of IFRS 16, see 2.4 Effects of the adoption of new IFRS Standards.

Stedin Group as lessee
The provisions of IFRS 16.9 were taken into account by Stedin Group in assessing whether a contract is, or contains, a lease. Upon commencement of a contract, Stedin Group assesses whether it is a lease or includes a lease component. A contract is or includes a lease if the contract grants the right to exercise control over the use of an identified asset during a certain period, in return for compensation. The incremental borrowing rate is based on the risk-free market interest rate, increased by a risk premium applying specifically to Stedin Group for a similar term and with a similar security as that which Stedin Group would have to pay in order to borrow the funds necessary to obtain a similar asset. With respect to each lease in which Stedin Group is the lessee, Stedin Group calculates a right-of-use asset and a corresponding lease liability, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases with a value of € 5,000 or less. Stedin Group recognises the lease payments for these leases on a straight-line basis as operational expenses in the income statement.

The lease liability is initially measured at the present value of the future lease payments, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses the incremental borrowing rate.

Lease payments that are included in the measurement of the lease liability comprise:

• fixed lease payments, less any rent reductions and/or investment contributions;
• variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;
• the exercise price of purchase options, if the lessee is reasonably certain to exercise the options;
• payments of penalties for terminating the lease, if it is reasonably certain that the lessee will exercise the option to terminate the lease.

The lease liability is then increased monthly to reflect the interest payable on the lease liability and is decreased to reflect the lease payments.

Stedin Group remeasures the lease liability and the right-of-use assets whenever:

• the lease term has changed, or the expectation of the exercise of an extension option, termination option or purchase option has changed;
• the lease payments change due to indexation, for instance;
• a lease contract is modified.

The right-of-use asset is stated at cost on the commencement date. This cost price consists of the amount of the initial statement of the lease liability, the initial direct costs incurred and the lease payments made on or before the commencement date, minus all the lease incentives received and the initial direct costs incurred.

Stedin Group determines the lease period as the non-cancellable period of a lease, together with:

• the periods included in an option to extend the lease if it is reasonably certain that Stedin Group will exercise this option;
• the periods included in an option to terminate the lease if it is reasonably certain that Stedin Group will not exercise this option.

In this assessment, Stedin Group takes into account all relevant facts and circumstances that are an economic motive to exercise the option to extend the lease, or exercise the option to terminate the lease.

Variable leases that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in profit or loss.

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. Stedin Group does not apply this simplification.

Right-of-use assets are periodically tested for impairment in accordance with IAS 36.

The right-of-use and the lease obligation must be assessed together with regard to the recognition of deferred taxes as a single transaction. So there is no temporary difference at first recognition. The deffered tax is calculated over the temporary differences that subsequently arise when the right of use is written off and the lease obligation is reduced.

Also see note 2.4 Effects of the adoption of new IFRS Standards under IFRS 16 Leases for the impact analysis for this standard with effect from 1 January 2019.

Stedin as lessor
Stedin Group leases a number of business premises and transformers to third parties. The assets are recognised by Stedin Group in property, plant and equipment. Lease revenues are recognised in equal amounts through the income statement of Stedin Group as revenues over the term of the lease.

Depreciation and amortisation

Depreciation is recognised in the consolidated income statement using the straight-line method based on the estimated lease term of the right-of-use asset. The lease term is assessed when the lease contracts are changed and the lease term can be terminated or renewed, based on the lease contract.

The following useful lives are applied:

The acquisition price of a subsidiary, joint venture or associate is equal to the amount paid to purchase the interest. If the acquisition price is higher than the share in the fair value at the date of acquisition of the identifiable assets, liabilities and contingent liabilities, the excess is recognised as goodwill. Any shortfall is recognised as a gain in profit or loss.

Goodwill is measured at cost less impairment. Goodwill is allocated to one or more cash-generating units. Allocated goodwill is tested for impairment annually. This test is not performed as long as goodwill has not been allocated.

Goodwill purchased on acquisition of subsidiaries and joint operations is recognised in the balance sheet under intangible assets. Goodwill paid to acquire an interest in a joint venture or associate is included in the cost of acquisition.

For further details, see note 15 Intangible assets.

Other intangible assets comprise customer databases acquired with acquisitions, software and licences, concessions, permits, rights and development costs. The related costs are capitalised if it is probable that these assets will generate economic benefits and their costs can be reliably measured. Other intangible assets have a finite useful life, and are recognised at cost less accumulated amortisation and impairment.

Software

Software is capitalised at cost. Cost of standard and customised software comprises the one-time costs of licences. Costs of software maintenance are recognised as an expense in the period in which they are incurred.

Depreciation and amortisation

Amortisation is recognised as an expense on the basis of the estimated useful life from the time that the relevant asset is available for use. Other intangible assets are amortised using the straight-line method. The residual value of these assets is nil. Amortisation is presented in the income statement as a component of 'Depreciation, amortisation and impairments of non-current assets'.

The following useful lives are applied:

Deferred taxes are calculated using the balance sheet method for the relevant differences between the book value and tax base of assets and liabilities. Deferred taxes are measured using the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on applicable tax rates and tax laws. Deferred taxes are recognised at face value.

Deferred tax assets are recognised for deductible temporary differences, tax losses carried forward and unused tax credits available for set-off if and to the extent that it is probable that future taxable profit will be available against which unused tax losses and unused tax credits can be utilised.

Deferred tax assets for all deductible temporary differences relating to investments in subsidiaries, joint operations, and interests in associates as well as joint ventures are only recognised if it is probable that the temporary difference will reverse in the near future and that future taxable profit will be available against which the deductible temporary difference can be utilised.

Deferred tax liabilities are recognised for all taxable temporary differences arising from investments in subsidiaries, joint operations, and interests in associates and joint ventures, unless Stedin Group can determine the time at which the temporary difference will reverse and it is probable that the temporary difference will not reverse in the near future.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to set off tax assets against tax liabilities, and where the deferred tax assets and liabilities relate to taxes levied by the same tax authority on the same fiscal unity.

Hedge accounting

Derivative financial instruments are classified as hedging instruments if they are used to hedge the risk of fluctuations in current or future cash flows, which could affect the result, or fluctuations in the fair value of assets or liabilities. If the hedge can be attributed to a particular risk or to the full movement in the transaction associated with an asset, liability or highly probable forecast transaction or balance sheet item, the attributed derivative financial instruments are recognised as hedging instruments.

The positive book values of the derivative financial instruments are recognised under the derivative financial instruments in non-current and current assets in the consolidated balance sheet. The negative book values of the derivative financial instruments are recognised in the non-current and current liabilities in the consolidated balance sheet.

Cash flow hedge accounting

Cash flow hedge accounting is intended to mitigate movements in future cash flows. If the conditions for cash flow hedge accounting are met, the effective portion of the changes to the fair value of the derivative financial instruments concerned is recognised in the consolidated statement of comprehensive income as 'Unrealised gains and losses on cash flow hedges'. These changes (after income tax) are then recognised in the cash flow hedge reserve in group equity or in the reserve for cost of hedging.

Amounts recognised through group equity are transferred to the consolidated income statement when the hedged asset or liability is settled. When a hedging instrument expires, is sold, terminated or exercised, or when the conditions for hedge accounting are no longer met although the underlying future transaction has yet to take place, the accumulated result remains in group equity (in the cash flow hedge reserve) until the forecast transaction has taken place. If the forecast transaction is no longer likely to take place, the accumulated result is transferred directly from group equity to the consolidated income statement.

Fair value hedge accounting

Fair value hedge accounting is applied to mitigate the risk of changes in the fair value of the hedged positions. If the conditions for fair value hedge accounting are met, the change in the fair value of the hedged positions and the change in fair value of the derivative financial instruments are recognised in the consolidated income statement. The ineffective portion is hereby recognised directly through the consolidated income statement.

Other financial assets are mainly long-term items with a term of more than one year, such as loans, receivables and prepayments to associates, joint ventures or third parties. Long-term receivables, loans and prepayments are measured at amortised cost using the effective interest method.

Assets/liabilities held for sale and discontinued operations are classified as held for sale when the book value will be recovered through a sale transaction rather than through continuing use. This classification is only made if it is highly probable that the assets/liabilities or operations are available for immediate sale in their present condition and the sale is expected to be completed within one year.

Assets/liabilities held for sale are measured at the lower of the book value preceding classification as held for sale and fair value less costs to sell.

Inventories are recognised at the lower of weighted average cost and direct net realisable value. Cost of inventories is the purchase price including directly attributable costs incurred to bring the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs to sell. Impairment of inventories is recognised through the consolidated income statement if the book value exceeds the net realisable value.

Trade and other receivables have a term of less than one year. These receivables also include the net amounts at the reporting date that have yet to be billed for services supplied. On initial recognition, receivables are accounted for at amortised cost less impairment losses due to expected losses for bad debts in connection with credit risk.

The expected credit losses are estimated on the basis of the credit quality of the counterparty on the basis of individual estimates or estimates for a portfolio of similar receivables. For the assessment of risks in portfolios, Stedin Group uses a simplified model that is based on Stedin's experience of receivables with the same risk profile, supplemented by expected developments of the debtors and the economic environment.
Receivables are written off when it is clear that the debtor will no longer be able to pay.

Cash and cash equivalents comprise cash and bank balances as well as deposits with a maturity of no more than three months.

The perpetual subordinated bond loan is classified under group equity in the consolidated financial statements, in agreement with the contractual conditions for the bond loan.

The principal of the perpetual subordinated bond loan is presented at face value. Both the discount and transaction costs relating to the issue of the bond loan were charged directly to the general reserve when the loan was issued. The coupon interest payable annually and the associated tax effects are recognised in the valuation of the loan.

The company financial statements likewise apply IFRS for the presentation of this bond loan.

Pensions

The pension liabilities of almost all business units have been placed with the industry-wide pension funds: Stichting Pensioenfonds ABP (ABP) and Stichting Pensioenfonds Metaal en Techniek (PMT). A limited number of employees have individual plans insured with various insurance companies.

The amount of the pension depends on age, salary and years of service. Employees may opt to retire earlier or later than the state retirement age, in which case their pension is adjusted accordingly. Retiring later than the state retirement age is only possible with Stedin's consent. At ABP, employees can retire between 60 and the state retirement age plus five years. At PMT, this is between five years before and five years after the state retirement age.

The most important pension plans, which have been placed with ABP, are group plans in which several employers participate. These plans are essentially defined benefit plans. However, as Stedin has no access to the required information and because participation in the group plans exposes Stedin to actuarial risks connected with present and former employees of other entities, these plans are treated as defined contribution plans and the pension contributions payable for the financial year are accounted for as pension expenses in the financial statements.

Other provisions for employee benefits

A provision is recognised for the obligation of Stedin Group to pay out amounts related to long-service benefits and on the retirement of employees. A provision is also recognised for the obligation of Stedin Group to contribute towards the health insurance premiums of retired employees, salary payments in the event of illness and the employer’s risk under the Unemployment Act. Where appropriate, these liabilities are calculated at the reporting date using the projected unit credit method, using a pre-tax discount rate which reflects the current market assessment of the time value of money.

A provision is recognised when there is a present legal or constructive obligation that is of an uncertain amount or timing due to a past event, the settlement of which will probably lead to an outflow of resources.

Provisions which will be settled within one year of the reporting date, or which are of limited material significance, are recognised at face value. Other provisions are recognised at the present value of the expected expenditure. The specific risks inherent to the relevant obligation are taken into account when determining this expenditure. The present value is calculated using a pre-tax discount rate which reflects the current market assessment of the time value of money. The expected expenditure is determined based on detailed plans in order to limit the uncertainty regarding the amount.

On initial recognition, interest-bearing debt is carried at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest-bearing debt is recognised at amortised cost using the effective interest method.

Trade payables and other financial liabilities are recognised at fair value. They are subsequently carried at amortised cost. Liabilities with a term of less than one year are not discounted on initial recognition. In view of their short-term nature, trade and other liabilities are recognised at face value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value can be measured in various ways and, depending on the use of observable inputs, the value is classified into the following categories:

Level 1

Level 1 recognises financial instruments whose fair value is measured using unadjusted quoted prices in active markets for identical instruments.

Level 2

Level 2 recognises financial instruments whose fair value is measured using market prices or pricing statements and other available information. Where possible, the measurement method uses observable market prices. Contracts for derivative financial instruments are measured by agreement with the counterparty, using observable interest rate and foreign currency forward curves.

Level 3

Level 3 recognises financial instruments whose fair value is measured using calculations involving one or more significant inputs that are not based on observable market data.