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Basis of accounting

The consolidated financial statements present our results for the years ended 31 March 2008, 2007 and 2006 and our financial position as at 31 March 2008 and 2007. They have been prepared using the accounting policies shown, in accordance with International Financial Reporting Standards (IFRS).

In complying with IFRS, we are also complying with the version of IFRS that has been endorsed by the European Union for use by listed companies.

IFRS differ from both US Generally Accepted Accounting Principles (US GAAP) and UK Generally Accepted Accounting Principles (UK GAAP). Following a rule change by the US Securities and Exchange Commission we no longer provide a reconciliation from our results and financial position as prepared under IFRS to the results and financial position as if they had been prepared in accordance with US GAAP.

Choices permitted under IFRS

Since 1 April 2005 we have presented our consolidated financial statements in accordance with IFRS. We were required to make a number of choices on the adoption of IFRS and in addition we continue to choose from certain options that are available within accounting standards.

The principal choices made on the adoption of IFRS, which cannot be changed, were as follows:

• Transition date

  Our opening IFRS balance sheet was established as at 1 April 2004. As a consequence goodwill amortisation ceased on this date and we used certain balances in our previous UK GAAP financial statements as the basis for our opening IFRS balance sheet.

• Business combinations

  Business combinations prior to 1 April 2004 were not changed retrospectively. In particular, we retained the use of merger accounting for the business combination with Lattice Group.

• Financial instruments

  We adopted IAS 39 on 1 April 2005. We chose to apply IAS 39 prospectively from that date and accordingly did not restate prior periods. As a consequence, the accounting for financial instruments differs from that which would have been presented had we always applied IAS 39.

• Carrying value of assets at transition

  In most cases, we used brought forward depreciated cost, as adjusted for changes in accounting policies to conform with IFRS, to be the opening carrying value under IFRS.

• Share-based payments

  We recognised all active share option grants retrospectively.

• Cumulative translation differences

  We chose to measure and present cumulative translation differences arising since 1 April 2004 only.

Significant choices that we continue to make on an ongoing basis include the following:

• Presentation formats

  We use the nature of expense method for our income statement and total our balance sheet to net assets and total equity.
  
  In the income statement, we present subtotals of total operating profit, profit before tax and profit from continuing operations, together with additional subtotals excluding exceptional items, remeasurements and stranded cost recoveries. Exceptional items, remeasurements and stranded cost recoveries are presented on the face of the income statement.

• Pensions

  We recognise actuarial gains and losses each year in the statement of recognised income and expense.

• Joint ventures

  We use equity accounting for jointly controlled entities instead of the alternative proportional consolidation method.

• Capitalised interest

  We capitalise interest into the cost of assets that we construct, where conditions of IAS 23 are met.

• Capital contributions

  Contributions received towards capital expenditure are recorded as deferred income and amortised in line with the depreciation on the associated asset.

• Timing of goodwill impairment reviews

  Goodwill impairment reviews are carried out annually in the final quarter of the financial year.

• Financial instruments

  We normally opt to apply hedge accounting in most circumstances where this is permitted. For net investment hedges, we have chosen to use the spot rate method, rather than the alternative forward rate method.

• Individual accounts

  We have chosen to continue to use UK GAAP, rather than IFRS, in the individual financial statements of National Grid plc and of UK subsidiary companies.

Accounting standards and interpretations adopted in 2007/08

In preparing our consolidated financial statements we have complied with International Financial Reporting Standards, International Accounting Standards and interpretations applicable for 2007/08. The following amendments to standards and interpretations were adopted during 2007/08, none of which resulted in a material change to our consolidated results, assets or liabilities in 2007/08 or in those of previous periods:

• New interpretations

  IFRIC 8, IFRIC 9, IFRIC 10 and IFRIC 11 contain guidance on accounting for share-based exchange transactions, embedded derivatives, impairments in half yearly reports and share-based payments.
  
  Implementation of these interpretations did not have a material impact on our results, assets or liabilities.