ANNUAL REPORT 2012

Accounting Policies, Critical Accounting Estimates and Judgements

Basis of accounting and preparation of Financial Statements

The financial statements are prepared in accordance with accounting standards generally accepted in Ireland and Irish statute comprising the Companies Acts, 1963 to 2012, and the European Communities (Companies: Group Accounts) Regulations, 1992. Accounting standards generally accepted in Ireland in preparing financial statements giving a true and fair view are those published by the Institute of Chartered Accountants in Ireland and issued by the Accounting Standards Board.

The financial statements are prepared in Euro under the historical cost convention.

The Group’s significant accounting policies are set out below, together with an explanation of where changes have been made to previous policies. There were no new standards adopted during the year.

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Basis of consolidation

The consolidated financial statements include the financial statements of Bord na Móna plc and all of its subsidiaries as listed on page 47.

The policies set out below have been consistently applied to all years presented in the consolidated financial statements and are consistently applied by all Group entities. Comparative figures have been restated where required in order to present on a consistent basis.

Intragroup transactions are eliminated on consolidation in the preparation of the Group financial statements. The results of subsidiary undertakings acquired or sold are included in the consolidated profit and loss account and cash flow statement up to or from the date control passes.

The identifiable assets and liabilities of the acquired entity are included in the consolidated financial statements of the acquirer at their fair values at the date of acquisition. The difference between these and the cost of acquisition is recognised as goodwill or negative goodwill. The results of the acquired entity are included in the profit and loss account of the acquiring Group from the date of acquisition. The assets and liabilities recognised in the allocation of fair values are those of the acquired entity that existed at the date of acquisition. They are measured at fair values that reflect the conditions at the date of the acquisition. The cost of acquisition is the amount of cash or cash equivalents paid and the fair value of other purchase consideration given by the acquirer, together with the associated transaction expenses.

The fair value exercise includes the measurement of contingent assets and liabilities. These are determined based on the Group’s reasonable estimates of the expected outcome. Certain contingent assets and liabilities that crystallise as a result of the acquisition are also recognised, where the underlying contingency was in existence before the acquisition (e.g. environmental re-instatement provisions).

Joint ventures are undertakings over which Bord na Móna exercises control jointly with one or more parties. The Group’s share of profits/losses of joint ventures is included in the consolidated profit and loss account. The Group’s interest in their net assets/ liabilities is included as a financial asset in the consolidated balance sheet at an amount representing the fair value of the Group’s share of the net assets plus the Group’s share of retained profits or losses.

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Turnover

Turnover is comprised of revenue, excluding value added tax, trade discounts and including other levies on goods and services to external customers arising in the normal course of business.

The Group supplies electricity to the ESB Customer Supply under a Power Purchase Agreement (‘PPA’) which expires in December 2015. Turnover is recognised for (i) capacity availability and (ii) energy supplied, on the basis of contractual performance in accordance with the terms of the PPA. Related pass through costs are recognised in accordance with the terms of the PPA.

Turnover on long-term contracts is recognised using the percentage-of-completion method, calculated on a services performed basis.

On receipt of payment from customers, in advance of the performance of the Group’s contractual obligations to its customers under the normal course of business, in respect of certain of its activities, the Group recognises deferred revenue. The deferred revenue is included in creditors on the balance sheet, representing the Group’s obligations under the contract terms. When the Group performs its obligations and thereby obtains the right to consideration under the terms of business, it reduces the liability and recognises that reduction in revenue in the profit and loss account. The costs associated with the delivery of the services are charged to cost of sales as incurred, to the extent that they are less than the unamortised deferred revenue. A provision is recognised where future costs in respect of the delivery of the service are estimated to exceed unamortised deferred revenue.

Revenue earned on service delivery but unbilled is recognised in accordance with contractual terms and separately disclosed as accrued income within debtors.

Operating lease rental income is recognised in accordance with the contractual terms.

All other revenue is recognised when the goods or services are delivered.

Turnover is stated after eliminating sales within the Group.

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Foreign currencies

Transactions denominated in foreign currencies are translated into Euro at the rate of exchange ruling at the transaction date or, if hedged, at the rate of exchange under the related forward currency contract. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date or, if hedged forward, at the rate of exchange under the related forward currency contract. The resulting profit or loss is included in the profit and loss account. Gains and losses arising on forward foreign exchange contracts which are used to hedge foreign transaction cash flows are recognised as an operating expense in the profit and loss account. Interest rate swap agreements and similar contracts are used to manage interest rate exposures. Amounts payable or receivable in respect of these derivatives are recognised as an interest expense over the period of the contracts.

The financial statements of foreign subsidiaries are translated into Euro using the closing rate method. Profits and losses arising on the re-translation of foreign subsidiaries are taken to reserves and recognised in the statement of total recognised gains and losses. Differences on foreign currency borrowings, to the extent that they are used to finance or provide a hedge against Group equity investment in foreign subsidiaries, are also taken to reserves and recognised in the statement of total recognised gains and losses.

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Derivative financial instruments

The Group uses derivative financial instruments including a number of cross currency interest rate swaps to hedge its exposure to interest and foreign exchange risks arising from two private placement facilities. In order to hedge the associated exchange rate exposures and fix the floating interest rates, the Group entered into a number of swap arrangements which match the maturity profile of the unsecured loan notes.

The fair value of the financial instruments is disclosed at each balance sheet date.

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Emission allowances

In accordance with the provisions of the European CO2 emissions trading scheme, emissions allowances covering a percentage of the expected emissions during the year are granted to Bord na Móna at the beginning of each year by the relevant Government Authority.

As emissions arise, a charge is recorded in the profit and loss account to reflect the amount required to settle the liability to the Authority. This provision will include the current market value of any additional allowances required to settle the obligation. These allowances, together with any additional allowances purchased during the year, are returned to the relevant Authority within four months of the end of that calendar year, in order to cover the liability for actual emissions of CO2 during that year. Certain of the emissions costs are recoverable from ESB Customer Supply under the PPA.

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Tangible fixed assets

Cost
Freehold land, and the estimated residual value of peatland after the peat production phase, are stated at cost. Cost includes direct costs (including direct labour) and overheads.

Peatland and other tangible fixed assets are stated at cost less accumulated depreciation.

The cost of landfill sites includes acquisition costs and the cost of construction.

Assets in the course of construction represent the cost of purchasing, constructing and installing tangible fixed assets ahead of their productive use.

The Group has a policy of capitalising finance costs. Finance costs that are directly attributable to the construction of tangible fixed assets are capitalised as part of the cost of those assets. Where funds are borrowed specifically for the purpose of financing the construction of a tangible fixed asset, the amount of finance costs capitalised is limited to the actual costs incurred on the borrowings during the period in respect of expenditure on the tangible fixed asset. The capitalisation of finance costs ceases when the asset is commissioned or where active development has been interrupted for an extended period of time.

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Depletion and depreciation

A depletion charge is recorded in respect of peatland, drainage and railways. Other tangible fixed assets are depreciated on a straight line basis at the rates indicated:

Plant & Machinery 5% to 33.3% per annum
Buildings 5% to 10% per annum

The Group’s power plant at Edenderry is depreciated on a unit of production basis in order to relate the depreciation to the estimated production capability of the plant. The Group supplies electricity to ESB Customer Supply under the PPA on a priority despatch basis. This PPA expires in 2015 and the plants contractual entitlement to priority despatch ceases at that date. The unit of production method of depreciation seeks to relate the depreciation charge to the estimated production capability of the plant.

The Group’s peaking plant at Edenderry is depreciated on a straight line basis with the charge calculated to write the cost of the asset down to its estimated residual value. The use of the straight line basis of depreciation reflects the anticipated consumption of the economic benefit of the plant on a consistent basis over the useful life of the plant based on its availability to the grid.

The cost of the landfill asset is depreciated over the licensed life of the infrastructural assets associated with it and the landfill cells are depreciated on the basis of the usage of void space.

No depreciation is charged on assets in the course of construction.

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Financial assets

Interests in subsidiary undertakings are initially recorded at cost on the Bord na Móna plc balance sheet.

The Group’s interest in joint ventures is the determined under the equity method in accordance with the provisions of FRS 9 ‘Associates and Joint Ventures’ and represents the Group’s share of net assets (other than goodwill) of the joint ventures or investment in the joint venture at inception.

The Group carries out an impairment review if events or changes in circumstances indicate that the carrying value of the financial asset may not be recoverable.

The recoverable amount is determined by comparing the carrying value of the financial asset against the higher of its fair value and its value in use. The value in use is determined by discounting estimated future cash flows expected to be derived from the financial asset, to net present value. To the extent that the carrying amount exceeds the recoverable amount, the financial asset is impaired and is written down.

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Investment properties

Investment properties are included in the balance sheet at their open market value. Reductions in valuations are recorded as a movement in the revaluation reserve through the statement of total recognised gains and losses. Revaluations below depreciated historical cost regarded as permanent are charged to the profit and loss account in the period.

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Goodwill and intangible assets

Purchased goodwill, being the excess of the consideration paid on the acquisition of a business over the fair values of the entity’s identifiable assets and liabilities, is capitalised and classified as an asset on the balance sheet. Goodwill is amortised to the Group profit and loss account over its estimated useful life (between three and twenty years).

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Impairment of assets and goodwill

If events or changes in circumstances indicate that the carrying value of tangible fixed assets or goodwill may not be recoverable, the Group carries out an impairment review.

The recoverable amount in respect of income generating units (‘IGUs’) is determined by comparing the carrying value of the IGU to the higher of its net realisable value and the value in use. The value in use is determined by discounting estimated future cash flows expected to be derived from the income generating unit, to net present value. The discount rate used reflects an appropriate risk weighting for the type of investment being tested for impairment.

To the extent that the carrying amount exceeds the recoverable amount, the asset is impaired and is written down. Any impairment loss arising is recognised in the profit and loss account unless it arises on a previously revalued asset.

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Research costs

Expenditure on pure or applied research is written off to the profit and loss account as incurred.

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Business development costs

Development costs are expensed to the profit and loss account as ‘Business Development’ costs if the criteria for capitalisation as an asset are not satisfied.

Development costs are capitalised as an intangible asset in line with accounting policy if there is (i) sufficient evidence that an asset has been created (ii) future inflow of benefit will occur and (iii) it can be measured with sufficient reliability.

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Grants

Capital grants received and receivable under EU-assisted schemes are recognised when received or when their receipt can be foreseen with virtual certainty. Grants received in respect of tangible fixed assets are treated as a deferred credit and amortised to the profit and loss account annually over the economic useful life of the related tangible fixed assets.

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Stocks, work in progress and long term contracts

Stocks and work in progress are valued at the lower of cost and net realisable value. Coal stocks are valued at weighted average cost.

Cost includes all direct expenditure incurred in bringing products to their current state under normal operating conditions. The cost of milled peat stock harvested is determined at each peatland location as the cost of the annual harvest allocated over the normal levels of harvest production calculated based on standard tonnage. The unit cost is reduced to actual cost where actual cost per tonne is lower than standard cost per tonne. The costs of milled peat stocks include a depletion charge, direct labour, other costs and related production overheads. Variations from standard tonnage (i.e. up tonnages where the actual output tonnages are greater due to improved moisture content) are recognised on measurement of the peat when the stock pile is fully outloaded. The additional bonuses of work groups which only arise when up-tonnage is recognised are provided for when the related up-tonnages are identified and recognised as part of this measurement process.

Net realisable value is based on anticipated selling price less the cost of selling such goods and any sales incentives or penalty payments.

Profit on long-term contracts is recognised once the outcome can be assessed with reasonable certainty. Losses on long-term contracts are provided as soon as they are foreseen. Long-term work in progress is stated net of payments received on account.

Provision is made for damaged, deteriorated, obsolete and slow moving items where appropriate.

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Trade debtors

Trade debtors are initially recognised at fair value. Trade debtors are considered for impairment on an on-going basis. Provisions for impairment of trade debtor balances are recorded against identified doubtful debtors.

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Cash and cash equivalents

Cash and cash equivalents comprise of cash at bank and in hand and short term deposits.

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Borrowings

Interest bearing loans and borrowings are initially recognised net of arrangement fees. These arrangement fees are amortised over the life of the related borrowing.

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Leases

Assets held under finance leases are included in tangible fixed assets at cost and are depreciated over the shorter of the lease term or their useful economic life. Obligations relating to finance leases, net of finance charges in respect of future periods, are included as appropriate under creditors due within or after one year. Finance charges are allocated to accounting periods over the lease term to reflect a constant rate of interest on the remaining balance of the obligations.

Rentals under operating leases are charged to the profit and loss account as incurred.

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Provisions

A provision is defined as a liability of uncertain timing or amount. Provisions are recognised in accordance with FRS 12 ‘Provisions, Contingent Liabilities and Contingent Assets’, when the Group has a legal or constructive obligation as a result of a past event, a reliable estimate of that obligation can be made and it is possible that an outflow of economic benefits will be required to settle the obligation.

Where the effect of the time value of money is material, provisions are discounted using a risk free rate. The provision is increased by a financing charge in each period, which is calculated based on the provision balance and discount rate applied at the last measurement date (updated annually) and is included in the profit and loss account as a financing charge.

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Environmental reinstatement provision

Provision is made for environmental reinstatement costs relating to the after-use of cutaway peatland and decommissioning costs. The provision is recorded when the circumstances giving rise to the obligation to reinstate the assets occur. The amount of the provision represents the present value of the expected future costs. A depletion charge is recorded in the profit and loss account in order to charge the cost of capitalised reinstatement costs to the profit and loss account reflecting extraction.

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Landfill restoration provision

A provision is recorded for the present value of the Group’s unavoidable costs in relation to the aftercare and the restoration cost of the landfill facility. This value is capitalised as a tangible fixed asset. Provision is made for the present value of post closure costs based on the quantity of waste deposited in the year. Similar costs incurred during the operating life of the sites are written off directly to the profit and loss account and not charged to the provision.

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Provision for generating stations closure

The provision for closure of generating stations represents the present value of the current estimate of the costs of closure of the stations at the end of their useful lives.

The estimated costs of closing stations are recognised in full, but discounted to present values using a risk free rate. The costs are capitalised in the tangible fixed asset and depreciated in the same way as the generating asset itself. The costs are reviewed each year and amended as appropriate. Amendments to the discounted estimated costs are capitalised into the relevant assets and depreciated prospectively.

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Self insurance provisions

Self insurance provisions relate to the estimated liability in respect of costs to be incurred under the Group’s self insurance programmes for events occurring on or prior to the year end. The provision is estimated based on a case by case assessment by the independent claims handling agents of the likely outturn on each case.

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Legal provisions

Provisions for legal claims are included in the financial statements, for legal and other matters on the basis of the amounts that the Group consider will become payable, after evaluating the recommendations of legal advisors, their in-house legal team, and other experts.

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Warranty provision

The Group issues warranties for certain goods and services. The warranty costs are provided for based on the duration of the warranty period.

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Redundancy provision

Redundancy costs are provided for by the Group, once a detailed formal plan has been prepared and approved and the Group is irrevocably committed to implementing the plan.

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Pensions and post retirement benefits

The Group has both defined benefit and contribution pension arrangements. Defined benefit pension scheme assets are measured at fair value. Defined benefit pension scheme liabilities are measured on an actuarial basis using the projected unit credit method. The excess of scheme liabilities over scheme assets is presented on the balance sheet as a liability net of related deferred tax and pension scheme surpluses, to the extent that they are considered recoverable are presented on the balance sheet as an asset net of related deferred tax. The defined benefit pension charge to operating profit comprises the current service cost and past service costs. The excess of the expected return on scheme assets over the interest cost on the scheme liabilities is presented in the profit and loss account as other finance income. Actuarial gains and losses arising from changes in actuarial assumptions and from experience surpluses and deficits are recognised in the statement of total recognised gains and losses for the year in which they occur.

The defined contribution pension charge to operating profit comprises the contribution payable to the scheme for the year.

Where the scheme rules require a surplus arising in the scheme to be shared between the employee and the members, the amount passed to the members is treated as an increase in the scheme liabilities.

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Taxation including deferred tax

Current tax represents the amount expected to be paid in respect of taxable profit for the year and is calculated using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.

Timing differences are temporary differences between profit as computed for taxation purposes and profit as stated in the financial statements which arise because certain items of income and expenditure in the financial statements are dealt with in different periods for taxation purposes.

Deferred tax assets are regarded as recoverable and recognised in the financial statements when, on the basis of available evidence, it is more likely than not that there will be suitable taxable profits from which the future reversal of the timing differences can be deducted. The recoverability of tax losses is assessed by reference to forecasts which have been prepared and approved by the Board.

Deferred tax is measured, on an undiscounted basis, at the tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

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Share based payment

Equity settled share based payment to employees are measured at the fair value of the equity instruments at the grant date. The fair value is expensed on a straight line basis over the vesting period. In accordance with FRS 20 ‘Share Based Payments’, the Group recognise an expense in the profit and loss account and a corresponding increase in equity in respect of the fair value of the shares issued to employees. The fair value of the shares issued is determined on a minority non-controlling basis. Factors taken into consideration in determining the fair value include the market, discounted cash flow, net assets value and the characteristics of the shares being acquired.

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Share capital

Ordinary shares are classified as equity.

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Dividends

Dividends are recognised in the financial statements when they have been appropriately approved or authorised by the shareholder and are no longer at the discretion of the Company.

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Critical accounting estimates and judgements

Preparation of the consolidated financial statements requires management to make certain assumptions that affect the reported amounts of assets and liabilities. These include the following areas:

(a) Pension scheme assets and liabilities
The actuarial valuation of pensions is based on assumptions regarding inflation, discount rates, the expected return on plan assets, salary increases, pension in payment increases and mortality rates. The assumptions adopted by the Group at 28 March 2012 are outlined in Note 25 to the financial statements and have been determined with assistance from the Group’s actuarial advisors.

The Turf Development Acts 1946 to 1998 and the rules governing the Bord na Móna GESS and RWESS pension schemes lay down in considerable detail the benefits that are to be provided to members. They also stipulate the shared contributions to be paid by both Bord na Móna and the contributing members. This does not conform to the ‘balance of cost’ defined benefit approach. For the purposes of reporting in accordance with FRS 17 ‘Retirement Benefits’ at 28 March 2012, 100% of the pension scheme deficit on the GESS scheme has been recognised in the financial statements. The RWESS pension scheme has a surplus at both 28 March 2012 and 30 March 2011 and the Group has accounted for its share of the pension scheme surplus on a 50:50 basis between members and the Group.

(b) Impairment of assets and goodwill
Intangible assets and property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may be impaired. The recoverable amount of income generating units is calculated based on the determination of a value in use for the income generating unit. This determination is based on forecasted future cash flows.

The Group’s Resource Recovery business is continuing to operate in challenging and highly competitive economic conditions and in a changing regulatory environment. In the event that the Group does not deliver anticipated volume and price increases or achieve anticipated cost reductions, or in the event that current weak economic conditions prevail in the domestic market, then the value in use assessment of the income generating unit may be adversely impacted. The determination of the value in use also requires application of an appropriate weighted average cost of capital and assessment of a long-term growth rate for the sector. The potential impact on the recoverable amount of changes in these key assumptions is set out in Note 7 to the financial statements.

(c) Carrying value of power plants
The Group’s power plant at Edenderry operates a fifteen year PPA with the ESB Customer Supply to provide electricity on a priority despatch basis. This PPA expires in December 2015. The plant’s contractual entitlement to priority despatch will cease as at that date. The Group anticipate that the plant will continue to operate in the period post 2015 in the single electricity market (‘SEM’) co-fired by biomass and peat. The related goodwill is being amortised over the period to 2025 reflecting a useful economic life of 20 years. In considering the carrying value of the plant at Edenderry and the goodwill arising on acquisition of the business, a number of key assumptions are made in respect of the operation of the plant in the period post 2015. These assumptions are considered on an annual basis on assessment of the appropriateness of the carrying value of the plant and the related goodwill.

(d) Environmental obligations
The Group has certain environmental obligations arising as a result of its land, and landfill operations. Determination of the provisions for the related environmental rehabilitation obligations in the period to and post extraction and operation reflects certain key assumptions in respect of the associated costs. These assumptions are reviewed on an on-going basis reflecting actual experience.

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Accounting year

The financial year ends on the last Wednesday in March. These financial statements cover the 52-week period 31 March 2011 to 28 March 2012 (prior year: 52-week period 1 April 2010 to 30 March 2011).