Carillion plc (the ‘Company’) is a company domiciled and incorporated in the United Kingdom (UK). The consolidated financial statements of the Company for the year ended 31 December 2009 comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in jointly controlled entities.

The consolidated financial statements were authorised for issuance on 3 March 2010.

Statement of compliance
The Group’s financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’). The Company has elected to prepare its parent company financial statements in accordance with UK GAAP. These are presented in the Company balance sheet and the Notes to the Company financial statements.

Basis of preparation
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements.

The financial statements are prepared on a going concern basis based on the assessment made by the Directors as described in the Operating and financial review.

The financial statements are presented in pounds sterling. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, pension scheme assets and financial instruments classified as available-for-sale.

The following relevant standards and interpretations have been adopted in 2009 as they are mandatory for the year ended 31 December 2009:

• Amendments to International Accounting Standard (IAS) 1 ‘Presentation of financial statements – A revised presentation’
• Revised International Accounting Standard 23 ‘Borrowing costs’
• International Financial Reporting Standard (IFRS) 8 – ‘Operating segments’
• International Financial Reporting Interpretations Committee (IFRIC) 14 ‘The limit on a defined benefit asset, minimum funding requirements and their interaction’
• Amendments to International Financial Reporting Standard 2 ‘Share-based payment – vesting conditions and cancellations’
• Amendments to International Financial Reporting Standard 7 ‘Improving disclosures about financial instruments’.
  

IAS 1 ’Presentation of financial statements – A revised presentation’ requires the presentation of a consolidated statement of changes in equity as a primary statement rather than as a note. Since the changes are presentational only, there is no impact on profit, earnings per share or net assets.

Revised IAS 23 ‘Borrowing costs’ requires the Group to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset. Previously, Group subsidiaries immediately recognised all borrowing costs as an expense. Revised IAS 23 has been applied prospectively from 1 January 2009 and has no material impact on profit, earnings per share or net assets in the year ended 31 December 2009.

IFRS 8 ‘Operating segments’ requires operating segments to be identified on the basis of information that internally is provided to the Group Chief Executive, who is the Group’s chief operating decision maker. Following the adoption of IFRS 8, Middle East construction services has been classified as a separate operating segment, whereas previously it was a component of the Construction services segment. In addition, IFRS 8 requires the Group to disclose on a segmental basis the revenue that is derived from individual customers that amounts to 10 per cent or more of Group revenue. Since the changes are presentational only, there is no impact on profit, earnings per share or net assets.

IFRIC 14 ‘The limit on a defined benefit asset, minimum funding requirements and their interaction’ limits the amount of defined benefit pension assets which can be recognised on certain schemes where the Group does not have an unconditional right to the refund of any surplus which may exist. This results in the derecognition of any surplus and the recognition of a liability for deficit funding arrangements. Comparative information has been restated for the effect of the retrospective application of IFRIC 14, the impact of which has been to reduce net assets at 1 January 2009 by £5.0m (see note 33). The adoption of IFRIC 14 has no impact on profit or earnings per share.

The adoption of Amendments to IFRS 2 ‘Share based payment – vesting conditions and cancellations’ and Amendments to IFRS 7 ‘Improving disclosures about financial instruments’ in the current year has had no impact on the financial statements.

In addition to the above, amendments to a number of standards under the annual improvements project to IFRS, which are mandatory for the year ending 31 December 2009, have been adopted in 2009. None of these amendments have had a material impact on the Group’s financial statements.

The following standards and interpretations are effective for the year ended 31 December 2010:

• International Accounting Standard 27 ‘Consolidated and separate financial statements (revised 2008)’
• International Financial Reporting Interpretations Committee 12 ‘Service concession arrangements’
• Revised International Financial Reporting Standard 3 ‘Business combinations’
• International Financial Reporting Interpretations Committee 15 ‘Construction of Real Estate’
• International Financial Reporting Interpretations Committee 16 ‘Hedges of a net investment in a foreign operation’.

The Group has considered the impact of these new standards and interpretations in future periods on profit, earnings per share and net assets. The only impact of the above is in relation to International Financial Reporting Committee 12, which is expected to reduce net assets at 1 January 2010 by £9.2 million. The Group has chosen not to early adopt any of the above standards and interpretations.

Basis of consolidation
(a) Subsidiaries
The consolidated financial statements comprise the financial statements of the Company and subsidiaries controlled by the Company drawn up to 31 December 2009. Control exists when the Group has direct or indirect power to govern the financial and operating policies of an entity so as to obtain economic benefits from its activities. Subsidiaries are included in the consolidated financial statements from the date that control transfers to the Group until the date that control ceases. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting year as the parent company.

The purchase method is used to account for the acquisition of subsidiaries.

(b) Joint ventures
A joint venture is a contractual arrangement whereby the Group undertakes an economic activity that is subject to joint control with third parties. The Group’s interests in jointly controlled entities are accounted for using the equity method. Under this method the Group’s share of the profits less losses of jointly controlled entities is included in the consolidated income statement and its interest in their net assets is included in investments in the consolidated balance sheet. Where the share of losses exceeds the interest in the entity the carrying amount is reduced to nil and recognition of further losses is discontinued. Interest in the entity is the carrying amount of the investment together with any long term interests that, in substance, form part of the net investment in the entity.

Financial statements of jointly controlled entities are prepared for the same reporting period as the Group except for:

• Carillion Enterprise Ltd
• Modern Housing Solutions (Prime) Ltd

Both of these entities have 31 March year ends, and their results are included in the Group accounts based on management accounts.

Where a Group company is party to a jointly controlled operation, that company accounts for the assets it controls, the liabilities and expenses it incurs and its share of the income. Such arrangements are reported in the consolidated financial statements on the same basis.

Goodwill and other intangible assets
Goodwill arising on acquisitions that have occurred since 1 January 2004 represents the difference between the fair value of the cost of acquisition and the fair value of the identifiable assets, liabilities and contingent liabilities of an acquired entity. Consideration includes the attributable costs of the acquisition. In respect of acquisitions prior to 1 January 2004 goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous Generally Accepted Accounting Practice.

Positive goodwill is recognised as an asset in the consolidated balance sheet and is subject to an annual impairment review. Goodwill arising on the acquisition of subsidiaries is recognised separately as an intangible asset in the consolidated balance sheet. Goodwill arising on the acquisition of jointly controlled entities is included within the carrying value of the investment. Negative goodwill is recognised in the income statement immediately.

Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is based on the useful economic lives of the assets concerned, which are principally as follows:

Computer software and licences
• straight-line over three to five years.

Customer contracts and lists
• Planned Maintenance Group
  consumption of economic benefits over six years
• Mowlem
  consumption of economic benefits over 35 years
• Alfred McAlpine
  consumption of economic benefits over 12 years
• Vanbots Group
  consumption of economic benefits over five years.

For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Impairment
Assets that have an indefinite useful life are not subject to amortisation and are tested for impairment at each balance sheet date. Assets subject to depreciation and amortisation are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement based on the amount by which the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Other non-current asset investments
Other non-current asset investments are classified as available for sale financial assets and are recognised at fair value. Changes in fair value in the year are recognised directly in the statement of comprehensive income. Dividend income from investments is recognised in the income statement when the right to receive payment is established.

Construction contracts
When the outcome of a construction contract can be estimated reliably, contract revenue and costs are recognised by reference to the degree of completion of each contract, as measured by the proportion of total costs at the balance sheet date to the estimated total cost of the contract.

Insurance claims, incentive payments and variations arising from construction contracts are included where they have been agreed with the client.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable those costs will be recoverable.

The principal estimation technique used by the Group in attributing profit on contracts to a particular period is the preparation of forecasts on a contract by contract basis. These focus on revenues and costs to complete and enable an assessment to be made of the final out-turn of each contract. Consistent contract review procedures are in place in respect of contract forecasting.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately. Contract costs are recognised as expenses in the period in which they are incurred.

Where costs incurred plus recognised profits less recognised losses exceed progress billings, the balance is shown as due from customers on construction contracts within trade and other receivables. Where progress billings exceed costs incurred plus recognised profits less recognised losses, the balance is shown as due to customers on construction contracts within trade and other payables.

Pre-contract costs
Pre-contract costs are expensed as incurred until the Group is appointed preferred bidder or formal notification of intention to appoint is received. Provided the contract is expected to generate sufficient net cash inflows to enable recovery and the award of the contract is probable, pre-contract costs incurred post the appointment as preferred bidder are included in amounts owed by customers on construction contracts.

Where pre-contract bid costs are reimbursed at financial close, the proceeds are initially applied against the asset included in amounts owed by customers on construction contracts. Any excess recoveries are carried forward as deferred income and released to profit over the period of the contract.

Revenue recognition
Revenue represents the fair value of consideration receivable, excluding value added tax, for services supplied to external customers. It also includes the Group’s proportion of work carried out under jointly controlled operations during the year. Revenue from service contracts is recognised by reference to services performed to date as a percentage of total services to be performed. Revenue from construction contracts is recognised in accordance with the Group’s accounting policy on construction contracts.

Property, plant and equipment
Depreciation is based on historical cost, less the estimated residual values, and the estimated economic lives of the assets concerned. Freehold land is not depreciated. Property, plant and equipment is depreciated in equal annual instalments over the period of their estimated economic lives, which are principally as follows:

Freehold buildings	40-50 years
Leasehold buildings and improvements 	Period of lease
Plant, machinery and vehicles 	Three-ten years

Assets held under finance leases are depreciated over the shorter of the term of the lease or the expected useful life of the asset.

Leasing
Operating lease rental charges are charged to the income statement on a straight-line basis over the life of each lease.

Assets held under finance leases are included in property, plant and equipment at the lower of fair value at the date of acquisition or present value of the minimum lease payments. The capital element of outstanding finance leases is included in financial liabilities. The finance charge element of rentals is charged to the income statement at a constant periodic rate of charge on the outstanding obligations.

Inventories
Inventories comprise raw materials and land for development and are valued at the lower of cost and net realisable value. Cost is calculated using the weighted average method.

Taxation
Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Foreign currencies
In individual entities, transactions denominated in foreign currencies are translated into sterling and recorded using the exchange rate prevailing at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the exchange rates ruling at the balance sheet date and the gains and losses on translation are included in the income statement.

On consolidation, the balance sheets of overseas entities are translated into sterling at the rates of exchange ruling at the balance sheet date. Income statements and cash flows of overseas entities are translated into sterling at rates approximating to the foreign exchange rates at the date of the transaction. Gains or losses arising from the consolidation of overseas entities are recognised in the translation reserve.

Net investment hedging of overseas operations is achieved through borrowings denominated in the relevant foreign currencies. Gains and losses arising from the effective portion of the hedges are recognised in equity and ineffective portions are recognised immediately in the income statement.

Employee benefits
(a) Retirement benefit obligations
For defined contribution pension schemes operated by the Group, amounts payable are charged to the income statement as they fall due.

For defined benefit pension schemes, the IAS 19 cost of providing benefits is calculated annually by independent actuaries using the projected unit credit method. The charge to the income statement reflects the current service cost of such obligations, and where applicable, past service cost.

The expected return on plan assets and the interest cost of scheme liabilities are included within financial income and expenses in the income statement.

The retirement benefit obligation recognised in the balance sheet represents the excess of the present value of the scheme liabilities over the fair value of scheme assets. When the calculation results in an asset to the Group, the amount recognised is limited on certain schemes where the Group does not have an unconditional right to refund of any surplus which may exist. Differences between the actual and expected returns on assets and experience gains and losses arising on scheme liabilities during the year, together with differences arising from changes in assumptions, are recognised in the statement of comprehensive income in the year.

The Group’s contributions to the scheme are paid in accordance with the scheme rules and the recommendations of the actuary.

(b) Other post-retirement benefit obligations
Certain Group companies provide post-retirement healthcare benefits to their employees. The expected costs of providing these benefits are accrued over the period of employment and are calculated by independent actuaries based on the present value of the expected liability.

(c) Share-based payments
Members of the Group’s senior management team are entitled to participate in the Leadership Equity Award Plan (LEAP). In addition, UK employees are able to participate in the Sharesave scheme.

The fair value of the LEAP and Sharesave schemes at the date of grant are estimated using the Black-Scholes pricing model. For both schemes the fair value determined at grant date is expensed on a straight-line basis over the vesting period, based on an estimate of the number of shares that will eventually vest.

Borrowing costs
Borrowing costs are capitalised where the Group constructs qualifying assets. All other borrowing costs are written off to the income statement as incurred.

Borrowing costs incurred within the Group’s jointly controlled entities relating to the construction of assets in Public Private Partnership projects are capitalised until the relevant assets are brought into operational use.

Borrowing costs are charged to the income statement using the effective interest method.

Share capital
The ordinary share capital of the Company is recorded at the proceeds received, net of directly attributable incremental issue costs.

Consideration paid for shares in the Company held by the Employee Share Ownership Plan (ESOP) Trust are deducted from the retained earnings reserve. Where such shares subsequently vest in the employees under the terms of the Group’s share option schemes or are sold, any consideration received is included in the retained earnings reserve.

Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and where it is probable that an outflow will be required to settle the obligation.

Provisions for restructuring are recognised when the Group has an approved restructuring plan that has either commenced or been announced publicly. Future operating costs are not provided for.

Financial instruments
Financial instruments are recognised when the Group becomes a party to the contractual provisions of the instrument. The principal financial assets and liabilities of the Group are as follows:

(a) Other non-current investments
Other non-current investments relate to unquoted equity interests that are not designated on initial recognition as at fair value through the income statement. Instead, they are recognised at fair value with movements in fair value recognised in the fair value reserve.

(b) Trade receivables
Trade receivables are initially recognised at fair value and then are stated at amortised cost.

(c) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at amortised cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash at bank and in hand, including bank deposits with original maturities of three months or less. Bank overdrafts are also included as they are an integral part of the Group’s cash management.

(d) Trade payables
Trade payables are initially recognised at fair value and then are stated at amortised cost.

(e) Bank and other borrowings
Interest bearing bank loans and overdrafts and other loans are recognised at amortised cost less attributable transaction costs. All borrowings are subsequently stated at amortised cost with the difference between initial net proceeds and redemption value recognised in the income statement over the period to redemption.

(f) Derivative financial instruments
Derivatives are initially recognised at fair value on the date the contract is entered into and subsequently remeasured in future periods at their fair value. The method of recognising the resulting change in fair value is dependent on whether the derivative is designated as a hedging instrument.

A number of the Group’s PPP jointly controlled entities have entered into interest rate derivatives as a means of hedging interest rate risk. The effective part of the change in fair value of these derivatives is recognised directly in equity. Any ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled to the income statement in the periods when the hedged items will affect profit or loss. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date.

The Group also enters into forward contracts in order to hedge against small and infrequent transactional foreign currency exposures. In cases where these derivative instruments are significant, hedge accounting is applied as described above. Where hedge accounting is not applied, movements in fair value are recognised in the income statement. Fair values are based on quoted market prices at the balance sheet date.

Net borrowing
Net borrowing comprises cash and cash equivalents together with bank overdrafts and loans, finance leases and other loans.