Tesco 2008 Annual Report Download - page 52

Tesco PLC Annual Report and
Financial Statements 2008
50 www.tesco.com/annualreport08
Interest-bearing borrowings
Interest-bearing bank loans and overdrafts are initially recorded at fair value,
net of attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference
between cost and redemption value being recognised in the Group Income
Statement over the period of the borrowings on an effective interest basis.
Trade payables
Trade payables are non interest-bearing and are stated at amortised cost.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds
received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge its exposure to
foreign exchange and interest rate risks arising from operating, financing
and investment activities. The Group does not hold or issue derivative
financial instruments for trading purposes, however if derivatives do not
qualify for hedge accounting they are accounted for as such.
Derivative financial instruments are recognised and stated at fair value.
The fair value of derivative financial instruments is determined by reference
to market values for similar financial instruments, by discounted cash flows,
or by the use of option valuation models. Where derivatives do not qualify
for hedge accounting, any gains or losses on remeasurement are immediately
recognised in the Group Income Statement. Where derivatives qualify for
hedge accounting, recognition of any resultant gain or loss depends on
the nature of the hedge relationship and the item being hedged.
In order to qualify for hedge accounting, the Group is required to document
from inception the relationship between the item being hedged and
the hedging instrument. The Group is also required to document and
demonstrate an assessment of the relationship between the hedged item
and the hedging instrument, which shows that the hedge will be highly
effective on an ongoing basis. This effectiveness testing is performed at
each period end to ensure that the hedge remains highly effective.
Financial instruments with maturity dates of more than one year from
the Balance Sheet date are disclosed as non-current.
Fair value hedging
Derivative financial instruments are classified as fair value hedges when
they hedge the Group’s exposure to changes in the fair value of a
recognised asset or liability. Changes in the fair value of derivatives that
are designated and qualify as fair value hedges are recorded in the Group
Income Statement, together with any changes in the fair value of the
hedged item that is attributable to the hedged risk.
Derivative financial instruments qualifying for fair value hedge accounting
are principally interest rate swaps (including cross currency swaps).
Cash flow hedging
Derivative financial instruments are classified as cash flow hedges when
they hedge the Group’s exposure to variability in cash flows that are either
attributable to a particular risk associated with a recognised asset or liability,
or a highly probable forecasted transaction.
The effective element of any gain or loss from remeasuring the derivative
instrument is recognised directly in equity.
The associated cumulative gain or loss is removed from equity and
recognised in the Group Income Statement in the same period or periods
during which the hedged transaction affects the Group Income Statement.
The classification of the effective portion when recognised in the Group
Income Statement is the same as the classification of the hedged transaction.
Any element of the remeasurement of the derivative instrument which does
not meet the criteria for an effective hedge is recognised immediately in the
Group Income Statement within finance income or costs.
Derivative instruments qualifying for cash flow hedging are principally
forward foreign exchange transactions and currency options.
Hedge accounting is discontinued when the hedging instrument expires or
is sold, terminated or exercised, or no longer qualifies for hedge accounting.
At that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity is retained in equity until the forecasted transaction
occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in equity is transferred to the Group
Income Statement.
Net investment hedging
Derivative financial instruments are classified as net investment hedges
when they hedge the Group’s net investment in an overseas operation.
The effective element of any foreign exchange gain or loss from
remeasuring the derivative is recognised directly in equity. Any ineffective
element is recognised immediately in the Group Income Statement.
Gains and losses accumulated in equity are included in the Group Income
Statement when the foreign operation is disposed of.
Derivative instruments qualifying for net investment hedging are principally
forward foreign exchange transactions and currency options.
Treatment of agreements to acquire minority interests
The Group has entered into a number of agreements to purchase the
remaining shares of subsidiaries with minority shareholdings.
Under IAS 32 ‘Financial Instruments: Disclosures’, the net present value of
the expected future payments are shown as a financial liability. At the end
of each period, the valuation of the liability is reassessed with any changes
recognised in the Group Income Statement within finance income or costs
for the year. Where the liability is in a currency other than Pounds Sterling,
the liability has been designated as a net investment hedge. Any change
in the value of the liability resulting from changes in exchange rates is
recognised directly in equity.
Notes to the Group financial statements continued
Note 1 Accounting policies continued