Tesco 2009 Annual Report Download - page 130

128 FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
Notes to the Parent Company financial
statements continued
Derivative financial instruments and hedge accounting
The Company uses derivative financial instruments to hedge its
exposure to foreign exchange and interest rate risks arising from
operating, financing and investing activities. The Company 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 Profit and Loss Account. 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 Company is required
to document from inception the relationship between the item being
hedged and the hedging instrument. The Company 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.
Derivative financial instruments with maturity dates of more than one
year from the Balance Sheet date are disclosed as falling due after more
than one year.
Fair value hedging
Derivative financial instruments are classified as fair value hedges when
they hedge the Company’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 Profit
and Loss Account, 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 Company’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 Profit and Loss Account in the same period or
periods during which the hedged transaction affects the Profit and
Loss Account. The classification of the effective portion when recognised
in the Profit and Loss Account 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 Profit and Loss Account.
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 or the original hedged item affects the Profit and Loss
Account. If a forecasted hedged transaction is no longer expected to occur,
the net cumulative gain or loss recognised in equity is transferred to the
Profit and Loss Account.
Net investment hedging
Derivative financial instruments are classified as net investment hedges
when they hedge the Company’s net investment in an overseas
operation. The effective element of any foreign exchange gain or loss
from remeasuring the derivative instrument is recognised directly in
equity. Any ineffective element is recognised immediately in the Profit
and Loss Account. Gains and losses accumulated in equity are included
in the Profit and Loss Account when the foreign operation is disposed of.
Derivative instruments qualifying for net investment hedging are
principally forward foreign exchange transactions and currency options.
Pensions
The Company participates in the Tesco PLC Pension Scheme which is
a multi-employer scheme within the Tesco Group and cannot identify its
share of the underlying assets and liabilities of the scheme. Accordingly,
as permitted by FRS 17 ‘Retirement Benefits’, the Company has
accounted for the scheme as a defined contribution scheme, and the
charge for the period is based upon the cash contributions payable.
Taxation
Corporation tax payable is provided on the taxable profit for the year,
using tax rates enacted or substantively enacted by 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 and would give
rise to an obligation to pay more or less taxation in the future.
Deferred tax assets are recognised to the extent that they are recoverable.
They are regarded as recoverable to the extent that on the basis of all
available evidence, it is regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying
timing differences can be deducted.
Deferred tax is measured on a non-discounted basis at the tax rates
that are expected to apply in the periods in which the timing differences
reverse, based on tax rates and laws that have been substantively enacted
by the Balance Sheet date.
Note 1 Accounting policies continued