Tesco 2011 Annual Report Download - page 107

Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted by the balance sheet
date. Tax expense is recognised in the Group Income Statement except
to the extent that it relates to items recognised in the Group Statement
of Other Comprehensive Income or directly in the Group Statement of
Changes in Equity, in which case it is recognised in the Group Statement
of Other Comprehensive Income or directly in the Group Statement of
Changes in Equity, respectively.
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.
Deferred tax is calculated at the tax rates that have been enacted or
substantively enacted by the balance sheet date. Deferred tax is charged
or credited in the Group Income Statement, except when it relates to
items charged or credited directly to equity or other comprehensive
income, in which case the deferred tax is also recognised in equity,
or other comprehensive income, respectively.
Deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the assets
to be recovered.
Deferred tax assets and liabilities are offset against each other when
there is a legally enforceable right to set-off current taxation assets against
current taxation liabilities and it is the intention to settle these on a net basis.
Foreign currencies
Transactions in foreign currencies are translated at the exchange rate on
the date of the transaction. At each balance sheet date, monetary assets
and liabilities that are denominated in foreign currencies are retranslated
at the rates prevailing on the balance sheet date. All differences are taken
to the Group Income Statement.
The financial statements of foreign subsidiaries are translated into
Pounds Sterling. Since the majority of consolidated companies operate
as independent entities within their local economic environment, their
respective local currency is the functional currency. Therefore, assets and
liabilities of overseas subsidiaries denominated in foreign currencies are
translated at exchange rates prevailing at the date of the Group Balance
Sheet; profits and losses are translated at average exchange rates for the
relevant accounting periods. Exchange differences arising are recognised
in the Group Statement of Comprehensive Income and are included in the
Group’s translation reserve. Such translation differences are recognised
as income or expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s
Balance Sheet when the Group becomes a party to the contractual
provisions of the instrument.
Trade receivables
Trade receivables are non interest-bearing and are recognised initially at
fair value, and subsequently at amortised cost using the effective interest
rate method, less provision for impairment.
Investments
Investments are recognised at trade date. Investments are classified as
either held for trading or available-for-sale, and are recognised at fair value.
There are no investments classified as held for trading.
For available-for-sale investments, gains and losses arising from changes
in fair value are recognised directly in equity, until the security is disposed
of or is determined to be impaired, at which time the cumulative gain or
loss previously recognised in equity is included in the net result for the
period. Interest calculated using the effective interest rate method is
recognised in the Group Income Statement. Dividends on an available-for-
sale equity instrument are recognised in the Group Income Statement
when the entity’s right to receive payment is established.
Loans and advances to customers and banks
Loans and advances are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and
include amounts due from customers and amounts due from banks.
The Group has no intention of trading these loans and advances and
consequently they are not classified as held for trading or designated
as fair value through profit and loss. Loans and advances are initially
recognised at fair value plus directly related transaction costs. Subsequent
to initial recognition, these assets are carried at amortised cost using the
effective interest method less any impairment losses. Income from these
financial assets is calculated on an effective yield basis and is recognised
in the Group Income Statement.
Impairment of loans and advances to customers and banks
At each balance sheet date the Group reviews the carrying amounts of
its loans and advances to determine whether there is any indication that
those assets have suffered an impairment loss. An impairment loss has
been incurred if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the amount or
timing of future cash flows from the asset.
If there is objective evidence that an impairment loss on a financial asset
or group of financial assets classified as loans and advances has been
incurred, the Group measures the amount of the loss as the difference
between the carrying amount of the asset or group of assets and the
present value of estimated future cash flows from the asset or group of
assets discounted at the effective interest rate of the instrument at initial
recognition. Impairment losses are assessed individually for financial assets
that are individually significant and collectively for assets that are not
individually significant. In making collective assessments of impairment,
financial assets are grouped into portfolios on the basis of similar risk
characteristics. Future cash flows from these portfolios are estimated on
the basis of the contractual cash flows and historical loss experience for
assets with similar credit risk characteristics. Historical loss experience is
adjusted, on the basis of current observable data, to reflect the effects
of current conditions not affecting the period of historical experience.
Impairment losses are recognised in the Group Income Statement and
the carrying amount of the financial asset or group of financial assets
is reduced by establishing an allowance for impairment losses. If in
a subsequent period the amount of the impairment loss reduces and
the reduction can be ascribed to an event after the impairment was
recognised, the previously recognised loss is reversed by adjusting the
allowance. Once an impairment loss has been recognised on a financial
asset or group of financial assets, interest income is recognised on the
carrying amount using the rate of interest at which estimated future
cash flows were discounted in measuring impairment.
Loan impairment provisions are established on a portfolio basis taking
into account the level of arrears, security, past loss experience, credit
scores and defaults based on portfolio trends. The most significant
factors in establishing the provisions are the expected loss rates and the
related average life. The portfolios include credit card receivables and
other personal advances. The future credit quality of these portfolios
is subject to uncertainties that could cause actual credit losses to differ
NOTE 1 ACCOUNTING POLICIES CONTINUED
TESCO PLC Annual Report and Financial Statements 2011 — 103
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