Tesco 2011 Annual Report Download - page 153

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, discounted
cash flows or use of option valuation models. Where derivatives do not
qualify for hedge accounting, any gains or losses on remeasurement are
immediately recognised in the Parent Company 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 items 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
Parent Company 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 and 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 Parent Company Profit and Loss Account in the
same period during which the hedged transaction affects the Parent
Company Profit and Loss Account. The classification of the effective
portion when recognised in the Parent Company Profit and Loss
Account is the same as the classification of the hedged transaction.
Any element of the remeasurement criteria of the derivative instrument
which does not meet the criteria for an effective hedge is recognised
immediately in the Parent Company Profit and Loss Account.
Derivative financial instruments qualifying for cash flow hedging are
principally forward foreign exchange transactions and interest rate swaps.
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
Parent Company 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 Parent Company 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 Parent
Company Profit and Loss Account. Gains and losses accumulated in
equity are included in the Parent Company Profit and Loss Account
when the foreign operation is disposed of.
Derivative instruments qualifying for net investment hedging are
principally forward exchange transactions and interest rate swaps.
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 the 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-discontinued 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
TESCO PLC Annual Report and Financial Statements 2011 — 149
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