Tesco 2013 Annual Report Download - page 85

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Tesco PLC Annual Report and Financial Statements 2013
OVERVIEW BUSINESS REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
Impairment of loans and advances to customers
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.
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 these provisions are the expected loss rates.
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 materially
from reported loan impairment provisions. These uncertainties include
the economic environment, notably interest rates and their effect on
customer spending, the unemployment level, payment behaviour and
bankruptcy trends.
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 proceeds 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 recognised initially
at fair value and subsequently measured at amortised cost using the
effective interest method.
Equity instruments
Equity instruments issued by the Group 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, interest rate and commodity risks arising from
operating, financing and investing 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.
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.
Derivative 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.
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 the other comprehensive income.
The associated cumulative gain or loss is reclassified from the other
comprehensive income 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.
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 the Group
Statement of Changes in Equity until the forecasted transaction occurs
or the original hedged item affects the Group Income Statement. If a
forecasted hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in the Group Statement of Changes
in Equity is reclassified 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 instrument is recognised directly in
other comprehensive income. Any ineffective element is recognised
immediately in the Group Income Statement. Gains and losses
accumulated in other comprehensive income are included in the
Group Income Statement when the foreign operation is disposed of.
Treatment of agreements to acquire non-controlling interests
The Group has entered into a number of agreements to purchase
the remaining shares of subsidiaries with non-controlling interests.
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.
Note 1 Accounting policies continued