Tesco 2013 Annual Report Download - page 87

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Tesco PLC Annual Report and Financial Statements 2013
OVERVIEW BUSINESS REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
• IAS 19 ‘Employee Benefits’ – non-cash Group Income Statement
charge for pensions. Under IAS 19, the cost of providing pension
benefits in the future is discounted to a present value at the corporate
bond yield rates applicable on the last day of the previous financial
year. Corporate bond yield rates vary over time which in turn creates
volatility in the Group Income Statement and Group Balance Sheet.
IAS 19 also increases the charge for young pension schemes, such
as the Group’s, by requiring the use of rates which do not take into
account the future expected returns on the assets held in the pension
scheme which will fund pension liabilities as they fall due. The sum
of these two effects can make the IAS 19 charge disproportionately
higher and more volatile than the cash contributions the Group is
required to make in order to fund all future liabilities. Therefore,
within underlying profit the Group has included the ‘normal’ cash
contributions for pensions but excluded the volatile element of IAS 19
to represent what the Group believes to be a fairer measure of the
cost of providing post-employment benefits.
• IAS 17 ‘Leases’ – impact of annual uplifts in rent and rent-free
periods. The amount charged to the Group Income Statement in
respect of operating lease costs and incentives is expected to increase
significantly as the Group expands its international business. The
leases have been structured in a way to increase annual lease costs
as the businesses expand. IAS 17 requires the total expected cost of
a lease to be recognised on a straight-line basis over the term of the
lease, irrespective of the actual timing of the cost. This adjustment
also impacts the Group’s operating profit and rental income within
the share of post-tax profits ofjoint ventures and associates.
• IFRS 3 (Revised) ‘Business Combinations’ – intangible asset
amortisation charges and costs arising from acquisitions. Under
IFRS 3 intangible assets are separately identified and fair valued.
The intangible assets are required to be amortised on a straight-line
basis over their useful lives and as such is a non-cash charge that
does not reflect the underlying performance of the business acquired.
Similarly, the standard requires all acquisition costs to be expensed
in the Group Income Statement. Due to their nature, these costs
have been excluded from underlying profit as they do not reflect
the underlying performance of the Group.
• IFRIC 13 ‘Customer Loyalty Programmes’ – fair value of awards.
The interpretation requires the fair value of customer loyalty awards
to be measured as a separate component of a sales transaction.
The underlying profit measure removes this fair value allocation
to present underlying business performance, and to reflect the
performance of the operating segments as measured by
management.
• Restructuring and other one-off costs. These relate to certain costs
associated with the Group’s restructuring activities and certain
one-off costs including costs relating to fair valuing the assets of
a disposal group. These have been excluded from underlying profit
as they do not reflect the underlying performance of the Group.
Note 1 Accounting policies continued