Tesco 2014 Annual Report Download - page 79

Note 1 Accounting policies continued
Business combinations and goodwill
The Group accounts for all business combinations by applying the purchase
method. All acquisition-related costs are expensed.
On acquisition, the assets (including intangible assets), liabilities and
contingent liabilities of an acquired entity are measured at their fair value.
Non-controlling interest is stated at the non-controlling interest’s proportion
of the fair values of the assets and liabilities recognised.
Goodwill arising on consolidation represents the excess of the consideration
transferred over the net fair value of the Group’s share of the net assets,
liabilities and contingent liabilities of the acquired subsidiary, joint venture
or associate and the fair value of the non-controlling interest in the acquiree.
If the consideration is less than the fair value of the Group’s share of the net
assets, liabilities and contingent liabilities of the acquired entity (i.e. a discount
on acquisition), the difference is credited to the Group Income Statement in
the period of acquisition.
At the acquisition date of a subsidiary, goodwill acquired is recognised as an asset
and is allocated to each of the cash-generating units expected to benefit from the
business combination’s synergies and to the lowest level at which management
monitors the goodwill. Goodwill arising on the acquisition of joint ventures and
associates is included within the carrying value of the investment. On disposal
of a subsidiary, joint venture or associate, the attributable amount of goodwill is
included in the determination of the profit or loss on disposal.
Intangible assets
Acquired intangible assets
Separately acquired intangible assets, such as software, pharmacy licences,
customer relationships, contracts and brands are measured initially at cost.
Intangible assets acquired in a business combination are recognised at fair
value at the acquisition date. Intangible assets with finite useful lives are
carried at cost and are amortised on a straight-line basis over their estimated
useful lives, at 2%-100% of cost per annum.
Internally generated intangible assets – Research and
development expenditure
Research costs are expensed as incurred. Development expenditure incurred
on an individual project is capitalised only if specific criteria are met including
that the asset created will probably generate future economic benefits.
Following the initial recognition of development expenditure, the cost
isamortised over the asset’s estimated useful life at 10%–25% of cost
perannum.
Property, plant and equipment
Property, plant and equipment is carried at cost less accumulated
depreciation and any recognised impairment in value.
Property, plant and equipment is depreciated on a straight-line basis to its
residual value over its anticipated useful economic life. The following
depreciation rates are applied for the Group:
• Freehold and leasehold buildings with greater than 40 years unexpired
– at 2.5% of cost;
• Leasehold properties with less than 40 years unexpired are
depreciated by equal annual instalments over the unexpired
period of the lease; and
• Plant, equipment, fixtures and fittings and motor vehicles – at rates
varying from 9%-50%.
Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, when shorter, over the term of
the relevant lease.
Impairment of non-financial assets
Goodwill is reviewed for impairment at least annually by assessing the
recoverable amount of each cash-generating unit to which the goodwill
relates. The recoverable amount is the higher of fair value less costs of
disposal, and value in use. When the recoverable amount of the cash-
generating unit is less than the carrying amount, an impairment loss is
recognised. Any impairment is recognised immediately in the Group
Income Statement and is not subsequently reversed.
For all other non-financial assets (including intangible assets and property,
plant and equipment) the Group performs impairment testing where there are
indicators of impairment. If such an indicator exists, the recoverable amount of
the asset is estimated in order to determine the extent of the impairment loss
(if any). Where the asset does not generate cash flows that are independent
from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
The recoverable amount is the higher of value in use and fair value less
costs of disposal. If the recoverable amount of an asset (or cash-generating
unit) is estimated to be less than its carrying amount, the carrying amount
of the asset (or cash-generating unit) is reduced to its recoverable amount.
An impairment loss is recognised immediately in the Group Income Statement.
Where an impairment loss subsequently reverses, the carrying amount of
the asset (or cash-generating unit) is increased to the revised estimate of
the recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined if no
impairment loss had been recognised for the asset (or cash-generating unit)
in prior years. A reversal of an impairment loss is recognised immediately as
a credit to the Group Income Statement.
Investment property
Investment property assets are carried at cost less accumulated depreciation and
any recognised impairment in value. The depreciation policies for investment
property are consistent with those described for owner-occupied property.
Short-term and other investments
Short-term and other investments in the Group Balance Sheet comprise
receivables, loan receivables and available-for-sale financial assets.
Receivables and loan receivables are recognised at amortised cost.
Available-for-sale financial assets are recognised at fair value.
Refer to the financial instruments accounting policy for further detail.
Inventories
Inventories comprise goods and properties held for resale and properties held
for, or in the course of, development with a view to sell. Inventories arevalued
at the lower of cost and fair value less costs to sell using the weighted average
cost basis.
Cash and cash equivalents
Cash and cash equivalents in the Group Balance Sheet consist of cash at
bank, in hand, demand deposits with banks, loans and advances to banks,
certificate of deposits and other receivables together with short-term
deposits with an original maturity of three months or less.
Non-current assets held for sale and discontinued operations
Non-current assets (or disposal groups) are classified as assets held for sale
when their carrying amount is to be recovered principally through a sale
transaction and a sale is considered highly probable. They are stated at the
lower of carrying amount and fair value less costs to sell.
Leasing
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
76 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements continued