Tesco 2015 Annual Report Download - page 35

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Commercial income issue
In September 2014, information was brought to the Board’s attention that indicated that the recognition of UK commercial income was being
accelerated and the accrual of costs was being delayed. The Board announced on 22 September 2014 that it had identified an overstatement
of its expected profit for the half year to 23 August 2014, principally due to this accelerated recognition of commercial income and deferral
of costs, in the order of £250 million.
The Board decided immediately to appoint Deloitte to carry out an independent investigation of the commercial income numbers in the UK,
and to defer the announcement of the interim results to allow time for this. The Deloitte report confirmed that amounts had been pulled forward
(in the case of income) or deferred (in the case of costs), contrary to Tesco Group accounting policies; that there had been similar practices in prior
reporting periods; and that the current and prior practices appeared to be linked as income pulled forward grew period by period.
In October 2014 as part of the interim results announcement, the Board further announced that the overstated recognition of commercial
income was estimated at £263 million. Taking into account the build-up of such overstatement in prior years, the impact on the trading
profit expectation for the half year was an over-estimate of £118 million, with overstatement of reported profits in the previous year to
28 February 2014 of £70 million, and in years prior to that of £75 million.
Subsequent to October 2014 we have continued to focus on this area and we have identified some further amounts, bringing the total
one-off adjustment relating to prior years to £208 million for our UK and ROI businesses.
Commercial income arises in a number of different ways, including discounts and rebates that suppliers agree to pay us based on the
volume of sales achieved and contributions to product promotion expenses. Our external auditors, PricewaterhouseCoopers LLP, focused
on this area in their audit of the 2013/14 accounts because of the significance of commercial income, the judgement required in accounting
for commercial income including the amounts owed at the year-end, and because of the potential risk of the manipulation of these balances.
The matters surrounding the commercial income issue are now the subject of an investigation by the Serious Fraud Office, and the Company
is co-operating fully with this investigation. This has limited the extent of the Company’s own investigation and what we can say about the
circumstances in which the overstatement occurred. A number of individuals have ceased employment with the Group as a consequence of
this investigation.
The “pulling forward” of commercial income from suppliers that was more appropriately attributed to future periods, was clearly a
management failure within the UK division. The fact that it remained undiscovered has been a matter of the deepest concern.
The Board had two main priorities in their response to the commercial income issue:
The overarching focus of the Board has been to ensure that this work did not, and does not, distract us from our core business of providing
value and a quality service to our customers.
We have noted that the Financial Reporting Council has urged companies to provide greater clarity in respect of their commercial income
and the Board has concurred that increased transparency is appropriate. This is discussed in the Financial review, pages 12 to 17.
On 4 February 2015, the Grocery Code Adjudicator (‘Adjudicator’) announced that an investigation has been launched into the conduct
of Tesco under the Groceries Supply Code of Practice. The Adjudicator is specifically investigating Tesco’s conduct under provisions of the
Code relating to delays in payments to suppliers and payments for shelf positioning. We are continuing to co-operate fully with the
Adjudicator’s investigation.
1. Ensure that all available steps are taken to ensure that nothing like this can happen again. The Chief Executive’s report details some
of those steps. New management is in place, training has been given and the overall commercial relationship with our suppliers and
the incentive structure for our commercial teams are being reset.
2. Ensure that the results accounted properly for all commercial income, whether in the UK business or our overseas operations,
and with all other aspects of our relationship with our suppliers.
33Tesco PLC Annual Report and Financial Statements 2015
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