Tesco 2015 Annual Report Download - page 40

Given the substantial changes in the composition of the Committee it was decided that it would not be appropriate for a formal review
of the effectiveness of the Audit Committee to take place this year.
The Committee considered a number of significant issues in the year taking into account in all instances the views of the Company’s
external auditors. The issues and how they were addressed by the Committee are detailed below:
Significant financial statement reporting issues
Issue How the issue was addressed by the Committee
Going concern basis for the
financial statements
The Committee reviewed management’s assessment of going concern with consideration of forecast cash flows, including sensitivity to trading
and expenditure plans and potential mitigating actions. The Committee also considered the availability of financing facilities in light of the
Company’s downgraded credit ratings and the capital and liquidity plans of Tesco Bank. Based on this the Committee confirmed that the
application of the going concern basis for the preparation of the financial statements continued to be appropriate.
Recognition of commercial
income
The Group has policies in place for the recognition of commercial income as disclosed in Note 1 to the financial statements. The overstatement
of historical commercial income reported in the half year to 23 August 2014, led to a significant increase in focus on this area during the year. The
Committee considered the activities that management carried out to address this issue together with the outcomes of investigations by internal
audit and external third party experts, and concurred with management’s assessment that adequate training and processes were implemented
to address compliance to policy and appropriate recognition of commercial income. See Note 3 and front half of the financial statements.
Restatement of prior year
comparatives
The Committee reviewed management’s assessment of the need to restate prior year comparatives in light of the prior year errors identified
during the year. The Committee considered management’s evaluation of the impact of these errors, on both prior year and current year
performance and/or position, including the potential impact on user perceptions. The Committee concurred with management that the
nature and impact of the errors were not material to either prior year comparatives or current year reporting, and that correcting the errors
in the current year accompanied by adequate presentation and disclosure was the appropriate treatment.
Fixed asset impairment and
onerous lease provisions
The Committee reviewed management’s impairment testing of property assets and estimate of onerous lease provisions for unprofitable assets
in light of the competitive environment and reduction in profitability in most markets, particularly the UK. The Committee considered the
appropriateness of key assumptions and methodologies for both value in use models and fair value measurements. This included challenging
cashflows, growth rates and discount rates and the use of independent third party valuations. The Group has recognised a £(3,266) million
impairment of trading stores, and a further £(903) million charge for closed stores, investments, WIP, intangibles and head office properties,
together with an onerous lease provision of £(669) million in the year. See Note 11 to the financial statements for Fixed assets impairment,
and Note 24 for Property Provisions.
Goodwill impairment The Committee reviewed management’s process for testing goodwill for potential impairment. This included challenging the key assumptions,
principally cash flow forecasts, growth rates and discount rates. The Group has recognised a goodwill impairment of £(116) million. See Note 10
to the financial statements.
Valuation of China associate The Committee reviewed management’s assessment of the valuation of the Group’s China associate, Gain Land, covering the methodology and
assumptions used by management including latest market information and independent valuation experts, in determining the fair value of the
investment. This included review of Gain Land’s projected cashflows, growth rates and discount rates used, and the external market indicators to include
in the valuation. Following this exercise, a £(630) million write-down to fair value was recognised at year end. See Note 3 to the financial statements.
Provisions The Committee considered the judgements made by management in arriving at the restructuring provisions for head office and stores structures,
and concurred with management’s assessment to recognise a restructuring provision of £(325) million. See Note 24 to the financial statements.
The Committee further considered management’s assessment of the status of the ongoing regulatory investigations and litigation relating to
the prior period and forecasting errors. The Committee concurred with management’s assessment that due to the early stage of these matters
and the uncertainties regarding the outcomes, no provision was required, and disclosure as contingent liabilities at year end was appropriate.
See Note 32 to the financial statements.
Valuation and provisioning
of inventories
The Committee reviewed management’s judgements in assessing the required level of inventories provisioning, including adopting a
forward looking provisioning methodology based on recent sales activities, in light of the competitive environment and changes to range
and stockholding. This resulted in a £(402) million charge in the income statement. The Committee further reviewed management’s approach
to identifying the directly attributable overheads capitalised in inventories, and agreed with the exclusion of certain overhead costs amounting
to £(168) million from the cost of inventories. See Note 3 to the financial statements.
Tesco Bank judgemental
matters
The Committee reviewed management’s judgements made in relation to Tesco Bank’s provisions for customer redress, loan impairment provisions
and insurance reserves, covering the estimated provision based on legal advice, estimates of the number and value of cases, and expected outcomes.
The Committee considered the reviews by the Bank’s own Audit Committee and Board to develop a detailed understanding of the matters. During
the year, an additional £(27) million of provisions for customer redress were recognised. See Note 24 to the financial statements.
Income statement non-GAAP
measure presentation
The Committee considered the presentation of the Group financial statements and, in particular, the appropriateness of the presentation of
one-off items in the calculation of underlying profit. The Committee reviewed the nature of items identified and concurred with management
that the treatment was even-handed, consistent across years and appropriately presented movements on items which have an effect over a
number of years. The total restructuring and other one-off charges for the year was £(6,814) million. See Note 3 to the financial statements.
Internal and External Audit
This relationship is developed and maintained through regular private meetings with both PricewaterhouseCoopers LLP and the
Head of Internal Audit. Further information regarding the roles of both Internal Audit and External Audit can be found below:
Internal Audit – Group Audit & Advisory
Group Audit & Advisory is an independent review function set up within Tesco as a service to the Board and all levels of management.
Its remit is to provide independent and objective assurance and consulting activity to add value and improve the organisation’s operations.
It helps the organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness
of risk management, control and governance processes.
Its responsibilities include assessing the key risks of the organisation and examining, evaluating and reporting on the adequacy and
effectiveness of the systems of risk management and internal control as operated by management. Management remains responsible
for identifying risks and for the design and operation of controls to manage risk. However, Group Audit & Advisory facilitate the Company’s
risk management processes with the Board and Audit Committee, by assisting with the annual process to refresh the Group’s Key Risk
Registers and by assisting the Company in its formulation and reporting of corporate governance policy.
Corporate governance report continued
38 Tesco PLC Annual Report and Financial Statements 2015