Tesco 2010 Annual Report Download - page 83

Financial statements
• IFRS 3 (revised) ‘Business Combinations’, effective for business
combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after 1 July 2009.
The revised standard continues to apply the acquisition method to
business combinations, with some significant changes, including: all
payments to purchase a business are to be recorded at fair value at the
acquisition date, with the contingent payments that are classified as
debt subsequently remeasured through the Group Income Statement.
There is a choice on an acquisition-by-acquisition basis to measure the
non-controlling interest in the acquiree either at fair value or at the non-
controlling interest’s proportionate share of the acquirer’s net assets.
All acquisition-related costs should be expensed. The Group will apply
IFRS 3 (revised) prospectively to all business combinations from
28February 2010.
• Amendment to IAS 39 ‘Financial Instruments: Recognition and
Measurement’ – Eligible Hedged Items, effective for annual periods
beginning on or after 1 July 2009. The amendment provides clarification
on how the principles that determine whether a hedged risk or portion
of cash flows is eligible for designation should be applied in particular
situations.
• IFRS 9 ‘Financial Instruments’, effective for annual periods beginning on
or after 1 January 2013. This is the first part of a new standard on
classification and measurement of financial assets that will replace IAS 39.
• Amendment to IAS 24 ‘Related Party Disclosures’, effective for annual
periods beginning on or after 1 January 2011.
• IFRIC 17 ‘Distributions of Non-Cash Assets to Owners’, effective for
annual periods beginning on or after 1 July 2009.
• IFRIC 18 ‘Transfers of Assets from Customers’, effective for transfers of
assets from customers received on or after 1 July 2009.
• IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’,
effective for annual periods beginning on or after 1 July 2010.
The Group continually reviews amendments to the standards made under
the IASB’s annual improvements project.
Use of non-GAAP profit measures – underlying profit before tax
The Directors believe that underlying profit before tax and underlying
diluted earnings per share measures provide additional useful information
for shareholders on underlying trends and performance. These measures
are used for internal performance analysis. Underlying profit is not defined
by IFRS and therefore may not be directly comparable with other
companies’ adjusted profit measures. It is not intended to be a substitute
for, or superior to IFRS measurements of profit.
The adjustments made to reported profit before tax are:
• IAS 32 and IAS 39 ‘Financial Instruments’ – fair value remeasurements –
Under IAS 32 and IAS 39, the Group applies hedge accounting to its
various hedge relationships when allowed under the rules of IAS 39
and when practical to do so. Sometimes the Group is unable to apply
hedge accounting to the arrangements but continues to enter into
these arrangements as they provide certainty or active management
of the exchange rates and interest rates applicable to the Group.
The Group believes these arrangements remain effective and
economically and commercially viable hedges despite the inability
to apply hedge accounting.
Where hedge accounting is not applied to certain hedging
arrangements, the reported results reflect the movement in fair value of
related derivatives due to changes in foreign exchange and interest
rates. In addition, at each period end, any gain or loss accruing on open
contracts is recognised in the Group Income Statement for the period,
regardless of the expected outcome of the hedging contract on
termination. This may mean that the Group Income Statement charge is
highly volatile, whilst the resulting cash flows may not be as volatile. The
underlying profit measure removes this volatility to help better identify
underlying business performance. During 2010 there was no impact
(2009 – £10m) of the IAS 32 and IAS 39 charge arose in the share of
post-tax profit of joint ventures and associates, with the remainder in
finance income/costs.
Note 1 Accounting policies continued
• IAS 19 Income Statement charge for pensions – Under IAS 19
‘Employee Benefits’, 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
Tesco’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 we have 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 ‘Leases’ requires the total 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. The impact of this
treatment in 2010 was a charge of £41m (2009 – £27m) to the Group
Income Statement after deducting the impact of the straight-line
treatment recognised as rental income within share of post-tax profits
of joint ventures and associates.
• IFRS 3 Amortisation charge from intangible assets arising on
acquisition – Under IFRS 3 ‘Business Combinations’, intangible assets
are separately identified and valued. The intangible assets are
required to be amortised on a straight-line basis over their useful
economic lives and as such is a non-cash charge that does not reflect
the underlying performance of the business acquired.
• IFRIC 13 ‘Customer Loyalty Programmes’ – This new 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.
• Exceptional items – Due to their significance and special nature,
certain other items which do not reflect the Group’s underlying
performance have been excluded from underlying profit. These gains
or losses can have a significant impact on both absolute profit and
profit trends; consequently, they are excluded from the underlying
profit of the Group. For the year ended 27 February 2010, exceptional
items are as follows:
– IAS 36 Impairment of goodwill arising on acquisitions – the carrying
value of goodwill relating to Japan was not fully recoverable,
resulting in an impairment charge of £131m (2009 – £nil), and as
such is a non-cash charge that does not reflect the underlying
performance of the business. The recoverable amount for Japan
was based on value in use, calculated from cash flow projections for
five years using data from the Group’s latest internal forecasts, the
results of which are reviewed by the Board.
– Restructuring costs – These relate to certain costs associated with
the Group’s restructuring activities. For the year ended 27 February
2010, the Group incurred £33m (2009 – £nil), relating to
restructuring activities.
There were no exceptional items in 2009.
Tesco PLC Annual Report and Financial Statements 2010 81