Tesco 2012 Annual Report Download - page 100

Notes to the Group financial statements
Note 1 Accounting policies continued
iii) Impairment of loans and advances to customers and banks
The Group’s loan impairment provisions are established to recognise incurred
impairment losses in its portfolio of loans classified as loans and receivables
and carried at amortised cost. These calculations require the use of estimates
as set out in the accounting policy note for Financial instruments.
Provisions
Provisions have been made for onerous leases, dilapidations, restructuring,
pensions, customer redress and claims. These provisions are estimates and
the actual costs and timing of future cash flows are dependent on future
events. The difference between expectations and the actual future liability
will be accounted for in the period when such determination is made.
The Group has a provision for potential customer redress. In the prior year,
the Financial Services Authority (‘FSA’) formally issued Policy Statement
10/12 (‘PS 10/12’), which introduced new guidance in respect of Payment
Protection Insurance (‘PPI’) customer redress and evidential provisions to
the FSA Handbook with an implementation date of 1 December 2010.
TheGroup will continue to handle complaints and redress customers in
accordance with PS 10/12. This will include ongoing analysis of historical
claims experience in accordance with the guidance.
The calculation of this provision involves estimating a number of variables,
principally the level of customer complaints which may be received and
the level of any compensation which may be payable to customers. The
number of cases on which compensation is ultimately payable may also be
influenced by the outcome of the analysis of historical claims referred to
above. A change in the estimate of any of the key variable in this calculation
could have the potential to significantly impact the provision recognised.
Insurance reserves
The Group recognises insurance commission arising from the sale
of general insurance policies sold under the Tesco brand. The level
of commission is dependent upon the profitability of the underlying
insurance policies, which is in turn dependent on the level of reserves
held by the insurance trading partner to underwrite the policies in place.
Calculation of the required level of insurance claims reserves is dependent
on a detailed actuarial review. Management also undertakes an
assessment of other risks which are outside the scope of this review
but that are inherent in assessing potential claims liabilities including
court/legal rulings on individual large losses, the extent to which claims
developments impact the reinsurance protection in place and the
proportion of claims settling with periodic payment orders. A change
in the estimate of any of the key variables in this calculation could have
the potential to significantly impact the reserve balance recognised
which would therefore also impact the insurance commission revenue
recognised in the income statement. The nature of these factors is such
that it is not possible at this time to quantify the uncertainty around
the eventual cost.
Post-employment benefit obligations
The present value of the post-employment benefit obligations depends
ona number of factors that are determined on an actuarial basis using
anumber of assumptions. The assumptions used in determining the
netcost (income) for pensions include the discount rate. Any changes in
these assumptions will impact the carrying amount of post-employment
benefit obligations.
Key assumptions for post-employment benefit obligations are disclosed
in Note 26.
Adoption of new International Financial Reporting Standards
The Group has adopted the following amended standards and
interpretations as of 27 February 2011.
 IAS 24 (amended) ‘Related party disclosures’
 IFRIC 14 (amended) ‘Prepayments of a minimum funding requirement’
 IFRIC 19 ‘Extinguishing financial liabilities with equity instruments’
The Group has adopted all amendments published in ‘Improvements to IFRSs’
issued in May 2010. The adoption of the above standards, interpretations
and amendments has not had any significant impact on the amounts
reported in the Group financial statements but may impact the accounting
for future transactions and arrangements.
Revenue
Revenue comprises the fair value of consideration received or receivable for
the sale of goods and services in the ordinary course of the Group’s activities.
Sale of goods
Revenue is recognised when the significant risks and rewards of ownership
of the goods have transferred to the buyer and the amount of revenue can
be measured reliably.
Revenue is recorded net of returns, discounts/offers and value added taxes.
Provision of services
Revenue from the provision of services is recognised when the service is
provided and the revenue can be measured reliably, based on the terms
of the contract.
Where the Group acts as an agent selling goods or services, only the
commission income is included within revenue.
Financial services
Revenue consists of interest, fees and income from the provision
ofinsurance.
Interest income on financial assets that are classified as loans and
receivables is determined using the effective interest rate method.
Calculation of the effective interest rate takes into account fees receivable,
that are an integral part of the instrument’s yield, premiums or discounts
on acquisition or issue, early redemption fees and transaction costs.
Fees in respect of services (such as credit card interchange, late payment,
balance transfer fees and ATM revenue) are recognised as the right to
consideration accrues through the provision of the service to the customer.
The arrangements are generally contractual and the cost of providing the
service is incurred as the service is rendered.
The Group generates commission from the sale and service of Motor and
Home insurance policies underwritten by Tesco Underwriting Limited, or in
a minority of cases by a third party underwriter. This is based on commission
rates which are independent of the profitability of underlying insurance
policies. Similar commission income is also generated from the sale of
white label insurance products underwritten by other third party providers.
The Group continues to receive insurance commission arising from the
sale of insurance policies sold under the Tesco brand through the legacy
arrangement with RBS. This commission income is variable and dependent
upon the profitability of the underlying insurance policies.
Clubcard, loyalty and other initiatives
The cost of Clubcard and loyalty initiatives is part of the fair value of the
consideration received and is deferred and subsequently recognised over
the period that the awards are redeemed. The deferral is treated as a
deduction from revenue.
The fair value of the points awarded is determined with reference to the
fair value to the customer and considers factors such as redemption via
Clubcard deals versus money-off-in-store and redemption rate.
96 Tesco PLC Annual Report and Financial Statements 2012