Tesco 2014 Annual Report Download - page 77

Use of assumptions and estimates
The preparation of the consolidated Group financial statements requires
management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based
on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates. The estimates and underlying assumptions are reviewed on an
ongoing basis.
Critical estimates and assumptions that are applied in the preparation ofthe
consolidated financial statements include:
Depreciation and amortisation
The Group exercises judgement to determine useful lives and residual values
of intangibles, property, plant and equipment and investment property.
The assets are depreciated down to their residual values over their estimated
useful lives.
Impairment
i) Impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment.
The recoverable amount of the cash-generating units has been determined
based on value in use calculations. These calculations require the use of
estimates as set out in Note 10.
ii) Impairment of assets
The Group has determined each store as a separate cash-generating unit for
impairment testing. Where there are indicators for impairment, the Group
performs an impairment test. Recoverable amounts for cash-generating
units are based on the higher ofvalue in use and fair value less costs of
disposal. Value in use is calculated from cash flow projections for generally
five years using data from the Group’s latestinternal forecasts. These
calculations require the use of estimates asset out in Note 11.
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, and customer redress. 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 provisions for potential customer redress. In 2010/11,
the Financial Conduct Authority (‘FCA’) 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 FCA Handbook with an implementation date of 1 December 2010.
TheGroup continues to handle complaints and redress customers in
accordance with PS 10/12.
During the course of the year the Group identified historic operational issues
that had resulted in instances where certain of the requirements of the
Consumer Credit Act (‘CCA’) for post contract documentation had not been
fully complied with. While there is no evidence that these issues have caused
particular detriment to customers, it is the Group’s intention to provide
redress to impacted customers in order to reflect the operation of the CCA
in respect of the customers’ liability.
Provision has been recognised for the CCA documentation redress and
represents management’s best estimate at the reporting date of the cost
of providing redress to certain loan and credit card customers. The Office
of Fair Trading (‘OFT’) has been advised of the Group’s approach to
determining the proposed customer redress. Oversight of CCA-related
matters passed from the OFT to the FCA on 1 April 2014 and the Group
expects to formally advise the FCA of the approach.
It is not clear what regulatory position, if any, the FCA will take and as
highlighted above, there is no judicial certainty in the legal position.
The actual cost of customer redress could therefore differ materially
from this estimate. Refer to Note 24 for further details.
The Group is part of an industry wide Scheme of Arrangement established
with the support of the relevant regulatory and customer protection bodies
to address customer redress relating to the historic sale of certain cardholder
protection products (‘CPP’) to credit card customers.
Note 1 Accounting policies
General information
Tesco PLC (‘the Company’) is a public limited company incorporated
anddomiciled in the United Kingdom under the Companies Act 2006
(Registration number 445790). The address of the registered office is
Tesco House, Delamare Road, Cheshunt, Hertfordshire, EN8 9SL, UK.
The financial year represents the 52 weeks ended 22 February 2014
(prior financial year 52 weeks ended 23 February 2013). For the UK,
the Republic of Ireland and the US, the results are for the 52 weeks ended
22 February 2014 (prior financial year 52 weeks ended 23 February 2013).
For all other operations, the results are for the calendar year ended 28
February 2014 (prior financial year ended 28 February 2013).
The main activities of the Company and its subsidiaries (together, ‘the Group’)
are those of retailing and retail banking.
Basis of preparation
The consolidated Group financial statements have been prepared in
accordance with International Financial Reporting Standards (‘IFRS’)
andIFRS Interpretations Committee (‘IFRIC’) interpretations as endorsed by
the European Union, and those parts of the Companies Act 2006 applicable
to companies reporting under IFRS. The consolidated Group financial
statements are presented in Pounds Sterling, generally rounded to the
nearest million. They are prepared on the historical cost basis, except for
certain financial instruments, share-based payments, customer loyalty
programmes and pensions that have been measured at fair value.
Discontinued operations
During the period, the Group entered into definitive agreements, subject to
the usual regulatory approvals, with China Resources Enterprise, Limited to
combine respective Chinese retail operations. The definitive agreements
allow for the exchange of the Group’s Chinese retail and property interests
plus cash of HK$4,325m for a 20% interest in the combined businesses.
On 27 November 2013 the Group completed a sale of the substantive part of
its US operations to YFE Holdings, Inc. with the remaining assets of the US
operations being disposed of as part of an orderly restructuring process. In
addition, the exit of the Japanese operations was successfully completed on
1 January 2013.
In accordance with IFRS 5 ‘Non-current assets held for sale and discontinued
operations’, the net results of these operations for the year are presented
within discontinued operations in the Group Income Statement (for which
the comparatives have been restated) and the assets and liabilities of the
operations are presented separately in the Group Balance Sheet. See Note 7
for further details.
The accounting policies set out below have been applied consistently
to allperiods presented in these consolidated financial statements.
Basis of consolidation
The consolidated Group financial statements consist of the financial
statements of the ultimate Parent Company (‘Tesco PLC’), all entities
controlled by the Company (its subsidiaries) and the Group’s share of
its interests in joint ventures and associates.
Subsidiaries
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date
that control ceases.
Intragroup balances and any unrealised gains and losses or income and
expenses arising from intragroup transactions are eliminated in preparing the
consolidated financial statements.
Joint ventures and associates
The Group’s share of the results of joint ventures and associates is included
in the Group Income Statement using the equity method of accounting.
Investments in joint ventures and associates are carried in the Group Balance
Sheet at cost plus post-acquisition changes in the Group’s share of the net
assets of the entity, less any impairment in value. The carrying values of
investments in joint ventures and associates include acquired goodwill.
If the Group’s share of losses in a joint venture or associate equals or exceeds
its investment in the joint venture or associate, the Group does not recognise
further losses, unless it has incurred obligations to do so ormade payments
on behalf of the joint venture or associate.
Unrealised gains arising from transactions with joint ventures and associates are
eliminated to the extent of the Group’s interest in the entity.
74 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements