Tesco 2006 Annual Report Download - page 52

50 Tesco plc
Notes to the financial statements continued
Note 1 Accounting policies continued
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised. Deferred tax is charged or credited in the Income
Statement, except when it relates to items charged or credited
directly to equity, in which case deferred tax is also dealt with
in equity.
Deferred tax liabilities and deferred tax assets are recognised
tothe extent that it is probable that taxable profits will be
available against which deductible temporary differences
can be utilised.
The carrying amount of deferred tax assets is reviewed at each
Balance Sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are offset against each other
when they relate to income taxes levied by the same tax
jurisdiction and when the Group intends to settle its current
tax assets and liabilities on a net basis.
Foreign currencies
Transactions in foreign currencies are translated at the
exchange rate on the date of the transaction. At each Balance
Sheet date, monetary assets and liabilities that are denominated
in foreign currencies are retranslated at the rates prevailing on
the Balance Sheet date. All differences are taken to the Income
Statement for the period.
The financial statements of foreign subsidiaries are translated
intoPounds Sterling according to the functional currency
concept of IAS 21 ‘The Effects of Changes in Foreign Exchange
Rates’. Since the majority of consolidated companies operate as
independent entities within their local economic environment,
their respective local currency is the functional currency.
Therefore, assets and liabilities of overseas subsidiaries
denominated in foreign currencies are translated at exchange
rates prevailing at the dateof the Group Balance Sheet; profits
and losses are translated into Pounds Sterling at average
exchange rates for the relevant accounting periods. Exchange
differences arising, if any,are classified as equity and
transferred to the Group’s translation reserve. Such translation
differences are recognised as income or expenses in the period
in which the operation is disposed of.
The financial statements of foreign subsidiaries that report in
the currency of a hyperinflationary economy are restated in
terms of the measuring unit current at the Balance Sheet date
beforethey are translated into Pounds Sterling.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
Financial instruments
Financial assets and financial liabilities are recognised on the
Group’s Balance Sheet when the Group becomes a party to
the contractual provisions of the instrument.
Trade receivables
Trade receivables are not interest-bearing and are stated at
their nominal value, reduced by appropriate allowances
for estimated irrecoverable amounts.
Investments
Investments are classified as either held-for-trading or
available-for-sale, and are measured at subsequent reporting
dates at fair value. For available-for-sale investments, gains and
losses arising from changes in fair value are recognised directly
in equity, until the security is disposed of or is determined to be
impaired; at which time the cumulative gain or loss previously
recognised in equity is included in the net profit or loss for
the period.
Financial liabilities and Equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that gives a
residual interest in the assets of the Group after deducting all
of its liabilities.
Interest-bearing borrowings
Interest-bearing bank loans and overdrafts are initially recorded
at the value of the amount received, net of attributable
transaction costs. Subsequent to initial recognition, interest-
bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being
recognised in the Income Statement over the period of the
borrowings on an effectiveinterest basis.
Trade payables
Trade payables arenotinterest-bearing and are stated at their
nominal value.
Equity instruments
Equity instruments issued by the Company are recorded
at the proceeds received, net of direct issue costs.