Tesco 2006 Annual Report Download - page 98

96 Tesco plc
Notes to the financial statements continued
Note 32 Explanation of transition to IFRSs continued
Notes to the reconciliations of equity and profit
The following describes the most significant adjustments arising from transition to IFRSs.
Share-based payment (IFRS 2)
a) Share Option Schemes
The main impact of IFRS 2 for the Group is the expensing of employees’ and Directors’ share options.
The expense is calculated with reference to the fair value of the award on the date of grant and is recognised over the vesting period
of the scheme, adjusted to reflect actual and expected levels of vesting. We have used the Black-Scholes model to calculate the fair
value of options on their grant date.
To ensure better comparability, the Group has applied IFRS 2 retrospectively to all options granted but not fully vested as at
29 February 2004, rather than just to those granted after 7 November 2002.
In 2004/05, application of IFRS 2 results in a pre-tax charge to the Income Statement of £48m; the pre-tax effect is partially offset
by a deferred tax credit of £16m. Deferred tax is calculated based on the difference between market price at the Balance Sheet
dateand the option exercise price. As a result the tax effect will not correlate to the charge. The excess of the deferred tax over the
cumulative Income Statement charge at the tax rate is recognised in equity (in 2004/05 this amounted to a credit of £9m to retained
earnings). The deferred tax assets recognised in February 2004 and February 2005 relating to the share option schemes are £25m
and £49m, respectively.
b) Share Bonus Schemes
Under UK GAAP the Group expensed sharebonus schemes by applying the rules of UITF 17. Whereas the UK GAAP Profit and loss
account charge was based on the intrinsic value of the award, the IFRS 2 charge is based on the fair value. This results in an
additional charge of £4m to the Income Statement in 2004/05.
As a result of IFRSs, deferred tax assets recognised under UK GAAP relating to share bonus schemes have reduced by approximately
£8m at both the 2004 and 2005 Balance Sheet dates.
Goodwill arising on Business Combinations (IFRS 3)
Under IFRS 3, goodwill is not amortised on a straight-line basis but instead is subject to annual impairment testing. Consequently,
the goodwill balances were reviewed for impairment at February 2004 and February 2005 and no impairment adjustments
wereidentified.
In terms of adjustments to the Income Statement in 2004/05, the non-amortisation of goodwill results in an increase of pre-tax
profit of £61m. There are no associated tax impacts.
In the February 2005 Balance Sheet, a foreign exchange gain of £2m has been recognised through reserves relating to the
non-amortisation of goodwill; therefore, the total adjustment to net assets relating to goodwill amounts to £63m.
Recognition of dividends (IAS 10)
Under IFRSs dividends declared after the Balance Sheet date are not recognised as a liability as at that Balance Sheet date.
The final dividend of £365m declared in April 2004 relating to the 2003/04 financial year has been reversed in the opening Balance
Sheet and charged to equity in the Balance Sheet as at 26 February 2005. Similarly, the final dividend accrued for the 2004/05
financial year of £410m has been reversed in the IFRS Balance Sheet as at 26 February 2005 and has been charged to equity
in the Balance Sheet as at 25 February 2006.
Leasing (IAS 17)
Thereare two impacts that have arisen from the adoption of IAS 17 – firstly, the reclassification of some leases between operating
and finance leases, and secondly, the treatment of fixed rental uplifts.
Reclassification between operating leases and finance leases
The finance lease tests under UK GAAP and IFRSs are broadly similar except that IAS 17 requires the Group to consider property
leases in their component parts (i.e. land and building elements separately).