Tesco 2010 Annual Report Download - page 126

Notes to the Parent Company financial statements continued
Derivative financial instruments and hedge accounting
The Company uses derivative financial instruments to hedge its exposure
to foreign exchange and interest rate risks arising from operating, financing
and investing activities. The Company does not hold or issue derivative
financial instruments for trading purposes, however if derivatives do not
qualify for hedge accounting they are accounted for as such.
Derivative financial instruments are recognised and stated at fair value.
The fair value of derivative financial instruments is determined by
reference to market values for similar financial instruments, by discounted
cash flows or by the use of option valuation models. Where derivatives do
not qualify for hedge accounting, any gains or losses on remeasurement
are immediately recognised in the Parent Company Profit and Loss
Account. Where derivatives qualify for hedge accounting, recognition of
any resultant gain or loss depends on the nature of the hedge relationship
and the item being hedged.
In order to qualify for hedge accounting, the Company is required to
document from inception the relationship between the item being hedged
and the hedging instrument. The Company is also required to document
and demonstrate an assessment of the relationship between the hedged
item and the hedging instrument, which shows that the hedge will be
highly effective on an ongoing basis. This effectiveness testing is
performed at each period end to ensure that the hedge has remained
highly effective.
Derivative financial instruments with maturity dates of more than one year
from the balance sheet date are disclosed as falling due after more than
one year.
Fair value hedging
Derivative financial instruments are classified as fair value hedges when
they hedge the Company’s exposure to changes in the fair value of a
recognised asset or liability. Changes in the fair value of derivatives that
are designated and qualify as fair value hedges are recorded in the Parent
Company Profit and Loss Account, together with any changes in the fair
value of the hedged item that is attributable to the hedged risk.
Derivative financial instruments qualifying for fair value hedge accounting
are principally interest rate swaps and cross currency swaps.
Cash flow hedging
Derivative financial instruments are classified as cash flow hedges when
they hedge the Company’s exposure to variability in cash flows that are
either attributable to a particular risk associated with a recognised asset
or liability, or a highly probable forecasted transaction.
The effective element of any gain or loss from remeasuring the derivative
instrument is recognised directly in equity.
The associated cumulative gain or loss is removed from equity and
recognised in the Parent Company Profit and Loss Account in the same
period or periods during which the hedged transaction affects the Parent
Company Profit and Loss Account. The classification of the effective
portion when recognised in the Parent Company Profit and Loss Account
is the same as the classification of the hedged transaction. Any element
of the remeasurement of the derivative instrument which does not meet
the criteria for an effective hedge is recognised immediately in the Parent
Company Profit and Loss Account.
Derivative instruments qualifying for cash flow hedging are principally
forward foreign exchange transactions and cross currency options.
Hedge accounting is discontinued when the hedging instrument expires or
is sold, terminated or exercised, or no longer qualifies for hedge accounting.
At that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity is retained in equity until the forecasted transaction
occurs or the original hedged item affects the Parent Company Profit and
Loss Account. If a forecasted hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred
to the Parent Company Profit and Loss Account.
Net investment hedging
Derivative financial instruments are classified as net investment hedges
when they hedge the Company’s net investment in an overseas operation.
The effective element of any foreign exchange gain or loss from
remeasuring the derivative instrument is recognised directly in equity. Any
ineffective element is recognised immediately in the Parent Company
Profit and Loss Account. Gains and losses accumulated in equity are
included in the Parent Company Profit and Loss Account when the foreign
operation is disposed of.
Derivative instruments qualifying for net investment hedging are principally
forward foreign exchange transactions and cross currency options.
Pensions
The Company participates in the Tesco PLC Pension Scheme which is a
multi-employer scheme within the Tesco Group and cannot identify its
share of the underlying assets and liabilities of the scheme. Accordingly,
as permitted by FRS 17 ‘Retirement Benefits’, the Company has accounted
for the scheme as a defined contribution scheme, and the charge for the
period is based upon the cash contributions payable.
Taxation
Corporation tax payable is provided on the taxable profit for the year, using
tax rates enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date and would give rise
to an obligation to pay more or less taxation in the future.
Deferred tax assets are recognised to the extent that they are recoverable.
They are regarded as recoverable to the extent that on the basis of all
available evidence, it is regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying
timing differences can be deducted.
Deferred tax is measured on a non-discounted basis at the tax rates that
are expected to apply in the periods in which the timing differences
reverse, based on tax rates and laws that have been substantively enacted
by the balance sheet date.
Recent accounting developments
Standards, amendments and interpretations adopted, following new
amendments to FRS interpretations. These have not had a significant
impact on the results or net assets of the Company:
• amendments to UITF Abstract 42 and FRS 26 – Embedded derivatives,
effective for periods beginning on or after 1 January 2009.
Standards, amendments and interpretations not yet effective, but not
expected to have a significant impact on the Company:
• amendment to FRS 25 ‘Financial Instruments: Presentation’ on
‘Puttable Financial Instruments and Obligations Arising on Liquidation’,
effective for periods beginning on or after 1 January 2010.
• amendment to FRS 25 ‘Financial Instruments: Presentation’ –
Presentation on Classification of Rights Issues, effective for annual
periods beginning on or after 1 February 2010; and
• amendment to FRS 26 ‘Financial Instruments: Recognition and
Measurement’ on Eligible Hedged Items, effective for periods beginning
on or after 1 July 2009.
Note 1 Accounting policies continued
124 Tesco PLC Annual Report and Financial Statements 2010