Tesco 2010 Annual Report Download - page 79

Financial statements
Borrowing costs
Borrowing costs directly attributable to the acquisition or construction
of qualifying assets are capitalised. Qualifying assets are those that
necessarily take a substantial period of time to prepare for their intended
use. All other borrowing costs are recognised in the Group Income
Statement in finance costs, excluding those arising from financial services,
in the period in which they occur. For Tesco Bank finance cost on financial
liabilities is determined using the effective interest rate method and is
recognised in cost of sales.
Investment property
Investment property is property held to earn rental income and/or for
capital appreciation rather than for the purpose of Group operating
activities. Investment property assets are carried at cost less accumulated
depreciation and any recognised impairment in value. The depreciation
policies for investment property are consistent with those described for
owner-occupied property.
Leasing
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
The Group as a lessor
Amounts due from lessees under finance leases are recorded as
receivables at the amount of the Group’s net investment in the leases.
Finance lease income is allocated to accounting periods so as to reflect a
constant periodic rate of return on the Group’s net investment in the lease.
Rental income from operating leases is recognised on a straight-line basis
over the term of the relevant lease.
The Group as a lessee
Assets held under finance leases are recognised as assets of the Group at
their fair value or, if lower, at the present value of the minimum lease
payments, each determined at the inception of the lease. The corresponding
liability is included in the Group Balance Sheet as a finance lease obligation.
Lease payments are apportioned between finance charges and reduction
of the lease obligations so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance charges are charged to the
Group Income Statement.
Rentals payable under operating leases are charged to the Group Income
Statement on a straight-line basis over the term of the relevant lease.
Sale and leaseback
A sale and leaseback transaction is one where a vendor sells an asset and
immediately reacquires the use of that asset by entering into a lease with
the buyer. The accounting treatment of the sale and leaseback depends
upon the substance of the transaction (by applying the lease classification
principles described above) and whether or not the sale was made at the
asset’s fair value.
For sale and finance leasebacks, any apparent profit or loss from the
sale is deferred and amortised over the lease term. For sale and operating
leasebacks, generally the assets are sold at fair value, and accordingly
the profit or loss from the sale is recognised immediately in the Group
Income Statement.
Following initial recognition, the lease treatment is consistent with those
principles described above.
Business combinations and goodwill
All business combinations are accounted for by applying the purchase
method.
On acquisition, the assets (including intangible assets), liabilities and
contingent liabilities of an acquired entity are measured at their fair value.
The interest of minority shareholders is stated at the minority’s proportion
of the fair values of the assets and liabilities recognised.
The Group recognises intangible assets as part of business combinations at
fair value on the date of acquisition. The determination of these fair values
is based upon management’s judgement and includes assumptions on the
timing and amount of future incremental cash flows generated by the
assets acquired and the selection of an appropriate cost of capital. The
useful lives of intangible assets are estimated, and amortisation charged
on a straight-line basis.
Goodwill arising on consolidation represents the excess of the cost of an
acquisition over the fair value of the Group’s share of the net assets/net
liabilities of the acquired subsidiary, joint venture or associate at the
date of acquisition. If the cost of acquisition is less than the fair value
of the Group’s share of the net assets/net liabilities of the acquired entity
(i.e. a discount on acquisition) then the difference is credited to the Group
Income Statement in the period of acquisition.
At the acquisition date of a subsidiary, goodwill acquired is recognised as
an asset and is allocated to each of the cash-generating units expected to
benefit from the business combination’s synergies and to the lowest level
at which management monitors the goodwill. Goodwill arising on the
acquisition of joint ventures and associates is included within the carrying
value of the investment.
Goodwill is reviewed for impairment at least annually by assessing the
recoverable amount of each cash-generating unit to which the goodwill
relates. The recoverable amount is the higher of fair value less costs to sell,
and value in use. When the recoverable amount of the cash-generating
unit is less than the carrying amount, an impairment loss is recognised.
Any impairment is recognised immediately in the Group Income Statement
and is not subsequently reversed.
On disposal of a subsidiary, joint venture or associate, the attributable
amount of goodwill is included in the determination of the profit or loss
on disposal.
Goodwill arising on acquisitions before 29 February 2004 (the date of
transition to IFRS) was retained at the previous UK GAAP amounts subject
to being tested for impairment at that date. Goodwill written off to
reserves under UK GAAP prior to 1998 has not been restated and will not
be included in determining any subsequent profit or loss on disposal.
Intangible assets
Acquired intangible assets
Acquired intangible assets, such as software, pharmacy licences, customer
relationships, contracts and brands, are measured initially at cost and are
amortised on a straight-line basis over their estimated useful lives, at
2%-100% of cost per annum.
Internally-generated intangible assets – Research and development
expenditure
Research costs are expensed as incurred.
Development expenditure incurred on an individual project is carried
forward only if all the criteria set out in IAS 38 ‘Intangible Assets’ are
met, namely:
• an asset is created that can be identified (such as software or new
processes);
• it is probable that the asset created will generate future economic
benefits; and
• the development cost of the asset can be measured reliably.
Following the initial recognition of development expenditure, the cost
is amortised over the project’s estimated useful life, usually at 14%-25%
of cost per annum.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication
that those assets are impaired. If such indication exists, the recoverable
Note 1 Accounting policies continued
Tesco PLC Annual Report and Financial Statements 2010 77