Tesco 2010 Annual Report Download - page 81

Financial statements
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 non interest-bearing and are recognised initially at
fair value, and subsequently at amortised cost using the effective interest
rate method, reduced by appropriate allowances for estimated
irrecoverable amounts.
Investments
Investments are recognised at trade date. Investments are classified as
either held for trading or available-for-sale, and are recognised at fair value.
There are no investments classified as held for trading.
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 result for the
period. Interest calculated using the effective interest rate method is
recognised in the Group Income Statement. Dividends on an available-for-
sale equity instrument are recognised in the Group Income Statement
when the entity’s right to receive payment is established.
Loans and advances
Loans and advances are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and
include amounts due from customers and amounts due from other banks.
The Group has no intention of trading these loans and advances and
consequently they are not classified as held for trading or designated
as fair value through profit and loss. Loans and advances are initially
recognised at fair value plus directly related transaction costs. Subsequent
to initial recognition, these assets are carried at amortised cost using the
effective interest method less any impairment losses. Income from these
financial assets is calculated on an effective yield basis and is recognised
in the Group Income Statement.
Impairment of loans and advances
At each balance sheet date, the Group reviews the carrying amounts of
its loans and advances to determine whether there is any indication that
those assets have suffered an impairment loss. An impairment loss has
been incurred if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the amount or
timing of future cash flows from the asset.
If there is objective evidence that an impairment loss on a financial asset
or group of financial assets classified as loans and advances has been
incurred, the Group measures the amount of the loss as the difference
between the carrying amount of the asset or group of assets and the
present value of estimated future cash flows from the asset or group of
assets discounted at the effective interest rate of the instrument at initial
recognition. Impairment losses are assessed individually for financial assets
that are individually significant and collectively for assets that are not
individually significant. In making collective assessments of impairment,
financial assets are grouped into portfolios on the basis of similar risk
characteristics. Future cash flows from these portfolios are estimated on
the basis of the contractual cash flows and historical loss experience for
assets with similar credit risk characteristics. Historical loss experience is
adjusted, on the basis of current observable data, to reflect the effects of
current conditions not affecting the period of historical experience.
Impairment losses are recognised in the Group Income Statement and the
carrying amount of the financial asset or group of financial assets reduced
by establishing an allowance for impairment losses. If in a subsequent
Note 1 Accounting policies continued
period the amount of the impairment loss reduces and the reduction
can be ascribed to an event after the impairment was recognised, the
previously recognised loss is reversed by adjusting the allowance. Once
an impairment loss has been recognised on a financial asset or group of
financial assets, interest income is recognised on the carrying amount
using the rate of interest at which estimated future cash flows were
discounted in measuring impairment.
Loan impairment provisions are established on a portfolio basis taking
into account the level of arrears, security, past loss experience, credit
scores and defaults based on portfolio trends. The most significant
factors in establishing the provisions are the expected loss rates and the
related average life. The portfolios include credit card receivables and
other personal advances. The future credit quality of these portfolios is
subject to uncertainties that could cause actual credit losses to differ
materially from reported loan impairment provisions. These uncertainties
include the economic environment, notably interest rates and their
effect on customer spending, the unemployment level, payment
behaviour and bankruptcy trends.
Financial liabilities and equity instruments
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
fair value, 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 Group Income Statement over the period of the
borrowings on an effective interest basis.
Trade payables
Trade payables are non interest-bearing and are stated at amortised cost.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds
received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge its exposure
to foreign exchange, interest rate and commodity risks arising from
operating, financing and investing activities. The Group 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 Group Income
Statement. 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 Group is required to
document from inception the relationship between the item being
hedged and the hedging instrument. The Group 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
remains highly effective.
Derivative financial instruments with maturity dates of more than one
year from the balance sheet date are disclosed as non-current.
Tesco PLC Annual Report and Financial Statements 2010 79