Tesco 2012 Annual Report Download - page 105

STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS OVERVIEW
The adjustments made to reported profit before tax are:
 IAS 32 and IAS 39 ‘Financial Instruments’ – fair value remeasurements.
Under IAS 32 and IAS 39, the Group applies hedge accounting to its
various hedge relationships when allowed under IAS 39 and when
practical to do so. Sometimes the Group is unable to apply hedge
accounting to the arrangements but continues to enter into these
arrangements as they provide certainty or active management of the
exchange rates and interest rates applicable to the Group. The Group
believes these arrangements remain effective and economically and
commercially viable hedges despite the inability to apply hedge
accounting. Where hedge accounting is not applied to certain hedging
arrangements, the reported results reflect the movement in fair value
of related derivatives due to changes in foreign exchange and interest
rates. In addition, at each year end, any gain or loss accruing on open
contracts is recognised in the Group Income Statement for the financial
year, regardless of the expected outcome of the hedging contract on
termination. This may mean that the Group Income Statement charge is
highly volatile, whilst the resulting cash flows may not be as volatile. The
underlying profit measure removes this volatility to help better identify
underlying performance of the Group.
 IAS 19 ‘Employee Benefits’ – non-cash Group Income Statement charge
for pensions. Under IAS 19, the cost of providing pension benefits in the
future is discounted to a present value at the corporate bond yield rates
applicable on the last day of the previous financial year. Corporate bond
yield rates vary over time which in turn creates volatility in the Group
Income Statement and Group Balance Sheet. IAS 19 also increases the
charge for young pension schemes, such as the Group’s, by requiring
the use of rates which do not take into account the future expected
returns on the assets held in the pension scheme which will fund
pension liabilities as they fall due. The sum of these two effects can
make the IAS 19 charge disproportionately higher and more volatile
than the cash contributions the Group is required to make in order to
fund all future liabilities. Therefore, within underlying profit the Group
has included the ‘normal’ cash contributions for pensions but excluded
the volatile element of IAS 19 to represent what the Group believes to
be a fairer measure of the cost of providing post-employment benefits.
 IAS 17 ‘Leases’ – impact of annual uplifts in rent and rent-free periods.
The amount charged to the Group Income Statement in respect of
operating lease costs and incentives is expected to increase significantly
as the Group expands its international business. The leases have been
structured in a way to increase annual lease costs as the businesses
expand. IAS 17 requires the total expected cost of a lease to be recognised
on a straight-line basis over the term of the lease, irrespective of the
actual timing of the cost. This adjustment also impacts the Group’s
operating profit and rental income within the share of post-tax profits
ofjoint ventures and associates.
 IFRS 3 (Revised) ‘Business Combinations’ – intangible asset
amortisation charges and costs arising from acquisitions. Under IFRS 3
intangible assets are separately identified and fair valued. The intangible
assets are required to be amortised on a straight-line basis over their
useful lives and as such is a non-cash charge that does not reflect the
underlying performance of the business acquired. Similarly, the standard
requires all acquisition costs to be expensed in the Group Income
Statement. Due to their nature, these costs have been excluded from
underlying profit as they do not reflect the underlying performance of
the Group.
 IFRIC 13 ‘Customer Loyalty Programmes’ – fair value of awards.
The interpretation requires the fair value of customer loyalty awards
to be measured as a separate component of a sales transaction. The
underlying profit measure removes this fair value allocation to present
underlying business performance, and to reflect the performance of
the operating segments as measured by management.
 IAS 36 ‘Impairment of Intangibles’ – impairment of goodwill arising
on acquisitions. The remaining carrying value of goodwill relating to
Japan was not fully recoverable and was fully impaired during the prior
financial year. The resulting non-cash charge does not reflect the
underlying performance of the Group.
 Restructuring and other one-off costs. These relate to certain costs
associated with the Group’s restructuring activities and certain one-off
costs including costs relating to fair valuing the assets of a disposal group.
These have been excluded from underlying profit as they do not reflect
the underlying performance of the Group.
Note 1 Accounting policies continued
Tesco PLC Annual Report and Financial Statements 2012 101