Tesco 2006 Annual Report Download - page 67

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65Tesco plc
Note 11 Property, plant and equipment continued
Impairment of Property, plant and equipment
The Group has determined that for the purposes of impairment testing, each store is a cash-generating unit. Cash-generating units
are tested for impairment if there are indications of impairment at the Balance Sheet date.
Recoverable amounts for cash-generating units are based on value in use, which is calculated from cash flow projections for five
years using data from the Group’s latest internal forecasts, the results of which are reviewed by the Board. The key assumptions
for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management
estimates discount rates using pre-tax rates that reflect current market assessment of the time value of money and the risks specific
to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future
changes in the market.
The forecasts are extrapolated beyond five years based on estimated long term growth rates (generally 3%-4%).
The pre-tax discount rates used to calculate value in use range from 9%-11% (2005 and 2004: 10%-13%) depending on the specific
conditions in which each store operates. This discount rate is derived from the Group’s post-tax weighted average cost of capital.
The Group’s cash-generating units were reviewed for impairment on transition to IFRSs using the methodology and assumptions
outlined above. This review resulted in impairment losses of £142m as at 29 February 2004. Due to movements in foreign exchange
rates, the impairment losses increased to £152m as at 26 February 2005.
The following amounts have been (charged)/credited to operating costs in the Income Statement during the current and prior year.
2006 2005
£m £m
Impairment losses
UK (29) –
Rest of Europe (18) –
Asia ––
(47) –
Reversal of impairment losses
UK 29 –
Rest of Europe 23 –
Asia––
52 –
Net reversal of impairment losses 5–
The impairment losses relateto stores whose recoverable amounts (either value in use or fair value less costs to sell) do not exceed
the asset carrying values. In all cases, impairment losses arose due to stores performing below budgeted trading levels.
The reversal of previous impairment losses arose principally due to improvements in stores’ performances over the last year and
a reduction in the weighted average cost of capital, which increases the net present value of future cash flows.
In all cases, the impairment losses charged or reversed during the year have been measured relative to the value in use of the stores.