Tesco 2009 Annual Report Download - page 78

76 FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
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
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 and interest rate 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.
Fair value hedging
Derivative financial instruments are classified as fair value hedges
when they hedge the Group’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 Group
Income Statement, 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 (including cross currency swaps).
Cash flow hedging
Derivative financial instruments are classified as cash flow hedges when
they hedge the Group’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 Group Income Statement in the same period or periods
during which the hedged transaction affects the Group Income Statement.
The classification of the effective portion when recognised in the Group
Income Statement 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 Group Income Statement within finance
income or costs.
Derivative instruments qualifying for cash flow hedging are principally
forward foreign exchange transactions and 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
Group Income Statement. If a forecasted hedged transaction is no longer
expected to occur, the net cumulative gain or loss recognised in equity
is transferred to the Group Income Statement.
Net investment hedging
Derivative financial instruments are classified as net investment hedges
when they hedge the Group’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 Group Income
Statement. Gains and losses accumulated in equity are included in the
Group Income Statement when the foreign operation is disposed of.
Derivative instruments qualifying for net investment hedging are
principally forward foreign exchange transactions and currency options.
Notes to the Group financial statements continued
Note 1 Accounting policies continued