Tesco 2009 Annual Report Download - page 80

78 FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
Notes to the Group financial statements continued
Note 1 Accounting policies continued
IFRS 3 Amortisation charge from intangible assets arising on acquisition 
– Under IFRS 3 ‘Business Combinations’, intangible assets are separately
identified and valued. The intangible assets are required to be amortised
on a straight-line basis over their useful economic lives and as such is a
non-cash charge that does not reflect the underlying performance of
the business acquired.
Exceptional items – Due to their significance and special nature, certain 
other items which do not reflect the Group’s underlying performance
have been excluded from underlying profit. These gains or losses can
have a significant impact on both absolute profit and profit trends;
consequently, they are excluded from the underlying profit of the
Group. There are no exceptional items in 2008/9 and 2007/8.
Segmental trading profit
Segmental trading profit is an adjusted measure of operating profit, which
measures the performance of each geographical segment before profit/
(loss) arising on property-related items, impact on leases of annual uplifts
in rent and rent-free periods, amortisation charge from intangible assets
arising on acquisition and replaces the IAS 19 pension charge with the
‘normal’ cash contributions for pensions.
Use of non-GAAP profit measures – underlying profit before tax
The Directors believe that underlying profit before tax and underlying
diluted earnings per share measures provide additional useful information
for shareholders on underlying trends and performance. These measures
are used for internal performance analysis. Underlying profit is not
defined by IFRS and therefore may not be directly comparable with other
companies’ adjusted profit measures. It is not intended to be a substitute
for, or superior to IFRS measurements of profit.
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 the rules of 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 period end, any gain or loss accruing on open contracts
is recognised in the Group Income Statement for the period, 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
business performance. During 2008/9, £10m (2007/8 – £nil) of the
IAS 32/39 charge arose in the share of post-tax profit of joint ventures
and associates, with the remainder in finance income/costs.
IAS 19 Income Statement charge for pensions – Under IAS 19 ‘Employee 
Benefits’, 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 Tesco’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 makes 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 we have 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 ‘Leases’ requires the total 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. The impact of this treatment in 2008/9 was
an adverse charge of £27m (2007/8 – £18m) to the Group Income
Statement after deducting the impact of the straight-line treatment
recognised as rental income within share of post-tax profits of joint
ventures and associates.