Tesco 2010 Annual Report Download - page 121

Financial statements
Note 33 Commitments and contingencies continued
Contingent liabilities
The Company has irrevocably guaranteed the liabilities, as defined in Section 5(c) of the Republic of Ireland (Amendment Act) 1986, of various subsidiary
undertakings incorporated in the Republic of Ireland.
For details of assets held under finance leases, which are pledged as security for the finance lease liabilities, see note 11.
There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability
to the Group. The Group recognises provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment
can be reliably estimated.
In September 2007, the Office of Fair Trading issued its provisional findings in its Statement of Objections relating to the alleged collusion between
certain large supermarkets and dairy processors. On 30 April 2010, the Office of Fair Trading announced that it had decided to drop the allegations
against the Group in relation to milk and butter in the dairy investigation. The Office of Fair Trading agreed a discretionary penalty discount of 10%
for the Group not contesting the two remaining allegations which related to cheese. The Group has however made no admission of wrongdoing.
The discounted fine will become payable after the OFT issues its decision later this year and is immaterial to the Group and therefore no provision
has been recognised in the Group’s financial statements.
Tesco Bank
At 27 February 2010, Tesco Bank has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £6.5bn (2009 –
£5.7bn). The amount is intended to provide an indication of the potential volume of business and not of the underlying credit or other risks.
The Financial Services Compensation Scheme (FSCS) is the UK statutory fund of last resort for customers of authorised financial services firms
and pays compensation if a firm is unable to pay claims against it. The FSCS has borrowed from HM Treasury to fund these compensation costs
associated with institutions that failed in 2008 and will receive receipts from asset sales, surplus cash flow and other recoveries from these institutions
in the future.
The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation
levies on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits. The levy is calculated based on
deposit balances held as at 31 December in each year and as such, this is seen as the ‘trigger event’ under accounting rules.
If the FSCS does not receive sufficient funds from the failed institutions to repay HM Treasury in full it will raise compensation levies. At this time it is
not possible to estimate the amount or timing of any shortfall resulting from the cash flows received from the failed institutions and, accordingly, no
provision for compensation levies has been made in these financial statements.
Note 34 Capital resources
The following table shows the composition of regulatory capital resources of Tesco Personal Finance PLC (being the regulated entity) at the balance
sheet date:
2010 2009
£m £m
Tier 1 capital:
Shareholders’ funds and minority interests 576 521
Tier 2 capital:
Qualifying subordinated debt 235 205
Other interests in tier 2 capital 21 19
Supervisory deductions (263) (259)
Total regulatory capital 569 486
The movement of tier 1 capital during the year is analysed as follows:
2010 2009*
£m £m
Beginning of the year 521 514
Share capital and share premium 230 –
Profit attributable to shareholders 37 7
Ordinary dividends (153) –
Increase in intangible assets (59) –
End of the year 576 521
* Tesco Personal Finance PLC was acquired as part of Tesco Personal Finance Group Limited on 19 December 2008.
It is Tesco Personal Finance PLC’s (TPF) policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its
activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the
business. In carrying out this policy, TPF has regard to the supervisory requirements of the Financial Services Authority (‘FSA’). The FSA uses Risk Asset
Ratio (‘RAR’) as a measure of capital adequacy in the UK banking sector, comparing a bank’s capital resources with its risk-weighted assets (the assets
and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement the RAR should be not less
than 8% with a Tier 1 component of not less than 4%. TPF has complied with the FSA’s capital requirements throughout the year.
Tesco PLC Annual Report and Financial Statements 2010 119