Tesco 2013 Annual Report Download - page 46

42 Tesco PLC Annual Report and Financial Statements 2013
Corporate governance continued
Internal controls
The Board is responsible for the Company’s system of internal controls
and for reviewing their effectiveness. As part of the year end process,
the CEOs of all international businesses, the UK core business and other
relevant material businesses in the UK, are required to certify that their
business has operated in compliance with applicable governance and
compliance requirements, policies and legislation during the year.
The details of any incidences of non-compliance must be disclosed and
a report of the responses is reviewed by Internal Audit and the Group
Compliance Committee.
Colleagues are required to confirm annually that they have complied
with the Code of Business Conduct which sets out the individual
obligations and responsibilities for anyone working at Tesco. More
details on this code can be found on page 30.
Group Finance is responsible for preparing the Group financial
statements, using a well-controlled consolidation process. Group
Finance contains a technical accounting team, which reviews external
technical accounting developments, financial reporting and accounting
policy issues. It is also responsible for maintaining a mandatory Group
accounting policy manual, which is in accordance with International
Financial Reporting Standards. Group Finance maintains its own
Risk Register and assesses its own controls systems. During the year
Group Finance has taken steps to make its processes more robust by
developing a key financial control framework to describe a mandatory
suite of controls across key business processes. Compliance is being
monitored by management by means of an annual self-assessment
programme which is being rolled out across the Group.
The Internal Audit programmes covering key financial controls have
been aligned with this framework to ensure consistency of approach.
There are a number of key committees which play a role in monitoring
compliance with internal controls.
The Group Compliance Committee is responsible for monitoring
compliance across the Group, including receiving reports from the
individual business unit compliance committees. It also reviews local
policies and approves changes and exceptions to those policies.
During the year it met six times and covered topics on social,
environmental, ethical, operational, commercial and corporate,
property and financial matters.
The Audit Committee reports to the Board each year on its assessment
of the effectiveness of the risk management and internal control systems
for the financial year and the period to the date of approval of the
financial statements. Throughout the year the Committee receives
regular reports from the external auditors covering topics such as quality
of earnings and technical accounting developments. Internal Audit and
senior management also regularly provide updates to the Committee.
All systems are designed to provide reasonable, but not absolute,
assurance against material statement or loss. The Board has conducted
a review of the effectiveness of internal controls and is satisfied that the
controls in place remain appropriate.
Financial risks review
The main financial risks faced by the Group relate to the availability of funds to meet business needs, fluctuations in interest and foreign exchange
rates and credit risks relating to the risk of default by parties to financial transactions. The management of these risks is set out below. Details of
the main financial risks relating to Tesco Bank and the management of those risks can be found in Note 22 to the financial statements on page 108.
Financial risk Risk management
Funding and
liquidity
The Group finances its operations by a combination of retained profits, disposals of property assets, debt capital market issues,
commercial paper, bank borrowings and leases. The objective is to ensure continuity of funding. The policy is to smooth the
debt maturity profile, to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities
and a strong credit rating so that maturing debt may be refinanced as it falls due. The Group has a long-term rating of BBB+
(stable) from Fitch, Baa1 (stable) from Moody’s and BBB+ (stable) from Standard & Poor’s. New funding of £1.4 billion was
raised during the year from property disposals. At the year end, net debt was £6.6 billion (2012: £6.8 billion).
Interest rate risk
management
Our objective is to limit the impact to our profit and loss from rising interest rates. Forward rate agreements, interest rate
swaps, caps and floors may be used to achieve the desired mix of fixed and floating rate debt.
Our policy is to fix interest rates for the year on a minimum of 40% of actual and projected debt interest costs of the Group
excluding Tesco Bank. At the year end, the percentage of interest bearing debt at fixed rates was 75% (2012: 90%). The
remaining balance of our debt is in floating rate form. The average rate of interest paid on an historic cost basis this year,
excluding joint ventures and associates, was 4.8% (2012: 4.8%).
Foreign currency
risk management
Our principal objective is to reduce the effect of exchange rate volatility on operating margins. Transactional currency
exposures that could significantly impact the Group Income Statement are managed, typically using forward purchases or
sales of foreign currencies and purchased currency options. At the year end, forward foreign currency transactions, designated
as cash flow hedges, equivalent to £1,835 million were outstanding (2012: £1,944 million) as detailed in Note 21. We translate
overseas profits at average foreign exchange rates.
We only hedge a proportion of the investment in our international subsidiaries as well as ensuring that each subsidiary is
appropriately hedged in respect of its non-functional currency assets. During the year, currency movements increased the
net value, after the effects of hedging, of the Group’s overseas assets by £420 million (last year decrease of £22 million).
Credit risk The objective is to reduce the risk of loss arising from default by parties to financial transactions. The Group holds positions
with an approved list of counterparties of good credit quality and these counterparties and their credit ratings are routinely
monitored.
Insurance We purchased assets, earnings and combined liability protection from the open insurance market for higher value losses only.
The risk not transferred to the insurance market is retained within the business with some cover being provided by our captive
insurance companies, ELH Insurance Limited in Guernsey and Valiant Insurance Company Limited in the Republic of Ireland.
ELH Insurance Limited covers Assets, Earnings and Combined Liability, while Valiant Insurance Company Limited covers
Combined Liability only.