Tesco 2015 Annual Report Download - page 19

Commercial income
Commercial income represents part of our
overall economic relationship with suppliers.
Consistent with standard grocery market
practice, we negotiate a very wide range of
payments to and from our suppliers including
fees, contributions, discounts, multiple offers
and volume rebates. Whilst we have embarked
on a fundamental review which will significantly
simplify our approach, in total we currently
use over 20 different categories of variation
in payment terms. Many of these relate to
adjustments to a cost price and can be
considered (and are in practice) a part of
the standard unit price variations that can
be expected under normal, competitive
market conditions. As such these amounts
are recognised in the income statement as
a deduction to the cost of goods sold.
A number of commercial income categories
can be conditional on the satisfaction of
certain actions or performance conditions
by either Tesco or the supplier in question,
including the achievement of agreed sales
volume targets, the provision of certain
benefits such as marketing materials or
promotional product positioning, and
costs incurred for unplanned variations
in product specification. In most instances,
the arrangements that set out these terms
cover periods that are within or end at the
same point as our financial year.
Where agreements are in place across a
period end, judgement can be required
to assess if the conditions will be met,
and therefore to estimate the period
end amounts payable and receivable. For
example, where there are volume-related
allowances spanning different account
periods, the Group assesses the probability
that targeted volumes will be achieved based
on historical and forecast performance,
recognising the appropriate amounts in the
period end balance sheet and income
statement.
Commercial income is reflected in a number
of balance sheet categories – principally due
to differences in timing between recognition
of income, receipt of cash and sale of goods.
In order to provide greater clarity on the
accounting for commercial income –
including those instances where judgement
and estimates are used – we are increasing
our disclosure to show the effects of
commercial income on the following balance
sheet accounts:
• Inventories: The carrying value of
inventories is reduced by the value of
commercial income which will be earned
when the associated stock is sold.
• Trade and other receivables: Amounts
that have been invoiced to suppliers but not
yet received are included within trade and
other receivables.
• Accrued income: Any amounts earned but
not yet invoiced to suppliers are included in
accrued income. The majority relates to
amounts outstanding under large supplier
agreements or promotional allowances that
run up to the period end. The balance
primarily reflects amounts due under
long-term agreements for volume rebates.
• Trade payables: Most agreements with
suppliers enable income earned to be offset
against amounts owed. These balances are
included as a deduction within trade payables.
• Accruals and deferred income: Any
amounts received in advance of income
being earned are included in accruals and
deferred income.
The impact of commercial income on each of
these accounts for the years to 28 February
2015 and 22 February 2014 is shown below:
2015
Group
£m
UK
£m
2014
Group
£m
UK
£m
Current Assets
Inventories (93) (67) (82) (52)
Trade and other receivables
–Other receivables 97 54 89 22
–Accrued income 158 117 230 173
Current Liabilities
Trade and other payables
–Trade payables 347 173 547 368
–Accruals and deferred income (53) (53) ––
17Tesco PLC Annual Report and Financial Statements 2015
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