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Tesco Annual Report 2010
Published by Tesco plc, 2014-10-11 06:35:24
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Note 16 Trade and other receivables continued As at 27 February 2010, trade and other receivables of £49m (2009 – £45m) were past due and impaired. The amount of the provision was £47m (2009 – £44m). The ageing analysis of these receivables is as follows: 2010 2009 £m £m Up to three months past due 8 3 Three to six months past due 4 3 Over six months past due 37 39 49 45 As at 27 February 2010, trade and other receivables of £115m (2009 – £97m) were past due but not impaired. The ageing analysis of these receivables is as follows: 2010 2009 £m £m Up to three months past due 97 71 Three to six months past due 10 15 Over six months past due 8 11 115 97 No receivables have been renegotiated in the current or prior year. Note 17 Loans and advances to customers Tesco Bank has loans and advances to customers. 2010 2009 £m £m Current 2,268 1,918 Non-current 1,844 1,470 4,112 3,388 The maturity of these loans and advances is as follows: 2010 2009 £m £m Repayable on demand or at short notice 1 1 Within three months 2,370 2,021 Greater than three months but less than one year 70 38 Greater than one year but less than five years 1,504 1,061 After five years 481 517 4,426 3,638 Provision for impairment of loans and advances (314) (250) 4,112 3,388 Loans and advances include amounts subject to securitisation of £1,459m (2009 – £1,468m). During 2009 the Group entered into a securitisation transaction and issued debt securities which the Group subsequently purchased. The purpose of the transaction was to allow the Group to enter into the Special Liquidity Scheme whereby it would enter into a sale and repurchase agreement acquiring Treasury Bills issued by the UK Government and using the debt securities as security. As at 27 February 2010 the Group held £500m (2009 – £588m) in respect of this transaction. The Treasury Bills do not meet the recognition criteria of IAS 39 and are not recognised on the Group Balance Sheet. Provision for impairment of loans and advances £m Acquisition through business combination* (229) Charge for the period (130) Uncollectible amounts written off 109 Recoveries of amounts previously written off (7) Financial statements Unwind of discount 7 At 28 February 2009 (250) Charge for the period (177) Uncollectible amounts written off 119 Recoveries of amounts previously written off (10) Unwind of discount 4 At 27 February 2010 (314) * Tesco Personal Finance Group Limited (trading as Tesco Bank) was acquired on 19 December 2008. Tesco PLC Annual Report and Financial Statements 2010 99
Notes to the Group financial statements continued Note 17 Loans and advances to customers continued At 27 February 2010, Tesco Bank's non-interest bearing loans were £373m (2009 – £291m). Loan impairment provisions of £314m (2009 – £250m) were held against these loans. During the year ended 27 February 2010, the gross income not recognised but which would have been recognised under the original terms of non-interest bearing loans was £29m (2009 – £25m). At 27 February 2010, loans and advances to customers of £75m (2009 – £82m) were past due but not impaired. The ageing analysis of these loans and advances is as follows: 2010 2009 £m £m Up to one month past due 55 58 One to three months past due 13 15 Over three months past due 7 9 75 82 Note 18 Loans and advances to banks and other financial assets Tesco Bank has loans and advances to banks and other financial assets with the following maturity: 2010 2009 Restated £m £m Within three months 144 1,509 Greater than three months but less than one year – 3 Greater than one year but less than five years – 29 144 1,541 There are no loans and advances to banks and other financial assets which are past due and impaired. Note 19 Cash and cash equivalents 2010 2009 £m £m Cash at bank and in hand 2,062 2,112 Short-term deposits 757 1,397 2,819 3,509 Cash of £1,314m (2009 – £1,233m) held on money market funds is classed as short-term investments. Note 20 Trade and other payables 2010 2009 Restated £m £m Trade payables 5,084 4,748 Other taxation and social security 487 334 Other payables 2,014 2,054 Amounts payable to joint ventures and associates (note 30) 42 162 Accruals and deferred income 1,815 1,367 9,442 8,665 Included in other payables are amounts of £160m (2009 – £68m) which are non-current. The impact of adopting IFRIC 13 on the 2009 opening balance sheet was to increase other payables by £38m and accruals and deferred income by £2m. Overall trade and other payables increased to £7,359m. 100 Tesco PLC Annual Report and Financial Statements 2010
Note 21 Borrowings Current 2010 2009 Maturity Restated Par value year £m £m Bank loans and overdrafts – – 575 3,014 Loan from joint ventures (note 30) – – 23 20 5.125% MTN £192m 2009 – 198 6.625% MTN £150m 2010 158 – 4.75% MTN €750m 2010 704 – Other MTNs – – 24 192 Finance leases (note 35) – – 45 47 1,529 3,471 Non-current Maturity 2010 2009 Par value year £m £m Finance leases (note 35) – – 164 196 6.625% MTN £150m 2010 – 154 4.75% MTN €750m 2010 – 689 3.875% MTN €500m 2011 479 476 5.625% MTN €1,500m 2012 1,375 1,362 LIBOR + 1.33% Bond – Tesco Bank £225m 2012 224 225 5% MTN £600m 2014 604 592 5.125% MTN €600m 2015 539 522 (a) 4% RPI MTN £263m 2016 270 268 5.875% MTN €1,500m 2016 1,520 1,488 5.5% USD Bond $850m 2017 621 678 5.5% MTN £350m 2019 351 351 6.125% MTN £900m 2022 890 901 5% MTN £515m 2023 520 515 (b) 3.322% LPI MTN £265m 2025 269 267 6% MTN £200m 2029 212 216 5.5% MTN £200m 2033 210 216 1.982% RPI MTN £221m 2036 222 221 (c) 6.15% USD Bond $1,150m 2037 834 977 5% MTN £300m 2042 306 306 5.125% MTN €600m 2047 587 628 5.2% MTN £500m 2057 500 500 Other MTNs – – 267 285 Other loans – – 780 358 11,744 12,391 (a) The 4% RPI MTN is redeemable at par, indexed for increases in the Retail Price Index (RPI) over the life of the MTN. (b) The 3.322% LPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%. (c) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. Borrowing facilities The Group has the following undrawn committed facilities available at 27 February 2010, in respect of which all conditions precedent had been met as at that date: 2010 2009 £m £m Expiring within one year – 100 Expiring between one and two years 1,000 – Expiring in more than two years 1,600 2,600 2,600 2,700 All facilities incur commitment fees at market rates and would provide funding at floating rates. Financial statements Tesco PLC Annual Report and Financial Statements 2010 101
Notes to the Group financial statements continued Note 22 Financial instruments Derivatives are used to hedge exposure to market risks and those that are held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes and the Group's hedging policies are further described below. Finance income of £20m (2009 – finance costs of £30m) resulted from hedge ineffectiveness. Fair value hedges The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt issued by the Group. 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 asset or liability that are attributable to the hedged risk. The gain or loss on the hedging instrument and hedged item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective interest rate method. A loss of £65m on hedging instruments was recognised during the year, offset by a gain of £85m on hedged items (2009 – a gain of £1,197m on hedging instruments was offset by a loss of £1,227m on hedged items). Cash flow hedges The Group uses forward foreign currency contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Where these contracts qualify for hedge accounting, mark-to-market gains and losses are deferred in equity. The hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows hedged will occur and will affect the Group Income Statement within one year of the balance sheet date. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is recognised in the Group Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Group Income Statement. Net investment hedges The Group uses forward foreign currency contracts, currency denominated borrowings and currency swaps to hedge the exposure of a proportion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates. The Group has a South Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Samsung Tesco Co. Limited. This liability has been designated as a net investment hedge of a proportion of the assets of Samsung Tesco Co. Limited. Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation. Financial instruments not qualifying for hedge accounting The Group's policy is not to use derivatives for trading purposes, however, some derivatives do not qualify for hedge accounting, or are specifically not designated as a hedge where gains and losses on the hedging instrument and the hedged item offset in the Group Income Statement. These instruments include caps, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs. The Group has a liability relating to the future purchase of the minority shareholding of its subsidiary, dunnhumby Limited. Changes in the value of the liability are recognised immediately in the Group Income Statement within finance income or costs. The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows: 2010 2009 Asset Liability Asset Liability £m £m £m £m Current 224 (146) 382 (525) Non-current 1,250 (776) 1,478 (302) 1,474 (922) 1,860 (827) 102 Tesco PLC Annual Report and Financial Statements 2010
Note 22 Financial instruments continued The fair value and notional amounts of derivatives analysed by hedge type are as follows: 2010 2009 Asset Liability Asset Liability Fair value Notional Fair value Notional Fair value Notional Fair value Notional £m £m £m £m £m £m £m £m Fair value hedges Interest rate swaps and similar instruments 10 685 (88) 2,304 6 307 (67) 2,123 Cross currency swaps 1,130 4,513 (45) 259 1,219 3,957 (39) 825 Cash flow hedges Interest rate swaps and similar instruments – – (40) 555 – 100 (66) 400 Cross currency swaps 129 315 (205) 1,064 227 357 (1) 171 Forward foreign currency contracts 19 483 (15) 600 101 1,762 (24) 348 Net investment hedges Forward foreign currency contracts 19 244 (172) 1,037 92 2,623 (194) 2,767 Cross currency swaps – – (30) 124 – – – – Future purchases of minority interests – – (105) – – – (167) – Derivatives not in a formal hedge relationship Interest rate swaps and similar instruments 140 1,140 (114) 1,350 1 774 (35) 3,740 Cross currency swaps 2 204 (25) 533 25 411 (47) 639 Forward foreign currency contracts 25 635 (42) 1,254 189 2,784 (154) 2,767 Future purchases of minority interests – – (41) – – – (33) – Total 1,474 8,219 (922) 9,080 1,860 13,075 (827) 13,780 The carrying value and fair value of financial assets and liabilities are as follows: 2010 2009 Carrying Fair Carrying Fair value value value value Restated Restated £m £m £m £m Assets Cash and cash equivalents 2,819 2,819 3,509 3,509 Loans and advances to customers – Tesco Bank 4,112 4,325 3,388 3,388 Loans and advances to banks and other financial assets – Tesco Bank 144 144 1,541 1,541 Short-term investments 1,314 1,314 1,233 1,233 Other investments – Tesco Bank 863 848 259 259 Joint venture loan receivables (note 30) 309 309 262 262 Derivative financial assets: Interest rate swaps and similar instruments 150 150 7 7 Cross currency swaps 1,261 1,261 1,471 1,471 Forward foreign currency contracts 63 63 382 382 Total financial assets 11,035 11,233 12,052 12,052 Liabilities Short-term borrowings: Amortised cost (771) (770) (3,191) (3,190) Bonds in fair value hedge relationships (713) (683) (233) (223) Long-term borrowings: Amortised cost (5,513) (5,617) (5,248) (5,028) Bonds in fair value hedge relationships (6,067) (5,992) (6,947) (6,147) Finance leases (Group as lessee – note 35) (209) (209) (243) (243) Customer deposits – Tesco Bank (4,357) (4,357) (4,538) (4,538) Deposits by banks – Tesco Bank (30) (30) (24) (24) Derivative and other financial liabilities: Interest rate swaps and similar instruments (242) (242) (168) (168) Financial statements Cross currency swaps (305) (305) (87) (87) Forward foreign currency contracts (229) (229) (372) (372) Future purchases of minority interests (146) (146) (200) (200) Total financial liabilities (18,582) (18,580) (21,251) (20,220) Total (7,547) (7,347) (9,199) (8,168) Tesco PLC Annual Report and Financial Statements 2010 103
Notes to the Group financial statements continued Note 22 Financial instruments continued The fair values of financial instruments have been determined by reference to prices available from the markets on which the instruments are traded. The fair value of all other items have been calculated by discounting expected future cash flows at prevailing interest rates. The above table excludes other receivables/payables, which have fair values equal to their carrying values. Financial assets and liabilities by category The accounting classifications of each class of financial assets and liabilities as at 27 February 2010 and 28 February 2009 are as follows: Loans and receivables/ Fair value Available- other financial through for-sale liabilities profit or loss Total At 27 February 2010 £m £m £m £m Cash and cash equivalents – 2,819 – 2,819 Loans and advances to customers – Tesco Bank – 4,112 – 4,112 Loans and advances to banks and other financial assets – Tesco Bank – 144 – 144 Short-term investments – 1,314 – 1,314 Other investments – Tesco Bank 604 259 – 863 Joint venture loan receivables (note 30) – 309 – 309 Customer deposits – Tesco Bank – (4,357) – (4,357) Deposits by banks – Tesco Bank – (30) – (30) Short-term borrowings – (1,484) – (1,484) Long-term borrowings – (11,580) – (11,580) Finance leases (Group as lessee – note 35) – (209) – (209) Derivative financial instruments: Interest rate swaps and similar instruments – – (92) (92) Cross currency swaps – – 956 956 Forward foreign currency contracts – – (166) (166) Future purchases of minority interests – – (146) (146) 604 (8,703) 552 (7,547) Loans and receivables/ Fair value other financial through liabilities profit or loss Total Restated Restated Restated At 28 February 2009 £m £m £m Cash and cash equivalents 3,509 – 3,509 Loans and advances to customers – Tesco Bank 3,388 – 3,388 Loans and advances to banks and other financial assets – Tesco Bank 1,541 – 1,541 Short-term investments 1,233 – 1,233 Other investments – Tesco Bank 259 – 259 Joint venture loan receivables (note 30) 262 – 262 Customer deposits – Tesco Bank (4,538) – (4,538) Deposits by banks – Tesco Bank (24) – (24) Short-term borrowings (3,424) – (3,424) Long-term borrowings (12,195) – (12,195) Finance leases (Group as lessee – note 35) (243) – (243) Derivative financial instruments: Interest rate swaps and similar instruments – (161) (161) Cross currency swaps – 1,384 1,384 Forward foreign currency contracts – 10 10 Future purchases of minority interests – (200) (200) (10,232) 1,033 (9,199) Fair value measurement Effective from 1 March 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the Group Balance Sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: • quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); • inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and • inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). 104 Tesco PLC Annual Report and Financial Statements 2010
Note 22 Financial instruments continued The following table presents the Group's financial assets and liabilities that are measured at fair value at 27 February 2010: Level 1 Level 2 Level 3 Total £m £m £m £m Assets Available-for-sale financial assets – 604 – 604 Derivative financial instruments: Interest rate swaps and similar instruments – 150 – 150 Cross currency swaps – 1,261 – 1,261 Forward foreign currency contracts – 63 – 63 Total assets – 2,078 – 2,078 Liabilities Derivative financial instruments: Interest rate swaps and similar instruments – (242) – (242) Cross currency swaps – (305) – (305) Forward foreign currency contracts – (229) – (229) Future purchases of minority interests – – (146) (146) Total liabilities – (776) (146) (922) Total – 1,302 (146) (1,156) The following table presents the changes in Level 3 instruments for the year ending 27 February 2010: £m Opening balance (200) Losses recognised in finance costs in the Group Income Statement (26) Losses recognised in reserves (11) Cash flow 91 Closing balance (146) Note 23 Financial risk factors The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions, and the availability of funds to meet business needs. These risks are managed as described below. The Group Balance Sheet position at 27 February 2010 is representative of the position throughout the year. Risk management is carried out by a central treasury department under policies approved by the Board of Directors. The Board provides written principles for risk management, as described in the Business Review on pages 41 to 44. Interest rate risk Interest rate risk arises from long-term borrowings. Debt issued at variable rates exposes the Group to cash flow interest rate risk. Debt issued at fixed rates exposes the Group to fair value risk. Our interest rate management policy is explained on page 44. The Group has RPI debt where the principal is indexed to increases in the RPI index. RPI debt is treated as floating rate debt. The Group also has LPI debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed rate debt. For interest rate risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors. Financial statements Tesco PLC Annual Report and Financial Statements 2010 105
Notes to the Group financial statements continued Note 23 Financial risk factors continued During 2010 and 2009, net debt was managed using derivative instruments to hedge interest rate risk as follows: 2010 2009 Fixed Floating Total Fixed Floating Total Restated Restated Restated £m £m £m £m £m £m Cash and cash equivalents – 2,819 2,819 – 3,509 3,509 Loans and advances to customers – Tesco Bank 1,827 2,285 4,112 3,388 – 3,388 Loans and advances to banks and other financial assets – Tesco Bank 144 – 144 – 1,541 1,541 Short-term investments – 1,314 1,314 – 1,233 1,233 Other investments – Tesco Bank 581 282 863 259 – 259 Joint venture loan receivables – 309 309 – 262 262 Finance leases (83) (126) (209) (84) (159) (243) Bank and other borrowings (11,806) (1,258) (13,064) (11,540) (4,079) (15,619) Customer deposits – Tesco Bank – (4,357) (4,357) – (4,538) (4,538) Deposits by banks – Tesco Bank (30) – (30) – (24) (24) Future purchases of minority interests (146) – (146) (200) – (200) Derivative effect: Interest rate swaps (2,215) 2,215 – (415) 415 – Cross currency swaps 6,677 (6,677) – 4,524 (4,524) – Caps and collars 120 (120) – 774 (774) – Total (4,931) (3,314) (8,245) (3,294) (7,138) (10,432) Credit risk Credit risk arises from cash and cash equivalents, trade and other receivables, customer deposits, financial instruments and deposits with banks and financial institutions. The Group policy on credit risk is described on page 44. The counterparty exposure under derivative contracts is £1,474m (2009 – £1,860m). The Group policy is to transact derivatives only with counterparties rated at least A1 by Moody's. The Group considers its maximum credit risk to be £11.0bn (2009 – £12.1bn), being the Group's total financial assets. For credit risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors on page 109. Liquidity risk Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.6bn (2009 – £2.7bn), which mature between 2011 and 2014. The Group has a European Medium Term Note programme of £15.0bn, of which £10.6bn was in issue at 27 February 2010 (2009 – £11.0bn), plus a Euro Commercial Paper programme of £2.0bn, none of which was in issue at 27 February 2010 (2009 – £1.6bn), and a US Commercial Paper programme of $4.0bn, none of which was in issue at 27 February 2010 (2009 – £nil). For liquidity risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors on page 109. 106 Tesco PLC Annual Report and Financial Statements 2010
Note 23 Financial risk factors continued The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The potential cash outflow of £15.6bn is considered acceptable as it is offset by financial assets and trade receivables of £12.9bn (2009 – £16.9bn offset by financial assets and trade receivables of £13.9bn). The undiscounted cash flows will differ from both the carrying values and fair value. Floating rate interest is estimated using the prevailing rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at the balance sheet date. For index-linked liabilities, inflation is estimated at 3% for the life of the liability. Due Due Due Due Due between between between between Due within 1 and 2 2 and 3 3 and 4 4 and 5 beyond 1 year years years years years 5 years At 27 February 2010 £m £m £m £m £m £m Non-derivative financial liabilities Bank and other borrowings (1,484) (1,078) (1,615) (845) (637) (7,267) Interest payments on borrowings (554) (518) (491) (405) (370) (4,605) Customer deposits – Tesco Bank (4,357) – – – – – Deposits by banks – Tesco Bank (30) – – – – – Finance leases (49) (47) (33) (11) (10) (178) Trade and other payables (9,282) (56) (26) (4) (7) (67) Derivative and other financial liabilities Net settled derivative contracts – receipts 71 50 50 48 21 19 Net settled derivative contracts – payments (164) (119) (59) (35) (56) (695) Gross settled derivative contracts – receipts 1,966 1,747 757 867 759 5,273 Gross settled derivative contracts – payments (1,703) (1,362) (689) (866) (653) (3,792) Future purchases of minority interests – (131) (25) – – – Total (15,586) (1,514) (2,131) (1,251) (953) (11,312) Due Due Due Due Due between between between between Due within 1 and 2 2 and 3 3 and 4 4 and 5 beyond 1 year years years years years 5 years At 28 February 2009 (restated) £m £m £m £m £m £m Non-derivative financial liabilities Bank and other borrowings (3,028) (971) (873) (1,931) (225) (7,943) Interest payments on borrowings (560) (549) (514) (486) (411) (5,045) Customer deposits – Tesco Bank (4,538) – – – – – Deposits by banks – Tesco Bank (24) – – – – – Finance leases (55) (51) (48) (32) (9) (172) Trade and other payables (8,522) (34) (5) (2) (4) (23) Derivative and other financial liabilities Net settled derivative contracts – receipts 104 17 9 5 4 1 Net settled derivative contracts – payments (245) (30) (19) (23) (13) (112) Gross settled derivative contracts – receipts 4,657 1,186 1,247 404 708 5,707 Gross settled derivative contracts – payments (4,577) (957) (1,053) (313) (671) (4,652) Future purchases of minority interests (93) – (87) (20) – – Total (16,881) (1,389) (1,343) (2,398) (621) (12,239) Foreign exchange risk The Group is exposed to foreign exchange risk principally via: • Transactional exposure, from the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Transactional exposures that could significantly impact the Group Income Statement are hedged. These exposures are hedged via forward foreign currency contracts which are designated as cash flow hedges. The notional and fair value of these contracts is shown in note 22. • Net investment exposure, from the value of net investments outside the UK. The Group hedges a proportion of its investments in its international subsidiaries via foreign currency transactions and borrowings in matching currencies, which are formally designated as net investment hedges. • Loans to non-UK subsidiaries. These are hedged via foreign currency transactions and borrowings in matching currencies, which are not formally designated as hedges, as gains and losses on hedges and hedged loans will naturally offset. Financial statements Tesco PLC Annual Report and Financial Statements 2010 107
Notes to the Group financial statements continued Note 23 Financial risk factors continued The impact on Group financial statements from foreign currency volatility is shown in the sensitivity analysis below. Sensitivity analysis The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment obligations and on the retranslation of overseas net assets as required by IAS 21 'The Effects of Changes in Foreign Exchange Rates'. However, it does include the foreign exchange sensitivity resulting from all local entity non-functional currency financial instruments. The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 27 February 2010. It should be noted that the sensitivity analysis reflects the impact on income and equity due to all financial instruments held at the balance sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates. The following assumptions were made in calculating the sensitivity analysis: • the sensitivity of interest payable to movements in interest rates is calculated on net floating rate debt, deposits and derivative instruments with no sensitivity assumed for RPI-linked debt; • changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group Income Statement and equity due to compensating adjustments in the carrying value of debt; • changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in equity; • changes in the carrying value of derivative financial instruments not designated as hedging instruments only affect the Group Income Statement; • all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group Income Statement; • debt with a maturity below one year is floating rate for the interest payable part of the calculation; and • the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations. Using the above assumptions, the following table shows the illustrative effect on the Group Income Statement and equity that would result from changes in UK interest rates, and in exchange rates: 2010 2009 Income Equity Income Equity gain/(loss) gain/(loss) gain/(loss) gain/(loss) £m £m £m £m 1% increase in GBP interest rates (2009 – 1%) (38) – (59) – 15% appreciation of the Euro (2009 – 25%) (13) (43) (22) (22) 10% appreciation of the South Korean Won (2009 – 20%) – (82) (1) (222) 25% appreciation of the US Dollar (2009 – 25%) (1) (8) (11) 218 25% appreciation of the Thai Baht (2009 – 25%) – (1) – (1) 10% appreciation of the Czech Koruna (2009 – 25%) – (31) – (204) 5% appreciation of the Polish Zloty (2009 – 15%) – – 14 – A decrease in interest rates and a depreciation of foreign currencies would have the opposite effect to the impact in the table above. The impact on equity from changing exchange rates results principally from foreign currency deals used as net investment hedges. The impact on equity will largely be offset by the revaluation in equity of the hedged assets. For changes in the USD/GBP exchange rate, the impact on equity results principally from forward purchases of US Dollars as cash flow hedges. Capital risk The Group's objectives when managing capital (defined as net debt plus equity) are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while maintaining a strong credit rating and headroom whilst optimising return to shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it, in light of changes to economic conditions and the strategic objectives of the Group. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them or issue new shares. In April 2006, the Group outlined its plan to release cash from its property assets, via a sequence of property joint ventures and other transactions, and return significant value to shareholders, either through enhanced dividends or share buy-backs. The target for the value of share buy-backs was increased from £1.5bn to £3.0bn over a five-year period from April 2007. Whilst the Group continued with the policy at the beginning of 2009, it subsequently used the proceeds from property divestment to pay down debt, following the two major acquisitions in 2009 (Homever and Tesco Bank). During 2009 the Group purchased and cancelled £100m ordinary shares. In the financial year 2010 the Group continued to use the proceeds from the sale of property to pay down debt, which it expects to continue in 2011. The policy for debt is to ensure a smooth debt maturity profile with the objective of ensuring continuity of funding. This policy continued during the current year with bonds redeemed of £390m (2009 – £524m) and new bonds issued totalling £nil (2009 – £4,901m). The Group borrows centrally and locally, using a variety of capital market issues and borrowing facilities to meet the requirements of each local business. 108 Tesco PLC Annual Report and Financial Statements 2010
Note 23 Financial risk factors continued Tesco Bank Interest rate risk Interest rate risk arises where assets and liabilities in Tesco Bank's banking activities have different repricing dates. Tesco Bank policy seeks to minimise the sensitivity of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to long term are measured and controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net interest income sensitivity over 12 months to a 1% parallel movement in interest rates. Tesco Bank also use value at risk (VaR) for risk management purposes with a time horizon of one trading day and a confidence interval of 95%. Interest rate risk is managed using interest rate swaps as the main hedging instrument. Credit risk Credit risk is the probability of customers and counterparties failing to meet their obligations to Tesco Bank and arises principally from Tesco Bank's lending activities but also from other transactions involving on and off-balance sheet instruments. Limits have been established for all counterparties based on their respective credit ratings. The limits and proposed counterparties are reviewed and approved by the Risk Management Committee (RMC) of Tesco Bank. Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned credit ratings, based on various credit grading models that reflect the probability of default. Liquidity risk Liquidity risk is managed on a consolidated basis within Tesco Bank's banking activities and adheres to the liquidity requirements set by the Financial Services Authority (FSA) from time to time. To meet regulatory requirements a diversified portfolio of high quality liquid and marketable assets is maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis. Tesco Bank has credit facilities sufficient to meet all foreseeable outflow requirements as they fall due and its liquidity risk is further mitigated by its well diversified retail deposit base. Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of the asset quality grades are as follows: At 27 February 2010 and 28 February 2009 Annual probability of default Minimum Midpoint Maximum S&P Asset quality grade % % % equivalent AQ1 0.00 0.10 0.20 AAA to BBB- AQ2 0.21 0.40 0.60 BB+ to BB AQ3 0.61 1.05 1.50 BB- to B+ AQ4 1.51 3.25 5.00 B+ to B AQ5 5.01 52.50 100.00 B and below Accruing Non- Impairment AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total At 27 February 2010 £m £m £m £m £m £m £m £m £m Assets: Other investments 863 – – – – – – – 863 Loans and advances to customers 501 381 762 1,495 838 76 373 (314) 4,112 Loans and advances to banks and other financial assets 144 – – – – – – – 144 Total assets 1,508 381 762 1,495 838 76 373 (314) 5,119 Commitments (note 33) 3,926 1,329 573 452 184 – – – 6,464 Total off balance sheet 3,926 1,329 573 452 184 – – – 6,464 Accruing Non- Impairment AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total At 28 February 2009 (restated) £m £m £m £m £m £m £m £m £m Assets: Other investments 259 – – – – – – – 259 Loans and advances to customers 352 652 828 870 563 82 291 (250) 3,388 Loans and advances to banks and other financial assets 1,541 – – – – – – – 1,541 Total assets 2,152 652 828 870 563 82 291 (250) 5,188 Commitments (note 33) 3,103 1,451 744 305 129 – – – 5,732 Financial statements Total off balance sheet 3,103 1,451 744 305 129 – – – 5,732 Tesco PLC Annual Report and Financial Statements 2010 109
Notes to the Group financial statements continued Note 23 Financial risk factors continued Insurance risk Tesco Bank is exposed to insurance risk indirectly through its profit sharing commission arrangement with The Royal Bank of Scotland Group PLC. Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations at the time of underwriting. The frequency and severity of claims and the sources of uncertainty for the key classes that Tesco Bank is exposed to are as follows: Motor insurance Claims experience is quite variable, due to a wide range of factors, but the principal ones are age, gender and driving experience, type and nature of vehicle, use of vehicle and area. There are many sources of uncertainty that will affect Tesco Bank's experience under motor insurance including operational risk, reserving risk, premium rates not matching claims inflation rates, the weather, the social, economic and legislative environment and reinsurance failure risk. Property insurance The major causes of claims for property insurance are theft, flood, escape of water, fire, storm, subsidence and various types of accidental damage. The major source of uncertainty is the volatility of weather. Note 24 Customer deposits 2010 2009 £m £m Customer deposits 4,357 4,538 Customer deposits are recorded at amortised cost and are repayable on demand. Note 25 Deposits by banks The Group has deposits by banks with the following maturity: 2010 2009 £m £m Within three months 30 24 Deposits by banks are recorded at amortised cost. Note 26 Provisions Property Other provisions provision Total £m £m £m At 23 February 2008 27 – 27 Foreign currency translation 3 – 3 Acquisitions through business combinations (restated) 93 99 192 Amount utilised in the year (12) – (12) At 28 February 2009 (restated) 111 99 210 Foreign currency translation 12 – 12 Amount provided in the year – 1 1 Amount utilised in the year (12) – (12) At 27 February 2010 111 100 211 Property provisions comprise future rents payable net of rents receivable on onerous and vacant property leases, provisions for terminal dilapidations and provisions for future rents above market value on unprofitable stores. The majority of the provision is expected to be utilised over the period to 2020. The other provision balance relates to a provision for customer redress in respect of potential customer complaints. This is likely to be utilised over several years. The balances are analysed as follows: 2010 2009 Restated £m £m Current 39 10 Non-current 172 200 211 210 110 Tesco PLC Annual Report and Financial Statements 2010
Note 27 Share-based payments The total Group Income Statement charge for the year recognised in respect of share-based payments is £300m (2009 restated – £246m), which is made up of share option schemes and share bonus payments. Of this amount £241m (2009 restated – £208m) will be equity-settled and £59m (2009 – £38m) cash-settled. a) Share option schemes The Company had nine share option schemes in operation during the year, all of which are equity-settled schemes: i) The Savings-related Share Option Scheme (1981) permits the grant to employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between £5 and £250 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date. ii) The Irish Savings-related Share Option Scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between €12 and €320 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date. iii) The Approved Executive Share Option Scheme (1994) was adopted on 17 October 1994. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme. iv) The Unapproved Executive Share Option Scheme (1996) was adopted on 7 June 1996. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme. v) The International Executive Share Option Scheme (1994) was adopted on 20 May 1994. This scheme permits the grant to selected non-UK executives of options to acquire ordinary shares on substantially the same basis as their UK counterparts. The exercise of options granted under this scheme will normally be conditional on the achievement of a specified performance target related to the growth in earnings per share over a three- year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme. vi) The Executive Incentive Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant for nil consideration. vii) The Performance Share Plan (2004) was adopted on 5 July 2004 and amended on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options granted before 29 June 2007 are normally exercisable between four and ten years from the date of grant for nil consideration. Options granted after 29 June 2007 are normally exercisable between three and ten years from the date of grant for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three-year period. viii) The Discretionary Share Option Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of approved, unapproved and international options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant at a price not less than the middle-market quotation or average middle-market quotations of an ordinary share for the dealing day or three dealing days preceding the date of grant. The exercise of options will normally be conditional on the achievement of a specified performance target related to the annual percentage growth in earnings per share over a three-year period. There will be no discounted options granted under this scheme. ix) The Group New Business Incentive Plan (2007) was adopted on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options will normally vest in four tranches: four, five, six and seven years after the date of grant and will be exercisable for up to two years from the vesting dates for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over the seven-year plan. The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP): For the year ended 27 February 2010 Savings-related Irish savings-related Approved Unapproved International executive Nil cost share option scheme share option scheme share option scheme share option scheme share option scheme share options Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 28 February 2009 142,810,097 306.21 5,418,903 315.67 15,868,920 350.56 81,299,884 339.97 43,898,205 366.61 14,323,708 0.00 Granted 38,117,516 328.00 1,752,363 328.00 2,844,857 338.40 26,542,534 338.42 19,097,981 338.82 3,093,147 0.00 Forfeited (9,476,452) 315.43 (873,617) 314.96 (581,769) 409.75 (3,213,394) 409.29 (2,147,644) 403.74 (2,299,256) 0.00 Exercised (33,216,641) 257.20 (842,581) 270.60 (3,581,117) 286.54 (18,721,402) 273.16 (5,967,794) 291.66 (5,932,144) 0.00 Outstanding at 27 February 2010 138,234,520 323.37 5,455,068 326.70 14,550,891 361.57 85,907,622 351.46 54,880,748 363.64 9,185,455 0.00 Exercisable as at 27 February Financial statements 2010 6,287,764 266.10 369,370 282.75 5,868,560 282.29 32,430,807 280.29 15,277,598 289.05 – – Exercise price 195.00 to 195.00 to 197.50 to 197.50 to 197.50 to range (pence) 307.00 307.00 388.75 415.50 318.60 – Weighted average remaining contractual life (years) 0.18 0.15 4.26 4.53 4.75 – Tesco PLC Annual Report and Financial Statements 2010 111
Notes to the Group financial statements continued Note 27 Share-based payments continued For the year ended 28 February 2009 Savings-related Irish savings-related Approved Unapproved International executive Nil cost share option scheme share option scheme share option scheme share option scheme share option scheme share options Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 23 February 2008 153,361,820 281.40 5,083,009 300.71 16,229,846 324.45 77,043,605 307.00 36,970,259 333.22 10,838,238 0.00 Granted 38,531,375 311.00 1,642,089 311.00 3,308,213 426.79 18,297,370 426.82 13,664,591 422.88 3,591,855 0.00 Forfeited (10,351,962) 299.64 (485,512) 293.84 (901,163) 384.34 (2,768,871) 388.51 (3,268,614) 327.65 – – Exercised (38,731,136) 214.48 (820,683) 226.80 (2,767,976) 277.55 (11,272,220) 243.72 (3,468,031) 269.07 (106,385) 0.00 Outstanding at 28 February 2009 142,810,097 306.21 5,418,903 315.67 15,868,920 350.56 81,299,884 339.97 43,898,205 366.61 14,323,708 0.00 Exercisable as at 28 February 2009 6,553,484 220.72 398,093 233.61 5,574,827 259.54 36,205,357 260.09 12,340,929 268.72 2,048,225 0.00 Exercise price 159.00 to 159.00 to 197.50 to 164.00 to 176.70 to range (pence) 248.00 248.00 313.50 313.50 312.75 0.00 Weighted average remaining contractual life (years) 0.18 0.15 3.99 4.63 4.76 5.83 Share options were exercised on a regular basis throughout the year. The average share price during the year ended 27 February 2010 was 380.05p (2009 – 372.06p). The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise. 2010 2009 Savings- Savings- related Executive related Executive share share Nil cost share share Nil cost option option option option option option schemes schemes schemes schemes schemes schemes Expected dividend yield (%) 3.6% 3.6-3.9% 0.0% 3.3% 3.3% 0.0% Expected volatility (%) 26-31% 25% 25% 25-30% 25% 25% Risk-free interest rate (%) 2.0-2.8% 2.8-3.3% 2.9% 3.2-3.8% 3.2-4.9% 4.6-4.9% Expected life of option (years) 3 or 5 6 6 3 or 5 6 6 Weighted average fair value of options granted (pence) 86.74 64.24 374.00 89.28 93.90 418.09 Probability of forfeiture (%) 14-16% 10% 0% 20-25% 10% 0% Share price (pence) 378.00 345.23 374.00 361.00 425.20 418.09 Weighted average exercise price (pence) 328.00 338.58 0.00 311.00 425.20 0.00 Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group's option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company's share price, the Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option. b) Share bonus schemes Eligible UK employees are able to participate in Shares in Success, an all-employee profit-sharing scheme. Each year, shares are awarded as a percentage of earnings up to a statutory maximum of £3,000. Eligible Republic of Ireland employees are able to participate in a Share Bonus Scheme, an all- employee profit sharing scheme. Each year, employees receive a percentage of their earnings as either cash or shares. Senior management also participate in performance-related bonus schemes. The amount paid to employees is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to eligible employees who have completed a required service period and depend on the achievement of corporate targets. The accrued cash element of the bonus at the balance sheet date is £52m (2009 – £33m). Selected senior management participate in the senior management Performance Share Plan. Awards made under this plan will normally vest three years after the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three year performance period. Senior management in the US business also participate in the US Long-Term Incentive Plan (2007) which was adopted on 29 June 2007. The awards made under this Plan will normally vest in four tranches: four, five, six and seven years after the date of award, for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed in the US business over the seven-year plan. 112 Tesco PLC Annual Report and Financial Statements 2010
Note 27 Share-based payments continued The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors' Remuneration Report. The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value except for awards under the US Long-Term Incentive Plan. The number and weighted average fair value (WAFV) of share bonuses awarded during the period were: 2010 2009 Shares WAFV Shares WAFV number pence number pence Shares in Success 28,661,004 349.66 21,295,232 431.05 Executive Incentive Scheme 13,731,567 355.51 10,996,677 415.68 Performance Share Plan 2,120,058 375.37 2,123,237 353.76 US Long-Term Incentive Plan 80,622 482.00 673,716 403.80 Note 28 Post-employment benefits Pensions The Group operates a variety of post-employment benefit arrangements, covering both funded defined contribution and funded and unfunded defined benefit schemes. The most significant of these are the funded defined benefit pension schemes for the Group's employees in the UK and the Republic of Ireland. Defined contribution plans The contributions payable for defined contribution schemes of £12m (2009 – £11m) have been fully expensed against profits in the current year. Defined benefit plans United Kingdom The principal plan within the Group is the Tesco PLC Pension Scheme, which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by trustees. Towers Watson Limited, an independent actuary, carried out the latest triennial actuarial assessment of the scheme as at 31 March 2008, using the projected unit method. At the date of the last actuarial valuation the actuarial deficit was £275m. The market value of the schemes' assets was £3,987m and these assets represented 94% of the benefits that had accrued to members, after allowing for expected increases in earnings and pensions in payment. During the year, the One Stop Senior Executive Pension Scheme was merged into the Tesco PLC Pension Scheme. As the One Stop Scheme was already part of the Group there has been no impact on the overall disclosures. The One Stop Scheme had a net liability of £4.6m at 28 February 2009. Overseas The most significant overseas scheme is the funded defined benefit pension scheme which operates in the Republic of Ireland. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme as at 1 April 2007. The valuations used for IAS 19 have been based on the most recent actuarial valuations and updated by Towers Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 27 February 2010. The schemes' assets are stated at their market values as at 27 February 2010. Towers Watson Limited have updated the most recent Republic of Ireland valuation. The liabilities relating to retirement healthcare benefits have also been determined in accordance with IAS 19, and are incorporated in the following tables. Principal assumptions The valuations used have been based on the most recent actuarial valuations and updated by Towers Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 27 February 2010. The major assumptions, on a weighted average basis, used by the actuaries were as follows: 2010 2009 % % Rate of increase in salaries 3.6 3.7 Rate of increase in pensions in payment* 3.4 3.1 Rate of increase in deferred pensions* 3.6 3.2 Rate of increase in career average benefits 3.6 3.2 Discount rate 5.9 6.5 Price inflation 3.6 3.2 Financial statements * In excess of any Guaranteed Minimum Pension (GMP) element. The main financial assumption is the real discount rate (the excess of the discount rate over the rate of price inflation). If this assumption increased/ decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £140m and the annual UK current service cost would decrease/increase by approximately £17m. Tesco PLC Annual Report and Financial Statements 2010 113
Notes to the Group financial statements continued Note 28 Post-employment benefits continued UK mortality assumptions The Company conducts analysis of mortality trends under the Tesco PLC Pension Scheme in the UK as part of the triennial actuarial valuation of the Scheme. At the latest triennial actuarial valuation as at 31 March 2008, the following assumptions were adopted for funding purposes: Base tables: PMA92C00 for male members with cohort improvements to 2000 and members taken to be one year younger than actual age. PFA92C00 for female members with cohort improvements to 2000 and members taken to be half a year older than actual age. These assumptions were used for the calculation of the pension liability as at 27 February 2010 for the main UK scheme. As at 27 February 2010, the mortality assumptions have been strengthened. The base tables have been updated in line with medium cohort projections with a minimum improvement of 1% per annum from 31 March 2008 to 27 February 2010. In addition, the allowance for future mortality improvements has been changed to incorporate medium cohort projections with a minimum improvement of 1% per annum. The following table illustrates the expectation of life of an average member retiring at age 65 at the balance sheet date and a member reaching age 65 at the same date +25 years: 2010 2009 in years in years Retiring at Reporting date at age 65: Male 21.6 21.5 Female 23.4 23.3 Retiring at Reporting date +25 years at age 65: Male 24.0 23.9 Female 25.9 25.8 Rates of return on scheme assets The assets in the defined benefit pension schemes and the expected nominal rates of return were: 2010 2009 Long-term Market Long-term Market rate of return value rate of return value % £m % £m Equities 8.7 2,521 8.9 1,482 Bonds 5.1 1,233 5.5 1,080 Property 7.0 343 7.3 342 Other (alternative assets) 8.7 484 8.9 383 Cash 4.1 115 3.7 133 Total market value of assets 4,696 3,420 The expected rate of return on assets is a weighted average based on the actual plan assets held and the respective returns expected on the separate asset classes. The expected rate of return on equities and cash have both been set having regard to expected returns over the medium term, as calculated by the Company's independent actuary. The expected rate of return on bonds was measured directly from actual yields for gilts and corporate bond stocks. The above rate takes into account the actual mix of UK gilts, UK corporate bonds and overseas bonds held at the balance sheet date. Movement in pension deficit during the year Changes in the fair value of defined benefit pension plan assets are as follows: 2010 2009 £m £m Opening fair value of plan assets 3,420 4,089 Expected return 265 338 Actuarial gains/(losses) 733 (1,270) Contributions by employer 415 376 Actual member contributions 9 8 Foreign currency translation (2) 11 Benefits paid (144) (132) Closing fair value of plan assets 4,696 3,420 114 Tesco PLC Annual Report and Financial Statements 2010
Note 28 Post-employment benefits continued Changes in the present value of defined benefit obligations are as follows: 2010 2009 £m £m Opening defined benefit obligation (4,914) (4,927) Current service cost (391) (428) Interest cost (313) (313) (Loss)/gain on change of assumptions (1,052) 760 Experience losses (1) (117) Foreign currency translation – (13) Benefits paid 144 132 Actual member contributions (9) (8) Closing defined benefit obligation (6,536) (4,914) The amounts that have been charged to the Group Income Statement and Group Statement of Comprehensive Income for the year ended 27 February 2010 are set out below: 2010 2009 £m £m Analysis of the amount charged to operating profit: Current service cost (391) (428) Total charge to operating profit (391) (428) Analysis of the amount (charged)/credited to finance (cost)/income: Expected return on pension schemes' assets 265 338 Interest on pension schemes' liabilities (313) (313) Net pension finance (cost)/income (note 5) (48) 25 Total charge to the Group Income Statement (439) (403) Analysis of the amount recognised in the Group Statement of Comprehensive Income: Actual return less expected return on pension schemes' assets 733 (1,270) Experience losses arising on the schemes' liabilities (1) (117) Foreign currency translation (2) (2) Changes in assumptions underlying the present value of the schemes' liabilities (1,052) 760 Total loss recognised in the Group Statement of Comprehensive Income (322) (629) The cumulative losses recognised through the Group Statement of Comprehensive Income since the date of transition to IFRS are £1,323m (2009 – £1,001m). Summary of movements in deficit during the year 2010 2009 £m £m Deficit in schemes at beginning of the year (1,494) (838) Current service cost (391) (428) Other finance (cost)/income (48) 25 Contributions by employer 415 376 Foreign currency translation (2) (2) Actuarial loss (320) (627) Deficit in schemes at end of the year (1,840) (1,494) History of movements The historical movement in defined benefit pension schemes assets and liabilities and history of experience gains and losses are as follows: 2010 2009 2008 2007 2006 £m £m £m £m £m Total market value of assets 4,696 3,420 4,089 4,007 3,448 Present value of liabilities relating to unfunded schemes (54) (39) (34) (27) (17) Present value of liabilities relating to partially funded schemes (6,482) (4,875) (4,893) (4,930) (4,642) Pension deficit (1,840) (1,494) (838) (950) (1,211) Financial statements Experience gains/(losses) on scheme assets 733 (1,270) (465) 82 309 Experience losses on plan liabilities (1) (117) (20) (41) (24) Tesco PLC Annual Report and Financial Statements 2010 115
Notes to the Group financial statements continued Note 28 Post-employment benefits continued Post-employment benefits other than pensions The Company operates a scheme offering retirement healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes. The liability as at 27 February 2010 of £12m (2009 – £10m) was determined in accordance with the advice of independent actuaries. In 2010, £0.7m (2009 – £0.7m) has been charged to the Group Income Statement and £0.5m (2009 – £0.5m) of benefits were paid. A change of 1.0% in assumed healthcare cost trend rates would have the following effect: 2010 2009 £m £m Effect of a 1% increase in assumed healthcare cost trend rate on: Service and interest cost 0.1 0.1 Defined benefit obligation 1.5 1.6 Effect of a 1% decrease in assumed healthcare cost trend rate on: Service and interest cost (0.1) (0.1) Defined benefit obligation (1.5) (1.3) Expected contributions A formal actuarial valuation is carried out triennially for the scheme trustees by a professionally qualified independent actuary. The purpose of the valuation is to agree a funding plan to ensure that present and future contributions should be sufficient to meet future liabilities. The actuarial valuation of approved schemes as at 31 March 2008 has been concluded and the Group's contributions are increasing to 11.1% from 10.9%. On this basis the Group expects to make contributions of approximately £430m to defined benefit pension schemes in the year ending 27 February 2011. Note 29 Called up share capital 2010 2009 Ordinary shares of 5p each Ordinary shares of 5p each Number £m Number £m Authorised: At beginning of year 10,858,000,000 543 10,858,000,000 543 Authorised during the year 2,500,000,000 125 – – At end of year 13,358,000,000 668 10,858,000,000 543 Allotted, called up and fully paid: At beginning of year 7,895,344,018 395 7,863,498,783 393 Share options 62,329,535 3 57,060,046 3 Share bonus scheme 27,370,504 1 – – Share buy-back – – (25,214,811) (1) At end of year 7,985,044,057 399 7,895,344,018 395 During the financial year, 62 million (2009 – 57 million) shares of 5p each were issued in relation to share options for aggregate consideration of £166m (2009 – £130m). During the financial year, 27 million (2009 – nil) shares of 5p each were issued in relation to share bonus awards for consideration of £1m (2009 – £nil). During the year, the Company purchased and subsequently cancelled no shares of 5p each. During 2009, the Company purchased and subsequently cancelled 25,214,811 shares of 5p each, representing 0% of the called up share capital, at an average share price of 3.98 per share. The total consideration, including expenses, £100m. The excess of the consideration over the nominal value was charged to retained earnings. Between 28 February 2010 and 16 April 2010 options over 3,722,750 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme (2000). Between 28 February 2010 and 16 April 2010, options over 5,592,493 ordinary shares have been exercised under the terms of the Executive Share Option Schemes (1994 and 1996) and the Discretionary Share Option Plan (2004). As at 27 February 2010, the Directors were authorised to purchase up to a maximum in aggregate of 790.1 million (2009 – 784.8 million) ordinary shares. The owners of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company. Capital redemption reserve Upon cancellation of the shares purchased as part of the share buy-back, a capital redemption reserve is created representing the nominal value of the shares cancelled. This is a non-distributable reserve. 116 Tesco PLC Annual Report and Financial Statements 2010
Note 30 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below: i) Trading transactions Sales to Purchases from Amounts owed Amounts owed related parties related parties by related parties to related parties 2010 2009 2010 2009 2010 2009 2010 2009 £m £m £m £m £m £m £m £m Joint ventures 154 183 360 290 6 14 18 6 Associates – – 1,313 1,175 – – 24 156 Sales to related parties consists of services/management fees and loan interest. Purchases from related parties include £226m (2009 – £174m) of rentals payable to the Group's joint ventures, including those joint ventures formed as part of the sale and leaseback programme. Purchases from associates include £1,312m (2009 – £1,171m) of fuel purchased from Greenergy International Limited. ii) Non-trading transactions Sales to Loans to Loans from Injection of related parties related parties related parties equity funding 2010 2009 2010 2009 2010 2009 2010 2009 £m £m £m £m £m £m £m £m Joint ventures 87 465 309 262 23 20 83 – Transactions between the Group and the Group's pension plans are disclosed in note 28. A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships (Accounts) Regulations 2008 ('Regulations') apply. The accounts for those partnerships have been consolidated into these accounts pursuant to Regulation 7 of the Regulations. On 25 June 2009, the Group formed a limited partnership with Tesco Pension Trustees. The limited partnerships contain twelve stores and two distribution centres which have been sold from and leased back to the Group. The Group sold assets for net proceeds of £386m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items. On 23 September 2009, the Group formed a limited partnership with a third party. The limited partnerships contain fifteen stores and two distribution centres which have been sold from and leased back to the Group. The Group sold assets for net proceeds of £460m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items. iii) Transactions with key management personnel Only members of the Board of Directors of Tesco PLC are deemed to be key management personnel. It is the Board who have responsibility for planning, directing and controlling the activities of the Group. Key management personnel compensation is disclosed in the audited section of the Directors' Remuneration Report. Transactions on an arm's length basis with Tesco Bank during the year were as follows: Credit card and personal loan balances Saving deposit accounts Number of key Number of key management management personnel £m personnel £m At 28 February 2009 2 – 2 – At 27 February 2010 – – 4 1 During the current and prior year, there were no other material transactions or balances between the Group and its key management personnel or their close family members. Financial statements Tesco PLC Annual Report and Financial Statements 2010 117
Notes to the Group financial statements continued Note 31 Reconciliation of profit before tax to cash generated from operations 2010 2009 Restated £m £m Profit before tax 3,176 2,917 Net finance costs 314 362 Share of post-tax profits of joint ventures and associates (33) (110) Operating profit 3,457 3,169 Depreciation and amortisation 1,384 1,189 Profit arising on property-related items (377) (236) Loss arising on sale of non property-related items 5 3 Impairment of goodwill 131 – Net reversal of impairment of property, plant and equipment (26) (22) Adjustment for non-cash element of pensions charge (24) 52 Share-based payments 241 208 Decrease/(increase) in inventories 34 (95) Decrease in trade and other receivables 124 79 Increase in trade and other payables 453 724 Increase in trade and other receivables – Tesco Bank (28) – Increase in trade and other payables – Tesco Bank 75 – Increase in loans and advances to customers (724) (20) Decrease/(increase) in loans and advances to banks, other financial assets and receivables 1,397 (1,538) (Decrease)/increase in customer deposits, payables and other financial liabilities (175) 1,465 Increase in working capital 1,156 619 Cash generated from operations 5,947 4,978 The increase in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than period end exchange rates. Note 32 Analysis of changes in net debt At Tesco Bank at Other At 28 February 28 February non-cash Elimination 27 February 2009 2009 Cash flow movements of Tesco Bank 2010 Restated £m £m £m £m £m £m Cash and cash equivalents 3,472 37 (739) 49 (204) 2,615 Short-term investments 1,233 – 81 – – 1,314 Joint venture loan and other receivables 262 – 45 13 – 320 Derivative financial instruments and other financial assets 1,858 2 (78) (308) (2) 1,472 Cash and receivables 6,825 39 (691) (246) (206) 5,721 Bank and other borrowings (3,424) – 2,909 (969) 256 (1,228) Finance lease payables (47) – 41 (39) – (45) Derivative financial instruments and other liabilities (483) (42) (51) 430 14 (132) Debt due within one year (3,954) (42) 2,899 (578) 270 (1,405) Bank and other borrowings (11,973) (222) (392) 1,007 224 (11,356) Finance lease payables (196) – – 32 – (164) Derivative financial instruments and other liabilities (302) – (10) (464) 51 (725) Debt due after one year (12,471) (222) (402) 575 275 (12,245) (9,600) (225) 1,806 (249) 339 (7,929) Note 33 Commitments and contingencies Capital commitments At 27 February 2010 there were commitments for capital expenditure contracted for, but not provided, of £1,835m (2009 – £1,551m), principally relating to the store development programme. 118 Tesco PLC Annual Report and Financial Statements 2010
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 Financial statements * 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
Notes to the Group financial statements continued Note 35 Leasing commitments Finance lease commitments – Group as lessee The Group has finance leases for various items of plant, equipment, fixtures and fittings. There are also a small number of buildings which are held under finance leases. The fair value of the Group's lease obligations approximate to their carrying value. Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments are as follows: Present value of Minimum lease payments minimum lease payments 2010 2009 2010 2009 £m £m £m £m Within one year 49 55 45 47 Greater than one year but less than five years 101 140 90 114 After five years 178 172 74 82 Total minimum lease payments 328 367 209 243 Less future finance charges (119) (124) Present value of minimum lease payments 209 243 Analysed as: Current finance lease payables 45 47 Non-current finance lease payables 164 196 209 243 Operating lease commitments – Group as lessee Future minimum rentals payable under non-cancellable operating leases are as follows: 2010 2009 £m £m Within one year 1,043 754 Greater than one year but less than five years 3,702 3,069 After five years 10,004 9,170 Total minimum lease payments 14,749 12,993 Operating lease payments represent rentals payable by the Group for certain of its retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights. The Group has lease break options on certain sale and leaseback transactions, which are exercisable if an existing option to buy back leased assets at market value at a specified date is also exercised, no commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date and so minimum lease payments exclude those falling after the buy-back date. Operating lease commitments with joint ventures Since 1988, the Group has entered into several joint ventures and sold and leased back properties to and from these joint ventures. The terms of these sale and leasebacks vary, however, common factors include: the sale of the properties to the joint venture at market value, options within the lease for the Group to repurchase the properties at market value, market rent reviews and 20-30 year lease terms. The Group reviews the substance as well as the form of the arrangements when making the judgement as to whether these leases are operating or finance leases; all of the leases under these arrangements are operating leases. Operating lease receivables – Group as lessor The Group both rents out its properties and also sublets various leased buildings under operating leases. At the balance sheet date, the following future minimum lease payments are contractually receivable from tenants: 2010 2009 £m £m Within one year 259 201 Greater than one year but less than five years 566 445 After five years 348 335 Total minimum lease payments 1,173 981 120 Tesco PLC Annual Report and Financial Statements 2010
Five year record 1 2006 2007 2008 2009 2010 Restated Financial statistics Group sales (including VAT) (£m) 43,137 46,611 51,773 59,426 62,537 Revenue (excluding VAT) (£m) UK 29,990 32,665 34,858 6 37,650 3 38,558 Rest of Europe 5,095 5,559 6,872 8,831 5 8,704 Asia 4,369 4,417 5,552 7,048 3 8,439 US – – 16 6 206 349 Tesco Bank – – – 163 6 860 Total Group 39,454 42,641 47,298 53,898 56,910 2 Group operating profit (£m) 2,280 2,648 2,791 3,169 3 3,457 Group operating profit margin 2 5.8% 6.2% 5.9% 5.9% 6.1% Share of results of joint ventures and associates (£m) 82 106 75 110 33 Profit on sale of investment in associates (£m) – 25 – – – Net finance costs (£m) (127) (126) (63) (362) (314) Profit before tax (£m) 2,235 2,653 2,803 2,917 3 3,176 Taxation (£m) (649) (772) (673) (779) (840) Minority interests (£m) (6) (7) (6) (5) (9) (Loss)/profit for the period from discontinued operation (£m) (10) 18 – – – 4,5 Profit for the financial year attributable to owners of the parent (£m) 1,570 1,892 2,124 2,133 3 2,327 Underlying profit before tax (£m) 2,277 2,545 2,846 3,124 3,395 5 Enterprise value (£m) 30,841 40,469 37,656 35,907 41,442 7 Basic earnings per share 8 20.20p 23.61p 26.95p 27.14p 3 29.33p Diluted earnings per share 8 19.92p 23.31p 26.61p 26.96p 3 29.19p Dividend per share 9 8.63p 9.64p 10.90p 11.96p 13.05p Return on shareholders' funds 10 24.9% 26.7% 25.1% 23.5% 3 23.0% Return on capital employed 11 12.7% 12.6% 16 12.7% 17 12.8% 20 12.1% Group statistics Number of stores 2,672 3,263 3,751 4,332 4,811 Total sales area – 000 sq ft 12 55,215 68,189 76,338 88,451 93,985 Average employees 368,213 413,061 444,127 468,508 472,094 Average full-time equivalent employees 273,024 318,283 345,737 364,015 372,338 UK retail statistics Number of stores 18 1,898 1,988 2,115 2,282 2,482 Total sales area – 000 sq ft 12,18 25,919 27,785 29,549 31,285 32,991 Average store size (sales area – sq ft) 13,18 32,816 34,209 35,055 35,215 35,485 Average full-time equivalent employees 175,459 184,461 193,917 194,420 196,604 UK retail productivity (£) Revenue per employee 14 170,923 177,084 179,840 196,436 3 196,120 Profit per employee 14 10,190 11,292 10,814 19 13,065 3 14,303 Weekly sales per sq ft 15 25.06 25.48 25.43 25.34 3 25.22 1 Results for the year ended 25 February 2006 include 52 weeks for the UK and ROI and 14 months for the majority of the remaining international businesses. 2 Operating profit includes integration costs and profit/(loss) arising on sale of fixed assets. Operating margin is based upon revenue excluding VAT. 3 The Group adopted IFRIC 13 'Customer Loyalty Programmes' and the amendments to IFRS 2 'Share-Based Payment' from 24 February 2008. Periods before this date have not been restated. 4 Consists of the net result of the Taiwanese business which was sold during 2007. 5 IFRS underlying profit excludes IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements, the IAS 19 Group Income Statement charge, which is replaced by the 'normal' cash contributions for pensions, IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods, IFRS 3 Amortisation charge from intangible assets arising on acquisition, IFRIC 13 'Customer Loyalty Programmes' – fair value of awards and exceptional items. For further details of this measure, see page 81. 6 Results have been restated to reflect the US and Tesco Bank as separate segments. 7 Market capitalisation plus net debt. 8 Basic and diluted earnings per share are on a continuing operations basis. 9 Dividend per share relating to the interim and proposed final dividend. 10 Profit before tax divided by average shareholders' funds. 11 The numerator is profit before interest, less tax. The denominator is the calculated average of net assets plus net debt plus dividend creditor less net assets held for sale. 12 Store sizes exclude lobby and restaurant areas. Financial statements 13 Average store size excludes Express and One Stop stores. 14 Based on average number of full-time equivalent employees in the UK, revenue exclusive of VAT and operating profit. 15 Based on weighted average sales area and sales excluding property development. 16 Excludes one-off gain from 'Pensions A-Day', with this one-off gain ROCE was 13.6%. 17 Using a 'normalised' tax rate before start-up costs in the US and Tesco Direct and excluding the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies. 18 Excluding Dobbies stores. 19 Excluding start-up costs in the US and Tesco Direct and adjusting average number of full-time equivalent employees in the UK to exclude US and Tesco Direct employees – profit per employee would be £11,317. 20 Excluding acquisition of Tesco Bank and Homever, and India start-up costs, and after adjusting for assets held for sale. Calculated on a 52-week basis, ROCE for 2009 is 12.8%. Tesco PLC Annual Report and Financial Statements 2010 121
Tesco PLC – Parent Company balance sheet 2010 2009 27 February 2010 notes £m £m Non-current assets Investments 5 11,716 10,975 Derivative financial instruments 10 1,250 1,473 12,966 12,448 Current assets Derivative financial instruments 10 208 291 Debtors 6 14,184 8,815 Current asset investments 7 1,997 2,970 16,389 12,076 Creditors – amounts falling due within one year Borrowings 9 (932) (1,981) Derivative financial instruments 10 (116) (373) Other creditors 8 (8,950) (2,569) (9,998) (4,923) Net current assets 6,391 7,153 Total assets less current liabilities 19,357 19,601 Creditors – amounts falling due after more than one year Borrowings 9 (10,805) (11,750) Derivative financial instruments 10 (621) (194) (11,426) (11,944) Net assets 7,931 7,657 Capital and reserves Called up share capital 13 399 395 Share premium account 14 4,801 4,638 Profit and loss reserve 14 2,731 2,624 Total equity 7,931 7,657 Accounting policies and notes forming part of these financial statements are on pages 123 to 130. Sir Terry Leahy Laurie McIlwee Directors The Parent Company financial statements on pages 122 to 130 were authorised for issue by the Directors on 5 May 2010 and are subject to the approval of the shareholders at the Annual General Meeting on 2 July 2010. Tesco PLC Registered number 00445790 122 Tesco PLC Annual Report and Financial Statements 2010
Notes to the Parent Company financial statements Note 1 Accounting policies Basis of preparation Share-based payments These financial statements have been prepared under UK GAAP using the Employees of the Company receive part of their remuneration in the form historical cost convention modified for the revaluation of certain financial of share-based payment transactions, whereby employees render services instruments and in accordance with applicable accounting standards and in exchange for shares or rights over shares (equity-settled transactions) or the Companies Act 2006. in exchange for entitlements to cash payments based on the value of the shares (cash-settled transactions). The financial year represents the 52 weeks ended 27 February 2010 (prior financial year 53 weeks ended 28 February 2009). The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. In accordance with FRS 20 'Share- A summary of the Company's significant accounting policies are set Based Payment' the resulting cost is charged to the Parent Company out below. Profit and Loss Account over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting. Exemptions The Directors have taken advantage of the exemption available under Where the Company awards options to employees of subsidiary entities, Section 408 of the Companies Act 2006 and not presented a Profit and this is treated as a capital contribution. Loss Account for the Company alone. Financial instruments The Company has also taken advantage of the exemption from preparing Financial assets and financial liabilities are recognised on the Parent a cash flow statement under the terms of FRS 1 'Cash Flow Statement'. Company's Balance Sheet when the Company becomes a party to the The cash flows of the Company are included in the Tesco PLC Group contractual provisions of the instrument. financial statements. Debtors The Company is also exempt under the terms of FRS 8 'Related Parties' Debtors are non interest-bearing and are recognised initially at fair from disclosing related party transactions with entities that are part of value and subsequently at amortised cost using the effective interest the Tesco PLC Group. rate method, reduced by appropriate allowances for estimated irrecoverable amounts. Changes in accounting policies The Company has adopted the following new and amended standards Investments and interpretations as of 1 March 2009: Investments are classified as either held for trading or available-for-sale and are measured at subsequent reporting dates at fair value. There are • Amendments to FRS 20 'Share-Based Payment' – Vesting Conditions and Cancellations, effective for annual periods beginning on or after no investments classified as held for trading. Gains and losses arising from changes in fair value for available-for-sale investments are recognised 1 January 2009 (early adoption is permitted), clarifies that only service and performance conditions are vesting conditions. Any other conditions directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised are non-vesting conditions which have to be taken into account to determine the fair value of the equity instrument granted. This award in equity is included in the net result for the period. must be treated as a cancellation where the award does not vest as a result of a failure to meet a non-vesting condition that is within the Financial liabilities and equity Financial liabilities and equity instruments are classified according to the control of either the Company or the counterparty. Cancellations are treated as accelerated vestings and all remaining future charges are substance of the contractual arrangements entered into. An equity instrument is any contract that gives a residual interest in the assets of the immediately recognised in the Parent Company Profit and Loss Account with the credit recognised directly in equity. The results for the year Company after deducting all of its liabilities. ended 28 February 2009 have been restated accordingly. The impact on the Parent Company's Profit and Loss Account and Balance Sheet Interest-bearing borrowings Interest-bearing bank loans and overdrafts are initially recorded at the is immaterial for both years. value of the amount received, net of attributable transaction costs. • Amendments to FRS 29 'Financial Instruments – Disclosures', effective Subsequent to initial recognition, interest-bearing borrowings are stated for annual periods beginning on or after 1 January 2009 required at amortised cost with any difference between cost and redemption value enhanced disclosures about fair value measurement and liquidity risk. being recognised in the Parent Company Profit and Loss Account over the period of the borrowings on an effective interest basis. Current asset investments These relate to money market deposits which are stated at cost. All income Creditors from these investments is included in the Parent Company Profit and Loss Creditors are non interest-bearing and are stated at amortised cost. Account as interest receivable and similar income. Equity instruments Investments in subsidiaries and joint ventures Equity instruments issued by the Company are recorded at the proceeds Investments in subsidiaries and joint ventures are stated at cost less, where received, net of direct issue costs. appropriate, provisions for impairment. Foreign currencies Assets and liabilities in foreign currencies are translated into Pounds Sterling at the exchange rates at the end of the financial year. Financial statements Tesco PLC Annual Report and Financial Statements 2010 123
Notes to the Parent Company financial statements continued Note 1 Accounting policies continued Derivative financial instruments and hedge accounting Net investment hedging The Company uses derivative financial instruments to hedge its exposure Derivative financial instruments are classified as net investment hedges to foreign exchange and interest rate risks arising from operating, financing when they hedge the Company's net investment in an overseas operation. and investing activities. The Company does not hold or issue derivative The effective element of any foreign exchange gain or loss from financial instruments for trading purposes, however if derivatives do not remeasuring the derivative instrument is recognised directly in equity. Any qualify for hedge accounting they are accounted for as such. ineffective element is recognised immediately in the Parent Company Profit and Loss Account. Gains and losses accumulated in equity are Derivative financial instruments are recognised and stated at fair value. included in the Parent Company Profit and Loss Account when the foreign The fair value of derivative financial instruments is determined by operation is disposed of. reference to market values for similar financial instruments, by discounted cash flows or by the use of option valuation models. Where derivatives do Derivative instruments qualifying for net investment hedging are principally not qualify for hedge accounting, any gains or losses on remeasurement forward foreign exchange transactions and cross currency options. are immediately recognised in the Parent Company Profit and Loss Account. Where derivatives qualify for hedge accounting, recognition of Pensions any resultant gain or loss depends on the nature of the hedge relationship The Company participates in the Tesco PLC Pension Scheme which is a and the item being hedged. multi-employer scheme within the Tesco Group and cannot identify its share of the underlying assets and liabilities of the scheme. Accordingly, In order to qualify for hedge accounting, the Company is required to as permitted by FRS 17 'Retirement Benefits', the Company has accounted document from inception the relationship between the item being hedged for the scheme as a defined contribution scheme, and the charge for the and the hedging instrument. The Company is also required to document period is based upon the cash contributions payable. and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be Taxation highly effective on an ongoing basis. This effectiveness testing is Corporation tax payable is provided on the taxable profit for the year, using performed at each period end to ensure that the hedge has remained tax rates enacted or substantively enacted by the balance sheet date. highly effective. Deferred tax is recognised in respect of all timing differences that have Derivative financial instruments with maturity dates of more than one year originated but not reversed at the balance sheet date and would give rise from the balance sheet date are disclosed as falling due after more than to an obligation to pay more or less taxation in the future. one year. Deferred tax assets are recognised to the extent that they are recoverable. Fair value hedging They are regarded as recoverable to the extent that on the basis of all Derivative financial instruments are classified as fair value hedges when available evidence, it is regarded as more likely than not that there will be they hedge the Company's exposure to changes in the fair value of a suitable taxable profits from which the future reversal of the underlying recognised asset or liability. Changes in the fair value of derivatives that timing differences can be deducted. are designated and qualify as fair value hedges are recorded in the Parent Company Profit and Loss Account, together with any changes in the fair Deferred tax is measured on a non-discounted basis at the tax rates that value of the hedged item that is attributable to the hedged risk. are expected to apply in the periods in which the timing differences reverse, based on tax rates and laws that have been substantively enacted Derivative financial instruments qualifying for fair value hedge accounting by the balance sheet date. are principally interest rate swaps and cross currency swaps. Recent accounting developments Cash flow hedging Standards, amendments and interpretations adopted, following new Derivative financial instruments are classified as cash flow hedges when amendments to FRS interpretations. These have not had a significant they hedge the Company's exposure to variability in cash flows that are impact on the results or net assets of the Company: either attributable to a particular risk associated with a recognised asset • amendments to UITF Abstract 42 and FRS 26 – Embedded derivatives, or liability, or a highly probable forecasted transaction. effective for periods beginning on or after 1 January 2009. The effective element of any gain or loss from remeasuring the derivative Standards, amendments and interpretations not yet effective, but not instrument is recognised directly in equity. expected to have a significant impact on the Company: The associated cumulative gain or loss is removed from equity and • amendment to FRS 25 'Financial Instruments: Presentation' on recognised in the Parent Company Profit and Loss Account in the same 'Puttable Financial Instruments and Obligations Arising on Liquidation', period or periods during which the hedged transaction affects the Parent effective for periods beginning on or after 1 January 2010. Company Profit and Loss Account. The classification of the effective • amendment to FRS 25 'Financial Instruments: Presentation' – portion when recognised in the Parent Company Profit and Loss Account Presentation on Classification of Rights Issues, effective for annual is the same as the classification of the hedged transaction. Any element periods beginning on or after 1 February 2010; and of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the Parent • amendment to FRS 26 'Financial Instruments: Recognition and Company Profit and Loss Account. Measurement' on Eligible Hedged Items, effective for periods beginning on or after 1 July 2009. Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and cross 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 Parent Company Profit and Loss Account. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Parent Company Profit and Loss Account. 124 Tesco PLC Annual Report and Financial Statements 2010
Note 2 Auditor remuneration 2010 2009 £m £m Fees payable to the Company's auditor for the audit of the Parent Company and Group financial statements 0.6 0. 6 Note 3 Employment costs, including Directors' remuneration 2010 2009 £m £m Wages and salaries 18 15 Social security costs 2 1 Pension costs 1 1 Share-based payment expense 30 18 51 35 The average number of employees (all Directors of the Company) during the year was 17 (2009 – 14). The Schedule VI requirements for Directors' remuneration are included within the Directors' Remuneration Report on pages 52 to 66. Note 4 Dividends For details of equity dividends see note 8 in the Group financial statements. Note 5 Investments Shares in Group Shares in undertakings joint ventures Total £m £m £m Cost At 28 February 2009 11,186 16 11,202 Additions 1,118 – 1,118 At 27 February 2010 12,304 16 12,320 Impairment At 28 February 2009 227 – 227 Charge for the year 377 – 377 At 27 February 2010 604 – 604 Net carrying value At 27 February 2010 11,700 16 11,716 At 28 February 2009 10,959 16 10,975 For a list of the Company's principal operating subsidiary undertakings and joint ventures see note 13 in the Group financial statements. The impairment charge for the year relates to a subsidiary whose net assets have been reduced below its carrying amount in the Parent Company Balance Sheet resulting from a dividend payment. Financial statements Tesco PLC Annual Report and Financial Statements 2010 125
Notes to the Parent Company financial statements continued Note 6 Debtors 2010 2009 £m £m Amounts owed by Group undertakings 13,948 8,587 (a) Amounts owed by joint ventures and associates 128 106 Other debtors 100 112 Deferred tax asset (b) 8 10 Total 14,184 8,815 (a) The amounts due from joint ventures and associates of £128m (2009 – £106m) are due after more than one year. (b) The deferred tax asset recognised by the Company, and the movements thereon, during the year are as follows: FRS 25 Other timing and FRS 26 differences Total £m £m £m At 28 February 2009 11 (1) 10 Charge to profit and loss account for the year (1) (1) (2) At 27 February 2010 10 (2) 8 Note 7 Current asset investments 2010 2009 £m £m Bonds and deposits 1,997 2,970 Note 8 Other creditors 2010 2009 £m £m Amounts falling due within one year: Other tax and social security 1 – Amounts owed to Group undertakings 8,639 2,141 Other liabilities 310 421 Accruals and deferred income – 7 8,950 2,569 126 Tesco PLC Annual Report and Financial Statements 2010
Note 9 Borrowings Maturity 2010 2009 Par value year £m £m Bank loans and overdrafts – – 27 1,494 Loans from joint ventures – – 17 9 5.125% MTN £192m 2009 – 198 6.625% MTN £150m 2010 158 154 4.75% MTN €750m 2010 704 689 3.875% MTN €500m 2011 479 476 5.625% MTN €1,500m 2012 1,375 1,362 5% MTN £600m 2014 604 592 5.125% MTN €600m 2015 539 522 (a) 4% RPI MTN £263m 2016 270 268 5.875% MTN €1,500m 2016 1,520 1,488 5.5% USD Bond $850m 2017 621 678 5.5% MTN £350m 2019 351 351 6.125% MTN £900m 2022 890 901 5% MTN £515m 2023 520 515 (b) 3.322% LPI MTN £265m 2025 269 267 6% MTN £200m 2029 212 216 5.5% MTN £200m 2033 210 216 1.982% RPI MTN (c) £221m 2036 222 221 6.15% USD Bond $1,150m 2037 834 977 5% MTN £300m 2042 306 306 5.125% MTN €600m 2047 587 628 5.2% MTN £500m 2057 500 500 Other MTNs – – 291 477 Other loans – – 231 226 11,737 13,731 (a) The 4% RPI MTN is redeemable at par, indexed for increases in the Retail Price Index (RPI) over the life of the MTN. (b) The 3.322% LPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%. (c) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. 2010 2009 £m £m Repayment analysis: Amounts falling due within one year 932 1,981 932 1,981 Amounts falling due after more than one year: Amounts falling due between one and two years 699 867 Amounts falling due between two and five years 2,795 2,784 Amounts falling due after more than five years 7,311 8,099 10,805 11,750 11,737 13,731 Financial statements Tesco PLC Annual Report and Financial Statements 2010 127
Notes to the Parent Company financial statements continued Note 10 Derivative financial instruments The fair value of derivative financial instruments has been disclosed in the Company's Balance Sheet as: 2010 2009 Asset Liability Asset Liability £m £m £m £m Current 208 (116) 291 (373) Non-current 1,250 (621) 1,473 (194) Total 1,458 (737) 1,764 (567) 2010 2009 Asset Liability Asset Liability Fair value Notional Fair value Notional Fair value Notional Fair value Notional £m £m £m £m £m £m £m £m Fair value hedges Interest rate swaps and similar instruments 10 665 (32) 400 6 257 (31) 1,000 Cross currency swaps 1,131 4,513 (44) 258 1,218 3,957 (40) 825 Cash flow hedges Interest rate swaps and similar instruments – – (39) 400 – – (66) 400 Cross currency swaps 129 315 (206) 1,042 226 336 (1) 171 Forward foreign currency contracts 9 218 – 1 19 656 (23) 283 Net investment hedges Cross currency swaps – – (30) 124 – – – – Forward foreign currency contracts 19 244 (172) 1,037 92 2,623 (194) 2,767 Derivatives not in a formal hedge relationship Interest rate swaps and similar instruments 140 1,115 (112) 1,025 1 774 (30) 3,280 Cross currency swaps 1 173 (22) 457 20 219 (47) 639 Future purchases of minority interest – – (41) – – – – – Forward foreign currency contracts 19 376 (39) 1,070 182 2,632 (135) 2,561 Total 1,458 7,619 (737) 5,814 1,764 11,454 (567) 11,926 Note 11 Share-based payments Tesco PLC's equity-settled share-based payment schemes comprise various share schemes designed to reward Executive Directors. For further information on these schemes, including the valuation models and assumptions used, see note 27 to the Group financial statements. a) Share option schemes The number of options and weighted average exercise price (WAEP) of share option schemes relating to Tesco PLC employees are: Savings-related Approved Unapproved Nil cost share option scheme share option scheme share option scheme share options For the year ended 27 February 2010 Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 28 February 2009 37,066 294.06 53,381 280.99 14,681,115 326.92 14,430,093 0.00 Granted 7,584 328.00 – – 3,804,440 338.40 3,093,147 0.00 Forfeited – – – – – – (2,299,256) 0.00 Exercised (8,544) 232.00 – – (3,936,026) 261.41 (6,038,529) 0.00 Outstanding at 27 February 2010 36,106 315.87 53,381 280.99 14,549,529 347.65 9,185,455 0.00 Exercisable as at 27 February 2010 – – 53,381 280.99 6,240,433 281.85 – – Exercise price range 197.50 to 197.50 to (pence) – – – 318.60 – 318.60 – – Weighted average remaining contractual life (years) – – – 4.77 – 4.40 – – 128 Tesco PLC Annual Report and Financial Statements 2010
Note 11 Share-based payments continued Savings-related Approved Unapproved Nil cost share option scheme share option scheme share option scheme share options For the year ended 28 February 2009 Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 23 February 2008 37,652 269.29 53,381 280.99 12,191,979 303.75 10,838,238 0.00 Granted 7,539 311.00 – – 2,615,968 427.00 3,591,855 0.00 Exercised (8,125) 195.00 – – (126,832) 164.00 – – Outstanding at 28 February 2009 37,066 294.06 53,381 280.99 14,681,115 326.92 14,430,093 0.00 Exercisable as at 28 February 2009 – – 43,965 272.93 7,511,677 258.10 2,050,588 0.00 Exercise price range 197.50 to 173.00 to (pence) – – – 312.75 – 312.75 – 0.00 Weighted average remaining contractual life (years) – – – 5.47 – 4.29 – 5.82 b) Share bonus schemes The number and weighted average fair value (WAFV) of share bonuses awarded during the period relating to Tesco PLC employees are: 2010 2009 Shares WAFV Shares WAFV number pence number pence Shares in Success 6,684 349.66 5,568 431.05 Executive Incentive Scheme 1,660,771 351.16 304,713 424.65 Performance Share Plan 243,129 374.00 238,024 356.05 US Long-Term Incentive Plan 80,622 482.00 63,514 482.00 Note 12 Pensions The total cost of the pension scheme to the Group was £439m (2009 – £403m). Further disclosure relating to the Tesco PLC Pension Scheme can be found in note 28 of the Group financial statements. Note 13 Called up share capital 2010 2009 Ordinary shares of 5p each Ordinary shares of 5p each Number £m Number £m Authorised: At beginning of year 10,858,000,000 543 10,858,000,000 543 Authorised during the year 2,500,000,000 125 – – At end of year 13,358,000,000 668 10,858,000,000 543 Allotted, called up and fully paid: At beginning of year 7,895,344,018 395 7,863,498,783 393 Share options 62,329,535 3 57,060,046 3 Share awards 27,370,504 1 – – Share buy-back – – (25,214,811) (1) At end of year 7,985,044,057 399 7,895,344,018 395 During the financial year, 62 million (2009 – 57 million) shares of 5p each were issued in relation to share options for aggregate consideration of £166m (2009 – £130m). During the financial year, 27 million (2009 – nil) shares of 5p each were issued in relation to share bonus awards for consideration of £1m (2009 – £nil). During the year, the Company purchased and subsequently cancelled no shares of 5p each (2009 – 25,214,811), representing 0% (2009 – 0%) of the Financial statements called up share capital, at an average price of £nil (2009 – £3.98) per share. The total consideration, including expenses, was £nil (2009 – £100m). The excess of the consideration over the nominal value has been charged to retained earnings. Tesco PLC Annual Report and Financial Statements 2010 129
Notes to the Parent Company financial statements continued Note 13 Called up share capital continued Between 28 February 2010 and 16 April 2010, options over 3,722,750 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme (2000). Between 28 February 2010 and 16 April 2010, options over 5,592,493 ordinary shares have been exercised under the terms of the Executive Share Option Schemes (1994 and 1996) and the Discretionary Share Option Plan (2004). As at 27 February 2010, the Directors were authorised to purchase up to a maximum in aggregate of 790.1 million (2009 – 784.8 million) ordinary shares. The owners of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company. Capital redemption reserve Upon cancellation of the shares purchased as part of the share buy-back, a capital redemption reserve is created representing the nominal value of the shares cancelled. This is a non-distributable reserve. Note 14 Reserves 2010 2009 £m £m Share premium account At beginning of year 4,638 4,511 Premium on issue of shares less costs 163 127 At end of year 4,801 4,638 Profit and loss reserve At beginning of year 2,624 2,181 Share-based payments 234 204 Purchase of treasury shares – (165) Dividend (968) (883) Change in fair value of available-for-sale financial assets – 3 Share buy-back (capital redemption) – 1 (Losses)/gains on cash flow hedges (82) 105 Profit after tax for the year 923 1,178 At end of year 2,731 2,624 Note 15 Contingent liabilities The Company has irrevocably guaranteed the liabilities, as defined by Section 5 (c) of the Republic of Ireland (Amendment Act) 1986, of various subsidiary undertakings incorporated in the Republic of Ireland. 130 Tesco PLC Annual Report and Financial Statements 2010
Independent auditors' report to the members of Tesco PLC We have audited the Parent Company financial statements of Tesco PLC Opinion on other matters prescribed by the Companies Act 2006 for the 52 weeks ended 27 February 2010 which comprise the Parent In our opinion: Company Balance Sheet and the related notes. The financial reporting • the part of the Directors' Remuneration Report to be audited has been framework that has been applied in their preparation is applicable law properly prepared in accordance with the Companies Act 2006; and and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). • the information given in the Directors' Report for the 52 weeks ended 27 February 2010 for which the Parent Company financial statements Respective responsibilities of Directors and auditors are prepared is consistent with the Parent Company financial As explained more fully in the Statement of Directors' Responsibilities set statements. out on page 68, the Directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they Matters on which we are required to report by exception give a true and fair view. Our responsibility is to audit the Parent Company We have nothing to report in respect of the following matters where the financial statements in accordance with applicable law and International Companies Act 2006 requires us to report to you if, in our opinion: Standards on Auditing (UK and Ireland). Those standards require us to • adequate accounting records have not been kept by the Parent comply with the Auditing Practices Board's Ethical Standards for Auditors. Company, or returns adequate for our audit have not been received from branches not visited by us; or This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of • the Parent Company financial statements and the part of the Directors' the Companies Act 2006 and for no other purpose. We do not, in giving Remuneration Report to be audited are not in agreement with the these opinions, accept or assume responsibility for any other purpose or accounting records and returns; or to any other person to whom this report is shown or into whose hands it • certain disclosures of Directors' remuneration specified by law are not may come save where expressly agreed by our prior consent in writing. made; or Scope of the audit of the financial statements • we have not received all the information and explanations we require An audit involves obtaining evidence about the amounts and disclosures for our audit. in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused Other matter by fraud or error. This includes an assessment of: whether the accounting We have reported separately on the Group financial statements of policies are appropriate to the Parent Company's circumstances and have Tesco PLC for the 52 weeks ended 27 February 2010. been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall Richard Winter (Senior Statutory Auditor) presentation of the financial statements. for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Opinion on financial statements London In our opinion the Parent Company financial statements: 5 May 2010 • give a true and fair view of the state of the Company's affairs as at 27 February 2010; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Tesco PLC Annual Report and Financial Statements 2010 131 Financial statements
Financial calendar Financial year end 2009/10 27 February 2010 Final ex-dividend date 28 April 2010 Record date 30 April 2010 Q1 Interim Management Statement June 2010 Annual General Meeting 2 July 2010 Final dividend payment date 9 July 2010 Half year end 2010/11 28 August 2010 Interim Results October 2010 Q3 Interim Management Statement December 2010 Christmas and New Year Trading Statement January 2011 Financial year end 2010/11 26 February 2011 Please note that dates are provisional and may be liable to change. 132 Tesco PLC Annual Report and Financial Statements 2010
Contents Financial highlights Overview Group sales +6.8% Chairman's statement 1 (including VAT)* A business for a new decade 2 Tesco at a glance 6 Chief Executive's review 8 Underlying profit +10.1% Report of the Directors before tax Our business 9 Our strategy 9 International 10 Group profit +10.4% Core UK 16 before tax Non-food 20 Retailing Services 24 Community 28 Our people 32 Underlying diluted +9.1% Our Board of Directors 36 earnings per share** Key performance indicators 38 Group financials 40 Risks and uncertainties 41 Diluted earnings +9.8% General information 45 per share Corporate governance 46 Remuneration report 52 Dividend +9.1% Financial statements 67 per share Statement of Directors' responsibilities 68 Independent auditors' report to the All growth figures reported on a 52-week basis. members of Tesco PLC 69 Group income statement 70 Group statement of comprehensive income 71 Group balance sheet 72 Group statement of changes in equity 73 Group cash flow statement 74 Reconciliation of net cash flow to movement in 74 net debt note Notes to the Group financial statements 75 2008/9 ‡ Five year record 121 52 weeks ended 27 February 2010 2009/10 52 weeks 53 weeks Tesco PLC – Parent Company balance sheet 122 Group sales (£m) (including VAT)* 62,537 58,570 59,426 Notes to the Parent Company financial statements 123 Independent auditors' report to the members of Group revenue (£m) (excluding VAT) 56,910 53,115 53,898 Tesco PLC 131 Group trading profit (£m) 3,412 3,039 3,086 Financial calendar 132 Underlying profit before tax (£m) 3,395 3,083 3,124 Group profit before tax (£m) 3,176 2,876 2,917 Underlying diluted earnings per share (p) 31.66 28.50 28.87 Dividend per share (p) 13.05 – 11.96 Group enterprise value (£bn) (market capitalisation plus net debt) 41.4 – 35.9 Return on capital employed 12.1% – 12.8% * Group sales (inc. VAT) excludes the accounting impact of IFRIC 13 (Customer Loyalty Programmes). ** Growth in underlying diluted EPS calculated on a constant tax rate basis. ‡ Restated for the impact of IFRIC 13 and IFRS 2. www.tesco.com/annualreport2010
Tesco PLC Tesco House Tesco PLC Delamare Road Cheshunt Hertfordshire EN8 9SL A business for www.tesco.com/annualreport2010 a new decade Annual Report and Financial Statements 2010 Printed on Revive Pure, a 100% recycled paper with FSC certification. Printed by Pureprint. Designed and produced by 35 Communications. Tesco PLC Annual Report and Financial Statements 2010
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