TIDMTSCO
RNS Number : 1841J
Tesco PLC
08 April 2020
Wednesday 8 April 2020
COVID-19 UPDATE AND PRELIMINARY RESULTS 2019/20
This is Part 1 of 2 of the Preliminary Results 2019/20
Before sharing our results for the financial year ending 29
February 2020, we would like to update you on the impact of
COVID-19.
COVID-19 Update
Our priority in dealing with the exceptional challenges posed by
COVID-19 is to ensure the safety of our customers and colleagues,
support our suppliers and maintain the availability of food. In
every region we are working closely with the government and public
health authorities to ensure we are supporting wherever we can and
following all the relevant guidelines.
The specific challenges across the Group are three-fold, and
most keenly felt in the UK. First, the significant change in buying
behaviour of our customers. Second, the impact of the virus on our
colleagues and thirdly, helping the more vulnerable in society, as
defined by the UK Government.
In the first few weeks of the crisis, significant panic buying
(c.30% uplift in the UK) cleared the supply chain of certain items.
This has now stabilised across the Group and more normal sales
volumes are being experienced. The size and nature of our workforce
means we have experienced a significant absence of colleagues. Full
colleague sickness support is in place and in the last two weeks
alone, we recruited more than 45,000 colleagues in the UK.
Whilst we have already stepped up our capacity on Grocery Home
Shopping by more than 20%, and will continue to increase this,
there is simply not enough capacity to supply the whole market.
Between 85% and 90% of all food bought will require a visit to a
store and here significant changes to the store environment have
been implemented to maximise safety for colleagues and customers.
We will continue to try and prioritise home delivery for the most
vulnerable in society as defined by the UK Government.
Dave Lewis, Chief Executive:
"COVID-19 has shown how critical the food supply chain is to the
UK and I'm very proud of the way Tesco, as indeed the whole UK food
industry, has stepped forward.
In this time of crisis we have focused on four things; food for
all, safety for everyone, supporting our colleagues and supporting
our communities.
Initial panic buying has subsided and service levels are
returning to normal. There are significant extra costs in feeding
the nation at the moment but these are partially offset by the UK
Business rates relief.
Tesco is a business that rises to a challenge and this will be
no different. I would like to thank colleagues for their
unbelievable commitment and customers for their help and
understanding. Together, we can do this."
Our response to date
Food for all
-- introduced a restriction of three items per customer on every
product line; now removed on majority of products as stock levels
stabilise
-- introduced special hours in stores for NHS workers, and more
vulnerable and elderly customers
-- expanded Grocery Home Shopping capacity by +20% in the last two weeks, adding 145,000 slots
-- working with Government to prioritise delivery slots for
vulnerable people without a support network
-- temporarily closed all cafes, phone shops, meat, fish, deli counters and salad bars
-- asked our office colleagues to volunteer for shifts in stores where they can
-- working closely with supplier partners to simplify our range
to get more of the most popular products on shelves
-- focusing on simple pricing for single products, removing many multi-buy promotions
Safety for everyone
-- introduced social distancing measures in stores; filmed a new
advertisement with colleagues summarising them
-- created one-way aisles and 'one-in, one-out' system to help limit flow
-- using directional floor markings to help everyone keep a safe distance
-- installing protective screens at the front and back of our checkouts
-- enhanced cleaning routines and new cleaning stations in stores
-- inviting customers that can, to pay at the checkout by card
Supporting our colleagues
-- colleagues ill with COVID-19 or in isolation receiving full
pay from their first day of absence
-- fully paid absence for 12 weeks for colleagues who are over 70, vulnerable or pregnant
-- paying a 10% bonus on the hourly rate for hours worked to
colleagues across stores, distribution centres and customer
engagement centres
-- range of policies to support parents during school closures,
including new school closure leave policy
-- more than 45,000 new colleagues have joined Tesco since 20
March, including pickers and drivers
-- colleague discount increased to 15% from 6 April to 7 May
Supporting our communities
-- we will continue our ongoing donations of GBP3m of food every
month through our Community Food Connection scheme and distribution
centres
-- a further GBP15m of food to be donated to FareShare and the
Trussell Trust over the next 12 weeks and a further GBP1m donation
between the two organisations
-- focusing GBP2m funding from Bags of Help community donation
scheme to charities helping the most vulnerable
-- building on our partnership with the British Red Cross,
donating GBP2m to help with extra costs in supporting people in
need
-- over GBP1m of funding in stores so they can support causes in their local neighbourhood
-- donating food for 1m free meal parcels for front-line NHS
workers, supporting 'SaluteTheNHS.org' initiative
-- constructing our first dedicated NHS Nightingale Hospital
pop-up store, at the NEC in Birmingham
Looking ahead
COVID-19 is having a material impact on the operations of our
business and we are incurring significant additional costs,
particularly in payroll as we recruit additional colleagues to meet
demand and cover the work of those colleagues who are absent and
being paid.
Whilst the full financial impact of the crisis for 2020/21 is
impossible to predict with a high degree of certainty, we have
considered a range of scenarios to understand potential outcomes on
our business and plan appropriately. Dependent on the scenario, the
estimated impact on our retail cost lines is between c.GBP(650)m
and c.GBP(925)m including significant cost increases in payroll,
distribution and store expenses.
At this stage it would not be prudent to provide financial
guidance for 2020/21, however if customer behaviour were to return
to normal by August it is likely that the additional cost headwinds
incurred in our retail operations would be largely offset by the
benefits of food volume increases, twelve months' business rates
relief in the UK and prudent operations management.
Tesco Bank, which operates as a stand-alone regulated entity, is
expected to be impacted by a reduction in income from all its
activities, including credit cards, loans and travel money. This
expected decrease in income, in addition to provisions for
potential bad debts, is likely to result in a loss for the Bank in
the year ending February 2021. Notwithstanding this, the Bank's
capital ratios (Tier 1 ratio: 20.6% and Total ratio: 23.1% as at 29
February 2020) and liquidity are expected to remain strong.
Up to date information on our response to COVID-19 can be found
on our website at www.tescoplc.com/covid-19 .
Preliminary Results 2019/20
TURNAROUND COMPLETE - WELL-PLACED TO SERVE ALL OF OUR
STAKEHOLDERS
On a continuing operations basis Change at
Change at constant
2019/20 2018/19(1) actual rates rates
Headline measures(2) (on a 52
week comparable basis):
Group sales(3) GBP56.5bn GBP56.9bn (0.7)% (1.0)%
- UK & ROI GBP44.9bn GBP44.9bn 0.1% 0.2%
* Central Europe GBP5.3bn GBP6.0bn (12.1)% (10.1)%
* Asia GBP5.2bn GBP4.9bn 6.7% 0.1%
* Tesco Bank GBP1.1bn GBP1.1bn (2.6)% (2.6)%
Group operating profit before
exceptional items and amortisation
of acquired intangibles(4) GBP2,959m GBP2,607m 13.5% 12.6%
Retail free cash flow(5) GBP2,063m GBP889m 132.1%
Net debt(5) GBP(12.1)bn GBP(13.2)bn down 8.4%
Diluted EPS before exceptional
and other items(6) 17.92p 14.01p 27.9%
Dividend per share 9.15p 5.77p 58.6%
Statutory measures (on a 53 week
basis):
Revenue GBP64.8bn GBP63.9bn 1.3%
Operating profit GBP2,518m GBP2,649m (4.9)%
Profit before tax GBP1,315m GBP1,617m (18.7)%
Diluted EPS(7) 9.54p 13.04p (26.8)%
For UK & ROI our reported statutory performance is for the
53 weeks ended 29 February 2020. For all other operations, these
results are for the calendar year ended 29 February 2020. To aid
comparability, headline results are shown on a 52 week basis. A
reconciliation between statutory results and headline alternative
performance measures is shown on page 4.
Headlines (52 week comparable basis)
Customer satisfaction
-- Shopping trip satisfaction improved across all formats; brand
net promoter score +7 points year-on-year(8)
-- Brand perception further improved across range, quality and value(9)
-- 'Aldi Price Match' launched in March across hundreds of Tesco and branded products
Cash profitability
-- Retail operating profit before exceptional items and
amortisation of acquired intangibles(10) of GBP2,766m, +14.9%,
margin 4.4%;
- Strong performance in UK & ROI and Asia, partly offset by
disruption impact of transformation in Central Europe
- UK & ROI GBP2,184m, +16.9%, margin 4.2%
- Central Europe GBP156m, (29.4)%, margin 2.8%
- Asia GBP426m, +33.5%, margin 8.2%
-- Bank operating profit before exceptional items GBP193m, (3.0)%
-- Cumulative Booker synergies GBP207m, delivered a year ahead
of target; acquisition of Best Food Logistics in early March
-- Group operating margin(4) of 4.64% (+56bps); Retail EBITDA(10) up 8.8% to GBP4.7bn
Cash flow
-- Retail free cash flow(5) of GBP2,063m, including CE property
disposals of GBP167m and GBP277m from sale of China joint
venture(11)
-- Final dividend 6.50p, reflecting strength of last year's
performance and our robust liquidity and balance sheet; full-year
dividend of 9.15p representing a pay-out ratio of 50%
-- Net debt(5) of GBP(12.1)bn, down GBP1.1bn year-on-year
Proposed sale of businesses in Thailand and Malaysia(12)
-- Consideration of $10.6bn (c.GBP8.2bn) on a cash and debt free
basis, conditional on shareholder and regulatory approval
-- Plan to return c.GBP5bn to shareholders via a special
dividend; GBP2.5bn one-off pension contribution to eliminate
funding deficit
-- Completion of sale expected 2H 2020; Thailand and Malaysia to
be treated as discontinued for 2020/21 financial year
Dave Lewis, Chief Executive:
"Over the last five years we have focused on serving customers
better, re-engaging our colleagues, completely resetting our
relationships with our suppliers and as a result we have been able
to add value for our shareholders.
These endeavours put us in a strong operational and financial
position to deal with the challenges of COVID-19.
I would like to thank Tesco colleagues for their contribution to
this turnaround journey and for their unbelievable commitment as we
face into the COVID-19 crisis. Their contribution continues to be
immense."
Headline Group results for financial year ending 29 February
2020
Key segmental results:
Sales(3) Operating Profit before exceptional
items and amortisation of acquired
intangibles
2019/20 2019/20 YoY YoY LFL 2019/20 2019/20 YoY YoY
sales
change(13)
53 week 52 week 52 week 52 week 53 week 52 week 52 week 52 week
basis change change change change
basis (actual (constant basis basis (actual (constant
rates) rates) rates) rates)
--------- ------------ ------------ --------- ----------- ----------- ---------- ---------- --------- -----------
UK & GBP2,230m GBP2,184m 16.9% 16.9%
ROI GBP45,752m GBP44,909m 0.1% 0.2% 0.2% 4.22% 4.21% +59bp +51bp
---------- ========== --------- -----------
- UK GBP37,215m GBP36,521m (0.6)% (0.6)% (0.3)%
- ROI GBP2,333m GBP2,290m (0.7)% 0.8% 1.2%
-
Booker GBP6,204m GBP6,098m 5.0% 5.0% 3.3%
------------ ------------ --------- ----------- ---------- ========== --------- -----------
Central
Europe GBP5,332m GBP5,332m (12.1)% (10.1)% (6.4)% GBP156m GBP156m (29.4)% (27.6)%
2.80% 2.80% (71)bp (70)bp
----------------------------------- --------- ----------- ----------- ---------- ---------- --------- -----------
GBP426m GBP426m 33.5% 24.8%
Asia GBP5,218m GBP5,218m 6.7% 0.1% (1.9)% 8.16% 8.16% +161bp +158bp
------------ ------------ --------- ----------- ----------- ---------- ---------- --------- -----------
Bank GBP1,068m GBP1,068m (2.6)% (2.6)% - GBP193m GBP193m (3.0)% (3.0)%
18.07% 18.07% (7)bp (7)bp
----------------------------------- --------- ----------- ----------- ---------- ---------- --------- -----------
GBP3,005m GBP2,959m 13.5% 12.6%
Group GBP57,370m GBP56,527m (0.7)% (1.0)% (0.6)% 4.64% 4.64% +56bp +47bp
------------ ============ --------- ----------- ----------- ---------- ========== --------- -----------
A full Group income statement can be found on page 28.
53 weeks ended 29 Exclude: 2019/20 2018/19(1) YoY YoY YoY
February 2020 Week
53
2019/20 52 week 53 week 52 week 52 week
basis change change change
On a continuing operations 53 week (Actual (Actual (Constant
basis basis
exchange exchange exchange
rates) rates) rates)
----------------------------- ---------- ------------
Group sales (exc.
VAT, exc. fuel)(3) GBP57,370m GBP(843)m GBP56,527m GBP56,883m 1.1% (0.7)% (1.0)%
------------ ---------- ------------ ------------ ---------- ---------- -----------
Fuel GBP7,390m GBP(140)m GBP7,250m GBP7,028m 5.1% 3.2% 3.2%
------------ ---------- ------------ ------------ ---------- ---------- -----------
Revenue (exc. VAT,
inc. fuel) GBP64,760m GBP(983)m GBP63,777m GBP63,911m 1.3% (0.2)% (0.5)%
------------ ---------- ------------ ------------ ---------- ---------- -----------
Group operating profit
before exceptional
items and amortisation
of acquired intangibles(4) GBP3,005m GBP(46)m GBP2,959m GBP2,607m 15.3% 13.5% 12.6%
------------ ---------- ------------ ------------ ---------- ---------- -----------
Include exceptional GBP(487)m GBP34m GBP(453)m GBP42m
items and amortisation
of acquired intangibles
------------ ---------- ------------ ------------ ----------
Group statutory operating
profit GBP2,518m - n/a GBP2,649m (4.9)%
------------ ---------- ------------ ------------ ----------
Adjusted Group profit
before tax(6) GBP2,276m GBP(37)m GBP2,239m GBP1,806m 26.0% 24.0%
------------ ---------- ------------ ------------
Group statutory profit
before tax GBP1,315m - n/a GBP1,617m (18.7)%
------------ ---------- ------------ ------------ ----------
Adjusted diluted EPS(6) 18.23p (0.31)p 17.92p 14.01p 30.1% 27.9%
------------ ------------ ----------
Statutory diluted
EPS 9.54p - n/a 13.04p (26.8)%
------------ ---------- ------------ ------------ ----------
Statutory basic EPS 9.60p - n/a 13.13p
------------ ---------- ------------ ------------
Dividend per share 9.15p - n/a 5.77p 58.6%
------------ ---------- ------------ ------------
Capex(14) GBP1.1bn - n/a GBP1.1bn
------------ ---------- ------------ ------------ ---------- ----------
Net debt(5) GBP(12.3)bn GBP0.2bn GBP(12.1)bn GBP(13.2)bn 6.9% 8.4%
------------ ---------- ------------ ------------ ---------- ----------
Retail free cash flow(5) GBP1.9bn GBP0.2bn GBP2.1bn GBP0.9bn 109.9% 132.1%
------------ ---------- ============ ------------ ---------- ----------
Notes
1. Last year figures restated for adoption of IFRS 16.
2. The Group has defined and outlined the purpose of its
alternative performance measures, including its headline measures,
in the Glossary starting on page 117.
3. Group sales exclude VAT and fuel. Sales growth shown on a
comparable days basis for Central Europe and Asia. Booker
consolidated from 5 March 2018 and therefore includes 9 additional
days in FY 2019/20 vs. FY 2018/19. The 9 additional days of Booker
sales in the current year contributed 0.2% to Group sales growth in
the year. Further detail can be found in the supplementary
information starting on page 114.
4. Excludes amortisation of acquired intangibles and excludes
exceptional items by virtue of their size and nature in order to
reflect management's view of underlying performance.
5. Net debt and retail free cash flow exclude the impact of
Tesco Bank in order to provide further analysis of the retail cash
flow statement. Net debt also includes lease liabilities following
the adoption of IFRS 16. Net debt excluding lease liabilities was
GBP(2.6)bn, down GBP0.2bn year-on-year.
6. Headline 'diluted earnings per share' and 'adjusted Group
profit before tax' measures exclude exceptional items, amortisation
of acquired intangibles, net pension finance costs and fair value
remeasurements of financial instruments. Full details of the
diluted earnings per share measure can be found in Note 9, starting
on page 54.
7. Statutory diluted earnings per share includes the impact of a
net post-tax charge of GBP(593)m in respect of exceptional items.
More detail can be found in Note 4 on page 48.
8. BASIS Global Brand Tracker. Based on your most recent
experience, how likely is it that you would recommend Tesco to a
friend or colleague?
9. Reflects year-on-year change in YouGov Brand UK perception
measures of range, quality and value.
10. Retail figure i.e. excludes the impact of Tesco Bank.
11. On 28 February 2020 we completed the sale of our 20% share
in Gain Land to a subsidiary of China Resources Holdings. The
disposal resulted in net cash proceeds of GBP277m.
12. On 9 March 2020 we announced the proposed sale of our
businesses in Thailand and Malaysia to a combination of CP Group
entities. Completion of the disposal, which is conditional on
shareholder approval and customary regulatory approvals in
Thailand and Malaysia, is expected during the second half of 2020.
Thailand and Malaysia will be treated as discontinued operations
for the 2020/21 financial year. All guidance and forward looking
statements throughout this statement are on a continuing operations
basis.
13. Like-for-like is a measure of growth in Group online sales
and sales from stores that have been open for at least a year (at
constant foreign exchange rates).
14. Capex is shown excluding property buybacks. Statutory
capital expenditure (including property buybacks) for the 53 weeks
ended 29 February 2020 was GBP2.1bn (LY GBP1.2bn).
Creating value for our key stakeholders
At our Capital Markets Day in June 2019, we set out further
opportunities available to the Group in terms of selective growth,
innovation and enabling technology. These opportunities will enable
us to continue to create long-term and sustainable value for all
our key stakeholders.
Customers
-- Price : 'Aldi Price Match' campaign launched in March 2020
across hundreds of Tesco and branded products
-- Stores : opened 18 Express stores in the UK and converted 54
One Stop to Express, allowing a wider fresh food offer
-- Online : taking steps to double online capacity in the UK;
first Urban Fulfilment Centre planned in West Bromwich Extra as
part of a programme to open more than 25 over the next three
years
-- Loyalty : Clubcard Plus launched in November; retention rate
90%+; basket size uplift exceeding expectations
-- Booker : leveraging Tesco network, including roll out of 'Top
up at Tesco'(1) ; re-launched Booker.co.uk in January
-- Simplify to serve : continued focus on improving customer
service whilst reducing operating costs; including right-sizing 545
large stores in Central Europe and rolling out a new Express
proposition to 51 stores in Asia
Colleagues
-- 82% of colleagues recommended Tesco as a great place to work
in January 2020 survey; 10% higher vs. peers(2)
-- First stage of a 10.45% increase for hourly paid store colleagues completed in September 2019
-- All large stores using new Scheduler tool, optimising 300 million colleague hours per year
-- 81% of colleagues agree there is an inclusive culture; five
long-standing executive-sponsored inclusion networks
-- 10,000+ young people developing employability and life skills
through partnership with Prince's Trust
-- Continued partnership with Mind, the mental health charity;
colleagues completed over 170,000 hours of mental health
e-learning
Supplier partners
-- Overall Group supplier satisfaction reached its highest score
to date of 77.8%, +1.6% pts. vs 1H 2019/20
-- Booker's acquisition of Best Food Logistics completed as
planned in early March 2020 for a nominal consideration
-- Carrefour alliance; 24 global agreements in place; more
opportunity in own brand and goods & services not for
resale
-- Working together with suppliers to reduce packaging
- Replaced plastic-wrapped multipacks with plastic-free
multibuys on Tesco and branded tinned food
- Loose fruit and vegetables price matched to pre-packed
products
- Fresh flowers being transitioned to paper packaging
Shareholders
-- Announced final dividend of 6.50p per share, reflecting the
strength of last year's performance and our robust liquidity and
balance sheet; full-year dividend of 9.15p per share with pay-out
ratio of 50%
-- Proposed sale of Thailand & Malaysia businesses for
c.GBP8.2bn(3) ; releasing material value, allowing us to further
simplify and focus the business, and to return significant value to
shareholders
-- Cumulative Booker synergies delivered one year ahead of target at GBP207m
-- Task Force on Climate-related Financial Disclosures:
signatory since 2017; phase one scenario analysis completed;
informing business continuity planning; phase two scenario analysis
in 2020/21
-- Zero-carbon business by 2050; roadmap to 100% renewable
electricity, with plans to fit solar panels to 187 stores
1. 'Top up at Tesco' allows Booker catering customers to use
their reward card at a Tesco till.
2. Measurement is against a benchmark composed of global retail
companies.
3. c.GBP8.2bn consideration is on a cash and debt free
basis.
Proposed sale of Thailand & Malaysia businesses for
c.GBP8.2bn
In March we announced that we had agreed to sell our businesses
in Thailand and Malaysia to a combination of CP Group entities(12)
, following inbound interest and a detailed strategic review.
Consideration for the disposal represents an enterprise value of
$10.6bn (c.GBP8.2bn) on a cash and debt free basis. Following
completion of the disposal, we intend to return c.GBP5bn to
shareholders via a special dividend and further de-risk the
business by reducing indebtedness through a GBP2.5bn pension
contribution, which is expected to eliminate the funding
deficit.
The disposal was unanimously agreed by the Board to be in the
best interests of all stakeholders and completion is expected in
the second half of 2020, conditional on shareholder and regulatory
approval. As the disposal is a Class 1 transaction under the
Listing Rules, the completion is conditional on shareholder
approval at a General Meeting. Shortly after completion, there will
then be a separate General Meeting to seek shareholder approval for
the return of proceeds and associated share consolidation. The
disposal will further simplify the Group, enabling a stronger focus
on driving cash generation and returns to shareholders from our
retail businesses in the UK and Ireland and in Central Europe.
Financial Results
All comparative figures included within this announcement have
been restated for IFRS 16, the financial reporting standard on
accounting for leases introduced by the International Accounting
Standards Board, effective for accounting periods beginning on or
after 1 January 2019. As previously indicated, we have adopted the
standard fully retrospectively. Further detail on this can be found
in Note 1 starting on page 34.
For UK & ROI our reported statutory performance is for the
53 weeks ended 29 February 2020. For all other operations, these
results are for the calendar year ended 29 February 2020. To aid
comparability, headline results are shown on a 52 week comparable
basis, with additional disclosure provided to explain the impact of
week 53 on the statutory measures. Reconciliations between
statutory results and headline alternative performance measures are
shown in the glossary starting on page 117 of this statement.
Sales:
UK & ROI(1) Central Asia (3) Tesco Bank Group
Europe
(2)
-----------------------------
On a 52 week basis:
----------------------------- ------------ ---------- ---------- ----------- -----------
Sales GBP44,909m GBP5,332m GBP5,218m GBP1,068m GBP56,527m
(exc. VAT, exc. fuel)
------------ ---------- ---------- ----------- -----------
change at constant exchange
rates(4) % 0.2% (10.1)% 0.1% (2.6)% (1.0)%
change at actual exchange
rates(4) % 0.1% (12.1)% 6.7% (2.6)% (0.7)%
------------ ---------- ---------- ----------- -----------
Like-for-like sales (exc.
VAT, exc. fuel) 0.2% (6.4)% (1.9)% - (0.6)%
------------ ---------- ---------- ----------- -----------
On a 53 week basis:
----------------------------- ------------ ---------- ---------- ----------- -----------
Statutory revenue GBP52,898m GBP5,576m GBP5,218m GBP1,068m GBP64,760m
(exc. VAT, inc. fuel)
Includes: Week 53 sales GBP843m - - - GBP 843m
(exc. VAT, exc. fuel)
Includes: Fuel GBP7,146m GBP244m - - GBP7,390m
------------ ---------- ---------- ----------- -----------
1. UK & ROI consists of Tesco UK, ROI and Booker. Booker
consolidated from 5 March 2018.
2. Central Europe consists of Czech Republic, Hungary, Poland
and Slovakia.
3. Asia consists of Thailand and Malaysia.
4. Sales change shown on a comparable days basis for Central
Europe and Asia. Based on statutory accounting dates, Group sales
grew by 0.8% at constant exchange rates and by 1.1% at actual
exchange rates.
Group sales declined by (0.7)% at actual exchange rates,
including a 0.3% foreign exchange translation benefit due to the
depreciation of Sterling. In the UK and the Republic of Ireland
(ROI) total sales increased by 0.1% at actual exchange rates,
against a backdrop of subdued market growth.
In the UK, we continued our Centenary celebrations offering
significant savings to customers through our '100 Years of Great
Value' events, and introduced exclusive Clubcard Prices for our 19
million Clubcard holders. We have further strengthened our value
proposition with the launch of our 'Aldi Price Match campaign' in
March 2020, price matching to Aldi on hundreds of Tesco and branded
products.
The customer reaction to the launch of Clubcard Plus in November
has been encouraging. For a GBP7.99 monthly subscription, customers
can benefit from 10% off 2 big shops in-store as well as savings on
popular Tesco brands and double data on Tesco Mobile. Subscribers
can also apply for a Clubcard Plus credit card from Tesco Bank with
no foreign exchange fees abroad(5) .
Our fresh food volumes outperformed the market by 0.5%(6)
supported by strong performance in our 'food to go' offer. We
continue to improve our overall product mix, making our general
merchandise offer more relevant by focusing on categories that are
complementary to our food offer such as Home and Cook. In the
coming year we are planning to rebalance space further, in
particular by augmenting our F&F clothing offer in a number of
our large stores.
Our online grocery customer service ratings all improved
year-on-year. Following a strong sales performance in the first
half, a slower rate of growth in the second half of the year
reflected our decision to maintain a sustainable approach to
incentivising new customers in a highly competitive environment. We
are taking steps to increase our online capacity to align to the
long-term growth in customer demand in this channel, with our first
Urban Fulfilment Centre planned in our West Bromwich Extra store.
This year we will also increase the number of vans and trial
unmanned Click & Collect sites to further support order
growth.
5. Subject to status.
6. Data is for the 52-weeks ending 22 February 2020 and is
sourced from IRI Retail Advantage(TM) , global insight providers to
the retail industry. Aldi and Lidl do not submit data to IRI and
are therefore excluded from their market definition.
In November we announced we will become the first UK retailer to
remove plastic-wrapped tinned multipacks from all stores and
replace them with plastic-free multibuys, eliminating 67 million
pieces of plastic. This forms part of our commitment to remove one
billion pieces of plastic from our own brand products by the end of
2020.
Booker sales grew (on a comparable days basis) by 3.8% excluding
tobacco (2.9% including tobacco) despite a challenging market in
both wholesale and retail, with small business confidence remaining
low. The continued focus on customer service was recognised in
November when Booker was named 'Best National Wholesaler' for
overall customer satisfaction(1) . The acquisition of Best Food
Logistics in early March 2020 will provide more customers with the
benefits of the sourcing capabilities of the wider Tesco
business.
In ROI sales grew by 0.8% at constant exchange rates, and we saw
particularly strong sales growth in core fresh food, including
bakery and produce, as customers responded well to the continued
investment in our 'You won't pay more' value campaign.
In Central Europe we have undertaken a significant
transformation, fundamentally changing our approach in Poland and
re-sizing, simplifying and improving the relevance of our
businesses in the Czech Republic, Hungary and Slovakia. Sales fell
by (10.1)% at constant exchange rates, reflecting disruption from
the actions we have taken including the rationalisation of our
general merchandise offer, making our customer offer more relevant
and compelling. Across the region we right-sized 545 hypermarkets,
closed 28 stores and, in Poland, completed the transition to a
two-format model (compact hypermarkets and supermarkets). We also
invested to improve the shopping trip for customers, focusing on
availability, which improved by 1% and our key 'Star lines'
products which saw like-for-like growth of 20%.
In Asia sales grew by 6.7% at actual rates and by 0.1% at
constant rates. In Thailand, our new Express proposition roll out
and large store re-invention programme are both progressing well
and as part of our innovation in store formats we now have two of
our 'ultra convenient' E-Pop stores in the Bangkok region. We have
simplified our fresh food offer, with more competitive prices and
our 'Food Love Stories' campaign has further improved customer
quality perceptions. The simplification of our general merchandise
ranges impacted our headline sales by c.(1)% in the year. In
Malaysia, we increased our market share, opening two new small
stores following favourable legislation changes, with plans for a
further four openings in 2020/21. Across the region we are building
trust with customers through our focus on reducing food waste and
plastic usage.
Group statutory revenue of GBP64.8bn grew by 1.3% year-on-year
and includes fuel sales of GBP7.4bn. Further information on sales
performance is included in the supplementary information starting
on page 114 of this statement.
1. HIM annual Wholesale Tracking programme.
Operating profit before exceptional items and amortisation of
acquired intangibles:
UK & Central Asia Retail Tesco Group
ROI Europe Bank
------------------------------------- --------- ----------
On a 52 week basis:
------------------------------------- ---------- --------- --------- ---------- ---------- ----------
Operating profit before exceptional GBP2,184m GBP156m GBP426m GBP2,766m GBP193m GBP2,959m
items and amortisation of acquired
intangibles
---------- --------- --------- ---------- ---------- ----------
change at constant exchange
rates % 16.9% (27.6)% 24.8% 13.9% (3.0)% 12.6%
change at actual exchange rates
% 16.9% (29.4)% 33.5% 14.9% (3.0)% 13.5%
---------- --------- --------- ---------- ---------- ----------
Operating profit margin before
exceptional items and amortisation
of acquired intangibles 4.21% 2.80% 8.16% 4.41% 18.07% 4.64%
---------- --------- --------- ---------- ---------- ----------
change at constant exchange 51bp (70)bp 158bp 48bp (7)bp 47bp
rates (basis points)
change at actual exchange rates 59bp (71)bp 161bp 58bp (7)bp 56bp
(basis points)
---------- --------- --------- ---------- ---------- ----------
On a 53 week basis:
------------------------------------- ---------- --------- --------- ---------- ---------- ----------
Statutory operating profit GBP1,944m GBP85m GBP415m GBP2,444m GBP74m GBP2,518m
---------- --------- --------- ---------- ---------- ----------
Includes: Week 53 GBP46m - - GBP46m - GBP46m
Includes: Exceptional items GBP(286)m GBP(71)m GBP(11)m GBP(368)m GBP(119)m GBP(487)m
and amortisation of acquired
intangibles
---------- --------- --------- ========== ---------- ----------
Group operating profit before exceptional items and amortisation
of acquired intangibles of GBP2,959m grew by 13.5% at actual
exchange rates. Retail operating profit before exceptional items
and amortisation of acquired intangibles of GBP2,766m increased by
14.9% year-on-year (at actual exchange rates) following strong
performance in UK & ROI and Asia, partly offset by the impact
of disruption as we transform our business in Central Europe to
improve long-term profitability in the region.
UK & ROI operating profit before exceptional items and
amortisation of acquired intangibles grew by 16.9% at actual rates
to GBP2,184m, with operating margin up 59 basis points
year-on-year. The increase in profitability was driven by the
actions we have taken to improve product mix, and cost savings
through further refinements to our operating model including
changes to our in-store counters offer and simplification of stock
control processes.
We have now delivered cumulative synergies (comprising the
in-year benefit of new initiatives combined with the carry forward
of prior year activity) of GBP207m from the Booker merger,
exceeding our c.GBP200m target a year earlier than planned. Whilst
we still see many opportunities to deliver further synergies, these
will no longer be considered separately to our overall UK & ROI
performance. In the period the challenge of a weak market in both
the wholesale and catering sectors was exacerbated by the effect of
the clearance of excess stock that had been built up in
anticipation of Brexit disruption. Despite these challenges
Booker's profit growth (including synergies) outperformed the
industry as a whole.
In Central Europe operating profit before exceptional items was
GBP156m, (29.4)% lower year-on-year. The actions described above to
simplify our operations resulted in significant sales disruption
and stock clearance costs, particularly in the second half of the
year. In addition, performance reflected investments to improve the
competitiveness of our offer, in particular our key 'Star lines'
products, over 600 everyday items which we have made available to
customers at market-leading prices. Excluding a GBP(13)m provision
made in the first half in respect of potential historic VAT
liabilities, the change in operating profit was (23.5)%.
In Asia, we saw a strong increase in profitability, with growth
of 33.5% at actual exchange rates and 24.8% at constant exchange
rates. We accelerated our cost savings initiatives in Thailand,
including a more efficient distribution operation and more focused,
more effective marketing activity. In addition, we benefited from
the flow through of prior year initiatives. We continued to
optimise the mix of our product ranges as we focus on sustainable,
profitable ranges in general merchandise. Performance also included
a GBP24m benefit as a result of changes to how property tax is
levied on businesses in Thailand.
In 2020/21, Asia will be treated as a discontinued operation
following the announcement on 9 March 2020 of the proposed sale of
our businesses in Thailand and Malaysia(1) .
Further information on operating profit performance is included
in Note 2, starting on page 42 of this statement.
1. Completion of the disposal is subject to shareholder and
regulatory approval.
Exceptional items and amortisation of acquired intangibles in
statutory operating profit:
This Exclude: This Last
year Week year year
53 week 53 52 week
basis basis
------------------------------------------------ --------- ----------
Net restructuring and redundancy costs GBP(151)m GBP44m GBP(107)m GBP(182)m
Net property disposals GBP55m GBP(11)m GBP44m GBP104m
Booker integration costs GBP(23)m - GBP(23)m GBP(15)m
Acquisition of property joint venture GBP(136)m - GBP(136)m -
Net impairment (loss)/reversal of non-current GBP(15)m - GBP(15)m GBP106m
assets
Impairment of investment in India joint venture GBP(47)m - GBP(47)m -
Profit on disposal of Gain Land GBP37m - GBP37m -
Other corporate activity costs GBP(22)m - GBP(22)m -
Tesco Bank mortgage disposal GBP(5)m - GBP(5)m -
Closure of Tesco Bank current accounts to GBP(56)m - GBP(56)m -
new customers
Provision for customer redress GBP(45)m - GBP(45)m GBP(16)m
Tesco Direct closure costs - - - GBP(38)m
Tesco Bank FCA provision - - - GBP(16)m
Release of amounts provided in relation of - - - GBP37m
FCA obligations - - - GBP176m
Release of provision relating to HMRC VAT - - - GBP7m
appeal - - - GBP(43)m
Sale of Lazada
Guaranteed minimum pensions (GMP) equalisation
----------
Total exceptional items in statutory operating GBP(408)m GBP33m GBP(375)m GBP120m
profit
--------- ----------
Amortisation of acquired intangible assets GBP(79)m GBP1m GBP(78)m GBP(78)m
--------- ----------
Total exceptional items and amortisation of GBP(487)m GBP34m GBP(453)m GBP42m
acquired intangibles in statutory operating
profit
--------- ========== ----------
Exceptional items are excluded from our headline performance
measures by virtue of their size and nature in order to reflect
management's view of the underlying performance of the Group.
This year, total exceptional items resulted in a net cost of
GBP(375)m, compared to a net credit of GBP120m in the prior year.
This year-on-year movement is principally due to provision releases
and net impairment reversals in the base, as well as the accounting
impact of obtaining full control of one of our property joint
ventures (Tesco Atrato Limited) through the acquisition of our
partner's 50% stake in September 2019. All of these significant
movements are non-cash.
Exceptional restructuring and redundancy costs of GBP(107)m
include a GBP(51)m charge relating to the simplification of our
store operating model in the UK and a GBP(43)m charge relating to
the transformation we have undertaken in Central Europe.
Exceptional net profits on property transactions of GBP44m have
arisen from property disposals within the UK (GBP18m) and Central
Europe (GBP26m).
We have incurred a GBP(23)m exceptional charge relating to
Booker integration costs, bringing costs to date to GBP(38)m.
The acquisition of our partner's stake in Tesco Atrato Limited
results in the Group taking on the joint venture's external debt in
addition to its freehold assets (15 stores and two distribution
centres). The exceptional charge of GBP(136)m represents the net
effect of the de-recognition of the previously held IFRS 16 lease
liabilities and right of use assets, and the impairment of the
acquired assets (further detail can be found in Note 33 on page 91
of this statement).
As announced at the half year, the impairment charge of GBP(47)m
relating to our Trent Hypermarket joint venture relates to reduced
profit expectations due to investments in the competitiveness of
our offer and reduced store expansion plans.
Other exceptional items include a profit of GBP37m on the
disposal of our 20% share in Gain Land in China, and a GBP(22)m
charge relating to corporate activity, which includes costs
relating to the proposed sale of our businesses in Thailand and
Malaysia in addition to other Group projects.
Tesco Bank recognised a GBP(56)m exceptional accelerated
depreciation charge following the decision to close our current
account business to new customers. Also, as announced at the half
year, Tesco Bank recognised an additional GBP(45)m provision for
customer redress due to an unexpectedly high number of claims
received in the weeks prior to the 29 August deadline in respect of
Payment Protection Insurance.
Net exceptional items of GBP(33)m in week 53 comprise a GBP(44)m
charge relating to further changes to our UK store operating model
and GBP11m of net profits on property transactions in the UK.
Further detail on exceptional items can be found in Note 4 on
page 48 of this statement.
Amortisation of acquired intangible assets is also excluded from
our headline performance measures. The GBP(78)m charge primarily
relates to our merger with Booker in March 2018, which resulted in
the recognition of goodwill of GBP3,093m and a GBP755m intangible
asset.
Joint ventures and associates:
This Exclude: This Last
year Week year year
53 week 53 52 week
basis basis
-------------------------------------------------- --------- ---------
Share of post-tax profits from JVs and associates GBP26m - GBP26m GBP21m
before exceptional items
--------- --------- --------- -------
Exceptional items GBP(8)m - GBP(8)m GBP11m
--------- --------- --------- -------
Share of post-tax profits from JVs and associates GBP18m - GBP18m GBP32m
--------- --------- ========= -------
Our share of post-tax profits from joint ventures and associates
before exceptional items was GBP26m, an increase of GBP5m
year-on-year primarily due to a reduced level of losses from Gain
Land, our former associate in China.
Exceptional items of GBP(8)m comprise a GBP(12)m charge for land
penalties arising in our 20% share of Gain Land, and in Tesco Bank,
an exceptional gain of GBP4m in our insurance joint venture, Tesco
Underwriting, reflecting a revision to the Ogden compensation
tables which are used to calculate future losses in personal injury
and fatal accident claims.
Following the sale of our 20% share in Gain Land and proposed
sale of our business in Thailand, which is inclusive of our 25%
share of the Tesco Lotus Retail Growth Freehold and Leasehold
Property Fund (TLGF), our share of post-tax profits from JVs and
associates will primarily relate to our UK property joint ventures.
In 2019/20 TLGF contributed GBP26m to profit.
Finance income and finance costs:
The following table sets out the components of net finance
costs.
This year Exclude: This year Last year
53 week Week 53 52 week
basis basis
--------------------------------------------- --------- ------------
Net interest on medium term notes, loans GBP(212)m GBP3m GBP(209)m GBP(238)m
and bonds
------------ --------- ------------ ------------
Other interest receivable and similar GBP23m - GBP23m GBP25m
income
--------------------------------------------- ------------ --------- ------------ ------------
Other finance charges and interest payable GBP(25)m - GBP(25)m GBP(49)m
--------------------------------------------- ------------ --------- ------------ ------------
Finance charges payable on lease liabilities GBP(541)m GBP6m GBP(535)m GBP(561)m
--------------------------------------------- ------------ --------- ------------ ------------
Capitalised interest - - - GBP1m
------------ --------- ------------ ------------
Net finance cost before exceptional GBP(755)m GBP(746)m GBP(822)m
charges, net pension finance costs and GBP9m
fair value remeasurements of financial
instruments
------------ --------- ------------ ------------
Fair value remeasurements of financial GBP(244)m GBP18m GBP(226)m GBP(153)m
instruments
--------------------------------------------- ------------ --------- ------------ ------------
Net pension finance costs GBP(71)m - GBP(71)m GBP(89)m
--------------------------------------------- ------------ --------- ------------ ------------
Net finance costs before exceptional GBP(1,070)m GBP27m GBP(1,043)m GBP(1,064)m
charges
------------ --------- ------------ ------------
Exceptional items:
--------------------------------------------- ------------ --------- ------------ ------------
- Fair value remeasurement on restructuring GBP(180)m - GBP(180)m -
derivative financial instruments
--------------------------------------------- ------------ --------- ------------ ------------
- Gain on Tesco Bank mortgage disposal GBP29m - GBP29m -
--------------------------------------------- ------------ --------- ------------ ------------
Net finance costs GBP(1,221)m GBP27m GBP(1,194)m GBP(1,064)m
------------ --------- ============ ------------
Net finance costs before exceptional charges, net pension
finance costs and fair value remeasurements of financial
instruments reduced by GBP76m year-on-year to GBP(746)m, mainly
driven by a reduction in net interest payable following debt
maturities, bond tenders and new debt issued at a significantly
lower rate of interest. In addition, finance charges payable on
lease liabilities reduced by GBP26m year-on-year due to ongoing
lease utilisation and the buyback of 21 leasehold properties in the
year.
Fair value remeasurements of financial instruments increased by
GBP73m year-on-year driven by a fall in inflation expectations
impacting the new index-linked swaps, which offset those put in
place as part of historical sale and leaseback property
transactions. The swaps were restructured to eliminate the impact
of future inflation on the Group's cash flow in relation to these
property transactions. Fair value remeasurements also includes
GBP(65)m primarily relating to the premium paid on the repurchase
on long-dated bonds (LY: GBP(121)m).
Net pension finance costs decreased by GBP18m year-on-year,
primarily due to a lower opening pension deficit. For the 2020/21
financial year, net pension finance costs are expected to be no
more than c.GBP55m. The exact cost will depend on the timing of the
one-off pension contribution of GBP2.5bn, described above.
The exceptional charge of GBP(180)m included in net finance
costs relates to actions taken to remove inflation risk from the
historical sale and leaseback property transactions. The charge,
which is non-cash, relates to the revaluation of credit risk
associated with the historical swaps, described above, over a
shorter timeframe.
An exceptional credit of GBP29m relates to a fair value
remeasurement as part of the sale of Tesco Bank's mortgage book
that was completed in September.
Further detail on finance income and costs can be found in Note
5 on page 50, as well as further detail on the exceptional items in
Note 4 on page 48.
Group tax:
This year Exclude: This year Last year
53 week Week 53 52 week
basis basis
------------------------------------------ --------- ----------
Tax on profit before exceptional items GBP(433)m GBP3m GBP(430)m GBP(397)m
and amortisation of acquired intangibles
---------- --------- ---------- ----------
Tax on exceptional items and amortisation GBP53m GBP(7)m GBP46m GBP50m
of acquired intangibles
---------- --------- ---------- ----------
Tax on profit GBP(380)m GBP(4)m GBP(384)m GBP(347)m
---------- --------- ========== ----------
Tax on Group profit before exceptional items and amortisation of
acquired intangibles was GBP(430)m, GBP33m higher than last year
due to increased profitability. This year's charge also includes a
credit arising from closing a number of issues relating to prior
years across the Group. Group cash tax paid in the year was
GBP340m, including GBP207m of corporate tax paid in the UK.
Following the reversal of the enacted 2% reduction in the rate
of UK corporation tax from 1 April 2020, we now expect the Group's
effective tax rate to be around 21% in the medium term. For the
2020/21 financial year we expect an effective tax rate of c.24% as
a result of a one-off rate change impact from revaluing deferred
tax from 17% to 19%.
As previously announced, following changes to the timing of UK
corporation tax payments, in common with other large UK companies
we will have two additional quarterly cash payments in the 2021
fiscal year. This change effectively moves from payment of around
half the tax liability after the financial year-end to full payment
in-year, and is expected to create a one-off additional cash
outflow in the first half of our 2020/21 financial year.
As part of the use of proceeds from the proposed sale of our
businesses in Thailand and Malaysia, we will make a GBP2.5bn
one-off contribution into the UK defined benefit pension scheme. As
the Group will receive tax relief on this contribution, it is
anticipated that the level of cash tax payable will be reduced by
c.GBP120m in the year of payment and c.GBP60m per annum in the
following three years.
On a statutory basis, the total tax charge is GBP(380)m which
includes a GBP53m credit relating to exceptional items.
Earnings per share:
This year Exclude: This year Last year
53 week Week 53 52 week
basis basis
------------------------------------------------- --------- ----------
Diluted EPS pre-exceptional items, amortisation
of acquired intangibles, net pension finance
costs and fair value remeasurements of
financial instruments 18.23p (0.31)p 17.92p 14.01p
---------- --------- ========== ----------
Statutory diluted earnings per share 9.54p - n/a 13.04p
---------- --------- ---------- ----------
Statutory basic earnings per share 9.60p - n/a 13.13p
---------- --------- ---------- ----------
Our diluted earnings per share before exceptional items,
amortisation of acquired intangibles, net pension finance costs and
fair value remeasurements of financial instruments was 17.92p,
27.9% higher year-on-year, due to our improved profit
performance.
Statutory basic earnings per share from continuing operations
were 9.60p, (26.9)% lower year-on-year, primarily reflecting the
change in the level of exceptional items year-on-year.
Dividend:
Reflecting the strength of our performance last year and given
our robust liquidity and balance sheet, we propose to pay a final
dividend of 6.50 pence per ordinary share. This takes the total
dividend for the year to 9.15 pence per ordinary share, up 58.6%
year-on-year, including the payment of an interim dividend of 2.65
pence per ordinary share in November 2019. This represents a
full-year dividend pay-out ratio of 50% on a 53 week basis.
We expect to maintain a full-year dividend pay-out ratio of 50%
going forward and from 2020/21 our interim dividend will be set at
35% of the prior year full-year dividend.
The proposed final dividend was approved by the Board of
Directors on 7 April 2020 and is subject to the approval of
shareholders at this year's Annual General Meeting. The final
dividend will be paid on 3 July 2020 to shareholders who are on the
register of members at close of business on 22 May 2020 (the Record
Date). Shareholders may elect to reinvest their dividend in the
Dividend Reinvestment Plan (DRIP). The last date for receipt of
DRIP elections and revocations will be 12 June 2020.
Summary of total indebtedness (1) :
Feb 2020 Exclude: Feb 2020 Feb 2019 Movement
53 week Week 53 52 week
basis basis
------------------------------ ------------- --------- -------------
Underlying net debt (excludes GBP(2,765)m GBP191m GBP(2,574)m GBP(2,734)m GBP160m
Tesco Bank)
Lease liabilities GBP(9,533)m GBP6m GBP(9,527)m GBP(10,470)m GBP943m
Pension deficit, IAS 19 basis GBP(2,573)m - GBP(2,573)m GBP(2,338)m GBP(235)m
(post-tax)
------------- --------- ------------- ------------- ----------
Total indebtedness GBP(14,871)m GBP197m GBP(14,674)m GBP(15,542)m GBP868m
------------- --------- ============= ------------- ----------
1. Total indebtedness is defined in the glossary, starting on
page 117.
Total indebtedness was GBP14,674m, down GBP868m year-on-year
driven by a reduction in our lease liabilities and underlying net
debt, partly offset by an increase in the pension deficit.
Our lease liabilities decreased by GBP943m year-on-year,
principally reflecting the purchase of our partner's 50% stake in
the Tesco Atrato Limited property joint venture. The acquisition,
which is treated as an asset acquisition, increases our freehold
property ownership and borrowings, replacing associated right of
use assets and lease liabilities. In addition, our lease
liabilities reduced due to capital repayments made in the year and
the buyback of a number of other leasehold properties.
On an IAS 19 basis, our pension deficit increased by GBP(235)m
to GBP(2.6)bn. An increase in the measurement of scheme liabilities
due to a fall in corporate bond yields was largely offset by strong
asset performance, including that of our liability-driven
investment portfolio, in addition to continued deficit
contributions and the application of the latest actuarial
assumptions.
As part of the use of proceeds from the proposed sale of our
businesses in Thailand and Malaysia, we have reached agreement with
the Trustees to make a GBP2.5bn one-off contribution into the
Scheme. This, along with other measures, is expected to eliminate
the funding deficit and significantly reduce the prospect of having
to make further pension deficit contributions in the future.
The agreement with the Trustees also covers the key principles
of the triennial scheme valuation, which will now be calculated as
at 31 December 2019. The Trustees will aim to conclude the
valuation as soon as is reasonably possible.
Further information on the Group's pension liability is
available in Note 29 which begins on page 83.
Our key credit metrics, which are fixed charge cover and total
indebtedness/EBITDA, have further improved since the end of the
last financial year, from 3.0 to 3.4 times and from 3.6 to 3.1
times respectively. We are now targeting leverage of c.2.5
times.
Summary retail cash flow:
This year Exclude: This year Last year
53 week Week 53 52 week
basis basis
======================================== =========== ========= =========== ============
Operating profit before exceptional GBP3,005m GBP(46)m GBP2,959m GBP2,607m
items and amortisation of acquired
intangibles
----------- --------- ----------- ------------
Less: Tesco Bank operating profit GBP(193)m - GBP(193)m GBP(199)m
before exceptional items
----------- --------- ----------- ------------
Retail operating profit before GBP2,812m GBP(46)m GBP2,766m GBP2,408m
exceptional items and amortisation
of acquired intangibles
======================================== =========== ========= =========== ============
Add back: Depreciation and amortisation GBP1,937m GBP(29)m GBP1,908m GBP1,887m
---------------------------------------- ----------- --------- ----------- ------------
Other reconciling items GBP66m GBP12m GBP78m GBP70m
---------------------------------------- ----------- --------- ----------- ------------
Pension deficit contribution GBP(267)m - GBP(267)m GBP(266)m
Underlying (increase) / decrease GBP(77)m GBP240m GBP163m GBP(306)m
in working capital
Retail cash generated from operations GBP4,471m GBP177m GBP4,648m GBP3,793m
before exceptional items
----------- --------- -----------
Exceptional cash items: GBP(230)m - GBP(230)m GBP(156)m
Relating to prior years:
- Shareholder Compensation Scheme - - - GBP(43)m
payments &
SFO fine - - - GBP(1)m
- Onerous contract provisions GBP(133)m - GBP(133)m GBP(60)m
- Restructuring payments
Relating to current year: GBP(64)m - GBP(64)m GBP(68)m
- Restructuring payments GBP(23)m - GBP(23)m GBP(12)m
- Integration costs GBP(10)m - GBP(10)m -
- Corporate costs - - - GBP28m
- Other(1)
---------------------------------------- ----------- ========= ----------- ------------
Retail operating cash flow GBP4,241m GBP177m GBP4,418m GBP3,637m
---------------------------------------- ----------- --------- ----------- ------------
Cash capex GBP(988)m GBP4m GBP(984)m GBP(1,126)m
Net interest GBP(777)m GBP27m GBP(750)m GBP(830)m
---------------------------------------- ----------- --------- ----------- ------------
Tax GBP(271)m - GBP(271)m GBP(302)m
---------------------------------------- ----------- --------- ----------- ------------
Property proceeds GBP269m GBP(11)m GBP258m GBP285m
---------------------------------------- ----------- --------- ----------- ------------
Property purchases - store buybacks GBP(172)m - GBP(172)m GBP(136)m
Market purchases of shares (net GBP(149)m - GBP(149)m GBP(146)m
of proceeds) GBP345m - GBP345m GBP(635)m
Acquisitions & disposals and dividends - - - GBP747m
received GBP(632)m - GBP(632)m GBP(605)m
Add back: Booker acquisition costs
(included above)
Repayments of obligations under
leases
======================================== =========== ========= =========== ============
Retail free cash flow GBP1,866m GBP197m GBP2,063m GBP889m
======================================== =========== ========= =========== ============
1. Booker integration costs were previously included within
'Other'.
Retail free cash flow increased by GBP1,174m year-on-year to
GBP2,063m, reflecting a strong increase in cash profitability, a
decrease in working capital and the contribution from the sale of
our share in Gain Land.
We generated a net working capital inflow of GBP163m. This
improvement is lower than initially planned, and includes the
reversal of the GBP(210)m impact seen in the second half of last
year primarily relating to our decision to delay the implementation
of a new general ledger system. Our planned progress was held back
by the timing of non-trade related payments, the deleveraging
effect of lower sales in Central Europe and the continued
prioritisation of securing availability for customers ahead of
potential Brexit deadlines. These factors were partly offset by a
refinement of payment terms with our largest suppliers.
The GBP(240)m impact shown in the table above in working capital
relating to week 53 is primarily driven by the timing of a fuel
payment.
Cash capital expenditure was GBP142m lower year-on-year as we
maintain our disciplined approach to capital investment.
An GBP80m reduction in cash interest principally relates to debt
maturities and bond tenders at a significantly lower rate of
interest. Cash interest also includes the interest element of lease
rental payments, which reduced by GBP26m year-on-year as leases
were utilised and we bought back a number of other leasehold
properties.
Retail cash tax paid in the year was GBP271m, a decrease of
GBP31m year-on-year. The decrease year-on-year was due to IFRS 16
transitional adjustments and a higher charge for fair value
remeasurements in the period, which are both eligible for cash tax
relief.
We generated GBP258m of property proceeds including GBP167m from
the sale of properties in Central Europe, mainly in Poland. We
utilised GBP172m of cash primarily for the buyback of our
Blandford, Chesterfield and High Wycombe stores, which will result
in an annual cash rental saving of GBP8m.
We purchased GBP149m of shares in the market following our
commitment to offset any dilution from the issuance of new shares
to satisfy the requirements of share schemes. Going forward we
continue to expect to utilise c.GBP150m a year, with the precise
amount depending on performance and market conditions.
The increase in repayments of obligations under leases of GBP27m
is largely offset by a corresponding decrease within the interest
element of lease rental payments included in net interest.
As previously announced, we will make a GBP0.3bn pension deficit
contribution in the 2020/21 financial year, which in addition to
the proposed one-off GBP2.5bn contribution in the second half of
2020, is expected to eliminate the funding deficit and
significantly reduce the prospect of having to make further deficit
contributions in the future, releasing c.GBP260m of annual free
cash flow.
Capital expenditure and space(1) :
UK & ROI Central Europe Asia Tesco Bank Group
This Last This Last This Last This Last This Last
year year year year year year year year year year
-------------------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
Capital expenditure GBP769m GBP709m GBP108m GBP130m GBP134m GBP235m GBP52m GBP31m GBP1,063m GBP1,105m
------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
Openings (k sq
ft) 270 176 - - 195 622 - - 465 798
-------------------- ------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
Closures (k sq
ft) (400) (270) (1,047) (1,013) (67) (196) - - (1,514) (1,479)
-------------------- ------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
Repurposed (k
sq ft) - - (1,936) (669) (777) (341) - - (2,713) (1,010)
------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
Net space change
(k sq ft) (130) (94) (2,983) (1,682) (649) 85 - - (3,762) (1,691)
------- ------- ------- ------- ------- ------- ------ ------ --------- ---------
1. 'Retail Selling Space' is defined as net space in store
adjusted to exclude checkouts, space behind checkouts, customer
service desks and customer toilets. Supplementary information
starting on page 114 provides a full breakdown of space by
segment.
Group capital expenditure shown in the table above reflects
expenditure on ongoing business activities across the Group. Our
capital expenditure for the year was GBP1.1bn, broadly level on the
prior year, and was primarily focused on store maintenance and
refits.
In the UK & ROI spend has related to the maintenance of our
stores in addition to 18 new Express store openings and our
temporary replacement store in Kennington. We also opened five
Jack's stores in the UK, bringing the total to twelve.
In Central Europe, our programme to address unproductive selling
space by either refitting, downsizing or repurposing stores is now
largely complete. In Poland we moved to a two-format model, which
involved closing or re-sizing all hypermarkets to our better
performing compact hypermarket format. The total space reduction in
Central Europe was c.3 million sq. ft. with c.2.1 million sq. ft.
of this within Poland.
In Asia we opened two new stores in Malaysia, following
favourable legislation changes and a further 54 new stores in
Thailand, primarily in our Express format.
Following the proposed sale of our businesses in Thailand and
Malaysia, in future years we expect our annual Group capital
expenditure to be within a range of GBP0.9bn to GBP1.2bn.
Statutory capital expenditure of GBP2.1bn includes GBP914m
relating to the acquisition of full control of the Tesco Atrato
Limited partnership (comprising 15 stores and two distribution
centres) and GBP136m relating to the buyback of a number of other
leasehold properties in the year.
Further details of current and forecast space can be found in
the supplementary information starting on page 114.
Property
This year Last year
UK & Central Asia Group UK & Central Asia Group
ROI Europe ROI Europe
-------------------- ---------- ---------- --------- --------- ----------
Property(1) -
fully owned
- Estimated market GBP15.0bn GBP2.7bn GBP4.0bn GBP21.7bn GBP14.3bn GBP3.0bn GBP4.0bn GBP21.3bn
value
- NBV(2) GBP14.4bn GBP2.2bn GBP2.3bn GBP18.9bn GBP13.6bn GBP2.7bn GBP2.4bn GBP18.7bn
% net selling
space owned 53% 77% 68% 61% 51% 79% 68% 61%
% property owned
- by value(3) 55% 74% 79% 60% 51% 77% 77% 58%
---------- --------- --------- ---------- ---------- --------- --------- ----------
1. Stores, malls, investment property, offices, distribution
centres, fixtures and fittings and work-in-progress. Excludes joint
ventures. Last year numbers restated for adoption of IFRS 16.
2. Property, plant and equipment excluding vehicles.
3. Excludes fixtures and fittings.
The estimated market value of our fully owned property as at the
year end increased by GBP0.4bn to GBP21.7bn. The market value of
GBP21.7bn represents a surplus of GBP2.8bn over the net book value
(NBV).
Our Group freehold property ownership percentage, by value, has
increased by 2% year-on-year. In September we completed the
purchase of our partner's 50% stake in the Tesco Atrato Limited
property joint venture, which includes 15 stores and two
distribution centres. This acquisition increased our percentage of
fully owned property in UK & ROI by c.2% and will lead to an
annualised cash rental saving of GBP41m. The repurchasing of three
large stores in the UK also supported an improvement in the
percentage of fully owned property, in addition to an annualised
cash rental saving of GBP8m.
In Central Europe, we released GBP167m of value through the
disposal of 58 properties in the year as part of the significant
transformation of the business that we are undertaking. This has
resulted in a year-on-year decrease in the market value of our
fully owned property in Central Europe, to GBP2.7bn.
Tesco Bank:
This year Last year YoY
----------------------------
Revenue GBP1,068m GBP1,097m (2.6)%
---------- ----------- --------
Operating profit before
exceptional items GBP193m GBP199m (3.0)%
---------- ----------- --------
Statutory operating profit GBP74m GBP169m (56.2)%
Lending to customers GBP8,451m GBP12,426m (32.0)%
Customer deposits GBP7,707m GBP10,465m (26.4)%
Net interest margin 4.1% 3.8% 0.3%
Total capital ratio 23.1% 18.3% 4.8%
---------- ----------- --------
Tesco Bank focuses on providing simple banking and insurance
products to a broad range of Tesco customers. Tesco Bank sales were
impacted by our decision to exit the mortgage market in September,
which also drove the decline in lending to customers. The insurance
market remains highly competitive and we continue to focus our
investment on retention of existing customers. This year we have
also invested in the customer experience through a number of
initiatives, including the launch of the Clubcard Plus Credit Card,
and a new Student Shopper Card as part of our Gift Card range. In
addition, we upgraded the Tesco Mobile app to allow customers to
purchase foreign currency and we rolled out our click and collect
service to more stores.
Operating profit before exceptional items decreased by (3.0)%
year-on-year to GBP193m. Our insurance income decreased as we
focused on competitive pricing, however we delivered increased
income from our loans portfolio in line with increased lending to
customers, and higher income from our Gift Cards and Travel Money.
The significant cost savings made this year include lower fraud
costs resulting from the Bank's continued focus on improved
technology and safeguarding our customers, and lower ATM
maintenance costs as a result of optimisation efficiencies. This
has contributed to the cost:income ratio improving by 1.9% pts
year-on-year.
In February we stopped accepting new applications for personal
current accounts, as part of our repositioning of Tesco Bank to
focus on the right products and services for Tesco customers. This
resulted in an exceptional charge of GBP(56)m relating to
accelerated depreciation of intangible and fixed assets. Total
exceptional items within statutory operating profit relating to
Tesco Bank were GBP(119)m and further detail can be found in Note 4
on page 48 of this statement.
An income statement for Tesco Bank can be found in the
supplementary information on page 116 of this statement. Balance
sheet and cash flow detail for Tesco Bank can be found within Note
2 starting on page 42 of this statement. Tesco Bank's full year
results are also published today and are available at
https://bank.tescoplc.com .
Contacts
Investor Relations: Chris Griffith 01707 912 900
Sarah Titterington 01707 912 878
Media: Christine Heffernan 01707 918 701
Philip Gawith, Teneo 0207 420 3143
This document is available at www.tescoplc.com/prelims2020
A live webcast will be held today at 8.30am for investors and
analysts and will be available on our website at
www.tescoplc.com/prelims 2020. This will include all Q&A and
will also be available for playback after the event. All
presentation materials, including a transcript, will be made
available on our website.
We will report our 1Q Trading Statement on Friday 26 June
2020.
Disclaimer
This document may contain forward-looking statements that may or
may not prove accurate. For example, statements regarding expected
revenue growth and operating margins, market trends and our product
pipeline are forward-looking statements. Phrases such as "aim",
"plan", "intend", "should", "anticipate", "well-placed", "believe",
"estimate", "expect", "target", "consider" and similar expressions
are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual
results to differ materially from what is expressed or implied by
the statements. Any forward-looking statement is based on
information available to Tesco as of the date of the statement. All
written or oral forward-looking statements attributable to Tesco
are qualified by this caution. Tesco does not undertake any
obligation to update or revise any forward-looking statement to
reflect any change in circumstance.
Independent auditor's report to the members of Tesco PLC
The independent auditor's report to the shareholders of Tesco
Plc included within the preliminary announcement of Tesco is a
direct extract from the independent auditor's report included
within the annual report and financial statements. Therefore it
references certain elements of the annual report which are not
included within the preliminary announcement and the page numbers
included in the opinion relate to the annual report and financial
statements.
Report on the audit of the financial statements
Opinion
In our opinion:
- the financial statements of Tesco PLC (the 'Parent Company')
and its subsidiaries (the 'Group') give a true and fair view of the
state of the Group's and of the Parent Company's affairs as at 29
February 2020 and of the Group's profit for the year then
ended;
- the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
- the Parent Company financial statements have been properly
prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including Financial Reporting Standard 101
"Reduced Disclosure Framework"; and
- the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
- the Group income statement;
- the Group statement of comprehensive income;
- the Group and Parent Company balance sheets;
- the Group and Parent Company statements of changes in equity;
- the Group cash flow statement; and
- the related Notes 1 to 37 of the Group financial statements
and Notes 1 to 17 of the Parent Company financial statements.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Parent
Company financial statements is applicable law and United Kingdom
Accounting Standards, including FRS 101 "Reduced Disclosure
Framework" (United Kingdom Generally Accepted Accounting
Practice).
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the Parent Company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the
Financial Reporting Council's (the 'FRC's') Ethical Standard as
applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by
the FRC's Ethical Standard were not provided to the Group or the
Parent Company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year
were:
Newly identified:
- proposed disposal of the Asia business;
Similar level of risk:
- store impairment review;
- recognition of commercial income;
- pension obligation valuation;
- contingent liabilities;
- presentation of the Group's income statement;
- Tesco Bank loan impairment; and
- retail technology environment, including IT security.
Materiality
We have considered a number of benchmarks and determined that it
is appropriate to base materiality on profit before tax before
exceptional items and amortisation of acquired intangibles. The
materiality that we used for the Group financial statements was
GBP85m (2018/19: GBP80m) which equates to 4.3% (2018/19: 5.1%
restated) of profit before tax before exceptional items and
amortisation of acquired intangibles. Refer to page 97 for further
details of exceptional items and amortisation of acquired
intangibles.
Scoping
Our audit scoping provides full scope audit coverage of 96%
(2018/19: 95%) of revenue and 92% (2018/19: 94% restated) of net
assets.
Significant changes in our approach
Our 2019/20 report includes a new key audit matter relating to
the proposed disposal of the Asia business.
We no longer report the following as key audit matters:
- Booker IFRS 3 acquisition accounting judgements and
presentation of results - as the related judgements were concluded
upon in 2018/19; and
- IFRS 16 presentation and disclosure key audit matter - as the
key estimates and judgements underpinning management's IFRS 16
impact assessment and related transition disclosures were concluded
upon in 2018/19.
There are no other significant changes in our approach except
for changes in key audit matters as described above.
Conclusions relating to going concern, principal risks and
viability statement
Going concern
We have reviewed the directors' statement on page 68 to the
financial statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them
and their identification of any material uncertainties to the
Group's and company's ability to continue to do so over a period of
at least twelve months from the date of approval of the financial
statements.
We considered as part of our risk assessment the nature of the
group, its business model and related risks including where
relevant the impact of the Covid-19 pandemic and Brexit, the
requirements of the applicable financial reporting framework and
the system of internal control. We evaluated the directors'
assessment of the Group's ability to continue as a going concern,
including challenging the underlying data and key assumptions used
to make the assessment, and evaluated the directors' plans for
future actions in relation to their going concern assessment.
We are required to state whether we have anything material to
add or draw attention to in relation to that statement required by
Listing Rule 9.8.6R(3) and report if the statement is materially
inconsistent with our knowledge obtained in the audit.
Going concern is the basis of preparation of the financial
statements that assumes an entity will remain in operation for a
period of at least 12 months from the date of approval of the
financial statements.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
Principal risks and viability statement
Based solely on reading the directors' statements and
considering whether they were consistent with the knowledge we
obtained in the course of the audit, including the knowledge
obtained in the evaluation of the directors' assessment of the
Group's and the company's ability to continue as a going concern,
we are required to state whether we have anything material to add
or draw attention to in relation to:
- the disclosures on pages 13 to 18 that describe the principal
risks, procedures to identify emerging risks, and an explanation of
how these are being managed or mitigated;
- the directors' confirmation on page 13 that they have carried
out a robust assessment of the principal and emerging risks facing
the Group, including those that would threaten its business model,
future performance, solvency or liquidity; or
- the directors' explanation on page 18 as to how they have
assessed the prospects of the Group, over what period they have
done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We are also required to report whether the directors' statement
relating to the prospects of the Group required by Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained in
the audit.
Viability means the ability of the Group to continue over the
time horizon considered appropriate by the directors.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
How the scope of our
audit
responded to the key
Key audit matter description audit matter Key observations
======================================= ================================ =====================================
Proposed disposal of the
Asia business
======================================= ================================ =====================================
As described in Note 1 (Accounting Our audit procedures We are satisfied that
policies, judgements and included challenging the Group was not committed
estimates) and Note 36 (Events whether the presentation to a disposal of the
after the reporting period) of assets and liabilities businesses as at 29
of the financial statements, in the balance sheet February 2020 and therefore
on 9 March 2020, the Group and financial results the results of the
announced the proposed sale in the income statement Asia business are appropriately
of its Asia business for of the Asia business presented within continuing
net cash proceeds of $10.3 was in line with the operations.
billion (equivalent to GBP8.0 requirements of IFRS
billion) before tax and 5, which would have
other transaction costs. required the sale to
The transaction is subject be approved by the Board
to shareholder and regulatory before year-end. In
approval and is expected order to assess this,
to complete during the second we discussed the matter
half of calendar year 2020. with members of the
Under IFRS 5- Non-current Board and reviewed minutes
Assets Held for Sale and of the relevant Board
Discontinued Operations, meetings.
the Group is required to
assess whether the Asia
business should be presented
as 'Held for sale' and the
financial results of the
business be included within
'Discontinued operations'.
We identified a key audit
matter relating to management's
judgement that the Group
was not committed to the
disposal as at 29 February
2020 and therefore the results
continue to be presented
within continuing operations.
As disclosed in Note 1 of
the financial statements,
the Group has concluded
that at the balance sheet
date the criteria for held
for sale were not met and
consequently the financial
results of the Asia business
have not been classified
as discontinued operations.
The Audit Committee's discussion
of this key audit matter
is set out on page 49.
======================================= ================================ =====================================
How the scope of our
audit responded to the
Key audit matter description key audit matter Key observations
============================================================ ============================================================ =================
Store impairment review
============================================================ ============================================================ =================
As described in Note 1 (Accounting Our audit procedures We concluded
policies, judgements and included obtaining an that the
estimates) and Note 11 (Property, understanding of relevant assumptions
plant and equipment) of controls around the in the
the financial statements, impairment review processes. impairment
the Group held GBP19,234m In relation to the Group's models,
(2018/19: GBP19,186m) of value-in-use assessment specifically
property, plant and equipment our procedures have in the
and GBP6,874m of right of included: value-in-use
use assets (2018/19: GBP7,713m) * challenging the key assumptions utilised in the cash calculations
at 29 February 2020. flow forecasts with reference to historical trading ,
Under IAS 36, the Group performance, market expectations and the were within
is required to complete reasonableness of management's forecasts; an
an impairment review of acceptable
its store portfolio where range, and
there are indicators of * reviewing and challenging the adequacy of that the
impairment or impairment management's sensitivity analysis in relation to key overall
reversal. assumptions to consider the extent of change in those level of net
Judgement is required in assumptions that either individually or collectively impairment
identifying indicators of would be required for the assets to be impaired, in charge was
impairment and estimation particular forecast cash flows and property fair reasonable.
is required in determining values and sublet rental potential; and
the recoverable amount of
the Group's store portfolio.
Additionally, there is judgement * assessing the extent to which the need for large
in relation to triggering scale government intervention in response to Covid-19
the reversals of impairments was evident as at 29 February 2020.
recognised in previous periods.
There is a risk that the
carrying value of stores With the involvement
and related fixed assets of our property valuation
may be higher than the recoverable specialists we challenged
amount. Where a review for the assumptions used
impairment, or reversal by the Group in determining
of impairment, is conducted, the fair market value
the recoverable amount is including those completed
determined based on the by external valuers
higher of 'value-in-use' and assessed whether
or 'fair value less costs appropriate valuation
of disposal'. methodologies have been
The two areas which are applied.
key to management's impairment
review are as follows:
* value-in-use derived from cash flow projections,
which rely upon Directors' assumptions and estimates
of future trading performance, including the Group's
ability to realise forecast cost savings; and
* fair value of properties or sublet rental potential
supporting the carrying value of store assets in each
of the Group's territories.
As disclosed within Note
15 of the financial statements,
the Group has incorporated
a Brexit risk adjustment
in the UK & ROI segment
and a Covid-19 risk adjustment
for all segments to reflect
the associated risks in
the Group's modelling based
on reasonable and supportable
information available to
management at year end.
As a result of the Group's
store impairment review
completed during the year,
a net impairment charge
of GBP312m (2018/19: net
impairment reversal of GBP129m)
was recognised.
The Audit Committee's discussion
of this key audit matter
is set out on page 49.
============================================================ ============================================================ =================
How the scope of our
audit
Key audit matter responded to the key
description audit matter Key observations
=========================== ============================================================ ===========================
Recognition of commercial
income
=========================== ============================================================ ===========================
As described in Note 1 Our audit procedures The results of our
(Accounting included obtaining an testing are
policies, judgements understanding of relevant satisfactory.
and controls the Group has We consider the
estimates) and Note 22 established in relation disclosure
(Commercial to commercial income given around supplier
Income) of the recognition. rebates to provide
financial In addition, we performed an appropriate
statements, the Group the following: understanding
has testing whether amounts of the types of rebate
agreements with recognised were accurate income received and
suppliers and recorded in the the impact on the
whereby volume-related correct period, by agreeing Group's
allowances, to the contractual performance balance sheet.
promotional and obligations in a sample
marketing of individual supplier
allowances and various agreements;
other * testing commercial income balances included within
fees and discounts are inventories and trade and other receivables, or
received netted against trade and other payables (as set out
in connection with the in Note 22) via balance sheet reconciliation
purchase procedures;
of goods for resale
from
those suppliers. As * circularising a sample of suppliers to test whether
such, the arrangements recorded were complete. Where
the Group recognises a responses from suppliers were not received, we
reduction completed alternative procedures such as agreement to
in cost of sales as a underlying contractual arrangements;
result
of amounts receivable
from * holding discussions with a sample of the Group's
those suppliers. buying personnel to further understand the buying
In accordance with processes;
IFRS
15, commercial income
should * using data analytics to profile commercial income,
only be recognised as identify deals which exhibited characteristics of
income audit interest upon which we completed detailed audit
within the income testing;
statement
when the performance
conditions * reviewing the Group's ongoing compliance with the
associated with it Groceries Supplier Code of Practice (GSCOP).
have Additionally, reviewing the reporting and
been met, for example correspondence to the Group's supplier hotline in
where order to identify any areas of non-compliance which
the marketing campaign may require further investigation; and
has
been held.
The variety and number * considering the adequacy of related disclosure within
of the Group's financial statements.
the buying
arrangements
with suppliers can
make
it complex to
determine
the performance
conditions
associated with the
income,
giving rise to a
requirement
for management
judgement.
As such we have
identified
this as a key audit
matter
and considered that
there
was a potential for
fraud
through possible
manipulation
of this income.
The Audit Committee's
discussion
of this key audit
matter
is set out on page 49.
=========================== ============================================================ ===========================
Pension obligation
valuation
=========================== ============================================================ ===========================
As described in Note 1 Our audit procedures We are satisfied that
(Accounting included obtaining an the overall
policies, judgements understanding of relevant methodology
and controls in relation is appropriate and
estimates) and Note 29 to the pension obligation the assumptions
(Post- valuation process. applied
employment benefits) In addition, we performed in relation to
of the following: determining
the financial * worked with our internal pension actuarial the pension valuation
statements, specialists to review the key actuarial assumptions are within an
the Group has a used, both financial and demographic, and considered acceptable
defined the methodology utilised to derive these assumptions; range. The actual
benefit pension plan and discount
in rate applied of 1.93%
the UK retail is within the market
business. * benchmarked and performed a sensitivity analysis on range. The methodology
At 29 February 2020, the key assumption determined by the Directors. used by the Group
the applies
Group recorded a net a different approach
retirement to estimating yields
obligation before of longer term high
deferred quality corporate
tax of GBP3,085m bonds
(2018/19: compared to the
GBP2,808m), comprising majority
scheme of companies, which
assets of GBP17,425m results in a discount
(2018/19: rate which is at the
GBP15,054m) and scheme optimistic end of the
liabilities market range.
of GBP20,510m
(2018/19:
GBP17,862m).
The pension obligation
valuation
is material, dependent
on
market conditions, and
sensitive
to changes in key
assumptions.
The key audit matter
specifically
relates to the
following
key assumptions:
discount
rate, inflation
expectations
and life expectancy
assumptions.
The setting of these
assumptions
is complex and
requires
the exercise of
significant
management judgement
with
the support of third
party
actuaries.
The Audit Committee's
discussion
of this key audit
matter
is set out on page 49.
=========================== ============================================================ ===========================
How the scope of our
audit
responded to the key
Key audit matter description audit matter Key observations
================================================================ ============================================================ ==================
Contingent liabilities
================================================================ ============================================================ ==================
As described in Note 1 (Accounting Our audit procedures We conclude
policies, judgements and included obtaining an that the
estimates) and Note 34 (Contingent understanding of relevant Group's
liabilities) of the financial controls in relation contingent
statements, the Group has to the monitoring of liabilities
a number of contingent liabilities. known exposures. disclosure
Judgement is required in In assessing the potential is complete.
assessing the likelihood exposures to the Group, Specifically,
of outflow, the potential we have completed a the
quantum of any outflow and range of procedures accounting
the associated disclosure including: and
requirements. This key audit * assessing the risks the business faces; disclosures
matter specifically relates in relation
to the following exposures: to the
* in 2016/17 UK shareholder actions were initiated * reading Board and other meeting minutes to identify ongoing UK
against the Group linked to the overstatement of areas subject to Group consideration; shareholder
expected profits in 2014 which may result in legal actions,
exposures; claims from
* meeting with the Group's internal legal advisors to the
understand ongoing and potential legal matters and purchasers of
* following the sale of Homeplus in 2015 the Group has reviewing third party correspondence and reports; the
received claims from the purchaser relating to the Homeplus
sale of the business; and business and
* assessing the reasonableness of management's the Group's
likelihood and quantification of outflow assessment; equal pay
* Tesco Stores Limited has received claims from current and matter are
and former store colleagues alleging that their work appropriate.
is of equal value to that of colleagues working in
the Group's distribution centres and that differences * reviewing the proposed accounting and disclosure of
in terms and conditions relating to pay are not actual and potential legal liabilities, drawing on
objectively justifiable. third party assessment of open matters.
The Audit Committee's discussion
of this key audit matter
is set out on page 49.
============================================================ ==================
Presentation of the Group's income statement
==================================================================================================================================================
One of the Group's key performance Our audit procedures Consistent with
indicators is 'Group operating included obtaining an other
profit before exceptional understanding of relevant businesses of a
items and amortisation of controls which address similar
acquired intangibles' (2019/20: the risk of inappropriate scale to the
GBP3,005m, 2018/19: GBP2,607m). presentation of the Group,
Refer to page 49 of the Group's income statement. there are
annual report for management's In order to address non-recurring
reconciliation of this key this key audit matter income and expense
performance indicator to we have completed audit items included
the Group's statutory profit procedures including: within
measure. * considering exceptional items disclosed by the Group profit before
Management judgement is and the existence of any further potential exceptional
required when applying this exceptional items included within the Group's items and
accounting policy and when underlying profit measures; amortisation
determining the classification of acquired
of items as exceptional intangibles
within the Group's income * assessing whether any bias exists in management's which do not meet
statement. Additionally, presentation of results and assessing consistency of the
we have considered the impact application across multiple financial years; Group's definition
of the 2019/20 financial of exceptional
period being a 53-week year items
on the disclosures. * assessing transactions completed outside of the and which largely
We have determined that normal course of business; offset.
there was a potential for We concur that
fraud through possible manipulation these
of the Group's income statement * assessing the appropriateness of excluding have been
presentation due to the amortisation of intangible assets acquired in appropriately
level of judgement involved business combinations from Group's operating profit included within
and remuneration targets alternative performance measure; and profit
being linked to the key before exceptional
performance indicator. items and
The Audit Committee's discussion * evaluating the impact of the 2019/20 financial period amortisation
of this key audit matter being a 53-week year. of acquired
is set out on page 49. intangibles.
We have reviewed
the
calculation of the
Alternative
Performance
Measures which
have
been calculated on
a 52-week basis,
where
relevant, and are
satisfied
that this has been
done on an
appropriate
basis.
================================================================ ============================================================ ==================
Key audit matter How the scope of our audit Key
description responded to the key audit matter observations
=========================================================== ============================================================= ===============
Tesco Bank loan impairment
=========================================================== ============================================================= ===============
As described in Note Our audit procedures included obtaining Based on our
19 (Loans and advances an understanding of the relevant controls audit
to customers and over the impairment review processes and procedures
banks) the Group the determination of the judgements within above, we
held an impairment the model. concluded
provision in respect In order to address this key audit matter that
of loans and advances we have completed audit procedures including: management's
to customers and * with support from internal economic modelling experts, provision is
banks of GBP488m challenging the macro-economic scenario forecasts reasonably
at 29 February 2020 that were incorporated into the ECL model; stated, and
(2018/19: GBP485m). is supported
The expected credit by a
loss on these loans * challenging how management had assessed the impact of methodology
and advances was Covid-19 within the ECL model to assess whether that that is
GBP178m in the year it was appropriately considered in the measurement of consistently
to 29 February 2020 ECLs at year end. In particular, we challenged applied and
(2018/19: GBP163m). Management's assessment of the likelihood of a severe compliant with
The impact of further economic downturn caused by Covid-19 at the reporting IFRS 9.
deterioration in date with reference to the reasonable and supportable
the economic outlook information available to management at that date;
on expected credit
losses ("ECLs") after
the reporting date * considering whether events arising after the
is discussed in note reporting date, such as the declaration of the
36 (Events after outbreak as a global pandemic by the World Health
the reporting period). Organisation on 11 March 2020, nationwide lockdowns,
Loan impairment remains and the fiscal and monetary policy responses to
one of the most significant combat the economic effects of Covid-19, provided
judgements made by evidence that such events were possible future events
management particularly which management could assign an appropriate
in light of the uncertain probability to at the reporting date, based on
economic outlook reasonable and supportable information available to
in the UK and, at management at that date;
the reporting date
the potential impact
of the global Covid-19 * challenging whether management's severe downside
outbreak. As described macro-economic scenario adequately captured the
in Note 1 (Accounting potential macro-economic downside risks arising as a
policies, estimates result of the Covid-19 outbreak, based on reasonable
and judgements) management's and supportable information available to management
provisioning methodology at the reporting date;
is based on an "expected
loss" model as required
under IFRS 9 'Financial * assessing management's methodology, including the
instruments'. refinements made, against the requirements of IFRS 9
The Audit Committee's with input from our internal credit risk-modelling
discussion of this specialists and we tested the application of that
key audit matter methodology within the impairment models;
is set out on page
49.
* challenging the quantitative and qualitative triggers
used to identify significant increases in credit risk
to assess whether they were consistently applied, and
whether they were based on reasonable information
indicative of a significant increased risk of default
since initial recognition;
* assessing and challenging the key assumptions used by
management to estimate the expected life of both
credit cards and unsecured personal loans using
historical observed data; and
* challenging the appropriateness and completeness of
management overlays, assessing and independently
recalculating those which were included.
=========================================================== ============================================================= ===============
Retail technology environment, including IT security
============================================================================================================================ =============
The Group's retail We have continued to challenge and assess Although
operations utilise changes to the IT environment through management's
a range of information the testing of remediated controls and remediation
systems. In 2015/16, concluding on the sufficiency and appropriateness plan is
2016/17, 2017/18 of management's changes. designed
and 2018/19 we reported During the year we have assessed the design to address
deficiencies in certain and implementation of the Group's relevant our concerns,
IT controls. These controls over the information systems given the
deficiencies could that are important to financial reporting, complexity
have an adverse impact including the changes made as part of of the
on the Group's controls the Group's replacement programme. underlying
and financial reporting Consistent with 2018/19, in 2019/20 we systems the
systems. did not plan to take a controls reliant plan is a
IT remediation is audit approach in the retail business multi-year
a complex, multi-year due to the ongoing weaknesses in the IT programme and
project involving environment. not yet
management judgement Accordingly, we extended the scope of complete,
and activities which our substantive audit procedures in response and therefore
are at risk of being to the deficiencies which affected the weaknesses
inappropriately designed, applications and databases within the remain in the
executed or at risk scope of our audit. control
of error. These areas environment.
include: Management's
* inappropriate controls in place to govern the IT actions have
changes such as inappropriate approval controls; and reduced the
number of
deficiencies
* appropriateness of remediated access controls and in the year
whether the remediated controls address previously by closing
identified deficiencies. the
deficiencies
relating to
The Audit Committee's batch
discussion of this management
key audit matter and change
is set out on page management
49. controls
linked
to the Group's
financial
reporting.
Further
remediation
work is
ongoing.
=========================================================== ============================================================= ===============
Our application of materiality
Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Performance materiality
Group Parent Company
Financial statements financial statements
======================= ============================================== ===============================
Materiality GBP85m (2018/19: GBP80m) GBP55m (2018/19: GBP52m)
======================= ============================================== ===============================
Basis for determining 4.3% (2018/19: 5.1% restated) of Materiality represents
materiality profit before tax before exceptional less than 1% (2018/19:
items and amortisation of acquired less than 1%) of net
intangibles of GBP1,961m (2018/19 assets.
restated: GBP1,564m).
Refer to Note 4 for additional
details of profit before tax before
exceptional items and amortisation
of acquired intangibles and management's
reconciliation to the Group's statutory
measure.
======================= ============================================== ===============================
Rationale for Profit before tax before exceptional As this is the Parent
the benchmark items and amortisation of acquired Company of the Group,
applied intangibles is an appropriate metric it does not generate
since it is a key performance indicator significant revenues
and is not impacted by any potential but instead incurs costs.
volatility which may be caused Net assets are of most
by exceptional items and amortisation relevance to users of
as a result of acquired intangibles the financial statements.
recognised under IFRS 3.
The materiality selected represents
0.6% (2018/19: 0.6% restated) of
the Group's net assets.
======================= ============================================== ===============================
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole. Group performance materiality was set at 66%
of Group materiality for the 2019/20 audit (2018/19: 70%). As we
continue to be unable to rely on internal controls in the retail
business we have used a lower percentage of materiality to
determine our performance materiality for 2019/20. In determining
performance materiality, we have also considered the uncorrected
misstatements identified in the previous period.
Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP4.25m (2018/19:
GBP4m) for the Group and the Parent Company, as well as differences
below that threshold that, in our view, warranted reporting on
qualitative grounds. We also report to the Audit Committee on
disclosure matters that we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level.
The Group has subsidiary grocery retail operations in eight
countries, together with interests in a number of other businesses
both in the UK and internationally.
The Group's accounting process is structured around local
finance functions and is further supported by a shared service
centre in Bengaluru, India which provides accounting and
administrative support for the Group's core retail operations. Each
local finance function reports into the central Group finance
function based at the Group's head office. Based on our assessment
of the Group, we focused our Group audit scope primarily on the
audit work on eight significant retail locations (UK, Booker,
Republic of Ireland, Czech Republic, Hungary, Poland, Slovakia and
Thailand) and Tesco Bank. The operations in Czech Republic,
Hungary, Poland and Slovakia are managed as one combined business.
All of these were subject to a full audit and represent 96%
(2018/19: 95%) of the Group's revenue, 92% (2018/19: 93%) restated
of profit before tax and 92% (2018/19: 94% restated) of net
assets.
In addition, three other businesses (Malaysia, dunnhumby and
Tesco Mobile) were subject to specific audit procedures on material
account balances, where the extent of our testing was based on our
assessment of the risks of material misstatement and of the size of
the Group's operations at those locations. The three businesses
accounted for 2% (2018/19: 3%) of the Group's revenue, 8% (2018/19:
3% restated) of profit before tax and 6% (2018/19: 6% restated) of
net assets.
At the Group level we also tested the consolidation process and
carried out analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the
aggregated financial information of the remaining components not
subject to audit or audit of specified account balances.
The most significant component of the Group is its retail
business in the UK. As such, there is extensive interaction between
the Group and UK audit team to ensure an appropriate level of
direction and supervision in this audit work. During the course of
our audit, the UK audit team visited 52 (2018/19: 50) retail stores
in the UK to attend either inventory counts or in order to complete
store control visits, and 5 (2018/19: 4) distribution centre
inventory counts.
The Group audit team visited 7 (2018/19: 7) of the 8 (2018/19:
8) significant locations set out above, in addition to Tesco Bank
and the Group's shared service centre in Bengaluru, with the Group
audit partner visiting 5 (2018/19: 3) of these locations. We also
had a dedicated audit partner of the audit team focused on
overseeing the role of the component audit teams located outside of
the UK and the Republic of Ireland, ensuring that we applied a
consistent audit approach to the operations in the Group's
international business.
The audit visits by the Group audit team were timed to enable us
to be involved during the planning and risk assessment process in
addition to the execution of detailed audit procedures. During our
visits, we attended key meetings with component management and
auditors, and reviewed detailed component auditor work papers.
Subsequent to the travel restrictions being put in place as a
result of the Covid-19 pandemic, we arranged for the component
audit files to be reviewed remotely and held regular calls with the
local teams to discuss the results and resolve any queries.
In addition, all key component audit teams were represented
during a centralised two-day planning meeting led by the Group
audit team and held in the UK prior to the commencement of our
detailed audit work. The purpose of this planning meeting was to
provide a good level of understanding of the Group's businesses,
its core strategy and a discussion of the significant risks and
workshops on our planned audit approach. Group management also
attended part of the meeting to support these planning
activities.
Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether there
is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the
work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact.
In this context, matters that we are specifically required to
report to you as uncorrected material misstatements of the other
information include where we conclude that:
- Fair, balanced and understandable - the statement given by the
directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's position and performance, business model and strategy,
is materially inconsistent with our knowledge obtained in the
audit; or
- Audit committee reporting - the section describing the work of
the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee; or
- Directors' statement of compliance with the UK Corporate
Governance Code - the parts of the directors' statement required
under the Listing Rules relating to the company's compliance with
the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's and the Parent Company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud and non-compliance
with laws and regulations are set out below.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we have considered the following:
- the nature of the industry and sector, control environment and
business performance including the design of the Group's
remuneration policies, key drivers for directors' remuneration,
bonus levels and performance targets;
- results of our enquiries of management, the Group's Internal
Audit function, the Group's Security function, the Group's
Compliance Officer, the Group's General Counsel and the Audit
Committee, about their own identification and assessment of the
risks of irregularities;
- any matters we identified having obtained and reviewed the
Group's documentation of their policies and procedures relating
to:
- identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances of non-
compliance;
- detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged fraud;
- the internal controls established to mitigate risks of fraud
or non-compliance with laws and regulations including the Group's
controls relating to Group's ongoing compliance with the Groceries
Supplier Code of Practice (GSCOP) requirements;
- the matters discussed among the audit engagement team
including significant component audit teams and involving relevant
internal specialists, including IT, tax, valuations and pensions
actuarial specialists regarding how and where fraud might occur in
the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
timing of recognition of commercial income, posting of unusual
journals and complex transactions and manipulating the Group's
alternative performance profit measures and other key performance
indicators to meet remuneration targets and externally communicated
targets. In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the financial
statements. The key laws and regulations we considered in this
context included Group's ongoing compliance with the GSCOP, UK
Companies Act, Listing Rules, employment law, health and safety,
pensions legislation and tax legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty.
Audit response to risks identified
As a result of performing the above, we identified presentation
of the Group's income statement, accounting for the UK customer
loyalty scheme and recognition of commercial income as key audit
matters related to the potential risk of fraud. The key audit
matters section of our report explains the matters in more detail
and also describes the specific procedures we performed in response
to those key audit matters. In relation to accounting for the UK
customer loyalty scheme, which is not a key audit matter, our
procedures included:
- obtaining an understanding of relevant controls relating to
the UK customer loyalty scheme;
- re-calculating the average fair value of unredeemed points and
assessing the appropriateness of the methodology applied;
- agreeing the inputs to the UK loyalty scheme calculation,
recalculating the year end accrual and assessing whether the
redemption percentages used in the calculation were reasonable;
and
- assessing that the accounting entries have been recorded in
accordance with IFRS 15: Revenue.
In addition to the above, our procedures to respond to risks
identified included the following:
- reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the financial statements;
- enquiring of management, the Audit Committee and in-house
legal counsel concerning actual and potential litigation and
claims;
- performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
- reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence with
HMRC; and
- in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams, and
remained alert to any indications of fraud or non-compliance with
laws and regulations throughout the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act
2006
In our opinion the part of the directors' remuneration report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of
the audit:
- the information given in the strategic report and the
directors' report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
- the strategic report and the directors' report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the Parent Company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
strategic report or the directors' report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
- the Parent Company financial statements are not in agreement
with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors ' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors' remuneration have
not been made or the part of the directors' remuneration report to
be audited is not in agreement with the accounting records and
returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were
appointed by the Group's shareholders on 26 June 2015 to audit the
financial statements for the year ended 27 February 2016 and
subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the
firm is five years, covering the years ending 27 February 2016 to
29 February 2020.
Consistency of the audit report with the additional report to
the Audit Committee
Our audit opinion is consistent with the additional report to
the Audit Committee we are required to provide in accordance with
ISAs (UK).
Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Simon Letts (Senior statutory auditor)
For and on behalf of Deloitte LLP Statutory Auditor
London, United Kingdom
7 April 2020
Group income statement
53 weeks ended 52 weeks ended
29 February 2020 23 February 2019
(restated*)
========================================== ==========================================
Before Before
exceptional Exceptional exceptional Exceptional
items items items items
and and and and
amortisation amortisation amortisation amortisation
of acquired of acquired of acquired of acquired
intangibles intangibles Total intangibles intangibles Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
=================== ===== =============== =============== ======== =============== =============== ========
Continuing
operations
Revenue 2 64,760 - 64,760 63,911 - 63,911
Cost of sales (59,871) (309) (60,180) (59,325) 110 (59,215)
=================== ===== =============== =============== ======== =============== =============== ========
Gross profit/(loss) 4,889 (309) 4,580 4,586 110 4,696
Administrative expenses (1,884) (178) (2,062) (1,979) (68) (2,047)
========================== =============== =============== ======== =============== =============== ========
Operating
profit/(loss) 3,005 (487) 2,518 2,607 42 2,649
Share of post-tax
profits/(losses)
of joint ventures
and associates 14 26 (8) 18 21 11 32
Finance income 5 23 - 23 25 - 25
Finance costs 5 (1,093) (151) (1,244) (1,089) - (1,089)
=================== ===== =============== =============== ======== =============== =============== ========
Profit/(loss)
before tax 1,961 (646) 1,315 1,564 53 1,617
Taxation 6 (433) 53 (380) (397) 50 (347)
=================== ===== =============== =============== ======== =============== =============== ========
Profit/(loss) for
the year from
continuing
operations 1,528 (593) 935 1,167 103 1,270
Discontinued
operations
Profit/(loss) for
the year from
discontinued
operations 7 - 38 38 - - -
Profit/(loss) for the year 1,528 (555) 973 1,167 103 1,270
========================== =============== =============== ======== =============== =============== ========
Attributable to:
Owners of the parent 1,526 (555) 971 1,169 103 1,272
Non-controlling interests 2 - 2 (2) - (2)
========================== =============== =============== ======== =============== =============== ========
1,528 (555) 973 1,167 103 1,270
========================== =============== =============== ======== =============== =============== ========
Earnings/(losses) per
share from
continuing
and discontinued
operations
Basic 9 9.99p 13.13p
Diluted 9 9.93p 13.04p
=================== ===== =============== =============== ======== =============== =============== ========
Earnings/(losses)
per share
from continuing
operations
Basic 9 9.60p 13.13p
Diluted 9 9.54p 13.04p
=================== ===== =============== =============== ======== =============== =============== ========
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 and reclassification of
profits/(losses) arising on property-related items as explained in
Note 1 and Note 37.
Group statement of comprehensive income/(loss)
===============================================================================
53 weeks 52 weeks
2020 2019
(restated*)
Notes GBPm GBPm
=============================================== ====== ======== ============
Items that will not be reclassified to
the Group income statement
Remeasurements of defined benefit pension
schemes 29 (466) 364
Net fair value gains/(losses) on inventory
cash flow hedges 49 -
Tax on items that will not be reclassified 6 71 (61)
=============================================== ====== ======== ============
( 346
) 303
=============================================== ====== ======== ============
Items that may subsequently be reclassified
to the Group income statement
Change in fair value of debt instruments
at fair value through other comprehensive
income 9 (10)
Currency translation differences:
Retranslation of net assets of overseas
subsidiaries, joint ventures and associates (68) 90
Gains/(losses) on cash flow hedges:
Net fair value gains/(losses) 57 130
Reclassified and reported in the Group
income statement (7) (57)
Tax on items that may be reclassified 6 (9) 5
=============================================== ====== ======== ============
( 18
) 158
=============================================== ====== ======== ============
Total other comprehensive income/(loss) ( 364
for the year ) 461
Profit/(loss) for the year 973 1,270
=============================================== ====== ======== ============
Total comprehensive income/(loss) for the
year 609 1,731
=============================================== ====== ======== ============
Attributable to:
Owners of the parent 607 1,733
Non-controlling interests 2 (2)
=============================================== ====== ======== ============
Total comprehensive income/(loss) for the
year 609 1,731
=============================================== ====== ======== ============
Total comprehensive income/(loss) attributable
to owners of the parent arising from:
Continuing operations 569 1,733
Discontinued operations 38 -
=============================================== ====== ======== ============
607 1,733
=============================================== ====== ======== ============
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 and reclassification of
profits/(losses) arising on property-related items as explained in
Note 1 and Note 37.
Group balance sheet
==============================================================================================
29 February 23 February 25 February
2020 2019 2018
(restated*) (restated*)
Notes GBPm GBPm GBPm
============================================= ====== =========== ============ ============
Non-current assets
Goodwill and other intangible assets 10 6,119 6,264 2,661
Property, plant and equipment 11 19,234 19,186 18,712
Right of use assets 12 6,874 7,713 7,527
Investment property 13 26 36 100
Investments in joint ventures and associates 14 307 602 597
Financial assets at fair value through
other comprehensive income 16 866 979 860
Trade and other receivables 18 166 243 217
Loans and advances to customers and
banks 19 4,171 7,868 6,885
Derivative financial instruments 25 1,083 1,178 1,117
Deferred tax assets 6 292 251 401
============================================= ====== =========== ============ ============
39,138 44,320 39,077
============================================= ====== =========== ============ ============
Current assets
Financial assets at fair value through
other comprehensive income 16 202 67 68
Inventories 17 2,433 2,617 2,264
Trade and other receivables 18 1,396 1,550 1,415
Loans and advances to customers and
banks 19 4,280 4,882 4,637
Derivative financial instruments 25 63 52 27
Current tax assets 21 6 12
Short-term investments 20 1,076 390 1,029
Cash and cash equivalents 20 3,408 2,916 4,059
============================================= ====== =========== ============ ============
12,879 12,480 13,511
Assets classified as held for sale 7 285 98 149
============================================= ====== =========== ============ ============
13,164 12,578 13,660
============================================= ====== =========== ============ ============
Current liabilities
Trade and other payables 21 (8,922) (9,131) (8,773)
Borrowings 23 (1,490) (1,563) (1,467)
Lease liabilities 12 (598) (646) (712)
Derivative financial instruments 25 (61) (250) (69)
Customer deposits and deposits from
banks 26 (6,377) (8,832) (7,812)
Current tax liabilities (324) (325) (335)
Provisions 27 (155) (226) (416)
============================================= ====== =========== ============ ============
(17,927) (20,973) (19,584)
===================================================== =========== ============ ============
Net current liabilities (4,763) (8,395) (5,924)
===================================================== =========== ============ ============
Non-current liabilities
Trade and other payables 21 (170) (365) (364)
Borrowings 23 (6,005) (5,580) (7,032)
Lease liabilities 12 (8,968) (9,859) (9,560)
Derivative financial instruments 25 (887) (389) (594)
Customer deposits and deposits from
banks 26 (1,830) (3,296) (2,972)
Post-employment benefit obligations 29 (3,085) (2,808) (3,282)
Deferred tax liabilities 6 (40) (49) (82)
Provisions 27 (137) (147) (129)
============================================= ====== =========== ============ ============
(21,122) (22,493) (24,015)
============================================= ====== =========== ============ ============
Net assets 13,253 13,432 9,138
============================================= ====== =========== ============ ============
Equity
Share capital 30 490 490 410
Share premium 5,165 5,165 5,107
All other reserves 3,658 3,770 717
Retained earnings 3,962 4,031 2,926
============================================= ====== =========== ============ ============
Equity attributable to owners of the
parent 13,275 13,456 9,160
Non-controlling interests (22) (24) (22)
============================================= ====== =========== ============ ============
Total equity 13,253 13,432 9,138
============================================= ====== =========== ============ ============
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 as explained in Note 1
and Note 37.
Dave Lewis
Alan Stewart
Directors
The financial statements on pages 28 to 99 were approved and
authorised for issue by the Directors on 7 April 2020.
Group statement of changes in equity
All other reserves
============================================================
Currency Capital Own
Share Share basis redemption Hedging Translation shares Merger Retailed Non-controlling Total
capital premium reserve reserve reserve reserve held reserve earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 23 February
2019 (as
previously
reported) 490 5,165 (5) 16 118 758 (179) 3,090 5,405 14,858 (24) 14,834
Cumulative
adjustment
to opening
balances
from
application
of IFRS 16
(net
of tax) (Note
37) - - - - - (28) - - (1,374) (1,402) - (1,402)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
At 23 February
2019
(restated*) 490 5,165 (5) 16 118 730 (179) 3,090 4,031 13,456 (24) 13,432
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Profit/(loss)
for the year - - - - - - - - 971 971 2 973
Other
comprehensive
income/(loss)
Currency
translation
differences - - - - - (68) - - - (68) - (68)
Change in fair
value of debt
instruments at
fair value
through
other
comprehensive
income - - - - - - - - 9 9 - 9
Remeasurements
of defined
benefit
pension
schemes - - - - - - - - (466) (466) - (466)
Gains/(losses)
on cash flow
hedges - - (12) - 111 - - - - 99 - 99
Tax relating
to components
of other
comprehensive
income - - 2 - (11) 1 - - 70 62 - 62
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total other
comprehensive
income/(loss) - - (10) - 100 (67) - - (387) (364) - (364)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total
comprehensive
income/(loss) - - (10) - 100 (67) - - 584 607 2 609
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Inventory cash
flow hedge
movements
Gains/(losses)
transferred to
the cost of
inventory - - - - (64) - - - - (64) - (64)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total inventory
cash flow
hedge
movements - - - - (64) - - - - (64) - (64)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Transactions
with owners
Purchase of own
shares - - - - - - (221) - - (221) - (221)
Share-based
payments - - - - - - 150 - 5 155 - 155
Dividends (Note
8) - - - - - - - - (656) (656) - (656)
Tax on items
charged to
equity - - - - - - - - (2) (2) - (2)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total
transactions
with owners - - - - - - (71) - (653) (724) - (724)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
At 29 February
2020 490 5,165 (15) 16 154 663 (250) 3,090 3,962 13,275 (22) 13,253
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 as explained in Note 1
and Note 37.
All other reserves
============================================================
Currency Capital Own
Share Share basis redemption Hedging Translation shares Merger Retained Non-controlling Total
capital premium reserve reserve reserve reserve held reserve earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 24 February
2018 (as
previously
reported) 410 5,107 - 16 40 655 (16) 40 4,250 10,502 (22) 10,480
Adjustment on
initial
application
of IFRS 16
(net
of tax) (Note
37) - - - - - (18) - - (1,324) (1,342) - (1,342)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
At 25 February
2018
(restated*) 410 5,107 - 16 40 637 (16) 40 2,926 9,160 (22) 9,138
Adjustment on
initial
application
of IFRS 9 (net
of tax) - - 1 - (1) - - - (177) (177) - (177)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
At 25 February
2018 410 5,107 1 16 39 637 (16) 40 2,749 8,983 (22) 8,961
Profit/(loss)
for the year
(as previously
reported) - - - - - - - - 1,322 1,322 (2) 1,320
IFRS 16
adjustment
to profit/
(loss)
for the year
(Note 37) - - - - - - - - (50) (50) - (50)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Profit/(loss)
for the year
(restated*) - - - - - - - - 1,272 1,272 (2) 1,270
Other
comprehensive
income/(loss)
Currency
translation
differences
(as
previously
reported) - - - - - 100 - - - 100 - 100
IFRS 16
adjustment
to currency
translation
differences - - - - - (10) - - - (10) - (10)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Currency
translation
differences
(restated*) - - - - - 90 - - - 90 - 90
Change in fair
value of
financial
assets at fair
value through
other
comprehensive
income - - - - - - - - (10) (10) - (10)
Remeasurements
of defined
benefit
pension
schemes - - - - - - - - 364 364 - 364
Gains/(losses)
on cash flow
hedges - - (6) - 79 - - - - 73 - 73
Tax relating
to components
of other
comprehensive
income - - - - - 3 - - (59) (56) - (56)
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total other
comprehensive
income/(loss)
(restated*) - - (6) - 79 93 - - 295 461 - 461
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total
comprehensive
income/(loss)
(restated*) - - (6) - 79 93 - - 1,567 1,733 (2) 1,731
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Transactions
with owners
Purchase of own
shares - - - - - - (277) - - (277) - (277)
Share-based
payments - - - - - - 114 - 67 181 - 181
Issue of shares 80 58 - - - - - 3,050 - 3,188 - 3,188
Dividends (Note
8) - - - - - - - - (357) (357) - (357)
Tax on items
charged to
equity - - - - - - - - 5 5 - 5
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
Total
transactions
with owners 80 58 - - - - (163) 3,050 (285) 2,740 - 2,740
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
At 23 February
2019
(restated*) 490 5,165 (5) 16 118 730 (179) 3,090 4,031 13,456 (24) 13,432
=============== ======= ======= ======== ========== ======= =========== ====== ======== ======== ======= =============== =======
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 as explained in Note 1
and Note 37.
Group cash flow statement
==========================================================================================
53 weeks 52 weeks
2020 2019
(restated*)
Notes GBPm GBPm
========================================================== ====== ======== ============
Cash flows generated from/(used in) operating activities
Operating profit/(loss) of continuing operations 2,518 2,649
Depreciation and amortisation 2,157 2,050
(Profit)/loss arising on sale of property, plant
and equipment, investment property, intangible assets
and assets classified as held for sale and early
termination of leases (170) (131)
(Profit)/loss arising on sale financial assets (3) (8)
(Profit)/ loss arising on sale of joint ventures
and associates (68) -
Net impairment loss/(reversal) on property, plant
and equipment, right of use assets, intangible assets
and investment property 302 (114)
Impairment of joint ventures 47 -
Adjustment for non-cash element of pensions charge 9 45
Other defined benefit pension scheme payments 29 (267) (266)
Share-based payments 87 77
Tesco Bank fair value movements included in operating
profit/(loss) 100 127
======== ============
Retail (increase)/decrease in inventories 178 11
Retail (increase)/decrease in development stock 1 (2)
Retail (increase)/decrease in trade and other receivables 175 108
Retail increase/(decrease) in trade and other payables (391) (310)
Retail increase/(decrease) in provisions (87) (197)
======== ============
Retail (increase)/decrease in working capital (124) (390)
======== ============
Tesco Bank (increase)/decrease in loans and advances
to customers and banks 127 (1,585)
Tesco Bank (increase)/decrease in trade and other
receivables 310 4
Tesco Bank increase/(decrease) in customer and bank
deposits, trade and other payables (3,849) 1,348
Tesco Bank increase/(decrease) in provisions 5 (25)
======== ============
Tesco Bank (increase)/decrease in working capital (3,407) (258)
========================================================== ====== ======== ============
Cash generated from/(used in) operations 1,181 3,781
Interest paid (803) (859)
Corporation tax paid (340) (370)
========================================================== ====== ======== ============
Net cash generated from/(used in) operating activities 38 2,552
========================================================== ====== ======== ============
Cash flows generated from/(used in) investing activities
Proceeds from sale of property, plant and equipment,
investment property, intangible assets and assets
classified as held for sale 3,965 286
Purchase of property, plant and equipment and investment
property (1,003) (1,101)
Purchase of intangible assets (201) (191)
Disposal of subsidiaries, net of cash disposed 4 8
Acquisition of subsidiaries, net of cash acquired - (715)
Disposal of associate 33 277 -
Net (increase)/decrease in loans to joint ventures
and associates 8 5
Investments in joint ventures and associates (9) (11)
Net (investments in)/proceeds from sale of short-term
investments (687) 639
Net (investments in)/proceeds from sale of financial
assets at fair value through other comprehensive
income (6) (122)
Dividends received from joint ventures and associates 42 41
Interest received 18 21
========================================================== ====== ======== ============
Net cash generated from/(used in) investing activities 2,408 (1,140)
========================================================== ====== ======== ============
Cash flows generated from/(used in) financing activities
Proceeds from issue of ordinary share capital 30 - 60
Own shares purchased (149) (206)
Repayment of obligations under leases (634) (606)
Increase in borrowings 1,332 975
Repayment of borrowings (1,788) (2,471)
Net cash flows from derivative financial instruments (17) 35
Dividends paid to equity owners 8 (656) (357)
========================================================== ====== ======== ============
Net cash generated from/(used in) financing activities (1,912) (2,570)
========================================================== ====== ======== ============
Net increase/(decrease) in cash and cash equivalents 534 (1,158)
Cash and cash equivalents at the beginning of the
year 2,916 4,059
Effect of foreign exchange rate changes (42) 15
========================================================== ====== ======== ============
Cash and cash equivalents at the end of the year 20 3,408 2,916
========================================================== ====== ======== ============
The notes on pages 34 to 99 form part of these financial
statements.
* Restated for the adoption of IFRS 16 as explained in Note 1
and Note 37.
Notes to the Group financial statements
Note 1 Accounting policies, judgements and estimates
General information
Tesco PLC (the Company) is a public limited company incorporated
and domiciled in the United Kingdom (UK) under the Companies Act
2006 (Registration number 445790). The address of the registered
office is Tesco House, Shire Park, Kestrel Way,
Welwyn Garden City AL7 1GA, UK.
The main activities of the Company and its subsidiaries
(together, the Group) are those of retailing and retail
banking.
Basis of preparation
The consolidated Group financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRS) as endorsed by the European Union (EU), and those parts of
the Companies Act 2006 applicable to companies reporting under
IFRS. The consolidated Group financial statements are presented in
Pounds Sterling, generally rounded to the nearest million. They are
prepared on the historical cost basis, except for certain financial
instruments, share-based payments and pension assets that have been
measured at fair value.
The Directors have, at the time of approving the financial
statements, a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for
the foreseeable future. Thus they continue to adopt the going
concern basis of accounting in preparing the financial
statements.
Unless otherwise stated, the accounting policies set out below
have been applied consistently to all periods presented in these
consolidated financial statements.
The following standards and amendments were adopted in the
current financial year, and further details of their impact on the
Group financial statements are given in Note 37 and Note 25
respectively:
- IFRS 16 'Leases', which has been applied fully
retrospectively; and
- 'Interest rate benchmark reform' amendments, which have been
adopted early.
Other standards, interpretations and amendments effective in the
current financial year have not had a material impact on the Group
financial statements.
The Group has not applied any other standards, interpretations
or amendments that have been issued but are not yet effective. The
impact of the following is still under assessment:
- IFRS 17 'Insurance contracts' .
Other standards, interpretations and amendments issued but not
yet effective are not expected to have a material impact on the
Group financial statements.
Basis of consolidation
The consolidated Group financial statements consist of the
financial statements of the ultimate Parent Company (Tesco PLC),
all entities controlled by the Company (its subsidiaries) and the
Group's share of its interests in joint ventures and
associates.
The financial year represents the 53 weeks ended 29 February
2020 (prior financial year 52 weeks ended 23 February 2019). For
the UK and the Republic of Ireland (UK & ROI), the results are
for the 53 weeks ended 29 February 2020 (prior financial year 52
weeks ended 23 February 2019). For all other operations, the
results are for the calendar year ended 29 February 2020 (prior
calendar year ended 28 February 2019).
Subsidiaries
Subsidiaries are consolidated in the Group's financial
statements from the date that control commences until the date that
control ceases. Intragroup balances and any unrealised gains and
losses or income and expenses arising from intragroup transactions
are eliminated in preparing the consolidated financial
statements.
Joint ventures and associates
The Group's share of the results of joint ventures and
associates is included in the Group income statement and Group
statement of comprehensive income/(loss) using the equity method of
accounting. Investments in joint ventures and associates are
carried in the Group balance sheet at cost plus post-acquisition
changes in the Group's share of the net assets of the entity, less
any impairment in value. The carrying values of investments in
joint ventures and associates include acquired goodwill. If the
Group's share of losses in a joint venture or associate equals or
exceeds its investment in the joint venture or associate, the Group
does not recognise further losses, unless it has incurred
obligations to do so or made payments on behalf of the joint
venture or associate. Dividends received from joint ventures or
associates with nil carrying value are recognised in the Group
income statement as part of the Group's share of post-tax profits/
(losses) of joint ventures and associates.
Unrealised gains arising from transactions with joint ventures
and associates are eliminated to the extent of the Group's interest
in the entity.
Prior period reclassifications
The Group no longer presents 'Profits/(losses) arising on
property- related items' separately in the Group income statement.
Amounts previously reported within 'Profits/(losses) arising on
property-related items' are presented within 'Cost of sales' or
'Administrative expenses'. Items previously determined to be
exceptional by virtue of their size and nature continue to be
reported within 'Exceptional items and amortisation of acquired
intangibles' in the Group income statement, with further details of
such items provided in the notes to the financial statements. Prior
period comparatives have been reclassified to align to the current
period presentational approach.
Following the adoption of IFRS 16, the Group now presents right
of use assets and lease liabilities on the face of the Group
balance sheet. Assets previously held under finance leases have
been reclassified from 'Property, plant and equipment' to 'Right of
use assets' and the associated lease liability has been
reclassified from 'Borrowings' to 'Lease liabilities'.
Revenue
Revenue is income arising from the sale of goods and services in
the ordinary course of the Group's activities, net of value added
taxes. Revenue is recognised when performance obligations are
satisfied and control has transferred to the customer. For the
majority of revenue streams, there is a low level of judgement
applied in determining the transaction price or the timing of
transfer of control.
Sale of goods
The sale of goods represents the vast majority of the Group's
revenue. For goods sold in store, revenue is recognised at the
point of sale. For online or wholesale sales of goods, revenue is
recognised on collection by, or delivery to, the customer. Revenue
is reduced by a provision for expected returns (refund liability).
An asset and corresponding adjustment to cost of sales is
recognised for the Group's right to recover goods from
customers.
Clubcard (customer loyalty programme)
Clubcard points issued by Tesco when a customer purchases goods
are a separate performance obligation providing a material right to
a future discount. The total transaction price (sales price of
goods) is allocated to the Clubcard points and the goods sold based
on their relative standalone selling prices, with the Clubcard
points standalone price based on the value of the points to the
customer, adjusted for expected redemption rates (breakage). The
amount allocated to Clubcard points is deferred as a contract
liability within trade and other payables. Revenue is recognised as
the points are redeemed by the customer.
Financial services
Revenue consists of interest, fees and income from the provision
of retail banking and insurance.
Interest income on financial assets that are measured at
amortised cost is determined using the effective interest rate
method. Calculation of the effective interest rate takes into
account fees receivable that are an integral part of the
instrument's yield, premiums or discounts on acquisition or issue,
early redemption fees and transaction costs. Interest income is
calculated on the gross carrying amount of a financial asset unless
the financial asset is impaired, in which case interest income is
calculated on the amortised cost, after allowance for expected
credit losses.
The majority of the fees in respect of services (credit card
interchange fees, late payment and ATM revenue) are recognised at
the point in time at which the transaction with the customer takes
place and the service is performed. For services performed over
time, payment is generally due monthly in line with the
satisfaction of performance obligations.
The Group generates commission from the sale and service of
motor and home insurance policies underwritten by Tesco
Underwriting Limited, or in a minority of cases by a third-party
underwriter. This is based on commission rates, which are
independent of the profitability of underlying insurance policies.
Similar commission income is also generated from the sale of white
label insurance products underwritten by other third-party
providers. This commission income is recognised on a net basis as
such policies are sold.
In the case of some commission income on insurance policies
managed and underwritten by a third party, the Group recognises
commission income from policy renewals as such policies are sold.
This is when the Group has satisfied all of its performance
obligations in relation to the policy sold and it is considered
highly probable that a significant reversal in the amount of
revenue recognised will not occur in future periods. This
calculation takes into account both estimates of future renewal
volumes and renewal commission rates. A contract asset is
recognised in relation to this revenue. This is unwound over the
remainder of the contract with the customer, in this case being the
third-party insurance provider.
The end policy holders have the right to cancel an insurance
policy at any time. Therefore, a contract liability is recognised
for the amount of any expected refunds due and the revenue
recognised in relation to these sales is reduced accordingly. This
contract refund liability is estimated using prior experience of
customer refunds. The appropriateness of the assumptions used in
this calculation is reassessed at each reporting date.
Commercial income
Consistent with standard industry practice, the Group has
agreements with suppliers whereby volume-related allowances,
promotional and marketing allowances and various other fees and
discounts are received in connection with the purchase of goods for
resale from those suppliers. Most of the income received from
suppliers relates to adjustments to a core cost price of a product,
and as such is considered part of the purchase price for that
product. Sometimes receipt of the income is conditional on the
Group performing specified actions or satisfying certain
performance conditions associated with the purchase of the product.
These include achieving agreed purchases or sales volume targets
and providing promotional or marketing materials and activities or
promotional product positioning. While there is no standard
industry definition, these amounts receivable from suppliers in
connection with the purchase of goods for resale are generally
termed commercial income.
Commercial income is recognised when earned by the Group, which
occurs when all obligations conditional for earning income have
been discharged, and the income can be measured reliably based on
the terms of the contract. The income is recognised as a credit
within cost of sales. Where the income earned relates to
inventories which are held by the Group at the reporting date, the
income is included within the cost of those inventories, and
recognised in cost of sales upon sale of those inventories.
Amounts due relating to commercial income are recognised within
trade and other receivables, except in cases where the Group
currently has a legally enforceable right of set-off and intends to
offset amounts due from suppliers against amounts owed to those
suppliers, in which case only the net amount receivable or payable
is recognised. Accrued commercial income is recognised within
accrued income when commercial income earned has not been invoiced
at the reporting date.
Finance income
Finance income, excluding income arising from financial
services, is recognised in the period to which it relates using the
effective interest rate method.
Finance costs
Finance costs directly attributable to the acquisition or
construction of qualifying assets are capitalised. Qualifying
assets are those that necessarily take a substantial period of time
to prepare for their intended use. All other borrowing costs are
recognised in the Group income statement in finance costs,
excluding those arising from financial services, in the period in
which they occur. For Tesco Bank, finance cost on financial
liabilities is determined using the effective interest rate method
and is recognised in cost of sales.
Business combinations and goodwill
The Group accounts for all business combinations by applying the
acquisition method. All acquisition-related costs are expensed.
On acquisition, the assets (including intangible assets),
liabilities and contingent liabilities of an acquired entity are
measured at their fair values. Non-controlling interests are stated
at the non-controlling interests' proportion of the fair values of
the assets and liabilities recognised.
Goodwill arising on consolidation represents the excess of the
consideration transferred over the net fair value of the Group's
share of the net assets, liabilities and contingent liabilities of
the acquired subsidiary, joint venture or associate and the fair
value of the non-controlling interest in the acquiree. If the
consideration is less than the fair value of the Group's share of
the net assets, liabilities and contingent liabilities of the
acquired entity (i.e. a bargain purchase), the difference is
credited to the Group income statement in the period of
acquisition.
At the acquisition date of a subsidiary, goodwill acquired is
recognised as an asset and is allocated to each of the
cash-generating units or groups of cash-generating units expected
to benefit from the business combination's synergies and to the
lowest level at which management monitors the goodwill. Goodwill
arising on the acquisition of joint ventures and associates is
included within the carrying value of the investment. On disposal
of a subsidiary, joint venture or associate, the attributable
amount of goodwill is included in the determination of the profit
or loss on disposal.
Where the Group obtains control of a joint venture or associate,
the Group's previously held interests in the acquired entity is
remeasured to its acquisition date fair value and the resulting
gain or loss, if any, is recognised in the Group income
statement.
Cloud software licence agreements
Licence agreements to use cloud software are treated as service
contracts and expensed in the Group income statement, unless the
Group has both a contractual right to take possession of the
software at any time without significant penalty, and the ability
to run the software independently of the host vendor. In such cases
the licence agreement is capitalised as software within intangible
assets.
Intangible assets
Intangible assets, such as software, acquired customer
relationships and pharmacy licences, are measured initially at
acquisition cost or costs incurred to develop the asset. Intangible
assets acquired in a business combination are recognised at fair
value at the acquisition date.
Following initial recognition, intangible assets with finite
useful lives are carried at cost less accumulated amortisation and
accumulated impairment losses. They are amortised on a
straight-line basis over their estimated
useful lives of 3 to 10 years for software and up to 10 years for customer relationships.
Research costs are expensed as incurred. Development expenditure
incurred on an individual project is capitalised only if specific
criteria are met.
Property, plant and equipment
Property, plant and equipment is carried at cost less
accumulated depreciation and any recognised impairment in value.
Property, plant and equipment is depreciated on a straight-line
basis to its residual value over its anticipated useful economic
life:
- freehold buildings - 10 to 40 years; and
- fixtures and fittings, office equipment and motor vehicles - 3 to 20 years.
Impairment of non-financial assets
Goodwill is reviewed for impairment at least annually by
assessing the recoverable amount of each cash-generating unit, or
group of cash-generating units, to which the goodwill relates. For
all other non-financial assets (including other intangible assets,
property, plant and equipment and right of use assets) the Group
performs impairment testing where there are indicators of
impairment. Where the asset does not generate cash flows that are
independent from other assets, the Group estimates the recoverable
amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs of
disposal, and value in use. When the recoverable amount is less
than the carrying amount, an impairment loss is recognised
immediately in the Group income statement.
Goodwill impairments are not subsequently reversed. Where an
impairment loss on other non-financial assets subsequently
reverses, the carrying amount of the asset (or cash-generating
unit) is increased to the revised estimate of the recoverable
amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined if no
impairment loss had been recognised for the asset (or
cash-generating unit) in prior years. A reversal of an impairment
loss is recognised immediately as a credit to the Group income
statement.
Investment property
Investment property assets are carried at cost less accumulated
depreciation and any recognised impairment in value. The
depreciation policies for investment property are consistent with
those described for property, plant and equipment.
Inventories
Inventories comprise goods and development properties held for
resale. Inventories are valued at the lower of cost and fair value
less costs to sell using the weighted average cost basis. Directly
attributable costs and incomes (including applicable commercial
income) are included in the cost of inventories.
Cash and cash equivalents
Cash and cash equivalents in the Group balance sheet consist of
cash at bank, in hand, credit and debit card receivables, demand
deposits with banks, loans and advances to banks, certificates of
deposits and other receivables together with short-term deposits
with an original maturity of three months or less.
Non-current assets held for sale and discontinued operations
Non-current assets (or disposal groups) are classified as assets
held for sale when their carrying amount is to be recovered
principally through a sale transaction and a sale is considered
highly probable. They are stated at the lower of carrying amount
and fair value less costs to sell.
The net results of discontinued operations are presented
separately in the Group income statement (and the comparatives
restated). Refer to Note 7 for further details.
Leases
The Group assesses whether a contract is, or contains a lease at
inception of the contract. A lease conveys the right to direct the
use and obtain substantially all of the economic benefits of an
identified asset for a period of time in exchange for
consideration.
The Group as a lessee
A right of use asset and corresponding lease liability are
recognised at commencement of the lease.
The lease liability is measured at the present value of the
lease payments, discounted at the rate implicit in the lease, or if
that cannot be readily determined, at the lessee's incremental
borrowing rate specific to the term, country, currency and start
date of the lease. Lease payments include: fixed payments; variable
lease payments dependent on an index or rate, initially measured
using the index or rate at commencement; the exercise price under a
purchase option if the Group is reasonably certain to exercise;
penalties for early termination if the lease term reflects the
Group exercising a break option; and payments in an optional
renewal period if the Group is reasonably certain to exercise an
extension option or not exercise a break option.
The lease liability is subsequently measured at amortised cost
using the effective interest rate method. It is remeasured, with a
corresponding adjustment to the right of use asset, when there is a
change in future lease payments resulting from a rent review,
change in an index or rate such as inflation, or change in the
Group's assessment of whether it is reasonably certain to exercise
a purchase, extension or break option.
The right of use asset is initially measured at cost,
comprising: the initial lease liability; any lease payments already
made less any lease incentives received; initial direct costs; and
any dilapidation or restoration costs. The right of use asset is
subsequently depreciated on a straight-line basis over the shorter
of the lease term or the useful life of the underlying asset. The
right of use asset is tested for impairment if there are any
indicators of impairment.
Leases of low value assets and short-term leases of 12 months or
less are expensed to the Group income statement, as are variable
payments dependent on performance or usage, 'out of contract'
payments and non-lease service components.
The Group as a lessor
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases. Where the Group is an intermediate lessor, the
sub lease classification is assessed with reference to the head
lease right of use asset. Amounts due from lessees under finance
leases are recorded as receivables at the amount of the Group's net
investment in the lease. Finance lease income is allocated to
accounting periods so as to reflect a constant periodic rate of
return on the Group's net investment in the lease. Rental income
from operating leases is recognised on a straight-line basis over
the term of the lease.
Sale and leaseback
A sale and leaseback transaction is where the Group sells an
asset and immediately reacquires the use of the asset by entering
into a lease with the buyer. A sale occurs when control of the
underlying asset passes to the buyer. A lease liability is
recognised, the associated property, plant and equipment asset is
derecognised, and a right of use asset is recognised at the
proportion of the carrying value relating to the right retained.
Any gain or loss arising relates to the rights transferred to the
buyer.
Post-employment obligations
For defined benefit plans, obligations are measured at
discounted present value (using the projected unit credit method)
while plan assets are recorded at fair value.
The operating and financing costs of such plans are recognised
separately in the Group income statement; service costs are spread
systematically over the expected service lives of employees and
financing costs are recognised in the periods in which they arise.
Actuarial gains and losses are recognised immediately in the Group
statement of comprehensive income/(loss).
Payments to defined contribution schemes are recognised as an
expense as they fall due.
Share-based payments
The fair value of employee share option plans, which are all
equity-settled, is calculated at the grant date using the
Black-Scholes or Monte Carlo model. The resulting cost is charged
to the Group income statement over the vesting period. The value of
the charge is adjusted to reflect expected and actual levels of
vesting.
Taxation
The tax expense included in the Group income statement consists
of current and deferred tax.
Current tax is the expected tax payable on the taxable income
for the financial year, using tax rates enacted or substantively
enacted by the balance sheet date. Tax expense is recognised in the
Group income statement except to the extent that it relates to
items recognised in the Group statement of comprehensive income/
(loss) or directly in the Group statement of changes in equity, in
which case it is recognised in the Group statement of comprehensive
income/(loss) or directly in the Group statement of changes in
equity, respectively.
Deferred tax is provided using the balance sheet liability
method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset
realised based on the tax rates that have been enacted or
substantively enacted by the balance sheet date. Deferred tax is
charged or credited in the Group income statement, except when it
relates to items charged or credited directly to the Group
statement of changes in equity or the Group statement of
comprehensive income/(loss), in which case the deferred tax is also
recognised in equity, or other comprehensive income,
respectively.
Deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the assets to be recovered.
Deferred tax assets and liabilities are offset against each
other when there is a legally enforceable right to set off current
taxation assets against current taxation liabilities and it is the
intention to settle these on a net basis.
Tax provisions are recognised for uncertain tax positions where
a risk of an additional tax liability has been identified and it is
probable that the Group will be required to settle that tax.
Measurement is dependent on management's expectation of the outcome
of decisions by tax authorities in the various tax jurisdictions in
which the Group operates. This is assessed on a case-by-case basis
using in-house tax experts, professional firms and previous
experience. Refer to Note 6.
Foreign currencies
The consolidated financial statements are presented in Pounds
Sterling, which is the ultimate Parent Company's functional
currency.
Transactions in foreign currencies are translated to the
functional currency at the exchange rate on the date of the
transaction.
At each balance sheet date, monetary assets and liabilities that
are denominated in foreign currencies are retranslated to the
functional currency at the rates prevailing at the balance sheet
date. Exchange differences are recognised in the Group income
statement in the period in which they arise, apart from exchange
differences on transactions entered into to hedge certain foreign
currency risks, and exchange differences on monetary items forming
part of the net investment in a foreign operation.
The assets and liabilities of the Group's foreign operations are
translated into Pounds Sterling at exchange rates prevailing at the
balance sheet date. Profits and losses are translated at average
exchange rates for the relevant accounting periods. Exchange
differences arising are recognised in the Group statement of
comprehensive income/(loss) and are included in the Group's
translation reserve. Such translation differences are recognised as
income or expenses in the period in which the operation is disposed
of.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
Financial instruments
Financial assets and financial liabilities are recognised in the
Group balance sheet when the Group becomes a party to the
contractual provisions of the instrument. Financial assets are
classified as either fair value through profit or loss, fair value
through other comprehensive income, or amortised cost.
Classification and subsequent remeasurement depends on the Group's
business model for managing the financial asset and its cash flow
characteristics. Assets that are held for collection of contractual
cash flows, where those cash flows represent solely payments of
principal and interest, are measured at amortised cost.
Trade receivables
Trade receivables are non interest-bearing and are recognised
initially at fair value, and subsequently at amortised cost using
the effective interest rate method, less allowance for expected
credit losses.
Investments
Debt instruments are classified at fair value through other
comprehensive income. Gains and losses arising from changes in fair
value are recognised directly in other comprehensive income, except
for impairment gains or losses, interest income and foreign
exchange gains and losses, which are recognised in the Group income
statement. When the debt instrument is derecognised, cumulative
amounts in other comprehensive income are reclassified to the Group
income statement.
Equity investments have been irrevocably designated at fair
value through other comprehensive income. Gains and losses arising
from changes in fair value are recognised directly in other
comprehensive income, and are not subsequently reclassified to the
Group income statement, including on derecognition. Impairment
losses are not recognised separately from other changes in fair
value. Dividends are recognised in the Group income statement when
the Group's right to receive payment is established.
Loans and advances to customers and banks
Loans and advances are initially recognised at fair value plus
directly related transaction costs. Subsequent to initial
recognition, these assets are carried at amortised cost using the
effective interest method less any expected credit losses.
Impairment of financial assets
The Group assesses on a forward-looking basis the expected
credit losses (ECLs) associated with its financial assets carried
at amortised cost and debt instruments at fair value through other
comprehensive income. The ECLs are updated at each reporting date
to reflect changes in credit risk.
The three-stage model for impairment has been applied to loans
and advances to customers and banks, debt instruments at fair value
through other comprehensive income, and loan receivables from joint
ventures and associates. The credit risk is determined through
modelling a range of possible outcomes for different loss
scenarios, using reasonable and supportable information about past
events, current conditions and forecasts of future events and
economic conditions and taking into account the time value of
money. A 12-month ECL is recognised, unless the credit risk on the
financial asset increases significantly after initial recognition,
when the lifetime ECL is recognised.
For trade and other receivables, contract assets and lease
receivables, the Group applies the simplified approach permitted by
IFRS 9 'Financial instruments', with lifetime ECLs recognised from
initial recognition of the receivable. These assets are grouped,
based on shared credit risk characteristics and days past due, with
ECLs for each grouping determined based on the Group's historical
credit loss experience, adjusted for factors specific to each
receivable, general economic conditions and expected changes in
forecast conditions.
Interest-bearing borrowings
Interest-bearing bank loans and overdrafts are initially
recorded at fair value, net of attributable transaction costs.
Subsequent to initial recognition, interest-bearing borrowings are
stated at amortised cost with any difference between proceeds and
redemption value being recognised in the Group income statement
over the period of the borrowings on an effective interest
basis.
Trade payables
Trade payables are non interest-bearing and are recognised
initially at fair value and subsequently measured at amortised cost
using the effective interest method.
Equity instruments
Equity instruments issued by the Group are recorded at the
proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge its
exposure to foreign exchange, inflation, interest rate and
commodity risks arising from operating, financing and investing
activities. The Group does not hold or issue derivative financial
instruments for trading purposes.
Derivative financial instruments are recognised and stated at
fair value. Where derivatives do not qualify for hedge accounting,
any gains or losses on remeasurement are immediately recognised in
the Group income statement. Where derivatives qualify for hedge
accounting, recognition of any resultant gain or loss depends on
the nature of the hedge relationship and the item being hedged.
At inception of designated hedging relationships, the Group
documents the risk management objective and strategy for
undertaking the hedge, the nature of the risks being hedged and the
economic relationship between the item being hedged and the hedging
instrument, including whether the change in cash flows of the
hedged item and hedging instrument are expected to offset each
other.
As permitted under IFRS 9, the Group has elected to continue to
apply the existing hedge accounting requirements of IAS 39
'Financial instruments: Recognition and measurement' for its
portfolio hedge accounting until a new macro hedge accounting
standard is implemented.
Derivative financial instruments with maturity dates of more
than one year from the reporting date are disclosed as
non-current.
Fair value hedging
Derivative financial instruments are classified as fair value
hedges when they hedge the Group's exposure to changes in the fair
value of a recognised asset or liability. Changes in the fair value
of derivatives that are designated as fair value hedges are
recognised in the Group income statement within finance income or
costs, together with any changes in the fair value of the hedged
item that is attributable to the hedged risk.
Cash flow hedging
Derivative financial instruments are classified as cash flow
hedges when they hedge the Group's exposure to variability in cash
flows that are either attributable to a particular risk associated
with a recognised asset or liability, or a highly probable
forecasted transaction. The effective element of any gain or loss
from remeasuring the derivative designated as the hedging
instrument is recognised directly in the Group statement of
comprehensive income/(loss) and accumulated in the hedging reserve.
Any cost of hedging, such as the change in fair value related to
forward points and currency basis adjustment is separately
accumulated in the currency basis reserve. The ineffective element
is recognised immediately in the Group income statement within
finance income or costs.
Where the hedged item subsequently results in the recognition of
a non-financial asset such as inventory, the amounts accumulated in
the hedging reserve and currency basis reserve are included in the
initial cost of the asset. For all other cash flow hedges, the
amounts accumulated in the hedging reserve and currency basis
reserve are recognised in the Group income statement when the
hedged item or transaction affects the Group income statement.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated or exercised or no longer meets the
Group's risk management objective. The cumulative gain or loss in
the hedging reserve and currency basis reserve remains until the
forecast transaction occurs or the original hedged item affects the
Group income statement. If a forecast hedged transaction is no
longer expected to occur, the cumulative gain or loss in the
hedging reserve and currency basis reserve is reclassified to the
Group income statement.
Net investment hedging
Financial instruments are classified as net investment hedges
when they hedge the Group's net investment in an overseas
operation. The effective element of any foreign exchange gain or
loss from remeasuring the instrument is recognised directly in
other comprehensive income. Any ineffective element is recognised
immediately in the Group income statement. Gains and losses
accumulated in other comprehensive income are included in the Group
income statement when the foreign operation is disposed of.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount
reported in the Group balance sheet when there is a current legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis or realise the asset and settle
the liability simultaneously.
Provisions
Provisions are measured at the present value of the expenditures
expected to be required to settle the obligation using a pre-tax
discount rate that reflects current market assessments of the time
value of money and the risks specific to the obligation. The
increase in the provision due to passage of time is recognised as
interest expense. Provisions for onerous contracts are recognised
when the Group believes that the unavoidable costs of meeting or
exiting the contract exceed the economic benefits expected to be
received under the contract.
Supplier financing arrangements
Suppliers can choose to access supplier financing arrangements
provided by different third party banks in different countries.
Commercial requirements, including payment terms or the price paid
for goods, do not depend on whether a supplier chooses to access
such arrangements. The arrangements support our suppliers by giving
them the option to access funding early, often at a lower cost than
they could obtain themselves.
Under the arrangements, suppliers may choose to access payment
early rather than on our normal payment terms, at a funding cost to
the supplier that is set by the provider banks but based on Tesco's
credit risk and the appropriate country risk premium. If suppliers
choose not to access early payment, the provider banks pay the
suppliers on our normal payment terms. The Group pays the provider
banks on our normal payment terms, regardless of whether the
supplier has chosen to access funding early.
Management reviews supplier financing arrangements to determine
the appropriate presentation of balances outstanding as trade
payables or borrowings, dependent on the nature of each
arrangement. Factors considered in determining the appropriate
presentation include the commercial rationale for the arrangement,
impact on the Group's working capital positions, credit
enhancements or other benefits provided to the bank and recourse
exposures.
Balances outstanding under current supplier financing
arrangements are classified as trade payables, and cash flows are
included in operating cash flows, since the financing arrangements
are agreed between the supplier and the banks, and the Group does
not provide additional credit enhancement nor obtain any working
capital benefit from the arrangements. Refer to Note 21.
Judgements and sources of estimation uncertainty
The preparation of the consolidated Group financial statements
requires management to make judgements, estimates and assumptions
in applying the Group's accounting policies to determine the
reported amounts of assets, liabilities, income and expenses. The
estimates and associated assumptions are based on historical
experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from
these estimates. The estimates and underlying assumptions are
reviewed on an ongoing basis, with revisions to accounting
estimates applied prospectively.
Critical accounting judgements
Critical judgements, apart from those involving estimations,
that are applied in the preparation of the consolidated financial
statements are discussed below:
Assets held for sale and discontinued operations
On 27 September 2019, the Group completed the sale of the
majority of Tesco Bank's mortgage portfolio to Bank of Scotland,
which is part of Lloyds Banking Group. As is customary in such a
transaction, the Group continued to recognise a small element of
the mortgage business, representing new advances to existing
mortgage customers, until migration of all mortgage accounts to the
purchaser, which took place on 30 March 2020. The remaining assets
and liabilities of the mortgage operations were classified as a
disposal group held for sale in the Group balance sheet. Based on
the relative size of the mortgage business to the Group, management
concluded that it does not represent a separate major line of
business or geographical area and hence has not been classified as
a discontinued operation.
On 9 March 2020, the Group reached agreement on the terms of a
sale of its operations in Thailand and Malaysia. The transaction is
subject to shareholder and regulatory approval and is expected to
complete during the second half of 2020. As at the balance sheet
date, the Board had not formally received final offers, including,
for example, pricing and commercial terms, details of bidders'
secured financing, or indications of the level of activities to be
undertaken regarding competition clearance. Discussions were also
ongoing regarding the level of a possible one-off contribution to
the Group's pension scheme from any sale proceeds. The Board had
therefore not given approval for any sale to proceed.
Management therefore concluded that these operations did not
meet the criteria to be classified as held for sale as at the
balance sheet date, and consequently they have not been classified
as discontinued operations. It is expected that these operations
will meet the criteria to be classified as held for sale and
presented as discontinued operations in the 2020/2021 interim
financial statements.
Leases
Management exercises judgement in determining the likelihood of
exercising break or extension options in determining the lease
term. Break and extension options are included to provide
operational flexibility should the economic outlook for an asset be
different to expectations, and hence at commencement of the lease,
break or extension options are not typically considered reasonably
certain to be exercised, unless there is a valid business reason
otherwise.
The discount rate used to calculate the lease liability is the
rate implicit in the lease, if it can be readily determined, or the
lessee's incremental borrowing rate if not. Management uses the
rate implicit in the lease where the lessor is a related party
(such as leases from joint ventures) and the lessee's incremental
borrowing rate for all other leases. Incremental borrowing rates
are determined monthly and depend on the term, country, currency
and start date of the lease. The incremental borrowing rate is
determined based on a series of inputs including: the risk free
rate based on government bond rates; a country specific risk
adjustment; a credit risk adjustment based on Tesco bond yields;
and an entity specific adjustment where the entity risk profile is
different to that of the Group.
Refer to Note 12 for additional disclosures relating to
leases.
Joint ventures and associates
The Group has assessed the nature of its joint arrangements
under IFRS 11 'Joint Arrangements' and determined them to be joint
ventures. These assessments required the exercise of judgement as
set out in Note 14.
Alternative performance measures (APMs) - Exceptional items
Management exercises judgement in determining the adjustments to
apply to IFRS measurements in order to derive APMs which provide
additional useful information on the underlying trends, performance
and position of the Group. This assessment covers the nature of the
item, cause of occurrence and the scale of impact of that item on
reported performance. Reversals of previous exceptional items are
assessed based on the same criteria.
An analysis of the exceptional items included in the Group
income statement, together with the impact of these items on the
Group cash flow statement, is disclosed in Note 4.
Refer to pages 117 to 122 for further details on the Group's
APMs.
Impact of coronavirus (COVID-19)
In light of the rapidly escalating COVID-19 pandemic, the Group
has considered whether any adjustments are required to reported
amounts in the financial statements.
As at the 29 February 2020 balance sheet date, no global
pandemic had been declared, the UK was still in the 'containment'
phase, large global share price falls had not yet occurred, and
larger-scale outbreaks were only apparent in China, Republic of
Korea, Iran and northern Italy where the Group does not have
operations. The full ramifications of COVID-19, and the extent of
Government interventions in response, were not apparent. To the
extent that there were indicators of some level of disruption
observable at the balance sheet date, these have been factored in
to the Group's financial statements as at 29 February 2020, in
particular assessing the impact of incorporating an additional
COVID-19 risk factor in to discount rates used in impairment
testing of goodwill and non-current assets and incorporating an
additional downside scenario in to expected credit loss
calculations in Tesco Bank.
Subsequent to the balance sheet date, the World Health
Organisation declared a pandemic on 11 March, the UK government
moved to a 'delay' phase on 12 March, announced social distancing
measures on 16 March, and unprecedented 'stay at home' restrictions
on 23 March. The first large falls in stock markets occurred in
early March, and Tesco introduced a '3 items only' limit on
purchases on 19 March in response to customer demand. The Group has
therefore concluded that the necessity for large scale Government
interventions (both in the UK and the other countries in which the
Group operates) in response to COVID-19 only became apparent after
the balance sheet date and therefore that the consequences of such
interventions represent non-adjusting post balance sheet events.
However, given these events are of such significance, further
disclosures, including additional sensitivities, are given in Note
36.
Key sources of estimation uncertainty
The key assumptions about the future, and other key sources of
estimation uncertainty at the reporting period end that may have a
significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year are
discussed below:
Post-employment benefit obligations
The present value of the post-employment benefit obligations
depends on a number of factors that are determined on an actuarial
basis using a number of assumptions. The assumptions used in
determining the net cost/(income) for pensions include the discount
rate, inflation rate and mortality assumptions. Any changes in
these assumptions will impact the carrying amount of
post-employment benefit obligations. Key assumptions and
sensitivities for post-employment benefit obligations are disclosed
in Note 29.
Impairment
The Group treats each store as a separate cash-generating unit
for impairment testing of property, plant and equipment and right
of use assets. Where there are indicators of impairment, management
performs an impairment test. Recoverable amounts for
cash-generating units are the higher of fair value less cost of
disposal, and value in use.
Value in use is calculated from cash flow projections based on
the Group's three-year internal forecasts. The forecasts are
extrapolated to five years based on management's expectations, and
beyond five years based on estimated long-term growth rates. Fair
value is determined with the assistance of independent,
professional valuers where appropriate. Key estimates and
sensitivities are disclosed in Note 15
Commercial income
Management is required to make estimates in determining the
amount and timing of recognition of commercial income for some
transactions with suppliers. In determining the amount of
volume-related allowances recognised in any period, management
estimates the probability that the Group will meet contractual
target volumes, based on historical and forecast performance. There
is limited estimation involved in recognising income for
promotional and other allowances.
Management assesses its performance against the obligations
conditional on earning the income, with the income recognised
either over time as the obligations are met, or recognised at the
point when all obligations are met, dependent on the contractual
requirements. Commercial income is recognised as a credit within
cost of sales. Where the income earned relates to inventories which
are held by the Group at period ends, the income is included within
the cost of those inventories, and recognised in cost of sales upon
sale of those inventories. Management views that the cost of
inventories sold (which is inclusive of commercial income) provides
a consistent and complete measure of the Group income statement
impact of the overall supplier relationships.
Management considers the best indicator of the estimation
undertaken is by reference to commercial income balances not
settled at the balance sheet date and has therefore provided
additional disclosures of commercial income amounts reflected in
the Group balance sheet. Refer to Note 22 for commercial income
disclosures.
Tesco Bank expected credit loss measurement
The measurement of ECLs for Tesco Bank financial assets requires
the use of complex models and significant assumptions about future
macro-economic conditions and credit behaviour, such as the
likelihood of customers defaulting and the resulting losses. Key
assumptions and sensitivities for Tesco Bank ECLs are disclosed in
Note 25.
Contingent liabilities
Contingent liabilities are possible obligations whose existence
will be confirmed only on the occurrence or non-occurrence of
uncertain future events outside the Group's control, or present
obligations that are not recognised because it is not probable that
a settlement will be required or the value of such a payment cannot
be reliably estimated. The Group does not recognise contingent
liabilities but discloses them. Refer to Note 34 for the
disclosures.
Alternative performance measures (APMs)
In the reporting of financial information, the Directors have
adopted various APMs. These measures are not defined by IFRS and
therefore may not be directly comparable with other companies'
APMs, including those in the Group's industry.
APMs should be considered in addition to, and are not intended
to be a substitute for, or superior to, IFRS measurements.
Purpose
The Directors believe that these APMs assist in providing
additional useful information on the underlying trends, performance
and position of the Group.
APMs are also used to enhance the comparability of information
between reporting periods and geographical units (such as
like-for-like sales), by adjusting for non-recurring or
uncontrollable factors which affect IFRS measures, to aid users in
understanding the Group's performance.
Consequently, APMs are used by the Directors and management for
performance analysis, planning, reporting and incentive-setting
purposes.
Changes to APMs
As with many retail businesses, the Group has a 53 week
financial year every 5 to 6 years. As the financial year to 29
February 2020 is a 53 week period, alternative performance measures
are presented on a 52 week basis excluding week 53, in order to
provide comparability with the prior year.
Retail operating profit is introduced as a measure of the
Group's operating profit from the Retail business excluding Tesco
Bank. It is based on Retail operating profit from continuing
operations before exceptional items and amortisation of acquired
intangibles.
As a result of adopting IFRS 16 in the current financial year,
the Directors and management have applied the following changes to
the Group's APMs:
- Free cash flow and Retail free cash flow have been redefined
to include 'Repayments of obligations under leases'. The impact of
adopting IFRS 16 has been to replace rental payments presented
within operating profit with a combination of interest payments and
capital repayments of the lease obligation, with no overall change
in total cash flow for the Group. Redefining Free cash flow and
Retail free cash flow to include the capital repayments of
obligations under leases ensures that the Group's reported free
cash flow measures are consistent with those previously
reported.
- Retail EBITDA is introduced as a measure of the Group's
operating performance and cash profitability. It is based on Retail
operating profit from continuing operations before exceptional
items, excluding Retail depreciation and amortisation. It is also
now used to derive the Total indebtedness ratio and Fixed charge
cover APMs. Rent expense is now de-minimis following the adoption
of IFRS 16, and so the Total indebtedness ratio denominator has
changed from EBITDAR (Retail EBITDA before Retail rent expense) to
Retail EBITDA, consistent with the Group's use of Retail EBITDA as
a measure of operating performance and profitability. Similarly,
the Fixed charge cover numerator has changed from EBITDAR to Retail
EBITDA.
- Total indebtedness has also been redefined to no longer
include the present value of future minimum lease payments under
non-cancellable operating leases. Following the adoption of IFRS
16, the Group's measure of Total indebtedness includes lease
liabilities (with the exception of short-term and low value asset
leases).
- The fixed charge cover denominator has also been redefined to
exclude interest on lease liabilities from net finance costs and
include all lease liability payments made in the period. Amending
the calculation ensures that all cash payments made in the period
with respect to the Group's lease liabilities continue to be
included in the calculation of fixed charge cover.
Refer to the Glossary on pages 117 to 122 for a full list,
comprehensive descriptions and purpose of the Group's APMs.
Note 2 Segmental reporting
The Group's operating segments are determined based on the
Group's internal reporting to the Chief Operating Decision Maker
(CODM). The CODM has been determined to be the Group Chief
Executive, with support from the Executive Committee, as the
function primarily responsible for the allocation of resources to
segments and assessment of performance of the segments.
The principal activities of the Group are therefore presented in
the following segments:
- Retailing and associated activities (Retail) in:
- UK & ROI - the United Kingdom and Republic of Ireland;
- Central Europe - Czech Republic, Hungary, Poland, Slovakia;
and
- Asia - Malaysia and Thailand.
- Retail banking and insurance services through Tesco Bank in the UK (Tesco Bank).
This presentation reflects how the Group's operating performance
is reviewed internally by management.
The CODM uses operating profit before exceptional items and
amortisation of acquired intangibles, as reviewed at monthly
Executive Committee meetings, as the key measure of the segments'
results as it reflects the segments' underlying performance for the
financial year under evaluation. Operating profit before
exceptional items and amortisation of acquired intangibles is a
consistent measure within the Group as defined within the glossary.
Refer to Note 4 for exceptional items and amortisation of acquired
intangibles. Inter-segment revenue between the operating segments
is not material.
Income statement
The segment results and the reconciliation of the segment
measures to the respective statutory items included in the Group
income statement are as follows:
53 weeks ended 29 Total
February at constant Total
2020 UK & Central Tesco exchange Foreign at actual
At constant exchange ROI Europe Asia Bank rates exchange exchange
rates GBPm GBPm GBPm GBPm GBPm GBPm GBPm
===================== ====== ======= ================== ========= ============ ========= ==========
Continuing operations
Group sales 45,784 5,447 4,896 1,068 57,195 175 57,370
Revenue 52,931 5,695 4,896 1,068 64,590 170 64,760
===================== ====== ======= ================== ========= ============ ========= ==========
Operating
profit/(loss) before
exceptional items
and amortisation
of acquired
intangibles 2,231 160 398 193 2,982 23 3,005
Exceptional items and
amortisation
of acquired
intangibles (286) (73) (11) (119) (489) 2 (487)
===================== ====== ======= ================== ========= ============ ========= ==========
Operating
profit/(loss) 1,945 87 387 74 2,493 25 2,518
Operating margin 4.2% 2.8% 8.1% 18.1% 4.6% 4.6%
===================== ====== ======= ================== ========= ============ ========= ==========
53 weeks ended 29
February Total
2020 Central Tesco at actual
At actual exchange UK & ROI Europe Asia Bank exchange
rates GBPm GBPm GBPm GBPm GBPm
Continuing operations
Group sales* 45,752 5,332 5,218 1,068 57,370
Revenue 52,898 5,576 5,218 1,068 64,760
===================== ====== ======= ================== ========= ============ ========= ============
Operating
profit/(loss) before
exceptional items
and amortisation
of acquired
intangibles * 2,230 156 426 193 3,005
Exceptional items and
amortisation
of acquired
intangibles (286) (71) (11) (119) (487)
===================== ====== ======= ================== ========= ============ ========= ============
Operating
profit/(loss) 1,944 85 415 74 2,518
Operating margin * 4.2% 2.8% 8.2% 18.1% 4.6%
===================== ====== ======= ================== ========= ============ ========= ============
Share of post-tax
profits/(losses)
of joint ventures and
associates 18
Finance income 23
Finance costs (1,244)
===================== ====== ======= ================== ========= ============ ========= ============
Profit/(loss) before tax 1,315
====================================== ====================================================================
* Refer to page 120 for a reconciliation from Group sales,
Operating profit before exceptional items and amortisation of
acquired intangibles and Operating margin shown above to the
Group's 52 week alternative performance measures.
Total
Central Tesco at actual
52 weeks ended 23 February 2019 UK & ROI Europe Asia Bank exchange
At actual exchange rates GBPm GBPm GBPm GBPm GBPm
Continuing operations
Group sales 44,883 6,030 4,873 1,097 56,883
Revenue 51,643 6,298 4,873 1,097 63,911
=========================================== ======== ======= ===== ===== ==========
Operating profit/(loss) before exceptional
items and amortisation of acquired
intangibles 1,868 221 319 199 2,607
Exceptional items and amortisation
of acquired intangibles 81 58 (67) (30) 42
=========================================== ======== ======= ===== ===== ==========
Operating profit/(loss) 1,949 279 252 169 2,649
Operating margin 3.6% 3.5% 6.5% 18.1% 4.1%
=========================================== ======== ======= ===== ===== ==========
Share of post-tax profits/(losses)
of joint ventures and associates 32
Finance income 25
Finance costs (1,089)
=========================================== ======== ======= ===== ===== ==========
Profit/(loss) before tax 1,617
=========================================== ======== ======= ===== ===== ==========
Tesco Bank revenue of GBP1,068m (2019: GBP1,097m) comprises
interest and similar revenues of GBP733m (2019: GBP729m) and fees
and commissions revenue of GBP335m (2019: GBP368m).
Balance sheet
The following tables showing segment assets and liabilities
exclude those balances that make up net debt (cash and cash
equivalents, short-term investments, joint venture loans and other
receivables, bank and other borrowings, lease liabilities,
derivative financial instruments and net debt of the disposal
group). With the exception of lease liabilities which have been
allocated to each segment, all other components of net debt have
been included within the unallocated segment to reflect how the
Group manages these balances. Intercompany transactions have been
eliminated other than intercompany transactions with Tesco Bank in
net debt.
Central Tesco
UK & ROI Europe Asia Bank Unallocated Total
At 29 February 2020 GBPm GBPm GBPm GBPm GBPm GBPm
=========================================== ========== ======= ====== ======= ============= ========
Goodwill and other intangible assets 4,892 28 285 914 - 6,119
Property, plant and equipment and
investment property 14,635 2,199 2,365 61 - 19,260
Right of use assets 5,719 491 650 14 - 6,874
Investments in joint ventures and
associates 11 1 208 87 - 307
Non-current financial assets at
fair value through other comprehensive
income 7 - - 859 - 866
Non-current trade and other receivables(a) 65 - 13 65 - 143
Non-current loans and advances to
customers and banks - - - 4,171 - 4,171
Deferred tax assets 129 33 61 69 - 292
=========================================== ========== ======= ====== ======= ============= ========
Non-current assets (b) 25,458 2,752 3,582 6,240 - 38,032
=========================================== ========== ======= ====== ======= ============= ========
Inventories and current trade and
other receivables(c)(d) 2,678 410 384 252 - 3,724
Current loans and advances to customers
and banks - - - 4,280 - 4,280
Current financial assets at fair
value through other comprehensive
income - - - 202 - 202
Total trade and other payables (7,215) (639) (989) (249) - (9,092)
Total customer deposits and deposits
from banks - - - (8,207) - (8,207)
Total provisions (161) (25) (49) (57) - (292)
Deferred tax liabilities (4) (36) - - - (40)
Net current tax (270) 9 (16) (26) - (303)
Post-employment benefits (3,056) - (29) - - (3,085)
Assets classified as held for sale 75 165 - 45 - 285
Net debt (including Tesco Bank)(e) (8,203) (663) (667) 47 (2,765) (12,251)
=========================================== ========== ======= ====== ======= ============= ========
Net assets 9,302 1,973 2,216 2,527 (2,765) 13,253
=========================================== ========== ======= ====== ======= ============= ========
(a) Excludes loans to joint ventures of GBP23m (2019: GBP105m)
which form part of net debt.
(b) Excludes derivative financial instrument non-current assets
of GBP1,083m (2019: GBP1,178m).
(c) Excludes net interest and other receivables of GBP1m (2019:
GBP1m) which form part of net debt.
(d) Excludes loans to joint ventures of GBP104m (2019: GBP28m)
which form part of net debt.
(e) On adoption of IFRS 16, lease liabilities included within
net debt have been presented within their respective segments.
Previously the Group's finance lease liabilities were presented
within the Unallocated segment. The prior financial year has been
restated. Refer to Note 37.
Central Tesco
UK & ROI Europe Asia Bank Unallocated Total
At 23 February 2019 (restated) GBPm GBPm GBPm GBPm GBPm GBPm
=========================================== ======== ======= ===== ====== =========== ======
Goodwill and other intangible
assets 4,927 27 284 1,026 - 6,264
Property, plant and equipment
and investment property 14,017 2,694 2,449 62 - 19,222
Right of use assets 6,537 479 682 15 - 7,713
Investments in joint ventures
and associates 12 1 503 86 - 602
Non-current financial assets
at fair value through other comprehensive
income 3 - - 976 - 979
Non-current trade and other receivables(a) 100 5 14 19 - 138
Non-current loans and advances
to customers and banks - - - 7,868 - 7,868
Deferred tax assets 86 34 71 60 - 251
=========================================== ======== ======= ===== ====== =========== ======
Non-current assets (b) 25,682 3,240 4,003 10,112 - 43,037
=========================================== ======== ======= ===== ====== =========== ======
Inventories and current trade and
other receivables(c)(d) 2,999 482 372 285 - 4,138
Current loans and advances to customers
and banks - - - 4,882 - 4,882
Current financial assets at fair
value through other comprehensive
income - - - 67 - 67
Total trade and other payables (7,452) (800) (1,016) (228) - (9,496)
Total customer deposits and deposits
from banks - - - (12,128) - (12,128)
Total provisions (245) (27) (49) (52) - (373)
Deferred tax liabilities (15) (24) (10) - - (49)
Net current tax (265) (12) (11) (31) - (319)
Post-employment benefits (2,788) - (20) - - (2,808)
Assets classified as held for sale 68 30 - - - 98
Net debt (including Tesco Bank)(e) (9,060) (728) (682) (413) (2,734) (13,617)
======================================== ======= ===== ======= ======== ======= ========
Net assets 8,924 2,161 2,587 2,494 (2,734) 13,432
======================================== ======= ===== ======= ======== ======= ========
(a)-(e) Refer to previous table for footnotes.
Other segment information
Central Tesco
UK & ROI Europe Asia Bank Total
53 weeks ended 29 February 2020 GBPm GBPm GBPm GBPm GBPm
Capital expenditure (including acquisitions
through business combinations):
Property, plant and equipment (a)(b) 1,674 97 128 7 1,906
Goodwill and other intangible assets
(c) 145 12 6 44 207
Depreciation and amortisation:
Property, plant and equipment (771) (137) (221) (9) (1,138)
Right of use assets (537) (45) (67) (2) (651)
Investment property (1) - - - (1)
Other intangible assets (218) (13) (6) (130) (367)
Impairment of financial assets
Financial asset net (loss)/reversal (4) - 3 (179) (180)
============================================ ======== ======= ===== ===== =======
Central Tesco
52 weeks ended 23 February 2019 UK & ROI Europe Asia Bank Total
(restated) GBPm GBPm GBPm GBPm GBPm
Capital expenditure (including
acquisitions
through business combinations):
Property, plant and equipment(b) 1,028 113 228 4 1,373
Goodwill and other intangible assets(c) 4,005 17 3 27 4,052
Depreciation and amortisation:
Property, plant and equipment (756) (151) (222) (10) (1,139)
Right of use assets (519) (40) (54) (2) (615)
Investment property (1) - - - (1)
Other intangible assets (201) (14) (7) (73) (295)
Impairment of financial assets
Financial asset net (loss)/reversal (20) - (1) (164) (185)
======================================== ======== ======= ===== ===== =======
(a) Includes GBP914m related to obtaining control of the Tesco
Atrato Limited partnership.
(b) Includes GBPnil (2019: GBP326m) of property, plant and
equipment acquired through business combinations.
(c) Includes GBPnil (2019: GBP3,861m) of goodwill and other
intangible assets acquired through business combinations.
Cash flow statement
The following tables provide further analysis of the Group cash
flow statement, including a split of cash flows between Retail and
Tesco Bank .
Tesco
Retail Tesco Bank Group
============== ============== ======== =======================================
Before Before
exceptional Exceptional exceptional Exceptional
items items items items
and and and and
amortisation amortisation amortisation amortisation Tesco
of acquired of acquired Retail of acquired of acquired Bank
53 weeks ended 29 intangibles intangibles Total intangibles intangibles Total Total
February 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating profit/(loss) of
continuing
operations 2,812 (368) 2,444 193 (119) 74 2,518
Depreciation and
amortisation 1,937 79 2,016 77 64 141 2,157
ATM net income (34) - (34) 34 - 34 -
(Profit)/loss arising on
sale
of property, plant and
equipment,
investment property,
intangible
assets and assets held
for sale
and early termination of
leases 5 (175) (170) - - - (170)
(Profit)/loss arising on
sale
of financial assets - - - - (3) (3) (3)
(Profit)/loss arising on
sale
of joint ventures and
associates - (68) (68) - - - (68)
Net impairment
loss/(reversal)
on property, plant and
equipment,
right of use assets,
intangible
assets and investment
property - 302 302 - - - 302
Impairment of joint
ventures - 47 47 - - - 47
Adjustment for non-cash
element
of pensions charge 9 - 9 - - - 9
Other defined benefit
pension
scheme payments (267) - (267) - - - (267)
Share-based payments 86 - 86 1 - 1 87
Tesco Bank fair value
movements
included in operating
profit/(loss) - - - 100 - 100 100
Cash flows generated from
operations
excluding working capital 4,548 (183) 4,365 405 (58) 347 4,712
(Increase)/decrease in
working
capital (77) (47) (124) (3,422) 15 (3,407) (3,531)
Cash generated from/(used
in)
operations (a)(b) 4,471 (230) 4,241 (3,017) (43) (3,060) 1,181
Interest paid (795) - (795) (8) - (8) (803)
Corporation tax paid (271) - (271) (69) - (69) (340)
Net cash generated
from/(used
in) operating activities 3,405 (230) 3,175 (3,094) (43) (3,137) 38
Proceeds from sale of
property,
plant and equipment,
investment
property, intangible
assets and
assets classified as held
for
sale 3 266 269 - 3,696 3,696 3,965
Purchase of property,
plant and
equipment and investment
property
- store buybacks (136) (36) (172) - - - (172)
Purchase of property,
plant and
equipment and investment
property
- other capital
expenditure (826) - (826) (5) - (5) (831)
Purchase of intangible
assets (162) - (162) (39) - (39) (201)
Disposal of subsidiaries,
net
of cash disposed 4 - 4 - - - 4
Acquisition of - - - - - - -
subsidiaries,
net of cash acquired
Disposal of associate
(Note 33) - 277 277 - - - 277
Net (increase)/decrease in
loans
to joint ventures and
associates - - - 8 - 8 8
Investments in joint
ventures
and associates (9) - (9) - - - (9)
Net (investments
in)/proceeds
from sale of short-term
investments (687) - (687) - - - (687)
Net (investments
in)/proceeds
from sale of financial
assets
at fair value through
other comprehensive
income (3) - (3) (3) - (3) (6)
Dividends received from
joint
ventures and associates 26 - 26 16 - 16 42
Dividends received from
Tesco
Bank 50 - 50 (50) - (50) -
Interest received 18 - 18 - - - 18
Net cash generated
from/(used
in) investing activities (1,722) 507 (1,215) (73) 3,696 3,623 2,408
Proceeds from issue of - - - - - - -
ordinary
share capital
Own shares purchased (149) - (149) - - - (149)
Repayments of obligations
under
leases (632) - (632) (2) - (2) (634)
Add: Cash outflow from - - - - - - -
major
acquisition
Less: Net
increase/(decrease)
in loans to joint
ventures and
associates - - - (8) - (8) (8)
Less: Net investments
in/(proceeds
from sale of)
short-term
investments 687 - 687 - - - 687
Free cash flow (a) 1,589 277 1,866 (3,177) 3,653 476 2,342
Increase in borrowings 1,082 - 1,082 250 - 250 1,332
Repayment of borrowings (1,378) - (1,378) (410) - (410) (1,788)
Net cash flows from
derivative
financial instruments (17) - (17) - - - (17)
Dividends paid to equity
holders (656) - (656) - - - (656)
Net cash generated
from/(used
in) financing activities (1,750) - (1,750) (162) - (162) (1,912)
Intra-Group funding and
intercompany
transactions 3 - 3 (3) - (3) -
Net increase/(decrease) in
cash
and cash equivalents (64) 277 213 (3,332) 3,653 321 534
Cash and cash equivalents
at
the beginning of the year 1,873 1,043 2,916
Effect of foreign exchange
rate
changes (42) - (42)
C ash and cash equivalents
at
the end of the year 2,044 1,364 3,408
(a) Refer to page 122 for a reconciliation from Retail operating
cash flow, Retail free cash flow and Free cash flow shown above to
the Group's 52 week alternative performance measures.
(b) APM: 'Retail operating cash flow' of GBP4,241m (2019:
GBP3,637m (restated)) is the cash generated from operations of the
continuing Retail business.
Cash flow statement
Tesco Tesco
Retail Bank Group
Before Before
exceptional Exceptional exceptional Exceptional
items items items items
and and and and
amortisation amortisation amortisation amortisation Tesco
52 weeks ended 23 of acquired of acquired Retail of acquired of acquired Bank
February 2019 intangibles intangibles Total intangibles intangibles Total Total
(restated) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating profit/(loss) of
continuing
operations 2,408 72 2,480 199 (30) 169 2,649
Depreciation and
amortisation 1,887 78 1,965 85 - 85 2,050
ATM net income (34) - (34) 34 - 34 -
(Profit)/loss arising on
sale of
property, plant and
equipment,
investment property,
intangible
assets and assets held
for sale
and early termination of
leases (19) (104) (123) (8) - (8) (131)
(Profit)/loss arising on
sale of
financial assets (1) (7) (8) - - - (8)
Net impairment
loss/(reversal)
on property, plant and
equipment,
right of use assets,
intangible
assets and investment
property (3) (111) (114) - - - (114)
Impairment of joint - - - - - - -
ventures
Adjustment for non-cash
element
of pensions charge 45 - 45 - - - 45
Other defined benefit
pension scheme
payments (266) - (266) - - - (266)
Share-based payments 82 - 82 (5) - (5) 77
Tesco Bank fair value
movements
included in operating
profit/(loss) - - - 127 - 127 127
Cash flows generated from
operations
excluding working capital 4,099 (72) 4,027 432 (30) 402 4,429
(Increase)/decrease in
working
capital (306) (84) (390) (223) (35) (258) (648)
Cash generated from/(used
in) operations 3,793 (156) 3,637 209 (65) 144 3,781
Interest paid (851) - (851) (8) - (8) (859)
Corporation tax paid (302) - (302) (68) - (68) (370)
Net cash generated
from/(used in)
operating activities 2,640 (156) 2,484 133 (65) 68 2,552
Proceeds from sale of
property,
plant and equipment,
investment
property, intangible
assets and
assets classified as held
for sale 22 263 285 1 - 1 286
Purchase of property,
plant and
equipment and investment
property
- store buybacks (136) - (136) - - - (136)
Purchase of property,
plant and
equipment and investment
property
- other capital
expenditure (962) - (962) (3) - (3) (965)
Purchase of intangible
assets (164) - (164) (27) - (27) (191)
Disposal of subsidiaries,
net of
cash disposed 8 - 8 - - - 8
Acquisition of
subsidiaries, net
of cash acquired (715) - (715) - - - (715)
Net (increase)/decrease in
loans
to joint ventures and
associates - - - 5 - 5 5
Investments in joint
ventures and
associates (11) - (11) - - - (11)
Net (investments
in)/proceeds from
sale of short-term
investments 639 - 639 - - - 639
Net (investments
in)/proceeds from
sale of financial assets
at fair
value through other
comprehensive
income (5) 7 2 (124) - (124) (122)
Dividends received from
joint ventures
and associates 31 - 31 10 - 10 41
Dividends received from
Tesco Bank 50 - 50 (50) - (50) -
Interest received 21 - 21 - - - 21
Net cash generated
from/(used in)
investing activities (1,222) 270 (952) (188) - (188) (1,140)
Proceeds from issue of
ordinary
share capital 60 - 60 - - - 60
Own shares purchased (206) - (206) - - - (206)
Repayments of obligations
under
leases (605) (605) (1) - (1) (606)
Add: Cash outflow from
major acquisition 747 - 747 - - - 747
Less: Net
increase/(decrease)
in
loans to joint
ventures and
associates - - - (5) - (5) (5)
Less: Net investments
in/(proceeds
from sale of)
short-term
investments (639) - (639) - - - (639)
APM: Free cash flow* 775 114 889 (61) (65) (126) 763
Increase in borrowings 704 - 704 271 - 271 975
Repayment of borrowings (2,046) - (2,046) (425) - (425) (2,471)
Net cash flows from
derivative
financial instruments 35 - 35 - - - 35
Dividends paid to equity
holders (357) - (357) - - - (357)
Net cash generated
from/(used in)
financing activities (2,415) - (2,415) (155) - (155) (2,570)
Intra-Group funding and
intercompany
transactions (14) - (14) 14 - 14 -
Net increase/(decrease) in
cash
and cash equivalents (1,011) 114 (897) (196) (65) (261) (1,158)
Cash and cash equivalents
at the
beginning of the year 2,755 1,304 4,059
Effect of foreign exchange
rate
changes 15 - 15
Cash and cash equivalent
at the
end of the year 1,873 1,043 2,916
* Free cash flow has been redefined to include 'Repayments of
obligations under leases' due to IFRS 16. This results in a minor
adjustment of GBP17m, restating previously reported Retail free
cash flow of GBP906m to GBP889m. There is no overall impact to cash
and cash equivalents at the end of the year.
Note 3 Income and expenses
Auditor's remuneration
53 weeks 52 weeks
2020 2019
GBPm GBPm
Fees payable to the Company's auditor and its associates
for the audit of the Company and Group financial statements 1.6 1.6
The audit of the accounts of the Company's subsidiaries 5.8 6.4
========
Total audit services 7.4 8.0
Audit-related assurance services 0.5 0.5
========
Total audit and audit-related assurance services 7.9 8.5
========
Fees payable to the Company's auditor and its associates
for other services:
Transaction services 0.2 -
All other non-audit services 1.6 3.5
========
Total non-audit services 1.8 3.5
========
Total auditor's remuneration 9.7 12.0
========
Other non-audit services of GBP1.6m (2019: GBP3.5m) represents:
retail consultancy services GBPnil (2019: GBP1.3m), provision of
data repository services for information needed by the Group and
Serious Fraud Office (SFO) GBP0.6m (2019: GBP1.7m ), SFO Monitor
role GBP0.6m (2019: GBP0.1m), and other services GBP0.4m (2019:
GBP0.4m). In addition to the amounts shown above, the auditor
received fees of GBP0.1m (2019: GBP0.2m) for the audit of the main
Group pension scheme.
Employment costs, including Directors' remuneration
53 weeks 52 weeks
2020 2019
Continuing operations Notes GBPm GBPm
======== ========
Wages and salaries 6,266 6,447
Social security costs 497 520
Post-employment defined benefits
(a) 29 45 78
Post-employment defined contributions 29 343 332
Share-based payments expense 28 129 118
Termination benefits (b) 116 151
======== ========
Total 7,396 7,646
======== ========
(a) Includes GBPnil (2019: GBP43m) past service cost related to
guaranteed minimum pensions (GMPs). This is treated as an
exceptional item. Refer to Note 4 and Note 29.
(b) Includes GBP110m (2019: GBP145m) of redundancy costs
included within exceptional items. Refer to Note 4.
Post-employment defined contribution charges include GBP116m
(2019: GBP110m) of salaries paid as pension contributions.
The table below shows the average number of employees by
operating segment during the financial year.
Average number Average number
of employees of
full-time equivalents
Continuing operations 2020 2019 2020 2019
UK & ROI 319,303 344,117 210,768 223,542
Central Europe 44,199 54,301 40,864 50,068
Asia 56,003 62,403 39,026 44,473
Tesco Bank 3,587 3,684 3,305 3,407
Total 423,092 464,505 293,963 321,490
Note 4 Exceptional items and amortisation of acquired
intangibles
Group income statement
53 weeks ended 29 February 2020
Total
exceptional
items and
amortisation
of acquired
Exceptional intangibles Share of Exceptional
items and included joint venture items
amortisation within and associates within
of acquired Cost Administrative operating profits/ Finance discontinued
intangibles of sales expenses profit (losses) costs Taxation operations
included in: GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Exceptional
items:
Net restructuring
and redundancy
costs(a) (138) (13) (151) - - 21 -
Property
transactions(b) 55 - 55 - - 15 -
Booker
integration
costs(c) (18) (5) (23) - - 4 -
Derivative
restructuring(d) - - - - (180) 34 -
Acquisition of
property
joint venture(e) (136) - (136) - - (23) -
Net impairment
loss of
non-current
assets(f) (19) 4 (15) - - 17 -
Impairment of
investment
in India joint
venture(g) - (47) (47) - - - -
Disposal of China
associate(h) - 37 37 - - (30) -
China land
penalties(i) - - - (12) - - -
China tax
liability
release(j) - - - - - - 38
Other corporate
activity
costs(k) - (22) (22) - - - -
Tesco Bank
mortgage
disposal(l) (8) 3 (5) - 29 (14) -
Tesco Bank
current
accounts(m) - (56) (56) - - 14 -
Provision for
customer
redress(n) (45) - (45) - - - -
Ogden rate
change(o) - - - 4 - - -
Total exceptional
items (309) (99) (408) (8) (151) 38 38
Amortisation of
acquired
intangibles:
Amortisation of
acquired
intangible
assets (Note
10) - (79) (79) - - 15 -
Total exceptional
items
and amortisation
of acquired
intangibles (309) (178) (487) (8) (151) 53 38
(a) This charge relates to simplification of our operating model
in Tesco Bank GBP(13)m, Central Europe GBP(43)m, and the UK &
ROI GBP(95)m.
(b) As part of the Group's strategy to maximise value from
property, the Group disposed of surplus properties which generated
a profit in Central Europe GBP26m and the UK & ROI GBP29m.
(c) Costs incurred in integrating Booker within the Tesco Group,
mainly focused on aligning distribution networks and operating
platforms.
(d) The Group is subject to inflation risk on certain lease
liabilities with its joint ventures, which increase annually with
LPI (RPI restricted to a range of 0%-5%). In order to mitigate this
inflation risk to the Group, a restructure of derivatives held with
external counterparties was undertaken during the year. This
resulted in the remeasurement of the fair value of these
derivatives, giving rise to a non-cash exceptional charge of
GBP(180)m.
(e) The Group obtained control of the Tesco Atrato Limited
partnership, previously accounted for as a joint venture, through
the acquisition of the other partner's 50% interest in the
partnership for a net cash consideration of GBP36m. The
acquisition, which is treated as an asset acquisition, increases
the Group's owned property portfolio and borrowings, replacing the
Group's associated right of use assets and lease liabilities. Refer
to Note 33 for further details.
(f) Net impairment loss relating to the Group's non-current
assets. Refer to Note 15 for further details.
(g) Investments in our offer to remain competitive in the
market, combined with a strategic decision to reduce store
expansion, have impacted our profit expectations of the joint
venture resulting in an impairment charge in the year.
(h) Gain from completing the sale of the Group's 20% share of
Gain Land to China Resources Holdings. Refer to Note 33 for further
details.
(i) The Group's China associate recognised certain penalties in
the year relating to delays in property development. This charge
represents the Group's 20% share of these penalties.
(j) During the current financial year, the Group reached a
settlement with the Chinese tax authority relating to a withholding
tax liability arising on the formation of the Gain Land associate
with China Resources Holdings in 2014. As a result of the
settlement, the Group has released the remaining withholding tax
liability of GBP38m - this has been classified within discontinued
operations, consistent with the classification of the original
liability in 2014.
(k) Includes costs incurred relating to the announced sale of
the Group's operations in Asia and other corporate activity during
the current financial year.
(l) The Group completed the majority of the transfer of the
beneficial ownership of Tesco Bank's mortgage portfolio to Lloyds
Banking Group, of which GBP30m is related to the gain on the
disposal, this is offset by the Group disposing of a proportion of
Tesco Bank's goodwill amounting to GBP(27)m. The Group also
incurred GBP(8)m related to accelerated amortisation and generated
a GBP29m fair value remeasurement gain.
(m) Following the decision to close the Bank's current accounts
to new customers, accelerated depreciation was charged on related
intangible and fixed assets, resulting in an additional charge of
GBP(56)m.
(n) The charge of GBP(45)m relates to additional costs in
respect of Payment Protection Insurance (PPI) as a result of higher
claim rates ahead of the deadline of 29 August 2019.
(o) The Group's share of the results for the period of its joint
venture, Tesco Underwriting, reflects a credit adjustment to
insurance reserves following a revision to the Ogden tables, which
are used to calculate future losses in personal injury and fatal
accident claims.
52 weeks ended 23 February 2019
Profit/(loss) for the year included the following exceptional
items and amortisation of acquired intangibles:
Total exceptional
items and
amortisation
of acquired Exceptional
Exceptional items and intangibles Share of items
amortisation Cost included joint venture included
of acquired intangibles of Administrative within operating and associates with discontinued
included sales expenses profit profits/(losses) Taxation operations
in: GBPm GBPm GBPm GBPm GBPm GBPm
Exceptional items
(restated):
Tesco Direct closure costs (38) - (38) - 7 -
Net restructuring and
redundancy
costs (159) (23) (182) - 30 -
Provision for customer
redress (16) - (16) - - -
Release of amounts
provided
in relation to FCA
obligations - 17 17 - - -
Insurance recovery of
amounts
in relation to FCA
obligations - 20 20 - - -
Property transactions* 87 17 104 11 7 -
Tesco Bank FCA charge - (16) (16) - - -
Booker integration costs (8) (7) (15) - 3 -
Freetime VAT provision
release 176 - 176 - (33) -
Lazada contingent proceeds - 7 7 - - -
GMP equalisation (37) (6) (43) - 7 -
Net impairment reversal of
non-current assets and
onerous
property provisions* 105 1 106 - 14 -
Total exceptional items 110 10 120 11 35 -
Amortisation of acquired
intangibles:
Amortisation of acquired
intangible
assets (Note 10) - (78) (78) - 15 -
Total exceptional items
and
amortisation of acquired
intangibles 110 (68) 42 11 50 -
* Reclassified for the change in presentation of
profits/(losses) arising on property-related items as explained in
Note 1.
Group cash flow statement
The table below shows the impact of exceptional items on the
Group cash flow statement: Amortisation of acquired intangibles
does not affect the Group's cash flow.
Cash flows from Cash flows from
operating activities Investing activities
53 weeks 52 weeks 53 weeks 52 weeks
2020 2019 2020 2019
(restated)
GBPm GBPm GBPm GBPm
========== =========== ===========
Payments relating to Tesco Direct closure - (38) - -
Prior year restructuring and redundancy
costs (133) (60) - -
Current year restructuring and redundancy
costs (69) (30) - -
Onerous contract provisions - (1) - -
Property transactions(a) - - 266 263
Settlement of claims for customer redress
in Tesco Bank (38) (49) - -
DPA/shareholder compensation scheme payments - (43) - -
Freetime VAT refund(b) - 12 - -
Tesco Bank FCA settlement payment - (16) - -
Insurance recovery of amounts in relation
to FCA obligations - 16 - -
Booker integration cash payments (23) (12) - -
Proceeds from sale of Tesco Bank's mortgage
book - - 3,696 -
Proceeds from sale of Lazada - - - 7
Acquisition of property joint venture
(Note 33) - - (36) -
Proceeds from disposal of China associate
(Note 33) - - 277 -
Corporate activity costs (10) - - -
========== =========== ===========
Total (273) (221) 4,203 270
========== =========== ===========
(a) These relate to proceeds from disposal of properties
primarily in UK & ROI and Central Europe.
(b) VAT recovered in relation to the appeal against HMRC
regarding the treatment of VAT on Clubcard rewards.
Note 5 Finance income and costs
53 weeks 52 weeks
2020 2019
(restated)
Continuing operations Notes GBPm GBPm
Finance income
Interest receivable and similar income 19 22
Finance income receivable on net investment
in leases 4 3
Total finance income 23 25
Finance costs
GBP MTNs and Loans (142) (144)
EUR MTNs (59) (77)
USD Bonds (11) (17)
Finance charges payable on lease liabilities (541) (561)
Other interest payable (25) (49)
Capitalised interest 11 - 1
Fair value remeasurements of financial instruments* (244) (153)
Total finance costs before exceptional items
and net pension finance costs (1,022) (1,000)
Net pension finance costs 29 (71) (89)
Total finance costs before exceptional items (1,093) (1,089)
Fair value remeasurement loss on derivative
restructuring 4 (180) -
Fair value remeasurement gain on Tesco Bank
mortgage book disposal 4 29 -
Total finance costs (1,244) (1,089)
Net finance costs (1,221) (1,064)
* Fair value remeasurements of financial instruments included
GBP(65)m (2019: GBP(121)m) relating to the premium paid on the
repurchase of long-dated bonds.
Note 6 Taxation
Recognised in the Group income statement
53 weeks 52 weeks
2020 2019
(restated)
Continuing operations GBPm GBPm
Current tax (credit)/charge
UK corporation tax 254 221
Overseas tax 154 131
Adjustments in respect of prior years (41) (8)
367 344
Deferred tax (credit)/charge
Origination and reversal of temporary differences 30 3
Adjustments in respect of prior years (17) -
13 3
Total income tax (credit)/charge 380 347
The Finance Act 2016 included legislation to reduce the main
rate of UK corporation tax from 20% to 19% from 1 April 2017 and to
17% from 1 April 2020. These rate reductions were substantively
enacted by the balance sheet date and therefore included in these
consolidated financial statements. Temporary differences have been
measured using these enacted tax rates. Legislation has been
substantively enacted after the current financial year balance
sheet date to repeal the reduction of the main corporation tax rate
thereby maintaining the current rate of corporation tax at 19%. The
Group expects to recognise a charge of GBP30m in the Group income
statement for the rate change impact from remeasuring opening
temporary differences to be reported in the financial year ending
27 February 2021.
Reconciliation of effective tax charge
53 weeks 52 weeks
2020 2019
(restated)
GBPm GBPm
Profit/(loss) before tax 1,315 1,617
Tax credit/(charge) at 19.0% (2019: 19.0%) (250) (307)
Effect of:
Non-qualifying depreciation (34) (35)
Expenses not deductible(a) (58) (26)
Unrecognised tax losses (35) (10)
Property items taxed on a different basis to accounting
entries(b) (3) 21
Impairment of non-current assets (36) 20
Banking surcharge tax (11) (18)
Differences in overseas taxation rates 4 13
Adjustments in respect of prior years(c) 58 1
Share of losses of joint ventures and associates 3 7
Irrecoverable withholding taxes (18) (13)
Total income tax credit/(charge) (380) (347)
Effective tax rate 28.9% 21.5%
(a) This includes current year movements on uncertain tax
positions. Prior year includes the release of amounts provided for
in relation to DPA and FCA obligations.
(b) This includes property items where the carrying values
differ from their valuation for tax purposes and recognition of
capital losses on property asset disposals.
(c) This includes adjustments to prior years uncertain tax
positions
Reconciliation of effective tax charge on profit before
exceptional items and amortisation of acquired intangibles, net
pension finance costs and fair value remeasurements of financial
instruments
53 weeks 52 weeks
2020 2019
(restated)
GBPm GBPm
Profit/(loss) before tax before exceptional items and
amortisation of acquired intangibles 1,961 1,564
Tax credit/(charge) at 19.0% (2019: 19.0%) (373) (297)
Effect of:
Non-qualifying depreciation (34) (35)
Expenses not deductible(a) (40) (24)
Unrecognised tax losses (13) (9)
Banking surcharge tax (17) (19)
Differences in overseas taxation rates 4 3
Adjustments in respect of prior years(b) 53 (8)
Share of losses of joint ventures and associates 5 5
Irrecoverable withholding taxes (18) (13)
Total income tax credit/(charge) before exceptional
items and amortisation of acquired intangibles (433) (397)
Effective tax rate before exceptional items and amortisation
of acquired intangibles 22.1% 25.4%
Tax charge on net pension finance costs and fair value
remeasurements of financial instruments at 19.0% on
GBP315m (2019: 19.0% on GBP242m) (60) (46)
Change in tax rate 2 2
Total income tax credit/(charge) before exceptional
items, net pension finance costs and fair value remeasurements
of financial instruments (491) (441)
Effective tax rate before exceptional items and amortisation
of acquired intangibles, net pension finance costs and
fair value remeasurements of financial instruments(c) 21.6% 24.4%
(a) This includes current year movements on uncertain tax
positions and expenses not qualifying for tax relief.
(b) This includes adjustments to prior years uncertain tax
positions.
(c) Refer to page 121 for a reconciliation from Effective tax
rate before exceptional items, net pension finance costs and fair
value remeasurements of financial instruments shown above to the
Group's 52 week alternative performance measures.
Tax on items credited directly to the Group statement of changes
in equity
53 weeks 52 weeks
2020 2019
GBPm GBPm
Current tax credit/(charge) on:
Share-based payments 1 2
Deferred tax credit/(charge) on:
Share-based payments (3) 3
Total tax on items credited/(charged) to the Group statement
of changes in equity (2) 5
Tax relating to components of the Group statement of
comprehensive income/(loss)
53 weeks 52 weeks
2020 2019
GBPm GBPm
Current tax credit/(charge) on:
Foreign exchange movements 1 3
Deferred tax credit/(charge) on:
Pensions 71 (61)
Fair value of movement on financial assets at fair value
through other comprehensive income (1) 2
Fair value movements on cash flow hedges (9) -
Total tax on items credited/(charged) to Group statement
of comprehensive income/(loss) 62 (56)
Deferred tax
The following are the major deferred tax (liabilities)/assets
recognised by the Group and movements thereon during the current
and prior financial years.
Property- Retirement Share- Short-term
related Acquired benefit based timing Tax Financial
items(a) intangibles obligation(b) payments differences losses instruments Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 25 February
2018 (restated) (414) - 554 43 143 1 (8) 319
Adjustment on
initial
application
of IFRS 9 - - - - - - 59 59
(Charge)/credit
to the Group
income statement 53 15 (23) - (28) 2 (22) (3)
(Charge)/credit
to the Group
statement of
changes in
equity - - - 3 - - - 3
(Charge)/credit
to the Group
statement of
comprehensive
income/(loss) - - (61) - - - 2 (59)
Disposals 4 - - - - - - 4
Business
combinations (7) (129) - 4 3 3 - (126)
Foreign exchange
and other
movements(c) - - - 1 3 - 1 5
At 23 February
2019 (restated) (364) (114) 470 51 121 6 32 202
(Charge)/credit
to the Group
income statement 37 14 (31) 2 (28) (2) (5) (13)
(Charge)/credit
to the Group
statement of
changes in
equity - - - (3) - - - (3)
(Charge)/credit
to the Group
statement of
comprehensive
income/(loss) - - 71 - - - (10) 61
Disposals 1 - - - - - - 1
Foreign exchange
and other
movements(c) 1 - 2 1 - - - 4
============ =======
At 29 February
2020(d) (325) (100) 512 51 93 4 17 252
============ =======
(a) Property-related items include a deferred tax liability on
rolled-over gains of GBP291m (2019: GBP287m), deferred tax assets
on capital losses of GBP166m (2019: GBP140m) and deferred tax
assets on IFRS 16 transitional adjustments of GBP276m (2019:
GBP306m). The remaining balance relates to accelerated tax
depreciation. The Group does not expect a material reversal in the
next financial year.
(b) The deferred tax asset on retirement benefits is expected to
reverse as additional funding contributions are made to the closed
defined benefit scheme. Refer to Note 29.
(c) The deferred tax charge for foreign exchange and other
movements is a GBP4m credit (2019: GBP5m credit) relating to the
re-translation of deferred tax balances at the balance sheet date
and is included within the Group statement of comprehensive
income/(loss) under the heading 'Currency translation
differences'.
(d) Remeasurement of temporary differences for the UK
corporation tax rate change substantively enacted post the balance
sheet date will increase the opening deferred tax asset in the
financial year ended 27 February 2021 by GBP23m.
Deferred tax assets and liabilities are offset when the Group
has a legally enforceable right to do so. The following is the
analysis of the deferred tax balances after offset:
2020 2019
(restated)
GBPm GBPm
Deferred tax assets 292 251
Deferred tax liabilities (40) (49)
252 202
No deferred tax liability is recognised on temporary differences
of GBP6.8bn (2019 revised: GBP6.0bn) relating to the unremitted
earnings of overseas subsidiaries and joint ventures as the Group
is able to control the timing of the reversal of these temporary
differences and it is probable that they will not reverse in the
foreseeable future. The deferred tax on unremitted earnings at 29
February 2020 is estimated to be GBP237m (2019: GBP237m) which
relates to taxes payable on repatriation and dividend withholding
taxes levied by overseas tax jurisdictions. UK tax legislation
relating to company distributions provides for exemption from tax
for most repatriated profits, subject to certain exceptions.
Unrecognised deferred tax assets
Deferred tax assets in relation to continuing operations have
not been recognised in respect of the following items because it is
not probable that future taxable profits will be available against
which the Group can utilise the benefits in the relevant
locations:
2020 2019
GBPm GBPm
Deductible temporary differences 78 90
Tax losses 226 199
304 289
As at 29 February 2020, the Group has unused trading tax losses
from continuing operations of GBP1,016m (2019: GBP894m) available
for offset against future profits. A deferred tax asset has been
recognised in respect of GBP25m (2019: GBP35m) of such losses. No
deferred tax asset has been recognised in respect of the remaining
GBP991m (2019: GBP859m) due to the unpredictability of future
profit streams. Included in unrecognised tax losses are losses of
GBP219m that will expire by 2024 (2019: GBP69m in 2023) and GBP142m
that will expire between 2025 and 2040 (2019: GBP139m between 2024
and 2039). Other losses will be carried forward indefinitely.
Changes in tax law or its interpretation
The Group operates in a number of territories which leads to the
Group's profits being subject to tax in many jurisdictions. The
Group monitors income tax developments in these territories (which
include the OECD Base Erosion and Profit Shifting (BEPS) initiative
and European Union's state aid investigations) which could affect
the Group's tax liabilities.
Note 7 Discontinued operations and assets classified as held for
sale
Assets classified as held for sale
2020 2019
GBPm GBPm
Assets classified as held for sale 285 98
The assets classified as held for sale consist mainly of
properties in the UK and Central Europe due to be sold within one
year and the remaining assets of Tesco Bank's mortgage operations
of GBP45m (2019: GBPnil). Refer to Note 1 Critical accounting
judgements for further details on the mortgage book disposal.
Discontinued operations
During the current financial year, the Group reached a
settlement with the Chinese tax authority relating to a withholding
tax liability arising on the formation of the Gain Land associate
with China Resources Holdings in 2014. As a result of the
settlement, the Group has released the remaining withholding tax
liability of GBP38m - this has been classified within discontinued
operations, consistent with the classification of the original
withholding tax liability in 2014. Refer to Note 4 for further
details.
Note 8 Dividends
2020 2019
Pence/share GBPm Pence/share GBPm
Amounts recognised as distributions to
owners in the financial year:
Prior financial year final dividend(a) 4.10 399 2.00 195
Paid interim dividend(b) 2.65 257 1.67 162
Dividends paid to equity owners in the
financial year 6.75 656 3.67 357
Proposed final dividend at financial year
end 6.50 637 4.10 402
(a) Excludes GBP3m prior financial year final dividend waived
(2019: GBPnil).
(b) Excludes GBP3m interim dividend waived (2019: GBP2m).
The proposed final dividend was approved by the Board of
Directors on 7 April 2020 and is subject to the approval of
shareholders at the Annual General Meeting. The proposed dividend
has not been included as a liability as at 29 February 2020, in
accordance with IAS 10 'Events after the reporting period'. It will
be paid on 3 July 2020 to shareholders who are on the Register of
members at close of business on 22 May 2020.
A dividend reinvestment plan (DRIP) is available to shareholders
who would prefer to invest their dividends in the shares of the
Company. For those shareholders electing to receive the DRIP, the
last date for receipt of a new election is 12 June 2020.
The Group has a share forfeiture programme following the
completion of a tracing and notification exercise to any
shareholders who have not had contact with Tesco PLC (the Company)
over the past 12 years, in accordance with the provisions set out
in the Company's Articles. GBPnil (2019: GBPnil) of unclaimed
dividends in relation to these shares have been adjusted for in
retained earnings. Refer to Note 30 for further details.
Note 9 Earnings/(losses) per share and diluted earnings/(losses)
per share
Basic earnings/(losses) per share amounts are calculated by
dividing the profit/(loss) attributable to owners of the parent by
the weighted average number of ordinary shares in issue during the
financial year.
Diluted earnings/(losses) per share amounts are calculated by
dividing the profit/(loss) attributable to owners of the parent by
the weighted average number of ordinary shares in issue during the
financial year adjusted for the effects of potentially dilutive
options. The dilutive effect is calculated on the full exercise of
all potentially dilutive ordinary share options granted by the
Group, including performance-based options which the Group
considers to have been earned.
For the 53 weeks ended 29 February 2020 there were 67 million
(2019: 72 million) potentially dilutive share options. As the Group
has recognised a profit for the year from its continuing
operations, dilutive effects have been considered in calculating
diluted earnings per share.
2020 2019 (restated)
Potentially Potentially
dilutive dilutive
share share
Basic options Diluted Basic options Diluted
Profit/(loss) (GBPm)
Continuing operations* 933 - 933 1,272 - 1,272
Discontinued operations 38 - 38 - - -
Total 971 - 971 1,272 - 1,272
Weighted average number
of shares (millions) 9,716 67 9,783 9,686 72 9,758
Earnings/(losses) per share
(pence)
Continuing operations 9.60 (0.06) 9.54 13.13 (0.09) 13.04
Discontinued operations 0.39 - 0.39 - - -
Total 9.99 (0.06) 9.93 13.13 (0.09) 13.04
* Excludes profits/(losses) from non-controlling interests of GBP2m (2019: GBP(2)m).
Diluted earnings/(losses) per share from continuing operations
before exceptional items and amortisation of acquired intangibles,
net pension finance costs and fair value remeasurements of
financial instruments
53 weeks 52 weeks
2019
Notes 2020 (restated)
Profit before tax from continuing operations before
exceptional items and amortisation of acquired intangibles
(GBPm) 1,961 1,564
Add: Net pension finance costs (GBPm) 5 71 89
Add/(less): Fair value remeasurements of
financial instruments (GBPm) 5 244 153
Profit before tax from continuing operations before
exceptional items and amortisation of acquired intangibles,
net pension finance costs and fair value remeasurements
(GBPm)(a) 2,276 1,806
Profit before tax from continuing operations before
exceptional items and amortisation of acquired intangibles,
net pension finance costs and fair value remeasurements
attributable to the owners of the parent (GBPm)(b) 2,273 1,806
Taxation on profit from continuing operations before
exceptional items and amortisation of acquired intangibles,
net pension finance costs and fair value remeasurements
attributable to the owners of the parent (GBPm)(c) (490) (439)
Profit after tax from continuing operations before exceptional
items and amortisation of acquired intangibles,
net pension finance costs and fair value remeasurements
attributable to the owners of the parent (GBPm) 1,783 1,367
Basic weighted average number of shares (millions) 9,716 9,686
Basic earnings per share from continuing operations
before exceptional items and amortisation of acquired
intangibles, net pension finance costs and fair value
remeasurements (pence) 18.35 14.11
Diluted weighted average number of shares (millions) 9,783 9,758
Diluted earnings per share from continuing operations
before exceptional items and amortisation of acquired
intangibles, net pension finance costs and fair value
remeasurements (pence)(a) 18.23 14.01
(a) Refer to page 121 for a reconciliation from Profit before
tax from continuing operations before exceptional items and
amortisation of acquired intangibles, net pension finance costs and
fair value remeasurements of financial instruments and Diluted
earnings per share from continuing operations before exceptional
items and amortisation of acquired intangibles, net pension finance
costs and fair value remeasurements of financial instruments shown
above to the Group's 52 week alternative performance measures.
(b) Excludes profit before tax attributable to non-controlling
interests of GBP3m (2019: GBPnil).
(c) Excludes tax charges on profits attributable to
non-controlling interests of GBP(1)m (2019: GBP(2)m).
Note 10 Goodwill and other intangible assets
Customer Intangible
Goodwill Software(a) relationships assets Total
GBPm GBPm GBPm GBPm GBPm
Cost
At 23 February 2019 5,550 1,840 715 447 8,552
Foreign currency translation (5) (2) - (1) (8)
Additions - 188 - 19 207
Reclassification - 40 - (5) 35
Disposals(b) (27) (198) - (2) (227)
At 29 February 2020 5,518 1,868 715 458 8,559
Accumulated amortisation
and impairment losses
At 23 February 2019 641 1,254 72 321 2,288
Foreign currency translation (4) (1) - - (5)
Charge for the year(c) - 281 76 10 367
Impairment losses(d) - 15 - 12 27
Reversal of impairment losses(d) - (31) - (7) (38)
Reclassification - 2 - (3) (1)
Disposals - (196) - (2) (198)
At 29 February 2020 637 1,324 148 331 2,440
Net carrying value
At 29 February 2020 4,881 544 567 127 6,119
At 23 February 2019 4,909 586 643 126 6,264
(a) Software includes GBP341m (2019: GBP297m) of internally
generated development costs.
(b) The disposal of goodwill relates to the sale of Tesco Bank's
mortgage book.
(c) Of the GBP86m (2019: GBP85m) amortisation of customer
relationships and other intangible assets, GBP79m (2019: GBP78m)
has been included within exceptional items and amortisation of
intangible assets. GBP76m (2019: GBP74m) of this balance arises
from amortisation of intangible assets recognised
upon the Booker acquisition. Refer to Note 4 for further details.
(d) Refer to Note 15.
Customer Intangible
Goodwill Software(a) relationships assets Total
GBPm GBPm GBPm GBPm GBPm
Cost
At 24 February 2018 2,458 3,166 - 392 6,016
Foreign currency translation (6) 1 - (1) (6)
Additions - 167 - 24 191
Acquired through business
combinations 3,098 - 715 48 3,861
Reclassification - (140) - 2 (138)
Disposals - (308) - (15) (323)
Fully amortised assets - (1,046) - (3) (1,049)
At 23 February 2019 5,550 1,840 715 447 8,552
Accumulated amortisation
and impairment losses
At 24 February 2018 662 2,378 - 315 3,355
Foreign currency translation (21) - - (2) (23)
Charge for the year(c) - 210 72 13 295
Impairment losses(d) - 15 - 27 42
Reversal of impairment losses(d) - (2) - (24) (26)
Disposals - (301) - (5) (306)
Fully amortised assets - (1,046) - (3) (1,049)
At 23 February 2019 641 1,254 72 321 2,288
(a)-(d) Refer to previous table for footnotes.
Note 11 Property, plant and equipment
Land and
buildings Other(a) Total
GBPm GBPm GBPm
Cost
At 23 February 2019 (restated) 24,484 6,993 31,477
Foreign currency translation (69) (15) (84)
Additions(b)(c) 1,285 621 1,906
Reclassification (24) (28) (52)
Classified as held for sale (589) (36) (625)
Disposals (219) (610) (829)
At 29 February 2020 24,868 6,925 31,793
Accumulated depreciation and impairment
losses
At 23 February 2019 (restated) 7,523 4,768 12,291
Foreign currency translation (23) (11) (34)
Charge for the year 525 613 1,138
Impairment losses(d) 611 111 722
Reversal of impairment losses(d) (391) (104) (495)
Reclassification 41 (23) 18
Classified as held for sale (298) (34) (332)
Disposals (147) (602) (749)
At 29 February 2020 7,841 4,718 12,559
Net carrying value (e)
At 29 February 2020 17,027 2,207 19,234
At 23 February 2019 (restated) 16,961 2,225 19,186
Construction in progress included
above (f)
At 29 February 2020 88 114 202
At 23 February 2019 37 109 146
(a) Other assets consist of fixtures and fittings with a net
carrying value of GBP1,712m (2019: GBP1,720m), office equipment
with a net carrying value of GBP245m (2019: GBP304m) and motor
vehicles with a net carrying value of GBP250m (2019: GBP201m).
(b) Includes GBPnil (2019: GBP1m) in respect of interest
capitalised, principally relating to land and building assets. The
capitalisation rate used to determine the amount of finance costs
capitalised during the financial year was 4.3% (2019: 4.5%).
Interest capitalised is deducted in determining taxable profit in
the financial year in which it is incurred.
(c) Includes GBP914m of land and buildings related to obtaining
control of the Tesco Atrato Limited partnership, which was impaired
by GBP(287)m on acquisition. Refer to the breakdown of assets and
liabilities acquired within Note 33.
(d) Refer to Note 15.
(e) Includes GBP1,406m (2019: GBP803m) of assets pledged as
security for secured bonds and GBP478m (2019: GBP489m) of property
held as security in favour of the Tesco PLC Pension Scheme. Refer
to Notes
23 and 29.
(f) Construction in progress does not include land.
Land and
buildings Other(a) Total
GBPm GBPm GBPm
Cost (restated)
At 25 February 2018 23,018 10,852 33,870
Foreign currency translation 24 36 60
Additions(b) 514 533 1,047
Acquired through business combinations 258 68 326
Reclassification 926 (796) 130
Classified as held for sale (48) 5 (43)
Disposals (73) (450) (523)
Fully depreciated assets* (135) (3,255) (3,390)
At 23 February 2019 24,484 6,993 31,477
Accumulated depreciation and impairment
losses (restated)
At 25 February 2018 6,559 8,599 15,158
Foreign currency translation (6) 18 12
Charge for the year 542 597 1,139
Impairment losses(d) 421 167 588
Reversal of impairment losses(d) (568) (141) (709)
Reclassification 790 (796) (6)
Classified as held for sale (20) 5 (15)
Disposals (60) (426) (486)
Fully depreciated assets* (135) (3,255) (3,390)
At 23 February 2019 7,523 4,768 12,291
Net carrying value 16,961 2,225 19,186
(a)-(d) Refer to previous table for footnotes.
* During the prior financial year, the Group performed a
comprehensive review of all fully-depreciated assets held in the
Group's fixed asset registers, and removed GBP3,390m of cost and
accumulated depreciation and impairment losses relating to those
fully-depreciated assets which are no longer in use by the
Group.
Note 12 Leases
Group as lessee
Lease liabilities 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. Purchase
options and renewal rights, where they occur, are at market value.
Escalation clauses are in line with market practices and include
inflation-linked, fixed rates, resets to market rents and hybrids
of these.
In prior years, the Group entered into several joint ventures,
and sold and leased back properties to and from these joint
ventures over 20 to 30 year terms. On certain transactions, the
Group has an option to buy back either the leased asset or the
equity of the other party, at market value and at a specified date,
typically at year ten. On some of these transactions the Group also
has a lease break option, which is exercisable if the buy back
option is exercised and the associated debt in the joint venture is
repaid. The lease liability in respect of these leases assumes that
the lease break option is not exercised.
On 13 September 2018, the Group exercised its option to buy back
the 50% equity holding in the Tesco Atrato Limited partnership held
by the other joint venture partner. The acquisition completed on 23
September 2019, at which point the associated property leases from
the joint venture became intercompany leases and are eliminated on
consolidation. Refer to Note 33 for further details.
Right of use assets
Land and
buildings Other Total
GBPm GBPm GBPm
Net carrying value at 23 February 2019 7,561 152 7,713
Additions 146 58 204
Depreciation charged (584) (67) (651)
Impairment losses(a) (267) - (267)
Reversal of impairment losses(a) 182 - 182
Derecognition on acquisition of property joint
venture (Note 33) (335) - (335)
Other(b) 31 (3) 28
Net carrying value at 29 February 2020 6,734 140 6,874
Land and Total
buildings Other GBPm
GBPm GBPm
Net carrying value at 25 February 2018 7,362 165 7,527
Additions (including acquisitions through business
combinations) 619 44 663
Depreciation charged (556) (59) (615)
Impairment losses(a) (195) - (195)
Reversal of impairment losses(a) 203 - 203
Other(b) 128 2 130
Net carrying value at 23 February 2019 7,561 152 7,713
* Refer to Note 15.
* Other movements include lease terminations, modifications and
reassessments, foreign exchange, reclassifications to assets held
for sale and entering into finance subleases.
Lease liabilities
The following tables show the discounted lease liabilities
included in the Group balance sheet and a maturity analysis of the
contractual undiscounted lease payments:
2020 2019
(restated)
GBPm GBPm
Current 598 646
Non-current 8,968 9,859
======
Total lease liabilities 9,566 10,505
======
2020 2019
(restated)
Maturity analysis - contractual undiscounted lease payments GBPm GBPm
======
Within one year 1,081 1,202
Greater than one year but less than five years 3,958 4,218
Greater than five years but less than ten years 4,178 4,539
Greater than ten years but less than fifteen years 2,810 3,267
After fifteen years 2,596 3,209
======
Total undiscounted lease payments 14,623 16,435
======
A reconciliation of the Group's opening to closing lease
liabilities balance is presented in Note 32.
Amounts recognised in the Group income statement
Amounts recognised in the Group cash flow statement
53 weeks 52 weeks
2020 2019
(restated)
GBPm GBPm
Total cash outflow for leases* 1,175 1,167
* Includes GBP5m (2019: GBP4m) related to Tesco Bank.
Future possible cash outflows not included in the lease
liability
Some leases contain break clauses or extension options to
provide operational flexibility. Potential future undiscounted
lease payments not included in the reasonably certain lease term
and hence not included in lease liabilities total GBP11.8bn (2019:
GBP12.0bn).
Future increases or decreases in rentals linked to an index or
rate are not included in the lease liability until the change in
cash flows takes effect. Approximately 72% (2019: 73%) of the
Group's lease liabilities are subject to inflation-linked rentals
and a further 12% (2019: 12%) are subject to rent reviews. Rental
changes linked to inflation or rent reviews typically occur on an
annual or 5-yearly basis.
The Group is committed to payments totalling GBP93m (2019:
GBP42m) in relation to leases that have been signed but have not
yet commenced.
Sale and leaseback
In October 2019, the Group completed a sale and leaseback
transaction in respect of a store and mall in Poland. Cash proceeds
of GBP24m were received and a gain of GBP11m was recognised. The
store and mall are being leased back over a 3 year lease term at
market rentals.
Group as lessor
The Group leases out owned properties and sublets leased
properties under operating and finance leases. Such properties
include malls, mall units, stores, units within stores,
distribution centres and residential properties.
Amounts recognised in the Group income statement
53 weeks 52 weeks
2020 2019
(restated)
GBPm GBPm
Finance lease - interest income(a) 4 3
Operating lease - rental income(b) 341 328
(a) Includes GBP4m (2019: GBP3m) of sublease interest
income.
(b) Includes GBP74m (2019: GBP70m) of sublease rental
income.
Finance lease payments receivable
The finance lease receivable (net investment in the lease)
included in the Group balance sheet is GBP48m (2019: GBP54m).
Operating lease payments receivable maturity analysis
2020 2019
(restated)
GBPm GBPm
Within one year 220 223
Greater than one year but less than two years 128 138
Greater than two years but less than three years 71 75
Greater than three years but less than four years 38 40
Greater than four years but less than five years 27 28
Greater than five years but less than ten years 83 77
Greater than ten years but less than fifteen years 44 40
After fifteen years 82 84
Total undiscounted operating lease payments receivable 693 705
Note 13 Investment property
2020 2019
GBPm GBPm
===== =====
Cost
At the beginning of the year 118 208
Foreign currency translation (1) (3)
Reclassification (11) (1)
Disposals (6) (86)
===== =====
At the end of the year 100 118
===== =====
Accumulated depreciation and impairment losses
At the beginning of the year 82 108
Foreign currency translation (1) (2)
Charge for the year 1 1
Impairment losses for the year* 5 1
Reversal of impairment losses for the year* (4) (2)
Reclassification (4) (2)
Disposals (5) (22)
===== =====
At the end of the year 74 82
===== =====
Net carrying value at the end of the year 26 36
===== =====
Rental income earned from investment properties under
operating leases 11 18
Direct operating expenses incurred on rental-earning
investment properties (3) (19)
===== =====
* Refer to Note 15.
The estimated fair value of the Group's investment property is
GBP0.2bn (2019: GBP0.2bn). This fair value has been determined by
applying an appropriate rental yield to the rentals earned by the
investment property. A valuation has not been performed by an
independent valuer.
Note 14 Group entities
The Group consists of the ultimate Parent Company, Tesco PLC,
and a number of subsidiaries, joint ventures and associates held
directly or indirectly by Tesco PLC. See pages 107 to 113 for a
complete list of Group entities.
Subsidiaries
The accounting year ends of the subsidiaries consolidated in
these financial statements are on or around 29 February 2020.
Consolidated structured entities
The Group has a number of securitisation structured entities
established in connection with Tesco Bank's credit card
securitisation transactions. Although none of the equity of these
entities is owned by the Group, the Group has rights to variable
returns from its involvement with these entities and has the
ability to affect those returns through its power over them under
contractual agreements. As such these entities are effectively
controlled by the Group, and are therefore accounted for as
subsidiaries of the Group.
These entities have financial year ends of 31 December. The
management accounts of these entities are used to consolidate the
results to 29 February 2020 within these financial statements.
Unconsolidated structured entities
In prior years, the Group sponsored a number of structured
entities. The Group led the formation of the entities and its name
appears in the name of the entities and/or on the debt issued by
the entities. The structured entities were set up to finance
property purchases by some of the UK property joint ventures in
which the Group typically holds a 50% equity interest. The
structured entities obtain debt financing from third party
investors and lend the funds to these joint ventures, who use the
funds to purchase the properties.
The liabilities of the UK property joint ventures include the
loans due to these structured entities. The Group's exposure to the
structured entities is limited to the extent of the Group's
interests in the joint ventures. The liabilities of the structured
entities are non-recourse to the Group.
The Group concluded that it does not control, and therefore
should not consolidate, these structured entities since it does not
have power over the relevant activities of the structured entities,
or exposure to variable returns from these entities.
Interests in joint ventures and associates
Principal joint ventures and associates
The Group's principal joint ventures and associates are:
Share of
issued share
capital,
loan capital Principal
Nature and debt Country area of
of relationship Business activity securities of incorporation operation
Included in 'UK property
joint ventures':
The Tesco Coral Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Blue Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Passaic Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Navona Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Sarum Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Dorney Limited Joint venture Property investment 50% England United Kingdom
Partnership
The Tesco Property (No. Joint venture Property investment 50% Jersey United Kingdom
2) Limited Partnership
The Tesco Arena Unit Joint venture Property investment 50% Jersey United Kingdom
Trust
Included in 'Other joint
ventures and associates':
Tesco Mobile Limited Joint venture Telecommunications 50% England United Kingdom
Tesco Underwriting Limited Joint venture Insurance 49.9% England United Kingdom
Trent Hypermarket Private Joint venture Retail 50% India India
Limited
Tesco Lotus Retail Growth Associate Property investment 25% Thailand Thailand
Freehold and Leasehold
Property Fund
The accounting period end dates of the joint ventures and
associates consolidated in these financial statements range from 31
December 2019 to 29 February 2020. The accounting period end dates
of joint ventures differ from those of the Group for commercial
reasons and depend upon the requirements of the joint venture
partner as well as those of the Group. The accounting period end
dates of the associates are different from those of the Group as
they depend upon the requirements of the parent companies of those
entities.
There are no significant restrictions on the ability of joint
ventures and associates to transfer funds to the parents, other
than those imposed by the Companies Act 2006 or equivalent local
regulations, and for Tesco Underwriting Limited, regulatory capital
requirements.
Prior to the Group's sale of its 20% share in Gain Land Limited
(Gain Land), management applied judgement in determining that Gain
Land was an associate of the Group. The Group had significant
influence by virtue of holding 20% equity interest which presumed
significant influence per IAS 28, together with having a
contractual right to appoint two out of 10 Directors, while taking
into account that the remaining 80% interest was held by one other
party.
The UK property joint ventures involve the Group partnering with
third parties in carrying out some property investments in order to
enhance returns from property and access funding, while reducing
risks associated with sole ownership. These property investments
generally cover shopping centres and standalone stores. The Group
enters into leases for some or all of the properties held in the
joint ventures. These leases provide the Group with some rights
over alterations and adjacent land developments. Some leases also
provide the Group with options to purchase the other joint
venturers' equity stakes at a future point in time. In some cases
the Group has the ability to substitute properties in the joint
ventures with alternative properties of similar value, subject to
strict eligibility criteria. In other cases, the Group carries out
property management activities for third party rentals of shopping
centre units.
The property investment activities are carried out in separate
entities, usually partnerships or limited liability companies. The
Group has assessed its ability to direct the relevant activities of
these entities and any impact on Group returns and concluded that
the entities qualify as joint ventures since decisions regarding
them require the unanimous consent of both equity holders. This
assessment included not only rights within the joint venture
agreements, but also any rights within other contractual
arrangements between the Group and the entities.
The Group made a number of judgements in arriving at this
determination, the key ones being:
- since the provisions of the joint venture agreements require
the relevant decisions impacting investor returns to be either
unanimously agreed by both joint venturers at the same time, or in
some cases to be agreed sequentially by each venturer at different
stages, there is joint decision making within the joint
venture;
- since the Group's leases are priced at fair value, and any
rights embedded in the leases are consistent with market practice,
they do not provide the Group with additional control over the
joint ventures or infer an obligation by the Group to fund the
settlement of liabilities of the joint ventures;
- any options to purchase the other joint venturers' equity
stakes are priced at market value, and only exercisable at future
dates, hence they do not provide control to the Group at the
current time;
- where the Group has a right to substitute properties in the
joint ventures, the rights are strictly limited and are at fair
value, hence do not provide control to the Group; and
- where the Group carries out property management activities for
third party rentals in shopping centres, these additional
activities are controlled through joint venture agreements or lease
agreements, and do not provide the Group with additional powers
over the joint venture.
Summarised financial information for joint ventures and
associates
The summarised financial information below reflects the amounts
presented in the financial statements of the relevant joint
ventures and associates, and not the Group's share of those
amounts. These amounts have been adjusted to conform to the Group's
accounting policies where required. The summarised financial
information for UK property joint ventures has been aggregated in
order to provide useful information to users without excessive
detail since these entities have similar characteristics and risk
profiles largely based on their nature of activities and geographic
market.
UK property joint
ventures Gain Land Limited
2020 2019 2020 2019
(restated)
GBPm GBPm GBPm GBPm
Summarised balance sheet
Non-current assets(a) 3,242 3,786 - 6,360
Current assets (excluding cash and cash
equivalents) 101 98 - 2,238
Cash and cash equivalents 28 40 - 649
Current liabilities(b) (487) (359) - (6,102)
Non-current liabilities(b) (3,621) (4,529) - (3,313)
=========
Net assets/(liabilities) (737) (964) - (168)
=========
Summarised income statement
Revenue 258 289 8,551 9,038
=========
Profit/(loss) after tax - - (95) (64)
=========
Reconciliation to carrying amounts:
Opening balance - - 263 274
Foreign currency translation - - (4) 2
Share of profits/(losses)(c) 12 15 (19) (13)
Dividends received from joint ventures
and associates (12) (15) - -
Additions/(disposals)(d) - - (240) -
=========
Closing balance - - - 263
=========
Group's share in ownership 50% 50% - 20%
Group's share of net assets/(liabilities) (369) (482) - (34)
Goodwill - - - 297
Deferred property profits offset against
carrying amounts (61) (61) - -
Cumulative unrecognised losses(c) 205 183 - -
Cumulative unrecognised hedge reserves(c) 225 360 - -
=========
Carrying amount - - - 263
=========
(a) The non-current asset balances of UK property joint ventures
are reflected at historical depreciated cost to conform to the
Group's accounting policies. The aggregate fair values in the
financial statements of the UK property joint ventures are
GBP4,338m (2019: GBP5,053m).
(b) The current and non-current liabilities of UK property joint
ventures largely comprise loan balances of GBP3,616m (2019:
GBP3,809m) and derivative swap balances of GBP452m (2019: GBP720m)
entered into to hedge the cash flow variability exposures of the
joint ventures.
(c) The share of profit for the year for UK property joint
ventures related to GBP12m dividends received from joint ventures
with GBPnil carrying amounts. GBP3m of losses and GBP37m of
increases in the fair values of derivatives arising from these
entities have been included in cumulative unrecognised
losses and cumulative unrecognised hedge reserves respectively.
(d) The Group completed the sale of its 20% investment in Gain
Land on 28 February 2020 for a consideration of GBP277m. Refer to
Note 33 for further details.
As at 29 February 2020, the Group has GBP106m (2019: GBP105m)
loans to UK property joint ventures.
Other joint ventures and associates
The Group also has interests in a number of individually
immaterial joint ventures and associates excluding UK property
joint ventures.
Joint ventures Associates
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
======= =====
Aggregate carrying amount of individually
immaterial joint ventures and associates 230 275 77 64
Group's share of profits/(losses) for
the year 14 15 11 15
======= =====
Note 15 Impairment of non-current assets
Impairment losses and reversals
No goodwill impairment losses were recognised by the Group in
2020 (2019: GBPnil).
The table below summarises the Group's pre-tax impairment losses
and reversals on other non-current assets and investments in joint
ventures and associates, with the former aggregated by segment due
to the large number of individually immaterial store
cash-generating units. This excludes any losses recognised on
classifying an asset or disposal group as held for sale. Impairment
losses and reversals are presented gross, and prior financial year
comparatives have been re-presented on the same basis and restated
following adoption of IFRS 16, 'Leases'.
UK & ROI Central Europe Asia Tesco Bank Total*
Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment
loss reversal loss reversal loss reversal loss reversal loss reversal
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Group balance
sheet
Other
intangible
assets (27) 36 - 2 - - - - (27) 38
Property, plant
and equipment (428) 272 (266) 195 (28) 28 - - (722) 495
Right of use
assets (242) 142 (10) 28 (15) 12 - - (267) 182
Investment
property (5) - - 4 - - - - (5) 4
Other
non-current
assets (702) 450 (276) 229 (43) 40 - - (1,021) 719
Investments
in joint
ventures
and associates - - - - (47) - - - (47) -
Total
impairment
(loss)/
reversal (702) 450 (276) 229 (90) 40 - - (1,068) 719
Group income
statement
Cost of sales
- underlying - - (5) 8 (2) - - - (7) 8
Cost of sales
- exceptional (658) 407 (271) 217 (41) 40 - - (970) 664
Administrative
expenses
- underlying (44) 43 - - - - - - (44) 43
Administrative
expenses
- exceptional - - - 4 (47) - - - (47) 4
Total
impairment
(loss)/
reversal (702) 450 (276) 229 (90) 40 - - (1,068) 719
* Of the GBP302m other non-current assets net impairment loss
for the Group (2019: GBP114m reversal), a net loss of GBP302m
(2019: GBP111m reversal) has been classified within exceptional
items, of which a net loss of GBP251m (2019: GBP109m reversal)
related to the UK & ROI, a net loss of GBP50m (2019: GBP44m
reversal) related to Central Europe and a net loss of GBP1m (2019:
GBP42m loss) related to Asia.
UK & ROI Central Europe Asia Tesco Bank Total*
Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment
52 weeks ended loss reversal loss reversal loss reversal loss reversal loss reversal
23 February GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2019
(restated)
Group balance
sheet
Other
intangible
assets (26) 21 (16) 5 - - - - (42) 26
Property, plant
and equipment (426) 534 (128) 163 (34) 12 - - (588) 709
Right of use
assets (147) 150 (25) 49 (23) 4 - - (195) 203
Investment
property - 2 (1) - - - - - (1) 2
Other
non-current
assets (599) 707 (170) 217 (57) 16 - - (826) 940
Investments - - - - - - - - - -
in joint
ventures
and associates
Total
impairment
(loss)/
reversal (599) 707 (170) 217 (57) 16 - - (826) 940
Group income
statement
Cost of sales
- underlying - - (1) 1 - - - - (1) 1
Cost of sales
- exceptional (597) 704 (162) 206 (56) 15 - - (815) 925
Administrative
expenses
- underlying (2) 1 (7) 10 - 1 - - (9) 12
Administrative
expenses
- exceptional - 2 - - (1) - - - (1) 2
Total
impairment
(loss)/
reversal (599) 707 (170) 217 (57) 16 - - (826) 940
* Refer to previous table for footnote.
The impairment loss in UK & ROI includes an impairment loss
of GBP287m (2019: GBPnil) in the UK in respect of the Group
obtaining control of the Tesco Atrato Limited partnership. Refer to
Note 33 for further details.
The impairment loss/reversal in Central Europe includes an
impairment loss of GBP220m (2019: GBPnil) / reversal of GBP142m
(2019: GBPnil) in Poland following the announcement in July 2019
that Tesco Poland will re-focus its business on its best performing
smaller store formats, converting its largest hypermarkets into
smaller compact hypermarkets, which will be run alongside its
existing smaller supermarkets. A full impairment review was
conducted in Poland at the time of the announced changes.
The remaining Other non-current assets impairment losses and
reversals for the Group largely reflect normal fluctuations
expected from store level performance, property fair values and
changes in discount rates, as well as any specific store
closures.
The Group recognised an impairment loss of GBP47m (2019: GBPnil)
against its investment in its joint venture Trent Hypermarket
Private Limited in India, reflecting investments in our offer to
remain competitive in the market, combined with a strategic
decision to reduce store expansion, which has impacted our profit
expectations of the joint venture.
Net carrying value of non-current assets
The net carrying values of Other non-current assets and
recoverable amounts of impaired Other non-current assets for which
an impairment loss has been recognised or reversed have been
aggregated by segment due to the large number of individually
immaterial store cash- generating units. The amounts below exclude
assets or disposal groups classified as held for sale.
UK & ROI Central Asia Tesco Bank Total
At 29 February 2020 GBPm Europe GBPm GBPm GBPm
GBPm
Net carrying value
Other intangible assets 1,055 28 16 139 1,238
Property, plant and equipment 14,612 2,196 2,365 61 19,234
Right of use assets 5,719 491 650 14 6,874
Investment property 23 3 - - 26
Other non-current assets 21,409 2,718 3,031 214 27,372
Goodwill(a) 3,837 - 269 775 4,881
Investments in joint ventures
and associates(b) 11 1 208 87 307
Net carrying value of
non-current
assets 25,257 2,719 3,508 1,076 32,560
Recoverable amount of impaired
Other non-current assets for
which
an impairment loss has been
recognised
or reversed, supported by:
Value in use 3,448 254 163 - 3,865
Fair value less costs of
disposal(c) 2,105 269 209 - 2,583
5,553 523 372 - 6,448
UK & ROI Central Asia Tesco Bank Total
At 23 February 2019 (restated) GBPm Europe GBPm GBPm GBPm
GBPm
Net carrying value
Other intangible assets 1,090 27 14 224 1,355
Property, plant and equipment 13,988 2,687 2,449 62 19,186
Right of use assets 6,537 479 682 15 7,713
Investment property 29 7 - - 36
Other non-current assets 21,644 3,200 3,145 301 28,290
Goodwill (a) 3,837 - 270 802 4,909
Investments in joint ventures
and associates (b) 12 1 503 86 602
Net carrying value of
non-current
assets 25,493 3,201 3,918 1,189 33,801
Recoverable amount of impaired
Other non-current assets for
which
an impairment loss has been
recognised
or reversed, supported by:
Value in use 3,311 426 184 - 3,921
Fair value less costs of
disposal
(c) 1,976 498 213 - 2,687
5,287 924 397 - 6,608
(a) Goodwill of GBP4,881m (2019: GBP4,909m) consists of UK
GBP3,834m (2019: GBP3,834m), ROI GBP3m (2019: GBP3m), Thailand
GBP193m (2019: GBP193m), Malaysia GBP76m (2019: GBP77m) and Tesco
Bank GBP775m (2019: GBP802m).
(b) The carrying value of the Group's investments include: Gain
Land GBPnil (2019: GBP263m), Trent Hypermarket Private Limited
GBP59m (2019: GBP102m) and Tesco Underwriting Limited GBP87m (2019:
GBP86m).
(c) Due to the individual nature of each property, fair values
are classified as Level 3 within the fair value hierarchy.
Impairment methodology
Cash-generating units
The Group treats each store as a separate cash-generating unit
for impairment testing of other intangible assets, property, plant
and equipment, right of use assets and investment property. Refer
to Note 1 for further details. The Group allocates goodwill to
groups of cash-generating units, where each country represents a
group of cash-generating units for the Group's retail operations,
as this represents the lowest level at which goodwill is monitored
by management. Tesco Bank represents a separate cash-generating
unit.
The recoverable amount of each store cash-generating unit is the
higher of its value in use and its fair value less costs of
disposal. The recoverable amount of a group of cash-generating
units to which goodwill has been allocated is determined based on
value in use calculations.
Head office and central assets such as distribution centres and
associated costs are allocated to store cash-generating units based
on level of use, estimated with reference to sales. Customer
fulfilment centres and associated costs that are part of a store
are included in the store cash-generating unit. Standalone customer
fulfilment centres and associated costs are allocated to the store
cash-generating units in the area that they serve to match the
customer base, based on level of use, estimated with reference to
sales.
Value in use
Estimates for value in use calculations include discount rates,
long term growth rates and expected changes to future cash flows,
including volumes and prices. Estimates are based on past
experience and expectations of future changes in the market,
including the prevailing economic climate and global economy,
competitor activity, market dynamics, changing customer behaviours,
structural challenges facing retail and the resilience afforded by
the Group's operational scale.
Cash flow projections are based on the Group's three-year
internal forecasts, the results of which are reviewed by the Board.
The forecasts are extrapolated to five years based on management's
expectations, and beyond five years based on estimated long-term
average growth rates. Long-term growth rates for the Retail
business are based on inflation forecasts by recognised bodies. The
long-term growth rate for Tesco Bank is based on inflation and GDP
growth forecasts by recognised bodies.
Management estimates discount rates using pre-tax rates that
reflect the market assessment as at the balance sheet date of the
time value of money and the risks specific to the cash-generating
units, including a Brexit risk adjustment in the UK & ROI
segment, and a COVID-19 risk adjustment to the discount rates for
all cash-generating units to reflect the impact of increased
volatility in forecast cash flows observable at that time. The
pre-tax discount rates are derived from the Group's post-tax
weighted average cost of capital, as adjusted for the specific
risks relating to each geographical region. Risk free rates are
based on government bond rates in each geographical region and
equity risk premia are based on forecasts by recognised bodies.
Fair value less costs of disposal
Fair values of owned properties are determined with regard to
the market rent for the stores or for alternative uses with
investment yields appropriate to reflect the physical
characteristics of the property, location, infrastructure,
redevelopment potential and other factors. In some cases, fair
values include residual valuations where stores may be viable for
redevelopment. Fair values of leased properties are determined with
regard to the discounted market rent for the property over the
remaining period of the lease, reflecting the condition and
location of the property and the local rental market. Fair values
of the Group's properties were determined with the assistance of
independent, professional valuers where appropriate. Costs of
disposal are estimated based on past experience in each
geographical region.
Investments in joint ventures and associates
The recoverable values of investments in joint ventures and
associates are estimated taking into account forecast cash flows,
equity valuations of comparable entities and/or recent transactions
for comparable businesses.
Key assumptions and sensitivity
Key assumptions
For value in use calculations, the key assumptions to which the
recoverable amounts are most sensitive are discount rates,
long-term growth rates and the impact on cash generated from
operations from year one sales growth (incorporating sales and
costs, volumes and prices). For fair value less costs of disposal
calculations, the key assumption is property fair values.
The discount rates and long-term growth rates for each group of
cash-generating units to which goodwill has been allocated are:
UK ROI Thailand Malaysia Tesco Bank
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
% % % % % % % % % %
Pre-tax discount
rates 8.0 8.8 8.1 8.5 9.0 9.6 11.5 11.8 9.7 10.4
Post-tax discount
rates 6.6 7.1 7.1 7.4 7.2 7.7 8.7 9.0 7.2 7.8
Long-term growth
rates 2.0 2.0 1.9 1.9 1.6 1.9 2.4 2.4 1.8 2.0
The discount rates and long-term growth rates for the Group's
portfolio of store cash-generating units, aggregated by segment due
to the large number of individually immaterial store
cash-generating units, are:
UK & ROI Central Europe Asia Tesco Bank
2020 2019 2020 2019 2020 2019 2020 2019
% % % % % % % %
8.0 - 8.5 - 7.0 - 7.4 - 9.0 - 9.6 -
Pre-tax discount rates 8.1 8.8 9.3 9.8 11.5 11.8 9.7 10.4
6.6 7.1 - 5.5 - 5.9 - 7.2 - 7.7 -
Post-tax discount rates - 7.1 7.4 8.3 8.4 8.7 9.0 7.2 7.8
1.9 - 1.9 - 2.0 - 2.0 - 1.6 - 1.9 -
Long-term growth rates 2.0 2.0 3.0 2.7 2.4 2.4 1.8 2.0
Sensitivity
The Group has carried out sensitivity analyses on the reasonably
possible changes in key assumptions in the impairment tests for (a)
each group of cash-generating units to which goodwill has been
allocated and (b) for its portfolio of store cash-generating
units.
(a) Neither a reasonably possible one percentage point increase
in discount rates, a one percentage point decrease in year one
sales growth nor a one percentage point decrease in long-term
growth rates would indicate impairment in any group of
cash-generating units to which goodwill has been allocated.
(b) Whilst there is not a significant risk of an adjustment to
the carrying amount of any one store cash-generating unit that
would be material to the Group as a whole in the next financial
year, the table below summarises the reasonably possible changes in
each key assumption and its impact on the impairment of the Group's
entire portfolio of store cash-generating units, presented in
aggregate due to the large number of individually immaterial store
cash-generating units:
2020* 2019
Impact on (restated)
impairment
Key assumption Reasonably possible change GBPm GBPm
Post-tax discount Increase of 1.0%pt for each
rates geographic region Increase (482) (477)
Decrease of 1.0%pt for each
geographic region Decrease 485 406
Year one sales Increase of 1.0%pt for each
growth geographic region Decrease 61 51
Decrease of 1.0%pt for each
geographic region Increase (61) (52)
Long-term growth Increase of 1.0%pt for each
rates geographic region Decrease 445 379
Decrease of 1.0%pt for each
geographic region Increase (410) (404)
Increase of 5.0%pt for each
Property fair values geographic region Decrease 105 129
Decrease of 5.0%pt for each
geographic region Increase (105) (130)
===========
* These sensitivities are presented on a consistent basis with
the prior financial year to aid comparability. Commentary on the
additional sensitivities adjusted for the impact of increased
volatility as a result of the coronavirus pandemic is given in Note
36.
Note 16 Financial assets at fair value through other
comprehensive income
Financial assets at fair value through other comprehensive
income comprise investments in debt and equity instruments of other
entities.
2020 2019
GBPm GBPm
Investments in debt instruments 1,058 1,040
Investments in equity instruments 10 6
===== =====
Total financial assets at fair value through other comprehensive
income 1,068 1,046
===== =====
Of which:
Current 202 67
Non-current 866 979
===== =====
1,068 1,046
===== =====
Note 17 Inventories
2020 2019
GBPm GBPm
Goods held for resale 2,429 2,611
Development properties 4 6
2,433 2,617
Goods held for resale are net of commercial income. Refer to
Note 22.
Cost of inventories recognised as an expense for the 53 weeks
ended 29 February 2020 was GBP48,260m (52 weeks ended 23 February
2019: GBP48,124m). Inventory losses and provisions recognised as an
expense for the 53 weeks ended 29 February 2020 were GBP1,320m (52
weeks ended 23 February 2019: GBP1,399m).
Note 18 Trade and other receivables
2020 2019
(restated)
GBPm GBPm
Trade receivables 495 598
Prepayments 192 279
Accrued income(a) 262 297
Other receivables 439 449
Amounts owed by joint ventures and associates (Note
31)(b) 174 170
Total trade and other receivables 1,562 1,793
Of which:
Current 1,396 1,550
Non-current 166 243
1,562 1,793
(a) Accrued income includes contract assets of GBP60m (2019:
GBP54m) primarily related to insurance renewal income. The expected
credit loss was immaterial as at 29 February 2020 (2019:
immaterial).
(b) Expected credit losses on amounts owed by joint ventures and
associates is not material.
Trade and other receivables include commercial income. Refer to
Note 22. Trade and other receivables are generally
non-interest-bearing. Credit terms vary by country and the nature
of the debt, ranging from 7 to 60 days.
The tables below present the aging of receivables and related
allowances for expected credit losses:
Up to Greater
6 months 6 to 12 than 12
Not past past due months months past Total
due GBPm past due due GBPm
At 29 February 2020 GBPm GBPm GBPm
Trade receivables 438 70 6 15 529
Other receivables 431 7 4 17 459
Trade and other receivables 869 77 10 32 988
Allowance for expected credit losses:
At the beginning of the year (5) (11) (14) (29) (59)
Foreign currency translation - 1 - - 1
Increase in allowance, net of recoveries,
charged to the Group income statement (2) - 4 (3) (1)
Amounts written off - 1 2 2 5
At the end of the year (7) (9) (8) (30) (54)
Up to
6 months 6 to 12 Greater
Not past past due months than 12 Total
due GBPm past due months past GBPm
GBPm GBPm due
At 23 February 2019 GBPm
Trade receivables 499 106 18 17 640
Other receivables 435 16 2 13 466
Trade and other receivables 934 122 20 30 1,106
Allowance for expected credit losses:
At the beginning of the year (3) (10) (16) (17) (46)
Increase in allowance, net of recoveries,
charged to the Group income statement (2) (2) - (17) (21)
Amounts written off - 1 2 5 8
At the end of the year (5) (11) (14) (29) (59)
Note 19 Loans and advances to customers and banks
Tesco Bank has loans and advances to customers and banks, as
follows:
2020 2019
GBPm GBPm
Current 4,280 4,882
Non-current 4,171 7,868
8,451 12,750
The maturity of these loans and advances is as follows:
2020 2019
GBPm GBPm
Repayable on demand or at short notice 4 4
Within three months 4,543 4,858
Greater than three months but less than one year 86 323
Greater than one year but less than five years 3,322 3,057
After five years 984 4,993
8,939 13,235
Expected credit loss allowance for loans and advances
to customers and banks (488) (485)
8,451 12,750
At 29 February 2020, GBP3.5bn (2019: GBP3.2bn) of the credit
card portfolio had its beneficial interest assigned to a
securitisation structured entity, Delamare Cards Receivables
Trustee Limited, for use as collateral in securitisation
transactions. The total encumbered portion of this portfolio is
GBP0.8bn (2019: GBP2.3bn).
At 29 February 2020, Delamare Cards MTN Issuer plc had GBP2.0bn
(2019: GBP2.4bn) notes in issue in relation to securitisation
transactions, of which GBP0.6bn (2019: GBP0.9bn) was externally
issued. The Group owned GBP1.2bn (2019: GBP1.1bn) class A Credit
Card backed notes and GBP0.2bn (2019:
GBP0.3bn) class D Credit Card backed notes.
Of the total GBP1.2bn (2019: GBP1.1bn) class A notes, GBPnil
(2019: GBP0.5bn) is held in a distinct pool for the purposes of
collateralising the Bank of England's Term Funding Scheme drawings.
All other prepositioned assets with the Bank of England are held
within their single collateral pool.
Refer to Note 25 for allowance for expected credit losses
disclosures.
Note 20 Cash and cash equivalents and short-term investments
Cash and cash equivalents
2020 2019
GBPm GBPm
Cash at bank and in hand 3,251 2,683
Short-term deposits 157 233
3,408 2,916
Short-term investments
2020 2019
GBPm GBPm
===== =====
Money market funds 1,076 390
===== =====
Cash and cash equivalents includes GBP35m (2019: GBP62m) of
restricted amounts mainly relating to the Group's pension schemes
and employee benefit trusts.
Note 21 Trade and other payables
2020 2019
(restated)
GBPm GBPm
Trade payables 5,579 5,750
Other taxation and social security 477 521
Other payables 1,793 1,552
Amounts payable to joint ventures and associates (Note
31) 26 20
Accruals 841 1,230
Contract liabilities 376 423
Total trade and other payables 9,092 9,496
Of which:
Current 8,922 9,131
Non-current 170 365
9,092 9,496
Trade and other payables are net of commercial income. Refer to
Note 22.
Contract liabilities represent consideration received for
performance obligations not yet satisfied, predominantly in
relation to Clubcard points. Substantially all of the revenue
deferred at the current financial year end will be recognised in
the following financial year.
Trade payables include GBP393m (2019: GBP348m) that suppliers
have chosen to early-fund under supplier financing arrangements.
Refer to Note 1. Amounts in trade payables that are overdue for
payment to the provider banks are immaterial.
Note 22 Commercial income
Below are the commercial income balances included within
inventories and trade and other receivables, or netted against
trade and other payables. Amounts received in advance of income
being earned are included in accruals .
2020 2019
GBPm GBPm
Current assets
Inventories (55) (69)
Trade and other receivables
Trade/other receivables 138 183
Accrued income 157 155
Current liabilities
Trade and other payables
Trade payables 292 327
Accruals (3) (4)
Note 23 Borrowings
Borrowings are classified as current and non-current based on
their scheduled redemption date, and not their maturity date.
Repayments of principal amounts are classified as current if the
repayment is scheduled to be made within one year of the balance
sheet date.
Current
2020 2019
(restated)
Par value Maturity GBPm GBPm
Bank loans and overdrafts - - 413 387
1.375% MTN EUR726m Jul 2019 - 636
5.5% MTN GBP97m Dec 2019 - 98
1% RPI Tesco Bank Retail Bond(a) GBP73m Dec 2019 - 72
2.125% MTN(b) EUR296m Nov 2020 255 -
1m USD LIBOR + 0.70% Tesco Bank
Bond $350m Nov 2020 273 -
5% Tesco Bank Retail Bond GBP200m Nov 2020 202 -
LIBOR + 0.65% Tesco Bank Bond(c) GBP350m May 2021 - 350
LIBOR + 0.53% Tesco Bank Bond(d) GBP300m Oct 2022 299 -
5.5457% Secured Bond(e)(f) GBP312m Feb 2029 22 20
6.0517% Secured Bond(g)(h) GBP471m Oct 2039 26 -
1,490 1,563
Non-current
2020 2019
(restated)
Par value Maturity GBPm GBPm
2.125% MTN(b) EUR296m Nov 2020 - 436
1m USD LIBOR + 0.70% Tesco Bank
Bond $350m Nov 2020 - 262
5% Tesco Bank Retail Bond GBP200m Nov 2020 - 203
6.125% MTN(b) GBP417m Feb 2022 416 561
LIBOR + 0.53% Tesco Bank Bond(d) GBP300m Oct 2022 - 299
5% MTN(b) GBP93m Mar 2023 103 183
1.375% MTN EUR750m Oct 2023 660 658
2.5% MTN EUR750m Jul 2024 653 658
2.5% MTN GBP400m May 2025 418 -
3.5% Tesco Bank Senior MREL Notes(i) GBP250m Jul 2025 250 -
3.322% LPI MTN(j) GBP354m Nov 2025 358 349
0.875% MTN EUR750m May 2026 640 -
5.5457% Secured Bond(e)(f) GBP312m Feb 2029 281 303
6.067% Secured Bond(e) GBP200m Feb 2029 192 191
LIBOR + 1.2% Secured Bond(e) GBP50m Feb 2029 36 34
6% MTN(b) GBP48m Dec 2029 58 119
5.5% MTN(b) GBP109m Jan 2033 133 186
1.982% RPI MTN(k) GBP294m Mar 2036 297 288
6.15% USD Bond $525m Nov 2037 555 428
6.0517% Secured Bond(g)(h) GBP471m Oct 2039 590 -
4.875% MTN(b) GBP20m Mar 2042 20 32
5.125% MTN EUR356m Apr 2047 316 319
5.2% MTN(b) GBP30m Mar 2057 29 71
6,005 5,580
(a) The 1% RPI Tesco Bank Retail Bond is redeemable at par,
indexed for increases in the RPI over the life of the bond.
(b) During the year, the Group undertook a tender for
outstanding bonds and as a result the following notional amounts
were repaid early, 2.125% MTN Nov 2020 EUR204m, 6.125% MTN Feb 2022
GBP114m, 5% MTN Mar 2023 GBP78m, 6% MTN Dec 2029 GBP50m, 5.5% MTN
Jan 2033 GBP41m, 4.875% MTN Mar 2042 GBP12m and 5.2% MTN Mar 2057
GBP43m.
(c) This bond was issued on 6 June 2014 and was redeemed on its
scheduled redemption date in May 2019.
(d) This bond was issued on 7 November 2017. The scheduled
redemption date of this bond is October 2020.
(e) The bonds are secured by a charge over the property, plant
and equipment held within the Tesco Property Limited Partnership, a
100% owned subsidiary of Tesco PLC. The carrying amounts of assets
pledged as security for secured bonds is GBP794m (23 February 2019:
GBP803m).
(f) This is an amortising bond which matures in Feb 2029. GBP22m
(23 February 2019: GBP20m) is the principal repayment due within
the next 12 months. The remainder is payable in quarterly
instalments until maturity in Feb 2029.
(g) This bond is secured by a charge over the property, plant
and equipment held within The Tesco Atrato Limited Partnership, a
100% owned subsidiary of Tesco PLC. The carrying amount of assets
pledged as security for secured bonds is GBP612m.
(h) This is an amortising bond which matures in Oct 2039. GBP26m
is the principal repayment due within the next 12 months. The
remainder is payable in quarterly instalments until maturity in Oct
2039.
(i) These Notes are Tesco Bank MREL compliant senior debt and
were issued on 25 July 2019. The scheduled redemption date is July
2024.
(j) The 3.322% Limited Price Inflation (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%.
(k) The 1.982% RPI MTN is redeemable at par, indexed for
increases in the RPI over the life of the MTN.
Note 24 Financial instruments
The carrying value and fair value of the following financial
assets and liabilities are set out below:
2020 2019
Carrying Carrying
value Fair value value Fair value
GBPm GBPm GBPm GBPm
Assets
Loans and advances to customers and banks
- Tesco Bank 8,451 8,672 12,750 12,931
Joint ventures and associates loan receivables* 127 193 133 205
Liabilities
Short-term borrowings:
Amortised cost (1,015) (928) (1,491) (1,499)
Bonds in fair value hedge relationships (475) (478) (72) (70)
Long-term borrowings:
Amortised cost (4,049) (4,714) (3,954) (4,369)
Bonds in fair value hedge relationships (1,956) (1,954) (1,626) (1,622)
Customer deposits - Tesco Bank (7,707) (7,711) (10,465) (10,427)
Deposits from banks - Tesco Bank (500) (500) (1,663) (1,663)
* Joint ventures and associates loan receivables carrying
amounts of GBP127m (2019: GBP133m) are presented in the Group
balance sheet net of deferred profits of GBP54m (2019: GBP54m)
historically arising from the sale of property assets to joint
ventures.
The above table excludes cash and cash equivalents, short-term
investments, trade and other receivables/payables, derivative
financial instruments and financial assets at fair value through
other comprehensive income where the carrying values are either
fair value or approximate fair value.
The fair values of financial instruments and derivatives have
been determined by reference to prices available from the markets
on which the instruments are traded, where they are available.
Where market prices are not available, the fair value has been
calculated by discounting expected future cash flows at prevailing
interest rates.
The expected maturity of financial assets and liabilities is not
considered to be materially different to their current and
non-current classification.
Financial assets and liabilities by category
The accounting classifications of each class of financial assets
and liabilities at 29 February 2020 and 23 February 2019 are as
follows:
Financial
assets Financial
at fair assets/ Fair value
value through liabilities through
other comprehensive at amortised profit
income cost or loss Total
At 29 February 2020 GBPm GBPm GBPm GBPm
Cash and cash equivalents - 3,382 26 3,408
Loans and advances to customers and
banks - Tesco Bank - 8,451 - 8,451
Short-term investments - 1,076 - 1,076
Financial assets at fair value through
other comprehensive income 1,068 - - 1,068
Joint ventures and associates loan
receivables - 127 - 127
Customer deposits - Tesco Bank - (7,707) - (7,707)
Deposits from banks - Tesco Bank - (500) - (500)
Short-term borrowings - (1,490) - (1,490)
Long-term borrowings - (6,005) - (6,005)
Lease liabilities - (9,566) - (9,566)
Derivative financial instruments:
Interest rate swaps and similar instruments - - (23) (23)
Cross-currency swaps - - 497 497
Index-linked swaps - - (275) (275)
Forward contracts - - (1) (1)
1,068 (12,232) 224 (10,940)
Financial
assets
at fair Financial Fair value
value through assets/ through
other comprehensive liabilities profit Total
income at amortised or loss GBPm
GBPm cost GBPm
At 23 February 2019 (restated) GBPm
Cash and cash equivalents - 2,885 31 2,916
Loans and advances to customers and
banks - Tesco Bank - 12,750 - 12,750
Short-term investments - 390 - 390
Financial assets at fair value through
other comprehensive income 1,046 - - 1,046
Joint ventures and associates loan
receivables - 133 - 133
Customer deposits - Tesco Bank - (10,465) - (10,465)
Deposits from banks - Tesco Bank - (1,663) - (1,663)
Short-term borrowings - (1,563) - (1,563)
Long-term borrowings - (5,580) - (5,580)
Lease liabilities - (10,505) - (10,505)
Derivative financial instruments:
Interest rate swaps and similar instruments - - (29) (29)
Cross-currency swaps - - 325 325
Index-linked swaps - - 292 292
Forward contracts - - 3 3
1,046 (13,618) 622 (11,950)
The above tables exclude trade and other receivables/payables
that are classified under loans and receivables/other financial
liabilities.
Fair value measurement
The following table presents the Group's financial assets and
liabilities that are measured at fair value at 29 February 2020 and
23 February 2019, by level of fair value 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).
Level Level Level Total
1 2 3 GBPm
At 29 February 2020 GBPm GBPm GBPm
Assets
Financial assets at fair value through
other comprehensive income 1,058 - 10 1,068
Financial assets at fair value through
profit or loss - 26 - 26
Derivative financial instruments:
Interest rate swaps and similar instruments - 47 - 47
Cross-currency swaps - 497 - 497
Index-linked swaps - 541 - 541
Forward contracts - 61 - 61
Total assets 1,058 1,172 10 2,240
Liabilities
Derivative financial instruments:
Interest rate swaps and similar instruments - (70) - (70)
Index-linked swaps - (816) - (816)
Forward contracts - (62) - (62)
Total liabilities - (948) - (948)
Net assets/(liabilities) 1,058 224 10 1,292
Level Level Level
1 2 3 Total
At 23 February 2019 GBPm GBPm GBPm GBPm
Assets
Financial assets at fair value through
other comprehensive income 1,040 - 6 1,046
Financial assets at fair value through
profit or loss - 31 - 31
Derivative financial instruments:
Interest rate swaps and similar instruments - 38 - 38
Cross-currency swaps - 342 - 342
Index-linked swaps - 811 - 811
Forward contracts - 39 - 39
Total assets 1,040 1,261 6 2,307
Liabilities
Derivative financial instruments:
Interest rate swaps and similar instruments - (67) - (67)
Cross-currency swaps - (17) - (17)
Index-linked swaps - (519) - (519)
Forward contracts - (29) (7) (36)
Total liabilities - (632) (7) (639)
Net assets/(liabilities) 1,040 629 (1) 1,668
The following table presents the changes in Level 3 instruments
for the 53 weeks ended 29 February 2020 and 52 weeks ended
23 February 2019:
2020 2019
GBPm GBPm
At the beginning of the year (1) 5
Gains/(losses) recognised in the Group statement of
comprehensive income/(loss) 1 1
Addition of financial instrument at fair value through
profit or loss - (7)
Disposal of financial instrument at fair value through
profit or loss 6 -
Addition of financial asset at fair value through other
comprehensive income 4 -
At the end of the year 10 (1)
During the financial year, there were no transfers (2019: no
transfers) between Level 1 and Level 2 fair value measurements, and
no transfers into and out of Level 3 fair value measurements (2019:
no transfers).
Offsetting of financial assets and liabilities
The following tables show those financial assets and liabilities
subject to offsetting, enforceable master netting arrangements and
similar agreements.
Related amounts
not offset in
the Group balance
sheet
Gross amounts
of financial
Gross amounts assets/ Net amounts
of (liabilities) presented
recognised offset in in the
financial the Group Group
assets/ balance balance Financial
At 29 February (liabilities) sheet sheet instruments Collateral Net amount
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and cash
equivalents 4,137 (729) 3,408 - - 3,408
Derivative
financial
instruments 1,146 - 1,146 (168) - 978
Total trade and
other
receivables
(a) 1,802 (240) 1,562 - - 1,562
Total assets 7,085 (969) 6,116 (168) - 5,948
Financial
liabilities
Bank loans and
overdrafts (1,142) 729 (413) - - (413)
Derivative
financial
instruments (948) - (948) 168 45 (735)
Total trade and
other payables
(b) (9,332) 240 (9,092) - - (9,092)
Total
liabilities (11,422) 969 (10,453) 168 45 (10,240)
Related amounts
not offset in
the Group balance
sheet
Gross amounts
of financial Net amounts
Gross amounts assets/(liabilities) presented
of recognised offset in in the
financial the Group Group
assets/ balance balance Financial
At 23 February (liabilities) sheet sheet instruments Collateral Net amount
2019 (restated) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and cash
equivalents 4,227 (1,311) 2,916 - - 2,916
Derivative
financial
instruments 1,230 - 1,230 (223) (12) 995
Total trade and
other
receivables(a) 2,063 (270) 1,793 - - 1,793
Total assets 7,520 (1,581) 5,939 (223) (12) 5,704
Financial
liabilities
Bank loans and
overdrafts (1,698) 1,311 (387) - - (387)
Deposits from
banks -
repurchases,
securities
lending and
similar
agreements
(Note
26) (324) - (324) - 3,006 2,682
Derivative
financial
instruments (639) - (639) 223 33 (383)
Total trade and
other
payables(b) (9,766) 270 (9,496) - - (9,496)
Total
liabilities (12,427) 1,581 (10,846) 223 3,039 (7,584)
(a) Total trade and other receivables includes GBP192m (2019:
GBP279m) of prepayments.
(b) Total trade and other payables includes GBP376m (2019:
GBP423m) of contract liabilities.
For the financial assets and liabilities subject to enforceable
master netting arrangements above, each agreement between the Group
and the counterparty allows for net settlement of the relevant
financial assets and liabilities when both elect to settle on a net
basis. In the absence of such an election, financial assets and
liabilities will be settled on a gross basis. However, each party
to the master netting agreement or similar agreement will have the
option to settle all such amounts on a net basis in the event of
default of the other party.
Note 25 Financial risk management
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. The management of
these risks is set out below.
Financial risk management is carried out by a central treasury
department under policies approved and delegated by the Board of
Directors. The Board provides written principles for risk
management.
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 IFRS 9.
The fair values of derivative financial instruments have been
disclosed in the Group balance sheet as follows:
2020 2019
Asset Liability Asset Liability
GBPm GBPm GBPm GBPm
Current 63 (61) 52 (250)
Non-current 1,083 (887) 1,178 (389)
1,146 (948) 1,230 (639)
The Group's hedging policies are further described below. The
main sources of hedge ineffectiveness are the effect of the
counterparties' and the Group's own credit risk on the fair value
of derivatives.
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.
These derivative contracts receive a fixed rate of interest and
pay a variable interest rate. These are formally designated in fair
value hedging relationships and are used to hedge the exposure to
changes in the fair value of debt which has been issued by the
Group at fixed rates.
There is an economic relationship between the hedged item and
the hedging instrument as the terms of the swap contracts match the
terms of the fixed rate borrowings, including notional amount,
maturity, payment and rate set dates. The Group has established a
hedge ratio of 1:1 for the hedging relationship as the underlying
risk of the swap contract is identical to the hedged item.
Cash flow hedges
Foreign currency risk
The Group is exposed to transactional foreign currency risk to
the extent that there is a mismatch between the currencies in which
sales, purchases, receivables and borrowings are denominated and
the respective functional currencies of Group entities.
The Group uses forward contracts to mainly hedge the foreign
currency cost of future purchases of goods for resale and
designates the spot element of these contracts to hedge the foreign
currency risk, and designates the spot component of foreign
currency forwards in hedge relationships.
Under the Group's hedging policy, the critical terms of the
forward contracts must align with the hedged items. The foreign
currency forwards are denominated in the same currency as the
highly probable future sales and purchases, which are expected to
occur within a maximum 24-month period, therefore determines the
hedge relationship to be 1:1.
The Group also uses index-linked swaps to hedge cash flows on
index-linked debt, interest rate swaps to hedge interest cash flows
on debt and cross-currency swaps to hedge cash flows on fixed rate
debt denominated in foreign currencies. During the current
financial year, a bond tender took place relating to the Euro
2.125% EUR500m 2020 MTN which was in a cash flow hedge
relationship. Of the outstanding EUR500m,
EUR204m of the bond was bought back and the associated hedging
instrument was monetised. As the interest payment cash flows on the
bought back element will now not take place, cash flow hedging was
discontinued on this portion.
Commodity price risk
The Group is affected by the price of certain commodities, and
uses forward contracts to hedge future purchases of diesel for own
use, which are forecast to occur within a 12 month period.
Net investment hedges
The Group uses Euro-denominated borrowings to hedge the exposure
of a portion of its net investments in overseas operations which
have a Euro functional currency, against changes in value due to
changes in foreign exchange rates. The hedged risk in the net
investment hedge is the risk of a weakening Euro against Pound
Sterling that will result in a reduction in the carrying amount of
the Group's Euro net investments.
To assess hedge effectiveness, the Group determines the economic
relationship between the hedging instrument and the hedged item by
comparing changes in the carrying amount of the debt that is
attributable to a change in the spot rate with changes in the
investment in foreign operations due to movements in the spot
rate.
The Group has established a hedge ratio of 1:1 as the underlying
risk of the hedging instrument is identical to the hedged risk
component.
The details of the hedging instruments and movements in
cumulative losses on net investment hedges in other comprehensive
income are set out below:
Movement Movement
on on
continued discontinued
Gains/(losses) on net Notional hedges hedges
investment hedges GBPm GBPm GBPm
At 24 February 2018 1,368 (58) (978)
Borrowings - movement 16 2
At 23 February 2019 1,281 (42) (976)
Borrowings - movement 48 (89)
At 29 February 2020 1,281 6 (1,065)
During the current financial year, the EUR726m 1.375% MTN
matured in July 2019 which reduced the amount of net investment
hedging. In November 2019, the Group issued the EUR750m 0.875% MTN,
maturing in May 2026, which was designated as a net investment
hedge at inception, thereby increasing net investment hedging.
There were no reclassifications from foreign currency translation
reserve and net investment hedge ineffectiveness was GBPnil (2019:
GBPnil) during the year.
IBOR reform
The Group has early adopted the 'Interest rate benchmark reform'
amendments in the current financial year. These allow the Group to
continue hedge accounting for its benchmark interest rate exposures
during the period of uncertainty arising from interest rate
benchmark reforms. The Group will continue to apply these
amendments until the uncertainty arising from interest rate
benchmark reform is no longer present with respect to the timing
and amount of the interest rate benchmark cash flows.
None of the Groups current GBP LIBOR- or EURIBOR-linked
contracts include adequate and robust fall back provisions for a
cessation of the referenced benchmark interest rate. The Group is
monitoring the market and the output from various industry working
groups managing the transition to new benchmark interest rates, and
will look to implement fall back language for different instruments
and IBORs when appropriate. For the Group's derivatives, the
International Swaps and Derivatives Association's (ISDA) fall back
clauses were made available at the end of 2019 and the Group will
begin discussion with its banks with the aim to implement this
language into its ISDA agreements in 2020.
Details of the hedging relationships for which the Group has
applied the 'Interest rate benchmark reform' amendments are given
below. These relate to the utilisation of derivatives to achieve
the desired mix of fixed and floating debt.
The following table sets out the extent of the risk exposure
associated with managing the fixed and floating debt mix as at 29
February 2020.
Carrying value
Interest Hedged Hedge relationship
Hedging instrument Notional Asset Liability rate benchmark item
Fair value
Interest rate swaps 645 17 - EURIBOR MTN hedge
Fair value
Interest rate swaps 3,469 30 (51) LIBOR MTN hedge
Cross currency interest Fair value
rate swaps 409 232 - LIBOR MTN hedge
Financial instruments not qualifying for hedge accounting
The Group's policy does not permit use of 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 naturally offset in the Group income statement. These
instruments include index-linked swaps and forward foreign currency
contracts.
The fair value and notional amounts of derivatives analysed by
hedge type are as follows:
2020 2019
Asset Fair value Asset Liability
Fair Fair Fair Fair
value Notional value Notional value Notional value Notional
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate swaps and
similar instruments 47 1,710 (51) 2,404 37 3,844 (49) 2,701
Cross-currency swaps 232 409 - - 126 180 (8) 222
Cash flow hedges
Interest rate swaps and
similar instruments - - (19) 50 - - (17) 110
Cross-currency swaps 265 1,477 - - 216 1,394 (9) 272
Index-linked swaps 186 649 - - 187 692 - -
Forward contracts 38 1,133 (29) 954 32 1,558 (18) 1,010
Derivatives not in a formal
hedge relationship
Interest rate swaps and
similar instruments - 35 - 13 1 432 (1) 244
Cross-currency swaps - - - - - - - -
Index-linked swaps 355 3,025 (816) 5,130 624 3,589 (519) 3,589
Forward contracts 23 1,139 (33) 1,416 7 901 (18) 1,511
Total 1,146 9,577 (948) 9,967 1,230 12,590 (639) 9,659
The following tables set out the maturity profile and average
interest rates and foreign currency exchange rates of the hedging
instruments used in the Group's non-dynamic hedging strategies.
2020 2019
More
Maturity profile Up to One More Up to One to than
one to five than one year five five
year years five years years
years
Fair value hedges
Interest rate risk
Interest rate swaps - GBP
- Notional amount (GBPm) 953 1,910 607 1,383 4,351 160
- Average net interest rate
(pay)/receive 1.08% 0.84% 1.39% (0.83%) (1.00%) 4.12%
Interest rate swaps - EUR
- Notional amount (GBPm) - 645 - - 651 -
- Average net interest rate
(pay)/receive - 0.63% - - 0.55% -
Interest rate/Foreign currency
risk
Cross currency swaps (GBP:USD)
- Notional amount (GBPm) - - 409 - - 402
- Average exchange rate - - 1.50 - - 1.50
- Average net interest rate
(pay)/receive - - 3.15% - - 3.04%
Cash flow hedges
Interest rate risk
Index linked swaps
- Notional amount (GBPm) - - 649 60 - 632
- Average net interest rate
(pay)/receive - - (4.22%) (1.99%) - (4.22%)
Interest rate swaps
- Notional amount (GBPm) - - 50 60 - 50
- Average net interest rate
(pay)/receive - - (4.23%) 1.57% - (4.12%)
Interest rate/Foreign currency
risk
Cross currency swaps (GBP:USD)
floating
- Notional amount (GBPm) 272 - - - 272 -
- Average exchange rate 1.29 - - - 1.29 -
- Average net interest rate
(pay)/receive 0.84% - - - 1.62% -
Cross currency swaps (GBP:EUR)
fixed
- Notional amount (GBPm) 254 645 306 - 434 960
- Average exchange rate 1.19 1.25 1.47 - 1.19 1.31
- Average net interest rate
(pay)/receive (0.87%) (1.46%) (0.32%) - (0.87%) (1.09%)
At 29 February 2020, forward foreign currency transactions,
designated as cash flow hedges, equivalent to GBP2.1bn were
outstanding (2019: GBP2.6bn). These forward contracts are largely
in relation to purchases of Euro (notional EUR0.8bn) (2019:
notional EUR2.0bn) and US Dollar (notional $0.9bn) (2019: notional
$1.1bn) with varying maturities up to August 2021. The notional and
fair values of these contracts is shown in the table on page
71.
The following table sets out the details of the hedged exposures
covered by the Group's fair value hedges.
Accumulated amounts
of fair value adjustments
Carrying value on hedged item
Changes
in fair
value for
calculating Residual
hedge hedge
Assets Liabilities Assets Liabilities ineffectiveness adjustments(a)
At 29 February 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate risk
Fixed rate loans(b) 4,416 - 10 - 12 6
Fixed rate savings - (3,003) - (1) (1) (1)
Fixed rate
investment
securities(b) 650 - 2 - 7 -
Fixed rate bonds(c) - (2,348) - (216) 140 (34)
(a) Accumulated amount of fair value hedge adjustments remaining
in the Group balance sheet for any hedged items that have ceased to
be adjusted for hedging gains and losses.
(b) Classified as loans and advances to customers.
(c) Classified as borrowings.
Accumulated amounts
of fair value adjustments
Carrying value on hedged item
Changes
in fair
value for
calculating Residual
hedge hedge
Assets Liabilities Assets Liabilities ineffectiveness adjustments(a)
At 23 February 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate risk
Fixed rate loans and
mortgages(b) 7,974 - (3) - 14 -
Fixed rate savings - (3,691) - - (1) -
Fixed rate
investment
securities(b) 473 - (5) - (3) -
Fixed rate bonds(c) - (1,778) - 95 (57) (59)
(a)-(c) Refer to previous table for footnotes
The following tables set out information regarding the change in
value of the hedged item used in calculating hedge ineffectiveness
as well as the impacts on the cash flow hedge reserve and currency
basis reserve.
Cumulative impact
on cash flow hedge
reserve and currency
basis reserve*
Change in Change
value in value
of hedged of hedged
instrument item for
for calculating calculating
hedge hedge Continued Discontinued
ineffectiveness ineffectiveness hedges hedges
Hedging instrument GBPm GBPm GBPm GBPm
Interest rate risk
Index-linked
Index-linked bonds swaps 22 (22) 69 -
Interest rate
Borrowings swaps (2) 2 (4) -
Foreign currency
risk
Trade payables Forward contracts 55 (55) 8 -
Interest
rate/Foreign
currency risk
Cross-currency
MTNs swaps 28 (28) 137 (44)
* Excludes deferred tax.
Cumulative impact
on cash flow hedge
reserve and currency
basis reserve*
Change
in value Change in
of hedged value of
instrument hedged item
for calculating for calculating
hedge hedge Continued Discontinued
At 23 February Hedging ineffectiveness ineffectiveness hedges hedges
2019 instrument GBPm GBPm GBPm GBPm
Interest rate
risk
Index-linked Index-linked
bonds swaps (1) 1 72 -
Borrowings Interest rate - - - -
swaps
Foreign currency
risk
Trade payables Forward contracts - - 22 -
Interest
rate/Foreign
currency risk
Cross-currency
MTNs swaps (9) 9 83 (46)
* Excludes deferred tax
The following table sets out information regarding the
effectiveness of hedging relationships designated by the Group, as
well as the impacts on profit or loss and other comprehensive
income:
2020 2019
Hedge Hedge
ineffectiveness ineffectiveness
Line item in Group income recognised recognised
statement that includes in profit in profit
hedge or loss or loss
ineffectiveness GBPm GBPm
Cash flow hedges Net finance costs - -
Net investment hedges Net finance costs - -
Fair value hedges - interest
rate risk
Borrowings Net finance costs (6) (22)
Derivatives Net finance costs - -
The following table presents a reconciliation by risk category
of the cash flow hedge reserve and analysis of other comprehensive
income in relation to hedge accounting:
2020 2019
Cash flow Currency Cash flow Currency
hedge basis Line item hedge basis Line item
reserve reserve reserve reserve
GBPm GBPm GBPm GBPm
Opening balance 118 (5) 40 -
Adjustment on initial application
of IFRS 9 (net of tax) -
2019 - - (1) 1
Opening balance (restated) 118 (5) 39 1
Interest rate risk
Index-linked swaps
- Net fair value gains/(losses) 1 - 30 -
- Amount reclassified to Net finance Net finance
Group income statement (2) - costs (20) - costs
Interest rate swaps
- Net fair value gains/(losses) (2) - (1) -
- Amount reclassified to Net finance Net finance
Group income statement (1) - costs - - costs
Interest rate/Foreign currency
risk
Cross currency swaps
- Net fair value gains/(losses) 70 (12) 15 (6)
- Amount reclassified to Net finance Net finance
Group income statement (4) - costs 8 - costs
Foreign currency risk
Forward contracts
- Net fair value gains/(losses) 49 - 92 -
- Amount reclassified to
Inventory (64) - Inventory (45) - Inventory
Tax (11) 2 - -
Closing balance 154 (15) 118 (5)
Interest rate risk
Debt issued at variable rates, as well as cash deposits and
short-term investments, expose the Group to cash flow interest rate
risk. Debt issued at fixed rates exposes the Group to fair value
risk.
The Group's policy is to target fixing a minimum of 50% of
interest costs for senior unsecured debt and a range of 55% to 85%
for fixed rate leases of the Group excluding Tesco Bank. At 29
February 2020, the percentage of interest-bearing debt at fixed
rates was 68% (2019: 78%). The weighted average rate of interest
paid on senior unsecured debt this financial year, excluding joint
ventures and associates, was 3.30% (2019: 3.76%).
Forward rate agreements, interest rate swaps, caps and floors
may be used to achieve the desired mix of fixed and floating rate
debt.
The Group has RPI-linked debt where the principal is indexed to
increases in the RPI. RPI debt is treated as floating rate debt.
The Group also has LPI-linked 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. RPI-linked debt and
LPI-linked debt are hedged for the effects of inflation until
maturity.
For interest rate risk relating to Tesco Bank, refer to the
separate section on Tesco Bank financial risk factors on page 77.
During 2020 and 2019, net debt was managed using derivative
instruments to hedge interest rate risk.
2020 2019 (restated)
Fixed Floating Total Fixed Floating Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cash and cash equivalents - 3,408 3,408 - 2,916 2,916
Loans and advances to
customers
and banks - Tesco Bank 4,370 4,081 8,451 8,328 4,422 12,750
Short-term investments - 1,076 1,076 - 390 390
Financial assets at fair value
through other comprehensive
income 659 409 1,068 475 571 1,046
Joint ventures and associates
loan
receivables 106 21 127 76 57 133
Lease liabilities (9,566) - (9,566) (10,505) - (10,505)
Bank and other borrowings (6,260) (1,235) (7,495) (5,810) (1,333) (7,143)
Customer deposits - Tesco Bank (3,164) (4,543) (7,707) (3,714) (6,751) (10,465)
Deposits from banks - Tesco
Bank (500) - (500) (1,663) - (1,663)
Derivative effect:
Interest rate swaps (1,092) 1,092 - (5,899) 5,899 -
Cross-currency swaps 410 (410) - 402 (402) -
Index-linked swaps (294) 294 - (346) 346 -
Total (15,331) 4,193 (11,138) (18,656) 6,115 (12,541)
Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations leading to a financial loss for the Group. Credit risk
arises from cash and cash equivalents, trade and other receivables,
loans to joint ventures and associates, derivative assets and loans
and advances to customers and banks, and investments.
For financial assets (other than trade and other receivables),
the Group holds positions with an approved list of investment-grade
rated counterparties and monitors the exposure, credit rating,
outlook and credit default swap levels of these counterparties on a
regular basis. Counterparty credit limits are reviewed on an annual
basis, and may be updated throughout the year. The limits are set
to minimise the concentration of risk and are set taking into
account the type and value of the specific financial asset.
For trade and other receivables, credit risk is managed with
various mitigating controls including credit checks, credit
insurance and master netting agreements. Due to the nature of the
retail business, there is little concentration of risk due to the
large number of customers which are spread across wide geographical
areas.
The net counterparty exposure under derivative contracts is
GBP1.0bn (2019: GBP1.0bn). The Group considers its maximum credit
risk to be GBP15.6bn (2019: GBP19.7bn) largely based on the Group's
total financial assets.
The low credit risk exemption has been applied to cash, cash
equivalents and investments as these are held with counterparties
with investment grade ratings (BBB or above) or are short-term in
nature.
A reconciliation of the Group's expected credit loss (ECL)
allowance on loans to related parties is provided below:
GBPm
24 February 2018 (as previously reported) -
Adjustment on initial application of IFRS 9 13
25 February 2018 (restated) 13
Increase/(decrease) in the allowance recognised in the
Group income statement (13)
23 February 2019 -
Increase/(decrease) in the allowance recognised in the
Group income statement during the year 2
29 February 2020 2
Gross loans to related parties of GBP183m (2019: GBP200m) are
presented net of loss allowances of GBP2m (2019: GBPnil) and
deferred profits of GBP54m (2019: GBP54m) on the Group balance
sheet. The ECL is determined by multiplying together the
probability of default (PD), exposure at default (EAD) and the loss
given default (LGD) for the relevant time period and for each
specific loan.
For credit risk relating to Tesco Bank, refer to the separate
section on Tesco Bank financial risk factors on pages 78 and
79.
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting the obligations associated with its financial
liabilities.
The Group finances its liquidity position and finances its
operations by a combination of retained profits, disposals of
assets, debt capital market issues, commercial paper, bank
borrowings and leases. The policy is to maintain a prudent level of
cash together with sufficient committed bank facilities to meet
liquidity needs as they arise, to maintain a smooth debt profile
and maturing senior unsecured debt will not exceed GBP1.5bn in any
12-month period.
The Group retains access to capital markets so that maturing
debt may be refinanced as it falls due. The Group has a GBP15.0bn
Euro Medium Term Note programme, of which GBP4bn was in issue at 29
February 2020 (2019: GBP4.2bn), plus GBP0.4bn equivalent of USD
denominated notes issued under 144A documentation (2019:
GBP0.4bn).
Liquidity risk is continuously monitored by short-term and
long-term cash flow forecasts. In addition, the Group has the
following undrawn committed facilities which mature between 2020
and 2021.
Borrowing facilities
The Group has the following undrawn committed facilities
available at 29 February 2020, in respect of which all conditions
precedent had been met as at that date:
2020 2019
GBPm GBPm
Expiring in less than one year 38 38
Expiring between one and two years 3,000 -
Expiring in more than two years - 3,000
3,038 3,038
The undrawn committed facilities include GBP0.4bn (2019:
GBP0.4bn) of bilateral facilities and a GBP2.6bn (2019: GBP2.6bn)
syndicated revolving credit facility. All facilities incur
commitment fees at market rates and would provide funding at
floating rates.
For liquidity risk relating to Tesco Bank, refer to the separate
section on Tesco Bank financial risk factors on page 77.
The following is an analysis of the undiscounted contractual
cash flows payable under financial liabilities and derivative
liabilities taking into account contractual terms that provide the
counterparty a choice of when (the earliest date) an amount is
repaid by the Group. The potential cash outflow of GBP19.3bn is
considered acceptable as it is offset by financial assets of
GBP16.8bn (2019: GBP21.3bn offset by financial assets of
GBP19.7bn).
The undiscounted cash flows will differ from both the carrying
values and fair values. 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.
Due Due Due Due
Due between between between between Due
within 1 and 2 and 3 and 4 and beyond
At 29 February 1 year 2 years 3 years 4 years 5 years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Non-derivative
financial
liabilities
Bank and other
borrowings (1,391) (467) (53) (795) (956) (3,776)
Interest
payments on
borrowings (227) (208) (181) (179) (159) (1,237)
Customer
deposits -
Tesco
Bank (6,426) (797) (233) (187) (115) -
Deposits from
banks - Tesco
Bank (3) (1) (501) - - -
Lease
liabilities (1,081) (1,018) (996) (993) (951) (9,584)
Trade and other
payables* (8,922) (22) (18) (2) (1) (127)
Derivative
financial
liabilities
Net settled
derivative
contracts
- receipts 10 11 467 116 - 25
Net settled
derivative
contracts
- payments (717) (42) (470) (148) (160) (18)
Gross settled
derivative
contracts -
receipts 2,534 - - - - -
Gross settled
derivative
contracts -
payments (2,585) - - - - -
Total (18,808) (2,544) (1,985) (2,188) (2,342) (14,717)
Due Due Due Due
Due between between between between Due
At 23 February within 1 and 2 and 3 and 4 and beyond
2019 1 year 2 years 3 years 4 years 5 years 5 years
(restated) GBPm GBPm GBPm GBPm GBPm GBPm
Non-derivative
financial
liabilities
Bank and other
borrowings (1,515) (1,221) (556) (28) (854) (3,118)
Interest
payments on
borrowings (258) (205) (176) (142) (141) (1,267)
Customer
deposits -
Tesco
Bank (8,569) (1,348) (336) (108) (186) (1)
Deposits from
banks - Tesco
Bank (337) (410) (945) - - -
Lease
liabilities (1,202) (1,107) (1,071) (1,034) (1,006) (11,015)
Trade and other
payables* (9,131) (28) (22) (11) (11) (293)
Derivative
financial
liabilities
Net settled
derivative
contracts
- receipts 6 3 2 - - -
Net settled
derivative
contracts
- payments (291) (340) (59) (79) (6) (20)
Gross settled
derivative
contracts -
receipts 2,438 (262) 14 - - -
Gross settled
derivative
contracts -
payments (2,460) 260 (43) - - -
Total (21,319) (4,658) (3,192) (1,402) (2,204) (15,714)
* Trade and other payables includes GBP376m (2019: GBP423m) of
contract liabilities. Refer to Note 21.
Foreign exchange risk
The Group is exposed to foreign exchange risk principally
via:
- transactional exposure that arises from the cost of future
purchases of goods, where those purchases are denominated in a
currency other than the functional currency of the purchasing
company. Transactional currency exposures that could significantly
impact the Group income statement are hedged. These exposures are
hedged via forward foreign currency contracts or purchased currency
options, which are designated as cash flow hedges and the policy is
to have minimum (20%) and maximum (80%) hedge level of forecast
uncommitted exposure within next 12 months;
- net investment exposure arises from changes in the value of
net investments denominated in currencies other than Pounds
Sterling. The Group's policy is to hedge a part of its investments
in its international subsidiaries via foreign currency derivatives
and borrowings in matching currencies, which are formally
designated as net investment hedges. During the current financial
year, currency movements decreased the net value, after the effects
of hedging, of the Group's overseas assets by GBP70m (2019:
increased by GBP100m). The Group also ensures that each subsidiary
is appropriately hedged in respect of its non-functional currency
assets; and
- loans to non-UK subsidiaries in currencies other than in the
Group's functional currency. The Group's policy is that 100% of the
foreign exchange risk is hedged. The risk exposure is managed by
the use of foreign currency derivatives and borrowings in matching
currencies. These are not formally designated as hedges as gains
and losses on hedges and hedged loans will naturally offset.
Sensitivity analysis
The impact on the Group financial statements from foreign
currency, inflation and interest rate volatility is discussed
below.
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 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 29 February 2020.
It should be noted that the sensitivity analysis reflects the
impact on income and equity due to 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 exposures on debt,
deposits and derivative instruments with no sensitivity assumed for
RPI-linked borrowings, which has been swapped to fixed rates;
- 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 financial instruments
designated as net investment hedges from movements in foreign
exchange rates are recorded directly in the Group statement of
comprehensive income/(loss); 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; 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, at the balance sheet date, from changes in interest
rates, inflation rates and currency exchange rates that are
reasonably possible for major currencies where there have recently
been significant movements:
2020* 2019
Income Equity Income Equity
gain/(loss) gain/(loss) gain/(loss) gain/(loss)
GBPm GBPm GBPm GBPm
1% increase in interest rates (2019: 1%) 39 (42) 58 (32)
10% appreciation of the Euro (2019: 10%) 1 (117) 1 (96)
10% appreciation of the US Dollar (2019:
10%) 5 78 - 100
25 basis points parallel upward shift in
the forward inflation curve (2019: 25 basis
points) 86 - - -
* These sensitivities are presented on a consistent basis with
the prior year to aid comparability. Commentary on additional
sensitivities adjusted for the impact of increased volatility as a
result of the coronavirus pandemic is given in Note 36.
A decrease in interest rates, depreciation of foreign currencies
and downward shift in the forward inflation curve would have the
opposite effect to the impact in the table above.
The impact on the Group income statement resulting from changes
in foreign exchange rates against GBP in relation to financial
instruments (excluding those arising for consolidation) are minimal
as Group policy dictates that all material income statement foreign
exchange exposures are hedged.
During the current financial year, the Group entered into a
number of derivative index-linked contracts with external
counterparties, to economically hedge a proportion of the Group's
exposure to index-linked lease liabilities with its joint ventures.
These are specifically not designated as accounting hedges, but are
economic hedges. However, the gains and losses on the hedging
instrument and hedged item do not naturally offset in the Group
income statement. This mismatch arises due to different accounting
outcomes of IFRS 9 and IFRS 16
which results in a timing difference.
The impact on the Group statement of comprehensive income/(loss)
from changing exchange rates results from the revaluation of
financial liabilities used as net investment hedges. The impact on
the Group statement of comprehensive income/(loss) will largely be
offset by the revaluation in equity of the hedged assets.
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 protecting and strengthening
the Group balance sheet through the 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.
The Group raises finance in the public debt markets and borrows
centrally and locally from financial institutions, using a variety
of capital market instruments and borrowing facilities to meet the
requirements of each local business.
In line with the Group's objectives, during the current
financial year, the Group issued a GBP400m bond maturing in 2025
and EUR750m bond maturing in 2026.
Refer to Note 32 for the value of the Group's net debt
(GBP12.3bn; 2019: GBP13.2bn), and the Group statement of changes in
equity for the value of the Group's equity (GBP13.3bn; 2019:
GBP13.4bn).
Insurance risk
The Group is exposed to the risk of being inadequately protected
from liabilities arising from unforeseen events. The Group
purchased assets, earnings and combined liability protection from
the open insurance market for higher value losses only.
The risk not transferred to the insurance market is retained
within the Group with some cover being provided by the Group's
captive insurance company, ELH Insurance Limited in Guernsey, which
covers Assets, Earnings and Combined Liability.
Tesco Bank
Interest rate risk
Interest rate risk arises mainly where assets and liabilities in
Tesco Bank's banking activities have different repricing dates and
from unexpected changes to the yield curve. Tesco Bank is exposed
to interest rate risk through dealings with retail customers as
well as through lending to and borrowing from the wholesale market.
Tesco Bank has established limits for risk appetite and stress
tests are performed using sensitivity to fluctuations in underlying
interest rates in order to monitor this risk. Tesco Bank also use
the Capital at Risk (CaR) approach which assesses the sensitivity
(value change) of a reduction in the Bank's capital to movements in
interest rates.
The scenarios considered include both parallel and non-parallel
movements of the yield curve and have been designed to assess
impacts across a suitable range of severe but plausible movements
in interest rates. Interest rate risk is primarily managed using
interest rate swaps as the main hedging instrument.
Liquidity and funding risk
Liquidity risk is the risk that Tesco Bank has insufficient
liquidity resources to meet its obligations as they fall due.
Funding risk is the risk that Tesco Bank does not have sufficiently
stable and diverse sources of funding.
Tesco Bank operates within a Liquidity Risk Management Policy
Framework (LRMP) to ensure that sufficient funds are available at
all times to meet demands from depositors, to fund agreed advances,
to meet other commitments as and when they fall due, and to ensure
the Board's risk appetite is met.
Liquidity and funding risks are assessed through the Individual
Liquidity Adequacy Assessment Process (ILAAP) on at least an annual
basis. Formal limits are set within the LRMP to maintain liquidity
risk exposures within the Liquidity Risk Appetite set by the Board
and key liquidity measures are monitored on a regular basis. Tesco
Bank maintains a conservative liquidity and funding profile to
confirm that it is able to meet its financial obligations under
normal, and stressed, market conditions.
Credit risk
Credit risk is the risk that a retail customer or counterparty
to a wholesale transaction will fail to meet its obligations in
accordance with contractually agreed terms and Tesco Bank will
incur losses as a result. Credit risk principally arises from the
Bank's retail lending activities but also from the placement of
surplus funds with other banks and money market funds, investments
in transferable securities and interest rate and foreign exchange
derivatives. In addition, credit risk arises from contractual
arrangements with third parties where payments and commissions are
due to the Bank for short periods of time. To minimise the
potential to be exposed to bad debts that are outside risk
appetite, processes, systems and limits have been established that
cover the end to end retail credit risk customer like cycle. These
include credit scoring, affordability, credit policies and guides,
and monitoring and reporting. The Bank is also exposed to wholesale
credit risk primarily through its treasury activities. Controls and
risk mitigants include daily monitoring of exposures, investing in
counterparties with investment grade ratings, restricting the
amount that can be invested with one counterparty and credit rating
mitigation techniques. Assessment of the expected credit loss (ECL)
on loans and advances to customers has taken into account a range
of macro-economic scenarios.
2020
Stage Stage Stage Total
1 2 3 GBPm
29 February 2020 GBPm GBPm GBPm
============== ================ =============
Gross exposure 7,688 953 289 8,930
Loan commitments 11,755 116 1 11,872
============== ================ =============
Total exposure 19,443 1,069 290 20,802
============== ================ =============
Allowance for expected credit losses
At 23 February 2019 (84) (229) (172) (485)
Transfers:
Transfers from stage 1 to stage 2 11 (11) - -
Transfers from stage 2 to stage 1 (64) 64 - -
Transfers to stage 3 3 50 (53) -
Transfer from stage 3 (2) (2) 4 -
Movements recognised in the Group income
statement:
Net remeasurement following transfer of
stage 38 (23) (93) (78)
New financial assets originated (27) (21) (10) (58)
Financial assets derecognised during the
year 9 12 3 24
Changes in risk parameters and other movements 32 (63) (60) (91)
Other movements:
Write-offs and asset disposals - 3 195 198
Reclassification of mortgage balances
to fair value through profit or loss 1 1 - 2
============== ================ =============
At 29 February 2020 (83) (219) (186) (488)
============== ================ =============
Reconciliation to Group balance sheet
Gross exposure 7,688 953 289 8,930
Allowance for expected credit losses (83) (219) (186) (488)
============== ================ =============
7,605 734 103 8,442
============== ================ =============
Fair value adjustment 9
Carrying value at 29 February 2020* 8,451
* Excludes loans and advances to banks
of GBPnil (2019: GBP324m). Refer to Note
19. 2019
Stage Stage Stage Total
1 2 3 GBPm
23 February 2019 GBPm GBPm GBPm
Gross exposure 11,464 1,179 271 12,914
Loan commitments 12,115 110 1 12,226
Total exposure 23,579 1,289 272 25,140
Allowance for expected credit losses
At 24 February 2018 (95) (211) (151) (457)
Transfers:
Transfers from stage 1 to stage 2 11 (11) - -
Transfers from stage 2 to stage 1 (46) 46 - -
Transfers to stage 3 3 41 (44) -
Movements recognised in the Group income
statement:
Net remeasurement following transfer of
stage 26 (19) (90) (83)
New financial assets originated (28) (36) (11) (75)
Changes in risk parameters and other movements 45 (41) (36) (32)
Other movements:
Write-offs and asset disposals 2 1 160 163
Transfer from provisions for liabilities
and other charges (2) 1 - (1)
At 23 February 2019 (84) (229) (172) (485)
Reconciliation to Group balance sheet
Gross exposure 11,464 1,179 271 12,914
Allowance for expected credit losses (84) (229) (172) (485)
11,380 950 99 12,429
Fair value adjustment (3)
Carrying value at 23 February 2019* 12,426
* Refer to previous table for footnote.
The Bank defines four classifications of credit quality for all
credit exposures: high, satisfactory, low and below standard.
Credit exposures are segmented according to the probability of
default (PD), with credit impaired reflecting a PD of 100%. At 29
February 2020 the quality of the Bank's loans and advances to
customers was high for 75% of the total exposure (2019: 83%),
satisfactory for 17% (2019: 11%), low for 5% (2019: 4%) and below
standard for 3% (2019: 2%). The quality of the loan commitments was
high for 97% of the total exposure (2019: 98%), satisfactory for 3%
(2019: 2%), low for 0% (2019: 0%) and below standard for 0% (2019:
0%).
Expected credit losses (ECL)
The ECL is determined by multiplying together the PD, exposure
at default (EAD) and loss given default (LGD) for the relevant time
period and for each asset category and by discounting back to the
balance sheet date. The ECL calculation and the measurement of
significant deterioration in credit risk both incorporate
forward-looking information using a range of macro-economic
scenarios, with key variables being the Bank of England base rate,
unemployment rate, house price index and Gross Domestic Product
(GDP).
The ECL calculation and the measurement of significant
deterioration in credit risk both incorporate forward-looking
information using a range of macro-economic scenarios. The key
economic variables are based on historical patterns observed over a
range of economic cycles.
The Group has engaged a third-party supplier to provide relevant
economic data for this purpose which, prior to incorporation into
the ECL calculation, is subject to internal review and challenge
with reference to other publicly available market data and
benchmarks. From this data, a base case scenario has been
developed, together with four additional scenarios, each of which
have been assigned a relative probability. The base case represents
an estimate of the most-likely outcome whilst other scenarios
represent more optimistic (upside) and more pessimistic (downside)
outcomes. Downside scenario 1 reflects an economic downside caused
by the UK being unable to secure a favourable trade deal with the
EU, while Downside scenario 2 represents a more severe recession.
As a result of COVID-19 developments at the balance sheet date, a
fifth scenario was introduced which used Downside 2 as a proxy, to
reflect the increased risk of an adverse impact on the economy from
the COVID-19 pandemic. The scenarios have been assigned weightings
of 40%, 20%, 30%, 5% and 5% respectively, which is considered to be
appropriate for the calculation of unbiased ECLs.
Default
An account is deemed to have defaulted when the Group considers
that a customer is in significant financial difficulty and that the
customer meets certain quantitative and qualitative criteria
regarding their ability to make contractual payments when due. This
includes instances where:
- the customer makes a declaration of significant financial difficulty;
- the customer or third-party agency communicates that it is
probable that the customer will enter bankruptcy or another form of
financial restructure such as insolvency or repossession;
- the account has been transferred to recoveries and the relationship is terminated;
- an account's contractual payments are more than 90 days past due; or
- where the customer is deceased.
Significant increase in credit risk
At each reporting date, the change in credit risk of the
financial asset is observed using a set of quantitative and
qualitative criteria, together with a backstop based on arrears
status. For each financial asset, the Group compares the lifetime
PD at the reporting date with the lifetime PD that was expected at
the reporting date at initial recognition (PD threshold). The Group
has established PD thresholds for each type of product which vary
depending on initial term and term remaining. A number of
qualitative criteria are in place such as: forbearance offered to
customers in financial difficulty; risk-based pricing
post-origination; credit indebtedness; credit limit decrease; and
pre-delinquency information. As a backstop, the Group considers
that if an account's contractual payment are more than 30 days past
due then a significant increase in credit risk has taken place. The
Group has used the low credit risk exemption in respect of its
portfolio of investment securities in both the current and prior
year.
The sensitivities in the ECL allowance to reasonably possible
changes in the following key assumptions are set out below:
Reasonably possible change 2020(*) 2019
Key assumption GBPm GBPm
Probability of default Increase of 2.5% 11 9
Decrease of 2.5% (11) (9)
Loss given default Increase of 2.5% 12 12
Decrease of 2.5% (12) (12)
Macro-economic factors Upside scenario (41) (33)
Base scenario (28) (21)
Downside scenario 1 40 67
Downside scenario 2 103 -
COVID-19 103 -
Probability of default threshold
(staging) Increase of 20% (17) (14)
Decrease of 20% 21 10
* These sensitivities are presented on a consistent basis with
the prior year to aid comparability. Commentary on additional
sensitivities adjusted for the impact of increased volatility as a
result of the coronavirus pandemic is given in Note 36.
Tesco Bank could be exposed to unacceptable levels of bad debt
and also suffer reputational damage if it did not provide adequate
support to customers who are experiencing financial difficulties.
Forbearance is relief granted by a lender to assist customers in
financial difficulty, through arrangements which temporarily allow
the customer to pay an amount other than the contractual amounts
due. These temporary arrangements may be initiated by the customer
or the Group where financial distress would prevent repayment
within the original terms and conditions of the contract. The main
aim of forbearance is to support customers in returning to a
position where they are able to meet their contractual
obligations.
Tesco Bank has adopted the definition of forbearance in the
European Banking Authority's (EBA) final draft Implementing
Technical Standards (ITS) of July 2014. The Group reports all
accounts meeting this definition, providing for them
appropriately.
Controls and risk mitigants
Tesco Bank has well defined forbearance policies and processes.
A number of forbearance options are made available to customers by
the Group. These routinely, but not exclusively, include the
following:
- arrangements to repay arrears over a period of time, by making
payments above the contractual amount, that ensure the loan is
repaid within the original repayment term;
- short-term concessions, where the borrower is allowed to make
reduced repayments (or in exceptional circumstances, no repayments)
on a temporary basis to assist with short-term financial hardship;
and
- for secured products, it may also be acceptable to allow the
customer to clear the arrears over an extended period of time,
provided the payments remain affordable.
Gross loans and Forbearance programmes Proportion of Forbearance
advances subject as a proportion programmes covered
to of total loans by allowance for
Forbearance programmes and advances by expected credit
category losses
2020 2019 2020 2019 2020 2019
GBPm GBPm % % % %
Credit cards - UK 107.6 92.8 2.5 2.0 49.7 53.3
Credit cards - Europe - - - - - -
Credit cards - Commercial 0.1 0.1 4.7 4.8 94.1 90.8
Loans 48.9 48.4 1.0 1.1 44.3 48.0
Mortgages - 6.0 - 0.2 - 1.2
Insurance risk
Tesco Bank is indirectly exposed to insurance risks through its
ownership of 49.9% of Tesco Underwriting Limited (TU), an
authorised insurance company. Insurance risk is defined as the risk
accepted through the provision of insurance products in return for
a premium. The timing and quantum of the risks are uncertain and
determined by events outside the control of Tesco Bank. The key
insurance risks within TU relate to underwriting risk and reserving
risk. TU operates a separate framework to ensure that the TU
insurance portfolio operates within agreed risk appetite. Tesco
Bank closely monitors performance of the portfolio against specific
thresholds and limits.
Note 26 Customer deposits and deposits from banks
2020 2019
GBPm GBPm
Customer deposits 7,707 10,465
Deposits from banks 500 1,663
8,207 12,128
Of which:
Current 6,377 8,832
Non-current 1,830 3,296
8,207 12,128
Deposits from banks include balances of GBPnil (2019: GBP324m)
in respect of securities sold under sale and repurchase agreements
and balances of GBP500m (2019: GBP1,339m) drawn under the Bank of
England's Term Funding Scheme. The underlying securities sold under
agreements to repurchase had a carrying value of GBPnil (2019:
GBP358m).
Note 27 Provisions
Property Restructuring Other provisions
provisions provisions GBPm Total
GBPm GBPm GBPm
At 23 February 2019 (restated) 161 143 69 373
Foreign currency translation (6) - 2 (4)
Amount released in the year (2) (20) (4) (26)
Amount provided in the year 9 171 53 233
Amount utilised in the year (7) (230) (48) (285)
Unwinding of discount 1 - - 1
At 29 February 2020 156 64 72 292
The balances are analysed as follows:
2020 2019
(restated)
GBPm GBPm
Current 155 226
Non-current 137 147
292 373
Property provisions
Property provisions comprise onerous property provisions,
including non-lease contracts related to unprofitable stores and
vacant properties, dilapidations provisions and asset retirement
obligation provisions.
Restructuring provisions
Of the GBP151m net charge (GBP171m charge, GBP20m release)
recognised in the year, GBP151m (2019: GBP182m) has been classified
within exceptional items as 'Net restructuring and redundancy
costs' and related to store and head office restructuring in the UK
& ROI GBP95m (2019: GBP131m), Central Europe GBP43m (2019:
GBP27m), Asia GBPnil (2019: GBP26m) and Tesco Bank GBP13m (2019:
GBP2m release).
Other provisions
Other provisions also include provisions for Tesco Bank customer
redress in respect of potential complaints arising from the
historical sales of PPI, and in respect of customer redress
relating to instances where certain requirements of the Consumer
Credit Act (CCA) for post-contract documentation have not been
fully complied with. In each instance, management have exercised
judgement as to both the timescale for implementing the redress
campaigns and the final scope of any amounts payable. During the
current financial year, an additional charge of GBP45m was
recognised in the Group income statement within exceptional items,
classified as 'Provision for customer redress' within cost of
sales. Refer to Note 4 for further details.
Other provisions are expected to be utilised in the next
financial year.
Note 28 Share-based payments
The Group income statement charge for the financial year
recognised in respect of share-based payments is GBP129m (2019:
GBP118m), which is made up of share option schemes and share bonus
payments. Of this amount, GBP113m (2019: GBP103m) will be settled
in equity and GBP16m (2019: GBP15m) in cash. National Insurance
payable in connection with options granted is treated as a
cash-settled transaction.
Share option schemes
The Company had 10 share option schemes in operation during the
financial year, all of which are equity-settled schemes:
i. The Savings-related Share Option Scheme (1981) permits the
grant to colleagues 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 colleagues of an amount
between GBP5 and GBP500 per four-weekly period. Options are capable
of being exercised at the end of the three or five-year period at a
subscription price of 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 ROI colleagues 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
colleagues of an amount between EUR12 and EUR500 per four-weekly
period. Options are capable of being exercised at the end of the
three or five-year period at a subscription price of 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 Executive Incentive Plan (2004) permitted the grant of
options in respect of ordinary shares to selected senior
executives. Options are normally exercisable between three and 10
years from the date of grant for nil consideration. No further
options will be granted under this scheme.
iv. The Executive Incentive Plan (2014) permits the grant of
options in respect of ordinary shares to selected senior executives
as a proportion of annual bonus following the completion of a
required service period and is dependent on the achievement of
corporate performance and individual targets. Options are normally
exercisable between three and 10 years from the date of grant for
nil consideration. Full details of this plan can be found in the
Directors' remuneration report.
v. The Performance Share Plan (2011) permits the grant of
options in respect of ordinary shares to selected executives.
Options are normally exercisable between the vesting date(s) set at
grant and 10 years from the date of grant for nil consideration.
The vesting of options will normally be conditional upon the
achievement of specified performance targets over a three-year
period and/or continuous employment.
vi. The Discretionary Share Option Plan (2004) permitted the
grant of approved, unapproved and international options in respect
of ordinary shares to selected executives. Options are normally
exercisable between three and 10 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 vesting of
options will normally be conditional upon the achievement of a
specified performance target related to the annual percentage
growth in earnings per share over a three-year period. There were
no discounted options granted under this scheme.
vii. The Group Bonus Plan permits the grant of options in
respect of ordinary shares to selected senior executives as a
proportion of annual bonus following the completion of a required
service period and is dependent on the achievement of corporate
performance and individual targets. Options are normally
exercisable between three and 10 years from the date of grant for
nil consideration.
viii. The Long Term Incentive Plan (2015) permits the grant of
options in respect of ordinary shares to selected executives.
Options are normally exercisable between the vesting date(s) set at
grant and 10 years from the date of grant for nil consideration.
The vesting of options will normally be conditional upon the
achievement of specified performance targets over a three-year
period and/or continuous employment.
ix. The Booker Group PLC Savings Related Share Option Plan 2008
(Booker SAYE) permitted the grant to Booker colleagues of options
in respect of ordinary shares in Booker Group PLC (Booker Shares)
linked to a building society/bank save-as-you-earn contract for a
term of three years with contributions from Booker colleagues of an
amount between GBP5 and GBP500 per four-weekly period. Following
completion of the acquisition of Booker Group PLC by Tesco PLC,
Booker colleagues elected to roll over their existing options over
Booker shares under the Booker SAYE into equivalent options over
ordinary shares in Tesco PLC (Tesco Shares). The options over Tesco
Shares are capable of being exercised at the end of the three year
period at a subscription price equivalent to not less than 80% of
the average of the middle-market quotations of a Booker Share over
the three dealing days immediately preceding the offer date.
x. The Booker Group PLC Performance Share Plan 2008 (Booker PSP)
permitted the grant of options in respect of Booker Shares to
selected Booker senior colleagues (Booker PSP Options). Under the
Booker PSP, tax approved Company Share Option Plan options (Booker
CSOP Options) were also granted to selected Booker senior
colleagues. Following completion of the acquisition of Booker Group
PLC by Tesco PLC, Booker senior colleagues elected to roll over
their existing Booker PSP and Booker CSOP Options over Booker
Shares into equivalent options over Tesco Shares. Booker PSP
Options are normally exercisable between the third anniversary of
the original date of grant and 10 years from the date of grant for
nil consideration. The vesting of options is normally conditional
upon the achievement of specified performance targets over a three
year period and continuous employment. Conditional on the vesting
of the relevant Booker PSP Options, Booker CSOP Options are
normally exercisable between the third anniversary of the original
date of grant and 10 years from the date of grant at a subscription
price equivalent to the market value of the Booker Shares at the
time of grant.
The following tables reconcile the number of share options
outstanding and the weighted average exercise price (WAEP):
For the 53 weeks ended 29 February 2020
Booker Group
Savings-related Irish Savings-related Nil cost Booker Group PLC
Share Option Share Option Share Option PLC Savings Performance Other Schemes
Scheme Scheme Scheme Related Share *
Plan Scheme
Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP
Outstanding
at 23
February
2019 215,591,248 168.04 6,470,978 175.06 25,377,129 - 9,827,705 145.36 11,222,347 - 12,379,637 -
Granted 44,387,158 219,00 1,977,339 219.00 537,271 - - - - - - -
Forfeited (23,512,462) 200.62 (1,062,090) 187.69 (5,502,793) - (766,057) 147.40 (2,870,980) - (12,379,637) -
Exercised (20,653,850) 167.18 (530,614) 180.60 (1,955,766) - (3,961,499) 137.46 (3,375,131) - - -
Outstanding
at 29
February
2020 215,812,094 175.06 6,855,613 185.35 18,455,841 - 5,100,149 151.21 4,976,236 - - -
Exercise 150.00 150.00 - 137.13 - -
price range to to to
(pence) 322.00 219.00 152.78
Weighted
average
remaining
contractual
life
(years) 2.09 2.55 6.39 1.32 0.51 -
Exercisable
at
29 February
2020 2,948,571 189.92 243,886 190.00 9,359,089 - 523,817 137.45 977,437 - - -
Exercise 151.00
price range to
(pence) 322.00 190.00 - 137.45 - -
Weighted
average
remaining
contractual
life
(years) 0.41 0.42 5.60 0.42 - -
* Other Schemes includes Approved Share Option Scheme
(Approved), Unapproved Share Option Scheme (Unapproved), and
International Executive Share Option Scheme (International).
Respectively: WAEP for Outstanding at 23 February 2019 were 338.40p
(2018: 391.25p), 338.40p (2018: 375.18p) and 338.40p (2018:
375.69p); WAEP for Forfeited during the current financial year were
338.40p (2019: 416.94p), 338.40p (2019: 400.96p) and 338.40p (2019:
396.04p); WAEP for Outstanding at 29 February 2020 were nil
(2019: 338.40p), nil (2019: 338.40p) and nil (2019: 338.40p).
Share options were exercised on a regular basis throughout the
financial year. The average share price during the 53 weeks ended
29 February 2020 was 237.69p (2019: 228.55p).
For the 52 weeks ended 23 February 2019
Booker
Savings-related Irish Nil cost Booker Group Group PLC
Share Option Scheme Savings-related Share PLC Savings Performance Other Schemes
Share Option Option Related Share Plan *
Scheme Scheme Scheme
Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP
Outstanding
at 24
February
2018 244,886,709 162.21 6,926,980 167.88 36,015,512 - - - - - 32,377,140 -
Granted 50,220,486 188.00 1,925,295 168.00 411,499 - 15,684,396 141.47 17,446,916 - - -
Forfeited (25,820,506) 188.17 (1,215,831) 178.35 (6,321,392) - (1,566,612) 145.59 (662,887) - (19,997,503) -
Exercised (53,695,441) 150.43 (1,165,466) 150.34 (4,728,490) - (4,290,079) 131.06 (5,561,682) - - -
Outstanding
at 23
February
2019 215,591,248 168.04 6,470,978 175.06 25,377,129 - 9,827,705 145.36 11,222,347 - 12,379,637 -
Exercise 150.00 150.00 - 88.26 - 338.40
price range to to to to
(pence) 322.00 322.00 163.76 427.00
Weighted
average
remaining
contractual
life (years) 2.46 2.71 7.31 1.89 0.96 0.20
Exercisable
at 23
February
2019 10,629,678 210.24 406,100 192.01 6,491,384 - 573,798 137.13 1,740,392 - 12,379,637 -
Exercise 150.00 150.00 338.40
price range to to to
(pence) 322.00 322.00 - 137.40 - 427.00
Weighted
average
remaining
contractual
life (years) 0.43 0.43 6.16 0.35 - 0.20
* Refer to previous table for footnotes.
The fair value of share options is estimated at the date of
grant using the Black-Scholes or Monte Carlo 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.
2020 2019
SAYE Nil cost SAYE Nil cost
Expected dividend yield (%) 3.7%-4.3% - 1.5-4.2% 1.5%
Expected volatility (%) 23-28% - 29% 25-30%
Risk-free interest rate (%) 0.8% - 0.8-1.1% 0.8-0.9%
Expected life of option (years) 3 or 5 - 3 or 5 3-6
Weighted average fair value of options
granted (pence) 38.56 - 41.01 68.04-180.35
Probability of forfeiture (%) 7-10% - 7-11% -
Share price (pence) 243.00 - 212.40 204.00
Weighted average exercise price (pence) 219.00 - 0.88-188.00 -
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.
Share bonus and incentive schemes
Selected executives participate in the Group Bonus Plan, a
performance-related bonus scheme. The amount paid to colleagues is
based on a percentage of salary and is paid partly in cash and
partly in shares. Bonuses are awarded to selected executives who
have completed a required service period and depend on the
achievement of corporate and individual performance targets.
Selected executives participate in the Performance Share Plan
(2011) and the Long Term Incentive Plan (2015). Awards made under
these plans will normally vest on the vesting date(s) set on the
date of the award for nil consideration. Vesting will normally be
conditional on the achievement of specified performance targets
over a three-year performance period and/or continuous
employment.
The Executive Directors participate in short-term bonus and
long-term incentive 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.
The number and weighted average fair value (WAFV) of share
bonuses & share incentives awarded during the financial year
were:
2020 2019
Number WAFV Number WAFV
of shares pence of shares pence
Group Bonus Plan 11,496,310 237.80 16,489,286 242.07
Performance Share Plan 39,136,637 233.77 25,570,973 254.79
Note 29 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit
arrangements, covering both funded and unfunded defined benefit
schemes and defined contribution schemes.
Defined contribution
Defined contribution schemes are open to all Tesco employees in
the UK.
Under the Group's defined contribution pension schemes,
employees of the Group pay contributions to an independently
administered fund, into which the Group also pays contributions
based upon a fixed percentage of the employee's contributions. The
Group has no further payment obligations once its contributions
have been paid. Contributions paid for defined contribution schemes
of GBP343m (2019: GBP332m) have been recognised in the Group income
statement. This includes GBP116m (2019: GBP110m) of salaries paid
as pension contributions.
Defined benefit schemes
The Group has a defined benefit pension deficit of GBP3,085m
(2019: GBP2,808m), comprising a number of schemes. The most
significant of these are for the Group's employees in the UK, which
are closed to future accrual, and ROI. The defined benefit pension
deficit in the UK represents 92% of the Group deficit (2019:
96%).
Business combinations
In the prior year, the Group acquired Booker, which has three UK
defined benefit pension schemes. The Booker Pension Scheme, closed
to future accrual, is the primary scheme, with two smaller closed
schemes relating to retail partners Budgens and Londis. The
combined defined benefit pension deficit acquired on business
combination in the prior year was GBP22m.
Guaranteed minimum pension
In the prior year a high court judgement was handed down
regarding the Lloyds Banking Group's defined benefit pension scheme
which affects many pension schemes in the UK, including the Group's
UK schemes. The judgement concluded that schemes should be amended
to ensure that members who have guaranteed minimum pensions (GMPs)
receive the same benefits regardless of their gender. This change
impacts GMP benefits accrued between 1990 and 1997. In consultation
with independent actuaries, the Group recognised the financial
effect of equalising benefits as a one-off GBP43m exceptional past
service cost in the prior year. This was presented as an
exceptional item in the Group income statement (Note 4).
United Kingdom
The principal plan within the Group is the Tesco PLC Pension
Scheme (the Scheme), the assets of which are held as a segregated
fund and administered by the Trustee.
The Scheme is established under trust law and has a corporate
trustee that is required to run the Scheme in accordance with the
Scheme's Trust Deed and Rules and to comply with all relevant
legislation. Responsibility for governance of the Scheme lies with
the Trustee. The Trustee is a company whose directors comprise:
1. representatives of the Group; and
2. representatives of the Scheme participants, in accordance
with its articles of association and UK pension law.
Scheme funding
The Group considers two measures of the pension deficit. The
accounting position is shown on the Group balance sheet. The
funding position, calculated at the triennial actuarial assessment,
is used to agree contributions made to the schemes. The two
measures will vary because they are for different purposes, and are
calculated at different dates and in different ways. The key
calculation difference is that the funding position considers the
expected returns of scheme assets when calculating the liability,
whereas the accounting position calculated under IAS 19 discounts
liabilities based on corporate bond yields.
The most recent completed triennial actuarial assessment of the
Scheme was performed on 31 March 2017 using the projected unit
credit method. The funding position was a deficit of GBP3,016m. The
market value of the Scheme's assets was GBP13,141m and these assets
represented 81% of the benefits that had accrued to members, after
allowing for expected increases in pensions in payment. Work is
underway on the next triennial valuation, with an effective date of
31 December 2019, with the Trustee concluding as soon as reasonably
possible.
The Group has a plan to fund the Scheme pension deficit and to
meet the expenses of the Scheme. Annual contributions of GBP285m
for 9 years from April 2018 were agreed, with contributions being
assessed at the next triennial review. The expenses for the year,
which include the Pension Protection Fund levy, were GBP28m (2019:
GBP23m). In the event that the Pension Protection Fund levy for the
Scheme exceeds GBP75m over three years, the Group agreed to pay
this excess amount to the Scheme over the following three years.
The market value of assets held as security in favour of the Scheme
is at least GBP575m.
Subject to the Group's sale of its operations in Thailand and
Malaysia (refer to Note 36), the Group has agreed with the Trustee
to contribute GBP2.5bn to the Tesco PLC Pension Scheme, to
eliminate the current funding deficit and significantly reduce the
prospect of having to make further pension deficit contributions in
the future.
The most recent Booker Pension Scheme triennial valuation showed
a funding deficit of GBP103m at 31 March 2019, with agreed
contributions of GBP15m per annum until end of 2028. No
contributions were required for the Budgens or Londis schemes.
IFRIC 14
The Group is not required to recognise any additional
liabilities in relation to funding plans, or limit the recognition
of any surpluses, as any future economic benefits will be available
to the Group by way of future refunds or reductions to future
contributions.
Maturity profile of obligations
The estimated duration of the Scheme obligations is an indicator
of the weighted average term of benefit payments after discounting.
For the Scheme this is 25 years.
Around half of the undiscounted benefits are due to be paid
beyond 30 years' time, with the last payments expected to be over
80 years from now. The estimated undiscounted benefit payments
expected to be paid out over the life of the Scheme is shown in a
graph in the Annual Report and Financial Statements 2020.
The liabilities held by the Scheme as at 31 March 2017, the date
of the last triennial valuation, are broken down as follows:
%
Deferred 81
Pensioner 19
Risks
The Group bears a number of risks in relation to the Scheme,
which are described below:
Risk Description of risk Mitigation
Investment The Scheme's accounting The Trustee and the Group regularly
liabilities are calculated monitor the funding position and
using a discount rate set operate a diversified investment
with reference to corporate strategy.
bond yields. If the return The Trustee and Group take a balanced
on the Scheme's assets approach to investment risk and
underperform this rate, use a long-term plan to manage investment
the accounting deficit risk.
will increase.
If the Scheme's assets
underperform the expected
return for the funding
valuation, this may require
additional contributions
to be made by the Group.
Inflation The Scheme's benefit obligations As part of the investment strategy,
are linked to inflation. the Trustee aims to mitigate this
A higher rate of expected risk through investment in a liability-driven
long-term inflation will investment (LDI) portfolio.
therefore lead to higher The portfolio invests in assets
liabilities, both for the which increase in value as inflation
IAS 19 and funding liability. expectations increase. This mitigates
If the Scheme's funding the impact of any adverse movement
liability increases, this in long-term inflation expectations.
may require additional The Scheme's holdings are designed
contributions to be made to hedge against inflation risk
by the Group. up to the value of the funded liabilities.
Additionally, changes to future
benefits were introduced in June
2012 to reduce the Scheme's exposure
to inflation risk by changing the
basis for calculating the rate of
increase in pensions to CPI (previously
RPI).
Interest A decrease in corporate As part of the investment strategy,
rate bond yields will increase the Trustee aims to mitigate this
the accounting deficit risk through investment in a liability-driven
under IAS 19. Similarly, investment (LDI) portfolio.
a decrease in gilt yields The portfolio invests in assets
will have an adverse impact which increase in value as interest
on the funding position rates decrease. The Scheme's holdings
of the Scheme. This may are designed to hedge against interest
lead to additional contributions rate risk up to the value of the
to be made by the Group. funded liabilities.
Because the aim of the portfolio
is to mitigate risk for the funding
position, ineffectiveness in hedging
for the accounting deficit under
IAS 19 can arise where corporate
bond and gilt yields diverge. This
is partially offset by Scheme holdings
in corporate bonds.
Life expectancy The Scheme's obligations To reduce this risk, changes to
are to provide benefits future benefits were introduced
for the life of the member in June 2012 to increase the age
and so increases in life at which members can take their
expectancy will lead to full pension by two years.
higher liabilities. The Trustee and Group regularly
monitor the impact of changes in
longevity on Scheme obligations.
The Operations and Audit Pensions Committee was established to
further strengthen the Group's Trustee Governance and provide
greater oversight and stronger internal control over the Group's
risks. The Group Pensions Committee was also set up to provide an
additional layer of governance and risk management. Further
mitigation of the risks is provided by external advisors and the
Trustee who consider the funding position, fund performance and
impacts of any regulatory changes.
Scheme principal assumptions
Financial assumptions
The major assumptions, on a weighted average basis, used by the
actuaries to value the defined benefit obligation of the Scheme
were as follows:
2020 2019
% %
Discount rate 1.9 2.8
Price inflation 2.8 3.1
Rate of increase in deferred pensions * 2.0 2.1
Rate of increase in pensions in payment *
Benefits accrued before 1 June 2012 2.7 2.9
Benefits accrued after 1 June 2012 2.1 2.2
====
* In excess of any guaranteed minimum pension (GMP) element.
Mortality assumptions
The Group, in consultation with an independent actuary,
conducted a mortality analysis under the Scheme as part of the
triennial actuarial valuation process. Subsequent to this analysis,
the Group adopted the best estimate assumptions for the calculation
of the IAS 19 pension liability for the main UK scheme.
The mortality assumptions used are based on tables that have
been projected to 2017 with CMI 2019 improvements. In addition, the
allowance for future mortality improvements from 2017 have been
updated to be in line with CMI 2019, with a long-term improvement
rate of 1.25% per annum.
The base tables used in calculating the mortality assumptions
are different for various categories of members, as shown
below:
Pensioner Non-Pensioner
Male Staff 100% of SAPS S2 Normal 105% of SAPS S2 Normal
Senior Manager 85% of SAPS S2 Normal 87% of SAPS S2 Normal
Light Light
Female Staff 100% of SAPS S2 All 98% of SAPS S2 All
Senior Manager 85% of SAPS S2 All 86% of SAPS S2 All
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 balance sheet date +25 years. A
comparison between the two retiree dates illustrates the expected
improvements in mortality over the next 25 years.
2020 2019
Years Years
Retiring at the balance
sheet date at age 65: Male 22.0 22.3
Female 23.8 24.0
Retiring at the balance
sheet date +25 years at
age 65: Male 23.4 23.7
Female 25.8 26.0
======
Sensitivity analysis of significant actuarial assumptions
The sensitivity of significant assumptions upon the Scheme
defined benefit obligations are detailed below:
2020(*) 2019
Discount Inflation Discount Inflation
Financial assumptions - Increase/(decrease) rate rate rate rate
in UK defined benefit obligation GBPm GBPm GBPm GBPm
Impact of 0.1% increase of the assumption (460) 383 (401) 334
Impact of 0.1% decrease of the assumption 479 (383) 401 (301)
Impact of 1.0% increase of the assumption (4,002) 4,289 (3,406) 3,607
Impact of 1.0% decrease of the assumption 5,572 (3,313) 4,709 (2,839)
Mortality assumptions - Increase/(decrease) in UK defined 2020(*) 2019
benefit obligation GBPm GBPm
Impact of 1 year increase in longevity 881 685
Impact of 1 year decrease in longevity (881) (685)
* These sensitivities are presented on a consistent basis with
the prior year to aid comparability. Commentary on additional
sensitivities adjusted for the impact of increased volatility as a
result of the coronavirus pandemic is given in Note 36.
Sensitivities are calculated by changing the relevant assumption
whilst holding all other assumptions constant. The sensitivities
reflect the range of recent assumption movements, and illustrate
that the financial assumption sensitivities do not move in a linear
fashion. Movements in the defined benefit obligation from discount
rate and inflation rate changes may be partially offset by
movements in assets.
Overseas
The most significant overseas scheme is the funded defined
benefit scheme which operates in ROI. An independent actuary, using
the projected unit credit method, carried out the latest actuarial
assessment of the ROI scheme as at 29 February 2020. At the
financial year end, the IAS 19 deficit relating to ROI was GBP206m
(2019: GBP106m).
Post-employment benefits other than pensions
The Group operates a scheme offering post-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 29 February 2020 of GBP8m (2019: GBP9m) was
determined in accordance with the advice of independent actuaries.
During the financial year, GBPnil (2019: GBPnil) has been charged
to the Group income statement and GBPnil (2019: GBPnil) of benefits
were paid.
Plan assets
The Group's pension schemes hold assets that both provide
returns and mitigate risk, including the volatility of future
pension payments. The table below shows a breakdown of the combined
investments held by the Group's schemes:
2020 2019
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
===============
Equities
UK 255 - 255 2 203 - 203 1
Europe 746 - 746 4 684 - 684 5
Rest of the world 4,347 - 4,347 25 4,224 - 4,224 28
===============
5,348 - 5,348 31 5,111 - 5,111 34
===============
Bonds
Government 750 - 750 4 1,174 - 1,174 8
Corporates -
investment
grade 1,362 - 1,362 8 648 - 648 4
Corporates -
non-investment
grade 2 - 2 0 2 - 2 0
===============
2,114 - 2,114 12 1,824 - 1,824 12
===============
Property
UK 44 1,036 1,080 6 83 1,032 1,115 7
Rest of the world 7 475 482 3 6 423 429 3
===============
51 1,511 1,562 9 89 1,455 1,544 10
===============
Alternative assets
Hedge funds 2 304 306 2 2 383 385 3
Private equity - 881 881 5 - 851 851 6
Other 225 1,043 1,268 7 230 827 1,057 7
===============
227 2,228 2,455 14 232 2,061 2,293 16
===============
Liability Driven
Investment
(LDI) portfolios 4,580 444 5,024 29 3,695 287 3,982 26
Cash 922 - 922 5 300 - 300 2
===============
Total fair value of
assets 13,242 4,183 17,425 100 11,251 3,803 15,054 100
===============
Quoted assets are those with a quoted price in an active
market.
The LDI category consists of assets, including gilts and
index-linked gilts, of the value of GBP8,115m (2019: GBP6,683m) and
associated repurchase agreements and swaps of GBP(3,091)m (2019:
GBP(2,701)m). Other derivatives are included in the asset category
to which they relate, reflecting the underlying nature and exposure
of the derivative.
The plan assets include GBP209m (2019: GBP198m) relating to
property used by the Group. Group property with net carrying value
of GBP478m (2019: GBP489m) (Note 11) and a value to the Scheme of
at least GBP575m (2019: GBP575m) is held as security in favour of
the Scheme.
Movement in the Group pension deficit during the current
financial year
Fair value of Defined benefit Net defined benefit
plan assets obligations surplus/(deficit)
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Opening balance 15,054 13,235 (17,862) (16,517) (2,808) (3,282)
Current service cost - - (40) (35) (40) (35)
Past service cost - - (5) (43) (5) (43)
Finance income/(cost) 409 396 (480) (485) (71) (89)
Included in the Group
income statement 409 396 (525) (563) (116) (167)
Remeasurement gain/(loss):
Financial assumptions
gain/(loss) - - (2,867) (478) (2,867) (478)
Demographic assumptions
gain/(loss) - - 182 (51) 182 (51)
Experience gain/(loss) - - 61 (39) 61 (39)
Return on plan assets
excluding finance income 2,158 932 - - 2,158 932
Foreign currency translation (3) (3) 5 3 2 -
Included in the Group
statement of comprehensive
income/(loss) 2,155 929 (2,619) (565) (464) 364
Member contributions 2 2 (2) (2) - -
Employer contributions 36 33 - - 36 33
Additional employer contributions 262 266 - - 262 266
Benefits paid (493) (547) 498 547 5 -
Acquired through business
combination - 740 - (762) - (22)
Other movements (193) 494 496 (217) 303 277
Closing balance 17,425 15,054 (20,510) (17,862) (3,085) (2,808)
Deferred tax asset 512 470
Deficit in schemes at
the end of the year, net
of deferred tax (2,573) (2,338)
Note 30 Called up share capital
2020 2019
Number of Number of
5p GBPm 5p GBPm
shares shares
Allotted, called up and fully paid:
At the beginning of the year 9,793,496,561 490 8,192,116,619 410
Share options exercised - - 41,525,096 2
Share bonus awards issued - - 12,000,000 1
Shares issued for the acquisition of
Booker - - 1,547,854,846 77
At the end of the year 9,793,496,561 490 9,793,496,561 490
No shares were issued during the current financial year in
relation to share options. During the previous financial year, 41.5
million ordinary shares of 5p each were issued in relation to share
options for an aggregate consideration of GBP60m. No (2019: 12
million) ordinary shares of 5p each were issued in relation to the
share bonus awards.
During the prior financial year, 1,548 million shares were
issued in relation to the Booker acquisition. The shares issued as
consideration for the acquisition of Booker were valued at
GBP3,127m based on the published share price on 2 March 2018 of
202.0 pence with GBP77m recognised as share capital and the
remaining GBP3,050m recognised as merger reserve, included within
Other reserves on the Group statement of changes in equity.
The Group has a share forfeiture programme following the
completion of a tracing and notification exercise to any
shareholders who have not had contact with the Company over the
past 12 years, in accordance with the provisions set out in the
Company's Articles of Association. Under the share forfeiture
programme the shares and dividends associated with shares of
untraced members are forfeited, with the resulting proceeds
transferred to the Group to use for good causes in line with the
Group's corporate responsibility strategy. During the current
financial year, the Group received GBPnil (2019: GBPnil) proceeds
from sale of untraced shares and GBPnil (2019: GBPnil) write-back
of unclaimed dividends, which are reflected in share premium and
retained earnings respectively.
As at 29 February 2020, the Directors were authorised to
purchase up to a maximum in aggregate of 979.3 million (2019: 977.2
million) ordinary shares before the Annual General Meeting 2020 on
26 June 2020.
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled to one vote per
share at general meetings of the Company.
Own shares purchased
Own shares represent the shares of Tesco PLC that are held in
Treasury or by the Employee Benefit Trust. Own shares are recorded
at cost and are deducted from equity.
The own shares held represents the cost of shares in Tesco PLC
purchased from the market and held by the Tesco International
Employee Benefit Trust to satisfy share awards under the Group's
share scheme plans (refer to Note 28). The number of ordinary
shares held by the Tesco International Employee Benefit Trust at 29
February 2020 was 87.6 million (2019: 68.1 million). This
represents 0.89% of called-up share capital at the end of the year
(2019: 0.70%).
No own shares held of Tesco PLC were cancelled during the
financial years presented.
Note 31 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:
Transactions
Joint ventures Associates
2020 2019 2020 2019
(restated) (restated)
GBPm GBPm GBPm GBPm
Sales to related parties 491 486 - -
Purchases from related parties 100 96 12 11
Dividends received 29 29 13 12
Injection of equity funding - 11 12 -
===========
Sales to related parties consist of services/management fees and
loan interest. Transactions between the Group and the Group's
pension plans are disclosed in Note 29.
Balances
Joint ventures Associates
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Amounts owed to related parties 26 20 - -
Amounts owed by related parties 47 37 - -
Lease liabilities payable to related parties 3,206 3,718 146 141
Loans to related parties (net of deferred
profits)* 127 133 - -
=====
* Loans to related parties of GBP127m (2019: GBP133m) are
presented net of deferred profits of GBP54m (2019: GBP54m)
historically arising from the sale of property assets to joint
ventures. For loans to related parties, a 12-month expected credit
loss is recorded on initial recognition. The expected credit loss
was immaterial as at the current balance sheet date.
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 financial statements for
those partnerships have been consolidated into these financial
statements pursuant to Regulation 7 of the Regulations.
Transactions with key management personnel
Members of the Board of Directors and Executive Committee of
Tesco PLC are deemed to be key management personnel. Cost of key
management personnel compensation for the financial year was as
follows:
2020 2019
GBPm GBPm
Salaries and short-term benefits 20 17
Pensions and cash in lieu of pensions 2 2
Share-based payments 16 13
Joining costs and loss of office costs 1 1
39 33
Attributable to:
The Board of Directors (including Non-executive Directors) 10 10
Executive Committee (members not on the Board of Directors) 29 23
39 33
Of the key management personnel who had transactions with Tesco
Bank during the financial year, the following are the balances at
the financial year end:
Credit card, mortgage
and personal loan Current and saving
balances deposit accounts
Number Number
of key of key
management management
personnel GBPm personnel GBPm
At 29 February 2020 6 - 13 1
At 23 February 2019 3 - 10 2
Note 32 Analysis of changes in net debt
Non-cash movements
At
23 February
2019 At
Cash
flows
arising Operating Acquisition
from and investing Fair of property
financing cash value Foreign Interest joint 29 February
(restated) activities flows gains/(losses) exchange income/(charge) venture Other 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Total Group
Bank and
other
borrowings (7,143) 456 255 (192) 2 (251) (622) - (7,495)
Lease
liabilities (10,505) 634 541 - 1 (541) 455 (151) (9,566)
Net
derivative
financial
instruments 591 17 7 (208) - 14 (223) - 198
Arising from
financing
activities (17,057) 1,107 803 (400) 3 (778) (390) (151) (16,863)
Cash and
cash
equivalents 2,916 - 534 - (42) - - - 3,408
Short-term
investments 390 - 687 - (1) - - - 1,076
Joint
venture
loans 133 - (8) - - 2 - - 127
Interest and
other
receivables 1 - (18) - (1) 19 - - 1
Total Group (13,617) 1,107 1,998 (400) (41) (757) (390) (151) (12,251)
Tesco Bank
Bank and
other
borrowings (1,421) 160 5 1 - (5) - - (1,260)
Lease
liabilities (35) 2 3 - - (3) - - (33)
Net
derivative
financial
instruments (29) - - (16) - - - - (45)
Arising from
financing
activities (1,485) 162 8 (15) - (8) - - (1,338)
Cash and
cash
equivalents 1,043 - 321 - - - - - 1,364
Joint
ventures
loans 29 - (8) - - - - - 21
Tesco Bank (413) 162 321 (15) - (8) - - 47
Retail
Bank and
other
borrowings (5,722) 296 250 (193) 2 (246) (622) - (6,235)
Lease
liabilities (10,470) 632 538 - 1 (538) 455 (151) (9,533)
Net
derivative
financial
instruments 620 17 7 (192) - 14 (223) - 243
Arising from
financing
activities (15,572) 945 795 (385) 3 (770) (390) (151) (15,525)
Cash and
cash
equivalents 1,873 - 213 - (42) - - - 2,044
Short-term
investments 390 - 687 - (1) - - - 1,076
Joint
ventures
loans 104 - - - - 2 - - 106
Interest and
other
receivables 1 - (18) - (1) 19 - - 1
Net debt (b) (13,204) 945 1,677 (385) (41) (749) (390) (151) (12,298)
(a) Movements in net debt arising from the Group's acquisition
of the Tesco Atrato Limited partnership. Refer to Note 33.
(b) Refer to page 121 for a reconciliation from Net debt shown
above to the Group's 52 week alternative performance measures.
Net debt excludes the net debt of Tesco Bank but includes that
of discontinued operations. Balances and movements in respect of
the total Group and Tesco Bank are presented to allow
reconciliation between the Group balance sheet and the Group cash
flow statement.
Non-cash movements
At At
25 February Acquisition 23 February
IFRS
2018 9 Operating of 2019
Cash
flows
arising Fair
from and investing value Interest
financing cash gains/ Foreign income/
(restated) adjustment activities flows (losses) exchange (charge) subsidiary Other (restated)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Total Group
Bank and
other
borrowings (8,499) - 1,496 298 (136) (8) (294) - - (7,143)
Lease
liabilities (10,272) - 606 561 - (16) (561) (504) (319) (10,505)
Net
derivative
financial
instruments 481 - (35) - 128 - 17 - - 591
===================
Arising from
financing
activities (18,290) - 2,067 859 (8) (24) (838) (504) (319) (17,057)
Cash and
cash
equivalents 4,059 - - (1,158) - 15 - - - 2,916
Short-term
investments 1,029 - - (639) - - - - - 390
Joint
venture
loans 138 (13) - (5) - - - - 13 133
Interest and
other
receivables 1 - - (21) - - 21 - - 1
===================
Total Group (13,063) (13) 2,067 (964) (8) (9) (817) (504) (306) (13,617)
===================
Tesco Bank
Bank and
other
borrowings (1,584) - 154 5 9 - (5) - - (1,421)
Lease
liabilities (36) - 1 3 - - (3) - - (35)
Net
derivative
financial
instruments (42) - - - 13 - - - - (29)
===================
Arising from
financing
activities (1,662) - 155 8 22 - (8) - - (1,485)
Cash and
cash
equivalents 1,304 - - (261) - - - - - 1,043
Joint
ventures
loans 34 - - (5) - - - - - 29
===================
Tesco Bank (324) - 155 (258) 22 - (8) - - (413)
===================
Retail
Bank and
other
borrowings (6,915) - 1,342 293 (145) (8) (289) - - (5,722)
Lease
liabilities (10,236) - 605 558 - (16) (558) (504) (319) (10,470)
Net
derivative
financial
instruments 523 - (35) - 115 - 17 - - 620
===================
Arising from
financing
activities (16,628) - 1,912 851 (30) (24) (830) (504) (319) (15,572)
Cash and
cash
equivalents 2,755 - - (897) - 15 - - - 1,873
Short-term
investments 1,029 - - (639) - - - - - 390
Joint
venture
loans 104 (13) - - - - - - 13 104
Interest and
other
receivables 1 - - (21) - - 21 - - 1
===================
Net debt (12,739) (13) 1,912 (706) (30) (9) (809) (504) (306) (13,204)
===================
Reconciliation of net cash flow to movement in Net debt
2020 2019
(restated)
GBPm GBPm
Net increase/(decrease) in cash and cash equivalents 534 (1,158)
Elimination of Tesco Bank movement in cash and cash equivalents (321) 261
Retail cash movement in other Net debt items:
Net increase/(decrease) in short-term investments 687 (639)
Net increase/(decrease) in joint venture loans -
Net (increase)/decrease in borrowings and lease liabilities 928 1,947
Net cash flows from derivative financial instruments 17 (35)
Net interest paid on components of Net debt 777 830
===========
Change in Net debt resulting from cash flow 2,622 1,206
Retail IFRS 9 adjustment - (13)
Retail net interest charge on components of Net debt (749) (809)
Retail fair value and foreign exchange movements (426) (39)
Retail other non-cash movements (151) (306)
Acquisition of property joint venture (Note 33) (390) -
Acquisition of subsidiary - (504)
===========
(Increase)/ decrease in Net debt 906 (465)
Opening Net debt (13,204) (12,739)
===========
Closing Net debt * (12,298) (13,204)
===========
* Refer to page 121 for a reconciliation from Net debt shown
above to the Group's 52 week alternative performance measures.
Note 33 Acquisitions and disposals
Acquisition of property joint venture - Tesco Atrato Limited
partnership
On 23 September 2019, the Group obtained control of the Tesco
Atrato Limited partnership (the partnership or Atrato), previously
accounted for as a joint venture. The Group obtained control
through the acquisition of the other partner's 50% interest in the
partnership for GBP32m (net of derecognition of a GBP5m purchase
commitment derivative). The partnership had bond and derivative
liabilities, and owns 15 stores and two distribution centres, which
the partnership previously leased to the Group. The acquisition,
which has been treated as an asset acquisition, increased the
Group's owned property portfolio and borrowings, replacing the
Group's associated right of use assets and lease liabilities, which
are eliminated on consolidation.
The table below sets out the values to the Group in respect of
obtaining control of the partnership:
Notes GBPm
=====
Property, plant and equipment 11 914
Cash and cash equivalents 1
Borrowings 32 (622)
Derivative liabilities 32 (223)
Other payables (7)
=====
Total assets and liabilities acquired 63
=====
Revaluation of the Group's original 50% investment 31
Consideration paid (net of derecognition of a GBP5m
purchase commitment derivative) 4 32
=====
Total cost 63
=====
The Group recognised the following gains and losses as an
exceptional item within cost of sales on the Group income
statement. The related tax charge of GBP(23)m has also been
classified as an exceptional item. Refer to Note 4 for further
details.
Notes GBPm
Revaluation of the Group's original 50% investment 31
Impairment of property, plant and equipment acquired 15 (287)
Derecognition of the Group's lease liabilities with the
partnership 32 455
Derecognition of the Group's right of use assets with
the partnership 12 (335)
Total exceptional loss within cost of sales (136)
Taxation - exceptional 4 (23)
Total exceptional loss after taxation (159)
Disposal of investment in associate - Gain Land
On 28 February 2020, the Group completed the sale of its 20%
share in its associate Gain Land Limited (Gain Land) in China. The
Group recognised a gain on disposal of GBP37m which has been
recognised as an exceptional item within administrative expenses
classified as 'Disposal of China associate'. The carrying value of
Gain Land on the disposal date was GBP240m. The Group received cash
proceeds of GBP277m, recognised as an exceptional item within cash
flows from investing activities. Refer to Note 4 for exceptional
items.
Note 34 Commitments and contingencies
Capital commitments
At 29 February 2020, there were commitments for capital
expenditure contracted for, but not incurred, of GBP140m (2019:
GBP70m), principally relating to store development.
Contingent liabilities
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 that a
settlement will be required and the value of such a payment can be
reliably estimated.
As previously reported, law firms in the UK have announced the
intention of forming claimant groups to commence litigation against
the Group for matters arising out of or in connection with its
overstatement of expected profits in 2014, and purport to have
secured third party funding for such litigation. In this regard,
the Group has received two High Court claims against Tesco PLC. The
first was received on 31 October 2016 from a group of 112 investors
(now reduced to 56 investors) and the second was received on 5
December 2016 from an investment company and a trust company. The
merit, likely outcome and potential impact on the Group of any such
litigation that either has been or might potentially be brought
against the Group is subject to a number of significant
uncertainties and, therefore, the Group cannot make any assessment
of the likely outcome or quantum of any such litigation as at the
date of this disclosure.
Prior to the disposal of its Korean operations (Homeplus), Tesco
PLC provided guarantees in respect of 13 Homeplus lease agreements
in Korea in the event of termination of the relevant lease
agreement by the landlord due to Homeplus' default. Entities
controlled by MBK Partners and Canada Pension Plan Investment Board
(CPPIB), as the purchasers of Homeplus, undertook to procure Tesco
PLC's release from these guarantees following the disposal of
Homeplus. At 29 February 2020, five guarantees remained
outstanding. This liability decreases over time with all relevant
leases expiring in the period between 2027 and 2031. The maximum
potential liability under these outstanding guarantees is between
KRW 205bn (GBP132m) and KRW 333bn (GBP214m). In the event that the
guarantees are called, the potential economic outflow is estimated
at KRW 161bn (GBP103m), with funds of KRW 65bn (GBP42m) placed in
escrow to provide the payment mechanism for these guarantees. The
net potential outflow to Tesco is therefore estimated at KRW 96bn
(GBP62m). Additionally, Tesco PLC has the benefit of an indemnity
from the purchasers of
Homeplus for any claims made over and above the amounts in
escrow.
On 23 March 2020 the Group was released from one of the
guarantees, reducing the maximum potential liability under the
remaining four outstanding guarantees to between KRW 116bn (GBP74m)
and KRW 198bn (GBP127m). In the event that the remaining four
guarantees are called, the potential economic outflow is estimated
at KRW 112bn (GBP72m), with funds of KRW 37bn (GBP24m) placed in
escrow to provide the payment mechanism for these guarantees. The
net potential outflow to Tesco is therefore reduced to an estimated
KRW 75bn (GBP48m).
Following the sale of Homeplus in 2015, the Group has received
claims from the purchasers relating to the sale of the business.
The claims are being vigorously defended. Whilst the claims have
evolved since originally issued, the Group does not believe the
claims are likely to lead to a material outflow of funds.
As previously reported, Tesco Stores Limited has received claims
from current and former Tesco store colleagues alleging that their
work is of equal value to that of colleagues working in Tesco's
distribution centres and that differences in terms and conditions
relating to pay are not objectively justifiable. The claimants are
seeking the differential between the pay terms looking back, and
equivalence of pay terms moving forward. At present, the likely
number of claims that may be received and the merit, likely outcome
and potential impact on the Group of any such litigation is subject
to a number of significant uncertainties and therefore, the Group
cannot make any assessment of the likely outcome or quantum of any
such litigation as at the date of this disclosure. There are
substantial factual and legal defences to these claims and the
Group intends to vigorously defend them.
Subsidiary audit exemptions
The following UK subsidiary undertakings are exempt from the
requirements of the Companies Act 2006 (the Act) relating to the
audit of individual accounts by virtue of section 479A of the
Act.
Company Company Company
Name number Name Number Name Number
Spen Hill Development Tesco Mobile Communications
Adminstore Limited 01882853 Limited 04827219 Limited 04780729
Armitage Finance Spen Hill Management Tesco Mobile Services
Limited 05966324 Limited 02460426 Limited 04780734
Spen Hill Properties
Buttoncable Limited 05294246 (Holdings) PLC 02412674 Tesco PEG Limited 06480309
Spen Hill Regeneration
Buttoncase Limited 05298861 Limited 06418300 Tesco PENL Limited 06479938
Day and Nite Stores
Limited 01746058 T & S Stores Limited 01228935 Tesco Red (3LP) Limited 010127765
Dillons Newsagents
Limited 00140624 Tapesilver Limited 05205362 Tesco Red (GP) Limited 05721630
Tesco Aqua (3LP) Tesco TLB Finance
Launchgrain Limited 05260856 Limited 09947521 Limited 04967622
Oakwood Distribution Tesco Aqua (GP) Tesco TLB Properties
Limited 05721635 Limited 05721654 Limited 03159425
One Stop Community Tesco Family Dining The Tesco Aqua Limited
Stores Limited 00198980 Limited 08514605 Partnership LP011520
One Stop Convenience The Tesco Red Limited
Stores Limited 02467178 Tesco Freetime Limited 04345023 Partnership LP011522
Paper Chain (East Tesco Gateshead
Anglia) Limited 0256555 Property Limited 08312532
Tesco PLC will guarantee all outstanding liabilities that these
subsidiaries are subject to as at the financial year ended 29
February 2020 in accordance with section 479C of the Act, as
amended by the Companies and Limited Liability Partnerships
(Accounts and Audit Exemptions and Change of Accounting Framework)
Regulations 2012. In addition, Tesco PLC will guarantee any
contingent and prospective liabilities that these subsidiaries are
subject to.
Tesco PLC has irrevocably guaranteed the liabilities and
commitments of the following Irish subsidiary undertakings, which
have been exempted pursuant to Section 357 of the Companies Act
2014 of Ireland from the provisions of Section 347 and 348 of that
Act: Chirac Limited; Cirrus Finance (2009) Limited; Clondalkin
Properties Limited; Commercial Investments Limited; Edson
Investments Limited; Edson Properties Limited; Monread Developments
Limited; Nabola Development Limited; Orpingford; Pharaway
Properties Limited; R.J.D. Holdings; Tesco Ireland Holdings
Limited; Tesco Ireland Limited; Tesco Ireland Pension Trustees
Limited; Tesco Mobile Ireland Limited ; Tesco Trustee Company of
Ireland Limited; Thundridge; Wanze Properties (Dundalk) Limited;
WSC Properties Limited. The irrevocable guarantee may be relied
upon for the purposes of the aforementioned exemption, while the
United Kingdom remains part of the European Economic Area for the
duration of the transition period, to 31 December 2020.
Tesco Bank
At 29 February 2020, Tesco Bank had contractual lending
commitments totalling GBP11.9bn (2019: GBP12.2bn). The contractual
amounts represent the amounts that would be at risk should the
available facilities be fully drawn upon and not the amounts at
risk at the reporting date.
Note 35 Tesco Bank capital resources
The following tables analyse the regulatory capital resources of
Tesco Personal Finance PLC (TPF), being the regulated entity at the
balance sheet date:
2020 2019
(restated)
GBPm GBPm
Common equity tier 1 capital:
Shareholders' funds and non-controlling interests, net
of tier 1 regulatory adjustments 1,567 1,434
Tier 2 capital:
Qualifying subordinated debt 235 235
Other interests - -
Total tier 2 regulatory adjustments (21) (29)
Total regulatory capital 1,781 1,640
On 27 June 2013, the final Capital Requirements Directive IV
(CRD IV) rules were published in the Official Journal of the
European Union. Following the publication of the CRD IV rules, the
Prudential Regulation Authority (PRA) issued a policy statement on
19 December 2013 detailing how the rules will be enacted within the
UK with corresponding timeframes for implementation. The CRD IV
rules are currently being phased in. The following tables analyse
the regulatory capital resources of TPF (being the regulated
entity) applicable as at the financial year end.
The movement in common equity tier 1 capital during the
financial year is analysed as follows:
2020 2019
(restated)
GBPm GBPm
At the beginning of the year 1,434 1,497
Initial application of IFRS 9 - (166)
Share capital and share premium - -
Profit attributable to shareholders 93 136
Other reserves 4 (15)
Ordinary dividends (50) (60)
Movement in material holdings - -
Increase in intangible assets 86 47
Other - Tier 1 - -
At the end of the year, excluding CRD IV adjustments 1,567 1,439
CRD IV adjustments - deferred tax (assets)/liabilities
related to intangible assets - (5)
1,567 1,434
It is the Group's 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, the
Group has regard to the supervisory requirements of the PRA.
Note 36 Events after the reporting period
On 7 March 2020, the Group acquired the trade and assets of Best
Food Logistics (trading name of BFS Group Ltd), which will be
accounted for as a business combination. The cash consideration
value will be finalised when the completion accounts are agreed,
but is likely to be negative. Best Food Logistics provides a food
supply chain and logistics services to a number of national fast
food and casual dining clients, including Pret-a-Manger, KFC,
Burger King and others. Best Food Logistics employs c.1,500 staff
and operates out of three main distribution centres. The initial
accounting for the transaction is not yet complete and so it is not
possible to include any further disclosures.
On 9 March 2020, the Group announced the proposed sale of Tesco
Thailand and Tesco Malaysia to a combination of CP Group entities
for net cash proceeds of $10.3 billion (equivalent to GBP8.0
billion) before tax and other transaction costs. The transaction is
subject to shareholder and customary regulatory approvals and is
expected to complete during the second half of calendar year 2020.
Following completion of the disposal, the Board intends to return
c.GBP5.0 billion to shareholders via a special dividend with
associated share consolidation, and reduce indebtedness through a
GBP2.5 billion pension contribution that is expected to
significantly reduce the prospect of having to make further pension
deficit contributions in the future. Refer to Note 1.
Impact of coronavirus (COVID-19)
The Group's operational response to COVID-19 is set out on pages
1 to 2.
Refer to Note 1 for details of the Group's judgement that the
extent of Government interventions in response to the COVID-19
pandemic only became apparent after the balance sheet date and
represent a non-adjusting post balance sheet event. Given these
events are of such significance, further explanation of the impact
of increased volatility of assumptions on sensitivities presented
in the financial statements are given below.
Impairment of non-current assets
Refer to Notes 1 and 15 for details of the Group's impairment
methodology, impairment losses and reversals, net carrying value of
non-current assets, and key assumptions and sensitivity analysis.
As at 29 February 2020, indicators observable at the balance sheet
date have been factored in to the Group's impairment testing of
goodwill and fixed assets, including a COVID-19 risk adjustment to
discount rates to reflect the impact of increased volatility in
forecast cash flows.
Subsequent to the balance sheet date, the Group has incurred
significant additional costs in meeting customer demand and
protecting the health and safety of customers and colleagues. In
particular, payroll costs will be higher than normal as additional
colleagues have been recruited both to meet demand and cover the
work of those colleagues who are absent and being paid. The Group
has also simplified ranges, and Booker's wholesale business has
seen a significant shift in balance from catering to retail sales.
The Group's businesses in Central Europe and Asia have incurred
similar cost increases and also expect to generate a lower level of
mall income as the vast majority of tenants in malls have not been
able to remain open. The UK Government's emergency policy changes
(most notably the 12-month business rates holiday) will be an
important offsetting benefit.
The Group has carried out further sensitivity analysis for its
portfolio of store cash-generating units, in addition to the
sensitivity analysis detailed in Note 15. Whilst the full financial
impact of the crisis for 2020/21 is impossible to predict with a
high degree of certainty, if customer behaviour were to return to
normal by August it is likely that the additional cost headwinds
incurred in our retail operations would be largely offset by the
benefits of food volume increases, twelve months' business rates
relief in the UK and prudent operations management, and so. The
Group has therefore assessed that the overall impact of the above
changes to cash flows would not cause a material impact on the
Group's non-current asset impairment provision. An increase of
2.0%pts in post-tax discount rates for each geographic region, and
a decrease in property fair values of 10%pts would increase the
Group's non-current asset impairment provision by GBP971m and
GBP209m respectively. These additional sensitivities would not
indicate impairment in any group of cash-generating units to which
goodwill has been allocated.
Tesco Bank expected credit loss calculations
Refer to Note 25 for details of the Group's expected credit loss
calculations and sensitivity analysis. As at the balance sheet
date, a five-scenario economic model is used, including a downside
scenario representing a more severe recession incorporating the
increased risk of an adverse impact on the economy given COVID-19
developments as at the balance sheet date. This scenario has been
assigned a weighting of 5% and incorporates a higher unemployment
rate and lower GDP than the base case.
Subsequent to the balance sheet date, the Group has sourced four
updated economic forecasts reflecting current economic
developments. The base scenario on which the Group has placed most
reliance assumes a delayed 'V' shaped recovery in the third quarter
of 2020 and is in line with Bank of England (BoE) guidance that
there will be significant economic disruption while social
distancing measures are in place, followed by an expected sharp
recovery when these are lifted. The expected credit loss
sensitivity to this base scenario is shown below, and excludes the
estimated mitigating impact of any support the Group offers to
customers who are experiencing financial difficulty as a result of
the pandemic, and the effectiveness of this at reducing customer
defaults.
COVID-19
base scenario
impact on
ECL allowance
GDP (5 years average) +1.2%
GDP (Q2 2020) -12.0%
Unemployment (5 years average) 4.8%
Unemployment peak (Q3 2020) 6.2%
Base rate (5 years average) 0.1%
Increase in ECL - 100% weighted GBP116m
The sensitivity of ECLs to increases in unemployment between the
balance sheet date and 31 December 2020 is approximately GBP60m for
each 1% increase in unemployment.
Pension deficit
Review of the key financial assumptions relating to the Group's
pension schemes subsequent to the year end indicate movements that
fall within the range of sensitivities described in Note 29. It is
too early to assess the impact of COVID-19 upon the Group's
long-term life expectancy assumptions. The fair value of plan
assets is expected to be volatile in the short term due to
uncertain market conditions.
Financial risks
The interest rate, inflation rate and foreign exchange rate
sensitivity assumptions in Note 25 have been reviewed in light of
the latest market data. For all three assumptions, the
sensitivities shown (1%, 25 basis points and 10% respectively)
remain valid in the current economic environment. In reaching this
conclusion, the Group has analysed both past and forward looking
market data as well as movements in the relevant forward curves
since the balance sheet date. Furthermore, interest rates are at an
all-time low, the Group's fixed/floating mix policy is unchanged,
inflation rates are also already low, and material foreign exchange
risk exposure is largely hedged.
Deferred tax asset recognition
Deferred tax assets can only be recognised to the extent it is
probable there will be future taxable profits. Subsequent to the
balance sheet date, the Group has reviewed the current impact of
COVID-19 on those future taxable profits and concluded that
deferred tax assets can continue to be recognised in full.
Note 37 Changes in accounting policies - IFRS 16 'Leases'
This note explains the impact of the adoption of IFRS 16
'Leases' on the Group's financial position and financial
performance.
IFRS 16 is effective for the accounting period commencing 24
February 2019. The Group adopted the standard retrospectively, with
comparatives restated from a transition date of 25 February
2018.
IFRS 16 requires lessees to recognise right of use assets and
lease liabilities on balance sheet for all leases, except
short-term and low value asset leases. At commencement of the
lease, the lease liability equals the present value of future lease
payments, and the right of use asset equals the lease liability,
adjusted for payments already made, lease incentives, initial
direct costs and any provision for dilapidation costs.
For pre-IFRS 16 operating leases, the rental charge is replaced
by depreciation of the right of use asset and interest on the lease
liability.
IFRS 16 therefore results in an increase to operating profit,
which is reported prior to interest being deducted. Depreciation is
charged on a straight-line basis, however, interest is charged on
outstanding lease liabilities and therefore reduces over the life
of the lease. As a result, the impact on the Group income statement
below operating profit is highly dependent on average lease
maturity. For an immature portfolio, depreciation and interest are
higher than the rental charge they replace and therefore IFRS 16 is
dilutive to EPS. For a mature portfolio, they are lower and
therefore IFRS 16 is accretive. The Group's lease portfolio on
transition is relatively immature, being approximately one-third
through an average total lease term of 26 years.
Under IFRS 16, the lease liability is remeasured upon the
occurrence of certain events, such as a change in lease term or a
change in future lease payments resulting from a change in an index
or rate (for example, inflation-linked payments or market rate rent
reviews). A corresponding adjustment is made to the right of use
asset. Over three-quarters of the Group's lease liability on
transition is subject to inflation-linked rental uplifts. The Group
no longer recognises property provisions for onerous lease
contracts as the lease payments are included within the lease
liability.
The Group applied the practical expedient not to reassess
whether a contract is, or contains, a lease on transition. The
Group has elected to recognise payments for short-term leases and
leases of low value assets on a straight-line basis as an expense
in the Group income statement.
IFRS 16 has not had a significant impact on the Group's existing
finance leases or on leases in which the Group is a lessor.
The most significant IFRS 16 judgements and estimates include
the determination of lease term when there are extension or
termination options, the selection of an appropriate discount rate
to calculate the lease liability and the impairment of right of use
assets. See Note 1 for further information.
The Group's lease portfolio consists of retail, distribution and
office properties and other assets such as motor vehicles.
IFRS 16 has a significant impact on reported assets, liabilities
and the income statement of the Group, as well as the
classification of cash flows relating to lease contracts. The
standard impacts a number of key measures such as operating profit
and cash generated from operations, as well as a number of
alternative performance measures used by the Group. Further details
on the impact of IFRS 16 can be found in the Group's 'Introducing
IFRS 16' analyst and investor briefing held on 15 February 2019 and
available on www.tescoplc.com/investor s/reports-
results-and-presentations.
Group balance sheet restatement
The table on the following page sets out the impact of IFRS 16
on the transition balance sheet at 25 February 2018 and on the
comparative period Group balance sheet as at 23 February 2019 and
related debt measures. Right of use assets (net of any impairments)
and lease liabilities are presented separately on the face of the
Group balance sheet. Net debt, which includes lease liabilities,
increases. Total indebtedness also increases as the IFRS 16 lease
liability exceeds the discounted operating lease commitments
previously included. Provisions decrease as onerous lease
provisions are replaced by impairments of the right of use assets.
Trade and other payables reduce as accruals for straight line
rental expense on leases with fixed rent increases are eliminated.
Trade and other receivables also reduce as lease prepayments are
eliminated. A deferred tax asset is recognised on the transition
adjustment.
Group balance sheet restatement continued
23 February 2019 25 February 2018
IFRS
IFRS 16
Reported 16 impact Restated Reported impact Restated
GBPm GBPm GBPm GBPm GBPm GBPm
Non-current assets
Goodwill and other intangible
assets 6,264 - 6,264 2,661 - 2,661
Property, plant and equipment 19,023 163 19,186 18,521 191 18,712
Right of use assets - 7,713 7,713 - 7,527 7,527
Investment property 36 - 36 100 - 100
Investments in joint ventures
and
associates (a) 704 (102) 602 689 (92) 597
Financial assets at fair value
through other comprehensive
income 979 - 979 860 - 860
Trade and other receivables 195 48 243 186 31 217
Loans and advances to
customers
and banks 7,868 - 7,868 6,885 - 6,885
Derivative financial
instruments 1,178 - 1,178 1,117 - 1,117
Deferred tax assets 132 119 251 116 285 401
36,379 7,941 44,320 31,135 7,942 39,077
Current assets
Financial assets at fair value
through other comprehensive
income 67 - 67 68 - 68
Inventories 2,617 - 2,617 2,264 - 2,264
Trade and other receivables 1,640 (90) 1,550 1,504 (89) 1,415
Loans and advances to
customers
and banks 4,882 - 4,882 4,637 - 4,637
Derivative financial
instruments 52 - 52 27 - 27
Current tax assets 6 - 6 12 - 12
Short-term investments 390 - 390 1,029 - 1,029
Cash and cash equivalents 2,916 - 2,916 4,059 - 4,059
12,570 (90) 12,480 13,600 (89) 13,511
Assets classified as held for
sale 98 - 98 149 - 149
12,668 (90) 12,578 13,749 (89) 13,660
Current liabilities
Trade and other payables (9,354) 223 (9,131) (8,994) 221 (8,773)
Borrowings (1,599) 36 (1,563) (1,479) 12 (1,467)
Lease liabilities - (646) (646) - (712) (712)
Derivative financial
instruments (250) - (250) (69) - (69)
Customer deposits and deposits
from banks (8,832) - (8,832) (7,812) - (7,812)
Current tax liabilities (325) - (325) (335) - (335)
Provisions (320) 94 (226) (544) 128 (416)
(20,680) (293) (20,973) (19,233) (351) (19,584)
Net current liabilities (8,012) (383) (8,395) (5,484) (440) (5,924)
Non-current liabilities
Trade and other payables (384) 19 (365) (364) - (364)
Borrowings (5,673) 93 (5,580) (7,142) 110 (7,032)
Lease liabilities - (9,859) (9,859) - (9,560) (9,560)
Derivative financial
instruments (389) - (389) (594) - (594)
Customer deposits and deposits
from banks (3,296) - (3,296) (2,972) - (2,972)
Post-employment benefit
obligations (2,808) - (2,808) (3,282) - (3,282)
Deferred tax liabilities (236) 187 (49) (96) 14 (82)
Provisions (747) 600 (147) (721) 592 (129)
(13,533) (8,960) (22,493) (15,171) (8,844) (24,015)
Net assets 14,834 (1,402) 13,432 10,480 (1,342) 9,138
Equity
Share capital 490 - 490 410 - 410
Share premium 5,165 - 5,165 5,107 - 5,107
All other reserves 3,798 (28) 3,770 735 (18) 717
Retained earnings 5,405 (1,374) 4,031 4,250 (1,324) 2,926
Equity attributable to the
owners
of the parent 14,858 (1,402) 13,456 10,502 (1,342) 9,160
Non-controlling interests (24) - (24) (22) - (22)
Total equity 14,834 (1,402) 13,432 10,480 (1,342) 9,138
APMs
Net debt (b) (2,863) (10,341) (13,204) (2,625) (10,114) (12,739)
Total indebtedness (c) (12,200) (3,342) (15,542) (12,284) (3,183) (15,467)
(a) The estimated impact of adopting IFRS 16 on the Group's Gain
Land Limited associate has been updated to reflect new, more
detailed, information received.
(b) Net debt comprises bank and other borrowings, lease
liabilities, net derivative financial instruments, joint venture
loans and other receivables/payables, offset by cash and cash
equivalents and short-term investments. It excludes the net debt of
Tesco Bank, which has lease liabilities of GBP36m as at 25 February
2018, and GBP35m as at 23 February 2019.
(c) Total indebtedness pre-IFRS 16 comprises Net debt plus the
IAS 19 deficit in the pension schemes (net of associated deferred
tax) plus the present value of future minimum lease payments under
non-cancellable operating leases. Post-IFRS 16, lease liabilities
are included in Net debt, replacing the present value of future
minimum lease payments under non-cancellable operating leases.
Group income statement restatement
The table below sets out the impact of IFRS 16 on the
comparative period Group income statement for the 52 weeks ended 23
February 2019 and related APMs. Cost of sales and administrative
expenses reduce and finance costs increase as straight line
operating lease rental expense is replaced by depreciation of the
right of use asset and interest on the lease liability. This
results in higher gross profit, operating profit and operating
margin. As the interest expense is front-end loaded and decreases
as the lease liability decreases, profit before tax is lower in the
early stages of a lease and higher in the later stages when
compared to a straight-line rental expense.
52 weeks ended IFRS 16 52 weeks ended
23 February 2019 Impact 23 February 2019
(reported)(*) (restated)
Before Before Before
exceptional Exceptional exceptional Exceptional exceptional Exceptional
items items items items items items
and and and and and and
amortisation amortisation amortisation amortisation amortisation amortisation
of acquired of acquired of acquired of acquired of acquired of acquired
intangibles intangibles Total intangibles intangibles Total intangibles intangibles Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Continuing
operations
Revenue 63,911 - 63,911 - - - 63,911 - 63,911
Cost of sales (59,719) 15 (59,704) 394 95 489 (59,325) 110 (59,215)
Gross profit/(loss) 4,192 15 4,207 394 95 489 4,586 110 4,696
Administrative expenses (1,986) (68) (2,054) 7 - 7 (1,979) (68) (2,047)
Operating
profit/(loss) 2,206 (53) 2,153 401 95 496 2,607 42 2,649
Share of post-tax
profits/(losses)
of 24 11 35 (3) - (3) 21 11 32
joint ventures and
associates
Finance income 22 - 22 3 - 3 25 - 25
Finance costs (536) - (536) (553) - (553) (1,089) - (1,089)
Profit/(loss) before
tax 1,716 (42) 1,674 (152) 95 (57) 1,564 53 1,617
Taxation (413) 59 (354) 16 (9) 7 (397) 50 (347)
Profit/(loss) for
the year 1,303 17 1,320 (136) 86 (50) 1,167 103 1,270
Earnings/(losses)
per share from
continuing
and discontinued
operations
Basic 13.65p (0.52)p 13.13p
Diluted 13.55p (0.51)p 13.04p
Earnings/(losses)
per share from
continuing
operations
Basic 13.65p (0.52)p 13.13p
Diluted 13.55p (0.51)p 13.04p
APMs
Operating margin 3.5% 0.6% 4.1%
Diluted EPS before
exceptional and
other items 15.40p (1.39)p 14.01p
* Reclassified for the change in presentation of
profits/(losses) arising on property-related items as explained in
Note 1.
Group cash flow statement restatement
The table below sets out the impact of IFRS 16 on the
comparative period cash flow statement for the 52 weeks ended 23
February 2019 and related APMs. IFRS 16 has no impact on total cash
flow for the year or cash and cash equivalents at the end of the
year. Cash generated from operations and free cash flow measures
increase as operating lease rental expenses are no longer
recognised as operating cash outflows. Cash outflows are instead
split between interest paid and repayments of obligations under
leases, which both increase.
Tesco
Retail Bank Tesco Group
IFRS Tesco IFRS Tesco Tesco IFRS Tesco
Retail 16 Retail Bank 16 Bank Group 16 Group
52 weeks ended 23 (reported) impact (restated) (reported) impact (restated) (reported) impact (restated)
February 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating
profit/(loss)
of continuing
operations 1,986 494 2,480 167 2 169 2,153 496 2,649
Depreciation and
amortisation 1,292 673 1,965 83 2 85 1,375 675 2,050
ATM net income (34) - (34) 34 - 34 - - -
(Profit)/loss
arising
on sale of
property,
plant and
equipment,
investment
property,
intangible assets
and assets held for
sale and early
termination
of leases (99) (24) (123) (8) - (8) (107) (24) (131)
(Profit)/loss
arising
on sale of
financial
assets (8) - (8) - - - (8) - (8)
Net impairment
loss/(reversal)
on property, plant
and equipment,
right
of use assets,
intangible
assets and
investment
property (58) (56) (114) - - - (58) (56) (114)
Adjustment for
non-cash
element of pensions
charge 45 - 45 - - - 45 - 45
Other defined
benefit
pension scheme
payments (266) - (266) - - - (266) - (266)
Share-based payments 82 - 82 (5) - (5) 77 - 77
Tesco Bank fair
value
movements included
in operating
profit/(loss) - - - 127 - 127 127 - 127
Cash flows generated
from operations
excluding
working capital 2,940 1,087 4,027 398 4 402 3,338 1,091 4,429
(Increase)/decrease
in working capital (438) 48 (390) (258) - (258) (696) 48 (648)
Cash generated
from/(used
in) operations 2,502 1,135 3,637 140 4 144 2,642 1,139 3,781
Interest paid (301) (550) (851) (5) (3) (8) (306) (553) (859)
Corporation tax paid (302) - (302) (68) - (68) (370) - (370)
Net cash generated
from/(used in)
operating
activities 1,899 585 2,484 67 1 68 1,966 586 2,552
Proceeds from the
sale of property,
plant and
equipment,
investment
property,
intangible assets
and assets
classified
as held for sale 285 - 285 1 - 1 286 - 286
Purchase of
property,
plant and equipment
and investment
property
- store buybacks (136) - (136) - - - (136) - (136)
Purchase of
property,
plant and equipment
and investment
property
- other capital
expenditure (962) - (962) (3) - (3) (965) - (965)
Purchase of
intangible
assets (164) - (164) (27) - (27) (191) - (191)
Disposal of
subsidiaries,
net of cash
disposed 8 - 8 - - - 8 - 8
Acquisition of
subsidiaries,
net of cash
acquired (715) - (715) - - - (715) - (715)
Net
(increase)/decrease
in loans to joint
ventures and
associates - - - 5 - 5 5 - 5
Investments in joint
ventures and
associates (11) - (11) - - - (11) - (11)
Net (investments
in)/proceeds from
sale of short-term
investments 639 - 639 - - - 639 - 639
Net (investments
in)/proceeds from
sale of financial
assets at fair
value
through other
comprehensive
income 2 - 2 (124) - (124) (122) - (122)
Dividends received
from joint ventures
and associates 31 - 31 10 - 10 41 - 41
Dividends received
from Tesco Bank 50 - 50 (50) - (50) - - -
Interest received 18 3 21 - - - 18 3 21
Net cash generated
from/(used in)
investing
activities (955) 3 (952) (188) - (188) (1,143) 3 (1,140)
Cash flow statement restatement continued
Retail Tesco Bank Tesco Group
IFRS Tesco IFRS Tesco Tesco IFRS Tesco
Retail 16 Retail Bank 16 Bank Group 16 Group
52 weeks ended 23 (reported) impact (restated) (reported) impact (restated) (reported) impact (restated)
February 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Proceeds from issue
of ordinary share
capital 60 - 60 - - - 60 - 60
Own shares purchased (206) - (206) - - - (206) - (206)
Repayment of
obligations
under leases (17) (588) (605) - (1) (1) (17) (589) (606)
Add: Cash outflow
from major
acquisition 747 - 747 - - - 747 - 747
Less: Net
increase/(decrease)
in loans to joint
ventures and
associates - - - (5) - (5) (5) - (5)
Less: Net
investments
in/(proceeds from
sale of) short-term
investments (639) - (639) - - - (639) - (639)
APM: Free cash flow
* 889 - 889 (126) - (126) 763 - 763
Increase in borrowings 704 - 704 271 - 271 975 - 975
Repayment of
borrowings (2,046) - (2,046) (425) - (425) (2,471) - (2,471)
Net cash flows from
derivative financial
instruments 35 - 35 - - - 35 - 35
Dividends paid to
equity owners (357) - (357) - - - (357) - (357)
Net cash generated
from/(used in)
financing
activities (1,827) (588) (2,415) (154) (1) (155) (1,981) (589) (2,570)
Intra-Group funding
and intercompany
transactions (14) - (14) 14 - 14 - - -
Net
increase/(decrease)
in cash and cash
equivalents (897) - (897) (261) - (261) (1,158) - (1,158)
Cash and cash
equivalents
at the beginning
of the year 2,755 - 2,755 1,304 - 1,304 4,059 - 4,059
Effect of foreign
exchange rate changes 15 - 15 - - - 15 - 15
Cash and cash
equivalents
at the end of the
year 1,873 - 1,873 1,043 - 1,043 2,916 - 2,916
* Free cash flow has been redefined to include 'Repayments of
obligations under leases' due to IFRS 16. This results in a minor
adjustment of GBP17m, restating reported Retail free cash flow of
GBP906m to GBP889m. There is no overall impact to cash and cash
equivalents at the end of the period.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EASLPEDAEEEA
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