REG - Tesco Personal FinTesco PLC - Final Results <Origin Href="QuoteRef">TSCO.L</Origin> - Part 8
12/04/2017 07:06
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Granted 539,072 190.00 - - - -
Forfeited (579,345) 172.66 (26,595) 338.40 (15,809) 338.40
Exercised (22,259) 150.18 - - - -
Outstanding at 28 February 2017 3,522,224 162.20 183,586 341.79 221,617 354.32
Exercisable at 28 February 2017 64,114 335.50 183,586 341.79 221,617 354.32
Exercise price range (pence) - 322.00 to 364.00 - 338.40 to 427.00 - 338.40 to 427.00
Weighted average remaining contractual life (years) - 0.43 - 2.64 - 2.02
Outstanding at 28 February 2015 3,317,686 171.27 245,641 340.93 281,109 350.95
Granted 1,082,533 151.00 - - - -
Forfeited (802,850) 196.26 (35,460) 338.40 (43,683) 338.40
Exercised (12,613) 150.00 - - - -
Outstanding at 29 February 2016 3,584,756 159.63 210,181 341.36 237,426 353.26
Exercisable at 29 February 2016 49,961 297.58 210,181 341.36 237,426 353.26
Exercise price range (pence) - 228.00 to 386.00 - 338.40 to 427.00 - 338.40 to 427.00
Weighted average remaining contractual life (years) - 0.42 - 3.64 - 3.03
105
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
41. Share Based Payments (continued)
Share options were exercised on a regular basis throughout the financial year. The average Tesco PLC share price during the
year ended 28 February 2017 was 184.31p (2016: 196.55p).
The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The
following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has
been made to incorporate the effects of expected early exercise.
Group 2017 2016
Savings - related share options schemes Savings - related share options schemes
Expected Dividend Yield (%) 1.4% 1.3%
Expected Volatility (%) 29 - 32% 25 - 26%
Risk free interest rate (%) 0.4 - 0.7% 0.9 - 1.3%
Expected life of option (years) 3 or 5 3 or 5
Weighted average fair value of options granted (pence) 52.83 52.58
Probability of forfeiture (%) 10 - 11% 9 - 11%
Share price (pence) 211.00 188.50
Weighted average exercise price (pence) 190.00 151.00
Volatility is a measure of the amount by which a price is expected to fluctuate in the period. The measure of volatility
used in Tesco PLC'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 Tesco PLC's share price, the Tesco PLC
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 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). Awards made under this plan 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.
Eligible UK colleagues are able to participate in Shares In Success, an all-employee profit-sharing scheme. Until May
2015, shares were awarded as a percentage of earnings, up to a statutory maximum permitted under the Share Incentive Plan
at the time of the award. Shares awarded through Shares In Success are held in trust on behalf of employees for a period
of at least three years.
The fair value of shares awarded under these schemes is their market value on the date of the award. Expected dividends are
not incorporated into the fair value.
106
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
41. Share Based Payments (continued)
The number of Tesco PLC shares and weighted average fair value (WAFV) of share bonuses awarded during the year were:
2017 2017 2016 2016
Shares (number) WAFV(pence) Shares (number) WAFV(pence)
Shares in Success - - 510,353 221.79
Group Bonus Plan 2,407,464 159.04 2,082,359 215.65
Performance Share Plan 3,404,300 160.15 3,138,823 216.35
107
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Adoption of New and Amended International Financial Reporting Standards
Standards, amendments and interpretations which became effective in the current year
During the year to 28 February 2017, the Group has adopted the following new accounting standards and amendments to
standards which became effective with relevant EU endorsement for annual periods beginning on or after 1 January 2016:
Annual Improvements
The Annual Improvements process covers minor amendments to IFRSs that the IASB considers non-urgent but necessary.
The Annual Improvements 2012-2014 process resulted in several minor changes to standards which are effective for annual
periods beginning on or after 1 January 2016. There has been no impact on the Group of the adoption of these amendments.
Amendment to IFRS 11 'Joint arrangements: Acquisition of an interest in a joint operation'
This amendment is effective for annual periods beginning on or after 1 January 2016. It provides new guidance on how to
account for the acquisition of an interest in a joint venture. The impact of this amendment on the Group is dependent on
any future acquisitions.
Amendments to IAS 16 and IAS 38 'Property, plant and equipment and intangible assets: Clarification of acceptable methods
of depreciation and amortisation'
These amendments are effective for annual periods beginning on or after 1 January 2016. They clarify that the use of
revenue based methods to calculate depreciation and amortisation of assets is not appropriate. There has been no impact on
the Group of the adoption of these amendments.
Amendment to IAS 27 'Equity method in separate financial statements'
This amendment is effective for annual periods beginning on or after 1 January 2016. It allows entities to use the equity
method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.
There has been no impact on the Group of the adoption of this amendment.
Amendments to IFRS 10, IFRS 12 and IAS 28 'Investment entities: Applying the consolidation exception'
These amendments are effective for annual periods beginning on or after 1 January 2016. They clarify the accounting for
interests in investment entities and application of the investment entity consolidation exemption. There has been no impact
on the Group of the adoption of these amendments.
Amendment to IAS 1 'Presentation of financial statements: Disclosure initiative'
This amendment is effective for annual periods beginning on or after 1 January 2016. It clarifies the application of
materiality and other requirements for disclosure within the financial statements. There has been no impact on the Group of
the adoption of this amendment.
Standards, amendments and interpretations issued but not yet effective
Annual Improvements
The Annual Improvements 2014-2016 process resulted in several minor changes to standards which are effective for annual
periods beginning on or after 1 January 2017. These amendments are not expected to impact the Group.
108
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Adoption of New and Amended International Financial Reporting Standards (continued)
Amendments to IFRS 10, and IAS 28 'Consolidated financial statements and associates and joint ventures: Sale or
contribution of assets'
These amendments will be effective from a date to be determined by the IASB. They address an inconsistency in current
requirements in dealing with the sale or contribution of assets between an investor and its associate or joint venture.
These amendments are not expected to have any impact based on the current Group structure.
Amendments to IAS 7 'Statement of cash flows: Disclosure initiative'
These amendments are effective for annual periods beginning on or after 1 January 2017, subject to EU endorsement. They
extend the disclosures required by IAS 7 about an entity's liquidity and aim to improve disclosures about an entity's debt.
These amendments will result in additional disclosures relating to movements in liabilities arising from financing
activities for the Group for the year ended 28 February 2018 onwards.
Amendment to IAS 12 'Income taxes: Recognition of deferred tax assets for unrealised losses'
This amendment is effective for annual periods beginning on or after 1 January 2017, subject to EU endorsement. It
clarifies the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. This
amendment is not expected to impact the Group.
Amendments to IFRS 2 'Classification and measurement of share-based payment transactions'
These amendments are effective for annual periods beginning on or after 1 January 2018, subject to EU endorsement. They
clarify how to account for certain types of share-based payment transactions. These amendments are not expected to impact
the Group.
Amendments to IFRS 4 'Applying IFRS 9, 'Financial Instruments', with IFRS 4, 'Insurance Contracts''
These amendments are effective for annual periods beginning on or after 1 January 2018, subject to EU endorsement. They
permit certain transitional arrangements to insurance entities to address the temporary accounting consequences of the
different effective dates of IFRS 9, 'Financial Instruments', and IFRS 4, 'Insurance Contracts'. These amendments are
expected to impact the Group's share of profit from its joint venture, TU, which provides the insurance underwriting
service for a number of the Group's general insurance products.
IFRS 15 'Revenue from contracts with customers'
IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted.
IFRS 15 introduces a five step approach to revenue recognition and will be applicable to all contracts with customers, with
certain exceptions. Both the Group's interest income and fee income integral to financial instruments fall outside the
scope of IFRS 15 and will continue to be accounted for in line with the other applicable standards, predominantly IAS 39,
'Financial instruments: Recognition and measurement' (to be replaced by IFRS 9, 'Financial Instruments' (refer below)).
All other fees and commissions income falls within the scope of IFRS 15.
Under IFRS 15, the Group will need to recognise revenue when performance obligations are satisfied, to the extent that the
Group expects entitlement to consideration. The standard also specifies a comprehensive set of disclosure requirements
regarding the nature, extent and timing as well as any uncertainty of revenue and corresponding cash flows with customers.
The Group continues to evaluate the full impact of IFRS 15, but expects that revenue recognition will be largely unchanged
on application of the new standard.
109
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Adoption of New and Amended International Financial Reporting Standards (continued)
Amendments to IFRS 15 'Clarifications to IFRS 15, 'Revenue from Contracts with Customers''
These amendments are effective for annual periods beginning on or after 1 January 2018, subject to EU endorsement. They
clarify how the principles of IFRS 15 should be applied in determining recognition of contract revenue and provide
transitional relief on modified and completed contracts for entities implementing the standard.
The Group continues to evaluate the full impact of IFRS 15, including these amendments, but expects that revenue
recognition will be largely unchanged on application of the new standard.
IFRS 16 'Leases'
IFRS 16 is effective for annual periods beginning on or after 1 January 2019, subject to endorsement by the EU. Early
adoption is permitted provided IFRS 15 is applied on the same date.
IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model.
The Group, as a lessee, will be required to recognise lease liabilities and corresponding right-of-use assets for all
applicable leases. The new standard also provides the option not to recognise 'short-term' leases and leases of
'low-value' assets. Where this exemption is taken, such leases will continue to be expensed to the income statement over
the term of the lease.
The income statement recognition pattern for the Group's leases will differ from the current pattern for operating leases,
with interest on the liabilities and depreciation expense on the right-of-use assets recognised separately. In the cash
flow statement, lease payments will be categorised within financing activities rather than operating activities.
IFRS 16 does not significantly change the accounting for leases by lessors.
The Group continues to evaluate the full impact of IFRS 16, but expects to recognise right-of-use assets on its balance
sheet at the adoption date in respect of property assets currently accounted for as operating leases. A corresponding
lease liability will also be recognised, representing the future payments to be made under these leases, discounted at the
rate implicitly defined in the lease or, where no rate is defined in the lease, the Group's weighted average cost of
capital. Amounts recognised will be determined by the Group's internal rate of borrowing on the adoption date.
IFRS 9 'Financial instruments'
IFRS 9 is effective for annual periods beginning on or after 1 January 2018. It is a replacement for IAS 39 'Financial
instruments: Recognition and measurement', excluding the part of IAS 39 related to macro hedge accounting. Macro hedge
accounting requirements are out of the scope of IFRS 9 and instead the IASB is developing a separate model. Entities are
therefore permitted to continue accounting for macro hedge portfolios in line with IAS 39.
The principle features of IFRS 9 are as follows:
Classification and measurement of financial assets and financial liabilities:
IFRS 9 will require the Group's financial assets to be classified as either held at amortised cost, fair value through
other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow
characteristics of the financial asset. The Group carried out a review of its balance sheet as at 29 February 2016 to
assess potential changes due to the introduction of the classification and measurement model prescribed by IFRS 9. While
this may not be fully representative of the impact as at 1 March 2018, due to requirements to perform the review based on
the facts and circumstances from the date of transition, the Group broadly expects the following classification changes to
take place:
· Loans and advances to customers that are classified as loans and receivables under IAS 39 will be measured at
amortised cost under IFRS 9; and
· Debt securities classified as available-for-sale will primarily be measured at FVOCI.
No measurement basis changes are anticipated as a result of the adoption of IFRS 9.
110
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Adoption of New and Amended International Financial Reporting Standards (continued)
Recognition of impairment:
IFRS 9 requires the Group to recognise expected credit losses (ECL) at all times, and to update the amount of ECL
recognised at each reporting date to reflect changes in the credit risk of financial instruments. The ECL is measured under
a three stage approach:
1. Upon origination of an asset, a loss allowance is established that is equal to the 12-month ECL, being the portion
of life-time expected losses resulting from default events that are possible within the next 12 months. Financial assets
where 12-month ECL is recognised are considered to be 'stage 1'.
2. Where a significant increase in credit risk since initial recognition is identified, a loss allowance equal to the
lifetime ECL is established. This is considered to be 'stage 2'.
3. Where there is objective evidence that leads to an asset being considered credit impaired, a full impairment loss
equal to the lifetime expected credit loss is established. This is considered to be 'stage 3' and it is not expected to
change from IAS 39.
The assessment of credit risk and the estimation of ECL are required to be unbiased, forward looking and
probability-weighted, determined by evaluating at the reporting date for each financial asset a range of possible outcomes
using reasonable and supportable information about past events, current conditions and forecasts of future events and
economic conditions. The estimation of ECL also takes into account the time value of money.
Hedging
The IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with financial
risk management. A new IFRS is under development to account for dynamic risk management. As permitted under IFRS 9, the
Group will elect to continue to apply the existing hedge accounting requirements of IAS 39 for its portfolio hedge
accounting until this new standard is implemented.
The Group has performed a review of its existing hedge relationships and it is expected that:
· Hedge relationships classified as cash flow hedges will transition to IFRS 9; and
· Hedge relationships classified as fair value hedges of the Group's existing AFS portfolio will transition to IFRS
9.
Transition
The classification and measurement and impairment requirements will be applied retrospectively by adjusting the opening
balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge accounting
relationships within the scope of IFRS 9 will transition prospectively. The mandatory application date for the standard as
a whole will be 1 March 2018.
IFRS 9 implementation program
The Group's IFRS 9 implementation programme (the Programme) was set up in 2015 to prepare for implementation of IFRS 9 and
significant preparatory and design work has taken place. The Programme is sponsored by the Chief Risk Officer (CRO) and
Chief Financial Officer (CFO). A steering committee comprising the CFO and CRO, and Senior Management from Risk, Finance,
Data and IT has been established and meets on a monthly basis to review the progress of the Programme. In line with all
significant change programmes within the Group, the Programme is managed according to the Group's business change
framework. Delivery of the required changes has been undertaken by individual work-streams. The Risk function is leading
the work to calculate impairments on the Group's retail financial assets while the Finance function is leading work on
classification and measurement, impairment calculations on non-retail financial assets, hedging assessment and the
development of financial reporting systems and processes.
111
TESCO PERSONAL FINANCE PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Adoption of New and Amended International Financial Reporting Standards (continued)
To date, the Programme has been focused on preliminary impact analysis, documenting the Group's accounting policy,
developing the operating and system target operating models and developing risk modelling methodologies for the calculation
of impairment. The Programme's focus has also been on the design and build of impairment models which have been developed
throughout the year ending 28 February 2017. The Group intends to perform a parallel run during 2017 to gain a better
understanding of the potential effect of the new standard.
The Group intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which
will be no later than in the Annual Report and Financial Statements for the year ended 28 February 2018. Until models have
been developed and sufficiently tested, the Group will not have a reliable understanding of the potential impact on its
Financial Statements and any consequential effects on regulatory capital requirements.
The Basel Committee on Banking Supervision has issued a Consultative Document (CD) on an interim approach and transitional
adjustments for the regulatory treatment of ECL accounting provisions under IFRS 9 and the current ECL model. The CD
highlights that accounting provisions under ECL models will be higher than under the current incurred loss models. The
document proposes amortisation of the capital impact of increased provisions under ECL models over three to five years from
the point of transition. The Group is considering the different approach proposed by the CD as part of its capital
planning.
Early Adoption of New Standards
The Group did not early adopt any new or amended standards in the year ended 28 February 2017.
43. Events after the reporting date
During the year, the Group's joint venture, TU, recognised additional insurance reserves following a revision to the Ogden
tables, which are used to calculate future losses in personal injury and fatal accident claims. As a result of the
recognition of these losses, TU has required a capital injection in order to maintain the required level of regulatory
capital.
The Board of Tesco Personal Finance Plc has approved a further injection of £15.5m to TU in exchange for ordinary shares in
TU, increasing the Group's investment in TU by an equivalent amount. The joint venture partner has correspondingly approved
an increase in its investment in TU's ordinary share capital.
112
TESCO PERSONAL FINANCE PLC
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF TESCO PERSONAL FINANCE PLC
We have audited the Financial Statements of Tesco Personal Finance plc for the year ended 28 February 2017, which comprise
the Consolidated Income Statement; the Consolidated Statement of Comprehensive Income; the Consolidated and Company
Statements of Financial Position; the Consolidated and Company Statements of Changes in Equity; the Consolidated and
Company Cash Flow Statements; and the related notes 1 to 43. The financial reporting framework that has been applied in
their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European
Union and, as regards the Company Financial Statements, as applied in accordance with the provisions of the Companies Act
2006.
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.
Respective responsibilities of directors and auditor
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. Our responsibility is to audit and
express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing
(UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for
Auditors.
Scope of the audit of the Financial Statements
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give
reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Company's
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of the Financial Statements. In addition, we read all the
financial and non-financial information in the annual report to identify material inconsistencies with the audited
Financial Statements and to identify any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications for our report.
Opinion on Financial Statements
In our opinion:
· the Financial Statements give a true and fair view of the state of the Group's and of the Company's affairs as at 28
February 2017 and of the Group's profit for the year then ended;
· the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European
Union;
· the Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European
Union and as applied in accordance with the provisions of the Companies Act 2006; 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.
113
TESCO PERSONAL FINANCE PLC
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF TESCO PERSONAL FINANCE PLC (continued)
Opinion on other matters prescribed by 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 Company and its environment obtained in the course of the audit, we
have not identified any material misstatements in the Strategic Report and the Directors' Report.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if,
in our opinion:
· adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been
received from branches not visited by us; or
· the Company Financial Statements are not in agreement with the accounting records and returns; or
· certain disclosures of directors' remuneration specified by law are not made; or
· we have not received all the information and explanations we require for our audit.
Stephen Williams ACA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Edinburgh, United Kingdom
10 April 2017
114
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