REG - Tesco PLC - Preliminary Results 2016/17 <Origin Href="QuoteRef">TSCO.L</Origin> - Part 3
12/04/2017 07:06
- Part 3: For the preceding part double click ID:nRSL2573Cb
Depreciation and amortisation 1,186 1,243 118 91 1,304 1,334
ATM net income (43) (38) 43 38 - -
(Profit)/loss arising on sale of property, plant and equipment and intangible assets (80) 165 2 (1) (78) 164
(Profit)/loss arising on sale of subsidiaries and other investments 7 - (4) - 3 -
(Profit)/loss arising on sale of joint ventures and associates (5) (1) - - (5) (1)
Impairment loss on goodwill 46 18 - - 46 18
Net impairment loss/(reversal) on other investments (12) (7) - - (12) (7)
Net impairment loss/(reversal) on loans/investments in joint ventures and associates - 1 - - - 1
Net impairment loss/(reversal) on property, plant and equipment, intangible assets and investment property (5) 182 - - (5) 182
Adjustment for non-cash element of pensions charge 7 (395) - - 7 (395)
Additional contribution into pension schemes (248) (223) - - (248) (223)
Share-based payments 14 273 1 10 15 283
Tesco Bank fair value movements included in operating profit - - 98 72 98 72
Cash flows generated from operations excluding working capital 1,690 2,231 335 371 2,025 2,602
(Increase)/decrease in working capital 588 350 (55) (518) 533 (168)
Cash generated from/(used in) operations 2,278 2,581 280 (147) 2,558 2,434
Interest received/(paid) (518) (422) (4) (4) (522) (426)
Corporation tax received/(paid) (64) 125 17 (7) (47) 118
Net cash generated from/(used in) operating activities 1,696 2,284 293 (158) 1,989 2,126
17
(7)
(47)
118
Net cash generated from/(used in) operating activities
1,696
2,284
293
(158)
1,989
2,126
* Tesco Bank operating profit as per Bank income statement excluding ATM net income segmental adjustment.
Retail Tesco Bank Tesco Group
2017£m 2016£m 2017£m 2016£m 2017£m 2016£m
Net cash generated from/(used in) operating activities 1,696 2,284 293 (158) 1,989 2,126
Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale (1,199) (858) (6) (13) (1,205) (871)
Purchase of intangible assets (129) (146) (40) (21) (169) (167)
Alternative performance measure: Free cash flow 368 1,280 247 (192) 615 1,088
Disposal of subsidiaries, net of cash disposed 205 3,237 - - 205 3,237
Acquisition of subsidiaries, net of cash acquired (25) (325) - - (25) (325)
Proceeds from sale of joint ventures and associates - 192 - - - 192
Proceeds from sale of property, plant and equipment, investment property, intangible assets and non-current assets classified as held for sale 509 350 3 - 512 350
Net (increase)/decrease in loans to joint ventures and associates 15 (1) - - 15 (1)
Investments in joint ventures and associates - (77) - - - (77)
Net (investments in)/proceeds from sale of short-term investments 736 (2,894) - - 736 (2,894)
Net (investments in)/proceeds from sale of other investments 111 17 30 (120) 141 (103)
Dividends received from joint ventures and associates 28 41 - - 28 41
Interest received/(paid) 41 3 - - 41 3
Net cash generated from/(used in) investing activities 292 (461) (13) (154) 279 (615)
Proceeds from issue of ordinary share capital 1 1 - - 1 1
Increase in borrowings 185 286 - 300 185 586
Repayment of borrowings (2,036) (1,328) - - (2,036) (1,328)
Net cash flows from derivative financial instruments 475 154 - - 475 154
Repayment of obligations under finance leases (12) (17) - - (12) (17)
Dividends paid to equity owners - - - - - -
Net cash generated from/(used in) financing activities (1,387) (904) - 300 (1,387) (604)
Intra-Group funding and intercompany transactions 45 50 (45) (50) - -
Net increase/(decrease) in cash and cash equivalents 646 969 235 (62) 881 907
Cash and cash equivalents at the beginning of the year 2,528 1,558 554 616 3,082 2,174
Effect of foreign exchange rate changes (131) 1 - - (131) 1
Cash and cash equivalents including cash held in disposal group at the end of the year 3,043 2,528 789 554 3,832 3,082
Cash held in disposal group (11) - - - (11) -
Cash and cash equivalents at the end of the year 3,032 2,528 789 554 3,821 3,082
Continuing operations Discontinued operations Retail
2017£m 2016£m 2017£m 2016£m 2017£m 2016£m
Operating profit/(loss) 940 911 (117) 102 823 1,013
Depreciation and amortisation 1,180 1,140 6 103 1,186 1,243
ATM net income (43) (38) - - (43) (38)
(Profit)/loss arising on sale of property, plant and equipment and intangible assets (84) 167 4 (2) (80) 165
(Profit)/loss arising on sale of subsidiaries and other investments 7 - - - 7 -
(Profit)/loss arising on sale of joint ventures and associates (5) (1) - - (5) (1)
Impairment loss on goodwill 46 18 - - 46 18
Net impairment loss/(reversal) on other investments (12) (7) - - (12) (7)
Net impairment loss/(reversal) on loans/investments in joint ventures and associates - 1 - - - 1
Net impairment loss/(reversal) on property, plant and equipment, intangible assets and investment property (106) 195 101 (13) (5) 182
Adjustment for non-cash element of pensions charge 6 (401) 1 6 7 (395)
Additional contribution into pension schemes (248) (223) - - (248) (223)
Share-based payments 14 271 - 2 14 273
Cash flow generated from operations excluding working capital 1,695 2,033 (5) 198 1,690 2,231
(Increase)/decrease in working capital 584 55 4 295 588 350
Cash generated from/(used in) operations 2,279 2,088 (1) 493 2,278 2,581
Interest received/(paid) (499) (379) (19) (43) (518) (422)
Corporation tax received/(paid) (64) 167 - (42) (64) 125
Net cash generated from/(used in) operating activities 1,716 1,876 (20) 408 1,696 2,284
Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale (1,193) (770) (6) (88) (1,199) (858)
Purchase of intangible assets (129) (145) - (1) (129) (146)
Alternative performance measure: Free cash flow 394 961 (26) 319 368 1,280
Included within net impairment loss/(reversal) of property, plant and equipment and intangible assets for discontinued
operations is £99m of impairment loss representing remeasurement to fair value less costs to sell of the Group's Turkish
operations. Refer to Note 7.
Note 3 Income and expenses
Continuing operations 2017£m 2016£m
Profit/(loss) before tax is stated after charging/(crediting) the following:
Property rental income, of which £38m (2016: £39m) relates to investment properties (358) (316)
Other rental income (50) (53)
Direct operating expenses arising on rental earning investment properties 20 20
Costs of inventories recognised as an expense 41,140 39,534
Inventory losses and provisions 1,337 1,252
Depreciation and amortisation 1,298 1,231
Operating lease expenses, of which £84m (2016: £102m) relates to hire of plant and machinery 1,043 1,142
Net impairment loss/(reversal) on property, plant and equipment and investment property (113) 26
Net impairment loss/(reversal) of goodwill, software and other intangible assets 53 187
Net impairment loss/(reversal) of investments in and loans to joint ventures and associates - 1
Note 4 Exceptional items
Income statement
52 weeks ended 25 February 2017
Profit/(loss) for the period included the following exceptional items:
Exceptional items included in: Cost of sales£m Administrative expenses£m Property- related items£m Total exceptional items included within operating profit£m Share of JV and associates profits/(losses)£m Finance costs£m Taxation£m Exceptional items within discontinued operations£m
Net restructuring and redundancy costs(a) (153) (26) (20) (199) - - 39 -
Net impairment (loss)/reversal of non-current assets and onerous lease provisions(b) 25 - (31) (6) (54) - 20 -
Provision for customer redress(c) (45) - - (45) - - - -
Interchange settlement(d) 57 - - 57 - - (11) -
Amounts provided in relation to DPA and FCA obligations(e) - (235) - (235) - - - -
Property transactions(f) - - 165 165 - - 50 -
Insurance reserve adjustment(g) - - - - (23) - - -
Foreign exchange losses on GBP short term investments held in overseas entities (h) - - - - - (244) - -
Exceptional items relating to discontinued operations(i) - - - - - - - (75)
Total (116) (261) 114 (263) (77) (244) 98 (75)
(a) This includes £164m relating to ongoing UK & ROI changes to the Group's distribution network and to store colleague
structures and working practices. It also includes £35m relating to Tesco Bank business simplification and head office
relocation cost.
(b) Net impairment (loss)/reversal of non-current assets includes a reversal of £103m in property, plant and equipment and
investment property, a net £(53)m loss in goodwill, software and other intangible assets and a net charge of £(56)m of
onerous lease provisions. Refer to Notes 10, 11 and 16 for further details on impairment. The £(54)m loss relates to the
Group's share of impairment in Gain Land Limited following a fair valuation exercise of its investment properties.
(c) Updated guidance from the Financial Conduct Authority (FCA) proposing an extension to the expected Payment Protection
Insurance (PPI) settlement deadline, inclusion of items that had previously been out of scope for settlement and higher
operational costs and claim rates than previously estimated, have resulted in a provision of £45m.
(d) This relates to settlement of a legal case in respect of interchange fees.
(e) The Group has taken a total exceptional charge of £235m in respect of the Deferred Prosecution Agreement (DPA) of
£129m, the expected costs of the compensation scheme of £85m, and related costs. This has been recorded in the financial
statements in the year to 25 February 2017 as an adjusting post balance sheet event. Refer to Notes 16 and 22 for further
details.
(f) As part of the Group's strategy to maximise value from property, the Group generated a profit on disposal of surplus
properties and development sites of £74m. In addition, two malls in Central Europe were disposed of, generating a profit of
£91m. There is a tax credit of £50m primarily due to a lower book value than tax value of assets disposed. Refer to item
(b) overleaf for cash proceeds.
(g) The Group's share of the results for the year of its joint venture, Tesco Underwriting, reflects an 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.
(h) The Group received £2.5bn of proceeds from the sale of the Korean operations in GBP money market funds in an
intermediate entity with a Euro functional currency. Over the year, this has generated a £244m loss which represents
foreign exchange losses arising on the revaluation of these sterling-denominated funds into Euros. The loss does not
represent an economic loss to the Group since there is an offset within other comprehensive income.
(i) On 10 June 2016, the Group announced the proposed sale of its Turkish operations. This charge includes: an impairment
of £(99)m following a remeasurement of the assets and liabilities of the Turkish operations to fair value less costs to
sell; £(3)m of costs to sell the Turkish operations and £27m of net adjustments on profits/(losses) of past disposals.
Refer to Note 7 for further details.
52 weeks ended 27 February 2016
Profit/(loss) for the period included the following exceptional items:
Exceptional items included in: Cost of sales£m Administrative expenses£m Property- related items£m Total exceptional items included within operating profit£m Finance costs£m Taxation£m Exceptional items within discontinued operations£m
Net impairment (loss)/reversal of non-current assets and onerous lease provisions (314) - (109) (423) - 73 15
Net restructuring and redundancy costs (75) (34) (17) (126) - 9 -
Property transactions - - 156 156 - (20) -
Past service credit and other associated costs 424 56 - 480 - (86) -
Foreign exchange losses on GBP balances held in overseas entities - - - - (220) - -
Release of overprovision of tax liabilities in prior years - - - - - 86 -
Loss on disposal of Korean operations - - - - - - (168)
Total 35 22 30 87 (220) 62 (153)
Cash flow statement
The table below shows the impact of exceptional items on the Group cash flow statement:
Cash flows from operating activities Cash flows from investing activities
2017£m 2016£m 2017£m 2016£m
Prior year restructuring costs and other exceptional costs including trading store redundancies(a) (54) (251) - -
Current year restructuring costs and other exceptional costs including trading store redundancies(a) (78) (63) - -
Utilisation of onerous lease provisions (113) (90) - -
Property transactions(b) 36 218 490 -
Provision for customer redress(c) (28) (34) - -
Legal settlement 57 - - -
Exceptional cash flows from discontinued operations 2 - - -
Defined benefit pension scheme closure cost - (58) - -
Property transactions - buy-back of property joint ventures, net of £15m cash acquired - - - (139)
Total (178) (278) 490 (139)
(a) Cash outflows on settlement of restructuring and redundancy costs.
(b) The proceeds from property transactions totalled £526m comprising £490m net proceeds from the sale of two malls in
Central Europe and other properties in the UK & ROI, and £36m for development sites in UK & ROI. Refer to item (f) on the
previous page.
(c) Settlement of claims for customer redress in Tesco Bank.
Note 5 Finance income and costs
Continuing operations 2017£m 2016£m
Finance income
Interest receivable and similar income 48 29
Financial instruments - fair value remeasurements 61 -
Total finance income 109 29
Finance costs
GBP MTNs and Loans (227) (176)
EUR MTNs (114) (122)
USD Bonds (93) (86)
Finance charges payable under finance leases and hire purchase contracts (8) (9)
Other interest payable (81) (97)
Capitalised interest (Note 11)* 6 6
Financial instruments - fair value remeasurements - (19)
Total finance costs before exceptional items and net pension finance costs (517) (503)
Net pension finance costs (Note 17) (113) (155)
Foreign exchange losses on GBP short-term investments held in overseas entities (Note 4) (244) (220)
Total finance costs (874) (878)
Net finance cost (765) (849)
* A deferred tax liability is recognised in respect of capitalised interest at the applicable rate in the country in which
the interest is capitalised.
Note 6 Taxation
Recognised in the Group income statement
Continuing operations 2017£m 2016£m
Current tax (credit)/charge
UK corporation tax 70 81
Release of UK provisions for uncertain tax positions - exceptional credit - (86)
Foreign tax 111 73
Adjustments in respect of prior years 19 (191)
200 (123)
Deferred tax (credit)/charge
Origination and reversal of temporary differences (43) (69)
Adjustments in respect of prior years* (36) 169
Change in tax rate (34) (31)
(113) 69
Total income tax (credit)/charge 87 (54)
* Prior year adjustments include a tax credit of £24m in relation to an impairment reversal classified as exceptional.
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 remeasured using the enacted tax rates
that are expected to apply when the liability is settled or the asset realised.
Reconciliation of effective tax charge
2017£m 2016£m
Profit/(loss) before tax 145 202
Tax credit/(charge) at 20% (2016: 20.1%) (29) (41)
Effect of:
Non-qualifying depreciation (33) (49)
Other non-deductible items(a) (82) (4)
Unrecognised tax losses (48) (103)
Release of provisions for uncertain tax positions - exceptional credit - 86
Property items taxed on a different basis to accounting entries(b) 77 114
Banking surcharge tax (17) (3)
Differences in overseas taxation rates 15 5
Adjustments in respect of prior years 17 22
Share of losses of joint ventures and associates (21) (4)
Change in tax rate 34 31
Total income tax credit/(charge) for the year (87) 54
Effective tax rate 60.0% (26.6%)
(a) This includes expenses not qualifying for tax relief including DPA and FCA obligations provision, impairments and
movements in uncertain tax positions partially offset by non-taxable income.
(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to
recognition of capital losses on property asset disposals.
Reconciliation of effective tax charge on alternative performance measures
2017£m 2016£m
Profit/(loss) before tax before exceptional items 729 335
Tax credit/(charge) at 20% (2016: 20.1%) (146) (67)
Effect of:
Non-qualifying depreciation (33) (30)
Other non-deductible items(a) (50) (4)
Unrecognised tax losses (14) (59)
Property items taxed on a different basis to accounting entries(b) (1) 102
Banking surcharge tax (17) (3)
Differences in overseas taxation rates (7) 8
Adjustments in respect of prior years 39 22
Share of losses of joint ventures and associates (5) (4)
Change in tax rate 49 27
Total income tax credit/(charge) for the year (185) (8)
Effective tax rate before exceptional items 25.4% 2.4%
Net pension finance costs 113 155
Tax charge at 20% (2016: 20.1%) (23) (31)
Change in tax rate 4 3
Total income tax credit/(charge) before exceptional items and net pension finance cost for the year (204) (36)
Effective tax rate before exceptional items and net pension finance costs 24.2% 7.3%
(a) This includes expenses not qualifying for tax relief, impairments and movements in uncertain tax positions partially
offset by non-taxable income.
(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to
recognition of capital losses on property asset disposals.
Note 7 Discontinued operations and non-current assets classified as held for sale
Assets and liabilities of the disposal group and non-current assets classified as held for sale
25 February 2017£m 27 February 2016£m
Assets of the disposal group 198 -
Non-current assets classified as held for sale 146 236
Total assets of the disposal group and non-current assets classified as held for sale 344 236
Total liabilities of the disposal group (171) -
Total net assets of the disposal group and non-current assets classified as held for sale 173 236
The non-current assets classified as held for sale consist mainly of properties in the UK and Central Europe due to be sold
within one year.
Discontinued operations
On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in Tesco Kipa Kitle Pazarlama
Ticaret Lojistik ve Gıda Sanayi A.Ş. (referred to as Turkish operations or Turkey) to Migros Ticaret A.Ş (Migros). In
accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the assets and liabilities related
to the Turkish operations have been classified as a disposal group held for sale within the period. Local regulatory
approval was granted on 9 February 2017 and the sale completed on 1 March 2017.
At year end, an impairment charge of £99m has been recognised in property, plant and equipment primarily based on the
latest completion statement as at 1 March 2017 reflecting fair value less costs to sell. This impairment has been included
as an exceptional item within discontinued operations. The gain/(loss) on disposal at completion will also reflect the
impact of recycling of Turkey's currency translation reserve; at the year end the recycling would have increased the loss
on sale by £119m. The equivalent amount for the recycling of the currency translation reserve at the date of disposal will
be recorded as a non-cash loss within discontinued operations in the year ending 24 February 2018.
The tables on the next page show the results of the discontinued operations which are included in the Group income
statement, Group balance sheet and Group cash flow statement respectively. The comparative includes the Korean operations,
which were sold on 22 October 2015 and disclosed as discontinued in the 2016 Annual Report.
Income statement 2017 2016
Total(a)£m Turkey£m Korea£m Total£m
Revenue 543 500 3,526 4,026
Expenses(b) (580) (555) (3,404) (3,959)
Profit/(loss) before tax before exceptional items (37) (55) 122 67
Taxation - - (41) (41)
Profit/(loss) after tax before exceptional items (37) (55) 81 26
Net impairment (loss)/reversal of non-current assets and onerous lease provisions (99) 15 - 15
Costs to sell and other provisions - Turkey (3) - - -
Loss after tax on disposal of Korean operations - - (168) (168)
Net adjustments to profit/(loss) of past disposals 27 - - -
Total profit/(loss) after tax of discontinued operations(c) (112) (40) (87) (127)
(a) These figures represent the income statement of Turkey for the current year and the net adjustments to profit/(loss)
of past disposals of £27m.
(b) Intercompany recharges totalling £2m (2016: £2m) between continuing operations and the Turkey discontinued operation
have been eliminated and intercompany recharges and intercompany loan interest totalling £48m between continuing operations
and the Korea discontinued operation have been eliminated in 2016. These eliminations impact the performance of continuing
and discontinued operations, reducing the profit/(loss) before tax of continuing operations by £2m (2016: £50m), whilst
increasing the profit/(loss) before tax of Turkey and Korea discontinued operations by the same respective amounts.
(c) Total profit/(loss) after tax of discontinued operations includes a loss of £6m attributable to non-controlling
interests (2016: loss of £2m).
Loss per share impact from discontinued operations 2017Pence/share 2016Pence/share
Basic (1.30) (1.54)
Diluted (1.30) (1.53)
Balance sheet Turkey
2017£m
Assets of the disposal group
Goodwill and other intangible assets 9
Property, plant and equipment 121
Inventories 43
Trade and other receivables 14
Cash and cash equivalents 11
Total assets of the disposal group 198
Trade and other payables (88)
Borrowings (76)
Other liabilities (7)
Total liabilities of the disposal group (171)
Total net assets of the disposal group 27
Cash flow statement
Turkey2017£m Korea andTurkey2016£m
Net cash flows from operating activities (20) 408
Net cash flows from investing activities 13 (20)
Net cash flows from financing activities 21 8
Net cash flows from discontinued operations 14 396
Intra-Group funding and intercompany transactions (2) (108)
Net cash flows from discontinued operations, net of intercompany 12 288
Net cash flows from disposal of subsidiary - (366)
Net cash flows from discontinued operations, net of intercompany and disposal of subsidiary 12 (78)
Note 8 Dividends
No dividend has been paid or is proposed in respect of the financial year ended 25 February 2017 (2016: £nil).
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 52 weeks ended 25 February 2017 there were 20 million (2016: 26 million) potentially dilutive share options. As the
Group has recognised a profit for the period from its continuing operations, dilutive effects have been considered in
calculating diluted earnings per share.
2017 2016
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) (£m)
Continuing operations(a) 66 - 66 263 - 263
Discontinued operations(b) (106) - (106) (125) - (125)
Total (40) - (40) 138 - 138
Weighted average number of shares (millions) 8,148 20 8,168 8,126 26 8,152
Earnings/(losses) per share (pence)
Continuing operations 0.81 - 0.81 3.24 (0.02) 3.22
Discontinued operations (1.30) - (1.30) (1.54) 0.01 (1.53)
Total (0.49) - (0.49) 1.70 (0.01) 1.69
(a) Excludes losses from non-controlling interest of £8m (2016: £7m).
(b) Excludes losses from non-controlling interests of £6m (2016: £2m).
Alternative performance measure: Earnings/(losses) per share and diluted earnings/(losses) per share from continuing
operations before exceptional items
2017 2016
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) (£m)
Continuing operations(a) 551 - 551 330 - 330
Discontinued operations(b) (36) - (36) 29 - 29
Total 515 - 515 359 - 359
Weighted average number of shares (millions) 8,148 20 8,168 8,126 26 8,152
Earnings/(losses) per share (pence)
Continuing operations 6.76 (0.01) 6.75 4.06 (0.01) 4.05
Discontinued operations (0.44) - (0.44) 0.36 (0.01) 0.35
Total 6.32 (0.01) 6.31 4.42 (0.02) 4.40
(a) Excludes losses from non-controlling interest of £7m (2016: £3m).
(b) Excludes losses from non-controlling interests of £1m (2016: £3m).
Alternative performance measure: Diluted earnings/(losses) per share from continuing operations before exceptional items
and net pension finance costs
2017 2016
Profit before tax from continuing operations before exceptional items (£m) 729 335
Add: Net pension finance costs (£m) 113 155
Profit before tax from continuing operations before exceptional items and net pension finance costs (£m) 842 490
Profit before tax from continuing operations before exceptional items and net pension finance costs attributable to the owners of the parent (£m) 845 494
Taxation on profit from continuing operations before exceptional items and net pension finance costs attributable to the owners of the parent (£m) (200) (37)
Profit after tax from continuing operations before exceptional items and net pension finance costs attributable to the owners of the parent (£m) 645 457
Diluted weighted average number of shares (millions) 8,168 8,152
Diluted earnings per share from continuing operations before exceptional items and net pension finance costs (pence) 7.90 5.61
Refer to page 52 for further detail on the Group's APMs.
Note 10 Goodwill, software and other intangible assets
Goodwill, software and other intangible assets of £2,717m (2016: £2,874m) comprise £1,792m goodwill (2016: £1,827m), £879m
software (2016: £975m) and other intangible assets of £46m (2016: £72m).
Impairment of goodwill
The goodwill balances, discount rates and long-term growth rates for each group of cash-generating units are shown below:
Balances£m Pre-taxdiscount rates Post-taxdiscount rates Long- termgrowth rates
2017 2016 2017 2016 2017 2016 2017 2016
Tesco Bank 802 802 12.0% 11.0% 9.1% 8.2% 3.0% 4.0%
UK* 735 796 9.3% 9.1% 7.5% 7.2% 2.0% 2.0%
Thailand 181 159 10.0% 10.1% 8.0% 8.1% 2.7% 2.6%
Malaysia 74 70 12.4% 12.3% 9.4% 9.4% 2.3% 2.1%
1,792 1,827
* Included in the UK prior year balance is £29m previously disclosed as Other.
Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more
frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated
to groups of cash-generating units according to the level at which management monitor that goodwill.
Impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the
cash-generating units to which goodwill has been allocated. Recoverable amounts for cash-generating units are the higher of
fair value less costs of disposal, and value in use. The key estimates for the value in use calculations are those
regarding discount rates, growth rates and expected changes in margins.
Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of
money and the risks specific to the cash-generating units. The pre-tax discount rates used to calculate value in use are
derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each
cash-generating unit.
Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the
Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the
market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on
estimated long-term average growth rates as shown above. These 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.
Goodwill related to the Sociomantic acquisition of £46m, within the UK balance, was fully impaired in the year due to lower
forecast cash flows for the business. This charge has been classified as an exceptional item within 'Net impairment of
non-current assets and onerous lease provisions' within cost of sales.
The Group has carried out a sensitivity analysis on the impairment tests of each group of cash-generating units to which
goodwill has been allocated. A reasonably possible increase in the discount rate or reduction in the long-term growth rate
by one percentage point, would not indicate impairment in any group of cash-generating units apart from Malaysia where an
increase in the discount rate by one percentage point would reduce the recoverable value by £90m to its carrying value of
£74m.
Impairment of software and other intangible assets
A net impairment loss of £7m has been recognised against software and other intangible assets as part of the impairment
review discussed in Note 11. This loss has been classified as an exceptional item within 'Net impairment of non-current
assets and onerous lease provisions' within cost of sales. Of the prior year impairment loss of £169m, a loss of £154m was
recognised principally as a result of an evaluation of the cash-generating unit for technology relating to online general
merchandising as the Group moved towards a single online platform for customers.
Note 11 Property, plant and equipment
Land andbuildings£m Other(a)£m Total£m
Cost
At 27 February 2016 22,557 10,468 33,025
Foreign currency translation 727 327 1,054
Additions(b) 816 579 1,395
Reclassification (103) 58 (45)
Classified as held for sale (316) (6) (322)
Disposals (674) (594) (1,268)
Transfer to disposal group classified as held for sale (317) (151) (468)
At 25 February 2017 22,690 10,681 33,371
Accumulated depreciation and impairment losses
At 27 February 2016 7,198 7,927 15,125
Foreign currency translation 258 239 497
Charge for the year 419 639 1,058
Impairment losses 246 27 273
Reversal of impairment losses (246) (33) (279)
Reclassification (58) 11 (47)
Classified as held for sale (137) (1) (138)
Disposals (353) (539) (892)
Transfer to disposal group classified as held for sale (232) (102) (334)
At 25 February 2017 7,095 8,168 15,263
Net carrying value
At 25 February 2017 15,595 2,513 18,108
At 27 February 2016 15,359 2,541 17,900
Construction in progress included above(c)
At 25 February 2017 57 66 123
At 27 February 2016 121 63 184
(a) Other assets consist of fixtures and fittings with a net carrying value of £2,023m (2016: £2,145m), office equipment
with a net carrying
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