REG - Tesco PLC - Preliminary Results 2016/17 <Origin Href="QuoteRef">TSCO.L</Origin> - Part 4
12/04/2017 07:06
- Part 4: For the preceding part double click ID:nRSL2573Cc
value of £161m (2016: £144m) and motor vehicles with a net carrying value of £329m (2016: £252m).
(b) Includes £6m (2016: £7m) 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 4.9% (2016:
4.6%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.
(c) Construction in progress does not include land.
Assets held under finance leases
Net carrying value includes assets held under finance leases, which are analysed below. These assets are pledged as
security for the finance lease liabilities.
2017 2016
Land and buildings£m Other£m Land and buildings£m Other£m
Net carrying value 66 27 55 21
Land and buildings
The net carrying value of land and buildings comprises: 2017£m 2016£m
Freehold 13,175 13,005
Long leasehold - 50 years or more 404 491
Short leasehold - less than 50 years 2,016 1,863
Net carrying value 15,595 15,359
In the current year the Group reclassified property, plant and equipment with a net book value of £nil (2016: £8m) to
development properties in inventories.
Land andbuildings£m Other(a)£m Total£m
Cost
At 28 February 2015 25,298 11,493 36,791
Foreign currency translation 76 34 110
Additions (b) 364 493 857
Acquired through business combinations 1,725 17 1,742
Reclassification (93) 2 (91)
Classified as held for sale (715) (23) (738)
Disposals (515) (346) (861)
Transfer to disposal group classified as held for sale (3,583) (1,202) (4,785)
At 27 February 2016 22,557 10,468 33,025
Accumulated depreciation and impairment losses
At 28 February 2015 8,021 8,330 16,351
Foreign currency translation 93 49 142
Charge for the year 318 759 1,077
Impairment losses 263 - 263
Reversal of impairment losses (220) (25) (245)
Reclassification (28) (77) (105)
Classified as held for sale (475) (20) (495)
Disposals (295) (281) (576)
Transfer to disposal group classified as held for sale (479) (808) (1,287)
At 27 February 2016 7,198 7,927 15,125
(a)-(b) Refer to previous page for footnotes.
Commitments for capital expenditure contracted for, but not incurred, at 25 February 2017 were £115m (2016: £215m),
principally relating to store development.
Impairment of property, plant and equipment
The Group has determined that for the purposes of impairment testing, each store is a cash-generating unit. Cash-generating
units are tested for impairment if there are indicators of impairment at the balance sheet date. 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 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 and
predominately range from 9% to 13% (2016: 9% to 12%). On a post-tax basis, the discount rates predominately range from 7%
to 10% (2016: 7% to 9%).
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. These long-term growth rates are based on inflation forecasts by recognised
bodies and range from 1% to 3% (2016: 2% to 6%).
Fair values 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. The key
inputs to the valuation are the potential market rents and yields, both of which are largely based on rentals and yields
for similar properties in that location. Fair values for the Group's properties were determined with the assistance of
independent, professional valuers where appropriate.
The net carrying value of £18,108m (2016: £17,900m) above comprises £13,338m (2016: £13,731m) of unimpaired assets and
£4,770m (2016: £4,169m) of impaired assets. Of the impaired assets, £2,196m (2016: £1,805m) carrying value was supported by
value in use and £2,574m (2016: £2,364m) was supported by fair value. Due to the individual nature of each property, these
fair values are classified as Level 3 within the fair value hierarchy.
The total net impairment reversal of £6m includes an impairment loss of £106m relating to the Group's decision to sell its
Turkish operations. This impairment has been classified as an exceptional item relating to discontinued operations; refer
to Note 4 and Note 7 for further details.
The remaining net impairment reversal of £112m (£279m reversal offset by £167m losses) relating to continuing operations
largely reflects normal fluctuations expected from store level performance within the continuing challenging economic
environment. These losses and reversals have been largely presented net at a country level to reflect the underlying trends
in the businesses. The impairment reversal of £279m (2016: £231m) relates to properties in the UK & ROI of £118m (2016:
£126m) and International of £161m (2016: £105m), whilst the impairment losses of £167m (2016: £263m) relate to properties
in the UK & ROI of £12m (2016: £164m) and International of £155m (2016: £99m).
Of the £112m net reversal relating to continuing operations, a £134m reversal within exceptional items related to trading
stores has been classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of
sales. In addition, a £30m charge within exceptional items related to construction in progress and closed stores has been
classified as 'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising
on property-related items. The remaining £8m reversal has not been included within exceptional items as it relates to the
ongoing management of the property portfolio.
The prior period net impairment charge of £18m included a £14m reversal relating to the Turkish operations, which were
classified as discontinued in the current financial year. Of the remaining £32m impairment charge related to continuing
operations, an £80m release within exceptional items related to trading stores and online general merchandising hardware,
which was classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of sales.
In addition, a £90m charge within exceptional items related to construction in progress and closed stores was classified as
'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising on
property-related items. An additional £34m charge within exceptional items relating to business rationalisation in the UK &
ROI was classified as 'Net restructuring and redundancy costs' included within cost of sales. The remaining £12m reversal
was not included within exceptional items.
The Group has carried out a sensitivity analysis on the impairment tests for its trading stores portfolio. A reasonably
possible increase of one percentage point in the post-tax discount rates for each geographic region would increase
impairment by £278m. A decrease by one percentage point would decrease impairment by £243m.
Note 12 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.
Subsidiaries
The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 25 February 2017.
Interests in joint ventures and associates
Principal joint ventures and associates
The Group's principal joint ventures and associates are:
Nature of relationship Business activity Share of issued share capital, loan capital and debt secrurities Country of incorporation Principal area of operation
Gain Land Limited Associate Retail 20% British Virgin Islands People's Republic of China / Hong Kong
Included in 'UK property joint ventures'
BLT Properties Limited* Joint venture Property investment 50% England United Kingdom
The Tesco Coral Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Blue Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Atrato Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Passaic Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Navona Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Sarum Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Dorney Limited Partnership Joint venture Property investment 50% England United Kingdom
The Tesco Property (No. 2) Limited Partnership Joint venture Property investment 50% Jersey United Kingdom
Included in 'Other joint ventures and associates':
Tesco Mobile Limited Joint venture Telecommunications 50% England United Kingdom
Tesco Underwriting Limited Joint venture Financial services 49.9% England United Kingdom
Trent Hypermarket Limited Joint venture Retail 50% India India
Tesco Lotus Retail Growth Freehold Associate Property investment 25% Thailand Thailand
and Leasehold Property Fund
* On 6 April 2017, the Group purchased the remaining 50% of equity interest in BLT Properties Limited. Refer to Note 22 for
further details.
The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from
31 December 2016 to 25 February 2017. The accounting period end dates for 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 parent,
other than those imposed by the Companies Act 2006, and for Tesco Underwriting Limited, regulatory capital requirements.
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, whilst reducing risks associated with sole ownership. These
property investments generally cover shopping centres and standalone stores. The Group enters into operating 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 impact 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
2017£m 2016£m 12 months to Dec 2016£m 12 months to Dec 2015£m
Summarised balance sheet
Non-current assets(a) 4,060 4,158 4,471 4,712
Current assets (excluding cash and cash equivalents) 99 58 2,261 2,047
Cash and cash equivalents 48 38 631 581
Current liabilities(b) (301) (327) (6,208) (5,550)
Non-current liabilities(b) (4,831) (4,572) (169) (153)
Net (liabilities)/assets (925) (645) 986 1,637
Summarised income statement
Revenue 292 296 9,081 8,408
Profit/(loss) after tax - (36) (626) (341)
Reconciliation to carrying amounts:
Opening balance - 49 511 582
Additions/(disposals) - (10) - -
Foreign currency translation - - 47 (3)
Share of profits/(losses)(c) 14 22 (125) (68)
Dividends received from joint ventures and associates (14) (29) - -
Deferred profits offset against carrying amounts(d) - (32) - -
Closing balance - - 433 511
Group's share in ownership 50% 50% 20% 20%
Group's share of net assets/(liabilities) (463) (323) 197 327
Goodwill - - 236 184
Deferred property profits offset against carrying amounts(d) (63) (64) - -
Cumulative unrecognised losses(e) 175 143 - -
Cumulative unrecognised hedge reserves(f) 351 244 - -
Carrying amount - - 433 511
(a) The non-current asset balances of UK property joint ventures are reflected at historic depreciated cost to conform to
the Group's accounting policies. The aggregate fair values in the financial statements of the joint ventures are £5,242m
(2016: £5,415m).
(b) The current and non-current liabilities of UK property joint ventures largely comprise loan balances of £4,121m (2016:
£4,151m) and derivative swap balances of £703m (2016: £487m) entered into to hedge the cash flow variability exposures of
the joint ventures. The 2016 derivative balance of £487m reflects a £159m reduction due to valuation adjustments for credit
risk not included in the prior year.
(c) The profit for the year for UK property joint ventures related to £14m dividends received from joint ventures with
£nil carrying amounts £21m of losses and £107m of decreases in the fair values of derivatives arising from these entities
have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively. The loss of
£(125)m for Gain Land Limited includes an impairment loss of £(54)m treated as an exceptional item. Refer to Note 4.
(d) Deferred profits that arose from the transfer of properties into the UK property joint ventures have been offset
against the carrying amounts of the related joint ventures. £1m relating to The Brookmaker Limited Partnership has been
released during the year as a result of the disposal.
(e) Cumulative unrecognised losses of £3m were disposed of relating to The Brookmaker Limited Partnership.
(f) The 2016 cumulative unrecognised hedge reserves balances have been reduced by £79m to reflect valuation adjustments
for credit risks.
At 25 February 2017, the Group has £103m (2016: £115m) loans to UK property joint ventures and £nil (2016: £nil) to Gain
Land Limited.
Other joint ventures and associates
The Group also has interests in a number of other joint ventures and associates, excluding UK Property joint ventures and
Gain Land Limited. These are not considered to be individually material to the Group.
Joint ventures Associates
2017£m 2016£m 2017£m 2016£m
Aggregate carrying amount of other joint ventures and associates 245 219 61 55
Group's share of profits/(losses) for the year (7) 23 11 2
Impairment
Management has performed impairment tests and sensitivity analysis on its investments in Gain Land Limited, Trent
Hypermarket Limited and Tesco Underwriting Limited. The carrying values of Trent Hypermarket Limited of £112m (2016: £96m)
and Tesco Underwriting Limited of £71m (2016: £76m) are included within 'Other joint ventures and associates' as discussed
above.
The recoverable values of these investments were estimated taking into account forecast cash flows, equity valuations of
comparable entities and/or recent transactions for comparable businesses. No impairment was recognised in the period for
these investments. Sensitivity tests for reasonably possible increases in the discount rates of one percentage point would
not indicate impairment in any of the investment.
Future changes in estimated cash flows, discount rates, competitive landscape, retail market conditions and other factors
may result in impairment losses or reversals of impairment in future periods.
Note 13 Cash and cash equivalents and short-term investments
Cash and cash equivalents 2017£m 2016£m
Cash at bank and in hand 3,498 2,334
Short-term deposits 323 748
3,821 3,082
Short-term investments 2017£m 2016£m
Money market funds 2,727 3,463
Included in cash and cash equivalents is an amount of £777m that has been set aside for completion of the merger with
Booker Group Plc. This cash is not available to the Group and must be held in ring-fenced accounts until released jointly
by the Group and its advisors on satisfaction of the completion terms of the merger as set out in the offering circular
dated 27 January 2017. Until that time, or if the merger is not completed, it remains an asset of the Group. At the
balance sheet date it was invested with a single financial institution at a floating rate of interest. Interest accrues and
is payable to the Group.
Note 14 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. Whilst 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 period
ends, 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 balance sheet date.
Management consider 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 balance sheet.
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 and deferred income.
2017£m 2016£m
Current assets
Inventories (75) (75)
Trade and other receivables
Trade/other receivables 215 201
Accrued income 150 100
Current liabilities
Trade and other payables
Trade payables 213 305
Accruals and deferred income (22) (43)
The 27 February 2016 accruals and deferred income disclosure, previously disclosed in Note 13 of the 2015/16 Preliminary
Results, included amounts that were unrelated to commercial income and has therefore been amended accordingly.
Note 15 Borrowings
Current Par value Maturity 2017£m 2016£m
Bank loans and overdrafts - - 912 845
Loans from joint ventures - - 6 6
4% RPI MTN £310m Sep 2016 - 316
5.875% MTN E1,039m Sep 2016 - 877
2.7% USD Bond $500m Jan 2017 - 361
5.4478% Term Loan £382m Jan 2017 - 396
LIBOR + 0.5% Term Loan £488m Oct 2017 484 -
1.250% MTN E500m Nov 2017 423 -
5.5% USD Bond $850m Nov 2017 709 -
5.5457% Secured Bond (a)(b) £366m Feb 2029 15 14
Finance leases - - 11 11
2,560 2,826
(a)-(b) Refer to the next page for footnotes.
Non-current
Par value Maturity 2017£m 2016£m
LIBOR +0.5% Term Loan £488m Oct 2017 - 478
1.250% MTN E500m Nov 2017 - 394
5.5% USD Bond $850m Nov 2017 - 666
5.2% Tesco Bank Retail Bond £125m Aug 2018 129 132
3.375% MTN E750m Nov 2018 641 595
LIBOR + 0.45% Tesco Bank Bond £150m May 2019 150 150
1.375% MTN E1,250m Jul 2019 1,063 990
5.5% MTN £350m Dec 2019 353 353
1% RPI Tesco Bank Retail Bond(c) £67m Dec 2019 67 66
LIBOR + 0.65% Tesco Bank Bond £300m Apr 2020 299 299
2.125% MTN E500m Nov 2020 423 394
5% Tesco Bank Retail Bond £200m Nov 2020 210 211
LIBOR + 0.65% Tesco Bank Bond £350m May 2021 349 349
6.125% MTN £900m Feb 2022 896 896
5% MTN £389m Mar 2023 411 411
2.5% MTN E750m Jul 2024 640 595
3.322% LPI MTN(d) £323m Nov 2025 326 320
5.5457% Secured Bond(a)(b) £366m Feb 2029 339 353
6.067% Secured Bond(a) £200m Feb 2029 190 189
LIBOR + 1.2% Secured Bond(a) £50m Feb 2029 31 30
6% MTN £200m Dec 2029 253 257
5.5% MTN £200m Jan 2033 255 259
1.982% RPI MTN(e) £268m Mar 2036 270 265
6.15% USD Bond $1,150m Nov 2037 1,063 1,035
4.875% MTN £173m Mar 2042 175 175
5.125% MTN E600m Apr 2047 522 486
5.2% MTN £279m Mar 2057 275 275
Finance leases - - 103 88
9,433 10,711
(a) 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
£788m (2016: £838m).
(b) This is an amortising bond which matures in February 2029. £15m (2016: £14m) is the principal repayment due within the
next 12 months. The remainder is payable in quarterly instalments until maturity in February 2029.
(c) The 1% RPI Tesco Bank Retail Bond is redeemable at par, indexed for increases in the RPI over the life of the bond.
(d) 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%.
(e) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.
Borrowing facilities
The Group has the following undrawn committed facilities available at 25 February 2017, in respect of which all conditions
precedent had been met as at that date:
2017£m 2016£m
Expiring in less than one year - 100
Expiring between one and two years - 2,200
Expiring in more than two years 4,427 2,700
4,427 5,000
The current year undrawn committed facilities include £1.8bn (2016: £2.4bn) of bilateral facilities and a £2.6bn (2016:
£2.6bn) syndicated revolving credit facility. During the year, £1.8bn equivalent of bilateral facilities were refinanced in
a tenor of three years to a final maturity of August 2019.
All facilities incur commitment fees at market rates and would provide funding at floating rates.
Note 16 Provisions
Propertyprovisions£m Restructuring provisions£m Otherprovisions£m Total£m
At 28 February 2015 941 325 100 1,366
Foreign currency translation (1) 4 - 3
Amount released in the year (4) (77) - (81)
Amount provided in the year 154 166 - 320
Amount utilised in the year (188) (335) (34) (557)
Transfer to disposal group classified as held for sale (74) - - (74)
Unwinding of discount 47 - - 47
At 27 February 2016 875 83 66 1,024
Foreign currency translation 12 4 - 16
Amount released in the year (38) (18) - (56)
Amount provided in the year 99 196 136 431
Amount utilised in the year (141) (162) (28) (331)
Transfer to disposal group classified as held for sale - (5) - (5)
Unwinding of discount 44 - - 44
At 25 February 2017 851 98 174 1,123
The balances are analysed as follows:
2017£m 2016£m
Current 438 360
Non-current 685 664
1,123 1,024
Property provisions
Property provisions comprise onerous lease provisions, including leases on unprofitable stores and vacant properties,
dilapidations provisions and asset retirement obligation provisions. These provisions are based on the least net cost of
fulfilling or exiting the contract.
The calculation of the value in use of the leased properties to the Group is based on the same assumptions for growth rates
and expected change in margins as those for Group owned properties, as discussed in detail in Note 11, discounted at the
appropriate risk free rate. The cost of exiting lease contracts is estimated as the present value of expected surrender
premiums or deficits from subletting at market rents, assuming that the Group can sublet properties at market rents, based
on discounting at the appropriate risk adjusted rate. For some leases, termination of the lease at the break clause
requires the Group to either purchase the property or buy out the equity ownership of the property at fair value. No value
is attributed to the purchase conditions since they are at fair value. It is also assumed that the Group is indifferent to
purchasing the properties.
Based on the factors set out above, the Group has recognised a net onerous property provision charge in the year of £61m
(2016: £150m), largely relating to onerous lease contracts for fully impaired properties and other onerous contracts
relating to properties. The Group has performed sensitivity analysis on the onerous lease provisions. A reasonably possible
increase of one percentage point in the risk-free rate would reduce the provision by £43m. A decrease of one percentage
point would increase the provision by £50m.
Of the net onerous property provision charge, a £76m charge (2016: £151m) has been recognised as an exceptional item; £56m
in cost of sales and £20m in property-related items. This is made up of £56m classified as 'Net impairment of non-current
assets and onerous lease provisions' and £20m classified as 'Net restructuring and redundancy costs'.
Onerous lease provisions will be utilised over the relevant lease terms, predominantly within the next 25 years.
Restructuring provisions
Of the £178m net charge (£196m charge, £18m release) recognised in the year, £135m relating to ongoing UK & ROI changes to
the distribution network and to store colleague structures and working practices has been classified as an exceptional
item. Refer to Note 4 for further details. The exceptional charges are expected to be utilised in the next financial year.
Other provisions
On 10 April 2017, the Group announced that its subsidiary, Tesco Stores Limited, had obtained Court approval and entered
into a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO) regarding historic accounting practices.
On 28 March 2017, the Group also announced that it had agreed with the UK Financial Conduct Authority (FCA) to a finding of
market abuse in relation to its trading statement announced on 29 August 2014. In making its finding, the FCA has expressly
stated that it is not suggesting that the Tesco PLC Board of Directors knew, or could reasonably be expected to have known,
that the information contained in that trading statement was false or misleading. The Group has agreed with the FCA (under
its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary
shares and listed bonds between 29 August 2014 and 19 September 2014 inclusive. The Group has taken a total exceptional
charge of £235m in respect of the 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.
Of the £235m, £91m is included in other current provisions to cover the cost of the compensation scheme and related costs.
The remaining £144m has been recorded within accruals. These charges have been classified as an exceptional item within
administrative expenses.
Other current provisions also include provisions for Tesco Bank customer redress in respect of potential complaints arising
from the historic sales of Payment Protection Insurance (PPI), and in respect of customer redress relating to instances
where certain of the 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. A charge of £45m has been recognised in the year as an exceptional
item in cost of sales. Refer to Note 4 for further details.
Note 17 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit
schemes and funded defined contribution schemes. The most significant of these are the funded defined benefit pension
schemes for the Group's employees in the UK (now closed to future accrual) and the Republic of Ireland, and the funded
defined contribution pension scheme for employees in the UK. Of these schemes, the UK defined benefit deficit represents
98% of the Group deficit (2016: 94%).
The principal plan within the Group is the Tesco PLC Pension Scheme (the 'Scheme'), which is a funded defined benefit
pension scheme in the UK, the assets of which are held as a segregated fund and administered by the Trustee.
The Career Average section of the Scheme ('Pension Builder') was closed to new members and future accrual on 21 November
2015. The Final Salary section of the Scheme, which was closed to new entrants in 2001, was also closed to future accrual
on 21 November 2015. As a result of this closure a one off past service credit of £538m and other associated costs of
£(58)m were recognised as exceptional items in the prior year. Refer to Note 4.
A defined contribution scheme, Tesco Retirement Savings Plan, was opened on 22 November 2015 and is open to all Tesco
employees in the UK.
At 31 March 2014, the deficit valuation arising from the triennial actuarial assessment was £2.8bn. A plan to pay £270m a
year was agreed with the Trustee to fund the UK pension deficit and to meet the expenses of the scheme. The expenses of the
scheme were £22m (2016: £27m).
The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming
to conclude the valuation as soon as is reasonably possible.
UK Principal assumptions
The major assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation as at 25
February 2017 were as follows:
2017% 2016%
Discount rate 2.5 3.8
Price inflation 3.2 2.9
Rate of increase in deferred pensions* 2.2 1.9
Rate of increase in pensions in payment*
Benefits accrued before 1 June 2012 3.0 2.7
Benefits accrued after 1 June 2012 2.2 1.9
* In excess of any Guaranteed Minimum Pension ('GMP') element.
The main financial assumption is the discount rate. If the discount rate increased by 0.1% or 1.0%, the UK defined benefit
obligation would decrease by approximately £526m or £4,536m respectively. If this assumption decreased by 0.1% or 1.0%, the
UK defined benefit obligation would increase by approximately £545m or £6,541m respectively.
Summary of movements in Group deficit during the financial year
Changes in the Group deficit, including movements of discontinued operations up to classification as held for sale, are as
follows:
2017£m 2016£m
Deficit in schemes at beginning of the year (3,175) (4,842)
Current service cost (35) (570)
Past service credit - 535
Net pension finance cost(a) (113) (155)
Contributions by employer(b) 28 433
Additional contributions by employer 248 223
Foreign currency translation (12) (8)
Remeasurements (3,567) 1,164
Transfer to disposal group classified as held for sale 5 45
Deficit in schemes at the end of the year (6,621) (3,175)
Deferred tax asset 1,122 563
Deficit in schemes at the end of the year, net of deferred tax (5,499) (2,612)
(a) Includes £nil (2016: £nil) discontinued operations up to reclassification as held for sale.
(b) Contributions by employer include £nil (2016: £125m) of salaries paid as pension contributions.
Note 18 Analysis of changes in net debt
At27 February2016£m Cashflow£m Fair value and foreign exchange movements£m Interest (charge)/income£m Othernon-cashmovements£m Reclassifications of movements in net debt of the disposal group£m At25 February2017£m
Total Group
Cash and cash equivalents 3,082 881 (131) - - (11) 3,821
Short-term investments 3,463 (736) - - - - 2,727
Joint venture loans 149 (15) - - 3 - 137
Interest and other receivables 1 (25) - 25 - - 1
Bank and other borrowings (13,253) 1,851 (372) (21) 10 73 (11,712)
Interest payables (185) 522 (18) (479) (10) 3 (167)
Finance lease payables (99) 12 (6) - (21) - (114)
Net derivative financial instruments 698 (475) 655 15 - - 893
Net derivative interest 59 (16) - (15) - - 28
Net debt of the disposal group - - - - - (65) (65)
Total Group (6,085) 1,999 128 (475) (18) - (4,451)
Tesco Bank
Cash and cash equivalents 554 235 - - - - 789
Joint ventures loans 34 - - - - - 34
Bank and other borrowings (1,441) - 1 - - - (1,440)
Interest payables (1) 4 - (3) - - -
Net derivative financial instruments (121) - 16 - - - (105)
Tesco Bank (975) 239 17 (3) - - (722)
Retail
Cash and cash equivalents 2,528 646 (131) - - (11) 3,032
Short-term investments 3,463 (736) - - - - 2,727
Joint ventures loans 115 (15) - - 3 - 103
Interest and other receivables 1 (25) - 25 - - 1
Bank and other borrowings (11,812) 1,851 (373) (21) 10 73 (10,272)
Interest payables (184) 518 (18) (476) (10) 3 (167)
Finance lease payables (99) 12 (6) - (21) - (114)
Net derivative financial instruments 819 (475) 639 15 - - 998
Net derivative interest 59 (16) - (15) - - 28
Net debt of the disposal group - - - - - (65) (65)
Net debt (5,110) 1,760 111 (472) (18) - (3,729)
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.
Reconciliation of net cash flow to movement in Net debt
2017£m 2016
£m
Net increase/(decrease) in cash and cash equivalents 881 907
Elimination of Tesco Bank movement in cash and cash equivalents (235) 62
Retail cash movement in other Net debt items
Net increase/(decrease) in short-term investments (736) 2,894
Net increase/(decrease) in joint venture loans (15) 1
Net (increase)/decrease in borrowings and lease financing 1,863 1,059
Net cash flows from derivative financial instruments (475) (154)
Net interest paid on components of net debt 477 419
Change in Net debt resulting from cash flow 1,760 5,188
Retail net interest charge on components of net debt (472) (447)
Retail fair value and foreign exchange movements 111 113
Debt disposed on disposal of Korean operations - 97
Debt acquired on business combinations - (1,545)
Retail other non-cash movements (18) (35)
(Increase)/decrease in Net debt for the year 1,381 3,371
Opening Net debt (5,110) (8,481)
Closing Net debt (3,729)
- More to follow, for following part double click ID:nRSL2573CeRecent news on Tesco
See all newsREG - Tesco PLC - Director/PDMR Shareholding
AnnouncementREG - Tesco PLC - Director/PDMR Shareholding
AnnouncementREG - Tesco PLC - Total Voting Rights
AnnouncementREG - Tesco PLC - Director/PDMR Shareholding
AnnouncementREG - Tesco PLC - Transaction in Own Shares
Announcement