REG - Tesco PLC - Preliminary Results 2016/17 <Origin Href="QuoteRef">TSCO.L</Origin> - Part 6
12/04/2017 07:06
- Part 6: For the preceding part double click ID:nRSL2573Ce
Risk descriptionThere are a number of areas within the Group financial statements which comprise accounting estimates by management and accordingly there is a risk that the Group's results are influenced through management bias in determining such estimates. Additionally, the Group's processes continue to be complex and reliant on legacy IT systems which lead to an increased risk of management override of controls. Specifically this risk lies in those areas with high levels of judgement such as commercial
income, value-in-use calculations within the impairment reviews, inventory accounting and provisioning. Management also exercises judgement in the presentation of the Group's income statement and the quality of the Group's earnings. A risk exists that invalid journal entries are recorded to influence the results and/or the financial position as desired through the override of controls implemented to prevent the recording of inappropriate journals. How the scope of our audit responded to the riskIn order to
address this risk, in addition to the procedures set out in the commercial income, impairment and inventory risksabove, we have completed audit procedures including: · assessing the design and implementation of controls which address the risk of management override, such as the 'entity level' controls which underpin the overall control environment for the Group;· auditing key areas of management estimate and judgement, including consideration of exceptional items disclosed by the Group and the
existence of any further potential exceptional items included within the Group's underlying profit measures;· using data analytics, testing journal entries for fraud characteristics by testing the completeness of the journal population reviewed and risk profiling the population to focus our work on journals of interest;· assessing transactions completed outside of the normal course of business; and· obtaining an understanding of the work of internal audit so as to assist us in directing
our audit effort and obtaining greater understanding of the controls in place across the Group. Key observationsWe have no matters to highlight in these areas. However, we note that consistent with other businesses of a similar scale to the Group, there are non-recurring income and expense items included within profit before exceptional items which do not meet the Group's definition of exceptional items and which largely offset. We concur that these have been appropriately included within profit before
exceptional items.
Risk descriptionIn November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack. The Group continues to work closely with the authorities and regulators on this incident. There is a risk that the Group has not identified and accounted for any liabilities which may arise from the incident. How the scope of our audit responded to the riskIn assessing the potential exposures to the Bank, we have completed a range of procedures including: · understanding the cause of the issue,
reviewing the incident reports prepared by external consultants and understanding management's response to findings;· understanding the status of discussions with authorities and regulators;· assessing the fraud losses and the treatment of associated recoveries from merchants; and· assessing whether the Group has appropriately identified and accounted for any other liabilities related to the payment fraud. Key observationsWe are satisfied that the Group has appropriately accounted for
liabilities associated with the incident.
Risk descriptionThe Group's retail operations utilise a range of information systems where in 2015/16 we identified deficiencies in certain IT controls. These deficiencies could have an adverse impact on the Group's controls and financial reporting systems. The Group is undergoing the replacement of a number of the Group's key systems and changes to key elements of the Group's IT infrastructure. How the scope of our audit responded to the riskWe have understood the Group's replacement programme and the
planned enhancements to the retail technology environment, including IT security. During the year we have assessed the design and implementation of the Group's controls over the information systems that are important to financial reporting, including the changes made as part of the Group's replacement programme. Where we noted deficiencies which affected applications and databases within the scope of our audit, we extended the scope of our substantive audit procedures. Key observationsAlthough we note
progress has been made during the year in enhancing the Group's controls over the information systems described above, given the complexity of the underlying systems the remediation process is not yet complete and therefore weaknesses remain in the control environment. The historical weaknesses we noted last year in relation to user access and change management controls linked to the Group's financial reporting systems are in the process of being remediated.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we did not provide a separate opinion on these matters.
Our liability for this report, and for our full audit report on the financial statements is 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 our audit report or this report, or for the opinions we have
formed.
Deloitte LLP
Chartered Accountants and Statutory Auditor
Appendix 1
Total sales performance at actual rates (exc. VAT, exc. fuel)
1Q2016/17 2Q 2016/17 3Q2016/17 4Q2016/17 1H2016/17 2H 2016/17 FY2016/17
UK & ROI 0.7% 1.7% 2.3% 0.7% 1.2% 1.5% 1.4%
UK 0.3% 1.0% 1.4% 0.2% 0.7% 0.8% 0.7%
ROI 8.7% 15.3% 19.7% 11.9% 11.9% 15.6% 13.8%
International 5.6% 16.5% 23.2% 16.1% 10.9% 19.5% 15.2%
Europe 8.2% 15.1% 19.6% 12.3% 11.6% 15.7% 13.7%
Asia 2.8% 18.2% 27.7% 20.9% 10.1% 24.1% 17.1%
Tesco Bank 3.5% 7.2% 6.3% 6.9% 5.3% 6.6% 6.0%
Group 1.8% 4.7% 6.5% 4.1% 3.3% 5.2% 4.3%
Appendix 2
Total sales performance at constant rates (exc. VAT, exc. fuel)*
1Q2016/17 2Q 2016/17 3Q2016/17 4Q2016/17 1H2016/17 2H 2016/17 FY2016/17
UK & ROI 0.3% 1.0% 1.4% 0.1% 0.6% 0.6% 0.6%
UK 0.3% 1.0% 1.4% 0.2% 0.7% 0.7% 0.7%
ROI 0.2% (0.3)% 0.0% (1.7)% (0.1)% (0.9)% (0.5)%
International 3.6% 2.8% 1.5% 0.6% 3.2% 1.0% 2.1%
Europe 2.4% 1.2% 0.1% (1.5)% 1.8% (0.7)% 0.5%
Asia 5.0% 4.8% 3.2% 3.2% 4.9% 3.2% 4.0%
Tesco Bank 3.5% 7.2% 6.3% 6.9% 5.3% 6.6% 6.0%
Group 1.1% 1.5% 1.5% 0.3% 1.3% 0.9% 1.1%
* These results have been reported on a continuing operations basis and exclude the results from our operations in Turkey.
Growth rates are all based on comparable days.
Appendix 3
Country detail
Revenue(exc. VAT, inc. fuel)
Localcurrency (m) £m Average exchange rate Closing exchange rate
UK 41,458 41,458 1.000 1.000
ROI 2,483 2,066 1.202 1.184
Czech Republic 43,017 1,324 32.49 31.98
Hungary 595,463 1,593 373.8 365.0
Poland 10,832 2,070 5.233 5.096
Slovakia 1,405 1,169 1.202 1.184
Malaysia 4,458 808 5.517 5.557
Thailand 204,059 4,378 46.61 43.66
Appendix 4
UK sales area by size of store
Store size (sq ft) February 2017 February 2016
No. of stores Millionsq ft % of total sq ft No. of stores Millionsq ft % of total sq ft
0 - 3,000 2,507 5.2 13.1% 2,498 5.2 12.5%
3,001 - 20,000 288 3.4 8.6% 289 3.5 8.4%
20,001 - 40,000 283 8.2 20.5% 283 8.3 20.0%
40,001 - 60,000 182 9.4 23.5% 204 10.4 25.0%
60,001 - 80,000 120 8.6 21.5% 132 8.9 21.5%
80,001 - 100,000 45 4.2 10.6% 45 4.2 10.2%
Over 100,000 8 0.9 2.2% 9 1.0 2.4%
Total* 3,433 39.9 100.0% 3,460 41.5 100.0%
* Excludes franchise stores.
Appendix 5
Actual Group space - store numbers(a)
2015/16 year end 2016/17 year end Net gain/Reduction(b) Openings Closures/disposals Repurposing/extensions
Extra 252 252 - - - 14
Superstore 478 479 1 2 (1) -
Metro 177 176 (1) - (1) -
Express 1,732 1,740 8 17 (9) -
Dotcom only 6 6 - - - -
Total Tesco 2,645 2,653 8 19 (11) 14
One Stop(c) 779 780 1 23 (22) -
Dobbies 36 - (36) - (36) -
UK(c) 3,460 3,433 (27) 42 (69) 14
ROI 149 148 (1) - (1) -
UK & ROI(c) 3,609 3,581 (28) 42 (70) 14
Czech Republic(c) 201 198 (3) - (3) 1
Hungary 208 206 (2) - (2) 2
Poland 440 429 (11) - (11) 1
Slovakia 161 154 (7) (7) 2
Europe(c) 1,010 987 (23) - (23) 6
Malaysia 62 71 9 9 - 6
Thailand 1,815 1,914 99 105 (6) 44
Asia 1,877 1,985 108 114 (6) 50
International(c) 2,887 2,972 85 114 (29) 56
Group(c) 6,496 6,553 57 156 (99) 70
UK (One Stop) 134 158 24 32 (8) -
Czech Republic 103 98 (5) - (5) -
Franchise stores 237 256 19 32 (13) -
(a) Continuing operations.
(b) The net gain/reduction reflects the number of store openings less the number of store closures/disposals.
(c) Excludes franchise stores.
Actual Group space - '000 sq ft(a)
2015/16 year end 2016/17 year end Net gain/reduction Openings Closures/disposals Repurposing/Extensions(c)
Extra 17,846 17,748 (98) - - (98)
Superstore 14,002 14,075 73 96 (23) -
Metro 2,005 1,993 (12) - (12) -
Express 4,031 4,054 23 40 (17) -
Dotcom only 716 716 - - - -
Total Tesco 38,600 38,586 (14) 136 (52) (98)
One Stop(b) 1,256 1,269 13 44 (31) -
Dobbies 1,652 - (1,652) - (1,652) -
UK(b) 41,508 39,855 (1,653) 180 (1,735) (98)
ROI 3,560 3,543 (17) - (17) -
UK & ROI(b) 45,068 43,398 (1,670) 180 (1,752) (98)
Czech Republic(b) 5,558 5,479 (79) - (28) (51)
Hungary 6,931 6,896 (35) - (5) (30)
Poland 9,688 9,578 (110) - (85) (25)
Slovakia 3,969 3,859 (110) - (83) (27)
Europe(b) 26,146 25,812 (334) - (201) (133)
Malaysia 4,164 4,005 (159) 35 - (194)
Thailand 15,536 15,522 (14) 514 (26) (502)
Asia 19,700 19,527 (173) 549 (26) (696)
International(b) 45,846 45,339 (507) 549 (227) (829)
Group(b) 90,914 88,737 (2,177) 729 (1,979) (927)
UK (One Stop) 185 212 27 39 (12) -
Czech Republic 96 92 (4) - (4) -
Franchise stores 281 304 23 39 (16) -
(a) Continuing operations.
(b) Excludes franchise stores.
(c) Repurposing of gross selling space is not included in the above net selling space measure.
Group space forecast to 24 February 2018 - '000 sq ft(a)
2016/17 year end 2017/18 year end Net gain/reduction Openings Closures/disposals Repurposing/extensions
Extra 17,748 17,748 - - - -
Superstore 14,075 14,149 74 74 - -
Metro 1,993 1,993 - - - -
Express 4,054 4,112 58 60 (2) -
Dotcom only 716 716 - - - -
Total Tesco 38,586 38,718 132 134 (2) -
One Stop(b) 1,269 1,297 28 49 (21) -
UK(b) 39,855 40,015 160 183 (23) -
ROI 3,543 3,584 41 40 - 1
UK & ROI(b) 43,398 43,599 201 223 (23) 1
Czech Republic(b) 5,479 5,049 (430) - (291) (139)
Hungary 6,896 6,800 (96) - - (96)
Poland 9,578 9,221 (357) - (167) (190)
Slovakia 3,859 3,630 (229) - (208) (21)
Europe(b) 25,812 24,700 (1,112) - (666) (446)
Malaysia 4,005 3,891 (114) 65 (60) (119)
Thailand 15,522 15,622 100 436 (16) (320)
Asia 19,527 19,513 (14) 501 (76) (439)
International(b) 45,339 44,213 (1,126) 501 (742) (885)
Group(b) 88,737 87,812 (925) 724 (765) (884)
UK (One Stop) 212 277 65 65 - -
Czech Republic 92 92 - - - -
Franchise stores 304 369 65 65 - -
(a) Continuing operations.
(b) Excludes franchise stores.
Appendix 6
Tesco Bank income statement
2016/17(a)£m 2015/16(a)£m
Revenue
Interest receivable and similar income 622 576
Fees and commissions receivable 390 379
1,012 955
Direct costs
Interest payable (175) (166)
Fees and commissions payable (23) (3)
(198) (169)
Gross profit 814 786
Other expenses:
Staff costs (165) (172)
Premises and equipment (76) (81)
Other administrative expenses (215) (212)
Depreciation and amortisation (96) (91)
Provisions for bad and doubtful debts (105) (68)
Operating profit before exceptional items 157 162
Restructuring and other exceptional items(b) (80) (1)
Operating profit 77 161
Net finance costs: movements on derivatives and hedge accounting 6 (8)
Net finance costs: interest (4) (4)
Share of profit/(loss) of joint venture(c) (16) (3)
Deduct: management charges - (1)
Profit before tax 63 145
(a) These results are for the 12 months ended 28 February 2017 and the previous period comparison is made with the 12
months ended 29 February 2016.
(b) Restructuring and other exceptional items in 2016/17 consists of an increase in the provision for customer redress of
£45m and business simplification and head office relocation costs of £35m.
(c) Share of profit/(loss) of joint venture includes a charge of £23m, representing the Group's share of losses incurred
by Tesco Underwriting Limited (TU) relating to the impact on TU's insurance reserves of a change in the Ogden tables, which
are used to calculate future losses in personal injury and fatal accident cases. The £23m charge has been reported as an
exceptional item in the Group income statement.
This information is provided by RNS
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