Company Announcements

Final Results

Source: RNS
RNS Number : 6854V
Tesco Personal Finance PLC
10 April 2019
 

Tesco Personal Finance plc

Publication of Annual Report and Financial Statements for the year ended 28 February 2019

 

In accordance with Listing Rule 9.6.1, a copy of the above document for Tesco Personal Finance plc has been submitted to the UKLA document viewing facility and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM

 

The document is also available on the Company's website at: www.corporate.tescobank.com 

 

This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement.

 

Reference to pages and numbers refer to page numbers and notes to the annual accounts in the Annual Report and Financial Statements 2019.

 

To view images associated with this announcement please click on the PDF link.

http://www.rns-pdf.londonstockexchange.com/rns/6854V_1-2019-4-9.pdf 

 

For any media enquiries please contact Chris Sibbald (Head Of Communications, Tesco Bank) on 07855955531.

 

 

 

10 April 2019

 

 

TESCO PERSONAL FINANCE PLC

ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 28 FEBRUARY 2019

Company Number SC173199

 

TESCO PERSONAL FINANCE PLC

CONTENTS

 

Directors and Advisers................................................................................................................................ 1

Strategic Report.......................................................................................................................................... 2

Directors' Report........................................................................................................................................ 19

Consolidated Income Statement................................................................................................................ 26

Consolidated Statement of Comprehensive Income.................................................................................. 27

Consolidated and Company Statements of Financial Position.................................................................... 28

Consolidated Statement of Changes in Equity............................................................................................ 29

Company Statement of Changes in Equity.................................................................................................. 31

Consolidated and Company Cash Flow Statements.................................................................................... 33

Notes to the Financial Statements.............................................................................................................. 34

Independent Auditor's Report................................................................................................................... 140

Abbreviations............................................................................................................................................. 151

Glossary of Terms....................................................................................................................................... 152

 

 

 

 

 

TESCO PERSONAL FINANCE PLC

DIRECTORS AND ADVISERS

 

Directors:

Graham Pimlott

Independent Non-Executive Chairman

 

Karl Bedlow

Chief Customer Officer

 

John Castagno

Independent Non-Executive Director

 

Robert Endersby

Independent Non-Executive Director

 

Jacqueline Ferguson

Independent Non-Executive Director

 

Richard Henderson

Chief Risk Officer

 

Declan Hourican

Chief Financial Officer

 

Simon Machell

Independent Non-Executive Director

 

Gerard Mallon

Chief Executive

 

James McConville

Independent Non-Executive Director

 

David McCreadie

Managing Director

 

Amanda Rendle

Independent Non-Executive Director

 

Alan Stewart

Non-Executive Director

 

James Willens

Senior Independent Non-Executive Director

 

 

 

Company Secretary:

Michael Mustard

 

 

 

 

Registered Office:

2 South Gyle Crescent

 

 

Edinburgh

 

 

EH12 9FQ

 

 

 

 

Independent Auditor:

Deloitte LLP

 

 

20 Castle Terrace

 

 

Edinburgh

 

 

EH1 2DB

 

 

 

 

Bankers:

The Royal Bank of Scotland plc

 

36 St Andrew Square

 

Edinburgh

 

EH2 2YB

 

 

 

 

HSBC Bank plc

 

 

8 Canada Square

 

 

London

 

 

E14 5HQ

 

 

 

 

 

Bank of New York Mellon, London Branch

 

1 Canada Square

 

 

London

 

 

E14 5AL

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                1


TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT

The Directors present their Strategic Report for the year ended 28 February 2019.

The Annual Report and Financial Statements comprises the Strategic Report, the Directors' Report, and the Company and Consolidated Financial Statements and accompanying notes.  In the Annual Report and Financial Statements, unless specified otherwise, the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture included in the Consolidated Financial Statements.  The Group operates using the trading name of Tesco Bank.

Tesco Personal Finance plc is a wholly owned subsidiary of Tesco Personal Finance Group PLC (TPFG), the share capital of which is wholly owned by Tesco PLC (Tesco).  A reconciliation of the results contained within this Strategic Report to the Tesco Bank results presented in the Tesco preliminary results 2018/19 can be found on the Tesco internet page https://www.tescoplc.com/media/754302/broker-pack-2019.pdf.

Business Model

The Group provides financial services and products to personal customers in the United Kingdom (UK). The Company is incorporated and registered in Scotland.  The Company owns 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company.  TU is accounted for as a joint venture of the Group. 

Headlines

Impact of Adoption of New Accounting Standards

The Group adopted both International Financial Reporting Standard (IFRS) 9 'Financial instruments' and IFRS 15 'Revenue from contracts with customers' with effect from 1 March 2018.

IFRS 9 has been applied retrospectively at 1 March 2018 by adjusting the opening balance sheet at that date, with no requirement to restate comparative periods. IFRS 15 has been applied fully retrospectively and prior period comparatives have been restated.

The adoption of IFRS 9 resulted in a decrease in the Group's and Company's total financial assets of £214.2m.  In addition, a provision of £9.3m was recognised in respect of expected credit loss allowances in excess of the carrying amount of the related financial assets.  Net of a deferred income tax asset of £57.0m in respect of these transitional adjustments, the overall impact on equity was therefore a reduction in equity of £166.5m at 1 March 2018.

The adoption of IFRS 15 resulted in the earlier recognition of certain insurance renewal commission income, amounting to £18.5m at 1 March 2017, as well as the reclassification of the provision for insurance refunds of £4.2m from provisions for liabilities and charges to other liabilities.  A related increase of £5.0m in the deferred income tax liability was also recognised at 1 March 2017.

Further details of the transitional impact of the adoption of IFRS 9 and IFRS 15 are set out at note 2.

Income Statement

·      Profit before tax is 0.1% lower at £198.9m (2018: £199.1m)1.  The key drivers of the decrease in profit before tax are:

an 11.3% increase in net interest income to £548.9m (2018: £493.1m), reflecting higher interest earnings on the back of lending growth.  Net interest margin has decreased slightly to 3.8% (2018: 3.9%), reflecting the impact of growth in the lower margin Mortgage book as a percentage of the group's overall lending portfolio;

a 5.3% reduction in fee and commission income to £333.2m (2018: £351.8m)1. This predominantly reflects continued pressure on insurance retention rates due to a highly competitive environment, leading to a reduction in insurance commission income, and a reduction in ATM income as a result of the downward trend in ATM transactions being seen across the market as customers move towards contactless and other forms of payment. Partially offsetting this, the Group has recognised accelerated income, net of the unwind of accelerated income recognised in prior years, of £13.2m in respect of certain insurance renewal commission income where the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates;

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 2         


TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Income Statement (continued)

a loss on financial instruments at fair value through profit or loss (FVPL) of £4.2m (2018: gain of £11.0m);

a gain on disposal of investment securities of £8.4m (2018: £0.1m);

an increase of 0.3% in operating expenses to £531.2m (2018: £529.5m). This includes a charge of £16.4m (2018: £nil) relating to the November 2016 fraud incident following receipt from the Financial Conduct Authority (FCA) of a final warning notice; and a payment protection insurance (PPI) charge of £16.0m (2018: £35.0m) recognised during the year.  The PPI charge recognised during the prior year was partially offset by a provision release in the prior year of £1.5m from the Group's Consumer Credit Act (CCA) customer redress provision and a credit of £9.7m received in the prior year following the conclusion of negotiations with a third party in respect of previously recognised customer redress.  Also included is a restructuring credit of £1.6m (2018: £1.2m) relating to the early exit from the Group's offices in central Edinburgh; and

a 19.4% increase in impairment charges to £164.1m (2018: £137.4m)2. This reflects balance growth, the implementation of a number of credit initiatives in recent years, which have been targeted at supporting the borrowing needs of Tesco customers in a profitable and controlled manner, and current year impairment charges now being calculated on an expected credit loss basis under IFRS 9.  The bad debt:asset ratio (BDAR) increased to 1.4% (2018: 1.3%)3.

·      Underlying profit before tax, which excludes items not reflective of ongoing trading performance, is 10.4% higher at £233.9m (2018: £211.9m)1.  A reconciliation of statutory to underlying profit for the current and prior period is set out on pages 5 and 6.

·      Income tax on the Group's profit for the year is a charge of £55.6m (2018: £60.6m)1.  The Group's current year effective tax rate is higher than the statutory rate principally due to the non-deductibility of both the PPI charge of £16.0m recognised during the year and the regulatory charge of £16.4m. 

Balance Sheet

·      Loans and advances to customers have increased by 7.8% to £12.4bn (2018: £11.5bn).  Mortgage balances reached £3.8bn (2018: £3.0bn) as the Mortgage product range continued to expand via the intermediary broker channel.  The Group has also seen growth in both Credit Cards and Personal Loan balances of 3.0% and 6.7% respectively.

·      Customer deposits have increased by 13.3% to £10.5bn (2018: £9.2bn).  This continues to be the main source of the Group's funding.  Deposits from banks at 28 February 2019 totalled £1,663.2m (2018: £1,539.0m).  At the year end, the Group had entered into repurchase transactions of £324.2m (2018: £200.0m) and accessed £1,339.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (2018: £1,339.0m). The lower cost of funding provided by the TFS is reflected in competitive offers for the Group's borrowing customers.

·      The balance sheet remains strong and well positioned to support future lending growth from both a liquidity and capital stand point.  At 28 February 2019, the total capital ratio was 18.4% (2018: 19.4%)1 and net stable funding ratio (NSFR) was 123.4% (2018: 118.1%)1.  The increase in the NSFR over the year reflects the relative movements in the Group's available and required funding, with additional customer deposits resulting in increased available funding of £1.2bn, offset by a £0.9bn increase in the Group's required funding, arising from the growth in customer lending referred to above.

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

2 The impairment charge for the year ended 28 February 2019 reflects impairment charges on an expected loss basis in accordance with IFRS 9.  The comparative figure reflects impairment charges on an incurred loss basis, as previously reported under International Accounting Standard (IAS) 39 'Financial instruments: Recognition and measurement'.

3 The BDAR for the year ended 28 February 2019 reflects impairment charges on an expected loss basis in accordance with IFRS 9.  The comparative figure reflects impairment charges on an incurred loss basis, as previously reported under IAS 39.

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Strategic Priorities

The vision of Tesco Bank is to 'be the bank for people who shop at Tesco'.  In order to further the Group's pursuit of this ambition, the Group continues to seek opportunities to make it easier for Tesco customers to bank and insure with the Group through targeted investment in technology and data, making life simpler for both customers and colleagues and driving efficiency that can be reinvested in the customer offer.  The Group's strategy is to bring the best of Tesco to financial services, offering customers great value across the range of products and earning customer trust through the Group's actions.  Use of the Group's mobile banking App continues to expand, and the App has now been downloaded by more than 1.2 million users. Changes to the App in April 2018 simplified the registration journey, enhancing the customer experience by allowing customers to register for the App without having to set up online banking security beforehand.

In May 2018, the Group launched a new online banking experience to improve how the Group's customers view their banking products, making it easier to see what matters most, at first glance. The Group's Personal Current Account customers can now see a balance beside each of their transactions, helping customers to better manage their money.  In February 2019 the Group announced new features, including the ability for customers to use Siri as a convenient way to check their account balances.

The Group's Tesco Pay+ service continues to grow, offering Tesco shoppers the ability to pay and collect Clubcard points with one simple and convenient scan of their phone.

The Group continues to deliver value to its Mortgage customers and improve the customer experience.  In the year, the Group launched a new Broker Product Switch Portal, which allows the Group's panel of Mortgage intermediaries to select new remortgage deals on behalf of existing customers.

The Group now has 323 Travel Money bureaux across the UK, and provided customers with over £1 billion in currency in the 12 months to 28 February 2019.

The Group's commitment to offering attractive products and good service for customers has been rewarded with recognition as 'Best Card Provider (Standard Rate)' and 'Best Variable Rate Mortgage Provider' at the 2018 Moneyfacts Awards, 'Best Direct Lender' at the What Mortgage Awards 2018, and 'Best Online Pet Insurance Provider' and 'Best Direct Car Insurance Provider' at the Your Money Awards 2018.  Additionally, the Bank's customer complaints service won 'Best Service Design in the Private Sector' at the Global Service Design Awards.

During the year, colleagues raised over £81,000 for the Group's charity partners and volunteered over 3,700 hours to the local communities. In April 2018, the Group marked its first 'Tesco Bank Turns Pink' event, showing the Group's commitment and support to Cancer Research UK's Race for Life.

In August 2018, Gerry Mallon joined the Group as Chief Executive.

Regulatory Developments

The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.

Three major components of regulatory reform relating to data regulation came into force during 2018.  These are Open Banking, the second Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR), all of which are focused on innovation, competition and consumer protection.

PSD2, together with Open Banking, allows customers to choose to share data from their banking products with third party providers (TPPs) and bring together some or all of their financial relationships and data in one place, potentially leading to a fundamental change in how customers manage both their money and data over the longer term.  The aim of these changes is to promote competition and increase customer choice. They provide potential opportunities for the Group to attract new customers, as well as potentially increasing competition from traditional banking businesses and new providers of financial services, including technology companies. The Group continues to monitor and review the risks associated with the introduction of PSD2, including the need to ensure that there is appropriate control and ownership of sensitive and confidential customer data as the use of TPPs becomes more widespread.

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

GDPR came into effect on 25 May 2018, providing new and enhanced rights for individuals in respect of their personal information.  The Group undertook a business-wide review of data protection policies and processes ahead of the GDPR compliance date and appointed a Data Protection Officer to oversee compliance.

Uncertainty remains around the implementation and impact of some regulatory developments including the finalisation of Basel III, which will be subject to European Union (EU) and UK implementation.  In addition, the Group will be subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2022.  The Group is working towards implementation of these requirements and has reflected them in its funding plan.

Business Review

During the year, the business continued to deliver growth across its primary products (Credit Cards, Personal Loans, Mortgages, Personal Current Accounts and Savings).

Mortgage balances grew by 25.1% in the period, reaching £3,753.2m (2018: £3,000.7m), while Credit Card balances increased by 3.0% and Personal Loans by 6.7%.

Customer deposits of £10,478.6m (2018: £9,248.0m) continue to be the Group's primary source of funding.  The Group's customer deposits grew by 13.3% in the year.

During the year, the Group maintained its funding from the BoE's TFS at £1,339.0m (2018: £1,339.0m) in order to support future lending growth.

Money Services products have performed well overall as the Group continues to enhance the product range and expand the customer base.  A reduction in ATM transaction volumes, due to the declining use of cash as customers move towards contactless and other forms of payment, was partially offset by growth in other products, including Travel Money.

A significant and ongoing investment has been made in Motor insurance pricing in the period, across both new business and renewal policies, in response to competition, supporting the Group's commitment to offering value to Tesco customers.  This has driven improved Motor insurance retention rates year-on-year, although the total number of in-force policies has fallen, reflecting the impact of competition on Motor insurance premiums.

During the year, the Group made the decision to exit the Travel insurance market, withdrawing the product from 31 January 2019.

Financial Performance

The Group's financial performance is presented in the Consolidated Income Statement on page 26.  A summary of the Group's financial performance on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.


 

Statutory basis

Restructuring Costs1

Customer redress2

Regulatory Charge3

Financial instruments4

Underlying basis


£m

£m

£m

£m

£m

£m

Year ended 28 February 2019







Net interest income

548.9

-

-

-

-

548.9

Other income

337.4

-

-

-

4.2

341.6

Total income

886.3

-

-

-

4.2

890.5

Total operating expenses

(531.2)

(1.6)

16.0

16.4

-

(500.4)

Impairment

(164.1)

-

-

-

-

(164.1)

Operating profit

191.0

(1.6)

16.0

16.4

4.2

226.0

Share of profit of joint venture

7.9

-

-

-

-

7.9

Profit before tax

198.9

(1.6)

16.0

16.4

4.2

233.9

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

 


 

Statutory basis

Restructuring costs1

Customer redress2

Regulatory  Provision3

Financial instruments4

Underlying basis

 


Restated5





Restated5

 


£m

£m

£m

£m

£m

£m

 

Year ended 28 February 2018







 

Net interest income

493.1

-

493.1

 

Other income

362.9

-

(11.0)

351.9

 

Total income

856.0

-

(11.0)

845.0

 

Total operating expenses

(529.5)

(0.9)

23.8

-

(506.6)

 

Impairment

(137.4)

0.9

-

(136.5)

 

Operating profit

189.1

23.8

-

(11.0)

201.9

 

Share of profit of joint venture

10.0

-

10.0

 

Profit before tax

199.1

23.8

-

(11.0)

211.9

 

1  Comprising:

·      depreciation and amortisation charge of £nil (2018: charge of £0.3m) presented within depreciation and amortisation on page 26;

·      a restructuring credit of £1.6m (2018: credit of £1.2m), reflecting a reduction in dilapidations and onerous lease provisions, presented within administrative expenses on page 26; and

·      impairment on loans and advances to customers following agreement to sell the Irish Credit Card book, of £nil (2018: £0.9m) presented within impairment on loans and advances to customers on page 26.

These charges and credits are in relation to business restructuring and not considered part of the Group's underlying results.

2  Comprising:

·      a PPI charge of £16.0m (2018: £35.0m) recognised during the year. The PPI charge recognised during the prior year was partially offset by a provision release in the prior year of £1.5m from the Group's CCA customer redress provision and a credit of £9.7m received in the prior year following the conclusion of negotiations with a third party in respect of previously recognised customer redress.  There was no such provision release or credit in the current year. All of these charges and credits are presented within operating expenses on page 26. These charges and credits are historical in nature and not reflective of the Group's underlying trading performance.

Comprising:

·      a charge of £16.4m (2018: £nil) in respect of the November 2016 fraud incident, presented within operating expenses on page 26. This charge relates to the financial penalty imposed by the FCA in relation to this incident and is not reflective of the Group's underlying trading performance.

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

The Directors consider the following to be Key Performance Indicators for the Consolidated Income Statement:

 

2019

2018

 

 

 

Restated1

 

 

 


 

Net interest margin

3.8%

3.9%

 

Underlying cost:income ratio 1

56.2%

60.0%

 

Cost:income ratio 1

59.9%

61.9%

 

Bad debt:asset ratio

1.4%

1.3%

 

1 The prior year has been restated following the retrospective adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

Capital and Liquidity Ratios

The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:

 

2019

2018

 

 

 

Restated1

 

 

 


 

Common equity tier 1 ratio

16.3%

16.2%

 

Total capital ratio

18.4%

19.4%

 

Net stable funding ratio

123.4%

118.1%

 

Loan to deposit ratio

118.6%

124.6%

 

1  The prior year has been restated following the retrospective adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

The Group's total capital ratio remains above internal targets and regulatory requirements at 18.4% (2018: 19.4%)1 and leaves the Group well placed to support future growth.

The increase in impairment provisions as a result of the adoption of IFRS 9 reduced the Group's common equity tier 1 capital ratio by 161 basis points (£164.4m) (unaudited) on an end point basis. The adoption of the regulatory capital transition arrangements allows the Group to spread the expected increase in provision over a 5 year period from 1 March 2018. The impact of IFRS 9 at 28 February 2019 under the transitional provisions was to reduce common equity tier 1 capital by £1.9m. The Group's common equity tier 1 capital is disclosed in note 40.

The NSFR, a measure of the Group's liquidity position, is within appetite at 123.4% (2018: 118.1%).  The Group maintains a liquid asset portfolio of high quality securities of £2.1bn (2018: £2.2bn).

1  The prior period has been restated following the retrospective adoption of IFRS 15 in the current period.  Refer to note 2 for further details.

Risk Management

Risk Management Approach

The Board of Directors has overall responsibility for determining the Group's strategy and related Risk Appetite. The Board's Risk Appetite comprises a suite of Risk Appetite statements, underpinned by corresponding measures with agreed triggers and limits.  The Risk Appetite framework defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business, its strategic objectives, long-term plan, capital plan and stress testing.  The Risk Appetite is formally reviewed by the Board on at least an annual basis.

The Board is also responsible for overall corporate governance, which includes overseeing an effective system of risk management and that the level of capital and liquidity held is adequate and consistent with the risk profile of the business.  To support this, a Risk Management Framework (RMF) has been embedded across the Group, creating an integrated approach to managing risk. The RMF brings together governance, Risk Appetite, the three lines of defence, the Policy Framework and risk management tools to support the business in managing risk as part of day-to-day activity, and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line Risk Management Function (RMFu).

The Chief Risk Officer (CRO) performs a strategic risk management role and is responsible for managing and enhancing the RMF.  The CRO is independent from any commercial function, reports directly to the Chief Executive Officer and can only be removed from his position with the approval of the Board.

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

The Group is exposed to a variety of risks through its day-to-day operations. The following table sets out the principal risks and uncertainties and how they are managed within the RMF.

Principal risks and uncertainties                                                Key controls and mitigating factors

Credit risk

The risk that a borrower will default on a debt or obligation by failing to make contractually obligated payments, or that the Group will incur losses due to any other counterparty failing to meet their financial obligations.

Operational risk

The risk of potential error, loss, harm or failure caused by ineffective or inadequately defined processes, system failure, improper conduct, human error, fraud or from external events.

All lending is subject to underwriting processes and the performance of all exposures is monitored closely.  Regular management reports are submitted to the Board and appropriate Committees.

 

 

The Group aims to manage operational risks within defined Risk Appetite limits.

An Operational Risk Framework comprising Event management, Risk and Control Self-Assessment (RCSA) and Operational Risk Scenario Analysis processes is in place.

Regular reporting is provided to the Executive Risk Committee (ERC) and remedial actions taken as required.

The Group's ERC provides oversight of the Group's operational risk profile.

A significant number of services and processes are provided by third party service providers and a key operational risk is the failure of an outsourced service provider.

The Procurement and Supplier Management policy provides consistent standards for supplier sourcing and selection.

The Supplier Management Framework enables the monitoring of the performance of third-party outsourced service providers and suppliers against agreed service level agreements, the management of those relationships and the improvement of service or termination of contract where appropriate.

Increased market demand for specialist personnel could result in increased costs of recruitment and retention or reduced organisational effectiveness if a sufficient number of skilled staff cannot be employed or retained.

The Executive Committee (ExCo) oversees key aspects of people risk, including talent management, performance management, retention and succession planning.

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Operational risk (continued)


Financial crime and fraud are significant drivers of operational risk and the external threat continues to grow across the Financial Services industry.

The Group has a suite of policies that provide clear standards for the management of financial crime risks.  The Group has a dedicated Financial Crime team and continually monitors emerging risks and threats. Regular updates are provided to Executive and Board level committees.

The financial services industry remains under significant threat from cyber-attacks. This includes various organised groups targeting institutions through phishing, malware, denial of service and other sophisticated methods.

The Group manages cyber security risks through its Information Security team. The Group continually monitors emerging risks and threats.  Regular reporting is provided to the Information Security Committee (ISC), ERC and Board Risk Committee (BRC).

Liquidity and Funding risk

Liquidity risk is the risk that the Group is not able to meet its obligations as they fall due.  This includes the risk that a given security cannot be traded quickly enough in the market to prevent a loss if a credit rating falls.

 

Funding risk is the risk that the Group does not have sufficiently stable and diverse sources of funding.

Liquidity risk is governed through the Liquidity Management Forum, Asset and Liability Management Committee (ALCo), BRC and the Board.  The Group maintains a liquidity position in excess of internal and regulatory requirements. The Treasury function ensures all liquidity and funding measures are managed within policy and Risk Appetite on a daily basis.

The Group undertakes an Internal Liquidity Adequacy Assessment Process (ILAAP). Material risks to the Group are reviewed through stress testing to support an internal assessment of the level of liquidity that the Group should maintain.

The Group is predominantly funded by its retail deposit base, which reduces reliance on wholesale funding and in particular results in minimal short-term wholesale funding.

  Market risk

The risk that the value of earnings or capital is altered through the movement of market rates. This includes interest rates, foreign exchange rates, credit spreads and equities.

Control of market risk is governed by the ALCo and the Market Risk Forum (MRF).  These bodies provide oversight of the Group's market risk position at a detailed level and provide regular reports and recommendations to the BRC.  The Group has no trading book.

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Insurance risk

The risks accepted through the provision of insurance products in return for a premium. These risks may or may not occur as expected and the amount and timing of these risks are uncertain and determined by events outside of the Group's control.

 

The Group's aim is to actively manage insurance risk exposure, with particular focus on those risks that impact profit volatility. The Group has no direct underwriting risk.  However the Group is exposed to underwriting risk through its joint venture, TU. TU is a separately regulated entity and is capitalised accordingly.

TU operates a risk management framework designed to identify and manage risks to which it is exposed. This includes the use of reinsurance to limit risk exposure above certain levels and the engagement of external independent actuaries to provide assurance over the valuation of insurance liabilities.

Risk Appetite and a suite of risk policies are in place to manage risk in TU.

  Regulatory risk

The risk of reputational damage, liability or material loss from failure to comply with the requirements of the financial services regulators or related codes of best practice applicable to the business areas within which the Group operates.

The Group's risk appetite is to comply with the relevant rules, regulations and data protection legislation.  As part of the Group's Policy Framework, the Compliance Director is responsible for the Compliance policy which is approved by the Board, as well as for monitoring, challenging and providing oversight of regulatory risk and compliance across the business.


The risk of business conduct leading to poor outcomes can arise as a result of an over aggressive sales strategy, poor management of sales processes, credit assessments and processes or failure to comply with other regulatory requirements.

Business areas manage conduct risk and use a range of management information to monitor the fair treatment of customers.  A framework of product-led conduct management information has been developed and is reviewed by Senior Management in the business lines. Customer outcomes are also assessed as part of the development and design of new products and through annual product reviews of existing products.  The ERC and the Board review and challenge delivery of fair outcomes for customers.

The risk that regulatory changes such as Open Banking, PSD2 and GDPR will have an impact on how customers manage both their money and data over the longer term, with the potential for such regulatory changes to fundamentally alter the nature of competition in UK retail banking and have an impact on the Group's activities.  These changes also create opportunities for traditional competitors as well as non-banking firms, particularly digitally focused technology companies who have the ability to move at pace.

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Regulatory risk (continued)

The volume and pace of regulatory change remains high.  The Group actively engages in relevant industry consultation and closely monitors potential changes to regulatory requirements to allow it to address possible opportunities while recognising potential competitive risks.  The Group has unique opportunities arising from these regulatory changes to create additional benefits for customers due to its position within the wider Tesco group.

Capital risk

The risk that the Group holds regulatory capital which is of insufficient quality and quantity to enable it to absorb losses.

 

The Group undertakes close monitoring of capital ratios to ensure it complies with current regulatory capital requirements and is well positioned to meet any anticipated future requirement. Management of capital is governed through the ALCo, the BRC and the Board.

The Group undertakes an Internal Capital Adequacy Assessment Process (ICAAP). Material risks to the Group are reviewed through stress testing to support an internal assessment of the level of capital that the Group should maintain.

Where capital is not considered to be an appropriate mitigant for a particular risk, alternative management actions are identified.

The stress testing scenarios and final ICAAP results are presented to the BRC for challenge and approval. The ICAAP is submitted to the regulator on a regular basis and forms the basis of the total capital requirement given to the Group.

The prudential regulation of banks continues to develop, with a number of topics currently under consultation in both the EU and the UK.  The impact of future changes to capital and funding regulation may have an impact on the Group's activities.

The Group actively engages in relevant industry consultation and closely monitors potential changes to regulatory requirements.

Brexit

On 29 March 2017, the UK triggered Article 50, formally beginning the process to leave the EU.  The process of exiting the EU continues to contribute to political and economic uncertainty in the UK and Europe.

 

 

Following the EU referendum result, the political and economic outlook for the UK remains uncertain.  There is significant uncertainty over the timing and form of the UK's exit from the EU, resulting in continued uncertainty across the UK banking sector.  The Group has actively considered the potential risks associated with the UK's exit from the EU and their impact on both the UK financial services market and the Group itself.

 

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Brexit (continued)

 

 

 

 

 

 

 

 

 

The most significant impact arises in respect of credit risk relating to the performance of the Group's portfolio of loans and advances to customers.  The Group is monitoring trends in customer behaviour to ensure it is alert to any significant changes in customer demand as a result of any Brexit-related activities.  The Group also continues to closely monitor the macro-economic position.  Assessment of the required loss allowance under IFRS 9 has taken into account a range of macro-economic scenarios, one of which reflects a no-deal Brexit.

In addition, the Group's internal liquidity and capital adequacy assessments are designed to ensure that the Group is expected to have sufficient capital resources to allow it to cope with a severe economic stress and maintain sufficient liquidity above required limits throughout the going concern forecast period.

The Bank has also undertaken a series of activities to prepare for  Brexit.  As a UK retail bank, the Group does not anticipate any significant operational disruption as a result of Brexit.  However, the Group has taken steps to confirm that suppliers based in both the EU and UK do not foresee any disruption to service (including any issues with the transfer of data to the Group) post-Brexit.

The Group will continue to monitor the wider economic environment, particularly to assess the impact on credit risk to the Group.  The Group also continues to monitor related developments to the UK's exit from the EU, including the possibility of a second Scottish independence vote.

LIBOR rate replacement

On 27 July 2017 the FCA announced that the London Interbank Offered Rate (LIBOR) would be phased out and replaced with an alternative reference rate by the end of 2021.  The replacement reference rate has not yet been announced.

The Group has considered and identified the risks associated with moving to the Sterling Overnight Index Average (SONIA) as the reference rate and has developed a plan to mitigate these risks, which is being implemented in accordance with the Group's governance framework. The Group also continues to monitor industry developments.

 

The following pages provide a more granular overview of the operational control processes and risk mitigants adopted by the Group.

A fuller description of these risks and controls can also be found in the Pillar 3 Disclosure Statements of TPFG for the year ended 28 February 2019.  These disclosures will be published in the Financial Information section of the Tesco Bank corporate website in due course.

https://corporate.tescobank.com/48/accounts-and-disclosures

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Risk Management Framework (RMF)

The Group has a formal structure for reporting, monitoring and managing risks.  This comprises, at its highest level, the Group's Risk Appetite, approved by the Board, which is supported by the RMF.

The scope of the RMF extends to all principal risks faced by the Group and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line RMFu.

The key components of the RMF are as follows:

Risk Governance Structure

The Group has established a governance structure which is appropriate for the business in terms of its level of complexity and risk profile.  This structure is reviewed  periodically so that it remains suitable to support the business.

The risk governance structure set out in these disclosures describes the structure that was in place for the year to 28 February 2019.

The Board

Chairman

Executive Directors

Non-Executive Directors

Graham Pimlott

Karl Bedlow

John Castagno

 

Richard Henderson

Robert Endersby

 

Declan Hourican

Jacqueline Ferguson

 

Gerard Mallon

Simon Machell

 

David McCreadie

James McConville

 

 

Amanda Rendle

 

 

Alan Stewart

 

 

James Willens

The Board is the key governance body and is responsible for overall strategy, performance of the business and ensuring appropriate and effective risk management, in line with the approved Risk Appetite.

The Board approves the Group's business plans, budget, long-term plan, ICAAP, ILAAP and any material new product lines in line with the approved Risk Appetite.  The Board also monitors the Group's risk profile and capital adequacy position.  The Group employs hedging and mitigation techniques defined within the Group's policies to ensure risks are managed within Risk Appetite.

The Board has delegated responsibility for the day-to-day running of the business to the Chief Executive who has in turn established the ExCo to assist in the management of the business and to deliver the strategy in an effective and controlled way.  The Board has established Board committees and the executive has established Senior Management committees to:

·              oversee the RMF;

·              identify the key risks facing the Group; and

·              assess the effectiveness of the risk management actions.

 

 

 

 

 

Tesco Personal

Finance Board

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit

Committee

 

Board Risk

Committee

 

Remuneration

Committee

 

Disclosure

Committee

 

Nomination

Committee

The Board has overall responsibility for the management of the business and acts as the main decision making forum.  It sets the Risk Appetite and strategic aims for the business, in some circumstances subject to shareholder approval, within a control framework which is designed to enable risk to be assessed and managed.  The Board satisfies itself that financial controls and systems of risk management are strong through the reporting provided to it and provides feedback where necessary to ensure that reporting remains fit for purpose.

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

In order to support effective governance and management of the wide range of responsibilities, the Board has established the following five sub-committees:

·              Audit Committee (AC)

The AC comprises James McConville (chairman), Robert Endersby, Simon Machell and Jacqueline Ferguson

The key responsibilities of the AC are to review the Financial Statements; review the accounting policies and practices for compliance with relevant standards; examine the arrangements made by Management regarding compliance with requirements and standards under the regulatory system; review the scope and results of the annual external audit; oversee the process for selecting the external auditor and make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor; consider the effectiveness of the external auditor and their independence; review reports covering anti-money laundering and compliance, in particular the Money Laundering Reporting Officer annual report and Risk Assurance Report; maintain a professional relationship with the external auditor; oversee the Internal Audit (IA) function and review the IA programme; work closely with the BRC to avoid, as much as possible, any overlap or gap in the overall risk and assurance activities of the two committees; carry out such investigations or reviews as shall be referred to it by the Board; review the Group's plans for business continuity; approve the annual plan of Risk Assurance activity within the Group; receive and review reports, findings and recommendations from Risk; review and consider the adequacy of any follow up action, and any relevant investigation work, carried out by or on behalf of Risk; review and monitor Management's response to findings and recommendations following investigations carried out by Risk; and review the findings of external assurance reports provided by outsourced providers.

Further detail on the AC is included within the AC section of the Directors' Report.

·              Board Risk Committee (BRC)

The BRC comprises Robert Endersby (chairman), John Castagno, James McConville, Graham Pimlott, Amanda Rendle, Alan Stewart, James Willens and Jacqueline Ferguson.

The role of the BRC is to oversee that a culture is appropriately embedded which recognises risk and encourages all employees to be alert to the wider impact on the whole organisation of their actions and decisions; take a forward-looking view of possible economic trends and risks, informed by analysis of appropriate information, and consider their potential impact on the business; consider, and recommend to the Board, the Group's Risk Appetite and seek to ensure that overall business strategy is informed by and remains aligned with it; and review and challenge all major risks, controls, actions and events in the business, alerting the Board to any areas of concern.

·              Remuneration Committee (RC)

The RC comprises James Willens (chairman), Robert Endersby, Graham Pimlott and Amanda Rendle.

The role of the RC is to monitor compliance with regulatory requirements relating to remuneration, specifically the approval and identification of Material Risk Takers (MRTs); oversee the establishment and implementation of a remuneration policy for all colleagues within the Group (including specific arrangements for MRTs); provide robust performance and risk assessment in the determination of pay outcomes, including the oversight of pay outcomes for MRT colleagues; and ensure that the levels and structure of remuneration are designed to attract, retain and motivate the management talent needed to run the Group's business in a way which is consistent with the Risk Appetite and ongoing sustainability of the business and is compliant with all applicable legislation, regulation and guidelines.

·              Disclosure Committee (DC)

The DC comprises Graham Pimlott (chairman), Robert Endersby, Richard Henderson, Declan Hourican, James McConville and James Willens.

The DC reviews, on behalf of the Board, formal company documents which are either destined for publication or which, due to their size or complexity, are better reviewed in detail in a smaller group, to ensure Tesco Bank's compliance with relevant statutory and regulatory obligations.

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

·              Nomination Committee (NC)

The NC comprises Graham Pimlott (chairman), Simon Machell, James Willens and Amanda Rendle.

The NC has responsibility for reviewing the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board and making recommendations with regard to any changes required, including the nomination of candidates to fill Board vacancies as and when they arise; considering succession planning for directors and other senior executives, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed in the future; and keeping under review the leadership needs of the organisation, both executive and non-executive, with a view to safeguarding the continued ability of the organisation to compete effectively in the marketplace by keeping up-to-date and fully informed about strategic issues and commercial changes affecting the Group and the market in which it operates.

Executive Committee (ExCo)

The Group's Board has delegated the day-to-day running of the business to the Chief Executive. The Chief Executive has established the ExCo to assist in the management of the business and to deliver against strategy in an effective and controlled way.  The ExCo provides general executive management of the business.  Each ExCo member is accountable to the Chief Executive and to the Board for managing performance in line with the Group's Risk Appetite, long-term plan, strategy and annual budget.

The principal roles and responsibilities of the ExCo include providing general executive management of the Group and monitoring performance, including financial performance, in accordance with the approved strategic plan and Risk Appetite as approved by the Board; overseeing risks and controls across the business; promoting a culture of fairness and actively promoting and encouraging the Values; striving for the successful execution of strategy; setting out a framework of reporting to the Board that is sufficient to enable the Board to fulfil its responsibilities; developing strategic plans, budgets and all other matters to be referred to the Board, with regard to the interests of its shareholder, employees, customers and other stakeholders, prior to submission to the Board for approval; authorising certain levels of spend; reviewing, challenging and providing direction relating to the delivery of fair outcomes for customers through regular updates on conduct risk; determining whether to launch the Group's Recovery Plan in the event of a breach of a recovery trigger and managing the crisis thereafter; and overseeing Procurement and Supplier Management, with particular focus on ensuring that the key risks associated with outsourcing and third party supplier management are assessed and mitigated.

In addition, in order to consider high level matters which require cross-functional oversight and engagement, the ExCo has established six sub-committees which report directly to it. The sub-committees have delegated authority to take decisions within strict parameters and financial authorities as detailed within their respective Terms of Reference. The ExCo receives and considers regular reports from each sub-committee on delegated matters and receives the minutes from those sub-committees to monitor key activities and decisions taken under delegation.

·              Commercial Executive Committee (CEC)

The principal role of the CEC is to oversee performance and matters arising across the Commercial business through review of credit risk approvals, receipt of risk, risk event and IA reporting; oversee top risks - ensuring that existing and emerging risks and issues are controlled appropriately and referred to the relevant Board, ExCo or sub-committee when needed; identify risks to good customer outcomes, providing challenge and recommending further action to resolve and track those actions to completion; and escalate material conduct or Treating Customers Fairly risks to the ExCo.

The CEC has four sub-committees: Commercial and Credit Risk Committee; Transactional Banking Management Committee; Savings, Loans and Mortgages Management Committee and the Insurance Management Committee.

 

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

·              Asset and Liability Management Committee (ALCo)

The principal role of the ALCo is to optimise the Group's balance sheet within Board approved Risk Appetite and relevant regulation; identify, manage and control the Group's balance sheet risks, defining strategic balance sheet structural objectives which align with Risk Appetite, the regulatory obligations of the Group and the commercial and business objectives approved by the Board; recommend to the Board any required changes to the amount or composition of the Group's capital base; monitor continuous compliance with all internal and regulatory limits relating to Liquidity, Capital and Market Risks; and periodically review and recommend for approval to the Board the Treasury principal risk policies and key regulatory documents.

The ALCo has three sub-committees: the Liquidity Management Forum; MRF and Capital Management Forum.

·              Executive Risk Committee (ERC)

The principal role of the ERC is to provide oversight and challenge on all aspects of the Group's RMF to oversee that the three lines of defence model is operating effectively; monitor the appropriateness of and adherence to Risk Appetite and make recommendations to the BRC on any changes; provide oversight of the Policy Framework and the consideration and challenge of policy waivers and exceptions; consider the impact of regulatory initiatives on the current and future state of compliance by the Group; and oversee operational resilience and procurement and supplier management, with particular focus on ensuring that the key risks associated with outsourcing and third party supplier management are assessed.

The ERC has nine sub-committees: Operational Resilience Committee; Supplier Management Group; Information Security Committee; Prudential Risk Forum; Risk Transformation Committee; Conduct Oversight and Risk Committee; Executive Credit Committee; Financial Crime Committee; and the Regulatory Change Forum.

·              Customer Division Executive Committee (CDEC)

The role of CDEC is to approve key decisions and provide oversight and challenge of performance and matters arising across the Customer division of the business, supporting the effective management of risk and control of all top risks and material events facing the division; provide oversight and challenge to support efficient and effective business and financial performance across the Customer division; and approve activities in relation to change and project-related work and consider and challenge customer outcomes as appropriate.

The CDEC has four sub-committees: Customer Security Committee; Service Risk Committee; Data Steering Group and the Customer Division Management Committee.

·              Insurance Executive Committee (IEC)

The role of the IEC is to support the Chief Customer Officer in creating and executing a business plan that will deliver the agreed insurance strategy within Risk Appetite. IEC approves key decisions within its delegated authority and receives appropriate management information to allow it to oversee performance, risk, conduct and customer matters.

·              Model Rating System and Oversight Committee (MRSOC)

The MRSOC exists to approve all high materiality models prior to their implementation and provide oversight of those models in operation, with reference to their compliance with regulation, operational effectiveness, governance and risk requirements.

 

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Three Lines of Defence

The Group has adopted the 'three lines of defence' model of governance, which is a widely recognised, best practice approach to ensuring that the risks within a financial institution are appropriately managed and are subject to effective oversight and challenge.  The model has clearly defined roles and responsibilities which help to drive effective risk management.

·              First line of defence

Senior Management within each business area is responsible for managing the risks that arise from the activities in which it is engaged in accordance with the Group's RMF and policies.  The role of the first line of defence is to implement the Group's RMF and policies; identify, assess, own and manage risks that arise from the activities in which it is engaged; design, implement, operate and test management controls; identify and manage risk events, including the delivery of remedial actions and performance of root cause analysis; operate within Risk Appetite and any and all related limits which the second line establish; comply with risk reporting standards established by the second line; and perform risk aggregation, analysis and reporting within their business line.

·              Second line of defence

The RMFu operates under the leadership of the CRO.  Risk teams reporting to the CRO are the second line of defence and are resourced by people with expertise in each of the principal risks faced by the Group.  This enables appropriate analysis, challenge, understanding and oversight of each of the principal risks.

The role of the second line of defence is to own, develop, communicate and provide advice on the Group's RMF and policies; provide risk-based oversight and assurance of the first line's implementation of the RMF and policies; provide risk-based oversight and assurance of first line risk management and control, including challenging the completeness of risk identification and assessment, which can take a variety of forms including active involvement in committees and meetings and review and challenge of Management information; own the Risk Appetite framework on behalf of the Board; design and deliver standards for risk reporting escalation; and perform Group-wide risk aggregation and analysis. 

·              Third line of defence

This comprises the IA function, which is responsible for providing independent assurance to the Board and Senior Management on the adequacy of the design and operational effectiveness of internal control systems and measures across the business. The IA function has an independent reporting line to the Chairman of the AC and is resourced by individuals with relevant experience and professional qualifications.  In addition, IA resources are supplemented across a range of audits by external support to provide additional subject matter expertise when required.

Independent assessment is provided through the execution of an agreed plan of audits and through attendance at relevant governance committees and through stakeholder management meetings.

The primary role of IA is to provide independent assurance on the effectiveness of governance, risk management and control across the first and second lines. The IA function achieves this through its core responsibilities, which include proposing an annual audit plan based on its assessment (after discussion with Management) of the significant potential risks to which the organisation could be exposed; carrying out audits of functions and processes in accordance with the annual audit plan and any additional special investigations requested by Management, the Board, the AC or the regulators; assessing the adequacy and effectiveness of the controls in the functions and processes audited, and issuing recommendations where improvement is required based on the results of work carried out; verifying compliance with those recommendations; reporting to the AC in relation to internal audit matters; and providing input to the Tesco IA department's reporting to the Tesco AC.

 

 

 

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TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Group Policies

The Group has a framework of key policies in place which are approved at Board and Executive level committees.  Each policy is owned by a specific individual who is responsible for developing and maintaining the policy, including gaining approval for the policy at the requisite level; communicating the policy, ensuring it is embedded so that those affected by it have sufficient information/understanding to comply; undertaking suitable assurance work to monitor compliance across the business; and reviewing non-compliance/policy waiver requests and agreeing suitable actions.

Each policy must be reviewed on at least a bi-annual basis, or earlier if there is a trigger for policy review such as a regulatory change, to ensure its continued effectiveness and applicability in line with changing risks.  The RMFu provides tracking and oversight of the Policy Framework and is responsible for undertaking assurance and providing reports to the Board on its effectiveness.

·              Stress Testing

Stress testing is the process by which the Group's business plans are regularly subjected to severe but plausible scenarios to assess the potential impact on the business, including projected capital and liquidity positions.  The scenarios adopted are subject to a rigorous selection process and include hypothetical operational failures, macro-economic stress events and customer behaviour impacts.  The results, along with proposed actions, are reported to the ALCo and BRC.  These are captured in both the ILAAP and the ICAAP.

·              Monitoring and Reporting

The Group monitors and tracks current exposures against limits defined in the agreed Risk Appetite and by the regulators. Exceptions are reported on a monthly basis to the ALCo and ERC and to each meeting of the BRC.  Adherence to these limits is independently monitored, measured and reported using a suite of key indicators defined by each risk team responsible for managing the major specific risk categories faced by the Group. Decisions made at subordinate risk committees and forums are reported to senior committees as appropriate.

 

The Strategic Report was approved by the Board of Directors and signed by order of the Board.

 

 

 

Michael Mustard

Company Secretary

8 April 2019

 

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT

The Directors present their Annual Report, together with the Company and Consolidated Financial Statements and Independent Auditor's Report, for the year ended 28 February 2019.

Business review and future developments

The Group's business review and future developments are set out in the Strategic Report on page 5.

Risk management

The Group's risk management disclosures are set out in the Strategic Report on pages 7 to 18.

Financial instruments

The Group's policies for hedging each major type of transaction are discussed in notes 1 and 17 to the Financial Statements.

Capital structure

The Group's capital structure is discussed in notes 33 and 40 to the Financial Statements.

Events after the reporting date

Details of events occurring after the reporting date are discussed in note 45 to the Financial Statements.

Going concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, including consideration of projections for the Group's capital and funding position. As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements.

Dividends

An interim dividend of £60.0m (2018: £50.0m) in respect of ordinary share capital was paid to TPFG on 21 February 2019.

Treating Customers Fairly

Treating Customers Fairly is central to the FCA's principles for businesses and remains central to the Tesco Values which sit at the heart of the business. These Values are designed to ensure that customer outcomes match their understanding and expectations.

Directors

The present Directors and Company Secretary, who have served throughout the year and up to the date of signing the Financial Statements, except where noted below, are listed on page 1.

Since 1 March 2018 to date the following changes have taken place:

 

Appointed

Resigned

 



Jacqueline Ferguson

26 April 2018


Gerard Mallon

13 August 2018


Iain Clink

 

24 August 2018

 

 

 

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

·              Audit Committee (AC)

Introduction from the AC Chairman

The Group operates in a demanding environment, particularly with regard to economic, reputational, political and regulatory factors. The role of the AC is critical in reviewing the effectiveness of the Group's internal control framework and assurance processes and in assessing and acting upon findings from both external and internal audit.  The AC keeps the current internal control framework and assurance processes under review to ensure that they adapt to the changing environment and remain appropriate for the Group.

AC composition, skills and experience

The AC acts independently of Management.  This ensures that the interests of shareholders are properly protected in relation to financial reporting and internal control.

As detailed in the section of the Strategic Report on the Board, the AC comprises four Independent Non-Executive Directors. 

James McConville is a Chartered Accountant and has significant financial and banking experience gained from over 30 years in the financial services sector, thus enabling him to fulfil the role as AC Chair.

James is currently Group Finance Director at Phoenix Group Holdings PLC, with responsibility for Finance, Treasury and Investor Relations. Previous appointments include Chief Financial Officer of Northern Rock plc and a variety of senior finance and strategy related roles for Lloyds Banking Group plc, including Finance Director of the Scottish Widows Group.

Robert Endersby has spent over 30 years working in the financial services sector, both within the United Kingdom and internationally and is an Associate of the London Institute of Banking and Finance. 

Robert's previous key appointments included Chief Risk Officer and member of the Executive Board of Danske Bank A/S, Vice Chairman of Danske Bank Oyj and senior risk management positions in Barclays, The Royal Bank of Scotland and ING Group.  Robert currently holds Non-Executive positions with Credit Suisse International and Credit Suisse Securities (Europe) Limited.

Simon Machell has worked in financial services for over 30 years and has experience in both general and life insurance in the UK, Europe and Asia.  The majority of Simon's experience was gained from a range of roles with Aviva, including Chief Executive of the RAC, Chief Executive of the general insurance business in the UK and running the insurance businesses in 14 markets across Eastern Europe and Asia.  Simon holds Non-Executive roles with Pacific Life Re, Prudential Corporation (Asia), Suncorp Group and TU.

Jacqueline Ferguson is an experienced Chief Executive from the technology industry. Jacqueline is the former Chief Executive of Hewlett Packard Enterprise Services UK, Ireland, Middle East Mediterranean and Africa and has extensive global experience including living and working in Silicon Valley, California for 3 years with Hewlett Packard.  Prior to Hewlett Packard Jacqueline worked for Electronic Data Systems and KPMG. 

Jacqueline is also a Non-Executive Director of Wood PLC and Croda PLC and a Trustee of Engineering UK and member of the Scottish First Minister's Advisory Board for Women and Girls, aimed at tackling Gender Inequality. Jacqueline chaired the public services strategy board for the Confederation of Business and Industry and was a member of the Tech Partnership, the industry body aimed at UK technology skills.

The Chairman, Chief Executive, Chief Financial Officer, Chief Risk Officer, Internal Audit Director, Director of Financial Control and Tesco Internal Audit Director attend committee meetings.  The external auditor also attends.

 

 

 

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

AC responsibilities

The key responsibilities of the AC are set out in the Strategic Report on page 14.

During the year, the AC received reports from a number of business areas including Finance in relation to financial reporting and Risk in relation to regulatory compliance, fraud, bribery and corruption and integrated assurance.  The AC also considered a variety of matters including the internal financial control framework, data leakage prevention, supplier assurance and business continuity arrangements.

Financial Statements and related financial reporting

In relation to the Financial Statements, the AC reviewed and recommended approval of the half-yearly results and annual Financial Statements and provided oversight of the statutory audit process.

During the year ended 28 February 2019, the AC considered the following matters:

·              Consistency and appropriateness of, and any changes to, significant accounting policies

The AC considered and accepted Management's review of the Group's accounting policies.  In particular, the AC has received reports from Management on the Group's transition to IFRS 9 and IFRS 15, both of which came into force for annual periods beginning on or after 1 January 2018.

The AC has also received reports from Management on the Group's readiness to comply with IFRS 16 'Leases', which will come into force for annual periods beginning on or after 1 January 2019.

·              The methods used to account for significant transactions

The AC reviewed and supported proposals from Management on the accounting for the issuance and redemption of notes in relation to securitisation transactions.

·              Going concern assessment

The AC considered Management's approach to, and the conclusions of, the assessment of the Group's ability to continue as a going concern.  This included Management's assessment of the impact of a no-deal Brexit on the Bank.  The AC supported the conclusion that it remained appropriate to adopt the going concern basis in preparing the Financial Statements.

·              Review of Financial Statements

The AC considered Management's approach to, and governance arrangements over, the preparation of the half-yearly results and annual Financial Statements and recommended to the Board that these should be approved.

·              Appropriate critical accounting estimates and judgements

The AC reviewed the nature, basis for and the appropriateness of the estimates and judgements proposed by Management in the Financial Statements.

The key estimates and judgements reflected in the Group's Financial Statements for the year ended 28 February 2019 are:

o   Loan impairment provision  (Refer to note 16)

At 28 February 2019, the Group's loan impairment provision was £485.2m.

The AC received regular reports from Management on provisioning, which assessed the adequacy of provisioning based on a number of factors.  These included levels of arrears, collateral, past loss experience, defaults based on portfolio trends, and expected loss rates.

The AC concluded that an appropriate governance framework existed to monitor provision adequacy and that the assumptions and judgements applied by Management were appropriate.

 

 

 

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

o   Effective interest rate (EIR)  (Refer to note 3)

IAS 39/IFRS 9 require the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology.

The AC received regular reports from Management summarising its approach, with particular focus given to reviewing the expected attrition rate of balances drawn, including the pay rates assumption used by Management.

The AC is satisfied that the carrying value of the assets and the associated income recognition is appropriate.

o   Provision for customer redress (Refer to note 29)

The Group has a provision for potential customer redress in relation to PPI.

The AC reviewed the key assumptions made in arriving at each element of the provision, with particular focus given to claims settled and the average amount of redress per claim.

The AC is satisfied that the provisions and related disclosures in the Financial Statements in respect of PPI and other customer redress provisions are appropriate.

o   Investment in joint venture (Refer to note 22)

The Group holds an investment in a joint venture, TU, an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting.

TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance.  Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Company and Consolidated Statement of Financial Position.

The AC reviewed the key judgements and estimates made by TU in determining the level of reserves held at the reporting date.

The AC is satisfied that the carrying amount of the Group's investment in TU is appropriate.

·              IT controls

The Group utilises a range of information systems to support its ongoing operations and financial reporting.

During the year, the AC received a number of reports on the Group's information systems, including the effectiveness of access rights to certain operating systems and applications used in the financial reporting process.

Improvements to access controls have been implemented and the AC will receive further reports on the effectiveness of access controls during the next financial year.

Performance and effectiveness of IA

The IA function supports the AC in providing an independent assessment of the adequacy and effectiveness of internal controls and the system of risk management. The function has the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with the Institute of Internal Auditors International Standards of the Professional Practice of Internal Auditing.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              22

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

It is essential for the AC to be able to have an honest and open relationship with both its external and internal auditors. This relationship is developed and maintained through private meetings with both Deloitte and the IA Director.

In compliance with the above standards, the AC assessed the effectiveness of the IA function with the results of the 2018 assessment being positive.

Performance and effectiveness of AC

The AC assesses the need for training on an ongoing basis and the annual agenda provides time for technical updates, which are provided by both internal and external experts.  During the year, the AC received specific training on accounting and reporting developments, with the key focus being on IFRS 9.  Training is also provided on an ongoing basis to meet the specific needs of individual committee members.

The effectiveness of the AC was reviewed as part of the wider Board effectiveness review which included interviews with all AC members.  It was concluded that the AC continued to be effective.

Non-audit fees

Deloitte contributes an independent perspective, arising from its work, on certain aspects of the Group's internal financial control systems, and reports to the AC.  The independence of the external auditor in relation to the Group is considered annually by the AC.

The Group has a non-audit services policy for work carried out by its external auditor.  This is split into three categories as follows:

1.             Pre-approved for the external auditor - audit-related in nature;

2.             Work for which AC approval is specifically required - transaction work and corporate tax services, and certain advisory services; and

3.             Work from which the external auditor is prohibited.

The AC concluded that it was in the best interests of the Group for the external auditor to provide a limited number of non-audit services during the year due to their experience, expertise and knowledge of the Group's operations.  Auditor objectivity and independence was considered for each engagement and the AC was satisfied that the audit independence was not, at any point, compromised.

Deloitte follows its own ethical guidelines and continually reviews its audit team to ensure its independence is not compromised.  The fees paid to the external auditor in the year are disclosed in note 9 to the Financial Statements.

·              Directors' Indemnities

In terms of Section 236 of the Companies Act 2006, all Executive and Non-Executive Directors have been issued a Qualifying Third Party Indemnity Provision by TPFG.  All Qualifying Third Party Indemnities were in force at the date of approval of the Financial Statements.

There was also a Qualifying Third Party Indemnity Provision issued by TPFG in force during the year for Iain Clink until the date of his resignation.

·              Our People

The Group is committed to promoting a diverse and inclusive workplace, reflective of the communities in which it does business. It approaches diversity in the broadest sense, recognising that successful businesses flourish through embracing diversity into their business strategy, and developing talent at every level in the organisation.

The Group's selection, training, development and promotion policies are designed to provide equality of opportunity for all colleagues, regardless of factors such as age, disability, gender reassignment, race, religion or belief, ethnic origin, gender, sexual orientation, marriage and civil partnership, pregnancy and maternity or trade union affiliation.  Decisions are based on merit.

During the prior year, the Group became a signatory to The Women in Finance Charter, which is a pledge for gender balance across financial services and represents a commitment from HM Treasury and signatory firms to work together

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              23

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

to build a more balanced and fair industry.  The Charter commits signatory firms to supporting the progression of women into senior roles in the financial services sector; recognises the diversity of the sector and that firms will have different starting points, meaning that each firm will set its own targets; and requires firms to publicly report on progress to deliver against these internal targets in support of the accountability and transparency needed to drive change. Further information on the Bank's progress against its gender diversity targets can be found at https://corporate.tescobank.com/.

The Group is committed to developing the skills and knowledge and supporting the wellbeing of its colleagues in order to help achieve its objectives and create a great place to work.  It ensures that the Tesco Values are reflected within its employment policies and practices to encourage engagement, enabling colleagues to be their best and able to contribute to the delivery of the Group's core purpose.

There are processes in place for understanding and responding to colleagues' needs through surveys and regular performance and development reviews. Business developments are communicated frequently to keep colleagues well informed about the progress of the Group. Ongoing training programmes also seek to ensure that colleagues understand the Group's objectives and the regulatory environment in which it operates.

The Group works with colleagues, including those with disabilities, to adapt work practices where necessary in order to help them work effectively within the business.

Colleagues are encouraged to become involved in the financial performance of the wider Tesco Group through a variety of schemes, principally the Tesco savings related share option scheme (Save As You Earn) and the partnership share plan (Buy As You Earn).

·              Cautionary statement regarding forward-looking information

Where this document contains forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. These statements should be treated with caution due to the inherent risks and uncertainties underlying any such forward-looking information. The Group cautions users of these Financial Statements that a number of factors, including matters referred to in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 8 to 12.

·              Statement of Directors' Responsibilities

The following should be read in conjunction with the responsibilities of the independent auditor set out in their report on page 148.

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare such financial statements for each financial year.  Under that law the Directors have prepared the Group and Company Financial Statements in accordance with IFRSs as adopted by the EU. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year.  In preparing these Financial Statements, the Directors are required to:

·      properly select and apply accounting policies;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance; and

·      make an assessment of the Group's and Company's ability to continue as a going concern.

 

 

                                                                                                                                                                                                                                                                                                                                              24

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006.  They are also responsible for safeguarding

the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group's website.  Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names are listed on page 1 of the Annual Report and Financial Statements, confirms that to the best of their knowledge:

·      the Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

·      the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of Group, together with a description of the principal risks and uncertainties that it faces; and

·      the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the Company's shareholders to assess the Group's and Company's position, performance, business model and strategy.

·              Disclosure in respect of the Independent Auditor

So far as each Director is aware at the date of approving this report, there is no relevant audit information, being information needed by the auditor in connection with preparing this report, of which the auditor is unaware.  All of the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

·              External Audit Partner

The external audit partner for the year to 28 February 2019 was Stephen Williams ACA who has fulfilled this role since Deloitte LLP's appointment as external auditor on 30 June 2015.

Approved by the Board of Directors and signed by order of the Board.

 

Michael Mustard

Company Secretary

8 April 2019

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              25


TESCO PERSONAL FINANCE PLC

CONSOLIDATED INCOME STATEMENT
For the Year Ended 28 February 2019

 

 

2019

2018

 

Note

£m

£m

 

 

 

Restated1

 

 

 


Interest and similar income

5

728.6

640.3

Interest expense and similar charges

5

(179.7)

(147.2)

 

 



Net interest income

 

548.9

493.1

 

 



Fees and commissions income

6

365.8

383.4

Fees and commissions expense

6

(32.6)

(31.6)

 

 

 


Net fees and commissions income

 

333.2

351.8

 

 

 


Net (loss)/gain on financial instruments at FVPL

7

(4.2)

11.0

Net gain on investment securities

8

8.4

0.1

 

 

 


Net other income

 

4.2

11.1

 

 

 


Total income

 

886.3

856.0

 

 

 


Administrative expenses

9

(415.6)

(422.7)

Depreciation and amortisation

24,25

(83.2)

(83.0)

Provision for customer redress

29

(16.0)

(23.8)

Regulatory charge

29

(16.4)

-

 

 

 


Operating expenses

 

(531.2)

(529.5)

 

 

 


Impairment loss on financial assets

10

(164.1)

(137.4)

 

 

 


Operating profit

 

191.0

189.1

 

 

 


Share of profit of joint venture

22

7.9

10.0

 

 

 


Profit before tax

 

198.9

199.1

 

 

 


Income tax charge

12

(55.6)

(60.6)

 

 

 


Profit for the year attributable to owners of the parent

 

143.3

138.5

 

1 The prior period has been restated following the retrospective adoption of International Financial Reporting Standard (IFRS) 15 'Revenue from contracts with customers' in the current period (refer to note 2 for further details) and a reclassification between interest and similar income and interest expense and similar charges (refer to note 1 for further details).

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               26

TESCO PERSONAL FINANCE PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Year Ended 28 February 2019

 

 

2019

2018

 

Note

£m

£m

 

 

 

Restated1

 

 

 


Profit for the year

 

143.3

138.5

 

 

 


Items that may be reclassified subsequently to the income statement

 

 


 

 

 


Available-for-sale (AFS) investment securities

 

 


Net gains on AFS investment securities

12

n/a

1.8

Taxation

12

n/a

(0.3)

 

 

n/a

1.5

 

 

 


Debt securities at fair value through other comprehensive income (FVOCI)

 

 


Net losses on debt securities at FVOCI

12

(1.7)

n/a

Net gains on debt securities reclassified to the income statement on disposal

12

(8.4)

n/a

Unwind of expected credit loss (ECL) allowance on disposals

 

0.4

n/a

Taxation

12

2.6

n/a

 

 

(7.1)

n/a

Cash flow hedges

 

 


Net losses arising on cash flow hedges

12

(0.8)

0.4

Taxation

12

0.1

(0.1)

 

 

(0.7)

0.3

Currency basis reserve

 

 


Net foreign currency losses arising on cross currency interest rate swaps

12

(0.3)

-

 

 

(0.3)

-

 

 

 


 

 

 


Share of other comprehensive expense of joint venture

22

(1.2)

(6.5)

 

 

(1.2)

(6.5)

 

 

 


Items that will not be reclassified to the income statement

 

 


 

 

 


Equity securities at FVOCI

 

 


Net gains on equity securities designated at FVOCI

12

0.5

n/a

Taxation

12

(0.1)

n/a

 

 

0.4

n/a

 

 

 


Other comprehensive expense for the year, net of tax

 

(8.9)

(4.7)

 

 

 


Total comprehensive income for the year attributable to owners

of the parent

 

134.4

133.8

1The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

                                                                                                                                                                                                                 

 

 

                                                                                                                                                                                                                                                                                                                                               27


TESCO PERSONAL FINANCE PLC

CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION
For the Year Ended 28 February 2019

                                                                                                                                                         Company number SC173199

 

 

            Group

             Company

 

 

2019

2018

2019

2018

 

Note

£m

£m

£m

£m

Assets

 

 

Restated1

 

Restated1

Cash and balances with central banks

14

1,072.1

1,318.6

749.9

997.3

Loans and advances to banks

15

324.2

-

324.2

-

Loans and advances to customers

16

12,425.7

11,522.4

12,425.7

11,522.4

Derivative financial instruments

17

31.3

46.1

31.3

46.1

Investment securities

18

1,071.5

959.5

1,071.5

959.5

Prepayments and accrued income

19

49.4

49.3

49.4

49.3

Other assets

20

236.6

280.6

284.2

327.1

Deferred income tax asset

23

57.6

-

57.6

-

Investment in joint venture

22

86.4

90.0

76.2

86.5

Intangible assets

24

224.2

271.1

224.2

271.1

Property, plant and equipment

25

61.6

68.0

61.6

68.0

Total assets

 

15,640.6

14,605.6

15,355.8

14,327.3

Liabilities

 

 


 


Deposits from banks

26

1,663.2

1,539.0

1,663.2

1,539.0

Deposits from customers

27

10,478.6

9,248.0

10,478.6

9,248.0

Debt securities in issue

28

1,185.5

1,347.6

275.2

399.9

Derivative financial instruments

17

60.2

88.4

51.1

88.4

Provisions for liabilities and charges

29

55.0

76.0

55.0

76.0

Accruals and deferred income

30

108.0

109.0

108.0

109.0

Current income tax liability

 

31.1

34.9

31.1

34.9

Other liabilities

31

151.2

147.7

795.0

820.5

Deferred income tax liability

23

7.7

7.7

Subordinated liabilities and notes

32

235.0

235.0

235.0

235.0

Total liabilities

 

13,967.8

12,833.3

13,692.2

12,558.4

Equity and reserves attributable to owners of parent

 

 


 


Share capital

33

122.0

122.0

122.0

122.0

Share premium account

33

1,097.9

1,097.9

1,097.9

1,097.9

Retained earnings

 

425.5

508.2

418.0

508.5

Other reserves

34

27.4

44.2

25.7

40.5

Total equity

 

1,672.8

1,772.3

1,663.6

1,768.9

Total liabilities and equity

 

15,640.6

14,605.6

15,355.8

14,327.3

Profit for the year of £135.5m (2018: £127.6m)1 is attributable to the Company.

The Consolidated and Company Financial Statements on pages 26 to 139 were approved by the Board of Directors and authorised for issue on 8 April 2019 and were signed on its behalf by:

 

 

Declan Hourican

Director

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              28


TESCO PERSONAL FINANCE PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2019

 

 

 

Share

capital

Share premium

Retained earnings

FV/AFS reserve

Cash flow hedge reserve

Currency Basis Reserve

Share based payment reserve

Total

equity

 

Note

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

   Restated1

 

 

 

 

Restated1

 

 

 

 

 

 

 

 

 

 

Balance at 1 March 2018

 

122.0

1,097.9

508.2

13.0

(0.3)

-

31.5

1,772.3

Impact of initial application of IFRS 9 'Financial instruments'

 

(166.0)

(0.5)

-

(166.5)

Balance at 1 March 2018 after adopting IFRS 9

 

122.0

1,097.9

342.2

12.5

(0.3)

-

31.5

1,605.8

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

Profit for the year

 

-

-

143.3

-

-

-

-

143.3

Net fair value movement on investment securities at FVOCI

12

-

-

-

(6.7)

-

-

-

(6.7)

Net movement on cash flow hedges

12

-

-

-

-

(0.7)

(0.3)

-

(1.0)

Share of other comprehensive expense of joint venture

22

-

-

-

(1.2)

-

-

-

(1.2)

Total comprehensive income

 

-

-

143.3

(7.9)

(0.7)

(0.3)

-

134.4

 

 

 

 

 

 

 

 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

Dividends to ordinary shareholders

13

-

-

(60.0)

-

-

-

-

(60.0)

Share based payments

34

-

-

-

-

-

-

(7.4)

(7.4)

 

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

-

-

(60.0)

-

-

-

(7.4)

(67.4)

 

 

 

 

 

 

 

 

 

 

Balance at 28 February 2019

 

122.0

1,097.9

425.5

4.6

(1.0)

(0.3)

24.1

1,672.8

 

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              29

TESCO PERSONAL FINANCE PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2019

 



Share

capital

Share premium

Retained earnings

AFS reserve

Cash flow hedge reserve

Share based payment reserve

Total

equity


Note

£m

£m

£m

£m

£m

£m

£m





Restated1




Restated1









 

Balance at 1 March 2017


122.0

1,097.9

419.7

18.0

(0.6)

27.0

1,684.0

Comprehensive income









Profit for the year


138.5

138.5

Net gains on AFS investment securities

12

1.5

1.5

Net gains on cash flow hedges

12


0.3

0.3

Share of other comprehensive expense of joint venture

22

(6.5)

(6.5)










Total comprehensive income


138.5

(5.0)

0.3

133.8










Transactions with owners









Dividends to ordinary shareholders

13

(50.0)

(50.0)

Share based payments

34

4.5

4.5

Total transactions with owners


(50.0)

4.5

(45.5)










Balance at 28 February 2018


122.0

1,097.9

508.2

13.0

(0.3)

31.5

1,772.3

 

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   30


TESCO PERSONAL FINANCE PLC

COMPANY STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2019

 

 

Share

capital

Share premium

Retained earnings

FV/AFS reserve

Cash flow hedge reserve

Share based payment reserve

Total

equity

 

Note

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

Restated1

 

 

 

Restated 1

 

 

 

 

 

 

 

 

 

Balance at 1 March 2018

 

122.0

1,097.9

508.5

9.3

(0.3)

31.5

1,768.9

Impact of initial application of IFRS 9 'Financial instruments'

 

-

-

(166.0)

(0.5)

-

-

(166.5)

Balance at 1 March 2018 after adopting IFRS 9

 

122.0

1,097.9

342.5

8.8

(0.3)

31.5

1,602.4

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

Profit for the year

 

-

-

135.5

-

-

-

135.5

Net fair value movement on investment securities at FVOCI

12

-

-

-

(6.7)

-

-

(6.7)

Net movement on cash flow hedges

12

-

-

-

-

(0.2)

-

(0.2)

Total comprehensive income

 

-

-

135.5

(6.7)

(0.2)

-

128.6

 

 

 

 

 

 

 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

Dividends to ordinary shareholders

13

-

-

(60.0)

-

-

-

(60.0)

Share based payments

34

-

-

-

-

-

(7.4)

(7.4)

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

-

-

(60.0)

-

-

(7.4)

(67.4)

 

 

 

 

 

 

 

 

 

Balance at 28 February 2019

 

122.0

1,097.9

418.0

2.1

(0.5)

24.1

1,663.6

 

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         31

TESCO PERSONAL FINANCE PLC

COMPANY STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2019

 



Share

capital

Share premium

Retained earnings

AFS reserve

Cash flow hedge reserve

Share based payment  reserve

Total

equity


Note

£m

£m

£m

£m

£m

£m

£m





Restated1




Restated1









 

Balance at 1 March 2017


122.0

1,097.9

430.9

7.8

(0.6)

27.0

1,685.0

Comprehensive income









Profit for the year


127.6

127.6

Net gains on AFS investment securities

12

1.5

1.5

Net gains on cash flow hedges

12

0.3

0.3










Total comprehensive income


127.6

1.5

0.3

129.4










Transactions with owners









Dividends to ordinary shareholders

13

(50.0)

(50.0)

Share based payments

34

4.5

4.5

Total transactions with owners


(50.0)

4.5

(45.5)










Balance at 28 February 2018


122.0

1,097.9

508.5

9.3

(0.3)

31.5

1,768.9

 

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              32


TESCO PERSONAL FINANCE PLC

CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
For the Year Ended 28 February 2019

 

 

 

Group

Company

 

 

2019

2018

2019

2018

 

Note

£m

£m

£m

£m

Operating Activities

 

 

Restated1

 

Restated1

Profit before tax

 

198.9

199.1

191.1

188.2

Adjusted for:

 

 


 


Non-cash items included in operating

profit before taxation and other adjustments

38

266.9

284.7

274.7

287.9

Changes in operating assets and liabilities

38

(277.7)

63.2

(307.9)

0.6

Income taxes paid

 

(68.2)

(44.5)

(68.2)

(44.5)

Cash flows generated from operating activities

119.9

502.5

89.7

432.2

 

 

 


 


Investing Activities

 

 


 


Purchase and disposal of intangible assets and property, plant and equipment

 

(30.2)

(53.5)

(30.2)

(53.5)

Purchase of investment securities classified as FVOCI/AFS

 

(713.0)

(179.1)

(713.0)

(179.1)

Sale of investment securities classified as FVOCI/AFS

 

590.5

185.4

590.5

185.4

Redemption of subordinated debt issued by joint venture

36

5.2

-

5.2

Investment in joint venture

22

(15.5)

(15.5)

Dividends received from joint venture

22

10.3

10.3

Cash flows (used in) investing activities

(137.2)

(62.7)

(137.2)

(62.7)

 

 

 


 


Financing Activities

 

 


 


Net  proceeds received in association with issuance of debt securities

28

270.7

300.0

Principal repayments on debt securities in issue

28

(425.0)

(150.0)

(125.0)

Dividends paid to ordinary shareholders

13

(60.0)

(50.0)

(60.0)

(50.0)

Interest paid on debt securities in issue

 

(23.4)

(24.6)

(23.4)

(17.2)

Interest (paid)/received on assets held to hedge debt securities in issue

 

(0.4)

3.6

(0.4)

3.6

Interest paid on subordinated liabilities and notes

 

(4.7)

(3.9)

(4.7)

(3.9)

Cash flows (used in)/generated from financing activities

(242.8)

75.1

(213.5)

(67.5)

 

 

 


 


Net (decrease)/increase in cash and cash equivalents

 

(260.1)

514.9

(261.0)

302.0

 

 

 


 


Cash and cash equivalents2 at beginning of year

 

1,303.5

788.6

982.2

680.2

 

 

 


 


Cash and cash equivalents2 at end of year

14

1,043.4

1,303.5

721.2

982.2

 

1The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

2Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits of £28.7m (2018: £15.1m) (refer to note 14).

 

 

                                                                   33

 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS

1.             Accounting Policies (continued)

Basis of Preparation

The Company and Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

In these Financial Statements the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture. Details of these subsidiaries and joint venture are provided in notes 21 and 22. These Consolidated Financial Statements comprise the Financial Statements of the Group. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Income Statement and Statement of Comprehensive Income of the Company.

The Company and Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments and investment securities held at fair value.

The Company and Consolidated Financial Statements are presented in Sterling, which is the functional currency of the Group. The figures shown in the Financial Statements are rounded to the nearest £0.1 million unless otherwise stated.

New and amended accounting standards adopted by the Group in the year are detailed in notes 2 and 44.

Going concern

The Directors have completed an assessment of the Group's going concern status, taking into account both current and projected performance, including projections for the Group's capital and funding position and having regard to the Group's risk profile. As a result of this assessment, the Directors consider the Group to be in a satisfactory financial position and have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Financial Statements.

Change in Presentation

During the year, the group reclassified interest expense and similar charges relating to derivative financial instruments to interest and similar income.  This reclassification more appropriately reflects within the Consolidated Income Statement the net impact of hedging activity on the interest income or expense of the hedged item.  Prior period comparatives have been restated to align to the current period approach.  The impact on the Consolidated Income Statement is as follows:

Line Item

Total as previously stated

Adjusted

Restated Total


£m

£m

£m

Interest and similar income

673.2

(32.9)

640.3

Interest expense and similar charges

(180.1)

32.9

(147.2)


493.1

-

493.1

 

                                                                                                                               

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              34


TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Principal accounting policies

A summary of the Group's accounting policies is set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated.

(a) Basis of consolidation

The Consolidated Financial Statements of the Group comprise the Financial Statements of the Company and all consolidated subsidiaries, including certain securitisation structured entities, and the Group's share of its interest in a joint venture, as at 28 February 2019.

Investment in Group undertakings

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The Company's investments in its subsidiaries are stated at cost less any impairment.

Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the Consolidated Financial Statements.

Securitisation structured entities

The Group enters into securitisation transactions in which it assigns Credit Card receivables to a securitisation structured entity which supports the issuance of securities backed by the cash flows from the securitised Credit Card receivables. Although none of the equity of the securitisation structured entities is owned by the Company, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group and are consolidated on a line by line basis in the Consolidated Financial Statements.

Investment in joint venture

A joint arrangement is an arrangement over which the Group has joint control.  Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. A joint venture is a joint arrangement whereby the Group has rights to a share of the net assets of the joint arrangement.

The Group's share of the results of a joint venture is included in the Consolidated Income Statement using the equity method of accounting. The Group's investment in a joint venture is carried in the Consolidated Statement of Financial Position at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment.

If the Group's share of losses in a joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture.

The Company's investment in a joint venture is stated at cost less any impairment.

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               35

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

(b) Revenue recognition

Net interest income recognition

Interest income and expense for all financial instruments measured at amortised cost are recognised using the effective interest rate (EIR) method.

The EIR method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the expected life of the financial asset or financial liability. The EIR is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount.  Calculation of the EIR takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual and behavioural terms of a financial instrument are considered when estimating future cash flows.

Interest income is calculated on the gross carrying amount of a financial asset unless the financial asset is impaired, in which case interest income is calculated on the amortised cost.

Net fees and commissions income recognition

The Group generates fees from banking services, primarily Credit Card interchange fees. Fees in respect of banking services are recognised in line with the satisfaction of performance obligations. This can be either at a point in time or over time, in line with the provision of the service to the customer.

The majority of banking services are performed at a point in time and payment is due from a customer at the time a transaction takes place.  For services performed over time, payment is generally due monthly in line with the satisfaction of performance obligations.

The costs of providing these banking services are incurred as the services are rendered. The price is usually fixed and always determinable.

The Group also generates commission from the sale and service of Motor and Home insurance policies underwritten by Tesco Underwriting Limited (TU) or, in a minority of cases, by a third party underwriter. This is based on commission rates which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third party providers. This commission income is recognised on a net basis as such policies are sold, in line with the satisfaction of performance obligations to customers.

In the case of certain commission income on insurance policies managed and underwritten by a third party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods.  This calculation takes into account both estimates of future renewal volumes and renewal commission rates.  A contract asset is recognised in relation to this revenue.  This is unwound over the remainder of the contract with the customer, the customer in this case being the third party insurance provider.

The end policyholders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly.  This contract refund liability is estimated using prior experience of customer refunds.  The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               36

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Customer loyalty programmes

The Group participates in the customer loyalty programme operated by Tesco Stores Limited (TSL). The programme operates by allowing customers to accumulate Clubcard points on purchases for future redemption against a range of Tesco products. Revenue in respect of these points is recognised at the time of the customer transaction as the Group has no obligation to customers in respect of Clubcard points once the points are allocated to a customer account. The revenue is recognised net of the cost of providing Clubcard points to customers, which is recharged by TSL to the Group.

Dividend income

Dividends are recognised in the Consolidated Income Statement when the entity's right to receive payment is established.

(c) Taxation

The tax charge or credit included in the Consolidated Income Statement consists of current and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted by the reporting date.

Deferred tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Company and Consolidated Financial Statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be realised.

Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current tax assets against current tax liabilities and it is the intention to settle these on a net basis.

(d) Foreign currency translation

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction.

Monetary items denominated in foreign currency are translated at the closing rate as at the reporting date.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Income Statement, except when deferred in equity as gains or losses from qualifying cash flow hedging instruments. All foreign exchange gains and losses recognised in the Consolidated Income Statement are presented net in the Consolidated Income Statement within the corresponding item. Foreign exchange gains and losses on other comprehensive income items are presented in other comprehensive income within the corresponding item.

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              37

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

In the case of changes in the fair value of monetary assets denominated in foreign currency classified as AFS (before 1 March 2018) or at FVOCI (from 1 March 2018), a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to the changes in the amortised cost are recognised in the Consolidated Income Statement, and other changes in the carrying amount, except impairment, are recognised in equity.

(e) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments with short term-maturities.

(f) Financial instruments - Policy applicable from 1 March 2018

The Group classifies a financial instrument as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it creates a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. 

Financial assets

Classification and measurement

The Group classifies its financial assets in the following categories:

·      Fair value through profit or loss (FVPL);

·      Fair value through other comprehensive income (FVOCI); and

·      Amortised cost.

Management determines the classification of the Group's financial assets at initial recognition. Purchases and sales of financial assets are recognised on the trade date - the date on which the Group commits to purchase or sell the asset.

All financial assets are measured at initial recognition at fair value, plus transaction costs for those classified as FVOCI and amortised cost. Transaction costs on financial assets classified as FVPL are recognised in the Consolidated Income Statement at the time of initial recognition.

Classification and subsequent measurement of financial assets depend on:

·      The Group's business model for managing the financial asset; and

·      The cash flow characteristics of the financial asset.

The business model reflects how the Group manages its financial assets in order to generate cash flows and is determined by whether the Group's objective is solely to collect contractual cash flows from the assets or to collect both contractual cash flows and cash flows arising from the sale of assets. If neither of these models applies, the financial assets are classified at FVPL.

In determining the business model, the Group considers past experience in collecting cash flows, how the performance of these financial assets is evaluated and reported to Management and how risks are assessed. 

Where the business model is to hold financial assets to collect contractual cash flows or to collect contractual cash flows and sell the assets, the Group assesses whether the financial asset's cash flows represent solely payments of principal and interest (the SPPI test). When making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               38

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Financial assets at amortised cost

Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest, and that are not designated as FVPL, are classified and subsequently measured at amortised cost. The carrying value of these financial assets is adjusted by any impairment loss allowance recognised and measured as described below.

Financial assets at FVOCI

Financial assets that are held for collection of contractual cash flows and for selling the assets, where those cash flows represent solely payments of principal and interest, and that are not designated at FVPL, are classified and subsequently measured at FVOCI.   The Group holds investments in debt securities which are classified as FVOCI.  Movements in the carrying amount of debt securities classified at FVOCI are taken through other comprehensive income, except the recognition of impairment gains or losses, interest revenue using the EIR method and foreign exchange gains and losses, which are recognised through the Consolidated Income Statement.

The Group also holds an investment in equity securities which has been irrevocably designated by Management at FVOCI at original recognition.  Movements in the carrying amount of these equity securities are taken through other comprehensive income and are not subsequently reclassified to the Consolidated Income Statement, including on disposal.  Impairment losses on these securities are not recognised separately from other changes in fair value.

For financial assets at FVOCI which are in fair value hedge relationships, the element of the fair value movement which relates to the hedged risk is recycled to the Consolidated Income Statement.

Financial assets at FVPL

Financial assets that do not meet the criteria for recognition at amortised cost or at FVOCI are measured at FVPL.

Impairment

The Group assesses on a forward-looking basis the ECLs associated with its financial assets carried at amortised cost and FVOCI, and with the exposure arising from loan commitments. The Group recognises a loss allowance for such losses at each reporting date. The measurement of ECLs reflects:

·      An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

·      The time value of money; and

·      Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Refer to note 36 for further details on the calculation of the allowance for ECLs.

Financial liabilities

Classification and measurement

All of the financial liabilities held by the Group, other than derivative financial liabilities, are classified and measured at amortised cost using the EIR method, after initial recognition at fair value. Fair value is calculated as the issue proceeds, net of premiums, discounts and transaction costs incurred. For financial liabilities in fair value hedge relationships, the carrying value is adjusted by the hedged item (the fair value of the underlying hedged risk) through the Consolidated Income Statement.

Derivative financial liabilities are classified and measured at FVPL. Further information on the classification and measurement of derivative financial instruments is set out at policy 1(g).

Derecognition

Financial assets are derecognised when the contractual rights to receive cash flows have expired or where substantially all of the risks and rewards of ownership have been transferred and the transfer qualifies for derecognition. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              39

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Collateral furnished by the Group under standard repurchase agreements is not derecognised because the Group retains substantially all the risks and rewards of ownership on the basis of the predetermined repurchase price, therefore the criteria for derecognition are not met. Credit Card receivables assigned by the Group to a securitisation structured entity do not qualify for derecognition, as the Group retains substantially all the risks and rewards of ownership of the securitised Credit Card receivables.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the Company and Consolidated Statements of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle a liability simultaneously.

Loan commitments

All loan commitments provided by the Group are as part of contracts that include both a loan and an undrawn commitment. As the Group cannot separately identify the ECLs on the undrawn commitment component from those on the loan component, the ECLs on the undrawn commitment are recognised together with the loss allowance for the loan.  Any excess of the ECLs over the gross carrying amount of the loan is recognised as a separate provision within provisions for liabilities and charges.

Financial instruments - Policy applicable prior to 1 March 2018

The Group classified a financial instrument that it issued as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument was classified as a liability if it created a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument was classified as equity if it evidenced a residual interest in the assets of the Group after the deduction of liabilities.

Financial assets

The Group classified its financial assets in the following categories: at FVPL, loans and receivables, and AFS. Management determined the classification of its financial assets at initial recognition. Purchases and sales of financial assets were recognised on the trade date - the date on which the Group committed to purchase or sell the asset.

Financial assets at FVPL included financial assets held for trading and those designated at FVPL at inception.  Financial assets held at FVPL were recognised at fair value, with any gains or losses included in the Consolidated Income Statement in the period in which they arose. Transaction costs were expensed at the time of initial recognition. Derivative financial assets were classified as held for trading unless they were accounted for as an effective hedging instrument, but were not separately categorised in the Statement of Financial Position.

Loans and receivables were non-derivative financial assets with fixed or determinable payments that were not quoted in an active market.  Subsequent to initial recognition at fair value plus transaction costs, these assets were carried at amortised cost using the EIR method and adjusted for any impairment losses or adjustments made as part of fair value hedging arrangements.

AFS financial assets were non-derivative financial assets that were either designated in this category or not classified in any of the other categories. Subsequent to initial recognition at fair value plus transaction costs, these financial assets were recorded at fair value, with the movements in fair value recognised in other comprehensive income until the financial asset was derecognised or impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income was recognised in the Consolidated Income Statement.  For AFS financial assets in fair value hedge relationships, the element of the fair value movement which related to the hedged risk was recycled to the Consolidated Income Statement.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              40

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Financial liabilities

All of the financial liabilities held by the Group, other than derivative financial liabilities, were measured at amortised cost using the EIR method, after initial recognition at fair value. Fair value was calculated as the issue proceeds, net of premiums, discounts and transaction costs incurred. The Group did not hold any financial liabilities classified as held for trading. For financial liabilities in fair value hedge relationships, the carrying value was adjusted by the hedged item (the fair value of the underlying hedged risk) through the Consolidated Income Statement.

Derecognition of financial assets and financial liabilities

Financial assets were derecognised when the contractual rights to receive cash flows had expired or where substantially all of the risks and rewards of ownership had been transferred and the transfer qualified for derecognition. Financial liabilities were derecognised when they had been redeemed or otherwise extinguished.

Collateral provided by the Group under standard repurchase agreements was not derecognised because the Group retained substantially all the risks and rewards on the basis of the predetermined repurchase price, therefore the criteria for derecognition were not met. Credit Card receivables assigned by the Group to a securitisation structured entity did not qualify for derecognition as the Group retained substantially all the risks and rewards of ownership of the securitised Credit Card receivables.

Offsetting of financial instruments

Financial assets and financial liabilities were offset and the net amount reported in the Company and Consolidated Statements of Financial Position when there was a legally enforceable right to offset the recognised amounts and there was an intention to settle on a net basis, or to realise an asset and settle a liability simultaneously.

Impairment of financial assets

The Group assessed at each reporting date whether there was objective evidence that a financial asset or group of financial assets was impaired. A financial asset or portfolio of financial assets was impaired and an impairment loss incurred if there was objective evidence that an event or events since initial recognition of the financial asset or group of financial assets had adversely affected the amount or timing of future cash flows expected from the financial asset or group of financial assets.

Financial assets carried at amortised cost

If there was objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables had been incurred, the Group measured the amount of the loss as the difference between the carrying amount of the financial asset or group of financial assets and the present value of estimated future cash flows from the financial asset or group of financial assets discounted at the EIR of the instrument(s) at initial recognition. Impairment losses were assessed individually for financial assets that were individually significant and collectively for financial assets that were not individually significant.  In making the collective assessment of impairment, financial assets were grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios were estimated on the basis of the estimated cash recoveries and historical loss experience for financial assets with similar credit risk characteristics.

Impairment losses were recognised in the Consolidated Income Statement and the carrying amount of the financial asset or group of financial assets was reduced by establishing an allowance for impairment losses. If, in a subsequent year, the amount of the impairment loss reduced and the reduction could be related objectively to an event after the impairment was recognised, the previously recognised loss was reversed by adjusting the allowance.

When a loan was deemed uncollectable it was written off against the related provision after all of the necessary procedures had been completed and the amount of the loss had been determined.  Subsequent recoveries of amounts previously written off received from customers or other third parties were recognised directly in the Consolidated Income Statement as a reduction in the loan impairment charge for the year.

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                41

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Financial assets classified as AFS

In the case of debt instruments classified as AFS, the recognition of an impairment loss occurred if there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event), and that had an impact on the estimated future cash flows of the financial asset and which could be reliably measured.  If any such evidence existed for AFS financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the Consolidated Income Statement - was removed from equity and recognised in the Consolidated Income Statement. If, in a subsequent period, the fair value of a debt instrument classified as AFS increased, and the increase could be objectively related to an event occurring after the impairment loss was reported in the Consolidated Income Statement, the impairment loss was reversed through the Consolidated Income Statement.

(g) Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments for the purpose of providing an economic hedge to its exposures to interest rate and foreign exchange risks as they arise from operating, financing and investing activities. The Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised at fair value on the contract date and are remeasured at fair value at subsequent reporting dates.

Hedge accounting

The Group designates certain hedging instruments as either fair value hedges or cash flow hedges, where it is efficient to do so and the relevant criteria are met. From 1 March 2018, the Group has implemented IFRS 9 hedge accounting requirements in respect of its fair value hedges of the Group's investment securities and its cash flow hedges.  As permitted under IFRS 9, the Group has elected to continue to apply the existing hedge accounting requirements of International Accounting Standard (IAS) 39 'Financial instruments: Recognition and measurement' for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.

The Group applies hedge accounting as follows:

·       Hedge relationships are classified as fair value hedges where the derivative financial instruments hedge the change in the fair value of fixed rate financial assets or financial liabilities due to movements in interest rates.

·       Hedge relationships are classified as cash flow hedges where the derivative financial instruments hedge the cash flows associated with inflation risk on an index linked issued bond, the interest rate risk and foreign currency risk on US Dollar notes issued by one of the Group's securitisation entities or the foreign currency risk on certain foreign currency invoices.

To qualify for hedge accounting, the Group documents, at the inception of the hedge: the hedging risk management strategy; the relationship between the hedging instrument and the hedged item or transaction; and the nature of the risks being hedged. The Group also documents the assessment of the effectiveness of the hedging relationship, to show that the hedge has been and will be highly effective on an ongoing basis.

Fair value hedges

Changes in the fair value of derivative financial instruments that are designated as fair value hedges are recognised in the Consolidated Income Statement. The hedged item is also adjusted for changes in fair value attributable to the hedged risk, with the corresponding adjustment made in the Consolidated Income Statement.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Consolidated Income Statement over the remaining period to maturity.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              42



 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

Cash flow hedges

Changes in the fair value of the derivative financial instruments that are designated as hedges of future cash flows are recognised directly in other comprehensive income and the ineffective portion is recognised immediately in the Consolidated Income Statement. Amounts recognised in other comprehensive income are recycled to the Consolidated Income Statement when equivalent amounts of the hedged item are recognised in the Consolidated Income Statement.

When the hedging instrument expires or is sold, terminated or exercised, hedge accounting is discontinued. Any cumulative gain or loss existing in equity at that time remains until the forecast transaction occurs or the original hedged item affects the Consolidated Income Statement. At that point, the cumulative gain or loss is also recognised in the Consolidated Income Statement.

(h) Derivative financial instruments not in hedge accounting relationships

Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Consolidated Income Statement as they arise.

(i) Impairment of non-financial assets

Non-financial assets are reviewed for impairment when there are indications that the carrying value may not be recoverable.  In the event that an asset's carrying amount is determined to be greater than its recoverable amount, an impairment loss is recognised immediately in the Consolidated Income Statement and the carrying value of the asset is written down by the amount of the loss.  The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets for which an impairment loss has been recognised are reviewed for possible reversal of the impairment at each reporting date.

(j) Property, plant and equipment

Items of property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and maintenance costs are charged to the Consolidated Income Statement in the period in which they are incurred.

Depreciation is charged to the Consolidated Income Statement on a straight-line basis so as to allocate the costs less residual values over the lower of the useful life of the related asset and, for leasehold improvements, the expected lease term. Depreciation commences on the date that the assets are brought into use. Work-in-progress assets are not depreciated until they are brought into use and transferred to the appropriate category of property, plant and equipment.  Estimated useful lives are:

·      Plant and equipment              2 to 8 years

·      Fixtures and fittings               4 to 14 years

·      Computer hardware               3 to 10 years

·      Freehold buildings                 40 years

·      Leasehold improvements      15 to 20 years

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.  Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in administrative expenses in the Consolidated Income Statement.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              43



 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.             Accounting Policies (continued)

(k) Intangible assets

Acquired intangible assets

Intangible assets that are acquired by the Group are stated at historical cost less accumulated amortisation and any impairment losses. Amortisation is charged to the Consolidated Income Statement on a straight-line basis over the estimated useful lives. The Group's intangible assets are computer software, for which the estimated useful lives are 3 to 10 years.

Internally generated intangible assets - research and development expenditure

Research costs are expensed in the Consolidated Income Statement as incurred.

Development expenditure incurred on an individual project is capitalised only if all of the following criteria are demonstrated:

·      an asset is created that can be identified (such as software);

·      it is probable that the asset created will generate future economic benefits; and

·      the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the estimated useful life of the asset created. Amortisation commences on the date that the asset is brought into use. Work-in-progress assets are not amortised until they are brought into use and transferred to the appropriate category of intangible assets.

(l) Leases

If a lease agreement, in which the Group is a lessee, does not transfer the risks and rewards of ownership of the asset, the lease is recorded as an operating lease.

Operating lease payments are charged to the Consolidated Income Statement on a straight-line basis over the period of the lease. Where an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor as compensation is charged to the Consolidated Income Statement in the period in which the termination takes place. 

The Group has entered into operating leases for office buildings.

(m) Employee benefits

The Group accounts for pension costs on a contributions basis in line with the requirements of IAS 19 'Employee Benefits'. The Group made contributions in the year to a funded defined benefit scheme and a funded defined contribution scheme. Both of these schemes are operated by TSL.

IAS 19 requires that, where there is no policy or agreement for sharing the cost of a defined benefit scheme across the subsidiaries, the Sponsoring employer recognises the net defined benefit cost of a defined benefit scheme. The Sponsoring employer of the funded defined benefit scheme is TSL and the principal pension plan is the Tesco PLC (Tesco) pension scheme.

(n) Share based payments

Employees of the Group receive part of their remuneration in the form of share based payment transactions, whereby employees render services in exchange for Tesco shares or rights over shares (equity-settled transactions) or in exchange for entitlements to cash based payments based on the value of the shares (cash-settled transactions).

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. The resulting cost is recognised in the Consolidated Income Statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              44

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.            Accounting Policies (continued)

The grant by Tesco of options over its equity instruments to the employees of the Group is treated as a capital contribution in equity. The social security contribution payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.

(o) Provisions for liabilities and charges and contingent liabilities

A provision is recognised where there is a present legal or constructive obligation as a result of a past event; it is more likely than not that an outflow of economic resources will be required to settle the obligation; and the amount can be reliably estimated. 

Provisions are measured at the present value of the expenditure expected to be required to settle the obligation.

A contingent liability is a possible obligation which is dependent on the outcome of uncertain future events not wholly within the control of the Group, or a present obligation where an outflow of economic resources is not likely or the amount cannot be reliably measured.

Contingent liabilities are not recognised in the Company or Consolidated Statement of Financial Position but are disclosed in the notes to the Financial Statements unless the possibility of an outflow of economic resources is remote.

(p) Dividends paid

Dividends are recognised in equity in the period they are approved by the Group's Board.

(q) Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Board of Directors as its chief operating decision-maker.

(r) Sale and repurchase agreements

Investment securities sold subject to a commitment to repurchase them at a predetermined price are retained on the Company and Consolidated Statements of Financial Position when substantially all of the risk and rewards of ownership remain with the Group. The counterparty liability is included in deposits from banks.  Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and advances from banks.

(s) Encumbered assets

The Group's methodology used to identify encumbered assets is aligned to definitions used in calculating the Group's Pillar 3 encumbrance disclosures.

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              45


TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15

On 1 March 2018 the Group adopted both IFRS 9 and IFRS 15.  Full transition disclosures are set out below.  Further details of the new accounting policies applied are set out in note 1.

(a) IFRS 9 'Financial instruments'

IFRS 9 is a replacement for IAS 39, 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.  In line with Tesco policy, the Group has adopted IFRS 9 in respect of its micro hedge accounting from 1 March 2018.  The Group continues to apply the existing hedge accounting requirements of IAS 39 for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.

The classification and measurement and impairment requirements of IFRS 9 have been applied retrospectively at 1 March 2018 by adjusting the opening balance sheet, with no requirement to restate comparative periods.  Hedge accounting relationships within the scope of IFRS 9 have transitioned prospectively.

Classification and measurement of financial instruments

The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 March 2018 are as follows:


IAS 39


IFRS 9


Group

Classification and measurement category

Carrying amount

Classification and measurement category

Carrying amount

Financial assets:


£m


£m

Cash and balances with central banks

Loans and receivables (amortised cost)

1,318.6

Amortised cost

1,296.7




FVPL (a)

21.9

Loans and advances to customers

Loans and receivables (amortised cost)

11,522.4

Amortised cost

11,308.4

Derivative financial instruments

Derivatives held for hedging

46.1

FVPL

46.1






Investment securities:





AFS

AFS

925.4

FVOCI - mandatory (b)

923.4




FVOCI - designated (c)

2.0

Loans and receivables

Loans and receivables (amortised cost)

34.1

Amortised cost

33.9

Other assets

Loans and receivables (amortised cost)

280.6

Amortised cost

280.6

Total financial assets


14,127.2


13,913.0






Financial liabilities





Deposits from banks

Amortised cost

1,539.0

Amortised cost

1,539.0

Deposits from customers

Amortised cost

9,248.0

Amortised cost

9,248.0

Debt securities in issue

Amortised cost

1,347.6

Amortised cost

1,347.6

Derivative financial instruments

Derivatives held for hedging

88.4

FVPL

88.4

Other liabilities

Amortised cost

147.7

Amortised cost

147.7

Subordinated liabilities

Amortised cost

235.0

Amortised cost

235.0

Total financial liabilities


12,605.7


12,605.7

                                                                                                                                                                                                               

                                                                                                                                                                                                                                                                                                                                              46

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)


IAS 39


IFRS 9


Company

Classification and measurement category

Carrying Amount

Classification and measurement category

Carrying amount

Financial assets:


£m


£m

Cash and balances with central banks

Loans and receivables (amortised cost)

997.3

Amortised cost

975.4




FVPL (a)

21.9

Loans and advances to customers

Loans and receivables (amortised cost)

11,522.4

Amortised cost

11,308.4

Derivative financial instruments

Derivatives held for hedging

46.1

FVPL

46.1






Investment securities:





AFS

AFS

925.4

FVOCI (b)

923.4




FVOCI (c)

2.0

Loans and receivables

Loans and receivables (amortised cost)

34.1

Amortised cost

33.9

Other assets

Loans and receivables (amortised cost)

327.1

Amortised cost

327.1

Total financial assets


13,852.4


13,638.2






Financial liabilities





Deposits from banks

Amortised cost

1,539.0

Amortised cost

1,539.0

Deposits from customers

Amortised cost

9,248.0

Amortised cost

9,248.0

Debt securities in issue

Amortised cost

399.9

Amortised cost

399.9

Derivative financial instruments

Derivatives held for hedging

88.4

FVPL

88.4

Other Liabilities

Amortised cost

820.5

Amortised cost

820.5

Subordinated liabilities

Amortised cost

235.0

Amortised cost

235.0

Total financial liabilities


12,330.8


12,330.8

 

The following explains how applying the new classification requirements of IFRS 9 led to changes in classification of certain financial assets held by the Group as shown in the tables above.

(a)    Reclassification of cash balances from amortised cost to FVPL

Cash balances relating to the Group's Travel Money offering have been reclassified at FVPL under IFRS 9 as these are held to earn fee and commission income and not solely to collect payments of principal and interest.

(b)    Mandatory reclassification of debt investment securities from AFS to FVOCI

Debt instruments previously classified as AFS under IAS 39 have been reclassified to the FVOCI category under IFRS 9 as the IAS 39 category has been removed. There has been no change in the measurement basis as a result of this reclassification.

(c)     Designation of equity investment securities from AFS to FVOCI

The Group has elected to designate equity instruments held in VISA Inc. at FVOCI as permitted by IFRS 9. These securities were previously classified as AFS.  There has been no change in the measurement basis as a result of this reclassification. The changes in fair value of these securities will no longer be reclassified to the Consolidated Income Statement on disposal.

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              47

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)

Reconciliation of Statement of Financial Position balances from IAS 39 to IFRS 9

The following table reconciles the carrying amount of financial assets from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 March 2018. There were no changes to the classification and measurement of financial liabilities.


IAS 39 carrying amount

Reclassification

Remeasurement

IFRS 9 carrying amount


28 February 2018



1 March 2018

Group

£m

£m

£m

£m

Financial Assets










Amortised cost





Cash and balances with central banks





Opening balance under IAS 39

1,318.6




Reclassification to FVPL


(21.9)



Closing balance under IFRS 9




1,296.7






Loans and advances to customers





Opening balance under IAS 39

11,522.4




Remeasurement: ECL allowance



(228.1)


Remeasurement: Recoverable asset balance



4.8


Transfer to  provisions for liabilities and charges1



9.3


Closing balance under IFRS 9




11,308.4






Investment securities - amortised cost





Opening balance under IAS 39

34.1




Remeasurement: ECL allowance



(0.2)


Closing balance under IFRS 9




33.9






Other assets





Opening balance under IAS 39 and closing balance under IFRS 9

280.6



280.6






Total financial assets measured at amortised cost

13,155.7

(21.9)

(214.2)

12,919.6

FVPL










Derivative financial instruments





Opening balance under IAS 39 and closing balance under IFRS 9

46.1



46.1






Cash and balances with central banks





Opening balance under IAS 39




Reclassification from amortised cost


21.9



Closing balance under IFRS 9




21.9






Total financial assets measured at FVPL

46.1

21.9

68.0

1 Credit loss provision in excess of gross carrying amount of financial assets transferred to provisions for liabilities and charges (refer note 29).

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              48

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)

Reconciliation of Statement of Financial Position balances from IAS 39 to IFRS 9 (continued)


IAS 39 carrying amount

Reclassification

Remeasurement

IFRS 9 carrying amount


28 February 2018



1 March 2018


£m

£m

£m

£m

FVOCI





Investment securities - AFS

925.4




Opening balance under IAS 39





Reclassification to FVOCI (debt)


(923.4)



Reclassification to FVOCI (equity)


(2.0)



Closing balance under IFRS 9









Investment securities - FVOCI





Opening balance under IAS 39




Reclassification to FVOCI from AFS (debt)


923.4



Reclassification to FVOCI from AFS (equity)


2.0



Closing balance under IFRS 9




925.4






Total financial assets measured at FVOCI

925.4

-

-

925.4






Total financial assets

14,127.2

-

(214.2)

13,913.0

 


IAS 39 carrying amount

Reclassification

Remeasurement

IFRS 9 carrying amount


28 February 2018



1 March 2018

Company

£m

£m

£m

£m

Financial Assets





Amortised cost





Cash and balances with central banks





Opening balance under IAS 39

997.3




Reclassification to FVPL


(21.9)



Closing balance under IFRS 9




975.4






Loans and advances to customers





Opening balance under IAS 39

11,522.4




Remeasurement: ECL allowance



(228.1)


Remeasurement: Recoverable asset balance



4.8


Transfer to  provisions for liabilities and charges1



9.3


Closing balance under IFRS 9




11,308.4






Investment securities - amortised cost





Opening balance under IAS 39

34.1




Remeasurement: ECL allowance



(0.2)


Closing balance under IFRS 9




33.9

Other assets





Opening balance under IAS 39 and closing balance under IFRS 9

327.1



327.1

Total financial assets measured at amortised cost

12,880.9

(21.9)

(214.2)

12,644.8

1 Credit loss provision in excess of gross carrying amount of financial assets transferred to provisions for liabilities and charges (refer note 29).

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              49

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)


IAS 39 carrying amount

Reclassification

Remeasurement

IFRS 9 carrying amount


28 February 2018



1 March 2018

FVPL

£m

£m

£m

£m

Derivative financial instruments





Opening balance under IAS 39 and closing balance under IFRS 9

46.1



46.1






Cash and balances with central banks





Opening balance under IAS 39




Reclassification from amortised cost


21.9



Closing balance under IFRS 9




21.9






Total financial assets measured at FVPL

46.1

21.9

68.0






 

FVOCI





 






 

Investment securities - AFS

925.4




 

Opening balance under IAS 39





 

Reclassification to FVOCI (debt)


(923.4)



 

Reclassification to FVOCI (equity)


(2.0)



 

Closing balance under IFRS 9




 






 

Investment securities - FVOCI





 

Opening balance under IAS 39




 

Reclassification to FVOCI from AFS (debt)


923.4



 

Reclassification to FVOCI from AFS (equity)


2.0



 

Closing balance under IFRS 9




925.4

 






 

Total financial assets measured at FVOCI

925.4

-

-

925.4

 






 

Total financial assets

13,852.4

-

(214.2)

13,638.2

 

 

The Group and Company recognised a deferred tax asset of £57.0m on 1 March 2018 in relation to the transitional measurement adjustments set out in the above tables.  This asset relates to both the additional ECL allowance recognised within loans and advances to customers of £214.2m and ECLs in excess of the gross carrying amount of the related financial assets, amounting to £9.3m, recognised within provisions for liabilities and charges (refer note 29).

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 50

 

 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)

Reconciliation of impairment allowance balance from IAS 39 to IFRS 9

The following table reconciles the prior period's closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment allowance measured in accordance with the IFRS 9 expected loss model at 1 March 2018:


28 February 2018



1 March 2018

Group and Company

Loan loss allowance under IAS 39

Reclassification

Remeasurement

Loan loss allowance under IFRS 9


£m

£m

£m

£m

Measurement category










Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9)





Loans and advances to customers1

238.1

-

218.8

456.9

Investment securities

-

0.2

0.2

Total

238.1

-

219.0

457.1






AFS financial assets (IAS 39)/Financial assets at FVOCI (IFRS 9)





Investment securities2

(0.5)

(0.5)

Total

(0.5)

(0.5)






1 Credit loss provision in excess of gross carrying amount of financial assets transferred to provisions for liabilities and charges (refer note 29).

2 The above loss allowance is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                51

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)

The following table reconciles in further detail the prior period's closing impairment allowance for loans and advances to customers in accordance with IAS 39 to the IFRS 9 allowance at 1 March 2018:

Group and Company

£m

IAS 39  loss allowance at 28 February 2018

238.1

12 month ECL

72.7

Lifetime ECL

100.6

Undrawn balances

8.6

Macro-economic scenarios

39.2

Transfer to provisions for liabilities and charges

(9.3)

Other changes

7.0

IFRS 9 loss allowance at 1 March 2018

456.9

 

(b) IFRS 15 'Revenue from contracts with customers'

IFRS 15 introduces a performance-based approach to revenue recognition and is applicable to all contracts with customers, with certain exceptions.   The Group's interest income and fee income integral to financial instruments fall outside the scope of IFRS 15 and are accounted for in line with the other applicable standards, predominantly IFRS 9 from 1 March 2018 (refer above).  All other fees and commissions income falls within the scope of IFRS 15.

In accordance with the transitional provisions in IFRS 15, the new rules have been applied retrospectively and comparatives for the 2018 financial year have been restated.

There are two changes for the Group as a result of the adoption of IFRS 15.

(i) Accounting for insurance renewal commission income

Prior to the adoption of IFRS 15, the Group recognised all insurance commission income on policy renewals at the time of the renewal. Under IFRS 15, the Group recognises commission income as policies are sold for a minority of insurance policies managed and underwritten by a third party. This is the point in time at which the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. A contract asset has been recognised in relation to this revenue and is included within other assets.

(ii) Presentation of insurance refund liability

Contract liabilities in relation to expected refunds to insurance customers were previously presented as current provisions for liabilities and charges. These are now included within other liabilities to reflect the terminology and requirements of IFRS 15.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                52

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2.             Transition to IFRS 9 and IFRS 15 (continued)

The impact of these changes on the relevant financial statements lines is as follows:

Group

As previously reported

IFRS 15 adjustments

Restated

At 1 March 2017

£m

£m

£m

Statement of Financial Position




Other assets

299.1

18.5

317.6

Provision for liabilities and charges

(83.5)

4.2

(79.3)

Other liabilities

(148.3)

(4.2)

(152.5)

Deferred income tax liability

(13.7)

(5.0)

(18.7)

Retained earnings

(406.2)

(13.5)

(419.7)





At 28 February 2018




Statement of Financial Position




Other assets

265.7

14.9

280.6

Provisions for liabilities and charges

(79.4)

3.4

(76.0)

Other liabilities

(144.3)

(3.4)

(147.7)

Deferred income tax liability

(3.7)

(4.0)

(7.7)

Retained earnings

(497.3)

(10.9)

(508.2)





Income Statement




Fee and commission charge

387.0

(3.6)

383.4

Income tax charge

(61.6)

1.0

(60.6)





Statement of Cash Flows




Non-cash items included in operating profit before taxation and other adjustments

297.4

(12.7)

284.7

Changes in operating assets and liabilities

46.9

16.3

63.2

 

Company

As previously reported

IFRS 15 adjustments

Restated

At 1 March 2017

£m

£m

£m

Statement of Financial Position




Other assets

387.2

18.5

405.7

Provision for liabilities and charges

(83.5)

4.2

(79.3)

Other liabilities

(925.3)

(4.2)

(929.5)

Deferred income tax liability

(13.7)

(5.0)

(18.7)

Retained earnings

(417.4)

(13.5)

(430.9)





At 28 February 2018




Statement of Financial Position




Other assets

312.2

14.9

327.1

Provisions for liabilities and charges

(79.4)

3.4

(76.0)

Other liabilities

(817.1)

(3.4)

(820.5)

Deferred income tax liability

(3.7)

(4.0)

(7.7)

Retained earnings

(497.6)

(10.9)

(508.5)





Statement of Cash Flows




Non-cash items included in operating profit before taxation and other adjustments

300.6

(12.7)

287.9

Changes in operating assets and liabilities

(15.7)

16.3

0.6

IFRS 15 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. These applicable disclosures are included throughout these financial statements, primarily in note 1.

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 53

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

3.             Critical Accounting Estimates and Judgements in Applying Accounting Policies

In the course of preparing the Financial Statements, no judgements have been made in the process of applying the Group's accounting policies, other than those using estimations (which are presented separately below), that have had a significant effect on the amounts recognised in the Financial Statements.

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its Financial Statements. The Group's principal accounting policies are set out in note 1.  United Kingdom (UK) company law and IFRSs require the Directors, in preparing the Group's Financial Statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent.  Where accounting standards are not specific and Management has to choose a policy, IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', requires them to adopt policies that will result in relevant and reliable information in the light of the requirements and guidance in IFRSs dealing with similar and related issues and the IASB Framework for the Preparation and Presentation of Financial Statements.

The judgements and estimates involved in the Group's accounting policies that are considered to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.

Impairment of financial assets (applicable from 1 March 2018)

The measurement of ECLs for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour, such as the likelihood of customers defaulting and the resulting losses.  Further explanation of the inputs, assumptions and estimation techniques used in measuring ECLs, as well as the key sensitivities of ECLs to change in these elements, are set out at note 36.

Effective interest rate (EIR)

IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology. The main area of estimation uncertainty in measuring the EIR on the Group's Credit Card portfolio is the expected attrition of the balances drawn at the reporting date.

Management uses a pay rates assumption to determine the expected repayment profile of the balances drawn as at the reporting date to the expected remaining term (capped at a maximum of 5 years from origination).

An increase of the pay rates assumption by 10% will reduce the asset value by £5.3m and a corresponding reduction of the pay rates assumption will increase the asset value by £6.2m.

Provision for customer redress

The Group has a provision for potential customer redress in relation to payment protection insurance (PPI).  For further details, including the key assumptions made in arriving at each element of this provision and a sensitivity analysis of key assumptions in the PPI model, refer to note 29.

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 54

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

3.             Critical Accounting Estimates and Judgements in Applying Accounting Policies (continued)

Investment in joint venture

The Group holds an investment in a joint venture, TU, an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting (see notes 1 and 22 for further details). 

TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance.  Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Company and Consolidated Statement of Financial Position.

The impact of any increase in reserves is determined by TU's ability to amend its pricing to reflect the increased costs of providing cover under the policies written.

A key element of the reserving calculation is the application of the Ogden tables, which are used to calculate the cost of any claim that involves compensation for loss of future benefits.  The tables provide an estimate of the return to be expected from the investment of a lump sum damages award.

A decrease in the Ogden rate for 2019 from -0.75% to -1.0% would decrease the carrying value of the Group's investment in TU by £1.2m. An increase in the Ogden rate for 2019 from -0.75% to +1.0% would increase the carrying value of the Group's investment in TU by £10.0m.

4.             Segmental Reporting

Following the measurement approach of IFRS 8, 'Operating Segments', the Group's operating segments are reported in accordance with the internal reporting provided to the Board of Directors, which is responsible for allocating resources to the operating segments and assessing their performance. 

The Group has one operating segment covering all of the Group's activities, the results of which are set out in the Consolidated Income Statement and Group and Company Statements of Financial Position.  The Group is primarily focused on providing financial services and products to personal customers in the UK therefore no geographic analysis is presented.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 55

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

5.             Net Interest Income

 

2019

2018

 

£m

£m

 

 

Restated1

Interest and similar income

 


On financial assets measured at amortised cost

 


Loans and advances to customers

710.8

628.0

Cash and balances with central banks

7.5

2.8

Investment securities

1.3

1.4

 

719.6

632.2

On financial assets measured at fair value

 


Investment securities

7.2

5.1

Derivative financial instruments

1.8

3.0

 

9.0

8.1

 

 


Total interest and similar income

728.6

640.3

 

 


Interest expense and similar charges

 


On financial liabilities measured at amortised cost

 


Deposits from customers

(139.6)

(114.1)

Deposits from banks

(11.7)

(4.1)

Debt securities in issue

(23.5)

(25.0)

Subordinated liabilities and notes

(4.9)

(4.0)

 

(179.7)

(147.2)

 

 


Total interest expense and similar charges

(179.7)

(147.2)

 

 


Net interest income

548.9

493.1

 

1The prior year restatement relates to the reclassification of amounts from interest expense to interest income.  Refer to note 1 for further details.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                56

 

 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

6.             Net Fees and Commissions Income

 

2019

2018

 

£m

£m

 

 

Restated1

Fees and commissions income

 


Banking revenue from contracts with customers

243.8

252.2

Insurance revenue from contracts with customers

98.6

109.6

Other revenue from contracts with customers

23.4

21.6

Total fees and commissions income

365.8

383.4

 

 


Fees and commissions expense

 


Banking expense

(32.6)

(31.6)

Total fees and commissions expense

(32.6)

(31.6)

 

 


Net fees and commissions income

333.2

351.8

 

With the exception of other revenue from contracts with customers, all of the above fees and commissions relate to financial assets and financial liabilities measured at amortised cost. These figures exclude amounts incorporated in determining the EIR on such financial assets and financial liabilities.

The prior period has been restated following the retrospective adoption of IFRS 15 in the current period.  Refer to note 2 for further details.

7.             Net (Loss)/Gain on Financial Instruments at FVPL

 

2019

2018

 

£m

£m

 

 


Foreign exchange (loss)/gain on financial assets

(0.2)

1.9

Net (loss)/gain arising on derivatives not designated as hedging

instruments

(4.1)

8.0

Fair value hedge ineffectiveness (refer note 17)

0.4

1.1

Cash flow hedge ineffectiveness (refer note 17)

(0.3)

-

Net (loss)/gain on financial instruments at FVPL

(4.2)

11.0

8.             Net Gain on Investment Securities

 

2019

2018

 

£m

£m

 

 


Net gain on disposal of AFS investment securities

n/a

0.1

Net gain on disposal of investment securities at FVOCI

8.4

n/a

Net gain on investment securities

8.4

0.1

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 57

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

9.             Administrative Expenses

 

2019

2018

 

£m

£m

Staff costs

 


Wages and salaries

111.2

114.2

Social security costs

11.0

11.8

Other pension costs

5.3

5.4

Share based payments

4.4

9.2

Other costs including temporary staff

38.9

33.6

Total staff costs

170.8

174.2

 

 


Non-staff costs

 


Premises and equipment

76.8

74.8

Operating leases

3.6

3.6

Marketing

49.3

63.8

Auditor's remuneration (refer below)

0.7

0.8

Outsourcing and professional fees

61.1

62.1

Other administrative expenses

54.9

44.6

Restructuring costs1

(1.6)

(1.2)

Total non-staff costs

244.8

248.5

Total administrative expenses

415.6

422.7

1During the year, the Group recognised organisational restructuring credits within administrative expenses amounting to £(1.6)m (2018: £(1.2m)) related to property operating lease exit costs.

 

2019

2018

 

£'000

£'000

Audit services

 


Audit of the Company and Consolidated Financial Statements

592

668

Audit of the Company's subsidiaries

41

34

Total audit services

633

702

 

 


Non-audit services

 


Audit related assurance services

88

83

Other non-audit services not covered above

26

52

Total non-audit services

114

135

Total auditor's remuneration

747

837

 

The average monthly number of persons (including Executive Directors) employed by the Group split by employee function during the year, was:

 

2019

2018

 

Number

Number

Head office and administration

1,340

1,323

Operations

2,344

2,625

Total average employees

3,684

3,948

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 58

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

10.           Impairment Loss on Financial Assets

 

2019

2018

 

£m

£m

Impairment loss on loans and advances to customers1

163.5

137.4

Impairment loss on investment securities at FVOCI

0.7

n/a

Reversal of impairment loss on investment securities at amortised cost

(0.1)

n/a

Total impairment loss on financial assets

164.1

137.4

1Included within the impairment loss on loans and advances to customers is an amount of £32.7m (2018: £34.6m) received through the sale of non-performing debt to third parties.

11.           Directors' Emoluments

The remuneration of the Directors paid by the Group during the year was as follows:

 

2019

2018

 

£m

£m

Aggregate emoluments

4.5

5.9

Aggregate amounts receivable under long-term incentive schemes

3.0

2.6

Loss of office

0.3

Share based payments

0.8

0.9

Total Directors' emoluments

8.3

9.7

 

 

2019

2018

 

Number

Number

Number of Directors to whom retirement benefits are accruing under defined benefit or defined contribution schemes

3

3

Number of Directors in respect of whose qualifying services shares were received or receivable under long-term incentive schemes

6

5

Number of Directors who exercised share options in the year

-

-

 

The total emoluments of the highest paid Director were £1.6m (2018: £2.3m).  During the year the highest paid Director did not exercise any share options (2018: £nil).

At 28 February 2019 the accrued pension and lump sum under a defined benefit scheme for the highest paid Director was £nil (2018: £nil).

During the year to 28 February 2019 one Director (2018: two Directors) left the company.  During the prior year, one Director was paid a sum of £0.3m upon leaving, in line with contractual terms and conditions.  There were no such payments in the current year.

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 59

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

12.           Income Tax

Income tax charge

 

 

2019

2018

 

 

£m

£m

 

 

 

Restated1

Current tax charge for the year

 

65.1

70.4

Adjustments in respect of prior years

 

(0.8)

0.8

 

 

 


Total current tax charge for the year

 

64.3

71.2

 

 

 


Deferred tax credit for the year

 

(9.3)

(9.7)

Tax rate change

 

0.8

0.6

Adjustments in respect of prior years

 

(0.2)

(1.5)

 

 

 


Total deferred tax credit for the year

 

(8.7)

(10.6)

 

 

 


Total income tax charge

 

55.6

60.6

 

The standard rate of corporation tax in the UK was changed from 20% to 19% with effect from 1 April 2017. This gives a blended corporation tax rate for the Group for the full year of 19.0% (2018: 19.1%).  In addition, a banking surcharge of 8% is applied to the Group's results.

The tax assessed for the full year is higher (2018: higher) than that calculated using the overall blended corporation tax rate for the Group. The differences are explained below:

 

2019

2018

 

£m

£m

 

 

Restated1

Profit before taxation

198.9

199.1

 

 


Profit on ordinary activities multiplied by blended rate in the UK of

19.0% (2018: 19.1%)

37.8

38.0

 

 


Factors affecting charge for the year:

 


Impact of banking surcharge

13.3

13.2

Expenses not deductible for tax purposes2

9.0

10.0

Adjustment in respect of prior years - current tax

(0.8)

0.8

Adjustment in respect of prior years - deferred tax

(0.2)

(1.5)

Share based payments

(2.9)

1.5

Other tax adjustments

0.1

-

Tax rate change

0.8

0.6

Share of profit of joint venture

(1.5)

(2.0)

 

 


Total income tax charge

55.6

60.6

 

1The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

2The majority of the adjustment relates to the tax impact of the non-deductibility of an additional PPI provision of £16.0m recognised in the year (2018: £35.0m) and   a regulatory charge of £16.4m (2018: £nil).                                                                                                                                                                                                                                                                                                                                       60

 

 

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

12.  Income Tax (continued)

The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be reduced to 17% from 1 April 2020.  This rate reduction was enacted during the year ended 28 February 2017 and is therefore incorporated in these Financial Statements.  The rate change is expected to reduce the Group's effective tax rate in the medium term.

Income tax relating to components of other comprehensive income

 

Before tax amount

Tax (charge)/credit

Net of tax amount

2019

£m

£m

£m

 

 

 

 

Items that may be reclassified to the income statement

 

 

 

Net losses on debt securities at FVOCI

(1.7)

0.4

(1.3)

Net gains on debt securities reclassified to the income statement on disposal

(8.0)

2.2

(5.8)

Net losses on cash flow hedges

(0.8)

0.1

(0.7)

Net losses on cross currency interest rate swaps

(0.3)

(0.3)

 

 

 

 

Items that will not be reclassified to the income statement

 

 

 

Net gains on equity securities designated at FVOCI

0.5

(0.1)

0.4

Total income tax relating to components of other comprehensive income

(10.3)

2.6

(7.7)

 

 

 

Before tax amount

Tax charge

Net of tax amount

2018

£m

£m

£m

Items that may be reclassified to the income statement




Unrealised net gains on AFS investment securities

1.8

(0.3)

1.5

Net gains on cash flow hedges reclassified to the income statement

0.4

(0.1)

0.3

Total items that may be reclassified to the income statement

2.2

(0.4)

1.8

 

Deferred tax charged directly to the Statement of Changes in Equity

 

Before tax amount

Tax charge

Net of tax amount

2019

£m

£m

£m

Net losses on share based payments reserve

(4.8)

(2.6)

(7.4)

 

(4.8)

(2.6)

(7.4)

 


Before tax amount

Tax credit

Net of tax amount

2018

£m

£m

£m

Net gains on share based payments reserve

3.6

0.9

4.5


3.6

0.9

4.5

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 61

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

13.  Distributions to Equity Holders

 

2019

2018

 

£m

£m

Ordinary dividend paid

60.0

50.0

 

60.0

50.0

 

On 21 February 2019 an interim dividend of £60.0m (£0.0492 per ordinary share) was paid.  In the prior year, an interim dividend of £50.0m (£0.0410 per ordinary share) was paid on 22 February 2018.

 

14.  Cash and Balances with Central Banks

 

Group

Company

 

2019

2018

2019

2018

 

£m

£m

£m

£m

Cash at bank

374.1

376.9

51.9

55.6

Balances held with the Bank of England (BoE) other than mandatory reserve deposits

669.3

926.6

669.3

926.6

Included in cash and cash equivalents

1,043.4

1,303.5

721.2

982.2

 

 


 


Mandatory reserves deposits held with the BoE

28.7

15.1

28.7

15.1

Total cash and balances with central banks

1,072.1

1,318.6

749.9

997.3

 

Mandatory reserve deposits held with the BoE of £28.7m (2018: £15.1m) are not included within cash and cash equivalents for the purposes of the cash flow statement as these do not have short-term maturities.  These balances are not available in the Group's day-to-day operations and are non-interest bearing. Other balances are subject to variable interest rates based on the BoE base rate.

15.           Loans and Advances to Banks

Group and Company

2019

2018

 

£m

£m

 

 


Loans and advances to banks

324.2

 

324.2

 

 


All of the above balances are current.

Loans and advances to banks include balances of £324.2m (2018: £nil) which have been purchased under sale and repurchase agreements.        

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                62

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

16.  Loans and Advances to Customers

Group and Company

2019

2018

 

£m

£m

Secured Mortgage lending

3,767.4

3,010.2

Unsecured lending

9,146.2

8,766.7

Total secured and unsecured lending

12,913.6

11,776.9

 

 


Fair value hedge adjustment

(2.7)

(16.4)

Gross loans and advances to customers

12,910.9

11,760.5

 

 


Less: allowance for impairment (refer to note 36)

(485.2)

(238.1)

 

 


Net loans and advances to customers

12,425.7

11,522.4

 

 


Current

4,557.5

4,636.6

Non-current

7,868.2

6,885.8

 

At 28 February 2019, the Group had contractual lending commitments of £12,226.2m (2018: £12,225.0m).  An additional ECL provision of £8.5m was also recognised at 28 February 2019 (2018: £nil). This represents the excess of total ECLs for both drawn and undrawn balances over the gross carrying balances as above. Refer to note 29 for further details.

Fair value hedge adjustments

Fair value hedge adjustments amounting to £(2.7)m (2018: £(16.4)m) are in respect of fixed rate Loans and Mortgages. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                63

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments

Strategy in using derivative financial instruments

The objective when using a derivative financial instrument is to ensure that the risk to reward profile of a transaction is optimised, allowing the Group to manage its exposure to interest rate and foreign exchange rate risk. The intention is to only use derivatives to create economically effective hedges. There are specific requirements stipulated under IFRS 9/IAS 39 which must be met for a derivative to qualify for hedge accounting. As a result, not all derivatives can be designated as being in an accounting hedge relationship, either because natural accounting offsets are expected or because obtaining hedge accounting would be especially onerous.

For those derivatives where hedge accounting is applied, gains and losses are offset by hedge adjustments in the Consolidated Income Statement. For those derivatives held for economic hedging purposes which cannot be designated as being in an accounting hedge relationship, the gains and losses are recognised in the Consolidated Income Statement.   In the Statement of Financial Position there is no distinction between derivatives where hedge accounting is applied and derivatives which cannot be designated as being in an accounting hedge relationship.

The following table analyses derivatives held for risk management purposes by type of instrument and splits derivatives between those classified in hedge accounting relationships and those not in hedge accounting relationships.

Group

2019

2018

 

Assets

Liabilities

Assets

Liabilities

 

£m

£m

£m

£m

Derivatives in hedge accounting relationships

 

 



Derivatives designated as fair value hedges

 

 



Interest rate swaps

17.8

(49.5)

30.5

(86.8)

 

 

 



Derivatives designated as cash flow hedges

 

 



Interest rate swaps

(0.3)

(0.7)

RPI basis swaps

12.5

11.5

Forward foreign exchange contracts

(0.2)

0.1

Cross currency interest rate swaps

-

(9.1)

-

-

Total derivatives in hedge accounting relationships

30.3

(59.1)

42.1

(87.5)

 

 

 



Derivatives not in hedge accounting relationships

 

 



Interest rate derivatives

 

 



Interest rate swaps

1.0

(1.1)

3.9

(0.8)

 

 

 



Currency derivatives

 

 



Forward foreign exchange contracts

0.1

(0.1)

Total derivatives not in hedge accounting relationships

1.0

(1.1)

4.0

(0.9)

 

 

 



Total

31.3

(60.2)

46.1

(88.4)

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 64

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

Company

2019

2018

 

Assets

Liabilities

Assets

Liabilities

 

£m

£m

£m

£m

Derivatives in hedge accounting relationships

 

 



Derivatives designated as fair value hedges

 

 



Interest rate swaps

17.8

(49.5)

30.5

(86.8)

 

 

 



Derivatives designated as cash flow hedges

 

 



Interest rate swaps

(0.3)

(0.7)

RPI basis swaps

12.5

11.5

Forward foreign exchange contracts

(0.2)

0.1

Total derivatives in hedge accounting relationships

30.3

(50.0)

42.1

(87.5)

 

 

 



Derivatives not in hedge accounting relationships

 

 



Interest rate derivatives

 

 



Interest rate swaps

1.0

(1.1)

3.9

(0.8)

 

 

 



Currency derivatives

 

 



Forward foreign exchange contracts

0.1

(0.1)

Total derivatives not in hedge accounting relationships

1.0

(1.1)

4.0

(0.9)

 

 

 



Total

31.3

(51.1)

46.1

(88.4)

 

Derivatives, whether designated in hedge accounting relationships or not, are regarded as current where they are expected to mature within one year.  All other derivatives are regarded as non-current.

Group

2019

2018

 

Assets

Liabilities

Assets

Liabilities

 

£m

£m

£m

£m

Current

13.8

(2.8)

1.5

(3.1)

Non-current

17.5

(57.4)

44.6

(85.3)

 

Company

2019

2018

 

Assets

Liabilities

Assets

Liabilities

 

£m

£m

£m

£m

Current

13.8

(2.8)

1.5

(3.1)

Non-current

17.5

(48.3)

44.6

(85.3)

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 65

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

Hedge accounting

The Group applies hedge accounting in the following hedging strategies:

·              Fair value hedges of interest rate risk

The Group's risk management objective of creating economically effective hedges is achieved by the use of interest rate contracts to swap fixed rate exposures back to a benchmark floating rate where no existing offset is available. This includes the hedging of fixed rate investment securities and issuances of fixed rate debt, which protects the Group against the fair value volatility of these financial assets and financial liabilities due to movements in interest rates. Each swap is defined as hedging one or more fixed rate assets or liabilities.  The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.

Sources of hedge ineffectiveness relate to differences in timing and repricing between execution of the hedging instrument and hedge item.

·              Portfolio fair value hedges of interest rate risk

The Group's risk management objective of creating economically effective hedges is achieved by the use of interest rate contracts to swap fixed rate exposures back to a benchmark floating rate where no existing offset is available. This includes the hedging of portfolios of fixed rate Loans, Mortgages and Savings products, which protects the Group against the fair value volatility of these financial assets and financial liabilities due to movements in interest rates.  The Group applies IAS 39 portfolio hedge accounting in respect of these hedging instruments.

Sources of hedge ineffectiveness include, but are not limited to, differences in timing and repricing between execution of the hedging instrument and hedge item, differences between actual and expected prepayment rates of the underlying hedge item and repricing differences between the portfolio of hedge items and the associated hedging instruments.

·              Cash flow hedges of debt securities issued

The Group holds inflation and interest rate swaps as cash flow hedges to mitigate the variability in cash flows associated with an inflation-linked debt security issued by the Bank.  The cash flows are expected to occur over the term to maturity in December 2019.  The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.

Sources of hedge ineffectiveness primarily relate to differences in timing and repricing between execution of the hedging instrument and hedge item.

The Group also holds cross currency interest rate swaps as cash flow hedges to mitigate the variability in cash flows associated with the foreign currency notes in issue. The cash flows are expected to occur over the term to maturity in 2020.  The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.

Sources of hedge ineffectiveness are primarily due to differences in timing and repricing between execution of the hedging instrument and hedge item.

·              Cash flow hedges of expected foreign currency payments

The Group holds forward foreign currency contracts as cash flow hedges to mitigate the variability in cash flows associated with expected (and highly probable) foreign currency payments. The payments, associated cash flows and the forward contracts are expected to occur and mature over the following 15 months. The Group applies IFRS 9 hedge accounting in respect of these hedging instruments.

Sources of hedge ineffectiveness relate to differences between expected and actual cash flows.

 

 

 

 

                                               

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                66

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

The following tables set out the maturity profile and average interest rate of the hedging instruments used in the Group's hedging strategies1:

Group2

Maturity

2019

Up to one month

One to three months

Three months to one year

One year to five years

More than five years

 

£m

£m

£m

£m

£m

Fair value hedges

 

 

 

 

 

Interest rate

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

- Nominal amount

70.2

122.3

1,191.3

4,285.7

159.7

- Average interest rate

1.16%

0.92%

1.03%

1.21%

4.12%

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

Interest rate

 

 

 

 

 

RPI basis swaps

 

 

 

 

 

- Nominal amount

-

-

60.0

- Average interest rate

-

-

LIBOR + 2.17% / 1.00% + UKRPI

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

- Nominal amount

-

-

60.0

- Average interest rate

-

1.57%

 

 

 

 

 

 

Foreign currency

 

 

 

 

 

Forward foreign exchange contracts

 

 

 

 

 

- Nominal amount

0.6

1.7

5.9

- Average exchange rate

1.30

1.30

1.31

 

 

 

 

 

 

Interest rate/Foreign currency

 

 

 

 

 

Cross currency interest rate swaps (GBP:USD)

 

 

 

 

 

- Nominal amount (£m)

272.2

- Average exchange rate

1.29

- Average interest rate: pay leg

LIBOR + 0.84%

- Average interest rate: receive leg

USD LIBOR + 0.70%

1Disclosures relate to derivatives in hedge accounting relationships only.

2On a Company basis, cross currency interest rate swaps with a nominal amount of £272.2m are excluded.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 67

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

The following tables set out details of the hedging instruments used in the Group's hedging strategies1:

Group2


Carrying amount



2019

Notional

Assets

Liabilities

Balance sheet line item

Changes in fair value used for calculating hedge ineffectiveness


£m

£m

£m


£m

Fair value hedges






Interest rate






Interest rate swaps

5,829.2

17.8

(49.5)

Derivative financial instruments

(10.4)







Cash flow hedges






Interest rate






RPI basis swaps

60.0

12.5

Derivative financial instruments

1.1

Interest rate swaps

60.0

(0.3)

Derivative financial instruments

0.4







Foreign currency






Forward foreign exchange contracts

8.2

(0.2)

Derivative financial instruments

(0.1)







Interest rate/foreign currency






Cross currency interest rate swaps (GBP:USD)

272.2

(9.1)

Derivative financial instruments

8.6

Total

6,229.6

30.3

(59.1)


(0.4)

1 Disclosures relate to derivatives in hedge accounting relationships only.

2 On a Company basis, cross currency interest rate swaps are excluded. Notional swap values are £5,957.4m, the carrying amount of liabilities is £(50.0)m and changes in fair value used for calculating hedge ineffectiveness amount to £(9.0)m.

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          68

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

The following tables set out details of the hedged exposures covered by the Group's hedging strategies1:

Group and Company

Carrying amount

Accumulated amounts of fair value adjustments on the hedged item

Balance sheet line item

2019

Assets

Liabilities

Assets

Liabilities


£m

£m

£m

£m


Fair value hedges






Interest rate






- Fixed rate Loans and Mortgages

7,973.8

(2.7)

Loans and advances to customers

- Fixed rate Savings

(3,691.2)

0.2

Deposits from customers

- Fixed rate investment securities

472.8

(5.1)

Investment securities

- Fixed rate retail bond

(202.9)

(3.2)

Debt securities in issue

Total fair value hedges

8,446.6

(3,894.1)

(7.8)

(3.0)


 

2019

Changes in value for calculating hedge ineffectiveness

Accumulated amount of fair value hedge adjustments remaining in the Statement of Financial Position for any hedged items that have ceased to be adjusted for hedging gains and losses


£m

£m

Interest rate



- Fixed rate loans and mortgages

13.7

0.2

- Fixed rate savings

(0.8)

- Fixed rate investment securities

(3.2)

0.2

- Fixed rate retail bond

1.1

0.5

Total fair value hedges

10.8

0.9

 

1Disclosures relate to derivatives in hedge accounting relationships only.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 69

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

The following tables set out information regarding the effectiveness of the hedging relationships designated by the Group, as well as the impacts on profit or loss and other comprehensive income1:

Group

Hedge ineffectiveness recognised in profit or loss

Line item in income statement that includes hedge ineffectiveness

2019

£m


Fair value hedges



Interest rate



- Interest rate swaps

0.4

Net gain/(loss) on financial instruments at FVPL

Total fair values hedges

0.4


1Disclosures relate to derivatives in hedge accounting relationships only.

 

 

Group2



Cash flow hedge reserve

2019

Balance sheet line item

Change in value of hedged item used for calculating hedge ineffectiveness

Continued hedges



£m

£m

Cash flow hedges




Interest rate




- RPI bond

Debt securities in issue

(1.4)

(0.4)





Foreign currency




- Accounts payable

Other liabilities

(0.3)

(0.1)

Interest rate/foreign currency




- Securitisation bond

Debt securities in issue

(8.6)

(0.5)

Total cash flow hedges


(10.3)

(1.0)

1Disclosures relate to derivatives in hedge accounting relationships only.

2 On a Company basis, the securitisation bond is excluded. Amounts used for calculating hedge ineffectiveness are £(1.7)m and the cash flow hedge reserve is £(0.5)m.

There are no amounts remaining in the cash flow hedge reserve for which hedge accounting is no longer applied.

 

 

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  70

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

Group2

 

 

 

 

2019

Cumulative hedging gains and (losses) recognised in other comprehensive income

Hedge ineffectiveness recognised in profit or loss

Line item in income statement that includes hedge ineffectiveness

Cumulative amount reclassified from cash flow hedge reserve to profit or loss

Line item in profit or loss that includes reclassification


£m

£m


£m


Cash flow hedges






Interest rate






- RPI basis and interest rate swaps

12.5

Net gain/(loss) on financial instruments at FVPL

(12.9)

Interest expense and similar charges







Foreign currency






- Forward foreign exchange contracts

(0.2)

Net gain/(loss) on financial instruments at FVPL








Interest rate/foreign currency






- Cross currency interest rate swaps (GBP:USD)

(8.6)

(0.3)

Net gain/(loss) on financial instruments at FVPL

8.1

Net gain/(loss) on financial instruments at FVPL

Total cash flow hedges

3.7

(0.3)


(4.8)


1Disclosures relate to derivatives in hedge accounting relationships only.

2On a Company basis, cross currency interest rate swaps are excluded.  Hedging gains and (losses) recognised in other comprehensive income are £12.3m, hedge ineffectiveness recognised in profit or loss is £nil and amounts reclassified to profit or loss are £(12.9m).

 



Group

£m

Hedging gains and losses recognised in other comprehensive income

3.7

Amount reclassified from cash flow hedge reserve to profit or loss

(4.8)

Tax

0.1

Cash flow hedge reserve

(1.0)

 



Company

£m

Hedging gains and losses recognised in other comprehensive income

12.3

Amount reclassified from cash flow hedge reserve to profit or loss

(12.9)

Tax

0.1

Cash flow hedge reserve

(0.5)

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                71

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

The following table presents a reconciliation by risk category of the cash flow hedge reserve and an analysis of other comprehensive income in relation to hedge accounting1:

 

Cash flow hedge reserve

Group

£m

Balance at 1 March 2018

(0.3)

Interest rate swaps

 

- Effective portion of changes in fair value

1.4

- Amount reclassified to profit or loss in the year

(1.4)

- Tax

0.1

 

 

Cashflow hedge - foreign exchange risk

 

- Effective portion of changes in fair value

(0.3)

 

 

Cross currency interest rate swaps

 

- Effective portion of changes in fair value

(8.6)

- Amount reclassified to profit or loss in the year

8.1

 

 

Balance at 28 February 2019

(1.0)

 

Cash flow hedge reserve

Company

£m

Balance at 1 March 2018

(0.3)

 

 

Interest rate swaps

 

- Effective portion of changes in fair value

1.4

- Amount reclassified to profit or loss in the year

(1.4)

- Tax

0.1

 

 

Cashflow hedge - foreign exchange risk

 

- Effective portion of changes in fair value

(0.3)

 

 

Balance at 28 February 2019

(0.5)

1Disclosures relate to derivatives in hedge accounting relationships only.

Comparative information under IAS 39

Fair value hedge

The analysis below details the ineffectiveness in the fair value hedge relationships included in the Consolidated Income Statement1:

 

2018

 

£m

Fair value gains on interest rate swaps in designated fair value hedges

67.0

Losses on fair value hedge adjustments

(65.9)

Net gains in Consolidated Income Statement (refer to note 7)

1.1

1Disclosures relate to derivatives in hedge accounting relationships only.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 72

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

17.          Derivative Financial Instruments (continued)

Cash flow hedge

Ineffectiveness recognised in the Consolidated Income Statement in respect of cash flow hedges for the 12 months to 28 February 2018 was £nil. Amounts are recycled from the cash flow hedge reserve when the underlying hedge item affects the Consolidated Income Statement. Therefore as the carrying value of the asset or liability is adjusted in respect of movements in the hedged risk, recycled amounts directly offset this adjustment within net interest income. Recycled amounts for the 12 months to 28 February 2018 were £1.4m.

 

18.  Investment Securities

Group and Company

2019

2018

 

£m

£m

Investment securities measured at FVOCI - debt

1,040.2

n/a

Investment securities designated at FVOCI - equity

2.5

n/a

Investment securities measured at amortised cost

28.8

n/a

AFS investment securities

n/a

925.4

Loans and receivables

n/a

34.1

Total investment securities

1,071.5

959.5

Debt investment securities measured at FVOCI

Group and Company

2019

 

£m

Government backed investment securities

185.5

Gilts

55.1

Supranational investment securities

406.1

Other investment securities

393.5

Total debt securities measured at FVOCI

1,040.2

Included in investment securities are fixed-interest investment securities totalling £472.8m (2018: £801.5m presented within the AFS investment securities table on page 74), and variable-interest investment securities amounting to £567.4m (2018: £121.9m presented within the AFS investment securities table on page 74).

Equity investment securities designated at FVOCI

The Group has elected to designate equity instruments held in VISA Inc. at FVOCI as permitted by IFRS 9. These securities were previously classified as AFS. There has been no change in the measurement basis as a result of this reclassification and these instruments continue to be held at fair value.

The preferred stock may be convertible into Class A Common Stock of VISA Inc. at certain future dates, the earliest point being June 2020.  Conversion is contingent upon future events, principally related to the outcome of interchange litigation against VISA Europe Limited.  As such, the valuation of £2.5m (2018: £2.0m presented within the AFS investment securities table on page 74) reflects both an illiquidity discount and the risk of a reduction in the conversion rate to VISA Inc. common stock.  The reduction in the conversion rate is the most significant unobservable input to the valuation.

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 73

                               

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

18.          Investment Securities (continued)

Investment securities measured at amortised cost

 

2019

 

£m

Investment in subordinated debt issued by TU

28.9

Gross investment securities measured at amortised cost

28.9

 

 

Less: allowance for impairment (refer note 36)

(0.1)

 

 

Net investment securities measured at amortised cost

28.8

 

The investment in subordinated notes issued by TU relates to subordinated notes with a gross carrying value of £28.9m (2018: £34.1m), classified as loans and receivables in the prior year.  Interest receivable on these notes is based on a rate of three month London Interbank Offered Rate (LIBOR) plus a spread ranging from 350 - 450 basis points.

AFS investment securities

Group and Company

2018


£m

Government backed investment securities

101.1

Gilts

581.5

Supranational investment securities

85.1

Other investment securities

155.7

Equity securities

2.0

Total AFS investment securities

925.4

Loans and receivables

This balance represents the investment in subordinated debt issued by TU of £34.1m which was classified as loans and receivables under IAS 39.  Interest receivable on these notes in the year to 28 February 2018 was based on a rate of three month LIBOR plus a spread ranging from 350 - 450 basis points. No impairment charges were recognised in respect of this investment under IAS 39.

19.          Prepayments and Accrued Income

Group and Company

2019

2018

 

£m

£m

Prepayments

10.8

10.2

Accrued income

38.6

39.1

Total prepayments and accrued income

49.4

49.3

All amounts are classified as current at the year end.

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 74

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

20.  Other Assets

 

Group

Company

 

2019

2018

2019

2018

 

£m

£m

£m

£m

 

 

Restated1

 

Restated1

Amount due from insurance commissions receivable

16.6

19.6

16.6

19.6

Contract asset - insurance renewal income

28.1

14.9

28.1

14.9

Accounts receivable and sundry debtors

191.5

236.6

191.5

236.6

Amounts due from Tesco Group subsidiaries

0.4

9.5

0.4

9.5

Amounts due from Tesco Personal Finance Group PLC (TPFG) and its subsidiaries

47.6

46.5

Total other assets

236.6

280.6

284.2

327.1

All amounts are classified as current at the year end, with the exception of £17.7m (2018: £5.6m) of the contract asset, which is expected to be received after more than one year.

Contract asset - insurance renewal income

Of the prior year contract asset balance, £9.3m has been reclassified in the year as commissions receivable (2018 restated: £3.6m has been reclassified in the prior year relating to the contract asset balance at 28 February 2017) as insurance policies have been renewed and commission due to the Group has become payable. In addition, an amount of £5.6m was unwound on renewal of the contract to which the insurance renewal income relates. Following contract renewal in respect of certain insurance policies, the remainder of the movement in the balance relates to accelerated income of £28.1m in respect of certain insurance renewal commission income where the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods.

1 The prior year restatement relates to the adoption of IFRS 15 in the current year.  Refer to note 2 for further details.

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                75

 


TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

21.           Investment in Group Undertakings

The following companies are accounted for as subsidiaries of the Group. These are securitisation structured entities established in connection with the Group's Credit Card securitisation transactions. Although none of the equity of the securitisation structured entities is owned by the Company, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group. The Company does not hold any investments in Group undertakings.

Name of company

Nature of business

Place of incorporation

Registered address

Delamare Cards Holdco Limited

Securitisation entity

UK

Asticus Building, 2nd floor,

21 Palmer Street, London, SW1H 0AD

Delamare Cards MTN Issuer plc

Securitisation entity

UK

Asticus Building, 2nd floor,

21 Palmer Street, London, SW1H 0AD

Delamare Cards Receivables Trustee Limited

Securitisation entity

UK

Asticus Building, 2nd floor,

21 Palmer Street, London, SW1H 0AD

Delamare Cards Funding 1 Limited

Securitisation entity

UK

Asticus Building, 2nd floor,

21 Palmer Street, London, SW1H 0AD

Delamare Cards Funding 2 Limited

Securitisation entity

UK

Asticus Building, 2nd floor,

21 Palmer Street, London, SW1H 0AD

All of the above companies have a financial year end of 31 December. The management accounts of these entities are used to consolidate the results to 28 February 2019 within these Consolidated Financial Statements.

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 76

 


TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

22.           Investment in Joint Venture

The following table shows the aggregate movement in the Group's investment in its joint venture in the year:

Group

2019

2018

 

£m

£m

At beginning of year

90.0

71.0

Acquisition of ordinary share capital

15.5

Dividends received

(10.3)

Share of profit of joint venture

7.9

10.0

Share of other comprehensive expense of joint venture

(1.2)

(6.5)

At end of year

86.4

90.0

 

Details of the Group's joint venture

 

 

 

 

Ownership interest

Name of company

Registered address

Nature of business

Place of Incorporation

2019

2018

Tesco Underwriting Limited

Ageas House, Hampshire Corporate Park, Templars Way, Eastleigh, Hampshire, SO53 3YA

Insurance

England

49.9% of Ordinary Share Capital

49.9% of Ordinary Share Capital

 

TU is an authorised insurance company which provides the insurance underwriting service for a number of the Group's general insurance products. TU is a private company and there is no quoted market price available for its shares.

The Group uses the equity method of accounting for its investment in TU, which has a financial year end of 31 December. The accounting year end date for TU differs from that of the Group as it is in line with the other joint venture partner. The management accounts of TU are used to consolidate the results to 28 February 2019 within these Consolidated Financial Statements.

TU has taken advantage of the optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 'Insurance Contracts' (the 'deferral approach'). This will remove the impact of potential temporary volatility in reported results for TU until the date of adoption of the new insurance standard IFRS 17

'Insurance Contracts' on 1 January 2021.

The Group has similarly elected to take a temporary exemption available from the requirements of IAS 28 'Investments in Associates and Joint Ventures' regarding the use of uniform accounting policies in equity accounting for a joint venture. This exemption allows the Group to equity account for the results of TU without any adjustments to reflect the impact of IFRS 9 within these Consolidated Financial Statements. The additional disclosures required as a result of taking this temporary exemption are included within the following sections.

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 77

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

22.          Investment in Joint Venture (continued)

Summarised financial information for the joint venture

This information reflects the amounts presented in the management accounts of the joint venture (and not the Group's share of those amounts):

Group

2019

2018

 

£m

£m

Non-current assets

768.2

876.7

Current assets

198.4

157.5

Current liabilities

(741.1)

(791.1)

Non-current liabilities

(58.0)

(68.3)

Net assets

167.5

174.8

 

 


Cash and cash equivalents

72.9

63.3

Current financial liabilities (excluding trade and other payables and provisions)

(15.0)

(10.7)

Non-current financial liabilities (excluding trade and other payables and provisions)

(58.0)

(68.3)

 

 

2019

2018

 

£m

£m

Income Statement

 


Revenue

297.7

366.6

Expenses including claims costs

(281.9)

(346.6)

Profit for the year

15.8

20.0

 

 


Other comprehensive expense

(2.5)

(13.0)

 

 


Total comprehensive income

13.3

7.0

 

 


The above profit includes the following:

 


Depreciation and amortisation

(2.5)

(2.9)

Interest income

13.5

13.9

Interest expense

(2.7)

(2.8)

Income tax charge

(4.2)

(1.6)

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 78

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

22.          Investment in Joint Venture (continued)

Reconciliation of the summarised financial position

A reconciliation of the summarised financial information presented to the carrying amount of the investment in joint venture is as follows.

Group

2019

2018

 

£m

£m

 

 


Net assets of the joint venture

167.5

174.8

 

 


Group share at 49.9%

83.6

87.2

Capitalised legal costs included in investment carrying value

2.8

2.8

Carrying value of investment in joint venture at end of year

86.4

90.0

Fair value disclosures

The following table provides information on the fair value of TU's financial assets at 28 February 2019:

2019

Fair value

Change in fair value during year

 

£m

£m

Financial assets that give rise to solely payments of principal and interest

741.4

(72.7)

Other financial assets

18.2

18.2

 

759.6

(54.5)

Credit risk disclosures

The following table provides information regarding the credit risk exposures of TU at 28 February 2019 by classifying financial assets according to the credit ratings of counterparties:

2019

AAA

AA

A

BBB

Other

Total

 

£m

£m

£m

£m

£m

£m

Investments

123.8

132.9

276.2

135.5

18.2

686.6

Cash and cash equivalents

25.1

47.8

72.9

Insurance and other receivables

1.1

1.2

3.7

3.6

13.7

23.3

 

150.0

181.9

279.9

139.1

31.9

782.8

Other information

The Group has no contingent liabilities or commitments in respect of the joint venture. The investment in the joint venture is classified as non-current.

Company

The Company carries the investment in the joint venture at cost.  The following table presents the aggregate movement in the Company's investment in the joint venture in the year:

Company

2019

2018

 

£m

£m

 

 


At beginning of year

86.5

71.0

Dividends received

(10.3)

-

Acquisition of ordinary share capital

15.5

At end of year

76.2

86.5

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                79

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

23.           Deferred Income Tax Asset/(Liability)

The deferred income tax liability can be analysed as follows:

2019

Accelerated capital allowances

Other

Total

Group and Company

£m

£m

£m

 

 

 

 

At beginning of year (restated)1

(7.0)

(0.7)

(7.7)

Credited to the Consolidated Income Statement in the current year

9.6

(0.3)

9.3

Credited to the Consolidated Income Statement for prior years

(0.2)

0.4

0.2

Credited to equity

56.6

56.6

Change in tax rate

(0.7)

(0.1)

(0.8)

At end of year

1.7

55.9

57.6

 

 

 

 

Deferred tax asset to be recovered within one year

 

 

8.0

Deferred tax asset to be recovered after more than one year

 

 

50.3

Total deferred income tax asset

 

 

58.3

 

 

 

 

Deferred tax liability to be recovered within one year

 

 

Deferred tax liability to be recovered after more than one year

 

 

(0.7)

Total deferred income tax liability

 

 

(0.7)

 

 

 

 

Deferred tax assets (net)

 

 

57.6

 

2018

Accelerated capital allowances

Other

Total (restated)1

Group and Company

£m

£m

£m





At beginning of year

(15.0)

(3.7)

(18.7)

Credited to the Consolidated Income Statement in the current year

8.5

1.2

9.7

Credited to the Consolidated Income Statement for prior years

0.4

1.1

1.5

Credited to equity

0.4

0.4

Change in tax rate

(0.6)

(0.6)

At end of year

(6.7)

(1.0)

(7.7)





Deferred tax asset to be recovered within one year



4.3

Deferred tax asset to be recovered after more than one year



2.2