Company Announcements

Preliminary Results 2020/21 Part 2

Source: RNS
RNS Number : 3720V
Tesco PLC
14 April 2021
 

Notes to the Group financial statements

Note 10 Goodwill and other intangible assets continued

 

 

Goodwill
£m

Software(a)
£m

Customer relationships(c)
£m

Intangible
 assets
£m

Total
£m

Cost

 

 

 

 

 

At 23 February 2019 (restated(b))

5,509

1,840

715

447

8,511

Foreign currency translation

(5)

(2)

-

(1)

(8)

Additions

-

188

-

19

207

Reclassification

-

40

-

(5)

35

Disposals

(27)

(198)

-

(2)

(227)

At 29 February 2020 (restated(b))

5,477

1,868

715

458

8,518

Accumulated amortisation and impairment losses

 

 

 

 

 

At 23 February 2019

 641

1,254

72

321

2,288

Foreign currency translation

(4)

(1)

-

-

(5)

Charge for the year(e)

-

281

76

10

 367

Impairment losses(f)

-

15

-

12

27

Reversal of impairment losses(f)

-

(31)

-

(7)

(38)

Reclassification

-

2

-

(3)

(1)

Disposals

-

(196)

-

(2)

(198)

At 29 February 2020

637

1,324

148

331

2,440

(a)-(e) Refer to previous table for footnotes.

 

 

 

 

 

 

 

Goodwill
£m

Software
£m

Customer relationships
£m

Intangible
 assets
£m

Total
£m

Cost

 

 

 

 

 

At 24 February 2018 (restated(b))

2,417

3,166

-

392

5,975

Foreign currency translation

(6)

1

-

(1)

(6)

Additions

-

167

-

24

191

Acquired through business combinations

3,098

-

715

48

3,861

Reclassification

-

(140)

-

2

(138)

Disposals

-

(308)

-

(15)

(323)

Fully-amortised assets

-

(1,046)

-

(3)

(1,049)

At 23 February 2019 (restated(b))

5,509

1,840

715

447

8,511

Accumulated amortisation and impairment losses

 

 

 

 

 

At 24 February 2018

662

2,378

-

315

3,355

Foreign currency translation

(21)

-

-

(2)

(23)

Charge for the year

-

210

72

13

295

Impairment losses

-

15

-

27

42

Reversal of impairment losses

-

(2)

-

(24)

(26)

Disposals

-

(301)

-

(5)

(306)

Fully-amortised assets

-

(1,046)

-

(3)

(1,049)

23 February 2019

641

1,254

72

321

2,288

(b) Refer to Note 1 for further details regarding prior year restatement.

 

 

Notes to the Group financial statements

Note 11 Property, plant and equipment

 

Land and buildings
£m

Other(a)
£m

Total

£m

Cost

 

 

 

At 29 February 2020

24,868

6,925

31,793

Foreign currency translation

(38)

(15)

(53)

Additions(b)

927

623

1,550

Acquired through business combinations

8

4

12

Transfers (to)/from assets classified as held for sale

29

-

29

Transfer to disposal group classified as held for sale

(3,642)

(1,415)

(5,057)

Disposals

(128)

(379)

(507)

At 27 February 2021

22,024

5,743

27,767

Accumulated depreciation and impairment losses

 

 

 

At 29 February 2020

7,841

4,718

12,559

Foreign currency translation

(15)

(10)

(25)

Charge for the year

432

489

921

Impairment losses(c)

353

107

460

Reversal of impairment losses(c)

(515)

(43)

(558)

Transfers (to)/from assets classified as held for sale

15

-

15

Transfer to disposal group classified as held for sale

(1,386)

(987)

(2,373)

Disposals

(72)

(371)

(443)

At 27 February 2021

6,653

3,903

10,556

 

 

 

 

Net carrying value

 

 

 

At 27 February 2021(d)

15,371

1,840

17,211

At 29 February 2020

17,027

2,207

19,234

 

 

 

 

Construction in progress included above(e)

 

 

 

At 27 February 2021

77

210

287

At 29 February 2020

88

114

202

(a)        Other assets consist of fixtures and fittings with a net carrying value of £1,345m (2020: £1,712m), office equipment with a net carrying value of £213m (2020: £245m) and motor vehicles with a net carrying value of £282m (2020: £250m)

(b)        Includes £476m of land and buildings related to obtaining control of The Tesco Property (No. 2) Limited Partnership, which was impaired by £(32)m on acquisition (2020: £914m of land and buildings related to obtaining control of The Tesco Atrato Limited Partnership, which was impaired by £(287)m on acquisition). The £476m additions comprised £492m cost of acquisition offset by £16m of historical deferred profit. Refer to the breakdown of assets and liabilities acquired within Note 33.

(c)         Refer to Note 15.

(d)        Includes £2,099m (2020: £1,406m) of assets pledged as security for secured bonds (refer to Note 23 and £826m (2020: £478m) of property held as security in favour of the Tesco PLC Pension Scheme (refer to Note 29.

(e)        Construction in progress does not include land.

 

 

Land and buildings
£m

Other(a)
£m

Total

£m

Cost

 

 

 

At 23 February 2019

24,484

6,993

31,477

Foreign currency translation

(69)

(15)

(84)

Additions(b)

1,285

621

1,906

Reclassification

(24)

(28)

(52)

Classified as held for sale

(589)

(36)

(625)

Disposals

(219)

(610)

(829)

At 29 February 2020

24,868

6,925

31,793

Accumulated depreciation and impairment losses (restated)

 

 

 

At 23 February 2019

7,523

4,768

12,291

Foreign currency translation

(23)

(11)

(34)

Charge for the year

525

613

1,138

Impairment losses(c)

611

111

722

Reversal of impairment losses(c)

(391)

(104)

(495)

Reclassification

41

(23)

18

Classified as held for sale

(298)

(34)

(332)

Disposals

(147)

(602)

(749)

At 29 February 2020

7,841

4,718

12,559

Net carrying value(d)

17,027

2,207

19,234

(a)-(d) Refer to previous table for footnotes

 

Notes to the Group financial statements

Note 12 Leases

Group as lessee

Lease liabilities represent rentals payable by the Group for certain retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights. Purchase options and renewal rights, where they occur, are at market value. Escalation clauses are in line with market practices and include inflation-linked, fixed rates, resets to market rents and hybrids of these.

 

In prior years, the Group entered into several joint ventures, and sold and leased back properties to and from these joint ventures over 20 to 30-year terms. On certain transactions, the Group has an option to buy back either the leased asset or the equity of the other party, at market value and at a specified date, typically at year 10. On some of these transactions the Group also has a lease-break option, which is exercisable if the buyback option is exercised and the associated debt in the joint venture is repaid. The lease liability in respect of these leases assumes that the lease-break option is not exercised.

 

On 18 September 2020, the Group obtained control of The Tesco Property (No. 2) Limited Partnership, previously accounted for as a joint venture, through the acquisition of the other partner's 50% interest, at which point the associated property leases from the joint venture became intercompany leases and are eliminated on consolidation. Refer to Note 33 for further details.

Right of use assets

 

 

Land and buildings

£m

Other

£m

Total

£m

Net carrying value at 29 February 2020

6,734

140

6,874

Additions (including through business combinations)

308

42

350

Depreciation charge for the year

(517)

(49)

(566)

Impairment losses(a)

(225)

-

(225)

Reversal of impairment losses(a) 

230

-

230

Derecognition on acquisition of property joint venture (Note 33)

(130)

-

(130)

Transfer to disposal group classified as held for sale

(724)

(20)

(744)

Other movements(b) 

190

(28)

162

Net carrying value at 27 February 2021

5,866

85

5,951

(a)        Refer to Note 15.

(b)        Other movements include lease terminations, modifications and reassessments, foreign exchange, reclassifications between asset classes and entering into finance subleases.

 

 

Land and

buildings

£m

Other

£m

Total

£m

Net carrying value at 23 February 2019

7,561

152

7,713

Additions (including through business combinations)

146

58

204

Depreciation charge for the year

(584)

(67)

(651)

Impairment losses(a)

(267)

-

(267)

Reversal of impairment losses(a) 

182

-

182

Derecognition on acquisition of property joint venture

(335)

-

(335)

Other movements(b) 

31

(3)

28

Net carrying value at 29 February 2020

6,734

140

6,874

(a)-(b) Refer to footnotes in table above.

Lease liabilities

The following tables show the discounted lease liabilities included in the Group balance sheet and a maturity analysis of the contractual undiscounted lease payments:

 

2021

£m

2020

£m

Current

575

598

Non-current

7,827

8,968

Total lease liabilities

8,402

9,566

 

Maturity analysis - contractual undiscounted lease payments

2021

£m

2020

£m

Within one year

969

1,081

Greater than one year but less than two years

939

1,018

Greater than two years but less than three years

912

996

Greater than three years but less than four years

867

993

Greater than four years but less than five years

841

951

Greater than five years but less than ten years

3,597

4,178

Greater than ten years but less than fifteen years

2,443

2,810

After fifteen years

1,959

2,596

Total undiscounted lease payments

12,527

14,623

A reconciliation of the Group's opening to closing lease liabilities balance is presented in Note 32.

 

 

Notes to the Group financial statements

Note 12 Leases continued

Amounts recognised in the Group income statement

Continuing operations

52 weeks

2021

£m

53 weeks
2020*

£m

Interest on lease liabilities

446

486

Variable payment expenses not included in lease liabilities

1

1

Expenses relating to short-term leases

17

14

Expenses relating to leases of low value assets (excluding amounts already included in short-term leases above)

1

-

* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

 

Amounts recognised in the Group cash flow statement

 

 

52 weeks

2021

£m

53 weeks

2020

£m

Total cash outflow for leases*

1,109

1,175

* Includes £5m (2020: £5m) related to Tesco Bank.

 

Future possible cash outflows not included in the lease liability

Some leases contain break clauses or extension options to provide operational flexibility. Potential future undiscounted lease payments not included in the reasonably certain lease term, and hence not included in lease liabilities, total £10.8bn (2020: £11.8bn).

 

Future increases or decreases in rentals linked to an index or rate are not included in the lease liability until the change in cash flows takes effect. Approximately 75% (2020: 72%) of the Group's lease liabilities are subject to inflation-linked rentals and a further 15% (2020: 12%) are subject to rent reviews. Rental changes linked to inflation or rent reviews typically occur on an annual or five-yearly basis.

 

The Group is committed to payments totalling £36m (2020: £93m) in relation to leases that have been signed but have not yet commenced.

 

Group as lessor

The Group leases out owned properties and sublets leased properties under operating and finance leases. Such properties include malls, mall units, stores, units within stores, distribution centres and residential properties.

 

Amounts recognised in the Group income statement

Continuing operations

52 weeks

2021

£m

53 weeks

2020(a)

£m

Finance lease - interest income(b)

5

4

Operating lease - rental income(c)

85

98

(a)        Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b)        Includes £5m (2020: £4m) of sublease interest income.

(c)         Includes £22m (2020: £26m) of sublease rental income.

 

Finance lease payments receivable

The finance lease receivable (net investment in the lease) included in the Group balance sheet is £86m (2020: £48m).

Operating lease payments receivable maturity analysis

 

2021

£m

2020

£m

Within one year

74

220

Greater than one year but less than two years

52

128

Greater than two years but less than three years

41

71

Greater than three years but less than four years

32

38

Greater than four years but less than five years

24

27

Greater than five years but less than ten years

70

83

Greater than ten years but less than fifteen years

38

44

After fifteen years

65

82

Total undiscounted operating lease payments receivable

396

693

 

Notes to the Group financial statements

Note 13 Investment property

 

2021

£m

2020

£m

Cost

 

 

At the beginning of the year

100

118

Foreign currency translation

1

(1)

Reclassification

(4)

(11)

Classified as held for sale

1

-

Disposals

(5)

(6)

At the end of the year

93

100

Accumulated depreciation and impairment losses

 

 

At the beginning of the year

74

82

Foreign currency translation

1

(1)

Charge for the year

1

1

Impairment losses for the year*

2

5

Reversal of impairment losses for the year*

(2)

(4)

Reclassification

(2)

(4)

Classified as held for sale

1

-

Disposals

(1)

(5)

At the end of the year

74

74

Net carrying value at the end of the year

19

26

 

 

 

Rental income earned from investment properties under operating leases

7

11

Direct operating expenses incurred on rental-earning investment properties

-

(3)

* Refer to Note 15.

 

The estimated fair value of the Group's investment property is £0.1bn (2020: £0.2bn). This fair value has been determined by applying an appropriate rental yield to the rentals earned by the investment property. A valuation has not been performed by an independent valuer.

 

Note 14 Group entities

The Group consists of the ultimate Parent Company, Tesco PLC, and a number of subsidiaries, joint ventures and associates held directly or indirectly by Tesco PLC. See pages 117 to 121 for a complete list of Group entities.

 

Subsidiaries

The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 27 February 2021.

 

Consolidated structured entities

The Group has a number of securitisation structured entities established in connection with Tesco Bank's credit card securitisation transactions. Although none of the equity of these entities is owned by the Group, the Group has rights to variable returns from its involvement with these entities and has the ability to affect those returns through its power over them under contractual agreements. As such, these entities are effectively controlled by the Group, and are therefore accounted for as subsidiaries of the Group.

 

These entities have financial year ends of 31 December. The management accounts of these entities are used to consolidate the results to 27 February 2021 within these financial statements.

 

Unconsolidated structured entities

In prior years, the Group sponsored a number of structured entities. The Group led the formation of the entities and its name appears in the name of the entities and/or on the debt issued by the entities. The structured entities were set up to finance property purchases by some of the UK property joint ventures in which the Group typically holds a 50% equity interest. The structured entities obtain debt financing from third-party investors and lend the funds to these joint ventures, who use the funds to purchase the properties.

 

The liabilities of the UK property joint ventures include the loans due to these structured entities. The Group's exposure to the structured entities is limited to the extent of the Group's interests in the joint ventures. The liabilities of the structured entities are non-recourse to the Group.

 

The Group concluded that it does not control, and therefore should not consolidate, these structured entities since it does not have power over the relevant activities of the structured entities, or exposure to variable returns from these entities.

 

 

Notes to the Group financial statements
Note 14 Group entities continued 

Interests in joint ventures and associates

Principal joint ventures and associates

 

The Group's principal joint ventures and associates are:

 

Nature of
relationship

Business activity

Share of issued share capital, loan capital and debt securities

Country of incorporation

Principal area
of operation

Included in 'UK property joint ventures':

 

 

 

 

 

The Tesco Coral Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Blue Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Passaic Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Navona Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Sarum Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Dorney Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Arena Unit Trust

Joint venture

Property investment

50%

Jersey

United Kingdom

Included in 'Other joint ventures and associates':

 

 

 

 

 

Tesco Mobile Limited

Joint venture

Telecommunications

50%

England

United Kingdom

Tesco Underwriting Limited

Joint venture

Insurance

49.9%

England

United Kingdom

Booker India Private Limited

Joint Venture

Retail

49%

India

India

Trent Hypermarket Private Limited

Joint venture

Retail

50%

India

India

 

The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from 31 December 2020 to 27 February 2021. The accounting period end dates of joint ventures differ from those of the Group for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.

 

There are no significant restrictions on the ability of joint ventures and associates to transfer funds to the parents, other than those imposed by the Companies Act 2006 or equivalent local regulations, and for Tesco Underwriting Limited, regulatory capital requirements. 

 

Prior to the Group's sale of its 20% share in Gain Land Limited (Gain Land) on 28 February 2020, management applied judgement in determining that Gain Land was an associate of the Group. The Group had significant influence by virtue of holding 20% equity interest which presumed significant influence per IAS 28, together with having a contractual right to appoint two out of 10 directors, while taking into account that the remaining 80% interest was held by one other party.

 

The UK property joint ventures involve the Group partnering with third parties in carrying out some property investments in order to enhance returns from property and access funding, while reducing risks associated with sole ownership. These property investments generally cover shopping centres and standalone stores. The Group enters into leases for some or all of the properties held in the joint ventures. These leases provide the Group with some rights over alterations and adjacent land developments. Some leases also provide the Group with options to purchase the other joint venturers' equity stakes at a future point in time. In some cases the Group has the ability to substitute properties in the joint ventures with alternative properties of similar value, subject to strict eligibility criteria. In other cases, the Group carries out property management activities for third-party rentals of shopping centre units.

 

The property investment activities are carried out in separate entities, usually partnerships or limited liability companies. The Group has assessed its ability to direct the relevant activities of these entities and any impact on Group returns and concluded that the entities qualify as joint ventures since decisions regarding them require the unanimous consent of both equity holders. This assessment included not only rights within the joint venture agreements, but also any rights within other contractual arrangements between the Group and the entities.

 

The Group made a number of judgements in arriving at this determination, the key ones being:

since the provisions of the joint venture agreements require the relevant decisions impacting investor returns to be either unanimously agreed by both joint venturers at the same time, or in some cases to be agreed sequentially by each venturer at different stages, there is joint decision-making within the joint venture;

since the Group's leases are priced at fair value, and any rights embedded in the leases are consistent with market practice, they do not provide the Group with additional control over the joint ventures nor do they infer an obligation by the Group to fund the settlement of liabilities of the joint ventures;

any options to purchase the other joint venturers' equity stakes are priced at market value, and only exercisable at future dates, hence they do not provide control to the Group at the current time;

where the Group has a right to substitute properties in the joint ventures, the rights are strictly limited and are at fair value, hence do not provide control to the Group; and

where the Group carries out property management activities for third-party rentals in shopping centres, these additional activities are controlled through joint venture agreements or lease agreements, and do not provide the Group with additional powers over the joint venture. 

 

Notes to the Group financial statements
Note 14 Group entities continued

Summarised financial information for joint ventures and associates

The summarised financial information below reflects the amounts presented in the financial statements of the relevant joint ventures and associates, and not the Group's share of those amounts. These amounts have been adjusted to conform to the Group's accounting policies where required. The summarised financial information for UK property joint ventures has been aggregated in order to provide useful information to users without excessive detail, since these entities have similar characteristics and risk profiles largely based on their nature of activities and geographic market.

 

 

UK property joint ventures

Gain Land Limited(d)

 

2021

£m

2020

£m

2021

£m

2020

£m

Summarised balance sheet

 

 

 

 

Non-current assets(a)

2,916

3,242

-

-

Current assets (excluding cash and cash equivalents)

50

101

-

-

Cash and cash equivalents

27

28

-

-

Current liabilities(b)

(420)

(487)

-

-

Non-current liabilities(b)

(3,229)

(3,621)

-

-

Net assets/(liabilities)

(656)

(737)

-

-

 

Summarised income statement

 

 

 

 

 

 

Revenue

250

258

-

8,551

Profit/(loss) after tax

-

-

-

(95)

 

Reconciliation to carrying amounts:

 

 

 

 

 

 

Opening balance

-

-

-

263

Foreign currency translation

-

-

-

(4)

Share of profits/(losses)(c)

14

12

-

(19)

Dividends received from joint ventures and associates

(14)

(12)

-

-

Disposals(d)

-

-

-

(240)

Closing balance

-

-

-

-

 

 

 

 

 

Group's share in ownership

50%

50%

-

-

Group's share of net assets/(liabilities)

(328)

(369)

-

-

Goodwill

-

-

-

-

Deferred property profits offset against carrying amounts

(60)

(61)

-

-

Cumulative unrecognised losses(c)

205

205

-

-

Cumulative unrecognised hedge reserves(c)

183

225

-

-

Carrying amount

-

-

-

-

(a)        The non-current asset balances of UK property joint ventures are reflected at historical depreciated cost to conform to the Group's accounting policies. The aggregate fair values in the financial statements of the UK property joint ventures are £3,939m (2020: £4,338m).

(b)        The current and non-current liabilities of UK property joint ventures largely comprise loan balances of £3,235m (2020: £3,616m) and derivative swap balances of £363m (2020: £452m) entered into to hedge the cash flow variability exposures of the joint ventures.

(c)         The share of profit for the year for UK property joint ventures related to £14m dividends received from joint ventures with £nil carrying amounts. £2m of profit and £12m of decrease in the fair values of derivatives arising from these entities have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively.

(d)        The Group completed the sale of its 20% investment in Gain Land Limited on 28 February 2020 for a consideration of £277m.

 

As at 27 February 2021, the Group has £101m (2020: £106m) loans to UK property joint ventures.

 

Other joint ventures and associates

The Group also has interests in a number of individually immaterial joint ventures and associates excluding UK property joint ventures.

 

Joint ventures

Associates

 

2021

£m

2020

£m

2021

£m

2020

£m

Aggregate carrying amount of individually immaterial joint ventures and associates

168

230

10

77

Group's share of profits/(losses) for the year*

1

2

11

(3)

* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

 

Note 15 Impairment of non-current assets

Impairment losses and reversals

An impairment of £295m was recognised on the goodwill associated with Tesco Bank (2020: £nil). This impairment arises due to an increase in the cost of equity used to discount cash flows and a reduction in cash flows arising from the economic impact of the pandemic. No other goodwill impairment losses were recognised by the Group (2020: £nil).

 

The table below summarises the Group's pre-tax impairment losses and reversals on other non-current assets and investments in joint ventures and associates, with the former aggregated by segment due to the large number of individually immaterial store cash-generating units. This includes any losses recognised immediately prior to classifying an asset or disposal group as held for sale but excludes all impairments post classification as held for sale. Impairment losses and reversals comparatives have been re-presented in order to show the Group's Poland, Thailand and Malaysia businesses as discontinued operations. There were no impairment losses or reversals in the year (2020: £nil) with respect to other non-current assets and investments in joint ventures and associates in Tesco Bank.

 

 

Notes to the Group financial statements
Note 15 Impairment of non-current assets continued

 

UK & ROI

Central Europe

Total continuing operations

Discontinued operations

Total(a)

52 weeks ended 27 February 2021

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Group balance sheet

 

 

 

 

 

 

 

 

 

 

Other intangible assets

(32)

9

(2)

7

(34)

16

-

-

(34)

16

Property, plant and equipment

(371)

497

(23)

38

(394)

535

(66)

23

(460)

558

Right of use assets

(209)

229

(16)

1

(225)

230

-

-

(225)

230

Investment property

(2)

2

-

-

(2)

2

-

-

(2)

2

Other non-current assets

(614)

737

(41)

46

(655)

783

(66)

23

(721)

806

Investments in joint ventures and associates

-

-

-

-

-

-

-

-

-

-

Total impairment (loss)/reversal

(614)

737

(41)

46

(655)

783

(66)

23

(721)

806

Group income statement

 

 

 

 

 

 

 

 

 

 

Cost of sales - underlying

(2)

-

-

-

(2)

-

-

-

(2)

-

Cost of sales - exceptional

(564)

683

(41)

46

(605)

729

-

-

(605)

729

Administrative expenses - underlying

(48)

54

-

-

(48)

54

-

-

(48)

54

Administrative expenses - exceptional

-

-

-

-

-

-

-

-

-

-

Total impairment (loss)/ reversal from continuing operations

(614)

737

(41)

46

(655)

783

-

-

(655)

783

Discontinued operations - underlying

-

-

-

-

-

-

-

-

-

-

Discontinued operations - exceptional

-

-

-

-

-

-

(66)

23

(66)

23

Total impairment (loss)/reversal

(614)

737

(41)

46

(655)

783

(66)

23

(721)

806

(a)        Of the £85m other non-current assets net impairment reversal for the Group (2020: £302m loss), a net reversal of £81m (2020: £302m loss) has been classified within exceptional items, of which a net reversal of £119m (2020: £251m loss) related to the UK & ROI, a net reversal of £5m (2020: £28m reversal) related to Central Europe and a net loss of £43m (2020: £79m loss) related to discontinued operations.

 

 

UK & ROI

Central Europe

Total continuing operations

Discontinued operations

Total(a)(b)

53 weeks ended 29 February 2020

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Impairment
loss
£m

Impairment
reversal
£m

Group balance sheet

 

 

 

 

 

 

 

 

 

 

Other intangible assets

(27)

36

-

-

(27)

36

-

2

(27)

38

Property, plant and equipment

(428)

272

(54)

67

(482)

339

(240)

156

(722)

495

Right of use assets

(242)

142

(2)

18

(244)

160

(23)

22

(267)

182

Investment property

(5)

-

-

2

(5)

2

-

2

(5)

4

Other non-current assets

(702)

450

(56)

87

(758)

537

(263)

182

(1,021)

719

Investments in joint ventures and associates

(47)

-

-

-

(47)

-

-

-

(47)

-

Total impairment (loss)/reversal

(749)

450

(56)

87

(805)

537

(263)

182

(1,068)

719

Group income statement

 

 

 

 

 

 

 

 

 

 

Cost of sales - underlying

-

-

(5)

8

(5)

8

-

-

(5)

8

Cost of sales - exceptional

(658)

407

(51)

75

(709)

482

-

-

(709)

482

Administrative expenses - underlying

(44)

43

-

-

(44)

43

-

-

(44)

43

Administrative expenses - exceptional

(47)

-

-

4

(47)

4

-

-

(47)

4

Total impairment (loss)/ reversal from continuing operations

(749)

450

(56)

87

(805)

537

-

-

(805)

537

Discontinued operations - underlying

-

-

-

-

-

-

(2)

-

(2)

-

Discontinued operations - exceptional

-

-

-

-

-

-

(261)

182

(261)

182

Total impairment (loss)/reversal

(749)

450

(56)

87

(805)

537

(263)

182

(1,068)

719

(a)        Refer to previous table for footnote.

(b)        Comparatives have been re-presented to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

 

 

Notes to the Group financial statements
Note 15 Impairment of non-current assets continued

The net impairment reversal in UK & ROI includes an impairment loss of £32m in the UK in respect of the Group obtaining control of The Tesco Property (No. 2) Limited Partnership (2020: £287m impairment loss in the UK & ROI in respect of the Group obtaining control of The Tesco Atrato Limited Partnership). Refer to Note 33 for further details.

 

Immediately preceding their recognition as held for sale in H1 2020/21, an impairment review was carried out on the Group's Poland, Malaysia and Thailand operations. There were no significant changes in relation to the Malaysia and Thailand operations between the 2020 year end and reclassification as held for sale, and expected proceeds exceeded the carrying value so no impairment was required. The Poland disposal involves both a corporate sale and the separate sale of the remaining property assets. Expected proceeds for the corporate sale exceeded the carrying value so no impairment was required. The recoverable amount of the remaining property assets is based on fair value less costs of disposal on an asset by asset basis, such that some assets are impaired while others have an impairment reversal. This results in a net impairment charge of £43m, recognised in discontinued operations - exceptional. See Note 7 for further details.

 

The remaining Other non-current assets impairment losses and reversals for the Group largely reflect normal fluctuations expected from store-level performance, property fair values and changes in discount rates, as well as any specific store closures.

 

Net carrying value of non-current assets

The net carrying values of Other non-current assets and recoverable amounts of impaired Other non-current assets for which an impairment loss has been recognised or reversed have been aggregated by segment due to the large number of individually immaterial store cash-generating units. The amounts below exclude assets or disposal groups classified as held for sale.

 

 

At 27 February 2021

UK & ROI

£m

Central
 Europe

£m

Tesco
Bank

£m

Total

£m

Net carrying value

 

 

 

 

Other intangible assets

959

32

131

1,122

Property, plant and equipment

15,379

1,767

65

17,211

Right of use assets

5,571

368

12

5,951

Investment property

18

1

-

19

Other non-current assets

21,927

2,168

208

24,303

Goodwill(a)

3,791

-

480

4,271

Investments in joint ventures and associates(b)

84

1

93

178

Net carrying value of non-current assets

25,802

2,169

781

28,752

Recoverable amount of impaired Other non-current assets

for which an impairment loss has been recognised or reversed,

supported by:

 

 

 

 

Value in use

2,555

152

-

2,707

Fair value less costs of disposal(c)

1,400

122

-

1,522

 

3,955

274

-

4,229

(a)        Goodwill of £4,271m (2020: £4,840m) consists of UK £3,789m (2020: £3,793m), ROI £2m (2020: £3m) and Tesco Bank £480m (2020: £775m) included within continuing operations and £nil (2020: Thailand £193m and Malaysia £76m) in discontinued operations.

(b)        The carrying value of the Group's investments include: Trent Hypermarket Private Limited £53m (2020: £59m) and Tesco Underwriting Limited £93m (2020: £87m).

(c)         Due to the individual nature of each property, fair values are classified as Level 3 within the fair value hierarchy.

At 29 February 2020 (restated(d))

UK & ROI
£m

Central
 Europe
£m

Tesco
Bank
£m

Total continuing operations
£m

Discontinued operations
£m

Total
£m

Net carrying value

 

 

 

 

 

 

Other intangible assets

1,055

25

139

1,219

19

1,238

Property, plant and equipment

14,612

1,824

61

16,497

2,737

19,234

Right of use assets

5,719

392

14

6,125

749

6,874

Investment property

23

2

-

25

1

26

Other non-current assets

21,409

2,243

214

23,866

3,506

27,372

Goodwill(a)

3,796

-

775

4,571

269

4,840

Investments in joint ventures and associates(b)

70

1

87

158

149

307

Net carrying value of non-current assets

25,275

2,244

1,076

28,595

3,924

32,519

Recoverable amount of impaired Other non-current assets for which an impairment loss has been recognised or reversed, supported by:

 

 

 

 

 

 

Value in use

3,448

178

-

3,626

239

3,865

Fair value less costs of disposal(c)

2,105

126

-

2,231

352

2,583

 

5,553

304

-

5,857

591

6,448

(a)-(c) Refer to previous table for footnotes.
(d) Refer to Note 1 for further details regarding the prior year restatement.

 

Notes to the Group financial statements
Note 15 Impairment of non-current assets continued

Impairment methodology

Cash-generating units

The Group treats each store as a separate cash-generating unit for impairment testing of other intangible assets, property, plant and equipment, right of use assets and investment property. Refer to Note 1 for further details. The Group allocates goodwill to groups of cash-generating units, where each country represents a group of cash-generating units for the Group's retail operations, as this represents the lowest level at which goodwill is monitored by management. Tesco Bank represents a separate cash-generating unit.

 

The recoverable amount of each store cash-generating unit is the higher of its value in use and its fair value less costs of disposal. The recoverable amount of a group of cash-generating units to which goodwill has been allocated is determined based on value in use calculations.

 

Head office and central assets such as distribution centres and associated costs are allocated to store cash-generating units based on level of use, estimated with reference to sales. Urban fulfilment centres and associated costs that are part of a store are included in the store cash- generating unit. Standalone customer fulfilment centres and associated costs are each treated as a separate cash-generating unit from the current financial year due to the evolution of the online channel that these centres support, rather than being allocated to the stores in their vicinity.

 

Value in use

Retail

Estimates for value in use calculations include discount rates, long-term growth rates, expected changes to future cash flows, including volumes and prices, and the probabilities assigned to cash flow scenarios. Estimates are based on past experience and expectations of future changes in the market, including the prevailing economic climate and global economy, competitor activity, market dynamics, changing customer behaviours, structural challenges facing retail and the resilience afforded by the Group's operational scale.

 

Cash flow projections are based on the Group's three-year internal forecasts, the results of which are reviewed by the Board. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates. Long-term growth rates for the Retail business are based on inflation forecasts by recognised bodies.

 

In the current year, the Group applies an expected cash flow approach by probability-weighting different cash flow scenarios. The greatest probability weighting is applied to the cash flows derived from the three-year internal forecasts. Additional scenarios take account of the risks presented by Brexit, COVID-19, a macro-economic downturn and climate change consistent with the viability statement scenarios (see 'Longer-term viability statement' in the Strategic Report) as well as an upside scenario.

 

Management estimates discount rates using pre-tax rates that reflect the market assessment as at the balance sheet date of the time value of money and the risks specific to the cash-generating units. The pre-tax discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region. Risk-free rates are based on government bond rates in each geographical region and equity risk premia are based on forecasts by recognised bodies. In the current year the risks associated with Brexit and COVID-19 are reflected in the probability-weighted cash flow scenarios, and hence the discount rate is no longer adjusted for these risks.

 

Tesco Bank goodwill

Tesco Bank value in use is calculated by discounting equity cash flows, defined as the excess above the regulatory requirement. Tesco Bank applies an expected cash flow approach, using the internal three-year forecasts, approved by the Board, as well as stressed scenarios in line with those used to measure expected credit losses (refer to Note 25) to form a probability-weighted cash flow. The long-term growth rate is based on inflation and GDP growth forecasts by recognised bodies. The discount rate is the cost of equity of Tesco Bank. Risk-free rates and equity risk premia are derived from recognised bodies.

 

Fair value less costs of disposal

Fair values of owned properties are determined with regard to the market rent for the stores or for alternative uses with investment yields appropriate to reflect the physical characteristics of the property, location, infrastructure, redevelopment potential and other factors. In some cases, fair values include residual valuations where stores may be viable for redevelopment. Fair values of leased properties are determined with regard to the discounted market rent for the property over the remaining period of the lease, reflecting the condition and location of the property and the local rental market, adjusted for a suitable void period. Fair values of the Group's properties were determined with the assistance of independent professional valuers where appropriate. Costs of disposal are estimated based on past experience in each geographical region.

 

Investments in joint ventures and associates

The recoverable values of investments in joint ventures and associates are estimated taking into account forecast cash flows, equity valuations of comparable entities and/or recent transactions for comparable businesses.

 

Notes to the Group financial statements
Note 15 Impairment of non-current assets continued

Key assumptions and sensitivity

Key assumptions

For value in use calculations, the key assumptions to which the recoverable amounts are most sensitive are discount rates, long-term growth rates, the impact on cash generated from operations from year one sales growth (incorporating sales and costs, as well as volumes and prices) and probabilities assigned to cash flow scenarios. For fair value less costs of disposal calculations, the key assumption is property fair values.

 

The discount rates and long-term growth rates for each group of cash-generating units to which goodwill has been allocated are:

 

 

UK

ROI

Tesco Bank

 

2021

%

2020

%

2021

%

2020

%

2021

%

2020

%

Pre-tax discount rates

5.9

8.0

5.4

8.1

12.8

9.7

Post-tax discount rates

4.8

6.6

4.7

7.1

10.4

7.2

Long-term growth rates

1.9

2.0

1.9

1.9

1.6

1.8

 

The discount rates and long-term growth rates for the Group's portfolio of store cash-generating units, aggregated by segment due to the large number of individually immaterial store cash-generating units, are:

 

 

 

UK & ROI

Central Europe

 

 

 

2021

%

2020

%

2021

%

2020

%

Pre-tax discount rates

 

 

5.4 - 5.9

8.0 - 8.1

5.5 - 8.3

7.0 - 9.3

Post-tax discount rates

 

 

4.7 - 4.8

6.6 - 7.1

4.4 - 7.6

5.5 - 8.3

Long-term growth rates

 

 

1.9

1.9 - 2.0

2.0 - 3.0

2.0 - 3.0

 

 

Sensitivity

The Group has carried out sensitivity analyses on the reasonably possible changes in key assumptions in the impairment tests for (a) each group of cash-generating units to which goodwill has been allocated and (b) for its portfolio of store cash-generating units.

(a)    With the exception of Tesco Bank, which has been impaired in the current year, neither a reasonably possible one percentage point increase in discount rates, a one percentage point decrease in year one sales growth nor a one percentage point decrease in long-term growth rates would indicate impairment (or further impairment), in any group of cash-generating units to which goodwill has been allocated.

The table below summarises the reasonably possible changes in key assumptions to which Tesco Bank goodwill is most sensitive and their impact on impairment in the current year:

Key assumption

Reasonably possible change

Impact on impairment

2021

£m

Cost of equity

Increase of 1.0%pt

Increase

(203)

Annual equity cash flows

Decrease of 5.0%

Increase

(107)

Long-term growth rates

Decrease of 0.5%pt

Increase

(27)

(b)    While there is not a significant risk of an adjustment to the carrying amount of any one store cash-generating unit that would be material to the Group as a whole in the next financial year, the table below summarises the reasonably possible changes in each key assumption and its impact on the impairment of the Group's entire portfolio of store cash-generating units, presented in aggregate due to the large number of individually immaterial store cash-generating units:

Key assumption

Reasonably possible change

Impact on impairment

2021

£m

2020

£m

Post-tax discount rates

Increase of 1.0%pt for each geographic region

Increase

(438)

(482)

 

Decrease of 1.0%pt for each geographic region

Decrease

397

485

Year one sales growth

Increase of 1.0%pt for each geographic region

Decrease

55

61

 

Decrease of 1.0%pt for each geographic region

Increase

(56)

(61)

Long-term growth rates

Increase of 1.0%pt for each geographic region

Decrease

304

445

 

Decrease of 1.0%pt for each geographic region

Increase

(308)

(410)

Property fair values

Increase of 5.0% for each geographic region

Decrease

81

105

 

Decrease of 5.0% for each geographic region

Increase

(80)

(105)

 

The probability applied to each cash flow scenario in the current year differs by country, depending on the expected likelihood of each scenario occurring in each country. The base case represents the cash flows derived from the three-year internal forecasts and is assigned a weighted average probability of 60%. The impairment is not highly sensitive to the upside and climate change scenarios, assigned 5% and 4% weighted average probabilities respectively. The table below sets out the weighted average probability assigned to each of the remaining scenarios, to which the impairment is most sensitive, and shows the impact on impairment of a reasonably possible change in probability for each scenario, where the corresponding opposite change in probability is applied to the base case.

 

 

Scenario

Weighted average probability

Reasonably possible change

Impact on impairment

2021

 £m

Brexit

11%

Increase of 5.0%pt for each geographic region

Increase

(59)

 

 

Decrease of 5.0%pt for each geographic region

Decrease

60

COVID-19

10%

Increase of 5.0%pt for each geographic region

Increase

(28)

 

 

Decrease of 5.0%pt for each geographic region

Decrease

29

Macro-economic downturn

10%

Increase of 5.0%pt for each geographic region

Increase

(80)

 

 

Decrease of 5.0%pt for each geographic region

Decrease

81

 

Notes to the Group financial statements
Note 16 Investments in debt and equity instruments

Financial assets at fair value through other comprehensive income

 

 

2021

£m

2020

£m

Investments in debt instruments(a)

-

1,058

Investments in equity instruments

14

10

Total financial assets at fair value through other comprehensive income

14

1,068

Of which:

 

 

Current

3

202

Non-current

11

866

 

14

1,068

 

Investment securities at amortised cost

 

2021

£m

2020

£m

Investment securities at amortised cost(a)

928

-

Expected credit loss allowance(b)

(1)

-

 

927

-

Of which:

Current

Non-current

175

752

-

-

 

927

-

(a)        Refer to Note 1 for more information regarding the change in business model.

(b)        Refer to Note 25 for allowance for expected credit losses disclosures.

 

On 1 March 2020, following a change in business model, the Group's £1,058m portfolio of debt investments measured at fair value through other comprehensive income was reclassified to investment securities at amortised cost (see Note 1) and the £3m cumulative loss relating to these assets, previously recognised in other comprehensive income, was adjusted against the carrying value of the assets. See Note 24 for the fair value of these assets as at 27 February 2021. A fair value gain of £8m would have been recognised in other comprehensive income in the current year had the financial assets not been reclassified.

 

Note 17 Inventories

 

2021

£m

2020

£m

Goods held for resale

2,066

2,429

Development properties

3

4

 

2,069

2,433

 

Goods held for resale are net of commercial income. Refer to Note 22.

 

Cost of inventories from continuing operations recognised as an expense for the 52 weeks ended 27 February 2021 was £42,482m (53 weeks ended 29 February 2020: £42,782m). Inventory losses and provisions recognised as an expense for the 52 weeks ended 27 February 2021 were £1,052m
(53 weeks ended 29 February 2020: £1,121m).

 

Note 18 Trade and other receivables

 

2021

£m

2020

£m

Trade receivables

424

495

Prepayments

207

192

Accrued income(a)

210

262

Other receivables

430

439

Amounts owed by joint ventures and associates (Note 31)(b)

162

174

Total trade and other receivables

1,433

1,562

Of which:

 

 

Current

1,263

1,396

Non-current

170

166

 

1,433

1,562

(a)        Accrued income includes contract assets of £52m (2020: £60m) primarily related to insurance renewal income. The expected credit loss was immaterial as at 27 February 2021 (2020: immaterial).

(b)        Expected credit losses on amounts owed by joint ventures and associates are not material.

 

Trade receivables include commercial income. Refer to Note 22. Trade receivables are generally non-interest-bearing. Credit terms vary by country and the nature of the debt, ranging from seven to 60 days.

 

 

Notes to the Group financial statements
Note 18 Trade and other receivables continued

The tables below present the ageing of receivables and related allowances for expected credit losses:

At 27 February 2021

 

Not past due

£m

Up to
six months past due

£m

Six to 12 months past due

£m

Greater than
12 months
past due

£m

 

Total

£m

Trade receivables

403

54

3

11

471

Other receivables

413

15

5

19

452

Trade and other receivables

816

69

8

30

923

 

Allowance for expected credit losses:

 

At the beginning of the year

(7)

(9)

(8)

(30)

(54)

Transfer to disposal group held for sale

-

1

1

4

6

Foreign currency translation

(1)

-

-

-

(1)

Increase in allowance, net of recoveries, charged to the Group income statement

(14)

(4)

-

(6)

(24)

Amounts written off

-

1

1

2

4

At the end of the year

(22)

(11)

(6)

(30)

(69)

 

At 29 February 2020

 

Not past due

£m

Up to
six months past due

£m

Six to 12 months past due

£m

Greater than
12 months
past due

£m

 

Total

£m

Trade receivables

438

70

6

15

529

Other receivables

431

7

4

17

459

Trade and other receivables

869

77

10

32

988

 

Allowance for expected credit losses:

 

 

 

 

 

At the beginning of the year

(5)

(11)

(14)

(29)

(59)

Foreign currency translation

-

1

-

-

1

Increase in allowance, net of recoveries, charged to the Group income statement

(2)

-

4

(3)

(1)

Amounts written off

-

1

2

2

5

At the end of the year

(7)

(9)

(8)

(30)

(54)

 

Note 19 Loans and advances to customers and banks

Tesco Bank has loans and advances to customers and banks, as follows:

 

 

2021

£m

2020

£m

Loans and advances to customers

6,402

8,451

Loans and advances to banks

-

-

 

6,402

8,451

Of which:

 

 

Current

3,093

4,280

Non-current

3,309

4,171

 

6,402

8,451

The maturity of these loans and advances is as follows:

 

2021

£m

2020

£m

Repayable on demand or at short notice

3

4

Within three months

3,354

4,543

Greater than three months but less than one year

94

86

Greater than one year but less than five years

2,922

3,322

After five years

654

984

 

7,027

8,939

Expected credit loss allowance for loans and advances to customers and banks

(625)

(488)

 

6,402

8,451

At 27 February 2021, £3.0bn (2020: £3.5bn) of the credit card portfolio had its beneficial interest assigned to a securitisation structured entity, Delamare Cards Receivables Trustee Limited, for use as collateral in securitisation transactions. The total encumbered portion of this portfolio is £nil (2020: £0.8bn).

 

At 27 February 2021, Delamare Cards MTN Issuer PLC had £1.8bn (2020: £2.0bn) notes in issue in relation to securitisation transactions, of which £nil (2020: £0.6bn) was externally issued. The Group owned £1.5bn (2020: £1.4bn) class A credit card-backed notes and £0.3bn (2020: £0.2bn) class D credit card-backed notes.

 

All of the £1.5bn (2020: £1.2bn) class A retained Credit Card backed notes are held within a single collateral pool.

 

Fair value hedge adjustments

Fair value hedge adjustments amounting to £6.7m (2020: £9.7m) are in respect of fixed rate loans. 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.
 

Refer to Note 25 for allowance for expected credit losses disclosures.

 

 

Notes to the Group financial statements
Note 20 Cash and cash equivalents and short-term investments

Cash and cash equivalents

 

2021

£m

2020*

£m

Cash at bank and in hand

2,495

3,980

Short-term deposits

15

157

Cash and cash equivalents in the Group balance sheet

2,510

4,137

Bank overdrafts

(532)

(1,106)

Cash and cash equivalents in the Group cash flow statement

1,978

3,031

* Refer to Note 1 for further details regarding the prior year restatement in relation to notional cash pooling arrangements.

 

Short-term investments

 

2021

£m

2020

£m

Money market funds

1,011

1,076

 

Cash and cash equivalents includes £101m (2020: £35m) of restricted amounts mainly relating to the Group's pension schemes and employee
benefit trusts.

 

Note 21 Trade and other payables

 

2021

£m

2020

£m

Trade payables

5,131

5,579

Other taxation and social security

369

477

Other payables

1,653

1,793

Amounts payable to joint ventures and associates (Note 31)

23

26

Accruals

956

841

Contract liabilities

376

376

Total trade and other payables

8,508

9,092

Of which:

 

 

Current

8,399

8,922

Non-current

109

170

 

8,508

9,092

 

Trade and other payables are net of commercial income. Refer to Note 22.

 

Contract liabilities represent consideration received for performance obligations not yet satisfied, predominantly in relation to Clubcard points.
The majority of the revenue deferred at the current financial year end will be recognised in the following financial year.

 

Trade payables include £572m (2020: £393m) that suppliers have chosen to early-fund under supplier financing arrangements. Refer to Note 1. Amounts in trade payables that are overdue for payment to the provider are immaterial.

 

Note 22 Commercial income

Below are the commercial income balances included within inventories and trade and other receivables, or netted against trade and
other payables. Amounts received in advance of income being earned are included in accruals.

 

2021

£m

2020

£m

Current assets

 

 

Inventories

(24)

(55)

Trade and other receivables

 

 

Trade/other receivables

90

138

Accrued income

125

157

Current liabilities

 

 

Trade and other payables

 

 

Trade payables

170

292

Accruals

(2)

(3)

 

 

 

Notes to the Group financial statements
Note 23 Borrowings

Borrowings are classified as current and non-current based on their scheduled redemption date, and not their maturity date. Repayments of principal amounts are classified as current if the repayment is scheduled to be made within one year of the balance sheet date.

 

Par value

Maturity

2021

£m

2020(k) 

£m

Bank loans and overdrafts(a)

-

-

559

1,142

2.125% MTN

€296m

Nov 2020

-

255

1m USD LIBOR + 0.70% Tesco Bank Bond

$350m

Nov 2020

-

273

5% Tesco Bank Retail Bond

£200m

Nov 2020

-

202

6.125% MTN

£417m

Feb 2022

417

416

LIBOR + 0.53% Tesco Bank Bond

£300m

Oct 2022

-

299

5% MTN(b)

£71m

Mar 2023

79

103

1.375% MTN

€750m

Oct 2023

662

660

2.5% MTN(b)

€473m

Jul 2024

415

653

2.5% MTN

£400m

May 2025

417

418

3.5% Tesco Bank Senior MREL Notes(h)

£250m

Jul 2025

251

250

3.322% LPI MTN(i)

£354m

Nov 2025

364

358

0.875% MTN

€750m

May 2026

649

640

5.5457% Secured Bond(c)(d)

£289m

Feb 2029

275

303

6.067% Secured Bond(c)

£200m

Feb 2029

193

192

LIBOR + 1.2% Secured Bond(c)

£50m

Feb 2029

48

36

0.375% MTN

€750m

Jul 2029

625

-

6% MTN(b)

£38m

Dec 2029

45

58

2.75% MTN

£450m

Apr 2030

441

-

LIBOR + 1.17% Secured Bond (f)(l)

£187m

Jan 2032

184

-

LIBOR + 1.17% Secured Bond (f)

£108m

Jan 2032

100

-

5.5% MTN(b)

£67m

Jan 2033

80

133

1.982% RPI MTN(j)

£294m

Mar 2036

302

297

6.15% USD Bond(b)

$355m

Nov 2037

333

555

6.0517% Secured Bond(e)(g)

£458m

Oct 2039

592

616

4.875% MTN(b)

£14m

Mar 2042

14

20

5.125% MTN(b)

€235m

Apr 2047

209

316

5.2% MTN(b)

£14m

Mar 2057

14

29

 

7,268

8,224

 

Of which:

 

 

Current

1,080

2,219

Non-current

6,188

6,005

 

7,268

8,224

(a)        Bank loans and overdrafts includes £532m (2020: £1,106m) of bank overdrafts. £525m (2020: £979m) is held under a notional pooling arrangement which does not meet the criteria to be presented net of cash on the balance sheet. Refer to Note 20.

(b)        During the year, the Group undertook a tender for outstanding bonds and as a result the following notional amounts were repaid early, 5% MTN Mar 2023 £22m, 2.5% MTN Jul 2024 €277m, 6% MTN Dec 2029 £10m, 5.5% MTN Jan 2033 £42m, 6.15% USD Bond Nov 2037 $170m, 4.875% MTN Mar 2042 £6m, 5.125% MTN Apr 2047 €121m and 5.2% MTN Mar 2057 £16m.

(c)         The bonds are secured by a charge over the property, plant and equipment held within The Tesco Property Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is £817m (29 February 2020: £794m).

(d)        This is an amortising bond which matures in Feb 2029. £26m (29 February 2020: £22m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Feb 2029.

(e)        These bonds is secured by a charge over the property, plant and equipment held within The Tesco Atrato Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is £837m (29 February 2020 £612m).

(f)         These bonds are secured by a charge over the property, plant and equipment held within The Tesco Property No. 2 Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is £445m.

(g)        This is an amortising bond which matures in October 2039. £14m is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Oct 2039.

(h)        These notes are Tesco Bank MREL compliant senior debt and were issued on 25 July 2019. The scheduled redemption date is July 2024.

(i)          The 3.322% Limited Price Inflation (LPI) MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%.

(j)          The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.

(k)         Refer to Note 1 for further details regarding the prior year restatement.

(l)          This is an amortising bond which matures in January 2032 £9m is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Jan 2032.

 

 

 

Notes to the Group financial statements
Note 24 Financial instruments

The Group recognises the following financial instruments on its balance sheet. The Group's exposure to the risks associated with its financial assets and liabilities is discussed in Note 25.

At 27 February 2021

Notes

At amortised

cost

£m

At fair value through profit

or loss

£m

At fair value through other comprehensive income

£m

Total

£m

Financial assets

 

 

 

 

 

Cash and cash equivalents

20

2,496

14

-

2,510

Short-term investments

20

1,011

-

-

1,011

Trade receivables

18

424

-

-

424

Other receivables

18

430

-

-

430

Joint ventures and associates loan receivables

31

122

-

-

122

Loans and advances to customers - Tesco Bank

19

6,402

-

-

6,402

Investment securities at amortised cost

16

927

-

-

927

Financial assets at fair value through other comprehensive income

16

-

-

14

14

Derivative financial instruments:

 

 

 

 

 

Interest rate swaps

 

-

42

-

42

Cross-currency swaps

 

-

298

-

298

Index-linked swaps

 

-

1,080

-

1,080

Forward contracts

 

-

42

-

42

 

 

11,812

1,476

14

13,302

Financial liabilities

 

 

 

 

 

Trade payables

21

(5,131)

-

-

(5,131)

Other payables

21

(1,653)

-

-

(1,653)

Borrowings

23

(7,268)

-

-

(7,268)

Customer deposits - Tesco Bank

26

(5,738)

-

-

(5,738)

Deposits from banks - Tesco Bank

26

(600)

-

-

(600)

Lease liabilities

12

(8,402)

-

-

(8,402)

Derivative financial instruments:

 

 

 

 

 

Interest rate swaps

 

-

(162)

-

(162)

Cross-currency swaps

 

-

(38)

-

(38)

Index-linked swaps

 

-

(729)

-

(729)

Forward contracts

 

-

(78)

-

(78)

 

 

(28,792)

(1,007)

-

(29,799)

 

 

At 29 February 2020 (restated)*

Notes

At amortised

costs

£m

At fair value through profit

or loss

£m

At fair value through other comprehensive income

£m

Total

£m

Financial assets

 

 

 

 

 

Cash and cash equivalents

20

4,111

26

-

4,137

Short-term investments

20

1,076

-

-

1,076

Trade receivables

18

495

-

-

495

Other receivables

18

439

-

-

439

Joint ventures and associates loan receivables

31

127

-

-

127

Loans and advances to customers - Tesco Bank

19

8,451

-

-

8,451

Investment securities at amortised cost

16

-

-

-

-

Financial assets at fair value through other comprehensive income

16

-

-

1,068

1,068

Derivative financial instruments:

 

 

 

 

 

Interest rate swaps

 

-

47

-

47

Cross-currency swaps

 

-

497

-

497

Index-linked swaps

 

-

541

-

541

Forward contracts

 

-

61

-

61

 

 

14,699

1,172

1,068

16,939

Financial liabilities

 

 

 

 

 

Trade payables

21

(5,579)

-

-

(5,579)

Other payables

21

(1,793)

-

-

(1,793)

Borrowings

23

(8,224)

-

-

(8,224)

Customer deposits - Tesco Bank

26

(7,707)

-

-

(7,707)

Deposits from banks - Tesco Bank

26

(500)

-

-

(500)

Lease liabilities

12

(9,566)

-

-

(9,566)

Derivative financial instruments:

 

 

 

 

 

Interest rate swaps

 

-

(70)

-

(70)

Cross-currency swaps

 

-

-

-

-

Index-linked swaps

 

-

(816)

-

(816)

Forward contracts

 

-

(62)

-

(62)

 

 

(33,369)

(948)

-

(34,317)

* Refer to Note 1 for further details regarding the prior year restatement.

 

 

Notes to the Group financial statements
Note 24 Financial instruments continued

The fair values are determined by reference to prices available from the markets on which the instruments are traded, where they are available. Where market prices are not available, the fair value is calculated by discounting expected future cash flows at prevailing interest rates. The fair value of assets measured at amortised cost is shown below.

 

The expected maturity of financial assets and liabilities is not considered to be materially different to their current and non-current classification.

 

Fair value of financial assets and liabilities measured at amortised cost

The fair value of financial assets and liabilities measured at amortised cost is shown below. The table excludes cash and cash equivalents, short-term investments, trade receivables/payables, and other receivables/payables where the carrying values approximate fair value.

 

 

2021

2020 (restated(a))

Carrying value

£m

Fair value

£m

Carrying value

£m

Fair value

£m

Financial assets measured at amortised cost

 

 

 

 

Loans and advances to customers - Tesco Bank (Level 3)

6,402

6,618

8,451

8,672

Investment securities at amortised cost (Level 1 and 2)

927

932

-

-

Joint ventures and associates loan receivables(b) (Level 2)

122

153

127

193

Financial liabilities measured at amortised cost

 

 

 

 

Borrowings

 

 

 

 

Amortised cost (Level 1 and 2)

(4,711)

(5,761)

(5,793)

(6,371)

Bonds in fair value hedge relationships (Level 1)

(2,557)

(2,658)

(2,431)

(2,432)

Customer deposits - Tesco Bank (Level 3)

(5,738)

(5,744)

(7,707)

(7,711)

Deposits from banks - Tesco Bank (Level 2)

(600)

(600)

(500)

(500)

(a)        Refer to Note 1 for further details regarding the prior year restatement.

(b)        Joint ventures and associates loan receivables carrying amounts of £122m (2020: £127m) are presented in the Group balance sheet net of deferred profits of £38m (2020: £54m) historically arising from the sale of property assets to joint ventures.

 

Fair value measurement by level of fair value hierarchy

The following table presents the Group's financial assets and liabilities that are measured at fair value, by level of fair value hierarchy:

quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

 

At 27 February 2021

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Assets

 

 

 

 

Financial assets at fair value through other comprehensive income

-

3

11

14

Cash and cash equivalents at fair value through profit or loss

-

14

-

14

Derivative financial instruments:

 

 

 

 

Interest rate swaps

-

42

-

42

Cross-currency swaps

-

298

-

298

Index-linked swaps

-

1,080

-

1,080

Forward contracts

-

42

-

42

Total assets

-

1,479

11

1,490

Liabilities

 

 

 

 

Derivative financial instruments:

 

 

 

 

Interest rate swaps

-

(162)

-

(162)

Cross-currency swaps

-

(38)

-

(38)

Index-linked swaps

-

(729)

-

(729)

Forward contracts

-

(78)

-

(78)

Total liabilities

-

(1,007)

-

(1,007)

Net assets/(liabilities)

-

472

11

483

 

 

Notes to the Group financial statements
Note 24 Financial instruments continued

At 29 February 2020

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Assets

 

 

 

 

Financial assets at fair value through other comprehensive income

1,058

-

10

1,068

Cash and cash equivalents at fair value through profit or loss

-

26

-

26

Derivative financial instruments:

Interest rate swaps

-

47

-

47

Cross-currency swaps

-

497

-

497

Index-linked swaps

-

541

-

541

Forward contracts

-

61

-

61

Total assets

1,058

1,172

10

2,240

Liabilities

 

 

 

 

Derivative financial instruments:

 

 

 

 

Interest rate swaps

-

(70)

-

(70)

Index-linked swaps

-

(816)

-

(816)

Forward contracts

-

(62)

-

(62)

Total liabilities

-

(948)

-

(948)

Net assets/(liabilities)

1,058

224

10

1,292

 

The following table presents the changes in Level 3 instruments:

 

 

2021

£m

2020

£m

At the beginning of the year

10

(1)

Gains/(losses) recognised in the Group statement of comprehensive income/(loss)

3

1

Disposal of financial instrument at fair value through profit or loss

(4)

6

Addition of financial asset at fair value through other comprehensive income

2

4

At the end of the year

11

10

 

During the financial year, there were no transfers (2020: no transfers) between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements (2020: no transfers).

 

Offsetting of financial assets and liabilities

The following tables show those financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements.

 

 

 

 

 

Related amounts not offset in the Group balance sheet

 

 

At 27 February 2021

Gross amounts of

recognised

financial assets/

(liabilities)

£m

Gross amounts of

financial assets/

(liabilities) offset

in the Group

balance sheet

£m

Net amounts

presented

in the Group

balance sheet

£m

Financial

instruments

£m

Collateral

£m

Net amount

£m

 

Financial assets

 

 

 

 

 

 

 

Derivative financial instruments

1,462

-

1,462

(234)

-

1,228

 

Trade receivables

520

(96)

424

-

-

424

 

Total assets

1,982

(96)

1,886

(234)

-

1,652

 

Financial liabilities

 

 

 

 

 

 

 

Derivative financial instruments

(1,007)

-

(1,007)

234

42

(731)

 

Trade payables

(5,227)

96

(5,131)

-

-

(5,131)

 

Total liabilities

(6,234)

96

(6,138)

234

42

(5,862)

 

                       

 

 

Notes to the Group financial statements
Note 24 Financial instruments continued

 

 

 

 

Related amounts not offset in the Group balance sheet

 

 

At 29 February 2020 (restated(a))

Gross amounts of

recognised

financial assets/

(liabilities)

£m

Gross amounts of

financial assets/

(liabilities) offset

in the Group

balance sheet

£m

Net amounts

presented

in the Group

balance sheet

£m

Financial

instruments

£m

Collateral

£m

Net amount

£m

 

Financial assets

 

 

 

 

 

 

 

Derivative financial instruments

1,146

-

1,146

(168)

-

978

 

Trade receivables

735

(240)

495

-

-

495

 

Total assets

1,881

(240)

1,641

(168)

-

1,473

 

Financial liabilities

 

 

 

 

 

 

 

Derivative financial instruments

(948)

-

(948)

168

45

(735)

 

Trade payables

(5,819)

240

(5,579)

-

-

(5,579)

 

Total liabilities

(6,767)

240

(6,527)

168

45

(6,314)

 

                       

(a) Refer to Note 1 for further details regarding the prior year restatement.

 

For the financial assets and liabilities subject to enforceable master netting arrangements above, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and liabilities will be settled on a gross basis. However, each party to the master netting agreement or similar agreement will have the option to settle all such amounts on a net basis in the event of default of the other party.

 

Note 25 Financial risk management

The Group's financial risk management is carried out under policies approved and authority delegated by the Board of Directors, including parameters for risk management across the Group. The financial risk management in relation to Retail is carried out by a central treasury department. Tesco Bank has a separate formal structure for reporting, monitoring and managing its financial risks appropriate to the nature of its business as a regulated financial institution.

 

The main financial risks faced by the Group, including Retail and Tesco Bank, and the management of these risks are set out below and include market risk (foreign exchange, interest rate, inflation and commodity prices), credit risk, liquidity risk, capital risk and insurance risk. Additional information on the management of the financial risks relating to Tesco Bank is also set out below.

 

(a) Market risk 

The Group is exposed to various elements of market risk, which include foreign exchange risk, interest rate risk, commodity price risk and inflation risk.

 

Foreign exchange risk

The Group is exposed to foreign exchange risk principally via:

transactional exposure that arises from the cost of future purchases of goods, where those purchases are denominated in a currency other than the functional currency of the purchasing company;

net investment exposure that arises from changes in the value of net investments denominated in currencies other than Pounds Sterling;

loans to and from subsidiaries in currencies other than in the entity's functional currency; and

debt issued in a currency other than Pound Sterling.

 

The foreign exchange risk for each of the above is managed via:

Transactional exposure

forward foreign currency contracts or purchased currency options, which are designated as cash flow hedges. The Group's policy is to hedge currency exposure that could significantly impact the Group income statement with a minimum (20%) and maximum (80%) hedge level of forecast uncommitted exposure within at least the next 12 months.

Net Investment exposure

foreign currency derivatives and borrowings in matching currencies, which are formally designated as net investment hedges. The Group's policy is to hedge a part of its investments in international subsidiaries.

Intercompany loan hedging

the use of foreign currency derivatives and borrowings in matching currencies. The Group's policy is that 100% of the foreign exchange risk is hedged. These are not formally designated as accounting hedges as gains and losses will naturally offset in the income statement.

Foreign currency debt

cross-currency swaps which swap the non-sterling debt back into a net sterling exposure. The Group's policy is to swap foreign currency debt back to Pound Sterling, unless there are appropriate matching foreign currency assets.

 

 

Notes to the Group financial statements

Note 25 Financial risk management continued
Interest rate risk

The Group is exposed to interest rate risk principally via:

debt issued at variable interest rates, as well as cash deposits and short-term investments, giving rise to cash flow risk; and debt issued at fixed interest rates, giving rise to fair value risk.

 

The interest rate risk for each of the above is managed via:

The issuance of debt at variable and floating interest rates as well as forward rate agreements, interest rate swaps, and caps and floors, which may be used to achieve the desired mix of fixed and floating rate debt. Hedging relationships are formally designated as either fair value or cash flow hedges. The Group's policy is to target fixing a minimum of 50% of interest costs for senior unsecured debt excluding Tesco Bank. At 27 February 2021, the percentage of interest-bearing debt at fixed rates was 67% (2020: 68%). The weighted average rate of interest paid on senior unsecured debt this financial year, excluding joint ventures and associates, was 3.07% (2020: 3.30%).
The Group has RPI-linked debt where the principal is indexed to increases in the RPI. RPI debt is treated as floating rate debt. The Group also has LPI-linked debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed-rate debt. RPI-linked debt and LPI-linked debt are hedged for the effects of inflation until maturity.

During 2021 and 2020, Group net debt was managed using derivative instruments to hedge interest rate risk.

 

2021

2020 (restated*)

Fixed

£m

Floating

£m

Total

£m

Fixed

£m

Floating

£m

Total

£m

Cash and cash equivalents

-

2,510

2,510

-

4,137

4,137

Loans and advances to customers - Tesco Bank

6,402

-

6,402

4,370

4,081

8,451

Investment securities at amortised cost

502

425

927

-

-

-

Short-term investments

-

1,011

1,011

-

1,076

1,076

Financial assets at fair value through other comprehensive income

14

-

14

659

409

1,068

Joint ventures and associates loan receivables

101

21

122

106

21

127

Lease liabilities

(8,402)

-

(8,402)

(9,566)

-

(9,566)

Bank and other borrowings

(6,102)

(1,166)

(7,268)

(6,260)

(1,964)

(8,224)

Customer deposits - Tesco Bank

(5,738)

-

(5,738)

(3,164)

(4,543)

(7,707)

Deposits from banks - Tesco Bank

-

(600)

(600)

(500)

-

(500)

Derivative effect:

 

 

 

 

 

 

Interest rate swaps

(1,206)

1,206

-

(1,092)

1,092

-

Cross-currency swaps

(905)

905

-

410

(410)

-

Index-linked swaps

(299)

299

-

(294)

294

-

Total

(15,633)

4,611

(11,022)

(15,331)

4,193

(11,138)

* Refer to Note 1 for further details regarding the prior year restatement.
 

Commodity price risk

The Group is exposed to commodity price risk via:

changes in commodity prices largely relating to diesel for own use.

The commodity price risk is managed via:

forward derivative contracts which are designated as cash flow hedges. These are used to hedge future purchases of diesel for own use which are forecast to occur within a 12-month period. The Group Policy is to hedge a minimum of 50% of the forecast uncommitted exposure within the next 12 months.

 

Inflation risk

The Group is exposed to inflation risk in relation to its financial assets and liabilities via:

Indexed linked debt, were the principal is indexed to increase / decrease in line with the RPI or LPI.

Lease liabilities where rent payments are indexed to increases / decreases in inflation indexes such as RPI.

The inflation risk is managed via:

Indexed-linked debt

Indexed-linked swaps, which are used to hedge RPI-linked and LPI-linked debt for the effect of inflation until maturity.

Indexed linked lease liabilities

Indexed linked swaps, which are used to hedge inflation linked rent payments for the effect of inflation until maturity of the lease.

 

Hedge accounting of market risks

Derivatives are used to hedge exposure to market risks, some of which are economic hedges and others are formally designated hedging instruments with hedge accounting applied. The main sources of hedge ineffectiveness are the effect of the counterparties' and the Group's own credit risk on the fair value of derivatives.

 

Notes to the Group financial statements

Note 25 Financial risk management continued 

Fair value hedges

The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed-rate debt issued by the Group and investment securities held by the Group.

 

Derivative contracts hedging fixed rate debt issued by the Group receive a fixed-rate of interest and pay a variable interest rate.

 

Derivative contracts held by the Group receive a floating rate of interest and pay a fixed interest rate to hedge investment securities where the Group receives a fixed rate of interest.

 

There is an economic relationship between the hedged item and the hedging instrument as the terms of the swap contracts match the terms of the fixed-rate borrowings, including notional amount, maturity, payment and rate set dates. The Group has established a hedge ratio of 1:1 for the hedging relationship as the underlying risk of the swap contract is identical to the hedged item.

 

Cash flow hedges

The Group is exposed to foreign currency risk arising from purchases of goods for resale in currencies other than the functional currency of the purchasing entity. Foreign currency forwards are utilised to hedge this risk and are formally designated as cash flow hedges.

 

Under the Group's hedging policy, the critical terms of the forward contracts must align with the hedged items. The foreign currency forwards are denominated in the same currency as the highly probable future sales and purchases, which are expected to occur within a maximum 24-month period, and the hedging relationship is determined to be 1:1.

 

The Group also uses forward contracts to hedge the price of certain commodities, these mainly relate to forward contracts to hedge future purchases of diesel for own use, which are forecast to occur within a 12-month period. These are denominated in the same currency and volume as the forecast purchases and the hedging relationship is determined to be 1:1.

 

The Group also uses index-linked swaps to hedge cash flows on index-linked debt and interest rate swaps to hedge interest cash flows on debt.

 

Net investment hedging

The Group uses Euro-denominated borrowings to hedge the exposure of a portion of its net investments in overseas operations which have a Euro functional currency, against changes in value due to changes in foreign exchange rates. The hedged risk in the net investment hedge is the risk of a weakening Euro against Pound Sterling that will result in a reduction in the carrying amount of the Group's Euro net investments.

 

To assess hedge effectiveness, the Group determines the economic relationship between the hedging instrument and the hedged item by comparing changes in the carrying amount of the debt that is attributable to a change in the spot rate with changes in the investment in foreign operations due to movements in the spot rate. The Group has established a hedge ratio of 1:1, as the underlying risk of the hedging instrument is identical to the hedged risk component.

 

The details of the hedging instruments and movements in cumulative losses on net investment hedges in other comprehensive income are set out below:

Gains/(losses) on net investment hedges

 

Nominal amount

of the hedged

item

£m

Nominal amount

of the hedging

instrument

£m

Movement on

continuing

hedges

£m

Movement on

discontinued

hedges

£m

At 23 February 2019

 

1,281

1,281

(42)

(976)

Change in value for calculating ineffectiveness

 

9

9

48

(89)

At 29 February 2020

 

1,290

1,290

6

(1,065)

Change in value for calculating ineffectiveness

 

10

10

(10)

-

Recycled to Group income statement

 

-

-

-

57

At 27 February 2021

 

1,300

1,300

(4)

(1,008)

 

Net investment hedge ineffectiveness was £nil (2020: £nil) during the year.

 

During the current financial year, the Group disposed of its Asian business resulting in a recycle to the income statement from the translation reserve of £57m (2020: £nil) relating to net investment hedging.

 

During the current financial year, currency movements decreased the net value, after the effects of hedging, of the Group's overseas assets by £68m (2020: decrease by £68m). The Group also ensures that each subsidiary is appropriately hedged in respect of its non-functional currency assets.

 

Financial instruments not qualifying for hedge accounting

The Group's policy does not permit use of derivatives for trading purposes. However, some derivatives do not qualify for hedge accounting, or are specifically not designated as a hedge where gains and losses on the hedging instrument and the hedged item naturally offset in the Group income statement. These instruments include index-linked swaps, interest rate swaps, cross-currency swaps and forward foreign currency contracts.

 

Notes to the Group financial statements

Note 25 Financial risk management continued 

IBOR reform

In the prior year, the Group early adopted the 'Interest Rate Benchmark Reform Phase 1' amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. This allowed the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty from interest rate benchmark reforms.

 

In the current year, the Group has early adopted the 'Interest Rate Benchmark Reform Phase 2' amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 and has applied this to hedging relationships where no uncertainty remains as IBOR based benchmarks have been replaced by risk-free benchmarks for a number of hedging relationships.

 

Both Phase 1 and Phase 2 are relevant to the Group because it applies hedge accounting to its interest rate benchmark exposures and modifications in response to the reform have been made to some but not all of the Group's derivative and non-derivative financial instruments.

 

Where new hedging arrangements have been entered into during the year these have been set up utilising risk-free rates.

 

During the year the Group transitioned some of its exposures from IBOR based to risk free rate indices. These included interest rate swaps and floating Inter-Company lending which were transitioned to Sterling Overnight Index Average (SONIA) based indices.

 

None of the Group's current IBOR linked contracts include adequate and robust fall-back provisions for cessation of the referenced

benchmark interest rate.

 

The Group continues to monitor the market and the output from various industry groups managing the transition to new benchmark interest rates, and will look to implement fall-back language for different instruments and IBORs when appropriate.

 

For the Group's derivatives, the International Swaps and Derivatives Association (ISDA) fall-back clauses were made available at the end of

2019 and the Group has entered discussions with its banks and other counterparties with the aim to implement this language into its ISDAs and other relevant agreements.

 

The Group's transition to alternative benchmark rates is managed by cross functional teams, led by the Treasury teams in the Retail business and Tesco Bank, with the aim to complete this transition during the financial year ending 26 February 2022. There are a number of potential risks arising from the transition, however the Group does not envisage that these will materialise, as significant progress on the transition has been made with its banks and other counterparties.

 

The following table sets out the hedging relationships as at 27 February 2021, which include IBOR benchmarks and are yet to be transitioned to

Risk-free rate benchmarks.

 

 

Carrying value

 

 

 

Hedging instrument

 Notional

£m

Asset

£m

Liability

£m

Interest
rate benchmark

Hedged item

Hedge relationship

Interest rate swaps

650

14

-

EURIBOR

MTN

Fair value hedge

Interest rate swaps

465

22

-

LIBOR

MTN

Fair value hedge

Interest rate swaps

346

-

(108)

LIBOR

Borrowing

Cash flow hedge

Cross-currency interest rate swaps

256

137

(3)

LIBOR

MTN

Not in formal hedge relationship

Investment in subordinated loans

21

21

-

LIBOR

-

Not in formal hedge relationship

                   

 

Derivatives and hedging exposures

The fair value and notional amounts of derivatives analysed by hedge type are as follows:

 

 

2021

2020

 

Asset

Liability

Asset

Liability

 

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value hedges

 

 

 

 

 

 

 

 

Interest rate swaps

42

2,018

(54)

2,774

47

1,710

(51)

2,404

Cross-currency swaps

-

-

(35)

650

232

409

-

-

Cash flow hedges

 

 

 

 

 

 

 

 

Interest rate swaps

-

-

(108)

346

-

-

(19)

50

Cross-currency swaps

-

-

-

-

265

1,477

-

-

Index-linked swaps

203

660

-

-

186

649

-

-

Forward contracts

37

1,118

(59)

1,468

38

1,133

(29)

954

Derivatives not in a formal hedge

 

 

 

 

 

 

 

 

relationship

 

 

 

 

 

 

 

 

Interest rate swaps

-

13

-

101

-

35

-

13

Cross-currency swaps

298

782

(3)

86

-

-

-

-

Index-linked swaps

877

3,209

(729)

4,982

355

3,025

(816)

5,130

Forward contracts

5

479

(19)

1,043

23

1,139

(33)

1,416

Total

1,462

8,279

(1,007)

11,450

1,146

9,577

(948)

9,967

 

 

Notes to the Group financial statements

Note 25 Financial risk management continued

The following tables set out the maturity profile and average interest rates and foreign currency exchange rates of the hedging instruments used in the Group's non-dynamic hedging strategies.

 

 

2021

2020

Maturity profile

Up to
 one year

One to
five years

More than five years

Up to
 one year

One to
 five years

More than
five years

Fair value hedges

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

Interest rate swaps - GBP

 

 

 

 

 

 

- Notional amount (£m)

1,384

2,156

602

953

1,910

607

- Average net interest rate (pay)/receive

0.32%

1.29%

0.59%

1.08%

0.84%

1.39%

 

 

 

 

 

 

 

Interest rate swaps - EUR

 

 

 

 

 

 

- Notional amount (£m)

-

650

-

-

645

-

- Average net interest rate (pay)/receive

-

0.66%

-

-

0.63%

-

 

 

 

 

 

 

 

Interest rate/Foreign currency risk

 

 

 

 

 

 

Cross-currency swaps (GBP:EUR)

 

 

 

 

 

 

- Notional amount (£m)

-

-

650

-

-

-

- Average exchange rate

-

-

1.13

-

-

-

- Average net interest rate (pay)/receive

-

-

(0.77%)

-

-

-

Cross-currency swaps (GBP:USD)

 

 

 

 

 

 

- Notional amount (£m)

-

-

-

-

-

409

- Average exchange rate

-

-

-

-

-

1.50

- Average net interest rate (pay)/receive

-

-

-

-

-

3.15%

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

Index-linked swaps

 

 

 

 

 

 

- Notional amount (£m)

-

360

300

-

-

649

Average net interest rate (pay)/receive

-

(4.23%)

(4.21%)

-

-

(4.22%)

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

- Notional amount (£m)

-

-

346

-

-

50

- Average net interest rate (pay)/receive

-

-

(4.97%)

-

-

(4.23%)

 

 

 

 

 

 

 

Interest rate/Foreign currency risk

 

 

 

 

 

 

Cross-currency swaps (GBP:USD) floating

 

 

 

 

 

 

- Notional amount (£m)

-

-

-

272

-

-

- Average exchange rate

-

-

-

1.29

-

-

- Average net interest rate (pay)/receive

-

-

-

0.84%

-

-

Cross-currency swaps (GBP:EUR) fixed

 

 

 

 

 

 

- Notional amount (£m)

-

-

-

254

645

306

- Average exchange rate

-

-

-

1.19

1.25

1.47

- Average net interest rate (pay)/receive

-

-

-

(0.87%)

(1.46%)

(0.32%)

 

At 27 February 2021, forward foreign currency contracts, designated as cash flow hedges, equivalent to £2.5bn were outstanding (2020: £2.1bn). These forward contracts are largely in relation to purchases of Euros (notional €1.0bn) (2020: notional £0.8bn) and US Dollars (notional $1.3bn) (2020: notional $0.9bn) with varying maturities up to August 2022.

 

For the above currencies the rates ranged from Euro/GBP 1.08 to 1.156 and US$/GBP from 1.222 to 1.416.

 

Forward commodity contracts hedging diesel purchases for own use as at 27 February 2021 had a GBP notional of £54m (2020: £69m) at a rate of £277 to £457 per tonne.

 

The notional and fair values of these contracts is shown on page 82.

 

The following table sets out the details of the hedged exposures covered by the Group's fair value hedges.

 

 

Carrying amount

Accumulated amounts of fair value adjustments on hedged item

 

 

At 27 February 2021

Assets

£m

Liabilities

£m

Assets

£m

Liabilities

£m

Changes in fair

value for

calculating hedge

ineffectiveness

£m

Residual hedge

adjustments(a)

£m

Fair value hedges

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

Fixed-rate loans(b)

3,653

-

7

-

(3)

(3)

Fixed-rate savings(c)

-

(1,866)

-

-

-

-

Fixed-rate investment securities(b)

500

-

10

-

8

-

Fixed-rate bonds(d)

-

(2,926)

-

(95)

(59)

(97)

(a)        Accumulated amount of fair value hedge adjustments remaining in the Group balance sheet for any hedged items that have ceased to be adjusted for hedging gains and losses.

(b)        Classified as Loans and advances to customers and banks.

(c)         Classified as Customer deposits and Deposits from Banks.

(d)        Classified as Borrowings.

 

 

Notes to the Group financial statements 

Note 25 Financial risk management continued

 

 

 

Carrying amount

Accumulated amounts of fair value adjustments on hedged item

 

At 29 February 2020

Assets
£m

Liabilities
£m

Assets
£m

Liabilities
 £m

Changes in fair

value for

calculating hedge

ineffectiveness

£m

Residual hedge

adjustments(a)

£m

Fair value hedges

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

Fixed-rate loans and mortgages(b)

4,416

-

10

-

12

6

Fixed-rate savings(c)

-

(3,003)

-

(1)

(1)

(1)

Fixed-rate investment securities(b)

650

-

2

-

7

-

Fixed-rate bonds(d)

-

(2,348)

-

(216)

140

(34)

(a)-(d) Refer to previous table for footnotes.

 

 

 

 

 

 

                     

 

The following tables set out information regarding the change in value of the hedged item used in calculating hedge ineffectiveness as well as the impacts on the cash flow hedge reserve and cost of hedging reserve.

 

 

 

 

 

Cumulative impact on hedging reserve and cost of hedging reserve*

At 27 February 2021

Hedging instrument

Change in

value of hedging

instrument for

calculating hedge

ineffectiveness

£m

Change in value of

hedged item for

calculating hedge

ineffectiveness

£m

Continuing

hedges

£m

Discontinued

hedges

£m

Interest rate risk

 

 

 

 

 

Index-linked bonds

Index-linked bonds

1

(1)

71

-

Borrowings

Interest rate swaps

30

(30)

18

-

Foreign currency risk

 

 

 

 

 

Trade payables

Forward contracts

(44)

44

(24)

-

Interest rate/Foreign currency risk

 

 

 

 

 

MTNs

Crosscurrency swaps

6

(6)

-

43

* Excludes deferred tax.

 

 

 

 

 

Cumulative impact on hedging reserve and cost of hedging reserve*

At 29 February 2020

Hedging instrument

Change in

value of hedging

instrument for

calculating hedge

ineffectiveness

£m

Change in value of

hedged item for

calculating hedge

ineffectiveness

£m

Continuing

hedges

£m

Discontinued

hedges

£m

Interest rate risk

 

 

 

 

 

Index-linked bonds

Index-linked bonds

22

(22)

69

-

Borrowings

Interest rate swaps

(2)

2

(4)

-

Foreign currency risk

 

 

 

 

 

Trade payables

Forward contracts

55

(55)

8

-

Interest rate/Foreign currency risk

 

 

 

 

 

MTNs

Crosscurrency swaps

28

(28)

137

(44)

* Excludes deferred tax.

 

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

 

 

 

 

 

 

Line item in Group income statement that includes hedge ineffectiveness

2021

2020

Hedge ineffectiveness recognised

 in profit or loss

£m

Hedge ineffectiveness recognised 

in profit or loss

£m

Cash flow hedges

Finance income/costs

-

-

Net investment hedges

Finance income/costs

-

-

Fair value hedges - interest rate risk

 

 

 

- Borrowings

Finance income/costs

(18)

(6)

- Derivatives

Finance income/costs

-

-

 

 

Notes to the Group financial statements
Note 25 Financial risk management continued

The following table presents a reconciliation by risk category of the Cash flow hedge and Cost of hedging reserves and an analysis of other comprehensive income in relation to hedge accounting:

 

 

2021

2020

 

Hedging reserve
 £m

Cost of hedging reserve
£m

Line item

Hedging reserve
£m

Cost of hedging reserve
£m

Line item

Opening balance

154

(15)

 

118

(5)

 

Interest rate risk

 

 

 

 

 

 

Index-linked swaps

 

 

 

 

 

 

- Net fair value gains/(losses)

16

-

 

1

-

 

- Amount reclassified to Group income statement

(15)

-

Finance income/costs

(2)

-

Finance income/costs

Interest rate swaps

 

 

 

 

 

 

- Net fair value gains/(losses)

30

-

 

(2)

-

 

- Amount reclassified to Group income statement

(6)

-

Finance income/costs

(1)

-

Finance income/costs

Interest rate/Foreign currency risk

 

 

 

 

 

 

Cross-currency swaps

 

 

 

 

 

 

- Net fair value gains/(losses)

(4)

17

 

70

(12)

 

- Amount reclassified to Group income statement

(65)

-

Finance income/costs

(4)

-

Finance income/costs

Foreign currency risk

 

 

 

 

 

 

Forward contracts

 

 

 

 

 

 

- Net fair value gains/(losses)

(3)

-

 

49

-

 

- Amount reclassified to Inventories

(28)

-

Inventories

(64)

-

Inventories

Tax

11

(2)

 

(11)

2

 

Closing balance

90

-

 

154

(15)

 

 

Sensitivity analysis

The impact on the financial statements of the Group, including Retail and Tesco Bank, from foreign currency, inflation and interest rate volatility is discussed below.

The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment benefit obligations and on the retranslation of overseas net assets. However, it does include the foreign exchange sensitivity resulting from local entity non-functional currency financial instruments.

The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 27 February 2021. It should be noted that the sensitivity analysis reflects the impact on income and equity due to financial instruments held at the balance sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates.

The following assumptions were made in calculating the sensitivity analysis:

the sensitivity of interest payable to movements in interest rates is calculated on net floating rate exposures on debt, deposits and derivative instruments with no sensitivity assumed for RPI-linked borrowings, which have been swapped to fixed rates;

changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group income statement and equity due to compensating adjustments in the carrying   value of debt;

changes in the carrying value of financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in the Group statement of comprehensive income/(loss);

all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group income statement; and

the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations.

Using the above assumptions, the following table shows the quantitative effect on the Group income statement and Group statement of changes in equity that would result, at the balance sheet date, from changes in interest rates, inflation rates and currency exchange rates that are reasonably possible for major currencies where there have recently been significant movements:

 

 

2021

2020

 

Income

gain/(loss)

£m

Equity

gain/(loss)

£m

Income

gain/(loss)

£m

Equity

gain/(loss)

£m

1% increase in interest rates (2020: 1%)

(31)

31

39

(42)

10% appreciation of the Euro (2020: 10%)

(5)

(96)

1

(117)

10% appreciation of the US Dollar (2020: 10%)

3

97

5

78

25 basis points parallel upward shift in the forward inflation curve (2020: 25 basis points)

116

-

86

-

 

 

Notes to the Group financial statements 

Note 25 Financial risk management continued

A decrease in interest rates, depreciation of foreign currencies and downward shift in the forward inflation curve would have the opposite effect to the impact in the table above.

 

The impact on the Group income statement resulting from changes in foreign exchange rates against GBP in relation to financial instruments (excluding those arising on consolidation) are minimal as Group policy dictates that all material income statement foreign exchange exposures are hedged.

 

During the current and prior financial year, the Group entered into a number of derivative index-linked contracts with external counterparties, to economically hedge a proportion of the Group's exposure to index-linked lease liabilities with its joint ventures. These are specifically not designated as accounting hedges but are economic hedges. However, the gains and losses on the hedging instrument and hedged item do not naturally offset in the Group income statement. This mismatch arises due to different accounting outcomes of IFRS 9 and IFRS 16 which results in a timing difference.

 

The impact on the Group statement of comprehensive income/(loss) from changing exchange rates results from the revaluation of financial liabilities used as net investment hedges. The impact on the Group statement of comprehensive income/(loss) will largely be offset by the revaluation in equity of the hedged assets in the Group statement of changes in equity.

 

(b)    Credit risk

Credit risk represents the risk that a counterparty will not meet its obligations leading to a financial loss for the Group. Credit risk arises from Cash and cash equivalents, Short-term investments, Trade receivables, Other receivables, Joint ventures and associates loan receivables, Loans and advances to customers - Tesco Bank, Loans and advances to banks - Tesco Bank, Investment securities at amortised cost,  Financial assets at fair value through other comprehensive income, and Derivative financial instruments.

 

For financial assets other than Trade receivables, Other receivables, Joint ventures and associates loan receivables, and Loans and advances to customers - Tesco Bank, the Group holds positions with an approved list of investment-grade rated counterparties and monitors the exposure, credit rating, outlook and credit default swap levels of these counterparties on a regular basis. Counterparty credit limits are reviewed on an annual basis and may be updated throughout the financial year. The limits are set to minimise the concentration of risk and are set taking into account the type and value of the specific financial asset.

 

For Trade receivables, Other receivables, Joint ventures and associates loan receivables, and Loans and advances to customers - Tesco Bank, the Group's credit risk is managed with various mitigating controls including credit checks, credit insurance and master netting agreements. Due to the nature of the Retail and Tesco Bank businesses, there is little concentration of risk due to the large number of customers which are spread across wide geographical areas.

 

Maximum exposure to credit risk

The maximum exposure to credit risk at the end of the reporting period reflects the carrying amount of each class of financial assets, including loan commitments which are not recognised on the balance sheet. Joint ventures and associates loan receivables in the table below are gross of deferred profits historically arising from the sale of property assets to joint ventures (see Note 31). The Group's maximum exposure to credit risk is £26.0bn (2020: £28.9bn).

 

The net counterparty exposure under derivative contracts is £1.2bn (2020: £1.0bn).

 

The Group's maximum gross exposure to credit risk is analysed below by class of financial instrument, including for financial instruments that are not subject to ECL i.e. derivative financial instruments and cash balances with central banks:

 

2021

£m

2020(a)

£m

 

Cash and cash equivalents(b)

 

2,510

 

4,137

Short-term investments

1,011

1,076

Trade receivables

424

495

Other receivables

430

439

Joint venture and associate loan receivables

160

181

Loans and advances to customers - Tesco Bank

6,402

8,451

Investment securities at amortised cost

927

-

Financial assets at fair value through other comprehensive income

14

1,068

Derivative financial instruments:

 

 

Interest rate swaps

42

47

Cross-currency swaps

298

497

Index-linked swaps

1,080

541

Forward contracts

42

61

Off balance sheet:

 

 

Loan commitments

12,668

11,872

Maximum exposure to credit risk

26,008

28,865

(a)        Refer to Note 1 for further details regarding the prior year restatement. 

(b)        Cash balances with central banks of £1.6bn (2020: £2.6bn) are included within Cash and cash equivalents.

 

 

Notes to the Group financial statements
Note 25 Financial risk management continued

Counterparty credit rating

The table below provides detail of financial assets by long term credit rating of investment-grade rated counterparties:

 

2021

2020

Rating

AAA

AA

A

BBB

Total

AAA

AA

A

BBB

Total

 

Money market funds

955

56

1,011

1,076

1,076

 

Investment securities at amortised cost

560

65

302

-

927

-

-

 

Investment securities at fair value through other comprehensive income

5

5

525

248

274         

14

1,061

 

Derivatives financial assets

 

  

  

  

 

  

  

  

  

 

 

Interest rate swaps

9

27

6

42

8

39

47

 

Cross currency swaps

211

87

298

287

 210

497

 

Index Linked swaps

613

467

1,080

95

446

541

 

Forward contracts

1

27

14

42

9

35

17

61

 

The low credit risk exemption has been applied to cash and cash equivalents, short-term investments, financial assets at fair value through  OCI, financial assets at amortised cost and investment securities as these are held with counterparties with investment-grade ratings (BBB or above) or are short term in nature. The expected credit loss is immaterial.

 

Expected credit losses

For trade receivables, contract assets and lease receivables the Group applies the simplified approach with lifetime ECLs recognised from initial recognition of the receivables. For loans and advances to customers, short-term investments, investment securities at amortised cost, debt instruments at fair value through other comprehensive income and loan receivables from joint venture and associates, the three-stage model for impairment has been applied. The expected lifetime of a financial asset is generally the contractual term.

 

The Group's financial assets are written off when the balance is known not to be recoverable or the Group is time barred from recovering a balance under local legislation.

 

The expected credit losses for Retail are immaterial. For details on the expected credit losses relating to Tesco Bank see below.

Gross loans to related parties of £160m (2020: £181m) are presented net of loss allowances of £nil (2020: £2m) and deferred profits of £38m (2020: £54m) on the Group balance sheet. The ECL is determined by multiplying together the probability of default (PD), exposure at default (EAD) and the loss given default (LGD) for the relevant time period and for each specific loan and by discounting back to the balance sheet date.
 

(c)    Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities.

 

The Group finances its liquidity position and its operations by a combination of retained profits, disposals of assets, debt capital market issuance, commercial paper, bank borrowings and leases. The policy is to maintain a prudent level of cash together with sufficient committed bank facilities to meet liquidity needs as they arise, to maintain a smooth debt profile and maturing senior unsecured debt will not exceed £1.5bn in any 12-month period.

 

The Group retains access to capital markets so that maturing debt may be refinanced as it falls due and the Group is investment grade rating with all three major credit rating agencies. 

 

2021

2020

 

Short term
rating

Long term rating

Outlook

Short term
rating

Long term rating

Outlook

Rating agency

 

 

 

 

 

 

Fitch

F3

BBB-

Stable

F3

BBB-

Stable

Moody's

P-3

Baa3

Stable

P-3

Baa3

Stable

Standard & Poor's

A-3

BBB-

Stable

A-3

BBB-

Stable

 

The Group has a £15.0bn Euro Medium Term Note programme, of which £4bn was in issue at 27 February 2021 (2020: £4.0bn), plus £0.3bn equivalent of USD-denominated notes issued under 144A documentation (2020: £0.4bn).

 

Liquidity risk is continuously monitored by short-term and long-term cash flow forecasts.

 

During the year, the Group accessed the capital markets twice issuing £450m (maturing in 2030) and €750m (maturing in 2029). The €750m issuance was the Group's first sustainability linked bond. The bond includes a coupon step up of 25 bps for the final three coupon payments, if science-based carbon reduction targets of 60% are not achieved compared to a 2015/16 baseline.

 

Borrowing facilities

The Group has the following undrawn committed facilities available at 27 February 2021, in respect of which all conditions precedent had been met as at that date:

 

2021

£m

2020

£m

Expiring in less than one year

38

38

Expiring between one and two years

-

3,000

Expiring in more than two years

2,500

-

 

2,538

3,038

 

During the year, a new three-year multicurrency £2.5bn revolving facility was established, replacing the existing £3bn committed facilities. The new facility is linked to three ESG targets and includes the use of risk-free rates rather than LIBOR.

 

The undrawn committed facilities include £nil (2020: £0.4bn) of bilateral facilities and a £2.5bn (2020: £2.6bn) syndicated revolving credit facility. All facilities incur commitment fees at market rates and would provide funding at floating rates. There were no withdraws from the facilities during the year.
 

Notes to the Group financial statements

Note 25 Financial risk management continued

For liquidity risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors on page 89.

 

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivative liabilities taking into account contractual terms that provide the counterparty a choice of when (the earliest date) an amount is repaid by the Group. The potential cash outflow is considered acceptable as it is offset by financial assets.

 

The undiscounted cash flows will differ from both the carrying values and fair values. Floating-rate interest and inflation is estimated using the prevailing rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at the balance sheet date.

 

 

 

At 27 February 2021

Due within

 1 year

£m

Due between

1 and 2 years

£m

Due between

2 and 3 years

£m

Due between

3 and 4 years

£m

Due between

4 and 5 years

£m

Due beyond

5 years

£m

Non-derivative financial liabilities

 

 

 

 

 

 

Bank and other borrowings

(1,002)

(53)

(779)

(724)

(888)

(3,844)

Interest payments on borrowings

(199)

(172)

(170)

(151)

(134)

(905)

Customer deposits - Tesco Bank

(4,924)

(488)

(253)

(114)

(24)

-

Deposits from banks - Tesco Bank

(500)

-

(100)

-

-

-

Lease liabilities

(969)

(939)

(912)

(867)

(841)

(7,999)

Trade payables

(5,131)

-

-

-

-

-

Other payables

(1,543)

(23)

(3)

(1)

-

(83)

Derivative financial liabilities

 

 

 

 

 

 

Net settled derivative contracts - receipts

69

51

32

26

4

19

Net settled derivative contracts - payments

(88)

(533)

(217)

(186)

(23)

(78)

Gross settled derivative contracts - receipts

2

2

2

1

1

2

Gross settled derivative contracts - payments

(7)

(8)

(10)

(11)

(12)

(61)

Total on balance sheet

(14,292)

(2,163)

(2,410)

(2,027)

(1,917)

(12,949)

 

 

 

 

 

 

 

Off balance sheet

Contractual lending commitments

(12,668)

-

-

-

-

-

Total

(26,960)

(2,163)

(2,410)

(2,027)

(1,917)

(12,949)

 

At 29 February 2020 (restated)*

Due within
1 year
£m

Due between 1 and 2 years
£m

Due between 2 and 3 years
£m

Due between 3 and 4 years
£m

Due between 4 and 5 years

£m

Due beyond 5 years
£m

Non-derivative financial liabilities

 

 

 

 

 

 

Bank and other borrowings

(2,120)

(467)

(53)

(795)

(956)

(3,776)

Interest payments on borrowings

(227)

(208)

(181)

(179)

(159)

(1,237)

Customer deposits - Tesco Bank

(6,426)

(797)

(233)

(187)

(115)

-

Deposits from banks - Tesco Bank

(3)

(1)

(501)

-

-

-

Lease liabilities

(1,081)

(1,018)

(996)

(993)

(951)

(9,584)

Trade payables

(5,409)

-

-

-

-

-

Other payables

(1,623)

(22)

(18)

(2)

(1)

(127)

Derivative financial liabilities

 

 

 

 

 

 

Net settled derivative contracts - receipts

10

11

467

116

-

25

Net settled derivative contracts - payments

(717)

(42)

(470)

(148)

(160)

(18)

Gross settled derivative contracts - receipts

2,534

-

-

-

-

-

Gross settled derivative contracts - payments

(2,585)

-

-

-

-

-

Total on balance sheet

(17,647)

(2,544)

(1,985)

(2,188)

(2,342)

(14,717)

 

Off balance sheet

 

 

 

 

 

 

Contractual lending commitments

(11,872)

-

-

-

-

-

Total

(29,519)

(2,544)

(1,985)

(2,188)

(2,342)

(14,717)

* Refer to Note 1 for further details regarding the prior year restatement.

 

The Group is not subject to covenants in relation to its facilities and borrowings. There is an element of seasonality in the Group's operations, however the overall impact on liquidity is not considered significant.

 

The Group cash flow statement includes net (investment in) / proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost of £116m inflow (2020: £6m outflow) within cash flows generated from/(used in) investing activities. The gross cash flows are £201m inflow (2020: £774m inflow) and £85m outflow (2020: £780m outflow).

 

The Group cash flow statement includes net cash flows from derivative financial instruments of £580m outflow (2020: £17m outflow) within cash flows generated from/(used in) financing activities. The gross cash flows are £2,276m outflow (2020: £346m outflow) and £1,696m inflow (2020: £329m inflow).
 

 

 

Notes to the Group financial statements 

Note 25 Financial risk management continued

(d)    Capital risk

The Group's objectives when managing capital (defined as net debt plus equity) are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while protecting and strengthening the Group balance sheet through the appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it, in light of changes to economic conditions and the strategic objectives of the Group.

 

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them, or issue new shares.

 

The Group raises finance in the public debt markets and borrows centrally and locally from financial institutions, using a variety of capital market instruments and borrowing facilities to meet the requirements of each local business.

 

In line with the Group's objectives, during the current financial year, the Group issued a £450m bond maturing in 2030 and undertook a liability management exercise by combining an issuance of €750m bond maturing in 2029 with a debt buyback, the latter resulting in notionals of £0.6bn
bought back across eight bonds.

 

Refer to Note 32 for the value of the Group's net debt (£12.0bn; 2020: £12.3bn), and the Group statement of changes in equity for the value of the Group's equity (£12.3bn; 2020: £13.4bn).

 

(e)    Insurance risk

The Group is exposed to the risk of being inadequately protected from liabilities arising from unforeseen events. The Group purchased assets, earnings and combined liability protection from the open insurance market for higher value losses only.

 

The risk not transferred to the insurance market is retained within the Group with some cover being provided by the Group's captive insurance company, ELH Insurance Limited in Guernsey, which covers assets, earnings and combined liability.

 

Tesco Bank

Information on the management of the financial risks relating to Tesco Bank, which is additional to the information provided for the Group overall, is set out below.

 

Interest rate risk

Interest rate risk arises mainly where assets and liabilities in Tesco Bank's banking activities have different repricing dates and from unexpected changes to the yield curve. Tesco Bank is exposed to interest rate risk through dealings with retail customers as well as through lending to and borrowing from the wholesale market. Tesco Bank has established limits for risk appetite and stress tests are performed using sensitivity to fluctuations in underlying interest rates in order to monitor this risk. Tesco Bank also use the Capital at Risk (CaR) approach which assesses the sensitivity (value change) of a reduction in the Bank's capital to movements in interest rates. 

 

The scenarios considered include both parallel and non-parallel movements of the yield curve and have been designed to assess impacts across a suitable range of severe but plausible movements in interest rates. Interest rate risk is primarily managed using interest rate swaps as the main hedging instrument.

 

Liquidity risk

Liquidity risk is the risk that Tesco Bank has insufficient liquidity resources to meet its obligations as they fall due. Funding risk is the risk that Tesco Bank does not have sufficiently stable and diverse sources of funding.

 

Tesco Bank operates within a Liquidity Risk Management Policy Framework (LRMP) to ensure that sufficient funds are available at all times to meet demands from depositors, to fund agreed advances, to meet other commitments as and when they fall due, and to ensure risk appetite is met.

 

Liquidity and funding risks are assessed through the Individual Liquidity Adequacy Assessment Process (ILAAP) on at least an annual basis. Formal limits are set within the LRMP to maintain liquidity risk exposures within the Liquidity Risk Appetite set by Tesco Bank's Board of Directors and key liquidity measures are monitored on a regular basis. Tesco Bank maintains a conservative liquidity and funding profile to confirm that it is able to meet its financial obligations under normal, and stressed, market conditions.

 

Credit risk

Credit risk is the risk that a retail customer or counterparty to a wholesale transaction will fail to meet its obligations in accordance with contractually agreed terms and Tesco Bank will incur losses as a result. Credit risk principally arises from the Bank's retail lending activities but also from the placement of surplus funds with other banks and money market funds, investments in transferable securities and interest rate and foreign exchange derivatives. In addition, credit risk arises from contractual arrangements with third parties where payments and commissions are due to the Bank for short periods of time. To minimise the potential exposure to bad debts that are outside risk appetite, processes, systems and limits have been established that cover the end-to-end retail credit risk customer life cycle. These include credit scoring, affordability, credit policies and guides, and monitoring and reporting. The Bank is also exposed to wholesale credit risk primarily through its treasury activities. Controls and risk mitigants include daily monitoring of exposures, investing in counterparties with investment grade ratings, restricting the amount that can be invested with one counterparty and credit-rating mitigation techniques. Assessment of the expected credit loss (ECL) on loans and advances to customers has taken into account a range of macroeconomic scenarios.

 

 

Notes to the Group financial statements

Note 25 Financial risk management continued

Maximum exposure to credit risk

The table below presents Tesco Bank's maximum exposure to credit risk i.e. total gross exposure, by stages and by class of financial instruments. For financial assets, the balances are based on gross carrying amounts. For loan commitments, the amounts represent the amounts for which Tesco Bank is contractually committed:

 

 

Stage 1

Stage 2

Stage 3

Total

27 February 2021

£m

 Not past due

£m

<30 days
past due

£m

>30 days
past due

£m

 Total

£m

 

£m

 

£m

Loans and advances to customers

5,749

981

25

25

1,031

242

7,022

Investment securities at FVOCI(a)

5

-

-

-

-

-

5

Investment securities at amortised cost

928

-

-

-

-

-

928

Loan commitments - Loans and advances to customers(b)

12,379

283

2

-

285

4

12,668

Total gross exposure

19,061

1,264

27

25

1,316

246

20,623

 

Loss allowance

 

 

 

 

 

 

 

Loans and advances to customers(b)

131

314

11

16

341

153

625

Investment securities at FVOCI

-

-

-

-

-

-

-

Investment securities at amortised cost

1

-

-

-

-

-

1

Total loss allowance

132

314

11

16

341

153

626

 

Net Exposure

 

 

 

 

 

 

 

Loans and advances to customers

5,618

667

14

9

690

89

6,397

Investment securities at FVOCI

5

-

-

-

-

-

5

Investment securities at amortised cost

927

-

-

-

-

-

927

Total net exposure

6,550

667

14

9

690

89

7,329

 

 

 

 

 

 

 

 

Coverage

Loans and advances to customers

2%

32%

44%

64%

33%

63%

9%

 

(a)        On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

(b)        The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advance to customers as above to the extent that it is below the gross carrying amount of loans and advances to customers. Where the loss allowance exceeds the gross carrying amount, any excess is included within the provisions.

 

 

Stage 1

Stage 2

Stage 3

Total

 

29 February 2020

£m

 Not past due

£m

<30 days
past due

£m

>30 days
past due

£m

 Total

£m

 

£m

 

£m

 

Loans and advances to customers

7,688

869

52

32

953

289

8,930

Investment securities at FVOCI(a)

1,061

-

-

-

-

-

1,061

Investment securities at amortised cost

-

-

-

-

-

-

-

Loan commitments - Loans and advances to customers(b)

11,755

116

-

-

116

1

11,872

Total gross exposure

20,504

985

52

32

1,069

290

21,863

 

Loss allowance

 

 

 

 

 

 

 

Loans and advances to customers(b)

83

178

21

20

219

186

488

Investment securities at FVOCI

-

-

-

-

-

-

-

Investment securities at amortised cost

-

-

-

-

-

-

-

Total loss allowance

83

178

21

20

219

186

488

 

Net Exposure

 

 

 

 

 

 

 

Loans and advances to customers

7,605

691

31

12

734

103

8,442

Investment securities at FVOCI

1,061

-

-

-

-

-

1,061

Investment securities at amortised cost

-

-

-

-

-

-

-

Total net exposure

8,666

691

31

12

734

103

9,503

 

 

 

 

 

 

 

 

Coverage

Loans and advances to customers

1%

20%

40%

63%

23%

64%

5%

 

(a)-(b) Refer to previous table for footnotes.

 

Expected credit losses (ECL)

The ECL is determined by multiplying together the probability of default (PD), exposure at default (EAD) and loss given default (LGD) for the relevant time period and for each asset category and by discounting back to the balance sheet date. The ECL calculation and the measurement of significant deterioration in credit risk both incorporate forward-looking information using a range of macroeconomic scenarios, with key variables being the Bank of England base rate, unemployment rate, house price index and gross domestic product. The key economic variables are based on historical patterns observed over a range of economic cycles.

 

 

Notes to the Group financial statements
Note 25 Financial risk management continued

The tables below present the reconciliations of ECL allowances on loans and advances to customers.

 

 

2021

27 February 2021

Stage 1
£m

Stage 2

£m

Stage 3
£m

Total
£m

Gross exposure

5,749

1,031

242

7,022

Loan commitments

12,379

285

4

12,668

Total exposure

18,128

1,316

246

19,690

 

Allowance for expected credit losses

 

 

 

 

At 29 February 2020

(83)

(219)

(186)

(488)

Transfers:

 

 

 

 

Transfers from stage 1 to stage 2

20

(20)

-

-

Transfers from stage 2 to stage 1

(9)

9

-

-

Transfers to stage 3

2

42

(44)

-

Transfers from stage 3

(2)

(2)

4

-

Movements recognised in the Group income statement:

 

 

 

 

Net remeasurement following transfer of stage

6

(36)

(72)

(102)

New financial assets originated

(25)

(5)

(2)

(32)

Financial assets derecognised during the current financial year

8

9

3

20

Changes in risk parameters and other movements

(56)

(134)

(83)

(273)

Other movements:

 

 

 

 

Write-offs and asset disposals

-

3

227

230

Transfers to provisions for liabilities and charges

8

12

-

20

Reclassification of mortgage book balances to fair value through profit or loss

-

-

-

-

At 27 February 2021

(131)

(341)

(153)

(625)

 

Reconciliation to Group balance sheet

 

 

 

 

 

Gross exposure

5,749

1,031

242

7,022

Allowance for expected credit losses

(131)

(341)

(153)

(625)

 

5,618

690

89

6,397

Fair value adjustment

 

 

 

5

Carrying value at 27 February 2021

 

 

 

6,402

 

 

2020

29 February 2020

Stage 1
£m

Stage 2

£m

Stage 3
£m

Total
£m

Gross exposure

7,688

953

289

8,930

Loan commitments

11,755

116

1

11,872

Total exposure

19,443

1,069

290

20,802

 

Allowance for expected credit losses

 

 

 

 

At 23 February 2019

(84)

(229)

(172)

(485)

Transfers:

 

 

 

 

Transfers from stage 1 to stage 2

11

(11)

-

-

Transfers from stage 2 to stage 1

(64)

64

-

-

Transfers to stage 3

3

50

(53)

-

Transfers from stage 3

(2)

(2)

4

-

Movements recognised in the Group income statement:

 

 

 

 

Net remeasurement following transfer of stage

38

(23)

(93)

(78)

New financial assets originated

(27)

(21)

(10)

(58)

Financial assets derecognised during the current financial year

9

12

3

24

Changes in risk parameters and other movements

32

(63)

(60)

(91)

Other movements:

 

 

 

 

Write-offs and asset disposals

-

3

195

198

Transfers to provisions for liabilities and charges

-

-

-

-

Reclassification of mortgage book balances to fair value through profit or loss

1

1

-

2

At 29 February 2020

(83)

(219)

(186)

(488)

 

Reconciliation to Group balance sheet

 

 

 

 

 

Gross exposure

7,688

953

289

8,930

Allowance for expected credit losses

(83)

(219)

(186)

(488)

 

7,605

734

103

8,442

Fair value adjustment

 

 

 

9

Carrying value at 29 February 2020

 

 

 

8,451

 

The Bank defines four classifications of credit quality for all credit exposures: high, satisfactory, low and below standard. Credit exposures are segmented according to the probability of default (PD), with credit impaired reflecting a PD of 100%.

 

 

Notes to the Group financial statements

Note 25 Financial risk management continued

 

At 27 February 2021

12-month PD

%

 Stage 1

£m

 Stage 2

£m

 Stage 3

£m

 Total

£m

Loans and advances to customers:

 

 

 

 

 

High quality

≤3.02

5,314

445

-

5,759

Satisfactory quality

>3.03 - 11.10

392

389

-

781

Low quality and below standard

≥11.11

43

197

-

240

Credit impaired

100

-

-

242

242

 

 

5,749

1,031

242

7,022

 

 

12-month PD

Stage 1

Stage 2

Stage 3

Total

At 29 February 2020

%

£m

£m

£m

£m

Loans and advances to customers:

 

 

 

 

 

High quality

≤3.02

6,609

37

-

6,646

Satisfactory quality

>3.03 - 11.10

1,037

485

-

1,522

Low quality and below standard

≥11.11

42

431

-

473

Credit impaired

100

 -

 -

289

 289

 

 

7,688

953

289

8,930

 

Default

An account is deemed to have defaulted when the Tesco Bank considers that a customer is in significant financial difficulty and that the customer meets certain quantitative and qualitative criteria regarding their ability to make contractual payments when due. This includes instances where:

the customer makes a declaration of significant financial difficulty;

the customer or third-party agency communicates that it is probable that the customer will enter bankruptcy or another form of financial restructure such as insolvency or repossession;

the account has been transferred to recoveries and the relationship is terminated;

an account's contractual payments are more than 90 days past due; or

where the customer is deceased.

 

A loan deemed uncollectable is written off against the related provision after all of the necessary procedures have been completed and the amount of the loss has been determined. Tesco Bank may write off loans that are still subject to enforcement activity. The outstanding contractual amount of such assets written off were £154m (2020: £140m).

 

Significant increase in credit risk

At each reporting date, the change in credit risk of the financial asset is observed using a set of quantitative and qualitative criteria, together with a backstop based on arrears status. For each financial asset, Tesco Bank compares the lifetime PD at the reporting date with the lifetime PD that was expected at the reporting date at initial recognition (PD threshold). Tesco Bank has established PD thresholds for each type of product which vary depending on initial term and term remaining. A number of qualitative criteria are in place such as: forbearance offered to customers in financial difficulty; risk-based pricing post-origination; credit indebtedness; credit limit decrease; and pre-delinquency information. As a backstop, Tesco Bank considers that if an account's contractual payment are more than 30 days past due then a significant increase in credit risk has taken place. Tesco Bank has used the low credit risk exemption in respect of its portfolio of investment securities in both the current and prior year.

 

Tesco Bank has commissioned four scenarios from its thirdparty provider, all of which were based on an economic outlook that sought to take account of the potential ramifications of the current COVID19 pandemic. These scenarios include a Base scenario, an Upside scenario and two different Downside scenarios. As the economic outlook remains uncertain, the scenarios are based on the success of the COVID19 vaccine roll out against emerging strains of the virus and, as the restrictions are lifted, the speed at which consumer and business confidence will support the recovery in GDP and the labour market. The Base scenario anticipates a delayed economic recovery, with consumer confidence remaining weak in the near term and unemployment peaking in Q3 2021. The Upside scenario involves a sharper economic recovery while Downside 1 scenario assumes a longer delay until the economy recovers. Downside 2 is a prolonged and sustained recession with a slow economic recovery thereafter. These scenarios are also reviewed to ensure an unbiased estimate of ECL by ensuring the credit loss distribution under a larger number of scenarios is adequately captured using these four scenarios and their respective weightings. The Base, Upside, Downside 1 and Downside 2 scenarios have been assigned weighting of 40%, 30%, 25% and 5% respectively.

 

The economic scenarios used include the following ranges of key indicators:

 

As at 27 February 2021 (5 year average)

Base
40%

Upside
30%

Downside 1
25%

Downside 2
5%

COVID-19
n/a

Bank of England base rate(a)

0.1%

0.2%

0.1%

0.1%

n/a

Gross domestic product(b)

2.6%

3.5%

2.2%

1.8%

n/a

Unemployment rate

5.5%

4.7%

6.7%

8.6%

n/a

Unemployment rate peak in year

5.8%

4.9%

7.4%

9.3%

n/a

 

As at 29 February 2020 (5 year average)

Base
40%

Upside
20%

Downside 1
30%

Downside 2
5%

Covid-19
5%

Bank of England base rate(a)

0.6%

0.2%

1.4%

2.3%

2.3%

Gross domestic product(b)

1.6%

2.0%

1.0%

0.7%

0.7%

Unemployment rate

3.9%

3.9%

5.3%

6.1%

6.1%

Unemployment rate peak in year

3.9%

3.9%

5.5%

6.3%

6.3%

(a)        Simple average

(b)        Annual growth rates

 

 

Notes to the Group financial statements 

Note 25 Financial risk management continued

Key assumptions and sensitivity

The key assumptions to which the Tesco Bank ECL is most sensitive are macroeconomic factors, probability of default (PD), loss given default (LGD), PD threshold (staging), and expected lifetime (revolving credit facilities). The table below sets out the changes in the ECL allowance that would arise from reasonably possible changes in these assumptions from those used in Tesco Bank's calculations as at 27 February 2021.

 

 

 

Impact on the loss allowance

Key assumption

Reasonably possible change

2021

£m

2020

£m

 

Closing ECL allowance

 

625

488

 

Macroeconomic factors (100% weighted)

Upside scenario

(66)

(41)

 

 

Base scenario

(1)

(28)

 

 

Downside scenario 1

57

40

 

 

Downside scenario 2

117

103

 

Probability of default

Increase of 2.5%

8

11

 

 

Decrease of 2.5%

(8)

(11)

 

Loss given default

Increase of 2.5%

10

12

 

 

Decrease of 2.5%

(10)

(12)

 

Probability of threshold (staging)

Increase of 20%

(7)

(17)

 

 

Decrease of 20%

11

21

 

Expected lifetime (revolving credit facility)

Increase of 1 year

9

2

 

 

Decrease of 1 year

(9)

(2)

 

 

COVID19 has had a significant impact on the global economy and there remains a large degree of uncertainty around the scale and stress of the peak of the economic downturn and the speed and shape of any subsequent recovery. The extension of government support measures such as furlough has been unprecedented and this, coupled with the granting of payment holidays by Tesco Bank, have broken traditional modelled relationships between unemployment and default. Although projected levels of unemployment remain high, Tesco Bank is yet to see significant defaults emerge in its lending portfolio and, as such, COVID19 specific adjustments to the modelled ECL provision to capture the estimated impact of the stress within the ECL provision have been recognised for an overall post-model adjustment of £214m which  includes three management overlays. A first £129m adjustment is in respect of the beneficial modelling impact of lower consumer spending through the pandemic. An increase or decrease of 10% on the adjustment for lower drawn balances would not result in a material increase or decrease of this management overlay. A second £64m adjustment is to recognise the expected emergence of defaults once support measures such as furlough and the various temporary customer support measures Tesco Bank has put in place are removed and a third £21m adjustment is to recognise an increase in credit risk in respect of customers who sought an extension to their initial payment holiday.

 

Forbearance

Tesco Bank could be exposed to unacceptable levels of bad debt and also suffer reputational damage if it did not provide adequate support to customers who are experiencing financial difficulties. Forbearance is relief granted by a lender to assist customers in financial difficulty, through arrangements which temporarily allow the customer to pay an amount other than the contractual amounts due. These temporary arrangements may be initiated by the customer or Tesco Bank where financial distress would prevent repayment within the original terms and conditions of the contract. The main aim of forbearance is to support customers in returning to a position where they are able to meet their contractual obligations.

Tesco Bank has adopted the definition of forbearance in the European Banking Authority's (EBA) final draft Implementing Technical Standards (ITS) of July 2014 and reports all accounts meeting this definition, providing for them appropriately.

Tesco Bank has well defined forbearance policies and processes. A number of forbearance options are made available to customers. These routinely, but not exclusively, include the following:

arrangements to repay arrears over a period of time, by making payments above the contractual amount, that ensure the loan is repaid within the original repayment term;

short-term concessions, where the borrower is allowed to make reduced repayments (or in exceptional circumstances, no repayments) on a temporary basis to assist with short-term financial hardship; and

for secured products, it may also be acceptable to allow the customer to clear the arrears over an extended period of time, provided the payments remain affordable.

 

Gross loans and advances subject to forbearance programmes

Forbearance programmes as a proportion of total loans and advances by category

Proportion of forbearance programmes covered by allowance for expected credit losses

 

2021

£m

2020

£m

2021

%

2020

%

2021

%

2020

%

Credit cards - UK

119

108

4

3

50

50

Credit cards - Commercial

-

-

5

5

96

94

Loans

48

49

1

1

56

41

 

Insurance risk

Tesco Bank is indirectly exposed to insurance risks through its ownership of 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. Insurance risk is defined as the risk accepted through the provision of insurance products in return for a premium. The timing and quantum of the risks are uncertain and determined by events outside the control of Tesco Bank. The key insurance risks within TU relate to underwriting risk and reserving risk. TU operates a separate framework to ensure that the TU insurance portfolio operates within agreed risk appetite. Tesco Bank closely monitors performance of the portfolio against specific thresholds and limits.

 

 

Notes to the Group financial statements

Note 26 Customer deposits and deposits from banks

 

2021

£m

2020

£m

Customer deposits

5,738

7,707

Deposits from banks

600

500

 

6,338

8,207

Of which:

 

 

Current

5,321

6,377

Non-current

1,017

1,830

 

6,338

8,207

 

Deposits from banks include balances of £500m (2020: £500m) drawn under the Bank of England's Term Funding Scheme (TFS) and £100m
(2020: £nil) drawn under the Bank of England's term Funding Scheme with additional incentives for Small and Medium Sized Entities (TFSME).

 

Note 27 Provisions

Property

provisions

£m

Restructuring

provisions

£m

Other

provisions

£m

Total

£m

At 29 February 2020

156

64

72

292

Foreign currency translation

-

3

(6)

(3)

Acquired through business combinations

5

-

-

5

Reclassifications

-

(3)

38

35

Amount released in the year

(24)

(29)

-

(53)

Amount provided in the year

49

31

105

185

Amount utilised in the year

(4)

(60)

(25)

(89)

Transfer to disposal group classified as held for sale

(51)

(6)

(11)

(68)

Unwinding of discount

1

-

-

1

At 27 February 2021

132

-

173

305

 

The balances are analysed as follows:

 

 

 

 

 

 

 

2021

£m

2020

£m

Current

 

 

186

155

Non-current

 

 

119

137

 

 

 

305

292

 

Property provisions

Property provisions comprise onerous property provisions, including non-lease contracts related to unprofitable stores and vacant properties, remediation works, dilapidations provisions and asset retirement obligation provisions. Property provisions related to leased properties are expected to be utilised prior to the end of the leases. Refer to Note 12 for a maturity analysis of the Group's contractual undiscounted lease payments.

 

Restructuring provisions

Of the £2m net charge (£31m charge, £(29)m release) recognised in the year, £2m (2020: £43m) has been classified as an exceptional item within discontinued operations, and £nil (2020: £108m charge) has been classified within exceptional items as 'Net restructuring and redundancy costs' within continuing operations, of which £nil (2020: £95m) related to UK & ROI and £nil (2020: £13m) related to Tesco Bank. Refer to Notes 4 and 7 for further details. The restructuring provisions were fully utilised in the financial year to 27 February 2021.

 

Other provisions

Other provisions include a £88m (2020: £nil) provision relating to claims from Homeplus (Korea) purchasers. Refer to Note 7 for further details. Additional provisions included in other provisions are individually immaterial. The majority of provisions are expected to be utilised in the next financial year.

 

 

Notes to the Group financial statements

Note 28 Share-based payments

The Group income statement charge for the financial year recognised in respect of share-based payments is £69m (2020: £129m), which is made up of share option schemes and share bonus payments. Of this amount, £60m (2020: £113m) will be settled in equity and £9m (2020:

£16m) in cash representing National Insurance contributions.

 

Share option schemes

The Company had nine share option schemes in operation during the financial year, all of which are equity-settled schemes:

i.   The Savings-related Share Option Scheme (1981) permits the grant to colleagues of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from colleagues of an amount between £5 and £500 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price of not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.

ii.   The Irish Savings-related Share Option Scheme (2000) permits the grant to ROI colleagues of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from colleagues of an amount between €12 and €500 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price of not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.

iii.  The Executive Incentive Plan (2004) permitted the grant of options in respect of Ordinary shares to selected senior executives. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. No further options will be granted under this scheme.

iv.  The Executive Incentive Plan (2014) permits the grant of options in respect of Ordinary shares to selected senior executives as a proportion of annual bonus following the completion of a required service period and is dependent on the achievement of corporate performance and individual targets. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. Full details of this plan can be found in the Directors' remuneration report.

v.  The Performance Share Plan (2011) permits the grant of options in respect of Ordinary shares to selected executives. Options are normally exercisable between the vesting date(s) set at grant and 10 years from the date of grant for nil consideration. The vesting of options will normally be conditional upon the achievement of specified performance targets over a three-year period and/or continuous employment.

vi.  The Group Bonus Plan permits the grant of options in respect of Ordinary shares to selected senior executives as a proportion of annual bonus following the completion of a required service period and is dependent on the achievement of corporate performance and individual targets. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. No further options will be granted under this scheme.

vii. The Long Term Incentive Plan (2015) permits the grant of options in respect of Ordinary shares to selected executives. Options are normally exercisable between the vesting date(s) set at grant and 10 years from the date of grant for nil consideration. The vesting of options will normally be conditional upon the achievement of specified performance targets over a three-year period and/or continuous employment.

viii.        The Booker Group PLC Savings Related Share Option Plan (2008) (Booker SAYE) permitted the grant to Booker colleagues of options in respect of ordinary shares in Booker Group PLC (Booker Shares) linked to a building society/bank save-as-you-earn contract for a term of three years with contributions from Booker colleagues of an amount between £5 and £500 per four-weekly period. Following completion of the acquisition of Booker Group PLC by Tesco PLC, Booker colleagues elected to roll over their existing options over Booker Shares under the Booker SAYE into equivalent options over ordinary shares in Tesco PLC (Tesco Shares).  The options over Tesco Shares are capable of being exercised at the end of the three-year period at a subscription price equivalent to not less than 80% of the average of the middle-market quotations of a Booker Share over the three dealing days immediately preceding the offer date.

ix.  The Booker Group PLC Performance Share Plan (2008) (Booker PSP) permitted the grant of options in respect of Booker Shares to selected Booker senior colleagues (Booker PSP Options). Under the Booker PSP, tax approved Company Share Option Plan options (Booker CSOP Options) were also granted to selected Booker senior colleagues.  Following completion of the acquisition of Booker Group PLC by Tesco PLC, Booker senior colleagues elected to roll over their existing Booker PSP and Booker CSOP Options over Booker Shares into equivalent options over Tesco Shares. Booker PSP Options are normally exercisable between the third anniversary of the original date of grant and 10 years from the date of grant for nil consideration. The vesting of options is normally conditional upon the achievement of specified performance targets over a three year period and continuous employment. Conditional on the vesting of the relevant Booker PSP Options, Booker CSOP Options are normally exercisable between the third anniversary of the original date of grant and 10 years from the date of grant at a subscription price equivalent to the market value of the Booker Shares at the time of grant.

 

 

Notes to the Group financial statements

Note 28 Share-based payments

The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP):

 

For the 52 weeks ended 27 February 2021

 

 

Savings-related
Share Option Scheme

Irish Savings-related Share Option Scheme

 

 
Nil cost
Share Option Scheme(a)

 

Booker Group PLC

Savings Related

Share Option Plan

Booker Group PLC Performance Share

Plan Scheme

Other Schemes

 

Options

WAEP

Options

WAEP

 

Options

WAEP

 

Options

WAEP

Options

WAEP

Options

WAEP

Outstanding at 29 February 2020

215,812,094

175.06

6,855,613

185.35

 

18,455,841

-

 

5,100,149

151.21

4,976,236

-

-

-

Granted

60,005,859

198.00

2,800,186

198.00

 

516,622

-

 

-

-

-

-

-

-

Forfeited

(18,268,028)

197.73

(808,107)

194.80

 

(3,675,500)

-

 

(271,569)

149.39

(2,257,156)

-

-

-

Exercised

(91,142,849)

151.29

(1,261,423)

153.20

 

(8,079,580)

-

 

(4,141,825)

151.10

(1,858,323)

-

-

-

Outstanding at 27 February 2021

166,407,076

193.86

7,586,269

194.35

 

7,217,383

-

 

686,755

152.58

860,757

-

-

-

Exercise price range (pence)

 

150.00 to 219.00

 

150.00 to 219.00

 

 

-

 

 

137.45

to

152.78

 

-

 

-

Weighted average remaining contractual life (years)(b)

 

2.86

 

2.78

 

 

5.18

 

 

0.42

 

-

 

-

Exercisable at 27 February 2021

4,780,919

151.11

108,223

151.00

 

7,217,383

 

 

686,755

152.58

860,757

-

-

-

Exercise price range (pence)

 

 

150.00

to

219.00

 

150.00

to

219.00

 

 

 

 

 

137.45

to

152.78

 

-

 

-

Weighted average remaining contractual life (years)(b)

 

0.42

 

0.42

 

 

5.18

 

 

0.42

 

-

 

-

 

(a)        The special dividend and associated share consolidation had a neutral impact to the number of options.

(b)        Contractual life represents the period from award to the scheme end date. Certain schemes may be exercised later than vesting date at the discretion of the individual.

Share options were exercised on a regular basis throughout the financial year. The average share price during the 52 weeks ended 27 February 2021 was 227.07p (2020: 237.69p).

For the 53 weeks ended 29 February 2020

 

Savings-related

Share Option Scheme

 

Irish Savings-related Share Option Scheme

 

 Nil cost Share Option Scheme

 

Booker Group PLC Savings Related Share Option Plan

      Booker Group PLC

Performance Share Plan Scheme

 

 

Other Schemes*

 

 Options

WAEP

 

 Options

WAEP

 

 Options

WAEP

 

 Options

WAEP

 

 Options

WAEP

 

 Options

WAEP

Outstanding at 23 February 2019

215,591,248

168.04

 

6,470,978

175.06

 

25,377,129

-

 

9,827,705

145.36

 

11,222,347

-

 

12,379,637

-

Granted

44,387,158

219,00

 

1,977,339

219.00

 

537,271

-

 

-

-

 

 

-

 

-

-

Forfeited

(23,512,462)

200.62

 

(1,062,090)

187.69

 

(5,502,793)

-

 

(766,057)

147.40

 

(2,870,980)

-

 

(12,379,637)

-

Exercised

(20,653,850)

167.18

 

(530,614)

180.60

 

(1,955,766)

-

 

(3,961,499)

137.46

 

 (3,375,131)

-

 

-

-

Outstanding at 29 February 2020

215,812,094

175.06

 

6,855,613

185.35

 

18,455,841

-

 

5,100,149

151.21

 

4,976,236

-

 

-

-

Exercise price range (pence)

 

150.00 to 322.00

 

 

150.00 to 219.00

 

 

-

 

 

137.13

to

152.78

 

 

-

 

 

-

Weighted average remaining contractual life (years)

 

2.09

 

 

2.55

 

 

6.39

 

 

1.32

 

 

0.51

 

 

-

Exercisable at 29 February 2020

2,948,571

189.92

 

243,886

190.00

 

 9,359,089

-

 

523,817

137.45

 

977,437

-

 

-

-

Exercise price range (pence)

 

150.00 to 322.00

 

 

190.00

 

 

-

 

 

137.45

 

 

-

 

 

-

Weighted average remaining contractual life (years)

 

0.41

 

 

0.42

 

 

5.60

 

 

0.42

 

 

-

 

 

-

* Other Schemes includes Approved Share Option Scheme (Approved), Unapproved Share Option Scheme (Unapproved), and International Executive Share Option Scheme (International). The WAEP for all other schemes at 29 February 2020 was 338.40p and all options were forfeited during the year.

 

 

Notes to the Group financial statements
Note 28 Share-based payments continued

The fair value of savings related share options schemes are estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.

 

 

 

 

2021

SAYE

2020

SAYE

Expected dividend yield (%)

 

 

4.90-5.05%

3.70-4.28%

Expected volatility (%)

 

 

23.00-25.60%

22.60-28.09%

Risk-free interest rate (%)

 

 

0.15-0.26%

0.81-0.84%

Expected life of option (years)

 

 

3 or 5

3 or 5

Weighted average fair value of options granted (pence)

 

 

27.13

38.56

Probability of forfeiture (%)

 

 

6-10%

7-10%

Share price (pence)

 

 

219.60

243.00

Weighted average exercise price (pence)

 

 

198.00

219.00

 

Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group's option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company's share price, the Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option.

 

Share bonus and incentive schemes

Selected executives participate in the Group Bonus Plan, a performance-related bonus scheme. The amount paid to colleagues is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to selected executives who have completed a required service period and depend on the achievement of corporate and individual performance targets.

Selected executives participate in the Performance Share Plan (2011) and the Long Term Incentive Plan (2015). Awards made under these plans will normally vest on the vesting date(s) set on the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets over a three-year performance period and/or continuous employment.

The Executive Directors participate in short-term bonus and long-term incentive schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors' remuneration report.

The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value.

The number and weighted average fair value (WAFV) of share bonuses and share incentives awarded were:

 

 

                              2021                               Number                          WAFV  

of shares                          pence

                             2020                              

Number                          WAFV  

of shares                         pence

                                                                   

 11,496,310                       237.80

 39,136,637                       233.77

Group Bonus Plan

Performance Share Plan

15,502,105                        246.70

25,024,909                            221.72

 

Note 29 Post-employment benefits

Pensions

The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and defined contribution schemes.

 

Defined contribution

Defined contribution schemes are open to all Tesco employees in the UK.

 

Under the Group's defined contribution pension schemes, employees of the Group pay contributions to an independently administered fund, into which the Group also pays contributions based upon a fixed percentage of the employee's contributions. The Group has no further payment obligations once its contributions have been paid. Contributions paid for defined contribution schemes in continuing operations of £347m (2020: £329m) have been recognised in the Group income statement. This includes £132m (2020: £116m) of salaries paid as pension contributions.

 

Defined benefit schemes

The Group has a defined benefit pension deficit of £1,222m (2020: £3,085m), comprising a number of schemes. The most significant of these are for the Group's employees in the UK, which are closed to future accrual, and ROI. The defined benefit pension deficit in the UK represents 86% of the Group deficit (2020: 92%).

 

Guaranteed minimum pension

During the year, a further high court judgement was handed down regarding the Lloyd's Banking Group's defined benefit pension schemes, which affects many schemes in the UK, including the Group's UK schemes. This ruling requires pension schemes to also consider the impact of guaranteed minimum pensions (GMPs) equalisation on individual transfer payments made since May 1990. In consultation with independent actuaries, the Group recognised the financial effect of this as a one-off £7m exceptional past service cost in the current year. This is presented as an exceptional item in the income statement (Note 4).

 

 

Notes to the Group financial statements
Note 29 Post-employment benefits continued

United Kingdom

The principal plan within the Group is the Tesco PLC Pension Scheme (the Scheme), the assets of which are held as a segregated fund and administered by the Trustee.

The Scheme is established under trust law and has a corporate trustee (the Trustee) that is required to run the Scheme in accordance with the Scheme's Trust Deed and Rules and to comply with all relevant legislation. Responsibility for governance of the Scheme lies with the Trustee. The Trustee is a company whose directors comprise:

1. representatives of the Group; and

2. representatives of the Scheme participants, in accordance with its articles of association and UK pension law.

 

Scheme funding

The Group considers two measures of the pension deficit. The accounting position is shown on the Group balance sheet. The funding position, calculated at the triennial actuarial assessment, is used to agree contributions made to the schemes. The two measures will vary because they are for different purposes, and are calculated at different dates and in different ways. The key calculation difference is that the funding position considers the expected returns of scheme assets when calculating the liability, whereas the accounting position calculated under

IAS 19 discounts liabilities based on corporate bond yields.

The most recent completed triennial actuarial assessment of the Scheme was performed as at 31 December 2019 using the projected unit credit method. After the £2.5bn contribution in relation to the Group's sale of its operations in Thailand and Malaysia, the funding position was a surplus of £570m. The market value of the Scheme's assets was £18,492m and these assets represented 103% of the benefits that had accrued to members, after allowing for expected increases in pensions in payment.

Subsequent to this triennial actuarial assessment it was agreed that no further pension deficit contributions would be required, with contributions being assessed at the next triennial review. The £2.5bn contribution has significantly reduced the prospect of having to make further pension deficit contributions in the future. The Group will continue to pay £25m per annum to meet expenses of the Scheme, including the Pension Protection Fund levy. Additionally, as part of the triennial review it was agreed that the market value of assets held as security in favour of the Scheme would increase to at least £775m (2020: £575m).

The most recent Booker Pension Scheme triennial valuation showed a funding deficit of £103m at 31 March 2019, with agreed contributions of

£15m per annum until the end of 2028. No contributions were required for the Budgens or Londis schemes.

IFRIC 14

The Group is not required to recognise any additional liabilities in relation to funding plans, or limit the recognition of any surpluses, as any future economic benefits will be available to the Group by way of future refunds or reductions to future contributions.

 

Maturity profile of obligations

The estimated duration of the Scheme obligations is an indicator of the weighted average term of benefit payments after discounting. For the Scheme this is 23 years.

Around 40% of the undiscounted benefits are due to be paid beyond 30 years' time, with the last payments expected to be over 80 years from now.

 

The liabilities held by the Scheme are broken down as follows:

 

%

Deferred members

78

Current pensioners

22

 

 

 

Notes to the Group financial statements
Note 29 Post-employment benefits continued

Risks

The Group bears a number of risks in relation to the Scheme, which are described below:

 

Risk

Description of risk

Mitigation

Investment

The Scheme's accounting liabilities are calculated using a discount rate set with reference to corporate bond yields. If the return on the Scheme's assets underperform this rate, the accounting deficit will increase.
 

If the Scheme's assets underperform the expected return for the funding valuation, this may require additional contributions to be made by the Group.

The Trustee and the Group regularly monitor the funding position and operate a diversified investment strategy.

 

The Trustee and Group take a balanced approach to investment risk and have a long-term plan to significantly reduce the investment risk within the Scheme.

Inflation

The Scheme's benefit obligations are linked to inflation. A higher rate of expected long-term inflation will therefore lead to higher liabilities, both for the IAS 19 and funding liability.

 

If the Scheme's funding liability increases, this may require additional contributions to be made by the Group.

As part of the investment strategy, the Trustee aims to mitigate this risk through investment in a liability-driven investment (LDI) portfolio.

 

The portfolio invests in assets which increase in value as inflation expectations increase. This mitigates the impact of any adverse movement in long-term inflation expectations.
 

The Scheme's holdings are designed to hedge against inflation risk up to the value of the funded liabilities.

 

Additionally, changes to future benefits were introduced in June 2012 to reduce the Scheme's exposure to inflation risk by changing the basis for calculating the rate of increase in pensions to CPI (previously RPI).

Interest rate

A decrease in corporate bond yields will increase the accounting deficit under IAS 19. Similarly, a decrease in gilt yields will have an adverse impact on the funding position of the Scheme. This may lead to additional contributions to be made by the Group.

As part of the investment strategy, the Trustee aims to mitigate this risk through investment in a LDI portfolio.

 

The portfolio invests in assets which increase in value as interest rates decrease. The Scheme's holdings are designed to hedge against interest rate risk up to the value of the funded liabilities.

 

Because the aim of the portfolio is to mitigate risk for the funding position, ineffectiveness in hedging for the accounting deficit under IAS 19 can arise where corporate bond and gilt yields diverge. This is partially offset by Scheme holdings in corporate bonds.

Life expectancy

The Scheme's obligations are to provide benefits for the life of the member and so increases in life expectancy will lead to higher liabilities.

 

 

To reduce this risk, changes to future benefits were introduced in June 2012 to increase the age at which members can take their full pension by two years.

 

The Trustee and Group regularly monitor the impact of changes in longevity on scheme obligations.

 

The operations and audit pensions committee was established to further strengthen the Group's Trustee governance and provide greater oversight and stronger internal control over the Group's risks. The Group pensions committee was also set up to provide an additional layer of governance and risk management. Further mitigation of the risks is provided by external advisors and the Trustee who consider the funding position, fund performance and impacts of any regulatory changes.

 

 

Notes to the Group financial statements
Note 29 Post-employment benefits continued

Scheme principal assumptions

Financial assumptions

The principal assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation of the Scheme were as follows:

 

2021

%

2020

%

Discount rate

2.0

1.9

Price inflation

2.9

2.8

Rate of increase in deferred pensions*

2.5

2.0

Rate of increase in pensions in payment*

 

 

Benefits accrued before 1 June 2012

2.8

2.7

Benefits accrued after 1 June 2012

2.5

2.1

* In excess of any guaranteed minimum pension (GMP) element.

 

Discount Rate

The discount rate for the Scheme is determined by reference to market yields of high-quality corporate bonds of suitable currency and term to the Scheme cash flows and extrapolated based on the trend observable in corporate bond yields to produce a single equivalent discount rate.

 

Inflation

The inflation assumption is used to determine increases in pensions linked to RPI and CPI inflation within sections of the Scheme, subject to relevant maximum and minimum increases.

 

RPI inflation is derived by reference to the difference between fixed-interest and index-linked long-term government bonds. To account for the premium that investors are willing to pay to mitigate the risk that inflation is higher than expected, the inflation assumption incorporates an inflation risk premium. CPI inflation is set by reference to RPI.

 

The government announced RPI reforms in 2019 and subsequently responded to a consultation in November 2020, with changes to align RPI with CPIH expected from 2030 onwards. The Group uses a bifurcated approach to pre- and post-2030 assumptions, reflecting the impact of the RPI reforms from 2030 onwards. In consultation with external actuaries, the inflation risk premium has been set at 0.42% (2020: 0.25%), representing the weighted average of 0.3% p.a. pre-2030 and 0.5% p.a. post-2030. The CPI differential has been set as 0.43% lower than RPI (2020: 0.80%), representing the weighted average of 1.0% p.a. pre-2030 and 0.1% p.a. post-2030.

 

Mortality assumptions

The Group, in consultation with an independent actuary, conducted a mortality analysis of the Scheme as part of the triennial actuarial valuation process. Subsequent to this analysis, the Group adopted the best estimate assumptions for the calculation of the IAS 19 pension liability for the main UK scheme.

The mortality assumptions used are based on tables that have been projected to 2017 with CMI 2018 improvements. In addition, the allowance for future mortality improvements from 2017 have been updated to be in line with CMI 2019, with a long-term improvement rate of 1.25% per annum.

The base tables used in calculating the mortality assumptions are different for various categories of members, as shown below:

 

 

Pensioner

Non-Pensioner

Male

Staff

90% of SAPS S3 Normal Heavy

97% of SAPS S3 Normal Heavy

 

Senior Manager

95% of SAPS S3 Normal Light

104% of SAPS S3 Normal Light

Female

Staff

110% of SAPS S3 Normal Heavy

114% of SAPS S3 Normal Heavy

 

Senior Manager

95% of SAPS S3 All Middle

100% of SAPS S3 All Middle

 

The following table illustrates the expectation of life of an average member retiring at age 65 at the balance sheet date and a member reaching age 65 at the balance sheet date +25 years. A comparison between the two retiree dates illustrates the expected improvements in mortality over the next 25 years.

 

 

2021

Years

2020

Years

Retiring at the balance sheet date at age 65:

Male

20.7

22.0

 

Female

22.2

23.8

Retiring at the balance sheet date +25 years at age 65:

Male

22.0

23.4

 

Female

23.9

25.8

Sensitivity analysis of significant actuarial assumptions

The sensitivity of significant assumptions upon the Scheme defined benefit obligation are detailed below:

 

Financial assumptions - Increase/(decrease) in UK Defined Benefit Obligation

                              2021                              

       Discount rate                                                               '                        £m

 

Inflation rate

£m

                               2020                               

Discount rate

£m

 

Inflation rate

£m

Impact of 0.1% increase of the assumption

(460)                       400 

(460)

383

Impact of 0.1% decrease of the assumption

480

(380)

479

(383)

Impact of 1.0% increase of the assumption

(4,038)

4,318

(4,002)

4,289

Impact of 1.0% decrease of the assumption

5,577

(3,418)

5,572

(3,313)

 

Mortality assumptions - Increase/(decrease) in UK Defined Benefit Obligation

2021

£m

2020

£m

Impact of 1 year increase in longevity

900

881

Impact of 1 year decrease in longevity

(920)

 (881)

Notes to the Group financial statements
Note 29 Post-employment benefits continued

Sensitivities are calculated by changing the relevant assumption while holding all other assumptions constant. The sensitivities reflect the   range of recent assumption movements and illustrate that the financial assumption sensitivities do not move in a linear fashion. Movements in the defined benefit obligation from discount rate and inflation rate changes may be partially offset by movements in assets.

Overseas

The Group operates defined benefit schemes in ROI. An independent actuary, using the projected unit credit method, carried out the latest actuarial assessment of the ROI schemes as at 27 February 2021. At the financial year end, the IAS 19 deficit relating to ROI was £169m (2020:

£206m).

Post-employment benefits other than pensions

The Group operates a scheme offering post-retirement healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes.

The liability as at 27 February 2021 of £7m (2020: £8m) was determined in accordance with the advice of independent actuaries. During the current financial year, £nil (2020: £nil) has been charged to the Group income statement and £nil (2020: £nil) of benefits were paid.

 

Plan assets

The Group's pension schemes hold assets that both provide returns and mitigate risk, including the volatility of future pension payments.

The table below shows a breakdown of the combined investments held by the Group's schemes:

 

 

                                                    2021                                                     

Quoted             Unquoted

£m                        £m

 

Total

£m                          %

                                                   2020                                                     

Quoted             Unquoted

£m                       £m

 

Total

£m                          %

Equities

 

 

 

 

 

 

 

 

UK

89

-

89

1

255

-

255

2

Europe

889

-

889

4

746

-

746

4

Rest of the world

4,502

-

4,502

22

4,347

-

4,347

25

 

5,480

-

5,480

27

5,348

-

5,348

31

Bonds

 

 

 

 

 

 

 

 

Government

1,377

-

1,377

6

750

-

750

4

Corporates - investment grade

3,334

-

3,334

17

1,362

-

1,362

8

Corporates - non-investment grade

197

-

197

1

2

-

2

-

 

4,908

-

4,908

24

2,114

-

2,114

12

Property

 

 

 

 

 

 

 

 

UK

78

1,041

1,119

6

44

1,036

1,080

6

Rest of the world

6

440

446

2

7

475

482

3

 

84

1,481

1,565

8

51

1,511

1,562

9

Alternative assets

 

 

 

 

 

 

 

 

Hedge funds

1

312

313

2

2

304

306

2

Private equity

-

1,020

1,020

5

-

881

881

5

Other

210

1,288

1,498

7

225

1,043

1,268

7

 

211

2,620

2,831

14

227

2,228

2,455

14

LDI portfolio

3,241

(493)

2,748

14

4,580

444

5,024

29

Cash

2,550

-

2,550

13

922

-

922

5

Total fair value of plan assets

16,474

3,608

20,082

100

13,242

4,183

17,425

100

Quoted assets are those with a quoted price in an active market. Unquoted assets are valued in accordance with IFRS13, using the most appropriate level within the fair value hierarchy based on the specifics of the asset class, and in line with industry standard guidelines, including the RICS methodology for property and the IPEV guidelines for Private Equity.

The LDI portfolio consists of assets, including gilts and index-linked gilts, of the value of £8,425m (2020: £8,115m) and associated repurchase agreements and swaps of £(5,677)m (2020: £(3,091)m). Other alternative assets include infrastructure and private credit investments. Other derivatives are included in the asset category to which they relate, reflecting the underlying nature and exposure of the derivative.

The plan assets include £222m (2020: £209m) relating to property used by the Group. Group property with net carrying value of £826m
(2020:£478m) (Note 11) and a value to the Scheme of at least £775m (2020: £575m) is held as security in favour of the Scheme.

 

 

Notes to the Group financial statements

Note 29 Post-employment benefits continued

Movement in the Group pension deficit during the financial year

Including all movements of discontinued operations up to classification as held for sale(a)       

 

Fair value of plan assets

Defined benefit obligation

Net defined benefit surplus/(deficit)

 

2021

£m

2020

£m

2021

£m

2020

£m

2021

£m

2020(b)

£m

Opening balance

17,425

15,054

(20,510)

(17,862)

(3,085)

(2,808))

Current service cost

-

-

(41)

(40)

(41)

(40))

Past service cost

-

-

(7)

(5)

(7)

(5))

Finance income/(cost)

341

409

(384)

(480)

(43)

(71))

Included in the Group income statement

341

409

(432)

(525)

(91)

(116))

 

 

 

 

 

 

 

Remeasurement gain/(loss):

 

 

 

 

 

 

Financial assumptions gain/(loss)

-

-

(1,193)

(2,867)

(1,193)

(2,867))

Demographic assumptions gain/(loss)

-

-

18

182

18

182

Experience gain/(loss)

-

-

354

61

354

61

Return on plan assets excluding finance income

(136)

2,158

-

-

(136)

2,158

Foreign currency translation

1

(3)

(4)

5

(3)

2

Included in the Group statement of comprehensive income/(loss)

(135)

2,155

(825)

(2,619)

(960)

(464))

 

 

 

 

 

 

 

Member contributions

2

2

(2)

(2)

-

-

Employer contributions

34

36

-

-

34

36

Additional employer contributions

2,836

262

-

-

2,836

262

Benefits paid

(421)

(493)

436

498

15

5

Classified as held for sale

-

-

29

-

29

-

Other movements

2,451

(193)

463

496

2,914

303

 

 

 

 

 

 

 

Closing balance

20,082

17,425

(21,304)

(20,510)

(1,222)

(3,085)

Deferred tax asset

 

 

 

 

218

512

Deficit in schemes at the end of the year, net of deferred tax

 

 

 

 

(1,004)

(2,573)

(a)        Movements in the year include £nil relating to discontinued operations up to classification as held for sale. After classification as held for sale post-employment benefit obligations movements within discontinued operations included £(1)m within the Group income statement, £(6)m remeasurement loss in the Group statement of comprehensive income/(loss) and £2m in other movements.

(b)        Movements in the prior year in relation to discontinued operations included £(8)m within the Group income statement, £(3)m in the Group statement of comprehensive income/(loss) and
£1m in other movements

 

Note 30 Called-up share capital

 

2021

2020

 

Number of
Ordinary shares

 £m

Number of
Ordinary shares

£m

Allotted, called-up and fully paid:

 

 

 

 

At the beginning of the year

9,793,496,561

490

9,793,496,561

490

Share consolidation (including shares issued(a))

(2,061,788,741)

-

 

-

At the end of the year

7,731,707,820

490

9,793,496,561

490

(a)        To affect the share consolidation, 11 additional Ordinary shares were issued so that the total Ordinary shares is exactly divisible by 19.

 

On 26 February 2021, the Group paid a special dividend of £4.9bn to shareholders in relation to the sale of its businesses in Thailand and Malaysia. In order to maintain the comparability of the Company's share price before and after the special dividend, a share consolidation was approved at the General Meeting held on 11 February 2021. Shareholders received 15 new Ordinary shares of 6 1/3 pence each for every existing 19 Ordinary shares of 5 pence each.

 

No shares were issued during the current financial year in relation to share options.

 

The Group has a share forfeiture programme following the completion of a tracing and notification exercise to any shareholders who have not had contact with the Company over the past 12 years, in accordance with the provisions set out in the Company's Articles of Association.  Under the share forfeiture programme the shares and dividends associated with shares of untraced members are forfeited, with the resulting proceeds transferred to the Group to use for good causes in line with the Group's corporate responsibility strategy. For more information on how these proceeds have been spent, please see our Little Helps Plan Report (available at www.tescoplc.com/littlehelpsplan). During the current financial year, the Group received £nil (2020: £nil) proceeds from sale of untraced shares and £nil (2020: £nil) write-back of unclaimed dividends, which are reflected in share premium and retained earnings respectively.

 

As at 27 February 2021, the Directors were authorised to purchase up to a maximum in aggregate of 773.2 million (2020: 979.3 million) Ordinary shares before the AGM 2021 on 25 June 2021.

 

The holders of Ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.

 

Own shares purchased

Own shares represent the shares of Tesco PLC that are held in Treasury or by the Employee Benefit Trust. Own shares are recorded at cost and are deducted from equity.

 

The own shares held represents the cost of shares in Tesco PLC purchased from the market and held by the Tesco International Employee Benefit Trust to satisfy share awards under the Group's share scheme plans (refer to Note 28). The number of Ordinary shares held by the Tesco International Employee Benefit Trust at 27 February 2021 was 58.4 million (2020: 87.6 million). This represents 0.76% of called-up share capital at the end of the year (2020: 0.89%).

 

No own shares held of Tesco PLC were cancelled during the financial years presented.

 

Notes to the Group financial statements
Note 31 Related party transactions 

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below:

 

Transactions

 

Joint venture

Associate

 

2021

£m

2020

£m

2021

£m

2020

£m

Sales to related parties

479

491

-

-

Purchases from related parties

87

100

10

12

Dividends received

18

29

8

13

Injection of equity funding

14

-

-

12

Sales to related parties consist of service/management fees and loan interest.

Transactions between the Group and the Group's pension plans are disclosed in Note 29.

Balances

 

Joint ventures

Associates

 

2021

£m

2020

£m

2021

£m

2020

£m

Amounts owed to related parties

23

26

-

-

Amounts owed by related parties

40

47

-

-

Lease liabilities payable to related parties

2,718

3,206

144

146

Loans to related parties (net of deferred profits)*

122

127

-

-

* Loans to related parties of £122m (2020: £127m) are presented net of deferred profits of £38m (2020: £54m), historically arising from the sale of property assets to joint ventures. Refer to Note 14 for further details. For loans to related parties, a 12-month expected credit loss (ECL) allowance is recorded on initial recognition. In the current and prior financial years, the ECL allowance was immaterial.

 

A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships (Accounts) Regulations 2008 (Regulations) apply. The financial statements for those partnerships have been consolidated into these financial statements pursuant to Regulation 7 of the Regulations.

 

Transactions with key management personnel

Members of the Board of Directors and Executive Committee of Tesco PLC are deemed to be key management personnel.

Cost of key management personnel compensation for the financial year was as follows:

 

2021

£m

2020

£m

Salaries and short-term benefits

20

20

Pensions and cash in lieu of pensions

2

2

Share-based payments

20

16

Joining costs and loss of office costs

-

1

 

42

39

Attributable to:

 

 

The Board of Directors (including Non-executive Directors)

14

10

Executive Committee (members not on the Board of Directors)

28

29

 

42

39

 

During the year 6,403,309 (2020: 8,470,986) Performance Shares and 2,615,921 (2020: 1,539,924) bonus shares were granted to key management personnel under the Performance Share Plan and Deferred Bonus Plan 2019 respectively. Vesting will be conditional on the achievement of specified performance targets over a three-year performance period and/or continuous employment. The cost of these awards will be spread over the vesting period.

 

Of the key management personnel who had transactions with Tesco Bank during the financial year, the following are the balances at the financial year end:

 

Credit card, mortgage and personal loan balances

Current and saving
deposit accounts

 

Number of key management personnel

£m

Number of key management personnel

£m

At 27 February 2021

4

-

7

-

At 29 February 2020

6

-

13

1

 

 

Notes to the Group financial statements
Note 32 Analysis of changes in net debt

 

 

 

 

Non-cash movements

 

 

 

At 29 February 2020
£m

Cash flows arising from financing activities
£m

Other cash flows
£m

Fair value gains/
(losses)
£m

Foreign exchange £m

Interest income/ (charge) £m

Acquisitions and disposals (a) £m

Other
£m

Discontinued operations
£m

At 27
February
2021
£m

Total Group

 

 

 

 

 

 

 

 

 

 

 

Bank and other borrowings, excluding overdrafts

(7,118)

716

223

(41)

(2)

(226)

(288)

-

-

(6,736)

 

Lease liabilities

(9,566)

621

488

-

-

(488)

977

(568)

134

(8,402)

 

Net derivative financial instruments

198

580

18

(203)

-

(20)

(118)

-

-

455

 

Arising from financing activities

(16,486)

1,917

729

(244)

(2)

(734)

571

(568)

134

(14,683)

 

Cash and cash equivalents in the Group balance sheet

4,137

-

(1,607)

-

8

-

-

-

(28)

2,510

 

Overdrafts(b)

(1,106)

-

539

-

-

-

-

-

35

(532)

 

Cash and cash equivalents (including overdrafts) in the Group cash flow statement

3,031

-

(1,068)

-

8

-

-

-

7

1,978

 

Short-term investments

1,076

-

(62)

-

(3)

-

-

-

-

1,011

 

Joint venture loans

127

-

2

-

-

2

(9)

-

-

122

 

Interest and other receivables

1

-

(12)

-

-

11

-

-

-

-

 

Net debt of the disposal group

-

-

-

-

-

-

-

-

(141)

(141)

 

Total Group

(12,251)

1,917

(411)

(244)

3

(721)

562

(568)

-

(11,713)

 

Tesco Bank

 

 

 

 

 

 

 

 

 

 

 

Bank and other borrowings, excluding overdrafts

(1,260)

774

4

(1)

-

(4)

-

-

-

(487)

 

Lease liabilities

(33)

3

2

-

-

(2)

-

-

-

(30)

 

Net derivative financial instruments

(45)

-

-

3

-

-

-

-

-

(42)

 

Arising from financing

(1,338)

777

6

2

-

(6)

-

-

-

(559)

 

activities

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents in the Group balance sheet

1,364

-

(584)

-

-

-

-

-

-

780

 

Overdrafts(b)

-

-

-

-

-

-

-

-

-

-

 

Cash and cash equivalents (including overdrafts) in the Group cash flow statement

1,364

-

(584)

-

-

-

-

-

-

780

 

Joint ventures loans

21

-

-

-

-

-

-

-

-

21

 

Tesco Bank

47

777

(578)

2

-

(6)

-

-

-

242

 

Retail

 

 

 

 

 

 

 

 

 

 

 

Bank and other borrowings, excluding overdrafts

(5,858)

(58)

219

(40)

(2)

(222)

(288)

-

-

(6,249)

 

Lease liabilities

(9,533)

618

486

-

-

(486)

977

(568)

134

(8,372)

 

Net derivative financial instruments

243

580

18

(206)

-

(20)

(118)

-

-

497

 

Arising from financing

(15,148)

1,140

723

(246)

(2)

(728)

571

(568)

134

(14,124)

 

activities

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents in the Group balance sheet

2,773

-

(1,023)

-

8

-

-

-

(28)

1,730

 

Overdrafts(b)

(1,106)

-

539

-

-

-

-

-

35

(532)

 

Cash and cash equivalents (including overdrafts) in the Group cash flow statement

1,667

-

(484)

-

8

-

-

-

7

1,198

 

Short-term investments

1,076

-

(62)

-

(3)

-

-

-

-

1,011

 

Joint ventures loans

106

-

2

-

-

2

(9)

-

-

101

 

Interest and other receivables

1